CRA Officials Admit Problems in Loan Program : Government: Independent audit of redevelopment agency is under way. Possible mismanagement and failure to collect payments are being investigated.

Concerns over possible mismanagement in a $300-million Los Angeles Community Redevelopment Agency loan program have prompted a detailed, independent audit of the fund, The Times has learned.

In conducting a limited review, CRA auditors found this month that the agency had failed to collect $636,000 in payments on 35 loans totaling $1.7 million. Officials say they lost track of these loans and 36 others.

The missing loan payments may not be collectible, officials said, because they are delinquent an average eight years and some date back to 1979.

The redevelopment agency’s portfolio of 1,850 loans helps finance everything from small home repairs in poor neighborhoods to the construction of downtown skyscrapers.

The full extent of the loan problems will not be clear until independent auditors complete an examination in about two months, city officials said.

“We are concerned,” said Los Angeles City Controller Rick Tuttle, who is overseeing the expanded audit. “They don’t seem to have a handle on the (loan) collection. As far as I can tell, (collections were not) done in any thorough, systematic way in the past.”

The CRA has no central, reliable means of ensuring collection on its huge loan portfolio, auditors found in the preliminary review. “There is no assurance that all agency loans receivable are . . . identified.

“We could not find any documented analyses of delinquent accounts . . . proposed collection efforts or results of actual collection efforts,” the audit said, warning that the CRA “will continue to lose principal and interest on loans” if controls are not implemented.

CRA President Jim Wood said: “There is a problem. . . . The agency needs to track these loans down and update them.”

Wood said he welcomes the Tuttle audit and considers it “absolutely critical,” but predicted that no “horrible mistakes” will be found.

News of the possibly mismanaged loans comes as the City Council is bearing down on the semi-independent CRA, which is governed by a five-member commission appointed by Mayor Tom Bradley.

Outraged by the CRA’s secret approval of a $1.5-million severance package for its former chief executive, John Tuite, the council this year adopted reforms to tighten controls. Chief among them was giving Tuttle direct authority over agency expenditures and enhanced financial watchdog powers.

“One of the first things we wanted done was a very careful review of the CRA . . . a very in-depth kind of picture,” Tuttle said. After consulting with auditors inside and outside the CRA to identify potential problem areas, Tuttle requested the independent examination of the loan portfolio.

Meanwhile, CRA officials, in what they say was an unrelated decision two months ago, began their internal audit of several hundred housing rehabilitation loans. The audit found that the CRA never set up a system to ensure payments on about 10% of the loans--valued at $2.8 million and some dating back as far as 1979.

CRA officials said the agency is addressing the problem. As part of a reorganization announced last week, they said, auditors will be added and responsibility for collection on loans will be centralized.

Officials say they cannot explain how loans could have gone without collections for so long.

Contributing to the problem, officials said, were staff turnover, turf wars between departments, decentralized financial controls and inadequate accounting and auditing manpower during the 1980s, when lending activity increased sharply.

Records and interviews show that CRA auditors and accountants did warn years ago that the loan program needed stronger supervision.

Former CRA controller Terry Matsumoto said requests for more accounting staff to track the loans, particularly in the housing department, were repeatedly turned down by top agency officials. “We were never were given authorization to monitor it,” he said. “The corporate decision was (that) it wasn’t justified.”

Paul Sakamoto, the current CRA accounting manager who oversees loan analysis, said: “A lot of things we should have done, we couldn’t do” because of staffing shortages.

Tuite, who was CRA chief through the late 1980s, said following up on loans and other matters after projects were completed was always “of some concern (and) very challenging.” He said he did not believe that requests for additional personnel to keep track of loans were turned down.

“I don’t recall us saying we would rather not monitor loans than add two or three more people,” he said. “It’s just not a decision someone would make.”

CRA loans are used to help remove blight, provide affordable housing or jump-start private development in depressed areas. They are offered at low interest rates and some have deferred payments, not due until a home or building is sold.

The bulk of the loans call for “residual receipt” payments, meaning borrowers only have to make payments when the income from their project--such as a low-income apartment building--exceeds expenses.

Ras Mallari, the CRA’s new asset manager, said he is trying to determine if the agency is owed payments on such loans.

“I’m trying to make sure we’ve been getting the financial statements” developers are supposed to furnish annually, he said.

CRA auditors who recently reviewed the housing program found that “staff does not perform a detailed review of (the borrower’s annual) financial statements to determine whether surpluses are available to be applied to agency loans.”

Wood said this area requires more scrutiny, particularly now that a number of CRA revitalization projects are maturing and may begin to make money.

Pierre Lorenger, the CRA’s financial manager, said the loans that are least likely to have problems are large commercial loans, such as those that help finance downtown high-rises. Those have been closely monitored by project managers because they often involve millions of dollars each, he said.

John Warfel, a developer of low-cost housing in the CRA’s Pico-Union revitalization area, said he is not surprised that the agency is having problems with its loan portfolio. He said he struggled to keep the agency’s records straight on a $34,000 rehabilitation loan to his company several years ago. “It wasn’t well-handled,” he said. “Often, they would have stuff wrong. We had to constantly phone them up and tell them” the correct information.

Warfel said he recently received a notice that his loan was delinquent, even though he said he paid it off last year when he refinanced the apartment building.

Next week, the CRA will begin wrestling with the question of how to handle the missing loans.

Wood said the commission will have to consider each case and the ability of the borrowers, some of whom are low-income homeowners, to repay accrued charges that could run into the thousands of dollars.

At this point, Tuttle said that forgiving any back interest will require approval by the City Council and CRA.