Inner city can't get the money.

Ballyhooed City-Federal Loan Program Has Not Gotten Off the Dime

Some 18 months have passed since Vice President Al Gore, L.A. Mayor Richard Riordan and a host of dignitaries gathered for the gala grand opening of the Los Angeles Community Development Bank. Grand proclamations were made that the bank's $430 million in federal funds would be leveraged with private-sector loans to bring an economic revival to inner-city Los Angeles.

But hardly a trickle of loans has flowed since then, despite strong demand from inner-city borrowers, willing private-sector lenders, and the Community Development Bank's $3 million annual operating budget.

To date, Community Bank has only made two loans totaling $2.7 million under its co-lending program. And many of the more than one dozen commercial lenders that signed up for the program say they have heard little or nothing from the organization since making their commitment nearly a year ago.

"We haven't done any loans with them under the co-lending program, and I don't know anyone who has," said Peter Barish, a vice president at Founders National Bank, a co-lender in the program.

Community Bank CEO Robert Kemp acknowledged that the organization has been slow getting up to speed, largely due to the complex nature of inner-city lending and the difficulty of putting together loans that comply with commercial banking regulations.

"We have to respond to whatever comes through the door. A lot of banks don't want to do loans of less than $100,000 because it's not economical, whereas the smallest loan we'll make is $1,000," he said.

Nonetheless, he added, the organization expects activity to pick up noticeably in the coming months, following the recent resolution of several regulatory issues and the Community Bank's planned roll-out of a new loan guarantee product in the next 30 days.

But it remains to be seen whether the new product will overcome commercial lenders' long-held reasons for not lending to inner-city borrowers - such loans are typically too small and too risky.

The idea of a Community Bank dates back to 1994, when Los Angeles was passed over by the U.S. government for designation as a federal "empowerment zone" - a designation that would have won the city millions of dollars in federal funds to help businesses and homeowners in L.A.'s inner-city areas.

As a consolation prize, federal government agencies later provided $430 million in grant money to help the city establish the Community Development Bank. The money was earmarked to finance the organization's operations, as well as its various lending and development programs.

Borrowers in the Community Bank's lending programs must be located or plan to locate in designated underserved areas of Los Angeles. To qualify for loans, borrowers must show that their application for a similar loan from a commercial lender had been rejected.

Three of the area's biggest commercial lenders - Union Bank of California, Bank of America and Wells Fargo Bank - all signed on a year ago as co-lenders with the Community Bank. But all three have yet to underwrite any joint loans with the organization.

Union Bank spokesman Andrew Porterfield attributed the lack of progress to Community Bank's focus on small deals and/or those that involve a high degree of risk.

Similarly, BofA spokesman Cary Walker said BofA has yet to co-lend with Community Bank because such deals would require BofA to cede most or all of the loans' risk management.

"BofA was the first local financial institution to declare support for Community Development Bank, pledging up to $50 million for the program," said Walker. "But we can't enter any co-lending arrangement that requires us to relinquish our risk management responsibilities."

Likewise, most smaller banks in the co-lending program have yet to do a single deal.

Officials at Far East National Bank, another of the more than a dozen institutions in the co-lending program, are equally under-whelmed with the responsiveness of the Community Development Bank.

Over a month ago, the Community Development Bank contacted Far East about funding two potential deals. But it has yet to follow up on those initial inquiries, said David Wang, a senior vice president in charge of Far East's Small Business Administration division.

"We responded to (the proposals) the same day," said Wang. "We said, 'Do you have a package; we want to get involved.' And they said, 'We're collecting information and want to keep you informed.' We never heard from them again," Wang said.

Community Bank's Kemp acknowledged that commercial lenders have been slow to get involved in the co-lending program, but he attributed the lack of progress to regulatory obstacles. Specifically, he said, many private lenders were unsure if Community Bank co-loans would conform with federal regulations and qualify as loans toward their Community Reinvestment Act lending requirements.

To address those problems, Community Bank has been working with federal regulators to make sure the loans it's proposing conform with the needs and requirements of commercial lenders, according to Kemp.

He said many of the ambiguities have recently been resolved, and the Community Bank expects to hold a working meeting on the subject with its co-lending partners in the next 30 days.

"It was function following form. A lot of things still had to be worked out ...," he said, noting that last year's co-lending announcement may have been a little premature.

Kemp added that commercial co-lenders could also become more involved with Community Bank in coming months, following the organization's roll-out of a new loan guarantee product also within the next 30 days.

While the co-lending program has been slow to get off the ground, Kemp also noted that Community Bank has solely funded 12 deals worth $6.2 million and has another 10 in the pipeline worth up to $15.5 million.

Despite the lack of progress in the co-lending arena, not all commercial lenders who signed on with the program were critical of its lack of progress. In fact, several said they have been working actively with Community Bank and are moving closer to putting some deals together.

"The expectations of any new thing are generally so high that it's hard to match those expectations," said Armand Walker, chief executive of Pine Cobble Financial Group, which is currently involved in two potential co-lending deals with Community Bank.

"Certainly time will tell, but ... I'm encouraged with their potential for doing business. Unlike some other programs I've seen in the past, we may be able to do some business with them," Walker said.

Commercial lenders are not the only constituency the Community Development Bank must serve. Its track record with borrowers is also weak, according to some inner-city business advocates.

Frank Moran, president of the Latin Business Association, said very few borrowers in the local Latino communities are even aware of the Community Bank, much less how to apply for its loans. He attributed this lack of knowledge to the Community Development Bank's lackluster marketing effort.

Nonetheless, Moran remains hopeful that the bank will eventually become an effective vehicle for funneling capital into the inner city.

"I'm still patiently optimistic that they will pick up steam. I'm not disappointed because I know there's an education process (for the participating lenders and borrowers) with the kinds of loans they want to do," Moran said.