Panel/40″/mike1st/mark2nd
By ANDREA L. NYLUND
Contributing Reporter
How are the inner-city communities of Los Angeles faring? The Business Journal interviewed four local leaders about the state of inner-city L.A. today. They represent a mainstream commercial bank, an African American-owned bank, a Korean American community group and a Latino business organization.
Don Mullane, executive vice president of Bank of America, oversees the bank’s $140 billion, 10-year lending commitment to underserved areas in the 10 Western states, a commitment BofA announced last October. BofA also has 10 full-service branches and 37 ATMs in South Central L.A., which the bank claims is more than all its competitors combined.
Paul Hudson is president and chief executive of Broadway Federal Bank, an African American-owned bank with five branches in the Mid City and South Central sections of Los Angeles.
Bong Hwan Kim is executive director of the Korean Youth and Community Center, which assists L.A.’s Korean community with small-business development, housing and various other community services.
Hector Barreto is chairman of the Latin Business Association, which promotes the growth of Latino-owned businesses in Los Angeles. The association runs various programs, including one to help members secure financing through more than 20 financial institutions.
Question: Do the residents and businesses in inner-city Los Angeles have adequate access to capital? Are there enough banks and financial services companies doing business in the inner city?
Hudson: Clearly not. It’s a vicious cycle.
It’s difficult to finance a business if you’ve never started one. Entrepreneurs use their homes as collateral for business financing, since getting a home loan is easier than a business loan. But it is still harder for inner-city residents to get home loans than in other places.
It will always be true that starting a business in low-income communities is difficult. Banks contribute to the problem and then use it as an excuse. They commit to millions of dollars, but no one seems to qualify. We need to turn the cycle around and make new credit commitments.
Kim: The entrepreneurs are there, but there’s a big gap between them and the big banks which, as they consolidate, don’t necessarily see the potential of these inner-city markets. The needs of the inner cities are different than well-to-do neighborhoods. There is a greater need for technical assistance, such as pre-loan packages and business plan assistance. Also, there are more language and cultural barriers to deal with.
Mullane: Making loans in these areas is absolutely profitable for us. We would like to see more competition from other banks. We’ve got 10 full-service branches and 37 ATMs in South Central L.A. that’s more than all competitors combined.
Having more competition would spawn growth and prevent the banking industry from getting lethargic.
We’ve made a $140 billion, 10-year commitment for 10 Western states. It’s the biggest lending commitment ever and is the first time a bank has made a commitment voluntarily in the absence of regulators, without any pending merger or acquisition.
Q: Whose responsibility is it to remedy the dearth of inner-city lending and how should they do it?
Kim: It will take the working of the public and private sectors as well as the community. You hear a lot about the banks’ commitments to the inner city, but when you get out on the street, you don’t see it.
Mullane: You can’t think just about banks and financial institutions. Banks’ market share in the U.S. is less than 25 percent. So other organizations like credit agencies and mutual funds need to make investments to regenerate those areas. You’ve got to get the Merrill Lynch truck to stop there too. It’s the credit vs. capital issue. You can’t keep piling credit on top of credit. What’s missing from these areas is venture capital.
Barreto: We also need more outreach programs and better links between organizations. We need leadership in corporations. And elected officials need to hold the banks responsible for commitments made.
Hudson: Everybody has to contribute and partner in this effort. Private enterprises, the community and government. First, the government is trying to turn these areas around by stimulating development in under-served areas, then the regulatory bodies need to ensure that things get done. I think it’s such a large problem that no one entity can remedy it.
Q: Since the 1992 riots, has the inner city’s access to capital improved, worsened, or remained the same?
Barreto: It’s about the same. What was disappointing was that there was a lot of positive rhetoric, but then companies turned away. It leaves a bad taste in your mouth. These communities are just trying to pick themselves up and get the standard of living they deserve.
Hudson: It’s another vicious cycle. If you can’t get loans, you can’t qualify for loans. Lay discriminatory lending on that and a combination of results, and you have status quo from 1992 through ’98.
Q: Why are financial institutions still reluctant to do business in inner-city neighborhoods? Are their concerns based more on false perceptions or reality?
Kim: The stereotypes about immigrants and neglected communities still persist, and the legacy of red-lining continues. There’s the perception that people are not as ambitious as in other places. The big institutions have to understand that small businesses are the engine of our economy, and false perceptions can put them in jeopardy.
Barreto: The myths about the Latino business community, for example, are that businesses have low disposable income, there’s not much revenue and Latinos are mostly immigrants. But if you look at the L.A. region 10 years ago, there were 70,000 Latino businesses compared to 250,000 today. The number doubles every two years. It’s a huge, dynamic, loyal and young community. The market is right here under our noses, but many financial institutions won’t even bother reading a business proposal from our community. We are working with banks to identify candidates who need access to capital.
Mullane: Not all financial institutions are reluctant to do business in the inner city. Business in these areas isn’t always as profitable as other areas, but it definitely contributes to shareholder value. Last year, the Bank of America Community Development Bank booked over $1 billion in loans in 37 cities across the United States. The loss has been very low. It’s all about economic development and jobs. To solve the problems in America, crime and inner-city conditions, people need to go to work every day. But the jobs are not where people live. Venture capital is needed to locate people in the city, to use the work force there. All council members agree that the city needs to provide economic incentives to make the area more attractive than others. People act in their enlightened self-interest.
Hudson: Many banks have taken the easy route and left instead of making these markets work. Incomes are lower, deposit balances are lower and technology, like ATMs and home banking, is adopted later. The market takes more time, but is worthy of bank attention, services and facilities.
Q: The L.A. Community Development Bank, a fund established in 1995 with $430 million in federal grants, was created to help revitalize local inner-city communities. But it has been criticized for not getting loans out quickly enough. Is the fund doing a good job of getting loans out to inner-city borrowers?
Mullane: It’s difficult. They’re still learning how to deal with commercial banks and vice versa. We didn’t want them to create false expectations by calling it a bank; it’s actually a fund. Their effectiveness is limited, since they can’t do multi-family affordable housing loans, only commercial lending. And only a relatively small number of loans require assistance from both a commercial bank and the L.A. Community Development Bank.
Hudson: It’s difficult for me to see the investment of the L.A. Community Development Bank. There’s no visible difference. But I’m more concerned with the large financial commitments made by banks. These are illusory commitments. Wells Fargo, for instance, entered a merger with First Interstate over four years ago. In return for closing down branches in lower-income communities, the bank promised to invest in the community. They made a commitment of $75 billion, but they don’t say how they invest, how people can apply for the money, or who will get it. And they don’t report on an annual basis on what they do. There’s no monitoring, no honoring of these commitments and no time plans. When the private sector starts talking about lending billions of dollars to the inner city, the potential for improvement is off the chart. But when I don’t see any results, I get livid. We’re not trying to totally revamp these areas, just change the tide of decay.
Q: How important a role will the new federal and city empowerment zones play in revitalizing inner-city communities, creating jobs and making lenders more willing to do business there?
Barreto: I believe the empowerment zones are very important in taking the stigma away from these areas. Twenty years ago there was much doubt, but a lot has been overcome in East L.A., where I have my office. The businesses are starting to feel that there is a future here, that they can have a return on investment and a capable, qualified work force to man their operations.
Hudson: The disincentives of being located in these communities are bigger. It’s mostly fringe players, such as light manufacturers and assembly plants that already are in the community, who are taking advantage of the incentives. One of the biggest new players to invest is Smart & Final. They’re doing a lot more than Wells Fargo and Bank of America put together. They’re building new stores in moderate-to-low-income communities. They’re providing jobs and a clean, secure place with adequate parking.
