Financing halted for OHA loan program

By David Butts and Vicki Viotti
Advertiser Staff Writers

The federal government has cut off money for a low-interest business loan program administered by the Office of Hawaiian Affairs and may force OHA to return up to $11 million that was never loaned.

NAMU'O

The 14-year-old Native Hawaiian Revolving Loan Fund won praise for helping hundreds of Hawaiian entrepreneurs who were turned down by conventional lenders, but it also was criticized for lax management and high default rates.

According to the most recent OHA report on the fund, 357 loans worth $15.7 million have been disbursed since the fund was established. Of those, 63 have been written off as uncollectible.

Last year, the fund lost its $1 million annual financing from the federal Administration for Native Americans.

The ANA decided to let the allotment lapse because officials judged that too few loans were going out from the fund, which has a balance of about $22 million, said OHA trustee Oswald Stender, chairman of OHA's Assets and Resource Management Committee. In 2002, the program made seven loans for a total of $346,400.

The federal agency is considering asking for the return of $11 million in contributions that remain in the loan fund, said Clyde Namu'o, OHA administrator.

The federal government matched money contributed by OHA, and the OHA money will stay in the fund.

Namu'o said he hopes the federal money can stay put because any money that was not loaned out was invested in U.S. government-backed securities, as the ANA requires.

"If they say, 'You have to give it back,' that's a whole chunk of change you have to return," he said. "But we think they'll agree that the program has been successful in terms of capitalizing the fund."

OHA is considering a new "microloan" plan that would make personal and educational loans, while the revolving fund would continue to make business loans with the money it retains.

An official of the ANA in Washington said he could not immediately comment on the issue of returning money or why the $1 million per year was stopped.

High in defaults

In addition to not lending most of the money allocated, the fund had a reputation for a high number of defaults. A state audit in 2001 reported that 43 percent of the loaned money — $2 million of a total $4.6 million — was 90 days past due.

OHA also had a history of not being strict with borrowers when they defaulted. In one case, it lent money to the owner of a charter fishing business to buy a boat and didn't repossess the boat even after the borrower failed to make payments for two years, according to the audit.

Stender said the problems the fund had were, in part, because it was designed to lend money to business owners who had been refused loans by two commercial banks. That rule and other federal restrictions have made it difficult to issue loans from the revolving fund, he said.

Namu'o added that after the audit, OHA worked hard to improve its delinquency rate, which now stands at about 30 percent.

Comparing rates

By comparison, the Hawai'i Community Loan Fund, a non-profit that lends to low- to moderate-income business owners, has about $2 million loaned out and only 5 percent of that is 30 days or more past due, said David Lawrence, the organization's executive director.

For business loan programs that target high-risk borrowers, a delinquency rate under 20 percent is considered good, Lawrence said.

Maile Meyer, founder and president of Native Books & Beautiful Things, took a $75,000 loan from the fund in 1998 with a 3.25 percent interest rate that she has since paid back.

Meyer said the program is valuable, but that perhaps it was unable to lend out all of its money because it wasn't tailored enough to the Hawaiian community and officials were too worried about default rates.

"They never thought outside the box," Meyer said.

OHA officials say a major impediment was the federal rule capping each loan at $75,000.

"They thought we should be lending out $2 million a year," Stender said. "That's an awful lot of $75,000 loans."

Stender said OHA met with newly appointed ANA commissioner Quanah Crossland Stamps in February and was told that revised rules would be considered to make it easier to find people who qualify.

Namu'o added, however, that ANA has frowned on requests to raise the loan cap to $250,000.

There are now 130 applicants in some stage of the review process, said Dean Oshiro, the fund's business loan officer. Many of them may be eliminated or may decide on their own to abandon the effort after taking the entrepreneurship training that is offered, he said.

"We have a lot of applicants that have an idea but don't know anything about business," he said. "(The training) opens up their eyes, and they realize that maybe going into business is not for me at this time."

Last week, trustees heard a presentation by a consulting firm, Business Advisory Group Inc., that favored the establishment of a "microloan" program to be administered by OHA.

Stender said the OHA board is leaning toward using its own resources for the microloans because federally financed programs could face legal challenges on the basis of racial discrimination because they serve Native Hawaiians exclusively.

Reach David Butts at dbutts@honoluluadvertiser.com or 535-2453. Reach Vicki Viotti at vviotti@honoluluadvertiser.com or 525-8053.