Agency’s Handling of Quake Loans Assailed

Los Angeles housing officials were lax in approving and dispensing more than $300 million in earthquake loans and failed to make sure contractors who received loans paid workers federally mandated prevailing wages, according to an audit released Friday by the city controller’s office.

Also, city Controller Rick Tuttle called for an in-depth review of the entire Housing Department, citing previous audits that found fault with the agency’s management.

“Prior audit reports including our own and those of the city’s external auditors have consistently identified system weaknesses that a strong management team should have known about and corrected,” the audit says.

Even more troubling, the audit states the department may have failed to advise tenants of their rights to receive moving costs when they were displaced by the federally funded repair program.

If true, the failure could expose the city and borrowers to lawsuits, the controller’s office said.

Gary Squier, the Housing Department’s general manager, shrugged off several of the audit’s harshest charges, but conceded that his department initially did a poor job of ensuring that contractors paid prevailing wages.

He called the charge that his department failed to advise displaced tenants of their rights “just plain wrong” and said the request for a management audit is “more spin than substance.”

In a four-page press release issued just minutes after the audit was made public, Squier commended his department for managing a program that helps rehabilitate 12,305 houses and apartments under “battlefield conditions.”

But the audit also uncovered a $442,000 loan on a property that did not appear to have received any quake damage. Squier said the case is being investigated for possible fraud charges.

The loan program--the most expensive city-managed recovery program created after the Northridge quake--was funded by the U.S. Department of Housing and Urban Development.

HUD staff members are studying the audit and will continue to investigate any potential fraud or abuse by loan recipients, HUD representative Wendy Greuel said.

“The appropriate HUD staff will review the report to determine if additional action is required and cases of fraud will be referred to law enforcement officials when appropriate,” she said.

The audit criticized the Housing Department on three key issues:

* The audit said the department’s loan program used lax approval methods and failed to collect necessary information from the borrowers.

“Specifically, we found that the LAHD’s loan application process was incomplete, requiring, in our opinion, insufficient borrower and property financial information,” the audit stated. The audit said the lack of documentation from the borrowers “significantly increased the LAHD’s risk of future default.”

But Squier said the loan program’s main goal was to quickly repair quake-damaged homes that displaced thousands of residents. He said it would have been unreasonable to use standard commercial loan procedures under such conditions.

“If you hired Bank of America to run this program, the money would never have hit the streets,” he said.

But Deputy Controller Tim Lynch said the audit shows that on occasion housing officials “didn’t follow their own expedited loan procedures.”

* The audit charged the department failed to enforce the 1931 federal Davis-Bacon Act, which requires contractors who received federal funds to pay workers prevailing wages.

The audit said the department uncovered violations of the Davis-Bacon Act in 20% of the loans in which the law applies. Instead of issuing penalties or seeking criminal prosecution of the borrowers, the audit says the department negotiated settlements to pay workers an average of only 50 cents on the dollar for the back pay that was due to them.

Squier said the prevailing wage violations were brought to his attention months ago by a local carpenter’s cooperative group. In response, he said he ordered a complete overhaul of the unit that monitors the Davis-Bacon Act and tripled the number of investigators assigned to look into such violations.

* The department found no evidence that the Housing Department notified tenants that the Uniform Relocation Act of 1970 required they be paid moving expenses when they are displaced by a federally funded repair project.

Squier rejected those charges, saying, “We have extensive procedures to notify the tenants.” He added that a vast majority of the loans were used to repair vacant buildings.

The audit recommends a slew of changes in the department, including several new procedures and controls to better monitor loans approved by the department.

The audit was launched in response to complaints by the Carpenters-Contractors Cooperative Committee, which accused the department of turning a blind eye to contractors who receive quake loans but failed to pay workers the prevailing wages.

The cooperative also complained about lax loan-approval procedures, among other things.

William Luddy, executive director of the cooperative, said he is “glad that we were vindicated but we are not happy with the situation as it is.”