Loan council gets back its U.S. funding HUD reverses position on minority lender after congressional appeals.

THE BALTIMORE EVENING SUN

Despite its $1.4 million worth of bad loans, missing records and other problems, the embattled Council for Equal Business Opportunity appears to have regained federal funding.

CEBO, a private non-profit organization, was created 24 years ago as a lender and adviser to high-risk minority businesses in Baltimore that cannot get bank financing.

The organization relies on public money and until yesterday had faced extinction because the U.S. Department of Housing and Urban Development cut off funding last year.

But the federal government reversed itself in a letter sent yesterday to Rep. Kweise Mfume, D-Md., from an assistant secretary at HUD, giving conditional approval of CEBO's funding for 1991. HUD's action followed appeals from Maryland's congressional delegation.

The amount was not specified but is expected to approximate last year's $617,000 grant.

The HUD letter said that no money will be released until the city shows that it will keep closer tabs on CEBO's activities.

The organization's problems with bad loans and missing records came to light recently in a confidential report prepared by CEBO at the request of city officials. A copy was obtained by The Evening Sun.

Of 479 loans made since 1972 totaling $7 million, 100 loans -- or nearly 21 percent -- have not been fully repaid, the report says.

The unpaid portion of the 100 loans totals $1.4 million.

Moreover, CEBO sometimes lent money to companies that had defaulted on earlier loans from the organization, the report shows.

For example, an electronics company owned by Robert L. Douglass, a former state senator and city councilman, received a $76,094 loan in 1986, three years after defaulting on a $30,000 loan.

In 1987, the company filed for bankruptcy, and CEBO has been unable to collect the total debt of $125,246 in principal and

interest.

Over the years, loans to companies that later collapsed have been a recurring problem for the organization.

In 1983, for instance, $50,000 went to a construction company owned by Baltimore lawyer Robert F. Dashiell -- who in the late 1970s had represented CEBO by suing businesses that had defaulted on loans.

Dashiell's company repaid $5,676 but then filed for bankruptcy, forcing CEBO to sue in an unsuccessful effort to recover the remaining $49,532 in principal and interest, according to court records.

The Evening Sun also has found that:

* CEBO violated federal regulations governing the use of money in its loan fund. The dollars can be used only for business loans. But in the last two years, CEBO has borrowed $347,000 for its day-to-day operations.

Officials of the organization say that $170,000 has been repaid, but city officials say that only $50,000 has been restored.

* CEBO strayed from its mandate to help only businesses in the city. Companies in Virginia and Pennsylvania have defaulted on CEBO loans, as have businesses in Annapolis, Columbia, Glen Burnie, Hyattsville, Owings Mills, Randallstown and Reisterstown.

* The organization paid Samuel T. Daniels, its founder and long-time director, a salary of $89,000 for the year before he retired in 1989. His salary the year before was $66,000, according to CEBO filings with the Internal Revenue Service. Daniels has said his final salary included 450 hours in unused vacation pay.

* CEBO granted loans to two of its board members, including an unusual $100,000 line of credit to a businessman shortly after he joined. Two other board members received business counseling from CEBO's staff, says Daniels. Both Daniels and officials now at the organization say the loans, which were repaid, broke no rules and received prior approval from the rest of the board.

* The United Way has placed CEBO on "conditional status" and has cut its $25,000 annual grant in half for failure to submit a financial audit, according to United Way spokesman Mel Tansill.

In their own defense, CEBO officials point to new leadership -- Michael A. Gaines became executive director more than a year ago -- and to tighter lending standards, including a ban on loans to out-of-town businesses.

Moreover, CEBO proposes to restructure its programs, concentrating on neighborhood revitalization projects to better meet federal guidelines.

Today, the organization's survival is crucial to the black community, says Gaines, the executive director.

"One of the most important things CEBO has done in 24 years is to make available to the minority community resources they could historically not obtain," he says.

Loans stimulate business activity, which in turn creates jobs, says Gaines, and this cycle of opportunity has an uplifting effect on the minority community.

"Without it, you probably would not have some growth in the middle class with respect to the business and economic development in Baltimore," he says.

Since it began, the organization has received at least $11 million in combined federal and city money.

In addition to its lending activities, CEBO has started several programs for minority businesses, helping train people for construction jobs, walking businesses through bidding procedures for construction jobs and helping companies get bonded and officially designated by the city and state as minority contractors.

For many years, the organization has enjoyed the support of high-ranking Baltimore officials, while some city auditors expressed frustration for being "pressured to rubber-stamp" CEBO's funds, as one auditor wrote after questioning unexplained costs and unusually high salary increases.

