LORAIN — The FBI is investigating loan programs administered for the city by the defunct Lorain Development Corp.
Federal agents have subpoenaed city records dealing with the programs, which have already come under scrutiny from city and state officials, according to public records obtained Thursday by The Chronicle-Telegram.
In a response to a U.S. Department of Housing and Urban Development report detailing an April review of the loan programs, Leon Mason, the director of the city’s Department of Building, Housing and Planning, wrote that he needed more time to complete his own comprehensive review of program documents the federal agency had asked for.
“Unfortunately at this time, we are unable to review all of the numerous loan files as the records and other items have been subpoenaed by the U.S. Department of Justice, Federal Bureau of Investigation (FBI) through our City’s Law Director for review, with an undetermined date of return of those records and files,” Mason wrote Wednesday.
Lorain Law Director Pat Riley declined to comment Thursday and is reviewing The Chronicle-Telegram’s public records request for the subpoenas.
Lorain Mayor Chase Ritenauer said he’s aware of the federal investigation, although he couldn’t say exactly what the FBI is looking into.
“It’s federal funds, certainly there could be compliance issues, there could be criminal issues and it should be analyzed,” he said.
A call to the FBI seeking comment wasn’t returned Thursday.
Before the city severed its relationship with Lorain Development Corp. in April, the nonprofit had served as what’s known as a “sub-recipient,” administering a series of loan programs for the city. It was a job the organization had performed since the 1980s.
Doug Rangel, who served as Lorain Development’s executive director, did not return a call seeking comment Thursday, but described how the process worked for an economic development revolving loan fund during an April meeting with The Chronicle-Telegram.
Rangel said that the federal government would give the money to the city in the form of grants and that funding would then go to Lorain Development Corp. Those seeking loans would apply to the program and those applications would be reviewed by members of a loan board.
If approved, the money would go to the recipients, who were supposed to use it for certain purposes and then repay the money, which could then be loaned out again.
Spread across multiple programs, the city has loans out totaling more than $12.2 million, including $715,482 in late payments that some borrowers owe, according to figures provided by Mason’s department.
In a June 14 report detailing its April inspection of the city program, HUD officials wrote that they found numerous problems, particularly with the city’s revolving loan fund. HUD officials ordered the city to suspend that program in their June 14 letter to Mason, although by then the city had cuts ties with Lorain Development.
“The results of our review were alarming,” the report, signed by Jorgelle Lawson, director of HUD’s Columbus Office of Community Planning and Development, said.
HUD inspectors looked at 15 loans given out through the program and in 13 of those they could find no evidence the loans met their objective of creating jobs.
“None of the files reviewed contained any information that demonstrated that jobs had been created,” the document said. “Furthermore, we found a number of instances in which the purposes of the loans were for highly questionable uses.”
The document cited loans to the Lorain County Community Action Agency to pay off debt, a loan designed to keep a church from going into foreclosure, multiple loans going to one individual, a loan to a former Lorain Development Corp. board member and other problems.
Mason said he can’t review the documents to determine if some of those and other loans accomplished their objective of creating jobs because the paperwork is in possession of the FBI, which is supposed to make copies and return the files.
Even if the city still had the documents, it’s unclear how helpful they would be. HUD’s review said the loan paperwork made it “difficult to compile” loan amounts.
“Based on the information supplied by the city, some of the loans have up to four loans per project, but only one agreement,” the HUD report said. “Many of the agreements and documentation identified multiple figures in the file. This made it confusing and extremely difficult to determine the overall loan amount or amounts loaned to the project.”
In his response to HUD, Mason acknowledged there were problems with how the loan program was administered as well as with “poor record retention.”
Conflicts and job creation
One of the loans that HUD officials flagged is a $250,000 loan made to South Shore Development Corp. in 2011 to help keep the struggling St. Joseph Community Center afloat.
That loan was never repaid and eventually written off by Lorain Development Corp. State auditors have said that more than $600,000 worth of loans distributed by Lorain Development Corp. were written off over the years, but Mason said that his research indicates that figure might be slightly lower because of how some of the loans were structured.
The HUD review said that the money lent to South Shore was troubling because at the time of the loan, Robert Gilchrist was serving as both the city’s service director and president of the South Shore board.
HUD called Gilchrist’s dual role “an apparent Conflict of Interest.”
Mason said based on his review of the documents, it doesn’t appear that the South Shore loan met the job creation requirement. He said around $166,000 of the loan was used to pay an electric bill and the rest went to operating costs at St. Joe’s.
Under federal regulations if the loans don’t meet the program guidelines, the city, which is grappling with a $3.6 million budget deficit this year, is on the hook for the money, Mason said.
Another loan to receive a review was money lent to Lorain County Commissioner Ted Kalo’s personal business, Ted’s Floor Coverings. It was one of the loans that HUD listed as not having paperwork detailing jobs created.
Kalo took out $100,000 worth of loans to renovate the downtown Lorain building where his store was once located. Kalo said Thursday that he created jobs after taking out the loans, but that economic downturns devastated his business after the Sept.11, 2001, terrorist attacks and again during the Great Recession.
Kalo said the setbacks led to his personal financial woes and problems paying back loans to the Lorain Development Corp. and private lenders.
In 2011, a judge ordered Kalo to repay most of the loan and he said he’s been making progress in paying down his debt. He still owes around $30,000 on the loan, but he is current on his payments, according to city records.
Kalo said he’s aware the FBI is reviewing the loan files, but isn’t worried that he failed to live up to his duty to put people to work,
“I created plenty of jobs,” he said, although he added that many of those jobs disappeared when his business was struggling.
Mason wrote that the documents now in the possession of the FBI could end up showing that some of the loans were justified under the job creation requirements.
“It is my hope that once provided the opportunity to review the aforementioned loan files as requested by HUD, my staff and I will be able to find the supporting documentation necessary to qualify these loans and activities,” he wrote.
Ritenauer, who became mayor in 2012, said that before Mason took on his current position Lorain Development Corp. received little oversight from city officials through the years.
“A lot of these predated me, but I’m the mayor now and it’s my responsibility to fix it,” he said.
Ritenauer said the city is looking for a new partner to oversee its loan programs.
City officials have previously complained that the Lorain Development board wasn’t properly constituted.
The board was only comprised of five members instead of the required nine who were supposed to be appointed by the mayor, although Ritenauer and his predecessors never made any appointments. Rangel said during a public hearing in April that he had thought the board was supposed to appoint its own members.
The board is supposed to be made up of two certified public accountants, two bankers, two lawyers, two businesspeople and a school administrator.
Lorain City Councilman Dennis Flores, D-2nd Ward, said he hasn’t seen the HUD report, something he thinks should have been shared with him as chairman of Council’s Federal Programs Committee, which has held several hearings this year looking at Lorain Development Corp. and the revolving loan program.
“There are a lot of questions for sure,” Flores said, adding that he plans to call a committee meeting to demand answers from city officials, including why he and other members of Council haven’t been told about the federal probe.
This isn’t the first time that Lorain has seen fallen under federal investigation in recent years. The city agreed to pay the federal government $235,000 to settle claims it had improperly awarded 11 no-bid contracts to Lorain contractor Don E. Buchs.
Former Lorain Community Development Director Sandy Prudoff also was convicted on charges stemming from the Cuyahoga County corruption investigation and served time in federal prison for improperly taking money from a Cleveland halfway house for consulting work he never actually performed.