Big Banks Fail to Back Inner City Loan Effort
Wells Fargo Bank, Union Bank of California and Bank of America have so far failed to deliver on high-profile pledges to back the nation’s largest ever inner city lending program, the Los Angeles Community Development Bank.
Considered a grand experiment in reviving the inner city through loans to struggling entrepreneurs, the Community Development Bank counted on the big banks’ promises of $210 million for loans to help revive areas such as Pacoima and South-Central.
Instead, for the 18 months the community bank has been making loans, the big banks have stalled, and not a penny of their promised loans has come through. “Getting them to honor their pledge has been problematic,” said C. Robert Kemp, head of the CDB.
As a result the Community Development Bank has relied on smaller banks and other lenders, who have kicked in $33 million to augment the CDB’s $40 million in federally-funded loans to inner city businesses approved to date.
That disappoints CDB backers, who, while applauding the bank for the 48 loans made so far, say the goal is to create a government partnership with private banks. The $210 million pledged from the three big banks was to help businesses that had failed to qualify for conventional loans, and be combined with federal funds for each individual borrower.
The banks give varied answers why the joint lending program is faltering to date. Some say the risks involved are too high. Others say the problem lies with the Community Development Bank, which they contend has failed to standardize the program, or with unreasonably high expectations of how quickly the joint lending program could be put into place.
Also cited are changing economic conditions that have banks chasing marginal borrowers they wouldn’t consider in the era in which the CDB was conceived. This has pushed the CDB toward even more risky deals, said Robert A. McNeely, Union Bank senior vice president. Union will participate at a later stage of the CDB’s evolution, he said.
The Community Development Bank “was not to be a charitable program,” said Don Mullane, Bank of America executive vice president. “If you really want to benefit that area, you’ve got to make loans of substance to companies of substance.”
Deputy Mayor Rocky Delgadillo said Mayor Richard Riordan plans to seek federal changes in the program to expand the pool of eligible borrowers to include those of lesser risk. Delgadillo agreed that the CDB has been forced to focus on risky borrowers, but he also said that the private banks need to be “pushed” toward involvement.
The Community Development Bank was established in 1995 to help soften the blow of the city’s failure to win an empowerment zone from the federal government. Instead, Los Angeles got $430 million from the Department of Housing and Urban Development to set up a 10-year loan program for businesses in targeted industrial areas in South-Central, East L.A., Pacoima and some areas of unincorporated Los Angeles County. (The city recently got the empowerment zone after all, but the CDB remains in place.)
The idea was to pair the federal loan money with private bank loans to stimulate job growth in disadvantaged areas, and banks responded enthusiastically at first. In 1995, Bank of America pledged $50 million, Wells Fargo and what was then First Interstate--which Wells Fargo later acquired--pledged a combined $125 million and Union Bank pledged $35 million for a total of $210 million. A consortium of smaller lenders pledged a total of $100 million.
The CDB targeted the most high-risk borrowers, those who had been turned down for conventional bank loans, and often those with few assets to show beyond their equipment and inventories. Among the hundreds of businesses that have applied for CDB loans are a few so marginal that they don’t even have bank accounts, and survive from one cash transaction to the next, Kemp said.
Among the beneficiaries to date is American Fleet Services President Maurice Venegas, who got a $25,000 loan from the CDB through one of its most successful intermediaries, the Valley Economic Development Center.
Venegas, 28, typifies the kind of marginalized entrepreneur the CDB hopes to help become a good credit risk for mainstream banks. A Columbian immigrant who learned English here at age 10, Venegas used credit cards and student loans to buy a bus when he was still a student at UCLA. He’s since built a combined business in transit services and truck repair with $1.1 million a year in revenues. “I will make those payments before I make any other payments,” he said of the CDB loan. “I was so surprised they did come through when no bank would.”
Another borrower is Desmond George, the owner of a South-Central grocery store. George watched his store burned to the ground in the 1992 riots, and banks won’t extend him credit because of his subsequent losses.
Although a $100,000 loan from the CDB helped him reopen the deli counter in his rebuilt store, he still lacks working capital, and fears that the CDB loan won’t give him a sufficient credit history to qualify for bank loans in the future.
George’s predicament offers a lesson in how one business’ lack of capital trickles down to everyone in this low-income neighborhood: George can’t buy his fresh vegetables and seafood in bulk, and so charges higher prices. If his business fails, there will be one less store in a place where grocery stores are already scarce.
CDB officials had hoped the banks, in partnership with the federal government, would step in and help with deals like George’s and also with bigger business-lending deals, those most likely to create the most jobs for residents of poorer areas.
But to date, the big banks have stood on the sidelines, with a few exceptions, such as Glendale Federal, Manufacturers, Cathay, Sumitomo and Ocean banks.
The bank has been surprised to find an array of other lenders and venture capital companies eager to participate. GE Capital participated in the bank’s largest deal, the $8.5-million acquisition of a dairy south of downtown L.A. by Copeland Beverage, Kemp said. The deal preserved about 150 jobs, CDB officials said.
But of 38 potential joint loan packages approved to date, only 12 have included money from private lenders, CDB officials said. Kemp said he expects the bigger banks will take more steps to do joint loans as time goes on, but added that he is concerned that the banks seem adverse to taking risks that are inherent in the program.
“If we could bring them bankable loans, we couldn’t do those loans,” he said.
Mullane, of Bank of America, said the Community Development Bank has so far not presented any deals that meet Bank of America’s underwriting standards. In some cases, he said, projected cash flows have simply not been sufficient to service the debt, in the bank’s view.
He noted that Bank of America’s pledge was made with the caveat that borrowers would meet the bank’s criteria.
The banks also point to their good lending record in other programs for underserved borrowers. Bank of America, Wells Fargo and Union Bank have all qualified for the best possible rating under the federal Community Reinvestment Act, meant to guarantee banks do not redline inner city communities. Wells Fargo is Southern California’s largest Small Business Administration lender, and Bank of America last year booked over $1 billion in loans from its own internal community development bank, chiefly for construction loans for affordable housing and small business loans.
David Gonzales, executive vice president of Wells Credit, the asset-based lending group of Wells Fargo, said the problems are specific to the CDB, rather than an aversion to inner city lending programs. He said Wells Fargo wants the CDB to standardize its lending program, perhaps to more closely resemble the government’s SBA lending program.
“This is not an easy issue,” said Gonzales, who also sits on the CDB’s board. “People try to make it easy. But it takes time.”
However, sources with the CDB say the large lenders have not been aggressive in either co-lending or solving the banks perceived problems. They say it’s crucial that private sector participation pick up steam as the bank plans to create loans from $52 million in government funds and whatever private capital can be found.
“It’s of critical importance,” said Kemp. “We want to grow these businesses into traditional credits. . . . We do not want to substitute the CDB for a normally functioning capital economy.”
All three big banks insisted they will fully participate, given time.
“We will fulfill our commitment,” said Bank of America’s Mullane. “We are waiting for the right deals and we need to find them.”
