Loan Portfolio Status
Since the Spring of 2016, the Department of Development has done significant work to correct, cure and improve the performance of the management of its Economic Development loan portfolio. This complex loan portfolio contains loans dating back to 1996. The dynamic nature of the portfolio; which is comprised of different loan programs, terms and loan adjustments, requires adequate staff and policies, which had been absent historically, but is now in place. Per the County Charter, the Department of Development has a unique mission in County government and a special responsibility in managing its economic development loan portfolio. This has required the remediation and elimination of past practices that have proven less than optimal in the stewardship of the Loan Portfolio.
The causes and symptoms of the loan portfolio’s historical management weaknesses have been well documented in several County Inspector General reports dating back to 2014. The Inspector General’s June 29, 2018 Report, however, notes significant management improvements to the stewardship of the Portfolio, while identifying work that remains—namely the complete review and validation of the 297 loans that are now in Portfol (the Department’s Economic Development loan system of record) by year end 2018. We are committed to completing this review.
It is important to note that the portfolio’s problematic loans, which have historically have resided primarily in 3rd party programs that were intentionally designed to have a higher risk threshold (it is these loans that have been the source of most of the delinquencies and the focus of our collections efforts to date). When the 149 third-party loans (which were structured to encourage innovation and entrepreneurship) are isolated, the portfolio’s performance is within acceptable standards of the public-sector lending sphere. The 149 third-party loans represent only 10% of the portfolio; however, 51% of those 149 loans are delinquent. The delinquency rate of the portfolio is 7.76% by the Loan Portfolio Team’s calculation. The actions outlined below describe the Department’s efforts to collect and maximize the repayment of monies owed to the County from borrower loans as of September 21, 2018 amounting to $2.8 million.
While we’ve made significant progress in improving and strengthening portfolio management, as the Inspector General acknowledged in his June 29, 2018 Report and, in his September 18th Report to the County Council, the Department remains focused on refining its policies and procedures, seeking staff resources and completing a final review of all loans by year end to continue to perfect the loan portfolio.
Below is the Department of Development’s Loan Portfolio Update. This update outlines the progress that has been made since the Spring of 2016 to correct the historical deficiencies in the Department loan portfolio. While we must work to continue portfolio improvements, we are at a point of stabilization and can report with confidence the current status and condition of the portfolio. As a result of additional and realigned staff resources, weekly portfolio meetings and new policies and procedures we can now provide, with confidence, the status of our Loan Portfolio.
CORRECTIVE ACTIONS TO DATE
The following areas have been addressed (each finding below is a summary of issues identified by the Inspector General in several reports in 2015-2016):
2015-2016 IG Finding A:
Loan agreements and documents often could not be located and were not properly entered Portfol. Loan files and borrower information was often missing.
After an exhaustive search of all electronic files and previous location of hard copy files, we have scanned all located documents into Portfol and are in the process of reviewing all files for completeness.
2015-2016 IG Finding B:
The Department is unable to articulate the current number of loans in its portfolio.
The Department has 297 loans in Portfol (the department’s loan system of record). Each of these loans are being further reviewed and validated.
2015-2016 IG Finding C:
Department has not posted its active loan portfolio to its website, per County code.
The Department first posted its searchable list of active loans on the County website in January 2018 and again in July 2018 and has committed to updating and posting the list semi-annually.
2015-2016 IG Finding D:
The Department did not have a consistent practice of invoicing borrowers for money borrowed from the County.
Since September 2017, borrowers have been consistently invoiced on a monthly/quarterly basis depending on loan terms. This has resulted in increased collections and higher borrower engagement. The Loan Portfolio Team communicates with borrowers frequently, often meeting with borrowers weekly to both resolve issues and better understand the business conditions of their company. This has resulted in higher collections and has enabled borrowers to execute business transactions such as refinancing or other corporate changes, based on a more responsive County Department of Development.
2015-2016 IG Finding E:
Lack of segregation of loan origination and servicing duties.
Since September 2017, loan origination and servicing duties have been organizationally separated. In November 2017, a full-time Loan Portfolio Manager was hired, relieving the Interim Loan Portfolio Manager appointed in August 2017. In January 2018, a Loan Portfolio Management Team was established, significantly increasing the level of resources devoted to Loan Portfolio management. The Team consists of:
Loan Portfolio Manager – FT
Assistant Loan Portfolio Manager – FT
Deputy Chief — 30% time
Chief — 15% time
Other Department of Development staff:
Administrative person to support the Loan & Assistant Loan Portfolio Manager will be hired to oversee records management and administrative components of the Loan Portfolio—this position has been posted for hire.
2015-2016 IG Finding F:
The Department lacks written policies and procedures that govern the stewardship of the Loan Portfolio.
In July 2017, the Department drafted its first Loan Policy Manual, which has been reviewed by an external 3rd party and has now been updated and finalized.
A complementary Loan Procedures Manual is in the process of being finalized.
Both the Loan Policy Manual and Loan Procedures Manual will be fully implemented with Economic Development staff by the end of October 2018; each Economic Development staff member will be required to affirm that he or she has reviewed and understands its mandates.
2015-2016 IG Finding G:
Department of Development had not consistently recorded loans into Portfol and insufficient Portfol servicing protocols were in place.
All loans have been entered Portfol. Entering data into Portfol is now a performance requirement as a matter of policy, outlined in the Department’s new Policy Manual. All Economic Development staff have received Portfol training and semi-annual training is now a requirement for all Portfol users. Security protocols have now been established and are the responsibility of the Loan Portfolio Manager to enforce. These protocols define and limit who has access to change or alter information in Portfol.
Credit for the progress made to date goes to:
- The leadership, support and engagement of the County Executive and his staff.
- Our partnership with the Inspector General’s office. Their reports and critique have put the County in a much stronger position, regarding managing and collecting monies owed to the County.
- Most importantly, the effort of the staff of the Department of Development, all of whom have contributed to the material improvement of the Portfolio. Special thanks go to the Loan Portfolio Management Team:
Bryan Edwards, Loan Portfolio Manager
Sona Lahoti, Assistant Loan Portfolio Manager
Greg Huth, Deputy Chief Economic Development
The Department’s Fiscal Team, working with OBM
This team, working with me on a weekly/daily basis, has put the Department in a position to issue this report with confidence.
- The Economic Development Improvement Team, comprised of County employees from various departments, set the foundation early on for our progress by locating loans from various sources, organizing documents and scanning them into Portfol to provide an initial baseline for review and further forensic action.
- The County Council Economic Development Committee and County Council Staff for their partnership and support.