USDA review finds oversight of N.C. rural loan programs inadequate

Review finds state oversight inadequate

cjarvis@newsobserver.comAugust 3, 2012 

Stephen A. LaRoque

M LEWIS

— An internal review by the federal agency that provided former state Rep. Stephen LaRoque with the money that led to his indictment criticizes the North Carolina operation on several fronts.

The U.S. Department of Agriculture’s Rural Development division, in a report delivered to the Raleigh office in April and obtained by The News & Observer this week, faults the state office for inadequate oversight and for loan delinquencies. The state has reported $34.6 million in lost federal loans and poor internal control over one loan program “has raised concerns in the national office,” the report says.

But the report, which gives passing marks to some of the agency’s practices, raises issues that for years have dogged some of the loan programs and are not limited to North Carolina.

Randall Gore, director of the Rural Development division in North Carolina, downplayed the negatives on Friday.

“As part of the USDA’s continuing efforts to improve services to our clients and support servicing of the loan portfolio administered by our state office, this periodic review shines a spotlight on issues which we have taken aggressive steps to address,” Gore said in a statement. “We welcome this review and we have moved to act in a way to provide improved service to our clients and safeguard public funds allocated to these programs.”

The Rural Development division makes several types of loans and grants, including two meant to stimulate businesses and community projects in rural areas for borrowers who haven’t been able to obtain bank loans. LaRoque, a Republican who represented Lenoir, Greene and Wayne counties, participated in those loan and grant programs as a middle man.

LaRoque was able to borrow federal money at 1 percent interest and relend it to borrowers at a negotiated rate for up to 30 years. LaRoque used millions of federal dollars to help struggling businesses over 15 years.

But a federal indictment last month accused him of diverting several hundred thousand dollars for his own benefit. Investigators say he compensated himself with nearly $2 million and bought lavish gifts for his girlfriend and future wife, including expensive Faberge eggs and jewelry, and made loans to close associates. He resigned from the General Assembly on July 25.

While the Rural Development division review found most of the loans it sampled were considered acceptable, 33 percent were classified as “adverse” or not classified at all. That increased the risk to the loan portfolio’s credit quality, the report says.

Reviewers found the number of delinquent loans had shot up beyond the national average in late 2011, when it amounted to 10.6 percent of the loan portfolio. “Increased lender oversight is now more important given the recent increase in delinquencies,” the review states.

The North Carolina program scored 78.2 percent in overall regulatory compliance, compared with the 96.7 percent it scored in 2004. Reviewers found the state office didn’t fully address recommendations that were made in 2004.

The loan program that LaRoque primarily used – the Intermediary Relending Program – has had problems on a national level for years. The federal agriculture department’s Office of Inspector General reported shortcomings to Congress in 1998 that were repeated in a 2010 OIG report and that are echoed in the LaRoque indictment.

Those criticisms include: making loans to ineligible borrowers for projects not in rural areas, intermediaries misusing their loan fund accounts, and having conflicts of interest between lenders and borrowers.

The 2012 OIG investigation recommended $7.9 million be repaid to the federal government. N.C. Policy Watch, an advocacy group that has investigated LaRoque’s business dealings, said $4 million of that amount was money loaned to LaRoque.

Still, the Rural Development division loans have helped businesses and communities throughout the country. As of 2009, $750 million in IRP loans alone had been made.

In North Carolina, Rural Development division loans and grants have gone to help moderate- and low-income people buy homes, assist in building libraries, schools, hospitals and day-care centers, utilities and broadband systems and renewable energy projects.

The North Carolina office has made recent loans and grants to N.C. State University, the Fuquay-Varina Economic Development Commission, the Henderson-Vance Downtown Development Commission, and to numerous private enterprises. North Carolina projects received more than $1.2 billion from the Rural Development Division in North Carolina.

The IRP program had capped individual loans at $250,000, but this year a cap of $150,000 was imposed, and intermediaries are now limited to receive no more than $400,000. LaRoque is accused of making loans higher than the $250,000 cap and amassing loan funds.

Jarvis: 919-829-4576

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