ADVOCATES for low-income people are up in arms over proposed HUD regulations governing development aid for cities. They say the new rules will result in cities spending much less money on improving low- and moderate-income neighborhoods and more in other better heeled and better represented areas. HUD officials respond that the new rules simply carry out congressional intent, and that the department will administer them so as to make sure the poor don't lose out.

This dispute, like so many others, has its origins in a vaguely worded statute. In 1974, Congress folded earlier urban programs into the Community Development Block Grant program. It specified that its various activities were "principally for persons of low and moderate income" -- words that remain in the statute. But Congress didn't define "principally" and advocacy groups complained that, over the years, cities chose to spend more and more money--by some measures over half -- on relatively prosperous areas and low-priority projects.

The Carter administration cracked down on cities, warning them that if they spent less than 75 percent of their money on projects for low- and moderate-income people, HUD would give their proposals a special going-over. In 1978, Congress disapproved fixed quotas for particular kinds of projects, but HUD kept up the pressure. By 1980, HUD estimated, three-quarters of CDBG money was spent in below-average-income areas.

Many cities also learned to blend their CDBG money with other federal and state aid to produce major improvements in blighted areas. Earlier complaints about too much monitoring dropped off. Last year, however, the Reagan administration secured amendments greatly reducing the planning and reporting required of cities. The regulations currently at issue flow from these amendments.

HUD Assistant Secretary Stephen J. Bollinger says his office will still monitor spending closely after the fact and make sure that program dollars go "principally" to their intended target. But it's hard to see how that will be done when the proposed regulations say that HUD will "no longer conduct any review of the grantee's overall program with respect to benefit to low- and moderate-income people." Local officials, moreover, far from being jubilant about their new freedom, are worried that local pressure to spend the money for other purposes will crop up again. They are aghast at the idea that HUD might decide long after the fact that they had misspent money, and reclaim it.

HUD officials, local officials and outside experts seem to agree that CDBG, as it is, is a good and flexible program. If the administration does remain committed to the primary goal of the program-- which Congress last year specifically left unchanged --there seems to be no good reason why the regulations cannot be redrafted to reflect the concerns of local officials and affected groups.