San Diego has joined a growing list of major cities requiring banks to prove that they are adequately serving low- and moderate-income consumers.
The city council last week unanimously passed a "responsible banking" ordinance that compels any bank doing business with the city to disclose detailed data on their lending and community redevelopment activities. Banks that fail to comply run the risk of losing the city's business.
The law was passed over the objections of banking groups, which argue that they are already obligated to keep tabs on their neighborhood activities under the Community Reinvestment Act. While banks generally agree that cities should choose financial institutions with strong records in supporting community development, they are concerned that local politicians will try to create "scorecards" or rating systems that rank banks based on subjective criteria of social responsibility.
"This is not catastrophic but it is about preventing something from being overly politicized and a ranking of banks," says Leland Chan, general counsel for the California Bankers Association. "Banks really are committed to the goals of the Community Reinvestment Act but we are concerned about people reacting to the politics of the time."
San Diego is at least the ninth city in the country to adopt a responsible-banking ordinance. Cleveland was the first to pass a law in 1991, followed by Philadelphia in 2005, but the rest were passed following last year's Occupy Wall Street movement. Similar ordinances, which have received the support of a broad coalition of community, labor and neighborhood activists, are now on the books in Seattle, Pittsburgh, Portland, Ore., Kansas City, Mo., Los Angeles and New York and are under consideration in Boston and other cities.
In some cases, banks have been successful in watering down the proposals; Los Angeles, for example, passed its ordinance in May but not before it dropped a provision that would have rated banks based on certain lending criteria.
San Diego's ordinance went a step further than those of other cities by requiring that banks submit a two-year community reinvestment plan detailing how they will meet the lending needs of low- and moderate-income consumers.
By mid-2014, any bank doing business in San Diego must provide details on community reinvestment activities in six lending categories including foreclosure information, modifications of distressed loans and outreach efforts to lower-income residents.
"What we were trying to do was more aimed at transparency as opposed to a punitive measure," says Lea Fields-Bernard, a consultant to the San Diego City Council's rules committee.
San Diego also requires that banks' annual reports and reinvestment plans be reviewed by a newly created community reinvestment review committee. The committee has the authority to issue recommendations to the city council and treasurer on which banks to select for the city's financial services contracts.
Banks have objected to the new committee claiming there are no objective criteria for how a bank can achieve an "eligible" recommendation and that there is no appeals process.
The California Bankers Association says the two-year plan required by San Diego would force banks to divulge information that could help competitors. Since banks generally do not prepare two-year business plans, they are concerned that their actual performance will be measured against the plans, and they could be penalized if their activities changed based on market conditions.
"What we're concerned the most about is that the review would be done by a review panel that even though it says they don't rate the banks, they do make a recommendation, and that it would be politicized," Chan says. "What banks have to do under [the Community Reinvestment Act] is defined and specific, and what the review committee wants is basically what the public is angry about or what politicians are interested in at the moment."
Chan also says it would be difficult for San Diego's treasurer to receive a recommendation from the review committee and simply ignore it, even though the 11-page ordinance specifically states that the review committee's report is only one factor in making determinations for the city's banking services. (Read the ordinance here.)
The ordinance even specifies that the review committee "will not establish scores or otherwise rank financial institutions for purposes of making its recommendations."
San Diego even included a requirement that any financial institution or affiliate that is the subject of a court judgment for engaging in predatory lending practices must explain changes they have made to address the violation.