Audit Faults City-Run Bank

An audit by a federal watchdog agency has found that at least $29 million in federal funds may have been spent inappropriately by the Los Angeles Community Development Bank, created after the 1992 riots to revitalize poor neighborhoods.

But the final audit backed away from a draft report that recommended that Los Angeles -- which oversees the bank and administers the bulk of its federal funding -- repay as much as $50 million in questionable expenditures from its general fund.

The audit was conducted by the inspector general of the Department of Housing and Urban Development, which provided $435 million to the bank, the nation’s largest community development lending experiment.

The audit, released late last month, comes at a time when the city has ordered the entity to wind down its operations or become self-sufficient.

Councilman Eric Garcetti, chairman of the council’s Economic Development and Employment Committee, expressed relief that auditors did not recommend that the city repay millions of dollars. Launched in 1996, the bank was plagued in its early years by bad loans, poor management and lawsuits from former borrowers, and consistently has fallen short of its mandate to create jobs for residents of the city’s poorest pockets.

The audit found that of 150 businesses that the bank assisted, 101 did not create or retain the required jobs for the low- and moderate-income residents the bank was designed to help. Only 11% of the jobs created by those businesses -- rather than the required 51% -- went to the targeted residents. It also found that $21 million in loans and investments improperly went to businesses located outside the targeted “empowerment zone,” which includes parts of central, east and south Los Angeles as well as Pacoima.

The audit came down hardest on the bank’s venture capital program, which committed $35 million to risky early-stage investments in technology companies at the height of the dot-com boom.

Of 14 companies that received investments, 12 did not move into the empowerment zone as required or create jobs for the residents they were directed to hire, the audit found. In fact, of 505 jobs created by the dozen businesses, only 32 went to low- or moderate-income residents and only four went to empowerment zone residents. About $29 million of the money has been spent, all of which auditors said “could be considered a questionable use of HUD funds.”

Bank officials contracted the venture capital program to Zone Ventures, which the audit also criticized. It recommends that HUD require the city or the bank to recoup more than $2.6 million in management fees paid to Zone Ventures. Auditors also found that imprudent business practices led to about $135,000 in unnecessary expenses. Garcetti said the city could be on the hook for about $44,000 of that.

HUD must respond to the inspector general by the end of next month with a plan for the bank or explain why it believes no corrective action is necessary.

Bank CEO William Chu declined to comment on the audit’s specifics, but said, “HUD, the city, county and the bank disagree [with the audit]....We will all work together cooperatively to find a resolution.” In comments in the audit, the bank contested all findings.

Chu has worked to correct the bank’s early mistakes since taking the helm in early 2000. Several lawsuits against the bank have been settled or dismissed and the only judgment against it is under appeal.

In August, the City Council ordered it to submit a plan to become self-sufficient or turn operations over to “a third party entity” within 18 months.

The bank has submitted its plan to the city Community Development Department, and the council is expected to review it by early December, Chu said.