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By JASON BOOTH

Staff Reporter

Few financial institutions were created with as much fanfare as the Los Angeles Community Development Bank.

Launched in 1995 at a gala ceremony hosted by Vice President Al Gore and L.A. Mayor Richard Riordan, the bank was formed with promises of providing up to $1 billion in loans to revive L.A.’s poorest neighborhoods, many of them still reeling from the effects of the 1992 riots.

But more than two years after its creation, the bank remains at odds with many of the commercial banks that were meant to be its allies. It stands as an example of how tricky lending to inner-city businesses can be.

“The LACDB has not been clear on what its mission is,” said David Gonzales, an executive vice president at Well Fargo who is on the board of LACDB. “The banks don’t know what to do. I’m a director, and I don’t know what co-lending means. That’s the problem.”

Community Development Bank officials counter that commercial banks have been insensitive to the challenges of lending to inner city businesses, many of which fail to meet even the most basic standards required of other borrowers.

“The loan officers are trying to make as many loans as they can that meet the safety and soundness criteria of the bank,” said LACDB Chairman Robert Kemp. “If that is the only measure they use, they will not make the kinds of loans that we make.”

Such bickering is a far cry from the optimism that accompanied the bank’s opening in 1995.

The institution got its start with a $430 million grant from the federal government. Using that money, the LACDB intended to leverage more than $1 billion in loans to inner city businesses through co-lender agreements with commercial banks and other lenders.

Commercial banks were quick to line up their support, with initial pledges of over $310 million. Wells Fargo Bank, Union Bank of California and Bank of America together accounted for $210 million.

But so far, the LACDB has closed only $25 million worth of loans to about 70 companies.

And the promised relationship with leading commercial banks has failed to materialize. To date, not one of the major banks has followed through on their co-lending pledges. The LACDB instead has been forced to rely on smaller banks and non-FDIC-regulated institutions.

“Turning the concept into a business initiative has been very difficult,” said Gonzales.

The co-lending relationship has proven particularly contentious. In most cases, the deals that the Community Development Bank brings forward are too risky for them to participate in, bankers say.

Under LACDB’s charter, a company needs to have been turned down by a commercial bank to be considered for a loan a requirement that makes it difficult for banks to consider virtually any of the deals presented.

“In theory, the LACDB has to find someone who with a little help will become credit worthy,” said Donald Mullane, chairman of Bank of America’s Community Development Bank, which specializes in lending to inner-city businesses.

“But generally, you are not going to find any deals on the edge. They are usually declined for very good reasons,” he said.

Kemp says commercial banks need to be more open minded when it comes to inner-city lending.

“We have had a number of presentations (to the banks) in which we said that we are willing to subordinate our position (in the loans) so we take all the risk and they take all the profits,” he said.

But even in those situations, the banks have balked.

Consider Kevin Copland, an African American entrepreneur who last year secured over $8 million in debt financing through the LACDB and GE Capital, but was unable to get a penny from any of the major banks in town. Copland used the money to finance the purchase of a downtown dairy.

Copland’s applications were rejected even after the LACDB loaned him more than $6 million, including a $3 million portion that requires no repayments for five years.

Kemp blames the major banks for being more concerned with meeting their corporate performance goals. Bankers counter than unlike the LACDB, they are in business to make money and cannot be expected to turn a blind eye to their profit margins.

“When we make a loan we don’t roll the dice,” Mullane said. “We are a very low-margin business. You don’t have to make many bad loans before you get into financial trouble.”

LACDB officials and their commercial banking partners are trying to hammer out a co-lending relationship that would be acceptable to both parties. And Kemp is optimistic that progress is being made. He said that by the end of April he expects to have reached substantial agreements on how to structure co-lender loans.

One structure would involve the LACDB making long-term loans to a firm, while the banks would offer revolving credit lines using the company’s accounts receivable as collateral.

The LACDB also is setting up a $50 million venture capital fund that would primarily draw on the bank’s $430 million grant, but would be partly capitalized by commercial banks.

That, according to Kemp, would help satisfy another frequent complaint by the banks that many of the companies proposed by the LACDB do not have enough equity to qualify for loans. That problem is particularly acute in low-income neighborhoods, where traditional sources of equity, such as real estate and wealthy relations, are less accessible.

The fund will be operational by the end of the June and will give the LACDB more control over the companies in which it invests.

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