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We audited the Office of the Commissioner for Municipal Affairs’ Section 108 Loan Guarantee program as part of our strategic plan and based on the deficiencies noted during our recent review of Municipal Affairs’ Section 108 Loan Guarantee program, concerning the slow progress of the Vieques Sports Complex project (Audit memorandum number 2014-AT-1801, issued March 20, 2014).  The objectives of the audit were to determine whether Section 108 loan program funds were effectively used to meet a Community Development Block Grant (CDBG) program national objective and provide the intended benefits and whether borrowers complied with loan contract and the U.S. Department of Housing and Urban Development (HUD) requirements.

Municipal Affairs did not ensure that borrowers completed three Section 108 Loan Guarantee activities that showed signs of slow progress.  As a result, HUD had no assurance that more than $21 million awarded and disbursed for three Section 108-funded activities met a national objective of the CDBG program and fully provided the intended benefits.

Section 108 loan program borrowers used more than $1 million for ineligible expenditures and did not support the eligibility of more than $367,000 in program disbursements.  In addition, loan proceeds were not disbursed within the established timeframe, borrowers did not provide HUD the required loan collateral, borrowers did not establish a financial management system in accordance with HUD requirements, and investments were not fully collateralized.  As a result, HUD lacked assurance that funds were adequately accounted for, safeguarded, and used for authorized purposes and in accordance with HUD requirements.

We recommend that HUD (1) determine the eligibility of more than $20 million in unsupported Section 108 program costs and activities that showed signs of slow progress and (2) require the repayment of more than $1 million in ineligible expenditures.