June 30, 2004 - From the June, 2001 issue

L.A.'s Community Development Bank: What Went Wrong- What's Its Future?

In April of this year, the L.A. City Council approved a plan allowing the beleaguered Los Angeles Community Development Bank to make $4 million in new loans. The question is: Will the Bank finally live up to its name? Due to political pressure from City officials to spend Bank money in a hurry, plus the fact that L.A. was not initially designated an official Empowerment Zone, the Bank has not yet formed a comprehensive, strategic plan to rebuild the community and partner with local development efforts already in place. But in the following MIR interview, CDB Board-member Denise Fairchild says that after being out of business for over a year and now infused with new funding, a new CEO, and a new team of City leaders, the Bank has a good chance to finally expand its focus to include more than just lending.

Denise, MIR has covered the Community Development Bank (CDB) since its inception in 1995. Give us a status report, if you would, on the viability and capacity of the Bank to meet its objectives.

The objective of the Community Development Bank is to rebuild the economic base and increase the job availability within the Empowerment Zone by providing loans to businesses for start-up operations and expansion programs, as well as attracting other businesses into the under-served area.

The Bank has gone through some major transitions in its relatively short history. Until recently, we had been out of business for over a year. Fortunately, however, we've again gained the authority to spend some money and are now officially back in business.

What specifically has challenged the Bank? What was it that got in the way of the Bank fulfilling the original mission set out in the early days of the Riordan Administration?

Well, the name "Community Development Bank" tends to connote a broader mission than what we have actually pursued. We are a community development bank, and the focus of our work from the very beginning has been on lending and business development, not community development or community building.

Within the Empowerment Zone, there are at least seven distinct neighborhoods, and development work has been going on in each of those communities long before the Bank began in 1995, with various nonprofits, businesses and residents. Unfortunately, the CDB never organized itself to partner with these organizations or residents in order to revitalize all the elements of a vibrant community-including housing, jobs, businesses, schools, etc.

In contrast, the legislation governing Federal Empowerment Zones was initially based on the South Shore Bank model in Chicago. That bank developed a comprehensive plan to rebuild a particular neighborhood. They had a housing plan, a business plan, and a plan to bring together the churches and community groups to build an infrastructure for people to get training, jobs and support service.

So from the standpoint of the legislation, we missed out big-time. There has always been a disconnect between our mandate and the legislation because initially we were not officially an Empowerment Zone: While we did get the $430 million to do business lending, we didn't get the Title XX money to do these broader community-building activities. Our mission has always been narrower-lending.

The other factor was that we were constantly being pushed by local officials to spend the money we had-and quickly. They wanted to see big chunks of money hitting the streets and reaching local businesses; in fact, the Bank was essentially measured by how many dollars it got on the street. Because the decree was to spend the money quickly-instead of building a long-term community development process-we're not building communities; we're funding deals. When we started, there were 17 community lending institutions doing the same work. We should have found a way to distinguish ourselves as a real partner to the community-and some of us on the Board tried-but the political charge was not there.

Having said that, we did get a lot of money on the street, and we still have close to 200 good working loans and investments in the portfolio today. That's 200 loans that would not have been made by conventional institutions, because in order to get a loan from us in the first place, you had to be denied by at least two institutions previously. And that's the story that doesn't get told.

Elaborate on that political charge. What has been the role of political and civic leadership in setting the context and direction of the Community Development Bank (which, by the way, began after the L.A. riots and in a time of real economic recession in this City)? What was the political context in which you found yourself as you began to shape the fundamental building blocks of the Bank?

The political context was certainly one of urgency-to be a private sector-oriented bank in the business of helping business. But again, that framework is alien to what a "community development bank" is traditionally about, which is developing partnerships and relationships with communities and all of the constituencies that make up the Empowerment Zone.

So eight years later, as Mayor Riordan leaves office, can you give our readers a candid assessment of what his role in the Bank has been?

Mayor Riordan was principally responsible for the architecture of the Community Development Bank, and if it were not for him, we would not have had that $430 million of spending authority.

The difficult part, however, is that the Mayor approached the Bank strictly in terms of the business community's interests, and did not possess the sensibilities necessary to achieve real "community development."

