Community Bank Moves to Reduce Loan Risks, Increase Jobs
Los Angeles Community Development Bank officials have unveiled details of a plan to gain control of their struggling loan portfolio, in part by commissioning an independent review of each borrower, grading the deals on a detailed risk scale, and only funding a limited number of the riskiest ventures.
The changes were disclosed at the annual public meeting Wednesday night of the federally funded bank, created to make loans to borrowers in the city’s poorest zones who have been rejected by commercial banks. The bank has come under scrutiny for creating few jobs so far for residents of the so-called empowerment zone--who the bank was designed to help--and for the way it has chosen and managed risky loans. Bank officials recently revealed in a report to the L.A. City Council that fully 60% of its portfolio consists of “problem” loans.
The 3-year-old bank was funded with $430 million, making it the largest community development initiative in the nation’s history. It must pay $315 million of that money back--funds guaranteed by future block grants for city social service programs.
While bank officials Wednesday pointed to the more than $73 million in loans funded as a sign of their success, they also offered a frank assessment of the bank’s shortcomings and laid out new strategies to mend them.
Some of the recent changes:
* The bank is funding an independent diagnosis of each borrower to determine their risk and whether they need technical assistance. Borrowers who do are given a $7,500 voucher and referrals to independent technical assistance providers. The program was launched March 1 and the bank plans to seek bids from additional technical assistance providers by month’s end.
* The bank has begun grading its portfolio on a seven-point risk scale and will now only fund a certain number of deals in the riskiest categories. The bank is also working to strengthen its underwriting and is planning its first loan officer training sessions to standardize underwriting.
* The bank is expanding a program to link borrowers with unemployed residents in the empowerment zone through publicly funded job training centers. By the end of last year, only 19% of the jobs created or retained by borrowers--or 142 jobs--had gone to those residents, far below the 51% that borrowers are expected to achieve within two years of funding. A pilot program this year with three job training centers increased that to 25%, bank officials said, and the program will be expanded.
* The bank has increased compensation to community organizations charged with underwriting and funneling key smaller deals to the bank. The bank fell far short of its goals to fund those smaller deals last year, largely because the community organizations are paid by the bank only if the deal is ultimately funded. A loan packaging program--whereby community organizations help borrowers compile their paperwork--generated no activity at all last year. In that case, the bank will now pay the organizations a “good faith” sum of $750 even if the loan application is ultimately rejected.
