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Development Bank Under HUD Scrutiny

Lending: A complaint from a borrower prompts an audit of the troubled Los Angeles financial institution.

February 08, 2001|LEE ROMNEY | TIMES STAFF WRITER

The Department of Housing and Urban Development's watchdog is auditing the Los Angeles Community Development Bank.

The Office of Inspector General audit was prompted by a complaint by an early borrower from the bank, the federal government's largest response to the 1992 riots and once a centerpiece of Vice President Al Gore's Empowerment Zone program. The bank has been plagued by litigation and has nearly ceased operations while it attempts to remake itself.

According to a spokesman for HUD's inspector general, the audit was initiated late last year in response to a citizen complaint and follow-up complaint from U.S. Rep. Steve Horn (R-Long Beach), who at the time headed a government oversight committee.

A spokeswoman for Horn said the complaint alleged "fraud and lender liability" and detailed the various lawsuits against the bank. One of those cases resulted in a $10-million judgment, which the bank is appealing. Several other lawsuits are scheduled for trial this year.

Bank Chief Executive William Chu said two federal auditors have been at the bank since Feb. 1 reviewing "policies and procedures." They told him the audit was "a congressional request in response to disgruntled borrowers" and could last four months.

"I feel that we've done nothing wrong," said Chu, who was hired last year to help repair the bank's image. "If they are going to tell me things that I can improve, I welcome that opportunity."

Several borrowers had complained in writing to officials as long as two years ago, but received no response. HUD conducted its own review of the bank in 1999. It criticized the city for lax oversight but found the bank's underwriting and record keeping to be sound.

The inspector general has units housed within each federal agency but is independent, so its audit could differ from HUD's. A spokesman said the office is apolitical, but the review comes just as a Republican administration is taking over.

Horn referred the borrower's complaint to the inspector general. Horn's spokeswoman said agencies appear to have stepped up audit activity since President Bush entered office.

The audit comes at a delicate time for the bank, funded with $430 million from HUD. With city approval, the bank could still tap more than $180 million in federal funds to make loans, but it has virtually run out of loan-loss reserves and is losing money yearly.

In October, bank officials unveiled a plan to remake the lender by creating a separate arm of private investors. The private funding--if the bank could get it--would ensure greater accountability. The private structure would also protect the new funds from the bank's liabilities.

But the Los Angeles Community Development Department rejected that plan, along with a second amended plan, and bank officials are now drafting a third.

The city department administers the bank's funds and the City Council must approve the bank's annual budget. If the bank defaults on its obligations to HUD, the city will pay the price through a reduction in future community development block grants.

Department general manager Lillian Kawasaki said the bank's newest plan is expected to come before the council by the end of the month.

The bank's initial proposal "was not really workable," Kawasaki said, because "it potentially would have created . . . additional liability with less control."

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