HUD finally cut off funding last fall, citing CEBO's poor record-keeping and its inability to prove whether loans and other programs created jobs for low- and moderate-income people in poor city neighborhoods, as federal regulations require.

Baltimore's Department of Housing and Community Development is responsible for overseeing CEBO's use of both federal and city funds, and federal officials have repeatedly criticized the city for failing to regulate the organization's expenses.

The CEBO report obtained by The Evening Sun was drawn up in March for the city housing department, which had requested an accounting of loan-fund activities.

CEBO said it could not find the files for 11 loans made during the 1970s and never repaid, totaling $201,519 in debt. Documents also are missing for loans made as recently as last year, the report shows.

The report also contains contradictory and incomplete financial data and shows that many businesses defaulted on more than one loan.

Officials at CEBO now say the report to the city was never intended to be made public because it was a preliminary draft and therefore incomplete.

The report is based on CEBO's files and lacks basic information for many unpaid loans, including borrowers' addresses, reasons that CEBO made the loans, evidence of collateral and whether any money was collected through legal action.

The report also states that CEBO has made 379 loans totaling $5.2 million that were fully repaid, but provides no other details except to say that a default rate of 20.5 percent is "an excellent success rate."

In an interview, Marc P. Blum, a local attorney on CEBO's board, said the loan picture given in the report "looks misleadingly bad" because it omits all the "good loans that get repaid."

Gaines, the executive director, and CEBO's board chairman, Fred Lazarus, say they consider the default rate impressively low, considering the nature of the high-risk loans made to small businesses that do not qualify for bank financing.

Although HUD asked city housing commissioner Robert W. Hearn for a CEBO loan accounting by January, the city has yet to send the March loan report to HUD, says Harold Young, HUD's director of community planning and development.

City housing officials have refused to comment directly on the material obtained by The Evening Sun, saying in a prepared statement:

"Even though you may have possession of CEBO documents, they are legally non-public, confidential documents and, given their legal status, we cannot comment on them. The right to privacy must be respected."

Meanwhile, the organization has nearly run out of money and is existing on a week-to-week basis with an emergency grant of $25,000 from the city.

HUD officials in Baltimore have raised questions about CEBO's activities and record-keeping for more than three years, since federal regulations were tightened for the use of Community Development Block Grant money to help for-profit businesses.

In 1988, three months after becoming mayor, Kurt L. Schmoke tried to cut all of CEBO's federal funds -- which would have erased more than 60 percent of CEBO's budget.

Schmoke now says he made the attempt because HUD officials had warned that the city could be charged penalties for continuing to fund the organization.

But shortly after he sent the bad news to CEBO, its board of directors "put on a full court press" to reinstate the HUD grant, says Schmoke.

The result, he says, was "a lot of finger-pointing. [CEBO board members] said it was politics, but my motivation was not political."

At the time, HUD's Baltimore office was headed by local VTC politician St. George I.B. Crosse.

Schmoke recalls that Crosse "did react to CEBO's constituency" by changing HUD's position and continuing to fund CEBO with $1.2 million for another two years. Later, Crosse was succeeded in his job by another HUD manager, Maxine Saunders, who cut off CEBO last November.

Crosse, contacted recently, said, "I really don't recall anything" about CEBO's grant.

For its first few years, CEBO relied on money from the Ford Foundation, but then became dependent on the public sector, first using federal Model Cities money in the early 70s, then Community Development Block Grant Funds as well as city operating funds.

Last year, CEBO received one of the largest grants -- $795,000 in city and federal money -- that the city housing department awarded to any of Baltimore's non-profit organizations.

Even in the early 1980s, as the Reagan administration cut Baltimore's federal money, CEBO's allotment remained a priority at City Hall.

CEBO's longevity is owed in part to Daniels, the influential founder and longtime executive director who retired in 1989.

While Daniels ran CEBO, he was also politically active, in 1986 chairing Blacks United for Schaefer in support of the then-mayor's first gubernatorial campaign.

Schmoke describes Daniels as "pretty well-connected politically" in his heyday. "He was a guy who was talked about as a possible candidate for mayor."

Daniels, who is not a Schmoke supporter, was also well-known to the city's last five mayors, says Schmoke.

"He had to have good political instincts to keep [CEBO] going, but I think the mayors also supported the mission of CEBO."

Daniels denies that his political clout had anything to do with CEBO's survival.

His battles over the years with city and federal bureaucrats who questioned CEBO's expenditures were won, he says, because, "I'm committed and we knew we deserved to continue and we kept our nose clean."

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