U.S. Agency Will Audit Los Angeles Community Development Bank

The U.S. Department of Housing and Urban Development will conduct an audit of the Los Angeles Community Development Bank in response to a city report that showed the federally funded bank falling short of its mandate to create jobs for Los Angeles’ poorest residents.

HUD officials have begun gathering information for the audit, which will begin next month. It is the first in the bank’s three-year history.

In addition to concerns over job creation, the audit will examine whether enough of the bank’s loans have gone to businesses located in the so-called empowerment zone, as required by HUD, and whether loans were processed “in a timely manner,” according to a letter from HUD to the city Community Development Department outlining the scope of the review.

The city concerns about the bank were raised in a routine annual report examining the performance of all its HUD-funded programs. Federal officials received the report late last year, and last month notified the city of plans for the audit.

The heightened federal scrutiny comes at a time when the bank is facing criticism for its handling of key early loans and slow progress creating jobs for residents of the city’s most economically depressed areas. A Times story published last month revealed that more than one-third of the bank’s largest borrowers in its first two years have either gone out of business or are in trouble with their loans. Among problem loans is one that ballooned to more than $15 million and has now been classified by bank officials as “significantly impaired,” a report by the bank’s outside auditor says.

In addition, several borrowers whose deals soured have accused the bank of micromanaging their businesses, and another has filed a lawsuit alleging fraud and breach of contract. The bank denied the allegations and has countersued. Other borrowers have complained of lengthy delays in loan processing.

The Los Angeles City Council has requested a report from bank officials later this month addressing the issues raised by the Times story. HUD officials said that the agency’s plans to monitor the bank were already underway and were not influenced by the Times story or City Council action. The review is routine for any HUD-funded program that appears to be experiencing difficulty, a HUD official said.

Funded with $430 million from HUD, the bank was the federal government’s largest response to the 1992 riots. The bank, really a state-licensed loan fund, was created to finance businesses located in the empowerment zone and a surrounding buffer area. Borrowers must be rejected by a conventional lender and are given two years to create a designated number of jobs for empowerment zone residents.

The restrictions--combined with a brightened economy that has spurred competition from commercial banks for some of the more viable deals--have made the bank’s task formidable. The bank has also taken several years to put some key programs in place. For instance, it is only now implementing a plan to offer independent technical assistance to unsophisticated borrowers.

Allegations from borrowers have focused on earlier loans. The bank closed a host of loans late last year, boosting its portfolio from $47 million last fall to nearly $100 million, bank officials said.

Bank officials also say they have moved more money into economically stressed Los Angeles than any other lender.

In the last year, the bank has also taken steps to streamline loan processing and monitor problem loans more closely. And in the last month, it has increased compensation to nonprofit organizations that generate and underwrite smaller loans, giving them upfront contracts that will enable them to better serve customers who need hand-holding, sources say.

A HUD official in Washington familiar with the bank said it appears to be overcoming its early troubles, which he referred to as “start-up problems.”

“You have to take account of the whole portfolio and I think overall [they] get a passing grade,” the HUD official said. “They’ve made some mistakes, there is no doubt about that . . . but overall, when you look at the good and the bad, it’s still a positive.”

The HUD monitoring will focus on “overall management of the loan process,” as well as the location of the loans and whether they are meeting the “public benefit” requirement of generating jobs, the letter said. Depending on the initial findings, HUD “may elect to review the bank’s loan underwriting.”

Bank and city officials could not be reached for comment.