City gets go-ahead to restart loan fund

Nearly a year later than expected, Providence is back in the commercial-lending business.

The Providence Economic Development Partnership’s Revolving Loan Fund, suspended by the U.S. Department of Housing and Urban Development in 2012 for loose underwriting and improper spending by administrators, was allowed to restart last week under city control.

The federal clearance will allow the city to reactivate a pool of $1.4 million in capital, seeded by payments from previous loan recipients, that had been frozen for roughly 18 months.

And it should speed up PEDP small-business financing through the city’s annual stream of federal Community Development Block Grant funds, said Providence Economic Development Director James Bennett.

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“We have not been as active as we had been and want to be,” Bennett said. “Right now we have access to another $6.5 million we could pass through and get out to businesses.

“We did take write-offs and really scrutinized our loan portfolio,” Bennett added. “We are getting a much-better relationship with HUD.”

Last November, Bennett had expected the full PEDP financing program to be back up at full speed and under local control by the end of last winter, but acknowledged the process had taken longer than anyone anticipated.

As for what delayed the authorization, Bennett said there was nothing specific HUD was demanding the city change in the program, this just turned out to be the length of the federal process. The government shutdown added an additional delay, he added.

When HUD reviewed the PEDP in 2012, it found poor monitoring of loan performance, insufficient recordkeeping, waste of administrative funds and a default rate of 60 percent. The federal agency considered terminating the program.

In response, the city ended the practice of allowing staff to approve loans of $75,000 and less. Now all loans must be approved by the full PEDP board, which includes Mayor Angel Taveras as chairman.

The city then wrote off at least $1.5 million in loans to businesses that had not made any payments in years.

City officials also wrote a set of formal policies and procedures, something apparently lacking previously, and made sure all payments are now entered in a computer system.

In a Dec. 5 letter to Bennett, Robert D. Shumeyko, director of HUD’s Office of Community Planning Development in Boston, credited the city for cleaning up PEDP procedures.

“The city has initiated significant management and organizational changes within the past year which has resulted in improved internal controls,” wrote Robert D. Shumeyko, director of HUD’s Office of Community Planning Development in Boston. “In recognition of the significant progress and the city’s commitment to promote transparency and accountability of the city’s economic- development activities, we have authorized PEDP to invite businesses to apply for [Community Development Block Grant] funding and make recommendations to HUD for funding approval.”

Writing off those hopeless loans and instituting more stringent lending standards has reduced the program’s default rate.

Of the $16.5 million in outstanding loans at the end of November, 35 percent of them were in default, more than 60 days overdue with a payment, or 28 percent of the total loan value, according to figures provided by the city.

Most of those loans still predate HUD intervention. Since July 2012, when HUD stepped in, the PEDP has loaned $2 million, $1.6 million of that so far this year, the city said.

Another unresolved issue is how and when the PEDP will repay money improperly spent under the more-relaxed oversight.

According to the HUD letter, PEDP still owes $528,532 out of $618,145 determined to be spent or loaned improperly.

“The city has not reimbursed HUD for ineligible expenditures to date, and is in discussion about which [Community Development Block Grant] eligible activities/expenses incurred by the city can appropriately be used to offset those costs,” an email statement from city spokeswoman Ann Gooding said.

Aside from its management issues, another question surrounding PEDP has been which industries and segments of the local business ecosystem the city should be focusing its capital on.

The PEDP’s mission is to be a lender of last resort, but before the recent HUD intervention, the program’s portfolio was skewed heavily toward small hospitality-sector businesses like night clubs and restaurants, with high risks and modest potential job-creation rewards.

By the end of last year, Bennett said the PEDP was making a conscious effort to diversify its portfolio and find businesses with greater employment upside.

To fuel the burgeoning Providence startup scene, the city last year launched the Innovation Investment Partnership, which pledged $50,000 of PEDP funds to companies who make it through the Betaspring accelerator or receive investments from Slater Technology Fund or Cherrystone Angel Group and agree to stay in the city for a year.

The program proved too successful, especially with Betaspring companies, and burned through $600,000 more than the initial $1 million budget in about nine months, causing Taveras to end it this past spring.

When the program was ended, Taveras said he would look at potentially doing something else to help the Providence startup scene.

Asked whether a resurgent PEDP will roll out anything similar to the IIP, Bennett said boosting the startup scene remains a priority, but there are no current plans to stimulate that sector.

“It’s something we are going to have to actively consider,” Bennett said about a program for technology startups. “You look at this as a startup area with the access to technical talent and look at what we have done. It put Betaspring on the map and generated other startups. We like having young folks working in Providence and taking advantage of the educational facilities.”

Another option some cities have taken is to dedicate a greater share of their Community Development Block Grant funding toward individual development projects, such as hotels or renovations of historic properties.

But Bennett said the city does not see that as the role of the PEDP, at least not now. Instead the city has restarted the Providence Redevelopment Agency to seize blighted properties and partner with private partners to improve them. •

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