Bank Built to Aid Poor Going Bust

Eight years after it was created to help businesses in areas ravaged by riots and poverty, the beleaguered Los Angeles Community Development Bank has begun the process of shutting down because its government funding is drying up, the chairman of the bank’s board said Sunday.

Created in the aftermath of the L.A. riots to stimulate investment in low-income communities, the bank has struggled in recent years after making high-risk loans that went into default. In addition, its effectiveness was questioned by a federal audit.

The Los Angeles City Council last year informed the bank that it had to either become a lending organization not dependent on government money, or shut down.

The council provided funding for operations only through March 31. Other funds are also drying up, bank officials said.

“As a result, LACDB is beginning the process of closing its operations in a manner that appropriately protects and addresses the needs of all parties who have an interest or stake in the bank,” the nonprofit institution said in a statement.

Board Chairman Robert Sausedo said there isn’t enough cash flow to keep the bank open. “The board of directors and management, after consulting with our advisors, have determined that this is the prudent course of action for LACDB,” Sausedo said.

City officials had mixed feelings Sunday about the bank’s impending demise, which had long been expected.

“Evidence that it created a significant number of jobs was lacking,” said Councilwoman Jan Perry, whose district includes part of the area served by the bank. “It could have been more, a lot more.”

Linda Griego, a former interim chief executive officer and board member at the bank, said the institution did some good but was hamstrung by unreasonable federal red tape.

“Expectations were high. I don’t think it accomplished what it was expected to,” Griego said.

The Valley Economic Development Corp. signed a contract Friday to take over management of the bank’s remaining $15-million loan portfolio and collect payments, according to Roberto Barragan, executive director of the corporation.

When the bank ceases to exist, Barragan said that the loan payments would be collected by his agency and paid to the city of Los Angeles.

The bank was the federal government’s most ambitious response to the 1992 riots, and was set up to revitalize poor areas of Los Angeles by financing businesses and creating jobs in those communities.

In the statement issued by the bank, officials said that, since its inception, the institution has helped more than 150 small businesses create nearly 4,000 full-time private sector jobs in predominantly low-income communities throughout Los Angeles. More than 90% of these jobs have benefited low- to moderate-income residents, the bank said.

However, an audit by the inspector general’s office of the U.S. Department of Housing and Urban Development concluded in 2002 that the bank had failed to meet the requirement to spend $430 million in poor areas designated as an empowerment zone.

In particular, the audit found the bank channeled $29 million into a venture capital program to fund more than a dozen high-tech start-up companies at the height of the dot-com boom, but that only four of the 505 jobs it created were for residents of the empowerment zone.

The bank is an independent nonprofit organization that is overseen by the city and county, but run by the bank’s board of directors and officers.

The city had previously covered 87% of the bank’s administrative and operating expenses, with the rest provided by the county.

City officials, who helped finance the bank with guarantees against the city’s future receipt of federal funds, said they are hopeful that the bank’s plan for shutting down will not create any financial liability for the city.

If the bank’s loans are not paid back or it is found to have improperly used any of the $100 million it received, the city could lose millions of dollars in federal grants.

“If LACDB financial activities are found ineligible by the U.S. Department of Housing and Urban Development, the city may be required to reimburse costs with non-federal funds,” warned Ron Deaton, the city’s chief legislative analyst, in a report to the City Council.

But Deaton said last week that the city has a good argument for not being placed on the hook for the bank’s losses, because the nonprofit bank was set up to be a separate entity from the city.

“We don’t think that’s appropriate,” Deaton said of holding the city liable. “The whole thing with HUD was that this was going to be an arms-length relationship.”

If there are any losses, the city would probably not see an effect on its federal block grant funds until 2010 or later, said Edward Baker, a manager of the city Community Development Department. “That’s always been a possibility as the loans are paid back or not,” Baker said.

Among the lingering liabilities is a lawsuit filed by Lido Bungee Corp. of Pacoima, which claimed the bank failed to follow through on a commitment to finance an expansion, costing the firm millions of dollars in lost business it had arranged.

“The Community Development Bank did not deliver on its promises,” said Michel Lavallee, board chairman of the firm.