The failure of the Department of Hawaiian Home Lands to adequately address a growing loan delinquency problem among its Native Hawaiian beneficiaries poses a solvency risk to the agency, according to the state auditor.

"By failing to identify and mitigate loan risk, and by allowing lessees to remain chronically delinquent, the commission ties up both loan and land resources that could be provided to other beneficiaries and creates a solvency risk for the Hawaiian Home Lands trust fund," according to the report released Wednesday by acting Auditor Jan K. Yamane.

About $83 million of more than $588 million in DHHL loan obligations — or 14 percent — was delinquent as of June 2012, the audit said.

Nearly 260 accounts were delinquent at least one year, including 56 that were five to 10 years behind and an additional 57 that were more than 10 years’ delinquent, the report noted. The longest delinquency was more than 22 years.

While the report acknowledged that the department issues high-risk loans, it faulted the Hawaiian Homes Commission for making decisions without sufficient information about risk exposure and the department for lax oversight.

"As a result, the department may be making loans to borrowers who cannot afford to make their payments," the auditor concluded.

Darrell Young, the agency’s deputy director, agreed that DHHL needs to improve its lending operation but said the auditor was unfairly comparing DHHL with a commercial lender.

"We’re the lender of last resort," Young said, adding that beneficiaries who get direct loans from DHHL typically have been rejected by two or three private lenders before coming to the agency.

When lessees fall behind on their loans, the department tries to resolve the delinquency rather than cancel the homesteading lease because the latter action could put a family on the streets, Young said.

"We’re going to work with that family to come up with a repayment plan," he added.

The agency’s main mission is to place beneficiaries — those who are at least 50 percent Native Hawaiian — on trust land through residential, ranching or farming leases. The leases are for 99 years at $1 per year.

The 1920s federal law creating the trust set aside roughly 200,000 acres statewide for homesteading, with the aim to enable Native Hawaiians to return to their lands and become self-sufficient. But the department has long been criticized for the slow pace of fulfilling its mission.

More than 26,000 homestead applicants were on waiting lists as of the end of 2011, according to DHHL figures.

"The challenge of the department and the Hawaiian Homes Commission is to strike a balance between addressing the management of its loan portfolio and addressing the needs of its beneficiaries for mortgage loan financing so they can be placed on Hawaiian home lands," wrote Jobie Masagatani, who heads the commission and department, in responding to Yamane’s findings.

Total loans to lessees nearly doubled from $309 million in fiscal 2003 to $590 million in fiscal 2012, according to figures from the audit.

The higher lending volume creates more risk, Young said.

The audit found flaws throughout the lending programs, including direct loans, which represent the highest and most immediate financial risk for DHHL.

The department’s fiscal management officer, for instance, admitted to auditors that no detailed analysis had been done to determine whether the direct loan program was profitable, operates at a loss or breaks even.

The department’s lax management of loans undermines its ability to serve all its beneficiaries, the auditor determined.

Yamane also found that lending policies are rarely reassessed. The 6 percent loan interest rate has not been reviewed since 1995, for instance, and the tool used to calculate household expenses for determining loan eligibility has not been updated in a decade, meaning the agency may be miscalculating lessees’ ability to repay the loans, the report said.

In reviewing 16 loans issued between 2009 and 2011, the auditor discovered that required documents were frequently missing from the files and that applicants failed to meet required standards in seven of those cases. Yet the department’s loan specialists did not record the failures in six of the seven cases, the audit noted.

The commission’s goal to provide long-term tenancy to Native Hawaiians shouldn’t justify keeping chronically delinquent lessees on home lands while the wait lists continue to grow, according to the report.

Masagatani, in her written response, said the department places a high priority on addressing loan risks.

Since she became director in May 2012, the staff has improved reporting to the commission, and staff and commissioners have received more training in lending, according to her response.