The Department of Housing and Urban Development's inspector general is investigating whether the city of Seattle should have received approval for a $24.2 million loan guarantee from the housing agency to renovate a vacant department store located in the center of the city's downtown retail corridor that Nordstrom Inc. plans to turn into its flagship store.

The Seattle Displacement Coalition, a low-income housing advocacy group, in a formal complaint filed with HUD last month said that city officials provided inaccurate information to the federal agency's staff about the condition of the city's downtown retail center in order to secure financing through a program aimed at helping communities revitalize blighted business districts.

The investigation, which is being handled by the IG's Northwest office in Seattle, comes as the city's mayor, Norm Rice, is high on the list of contenders being considered by the Clinton administration to replace outgoing HUD Secretary Henry G. Cisneros. HUD officials originally slated the investigation to begin in January, according to a letter to John Fox, director of Seattle Displacement Coalition. However, it appears the start of the inquiry has been moved up because of its possible impact on Rice's nomination.

A spokeswoman for Rice's office confirmed that the mayor and an employee of the city's Office of Economic Development have been interviewed by HUD officials in connection with the investigation. HUD officials also have interviewed officials of Seattle Displacement, which includes Jordan Brower, a former city council candidate.

A. George Tilley, district inspector general for audit in Seattle, declined to comment about the investigation or when it might be completed. But in his letter to Fox, Tilley wrote, "Your complaint asserts that the characterization of the area as blighted misrepresents the facts presented to HUD. We will review the facts surrounding HUD's decision to approve the Section 108 Loan Guarantee to independently determine its eligibility."

Laura Paksin, Rice's deputy press secretary, said, "We feel comfortable and confident that we followed the policies and procedures of HUD. This loan is for urban blight. It is being used for that purpose."

But the Seattle Displacement Coalition says the city submitted false crime statistics in its HUD loan application to make it appear that the downtown area had worsened significantly after the 700,000-square-foot Frederick & Nelson department store was closed in 1992. The group also accused the city of seeking the loan for the building's former owner, Pine Street Development, even though there was interest from other developers to renovate the store without HUD financing.

The $24.2 million loan guarantee allowed the city of Seattle to sell notes on the financial market that are secured by the federal Treasury. The city in turn sent the resulting cash to Pine Street Development, which will have to repay the money to the institutions and individuals holding the debt. Pine Street purchased the building from its former owner and then made a deal with Nordstrom's department store to take it over. In return, Pine Street received the three buildings that now make up Nordstrom's downtown complex. The city put up federal Community Block Grant funds as collateral for the guarantee.

Seattle-based Nordstrom's plans to spend $100 million to renovate the building into its flagship downtown department store and corporate offices, said spokeswoman Brooke White. The renovations are slated for completion in 1998.

Jordan Brower of Seattle Displacement charged that the city "went to a great deal of chicanery to hide key elements from HUD."

Figures from the Seattle Police Department were submitted with the HUD application that showed the crime rate rose 162 percent after the Frederick & Nelson building was closed. Seattle Displacement contends the figures are inaccurate because they included statistics, such as graffiti, that were not recorded in the years when the store was open. The police department later revised the figures after the loan had been approved, the complaint said.

In addition, an employee from the city's economic development office, in a confidential memo to a city councilwoman, provided some information about Nordstrom's involvement and the loan's structure that council members were advised to avoid discussing during a public hearing about the project. Investors in the development group include Chicago developer Jeff Rhodes and saxophonist Kenny G. CAPTION: NORM RICE