NCPA - National Center for Policy Analysis

Sky-High Default Rates At Federally Funded Bank

November 15, 1999

The Los Angeles Community Development Bank was supposed to make loans to businesses in depressed areas of the city and create jobs. It made the loans, but the whole scheme has been a crushing disappointment even to its staunchest defenders.

Vice President Al Gore once called it "an example of how an economic empowerment program should work." However,

  • The development bank had loaned out $97 million as of September 30 -- but it suffered a loan default rate of 32 percent and has created only a tiny fraction of the jobs it promised.
  • By the end of 2004, it is supposed to have loaned out all of its $435 million in federal funds -- and then see that it is all paid back.
  • Although it took the bank 14 months to make its first loan, that one was so badly botched, according to the borrower, that he was effectively in default from the first day and had to shutter his business.
  • The Department of Housing and Urban Development, which financed the bank, claims the fault lies at least in part with lax oversight by the city, while the city complains that the federal money came with too many strings.

There are several other community development banks around the country -- in cities like Cleveland and Washington -- but none are as large, as political in their origins or as dependent on federal funds as the Los Angeles bank, observers report.

By contrast, a private-sector organization called the California Economic Development Lending Initiative -- a consortium of 45 banks with a lending capacity of about $65 million -- also makes loans in distressed areas. But the private bank, which has $29 million in loans outstanding, has a default rate of just 2 percent.

Observers say the difference is that the private-sector effort is staffed by experienced professionals who keep a close eye on their borrowers and are available to offer sound advice -- all attributes lacking in the federally-financed endeavor.

Source: James Sterngold, "A Grand Idea That Went Badly Awry," New York Times, November 14, 1999.

 

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