The country’s two biggest cities Tuesday passed ordinances designed to encourage banks to invest more in low- and moderate-income communities.
The laws, known as “responsible banking ordinances,” reward banks that make the most substantial community investments -- like small business loans and home loans -- when city officials are deciding which financial institutions will be awarded city contracts.
Both pieces of legislation are headed on different tracks: Los Angeles Mayor Antonio Villaraigosa is expected to sign off on the ordinance. In New York, Mayor Michael Bloomberg is likely to veto it, though the city council will be able to override it.
Both cities had been considering the measures in recent weeks. In Los Angeles, city council members moved up the schedule of their vote Tuesday, once it became clear that lawmakers in New York were poised to pass legislation, so that the ordinances would be approved in the country's two largest cities almost simultaneously.
Lawmakers in Los Angeles passed the ordinance unanimously, while New York city council members passed it on a 44-4 vote.
“Every elected official has an obligation to ensure that taxpayer dollars are invested wisely – in institutions that are committed to our cities and our communities,” said Los Angeles City Council member Richard Alarcón, the legislation’s biggest advocate, in a statement.
“Shedding light on any practice is the best disinfectant, and by illuminating the needs of the communities they serve, banks will be better able to meet those needs,” New York City Council Speaker Christine C. Quinn said in a statement.
Ordinances like the ones passed in Los Angeles and New York are gaining traction nationwide in the wake of the recession and the Occupy Wall Street movement. Pittsburgh recently passed a similar measure, and San Diego City Council President Tony Young is expected to introduce one Wednesday. Other cities including Boston and Portland have recently considered similar legislation.
Many of those cities have based their banking laws on that of Cleveland, the first large American city to address the issue, with legislation passed in 1991. There, a bank that wants the city’s business has to report data such as its volume of residential home loans, small business loans, and bank branches – particularly in the city's low-income communities. It also must provide the city with an outline of its goals for addressing low-income residents’ credit needs.
When it's time to award a new depository contract, the city measures how closely a bank’s record stacks up against its goals, and then uses that information to determine which banks are doing the best work serving residents -- and thus which banks deserve the city’s business.
Cleveland officials say they’re pleased with the results, citing the city's lower-than-average rate of un-banked residents and the stable number of bank branches in the city at a time when bank branches have closed across the country.
The banking industry generally opposes policies like the ones passed in New York and Los Angeles. Opponents argue the rules are so onerous that many banks would rather stop doing business with cities than report the data. Elected officials are essentially calling their bluff.
"We have $30 billion in assets," Alarcón told Governing earlier this month. "I doubt financial institutions are going to turn their backs on those assets.