South Shore Bank-upon which the CDB is modeled-has a unit that is now traveling to other areas of the country to share its ideas, and has been out to Los Angeles twice. What lessons can we learn from them and others to revitalize the effort that was begun here six years ago?


Again, we all need to take a hard look at the planning and organizing that went into the South Shore Bank. They built a sound business plan in four volumes based on actual conditions, recognizing the interplay between jobs, business opportunities, housing needs, and the community infrastructure. They also assembled their financial resources to meet all the needs in that community-they know they need a capable, trained and skilled workforce, as well as a social service support system for people who are either in training or trying to get work.

In Los Angeles, the churches and social service agencies that could provide the resources to make that infrastructure work on behalf of the workforce (which in turn is on behalf of the business community) are not organized in a way that supports the lending activities of the Bank. Because we had to get out of the gate quickly and build a bank from scratch, all our time was consumed doing things like finding the space, setting the lending policies, hiring the staff, instead of forming a real plan for each of the neighborhoods. We have an Empowerment Zone Oversight Committee (EZOC) made up of representatives from each community, but it's completely separate from the Bank itself. Therefore, the conversation necessary to create an integrated and relevant community lending process really hasn't taken place.

As a result of not using that "community development lens" to guide our enterprises, there were all kinds of opportunities that we missed. For instance, the childcare needs in one neighborhood are such that people cannot get to work. We should have been thinking about starting childcare businesses in partnership with the community. Another example is found in the neighborhoods along the Alameda Corridor, where a great deal of construction is taking place. We should have been developing a contract lending relationship to help the local contractors bid on deals with the Alameda Corridor Transportation Authority. Another example: we have scores of restaurants in our communities. We should have created an incentive program for restaurants to play on the idea of the Vernon Central Community, for example, to be urban tourist destinations.

Again, using the chronology of "the end of eight years," there are those who say that in his business teams, Riordan was an aggressive promoter of economic development. There are others who say he never was able to use the institutions, community-based groups, and even City institutions to make an economic strategy viable and lasting. Where do you come down in that debate? Given your experience with the Community Development Bank, what do you see as the Riordan Administration's record on economic development?

There is a fundamental difference between economic development and community development. The Mayor clearly organized his staff and his resources to promote economic and business development. But that's only one part of what a community needs to be economically viable and livable.

If the Bank had had a broader community development perspective, it definitely could have expanded its portfolio and its vision of what it could do.

Denise, what's the status of the $100 million in Federal Economic Development Initiative (EDI) money that was pledged as backing for the $430 million in community development seed funding for the Bank? Did the City put those funds in jeopardy by backing the Bank?

The funding for the Bank comes out of two pots. One is called Section 108 Authority-which is basically a loan on our Community Development Block Grant (CDBG) funds-and we use that primarily for lending.

The second is $100 million of EDI grant funds, which we use mainly for overhead, staff costs and other non-loan related services. We've also put some of those funds aside in a reserve fund so that we don't have to sacrifice our CDBG dollars in the future if a loan defaults. At this point, there is no jeopardy to the CDBG funds; we have all of our dollars protected through the EDI reserve funds.

Give us a sense of what happens for the balance of the year 2001 with regard to the Community Development Bank. What's on the agenda of the Board?

We're essentially reestablishing ourselves in the community. So far, we've been authorized to spend about $4 million for small business lending throughout the City. Our hope is that we will have another $200 million at our disposal soon.

What kinds of investment and/or collaboration have or could take place between stakeholder institutions like L.A. Trade Tech and others in the area that the Community Development Bank serves?

At this point, we still haven't developed a strategy for partnering with the major institutions or community organizations in the area. Our priority has been to restructure the Bank and get back into the banking business.

Again, I think we'll miss another important opportunity to go forward with a new and better agenda if we don't establish those relationships right away. Fortunately, we have a great new Chair and a new President/CEO, William Chu. Mr. Chu is not only very well grounded in the banking business, but also has the heart to be the cheerleader and the community partner that the Bank so desperately needs.

So far, he's unfortunately been inundated with all the problems. But I think that once we clear the decks, he'll be able to reposition the Bank in a new and better way and reestablish our credibility in the community.



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