Wells Fargo Bank, Union Bank of California and Bank of America have so far failed to deliver on their pledges to back the federal government's largest ever inner-city lending program, the Los Angeles Community Development Bank.
A widely watched experiment in reviving depressed urban neighborhoods through loans to struggling--but promising--entrepreneurs, the development bank counted on the big institutions' commitment to lend $210 million in areas such as Pacoima and South-Central Los Angeles.
But not a penny of that money has come through. "Getting them to honor their pledge has been problematic," said C. Robert Kemp, head of the development bank.
As a result, the institution has relied instead on an array of smaller banks and other lenders, which have kicked in $33 million to augment its $40 million in federally funded loans approved to date.
That disappoints the development bank's officials, who say the goal is to create a government partnership with private financial institutions. The big banks' $210 million, matched by federal funds, was to have gone to businesses that had failed to qualify for conventional financing.
Banks give varied answers as to why the joint lending program has faltered. Some say the risks involved are too high. Others say the problem lies with the development bank, which they contend has failed to standardize the program, or with unreasonably high expectations of how quickly the program could be put into place.
Also cited are changing economic conditions that have banks chasing marginal borrowers they wouldn't consider during the recession in which the development bank was conceived. This has pushed the federally funded development institution toward even more risky deals, said Robert A. McNeely, Union Bank senior vice president. Union will participate at a later stage of the development bank's evolution, he predicted.
The development institution "was not to be a charitable program," said Bank of America Executive Vice President Don Mullane. "If you really want to benefit that area, you've got to make loans of substance to companies of substance."
Los Angeles Deputy Mayor Rockard Delgadillo said Mayor Richard Riordan plans to seek federal changes in the program to expand the eligible pool of borrowers. Delgadillo agreed that the development bank has been forced to focus on risky borrowers, but he also said 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 on the Eastside and in South-Central, Pacoima and some unincorporated areas of Los Angeles County. (The city recently got the empowerment zone after all, but the development bank remains in place.)
The idea was to pair the federal loan money with private bank loans to stimulate job growth in disadvantaged areas, and initially banks responded enthusiastically. In 1995, Bank of America pledged $50 million, and Wells Fargo and what was then First Interstate--which Wells has since acquired--pledged a combined $125 million. Union Bank said it would kick in $35 million. A consortium of smaller lenders pledged a total of $100 million.
The development bank targeted the riskiest borrowers, those who had been turned down for conventional bank loans, and often those with few assets to show beyond their equipment and inventories. In fact, among the hundreds of businesses that have applied for 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 community bank through one of its most successful intermediaries, the Valley Economic Development Center.
Venegas, 28, typifies the kind of scrappy, marginalized entrepreneur the development bank hopes to help become a good credit risk for mainstream financial institutions. A Colombian immigrant who learned English here at age 10, he used credit cards and student loans to buy a bus while still a student at UCLA. He has since built a transit services and truck repair business that has $1.1 million in yearly revenue. "I will make those payments before I make any other payments," he said of the community bank's loan. "I was so surprised they did come through when no [other] bank would."
Another borrower is Desmond George, owner of a South-Central grocery who watched his store burn to the ground in the 1992 riots. Banks would not extend him credit because of his losses.
Though borrowing $100,000 from the development bank helped him reopen his deli counter, he still lacks working capital and fears that the loan won't give him a sufficient credit history to qualify for conventional bank loans in the future.