THE REHABILITATION LOAN PROGRAM PROVIDES DIRECT LOW-COST LOANS TO PROPERTY OWNERS FOR THE REHABILITATION OF BASICALLY SOUND STRUCTURES. AS A RESULT OF HUD'S IMPROPER MANAGEMENT OR ACCOUNTING FOR DEFAULTED REHABILITATION LOANS VALUED AT OVER $53 MILLION, THE ACCOUNTING RECORDS DID NOT SHOW THE AMOUNTS DUE THE GOVERNMENT ON MANY DEFAULTED LOANS, AND OVER $2 MILLION, OR ABOUT 53 PERCENT OF THE AMOUNTS DUE IN FISCAL 1977, WERE NOT COLLECTED. HUD'S MANUAL RECORDKEEPING SYSTEM COULD NOT ADEQUATELY HANDLE THE VOLUME OF DEFAULTED LOANS ON HAND, AND LOAN SERVICING ACTIVITY WAS HAMPERED BY A GENERAL LACK OF MANAGEMENT ATTENTION. THE DEPARTMENT'S FIELD OFFICES, DUE TO STAFFING LIMITATIONS AND HIGHER PRIORITY ASSIGNMENTS, HAVE NOT TAKEN EFFECTIVE COLLECTIVE ACTION AND HAVE SELDOM RECOMMENDED FORECLOSURE. IN TESTIMONY ON OCTOBER 5, 1978, BEFORE THE MANPOWER AND HOUSING SUBCOMMITTEE OF THE HOUSE COMMITTEE ON GOVERNMENT OPERATIONS, HUD AGREED (1) TO CHARGE A DETERRENT 4-PERCENT LATE FEE, (2) TO ALTER THE FEDERAL NATIONAL MORTGAGE ASSOCIATION CONTRACT TO PERMIT MORE SERVICING, (3) TO PROVIDE ADDITIONAL STAFFING IN BOTH THE DEPARTMENT'S CENTRAL OFFICE AND FIELD OFFICES, AND (4) TO CONSIDER A LOCALITY'S DELINQUENCY RATE WHEN MAKING FUTURE FUNDING DECISIONS. DEPARTMENT OFFICIALS HAVE SHOWN GREAT INTEREST IN IMPROVING THE PROGRAM AND HAVE AGREED TO IMPLEMENT THE GENERAL ACCOUNTING OFFICE'S SUGGESTIONS TO CORRECT THE PROGRAM'S ACCOUNTING AND FINANCIAL MANAGEMENT PROBLEMS. A SPECIAL TASK FORCE HAS BEEN APPOINTED TO STUDY ALL PROGRAM ASPECTS AND MAKE RECOMMENDATIONS. AN APPENDIX PROVIDES CORRESPONDENCE FROM THE HUD DIRECTOR TO GAO. TABLES SUPPORT THE TEXT. (MHP)