Ann Faulk, a 32-year-old welfare mother, sat in the subdued light of the interview room at Chambers Funeral Home at 517 11th St. SE, clutching an envelope full of rumpled dollar bills. Her minister, the Rev. Tom Nees, stood beside her.

She was still stunned from the death of her 5-year-old daughter, Nicole, in an apartment fire three days earlier last February. Her 3-year-old son, Dwayne, also trapped in the fire, lay near death at Children's Hospital.

She did not know it, but Ann Faulk was about to enter the murky world of "welfare funerals" in Washington, a twilight realm of private grief and public, tax-paid "contract" burials involving hundreds of the city's poor each year and costing the city about $225,000 annually. It is a world longsimmering with social, racial and financial antagonisms.

W. W. Chambers III, the tall, bright-eyed funeral director, took a sheaf of welfare eligibility papers from Faulk. The basic expenses of the funeral, he explained, would be paid by the city through its contract with Chambers. Yes, Ann Faulk said, the people at the welfare office had already told her that.

However, Chambers continued, there were some extras not covered by the city that she might want, such as flowers, a newspaper notice, an extra death certificate and a guest book for the wake and funeral. Nees, in a detailed narrative written later, gave his account of what happened next:

Chambers helped Faulk write a newspaper announcement. That would be $21.10, he said.

"Will you pay now?" Chambers asked. Faulk reached for her envelope and carefully counted out the bills.

"Would you like a death certificate for the family?" Chambers asked next. She said yes. "That will be $2.50," Chambers said.

Next he showed her a sample guest book. "You will want a record of the friends who come to the viewing and the service," Chambers said. "For $6 we can provide this lovely book." She counted out the cash. The total came to $29.60.

All this, Nees later recalled, "before the interview was half over.It was the first time I had ever seen an undertaker request money from an individual in the initial conversation."

Things went from bad to worse after that, according to Nees. Because of the tight schedule of funerals, Chambers said he would "have to hold the service to one half-hour" and not open the coffin for viewing because of additional delays that would cause.

Finally, Chambers said, the funeral could not be held for a week because of a backlog.

"Ann [Faulk] cried out," Nees said. "The long delay was too much to bear." When Nees objected, Chambers agreed to move the funeral up three days, but explained that the funeral home "could only take a certain number of these [welfare] cases at a time and that people just had to wait their turn."

Nees and Faulk were angry as they left Chambers-angrey at what Nees called the "extreme insensitivity" to the "poor in moments of grief."

Ultimately, Faulk cancelled the Chambers funeral and-after her son died a day or two later-arranged for a joint funeral provided at cost, $350, by another funeral home.

"We passed the hat on the block to pay for it," Nees said.

Chambers "was rushing us," Faulk said in a recent interview. "He was not interested in what was really going on . . . He was after the money."

Nees, a longtime inner city housing activist, took his complaint to City Hall. Investigations followed. W. W. Chambers III and his father, William W. Chambers Jr., president of the family-owned funeral business, were questioned by welfare and contract officials.

Last Friday, the Department of General Services, the city's contracting agency, issued a stinging reprimand, calling Chambers' conduct in the Faulk case "nonprofessional and insensitive" and "most repugnant to this government."

The reprimand, signed by the department's director, Sam Starobin, warned that Chambers' exclusive contract-worth about $200,000 to $225,000 a year-would be revoked unless they notified the department of corrective steps within 14 days.

Chambers, an almost legendary family enterprise here since the turn of the century and famed for its cutrate funerals and unorthodox advertising, stoutly defends its record. Nevertheless, William Chambers Jr. acknowledged in an interview last week that he is taking new steps, including hiring a black part-time funeral director, to assist in his white-owned operation. He also promises to devote more attention to specific requests of bereaved families.

Chambers, 58, said the Nees' complaint resulted primarily from a "personality clash" between Nees and Chambers' son, William III, 32, who runs the 11th Street branch of the undertaking firm. Nees "misinterpreted my son's businesslike manner as being harsh or callous or something," said the elder Chambers. "It was not that at all . . . although undertaking has to be a business in some ways, of course, just like everything else."

Chambers continues today its 75-year tradition of delivering efficient, no-frills service. Its founder, W. W. Chambers Sr., an outspoken and occasionally irreverent critic of his own industry, pioneered price listing of funerals and ran billboards in Washington's street cars in the 1940s. He shocked the traditionally staid funeral industry when he published a calendar in the late 1940s featuring a buxom nude above the caption, "Beautiful Bodies by Chambers."

The Faulk incident comes amid efforts in the city council to end the present contract system dominated by Chambers. It also comes amid cries of some black undertakes that Chambers is insensitive to black funeral tradition-open caskets and prolonged emotional grieving.

