Since 2010, Boston, Los Angeles, New York, Philadelphia, and Pittsburgh, among others, have all considered or passed laws known as “responsible banking ordinances” designed to encourage banks to increase their lending and other services to the city's residents, particularly those in low-income communities.
The laws work like this: in order to be considered for a city contract, banks must submit detailed plans outlining their goals that address the volume of home loans and small business loans they'll make in the city, particularly in low- and moderate-income areas that historically haven’t been targeted for investment. They also must describe what they're doing to address the credit needs of low- and moderate-income residents.
The banks would then be required to report their actual performance to the cities. City staff would evaluate each bank's goals against its track record, make the information public, and take it into account when deciding which financial institutions are awarded city business.
“[I]f they do not reach their goals, there should be some type of repercussion for that,” says Tony Young, president of the San Diego City Council, who intends to introduce a responsible banking ordinance within about six weeks.
City leaders who advocate for the ordinances say they're trying to build upon the Community Reinvestment Act (CRA), a 1977 law that ended that was designed to encourage banks to address the banking needs of low- and moderate-income Americans and reduce the practice of redlining.
Banks report lending data to federal regulators, who take a bank's CRA record into consideration when deciding whether to approve a bank's plans for expansion.
But that law examines banks from a national perspective. City leaders want to make sure banks are serving their residents and they think creating their own laws is a way to do that. Since governments make billions of dollars in deposits at banks, they believe they have some leverage. They hope banks will compete to have the best community reinvestment record in order to get those depository contracts.
The movement has gained steam in part due to Occupy Wall Street protests, says Rose Zitiello, manager of banking relations for the city of Cleveland, which is believed to be the first major American city to craft a responsible banking ordinance. The city’s 1991 law is the basis of many of the ordinances being considered by cities today.
In Cleveland, a bank isn't eligible for a contract unless its four-year responsible banking plan is approved by the city's director of community development. When bidding on a contract, the bank's record is taken into consideration. Banks are awarded points based on factors like how close they came to meeting various lending and investing goals, how many branches they opened in low- and moderate-income neighborhoods, and how many minorities and women they employ in executive positions.
Zitiello says the ordinance has been around so long that it’s become a collaborative process between the city and the private sector after some pushback from the banking community at the onset. “Any time you introduce something that goes against the status quo, it gets resistance," she says. “At this point, we’re not experiencing that.”
But the banking community is resisting some of the changes being proposed in cities nationwide. David Floreen, senior vice president at the Massachusetts Bankers Association, said at a 2010 hearing that Boston’s proposed responsible banking ordinance is “a solution looking for a problem.”
At the hearing, he said small and large banks alike believed it would be too costly to implement the new reporting requirements. He said most banks “would probably take a pass” and give up on city business altogether rather than comply with the new rules.
Young, of San Diego, says he’s meeting with local banking officials before introducing his legislation. He believes doing so will help set the proper tone for the forthcoming debate about the legislation. But he believes it is indeed appropriate for the city to use its leverage to try to force certain actions by the banks. If they don’t agree, Young says, they “can conduct their business elsewhere.”
Some industry officials say that’s exactly what they intend to do.
The California Bankers Association is opposing the ordinance making its way through Los Angeles. The city council recently voted unanimously to have the city staff draft the language for a responsible banking ordinance.
Leland Chan, general counsel for the California Bankers Association, said in a recent letter to city officials that the type of granular information the city is seeking “may raise privacy concerns.” Like Floreen, Chan also suggested that burdensome rules could reduce the number of financial institution interested in doing business with the city.
Los Angeles City Councilmember Richard Alarcón, who's behind his city's ordinance, calls that argument "hogwash."
"We have $30 billion in assets," he says. The city has about 40 to 50 contracts with financial institutions that involve everything from deposits to bond deals to letters of credit. That, he believes, gives the city leverage. "I doubt financial institutions are going to turn their backs on those assets."
The deals also could represent something of a power shift for municipalities, who in recent years, have been duped by financial institutions like UBS, Wachovia, and subsidiaries of Bank of America and JPMorgan Chase, all of whom faced federal charges in connection to various bid rigging schemes involving municipal security deals.
"It boils down to caveat emptor," Alarcón continues. "A purchaser of services and goods should be well-informed about who they're doing business with. If banks have a problem with that, I think we as a society should be scrutinizing them very closely."
Boston City Councilmember Felix Arroyo, who's leading the effort for a responsible banking ordinance in his city, notes that banks aren't being told how much they should invest and lend; rather, they're being compared against one another. "This is not anti-capitalist," says Arroyo. "As a consumer, I'm going to compare the products, and I'm going to pick the product that's best for the city."
In Pittsburgh, Boston and elsewhere, lawmakers have met early on with financial institutions to get feedback in order to avoid crafting a law so onerous that banks would avoid city business altogether.
One of the biggest challenging in crafting the law was to convince banks to give up some data that they may consider to be a trade secret, says Matthew Barron, policy director for Councilman William Peduto, the original sponsor of a responsible banking ordinance ultimately approved by Pittsburgh this spring. But he says the city isn’t asking for anything that banks don’t already report to federal regulators; rather, it’s only seeking the same data for the local level.
He says lawmakers' ultimate goal was to work with banks to crate low-cost financial products for residents who currently don’t use banks, and to ensure that those products would be tailored to people who don't have high levels of financial literacy.
Meanwhile, Cleveland's ordinance appears to be showing results 20 years after it was passed.
The city’s percentage of under-banked and un-banked residents is less than the national average, and even though banks have been closing across the country in recent years, the number of branches among the seven banks that have depository contracts with Cleveland has remained stable.
“Everybody is putting in a good faith effort to do the best they can,” Zitiello says. “Their goal is obviously to be profitable. Our goal is to maximize their lending and investing.”
