Banking on a New Kind of Lending : Development banks a key to rebuilding L.A.?

A major challenge to rebuilding Los Angeles lies in providing sustained sources of capital to finance new businesses, home loans and other much-needed community development in the inner city. Urban lending has never been a strong suit of conventional banks, but many have committed money to loan programs in the city since last spring’s riots. But much more is needed.

To address the problem, many urban strategists are examining the concept of urban development banks--institutions dedicated to the special financing needs of cities. The idea has taken different forms and meanings. The Rev. Jesse Jackson likes the idea of a national urban development bank to finance Felix G. Rohatyn’s proposal for a vast rebuilding program for cities, bridges, roads and other infrastructure across the nation. The concept would require new legislation and government funding, a lengthy and difficult process.

A far more modest approach, doable in South-Central Los Angeles under existing laws, would be to create community development banks. Such a grass-roots institution looks and acts like a conventional bank with one important exception: Its primary focus is to make home, business and consumer loans to people who want to work and invest in inner-city neighborhoods. However, these borrowers, who are crucial to revitalization efforts, typically do not qualify under the cookie-cutter profile used by most conventional banks to assess their customers.

Qualifying these applicants often requires subjective measures that cannot readily be institutionalized. By conventional standards they are considered risky borrowers. They may require more personal service to qualify them for a loan and may need assistance in planning how to meet their loan obligations.

South Shore Bank in Chicago is a model of what a community development bank can do. Founded almost two decades ago to revive a depressed black neighborhood, South Shore is privately owned by a small group of investors, churches, corporations and nonprofit foundations.

It takes deposits, which are federally insured, from those who want to support the bank’s social programs. It helps neighborhood economic development through its nonprofit community development company and its for-profit real estate development arm. Today, the South Shore area has been transformed from a decaying neighborhood to a tidy, middle-class black neighborhood. Southern Development Bancorporation in Arkansas modeled itself after South Shore and is focusing on business and jobs creation.

Pooling resources in a similar community development bank could be a key factor in the rebuilding of Los Angeles.