City Council OKs Phasing Out Community Development Bank

The City Council approved a plan Friday to phase the troubled Los Angeles Community Development Bank out of existence, while granting the bank access to $1.4 million to keep it operating for the next six months.

More than a third of that is slated for Zone Ventures, a venture capital firm that has already received a controversial $29 million in investments from the federally funded bank. A recent federal audit labeled that use of public funds questionable and said the risky program to invest in high-tech start-ups had done almost nothing to help the low-income residents that the bank was designed to serve.

The bank was created after the 1992 riots to revitalize Central, East and South Los Angeles and Pacoima. The bank is funded by grants and loans from the U.S. Department of Housing and Urban Development and is overseen by the city. If the bank defaults on its loans, the city could lose millions of dollars in future federal grants.

Risky loans and early mistakes have plagued the bank, and the City Council had directed it to phase out operations in the next 18 months. On Friday, the council approved six more months of funding to allow the bank to carry out its transition plan.

Among other things, the bank will attempt to contract out management of its loan portfolio or sell it altogether. The bank is also looking for investors to take over its partnership with Zone Ventures, pay the firm’s hefty management fees and make additional investments in those high-tech firms that have survived the recession.

The bank must report on its progress and request more funding in six months.

The recent audit, by HUD’s office of inspector general, found that the bank had fallen short on its mandate to spend most of its $430 million in the designated Empowerment Zone and create jobs for residents. The venture capital program was largely to blame. Of 505 jobs created by the high-tech companies, only four had gone to Empowerment Zone residents, the audit found, and most of the companies hadn’t located in the core zone.

The bank entered into the partnership with Zone Ventures, the Los Angeles arm of Silicon Valley-based Draper Fisher Jurvetson, at the height of the dot-com boom. While some bank officials acknowledged that the high-tech firms weren’t likely to create jobs for low-income residents, the bank hoped to cash in when the companies went public. The scheme backfired when the market soured.

While the audit said Zone Ventures had not met the terms of its agreement with the bank and never intended to create jobs for Empowerment Zone residents, Zone Ventures’ managing partner, Frank Creer, disagreed.

“I think we have done exactly what we told the bank we would do,” he said.