L.A. Community Bank Actions Criticized

The Los Angeles Community Development Bank--the federal government’s biggest response to the 1992 riots--has had more than a third of its major borrowers go out of business or fall into deep trouble with their loans, and has created only 132 jobs for residents of the poorest urban areas that it was created to serve, according to interviews and documents.

The disappointing performance of the 36 largest loans made in the bank’s first two years and the slow start getting jobs to residents have led some community leaders to call for an overhaul of the bank--the nation’s largest community development initiative ever.

Moreover, the bank is facing bitter criticism by some borrowers, including one who filed a lawsuit alleging fraud and negligence. Others say the bank dragged out loan processing, made false promises and meddled inappropriately in their businesses. Among the most vocal are three of the bank’s largest loan recipients, who were lauded by bank officials at ribbon-cutting ceremonies. They accounted for 37% of the money the bank had lent by last fall.

Bank Chief Executive Robert Kemp defended the bank’s record, saying it operates in a high-risk environment.

“When you take into consideration that every loan is a high-risk loan and one that can’t be made by a regulated financial institution, you would expect that there would be a high failure rate,” he said.

Lindsey Austin, a longtime member of the Orange County Sheriff’s Advisory Council, sees it differently.

“My reputation is gone,” said Austin, who is suing the bank. “It’s destroyed me. They put me out of business [and] put my employees out of work.”

The bank has countersued Austin, alleging he never intended to meet his obligations to the bank.

Funded with $430 million from the Department of Housing and Urban Development, the bank was created to help businesses rejected by commercial lenders, shepherding often unsophisticated borrowers into the banking fold while requiring them to hire residents of the urban core.

However, interviews and documents reveal that:

* As of November, only about 19% of the 682 jobs at borrower companies--132 jobs--were held by residents of the so-called empowerment zone, far below the 51% ultimately required by federal officials. An unknown number of those jobs have since disappeared after companies went out of business. At one company shuttered by labor officials last fall for nonpayment of wages, 120 jobs were lost.

* The bank closed and funded deals that did not satisfy federal rules from the start. At least three companies were funded before they had leased facilities in the bank’s target areas. Two--including Austin’s--never operated in the zone, and one is no longer in business. Since those deals did not comply with HUD requirements, the bank, backed by the city, may be on the hook to cover any losses, Kemp said.

* Bank officials and loan officers have taken an unusually heavy-handed approach in an attempt to keep borrowers afloat, acting as business consultants and, in its largest loan, directing management decisions, company documents show. The efforts have led to allegations of interference and exposed the bank to potential liability, experts say.

The bank’s track record has led to calls for reform.

“The bank’s board of directors should . . . redesign the whole thing,” said Roberto Barragan, vice president of business lending for the Valley Economic Development Center, which processes microloans for the bank.

Both the Clinton administration and Mayor Richard Riordan lauded the bank’s creation as a linchpin for economic recovery. Its task is inherently risky, its execution hamstrung by federal requirements. Bank officials argue that the bank can succeed only through unconventional treatment of borrowers. Because it is not a commercial bank but a state-licensed loan fund, it is not subject to federal banking regulations, giving it considerable leeway in its lending practices.

Kemp said the bank has made some “minor” mistakes and misinterpreted some regulatory requirements when making early loans but has learned from its errors. The bank is working to standardize its approach to borrowers and has made changes to speed up approval and funding, he said.

Last month, the bank also placed its director of business development--who oversaw all loan officers--on paid leave and shifted the responsibilities of other personnel, sources said. Kemp confirmed the changes but declined to discuss them for privacy reasons.

Antonio Gonzalez, chairman of the bank’s board, said the bank is further along on job creation than it had anticipated since borrowers have two years to meet job obligations. Bank officials say the bank is outpacing most lenders serving the area.

However, critics say inconsistent and unorthodox treatment of borrowers and an effort to forge ahead without fully understanding its own regulations or the community have left the bank vulnerable--and ultimately could leave the city of Los Angeles on the hook for millions of dollars. The bank’s federal funding is guaranteed by the city’s future community development block grants. In addition, if HUD finds that certain deals never complied with its regulations, it could require the bank to repay it, probably from city coffers.

Barragan said the bank has done a disservice to some borrowers by funding excessively risky deals without providing independent technical help, then stepping in with a heavy hand to try to stem the damage.

“You’re playing with the public’s money, and you’re playing with the borrower’s lives,” he said.

The low number of jobs created so far for empowerment zone residents indicates that the bank is not structured to meet its mandate, said Caron Caines, an attorney with San Fernando Neighborhood Legal Services in Pacoima who heads an effort by the Empowerment Zone Oversight Committee to explore problems with the bank.

“Don’t act like just because you’re spending the dough, you’re doing the job,” she said. “HUD, the city and the bank need to sit around the table and say, ‘How are we going to make this work?’ You’ve got all this money [out], but what is it costing per job?”

By last fall, the bank had made 64 loans for a total of $47 million. Of those, 36--for nearly $45 million--were larger loans that bank staff generated. Most of the others were small loans underwritten and presented to the bank by community organizations.