Not so, said William Chambers Jr. "We have never stopped a person from screaming or yelling or hollering 'Hallelujah' under any circumstances," he told a city council committee hearing last summer. "If anything, I would encourage it. The more 'hallelujahs,' the more crying, the more gnashing of teeth, the better for the funeral business."

Department of Human Resources officials, nevertheless, say they have received a slow but steady stream of complaints from poor families-most of them black - about their treatment by Chambers.

"It's not so much the service-the embalming, preparation of the body, the coffin - all that seems pretty good," said Curtis Strickland, who supervises burial eligibility requests for the city. "It's more the attitude at Chambers that people complain about . . . it's hard to put your finger on it."

Under the contract, Chambers is reimbursed a basic fee of $585 by the city for each adult funeral service and lesser amounts for children and infants.

In fiscal 1978, Chambers handled 480 contract burials, according to city government figures, but was reimbursed at a somewhat lower rate of $465 per adult funeral.

Chambers has held the annual contract - awarded on the basis of competitive bids, usually between three and four firms - off and on for the last 30 years, including the last three years.

Members of the Chambers family said they have always fulfilled the contract, not only providing full respect and dignity for the dead but also giving the city's taxpayers a bargain.

In a point-by-point response to Nees' complaint in the Faulk case, W. W. Chambers III acknowledged in an interview that he asked Faulk if she would pay for the extra items immediately, "but I wasn't harsh about it the way Mr. Nees said. I think I probably said something like, 'Would you mind taking care of this now?'"

"It is important that we collect the money," he explained, ". . . especially with people of this sort. Some of them never pay if you wait till later."

"Mind you," he added, "most of them, 99 percent of them, are very, very honest and very nice to deal with."

Under terms of the contract, Chambers is permitted to sell certain specified optional items, such as flowers, newspaper notices and guest books.

As for the week's delay in scheduling the funeral, Chambers said the volume of funerals-two to three a day-is so great that delays are often necessary.

The near-record snowfall in mid-February-when Nicole Faulk died-complicated the problem, Chambers said, creating greater delays and increasing the backlog of funerals still further. Even so, he noted, he agreed to move the Faulk funeral date up by three days.

Chambers denied a contention by Nees that "paying families" would get a funeral quicker. "That's completely untrue," he said. "We treat everybody alike." The bulk of Chambers' funerals at the 11th Street SE branch-480 of 600 last year-were for the poor, he noted, "so there's not much room" for preferential treatment.

As for putting time limits on the funeral service, Chambers again said he did not tell Nees he would "have to hold his service to a half-hour."

"I wouldn't have put it impolitely like that," Chambers said. "I think I probably asked him very courteously if he could limit his service to a half-hour, or at least try to do the best he could."

Chambers agreed he refused to have the coffin open during the funeral service. "It's not in the [city] contract," he said.

Again, he said, it is a matter of time. "If you tack on a viewing [of the body at the funeral service], it would take another half-hour or so," Chambers said. "The viewing causes emotional upset. People linger at the casket. . . It delays things."

The city contract does provide for viewing of the body, Chambers said, but at a wake "visitation" usually held for a three-hour period the evening before the funeral service.

The city council has before it a "choice of undertaker" bill that would abolish the contract system and provide instead a direct grannt to surviviors to choose their own undertaker.

Chambers opposes the measure. Black undertakers generally support it, complaining that a "nonminority" firm now controls the business.

William Chambers Jr. contended his black hands in the cookie jar instead of asking and receiving their share in a controlled manner."

Chambers also noted he was the first white undertaker in a traditionally segregated industry to integrate his business in the early 1960s.

In a recent interview, he said, he is able to underbid the few other Washington funeral homes interested in the burial contract for the poor because "I buy my materials in volume - my embalming chemicals, caskets, everything. I get them for less."

Funeral industry spokesmen here acknowledged Chambers' prices generally run lower than those of his competitors.

Chambers estimated he "clears $50 to $60" on each city contract funeral on the average. "Sometimes we just break even."

Asked why he pursues the business if it pays so little, he said, "I want to make my mark with the black community, so I can have future business in the community. . . PA [public assistance] burials put me in touch with the community."

That's why, he said, he finds the Nees complaint in the Faulk case baseless.

"That complaint, if true, would be like biting the hand that feeds me," Chambers said. CAPTION: Picture 1, ANN FAULK . . . long delay "too much to bear"; Picture 2, ANN FAULK . . . double tragedy for welfare mother; Picture 3, W. W. Chambers Jr., left, and son W. W. Chambers, III, with coffin for indigents. By Frank Johnston-The Washington Post