HOUSTON -- The city of Houston has agreed to repay $15.5 million to the U.S. Department of Housing and Urban Development to end a long-term dispute over misspent grants, officials said.

The payments will settle findings that Houston improperly spent grants from three federal housing programs before December 2004. It represents one of the largest repayments HUD has ever demanded from a local government receiving its funds, the agency said.

The City Council on Wednesday will consider the five-year repayment plan, which city officials have been negotiating with HUD since May 2007. HUD demanded to be repaid in a letter to the city in March. Originally, the agency said the city owed about $32 million.

The problems peaked in 2005, when an audit of spending found that Houston's housing department chose projects based on its directors' whims, allowed for massive defaults on loans and created opportunities for conflicts of interest and fraud.

The city's relationship with HUD is important because Houston relies on the federal agency to pay for such services as down payment assistance to working-class home buyers and free repairs to homes of the poor and elderly.

"We're working closely with the city in very much a cooperative spirit," HUD spokesman Brian Sullivan said Monday.

The initial payment of $3.1 million on Dec. 1 will come from an affordable housing account funded by revenues from the city's Tax Increment Reinvestment Zones. The source of future payments hasn't been determined, said Richard Celli, director of Houston's Housing and Community Development Department.

"I believe we have a better Housing Department in place now," said Councilwoman Jolanda Jones, who chairs the council's housing committee, in a story for Monday's online edition of the Houston Chronicle. "We certainly have better bookkeepers in place," she added, noting that some of the problems were based on poor record-keeping.

Jones said she doesn't think the city could have brokered a better deal.

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