Kemp said problems with larger loans do not reflect undue losses to the bank. The bank has written off five loans, for $2.5 million, he said. Of the total dollar amount of the portfolio, only 16% is delinquent, he said. He added that the total amount of loans closed now surpasses $60 million.

Deputy Mayor Rocky Delgadillo said the city believes the bank is working, although city officials have told the bank there is “room for improvement.”

To be sure, not all borrowers are complaining. Said Ernest Garcia, co-owner of West Coast Metal Finishing: “If it wasn’t for the bank, I wouldn’t be here today. . . . They’ve guided me in the right direction.”

That guidance, however, has led to accusations of meddling by some borrowers who haven’t fared as well. When the bank was conceived by political and community leaders in 1995, technical assistance for borrowers was deemed crucial. While the bank has encouraged some borrowers to use city-funded assistance programs, it is only now implementing a program to require that borrowers work with specialized consultants.

Until now, Kemp said, the bank has often assumed the role of consultant. The practice is generally avoided by lenders because it can expose them to conflict-of-interest allegations if deals go bad, a problem known as “lender liability.” Kemp said the bank’s mandate is so special that it has had to get more involved with borrowers than conventional lenders.

Allegations of interference have been voiced most furiously by Kevin Copeland, former president and chief executive of Copeland Beverage Group. The bank has poured $15 million so far into the dairy, whose board in August ousted Copeland from its helm.

Copeland alleges that the bank exercised so much control over management structure and business decisions that he was never free to run the company.

Company documents show that the bank required Copeland to employ certain people; designed the dairy board’s executive committee, granting itself authority over who should be on it; and required mandatory changes to the dairy’s bylaws, demanding approval over any management changes. In addition, it recommended a member of its own credit committee to the dairy’s board, records show.

Kemp denies the assertions, saying the bank required only that Copeland employ people with certain experience, allowing him to choose them. Copeland lost the reins of his company by failing to deliver promised sales, Kemp said. But Copeland disagrees.

“They started to institute controls from day one. I was a lame duck,” he said. “If it goes up in flames because of me, that’s one thing. But they never gave me the chance.”

Barry Cappello, a Santa Barbara attorney who wrote a book on lender liability, said community lenders are as exposed as commercial banks. The Copeland deal raises red flags, he said, because lenders tread on thin ice when they act as a consultant, get involved on the board of directors or dictate consultants.

“Once the loans go bad,” he said, “guess who’ll be responsible for the failures? It’s going to be the bank because they were the ones responsible for the recommendations.”

George Akers, former CEO of Trinity Knitworks, a $1.2-million loan recipient, is also accusing the bank of improper interference and has retained Rick Rodriguez, a former senior vice president at Security Pacific National Bank, as a consultant. The bank undercapitalized the company, Rodriguez said, ignoring recommendations from its own consultant, then sent in a loan officer who decided “which vendors to pay and which not to pay”--decisions he said hurt the company. The loan officer, Melvyn C. Bell, later became the company’s chief financial officer. Bell was in that position when labor officials charged Trinity with owing more than $200,000 in back wages. Akers left the company before it was shuttered by labor officials.

Kemp said the bank fired Bell and did not know he had plans to work for a borrower. He blamed Trinity’s decline on company management, though he agreed the bank could have done more to provide independent technical assistance and monitor the firm.

Austin, another key borrower, has filed a lawsuit alleging fraud and negligence by the bank, claiming it promised to work with him, then called his loan just weeks after he spent $65,000 moving into the empowerment zone.

His company, Summit Industries, was a manufacturer of countertops and tubs with a plant in Mexico. The suit alleges that bank officials, frustrated after asking Austin for months to move into the empowerment zone, gave him an 11-day deadline to do so, promising that if he complied, they would try to resolve other issues of back payments.

According to Austin’s lawsuit, he scrambled to sign a three-year lease on a building and ordered manufacturing equipment. Bank officials then told him he had five days to become fully operational, and when he could not meet the deadline, they called his loan. Austin is now being sued by the landlord of the building for breaking his lease.

The suit also alleges that Summit’s weak financial condition was due in part to a legal tangle that resulted when the bank failed to make sure it had a secured position on the loan before closing.

As a result of the bank’s actions, the lawsuit says, Austin lost his company in Mexico, the parent company in Santa Fe Springs and a new company he formed in San Diego County after the default.

Bank officials disagree with Austin.

“We gave him a notice of 11 days after [nine] months. How much more time should we have given him?” Kemp asked.

Critics say the bank’s nontraditional approach has translated into inconsistent treatment of borrowers and practices that most lenders avoid. But bank officials say the bumpy start has been unavoidable.

“Starting a bank from scratch and bringing everything on line means you either have to spend millions quickly or you recognize it for what it is, which is a growth and development process,” said bank board member Denise Fairchild.

“I always felt, ‘Why are we starting a bank from scratch when there are other community development institutions in place?’ ” Fairchild said. “But it was a decision from City Hall. Well, you pay the price, and that means you’ve got growing pains.”

Times staff writer Patrick J. McDonnell contributed to this report.