Giving bankers yet another thing to think about, an effort is gaining momentum to require banks to lend more in low-income neighborhoods in order to gain municipal business.
Before community banks get too comfortable thinking it's another assault on mega-banks, a leading promoter of the cause says big banks often do a better job than smaller banks on this type of lending.
City councils in New York, Los Angeles and Pittsburgh have passed ordinances this year requiring banks that hold city government deposits to provide detailed accounts of their lending practices in low-income communities. Boston, Milwaukee, Minneapolis and San Diego are considering similar proposals.
Much of low-income lending is tied to residential finance.
Banks could lose deposits if city governments determine that they aren't doing enough in low-income neighborhoods. Lending data, broken down by neighborhood, will be made available for public inspection.
Cleveland and Philadelphia pioneered the concept of so-called responsible banking acts several years ago.
But the movement is gaining traction because "there is a lot of anger being directed at the financial services industry," says Warren Traiger, a banking lawyer at BuckleySandler. Never mind that the ordinances aren't needed, says Traiger, who advises banks on Community Reinvestment Act compliance.
"These local ordinances are superfluous," Traiger says. "Banks already have a sufficient degree of federal and state oversight with respect to how well they're serving their communities."
Regulators have failed to enforce the CRA and the Fair Lending Act, says John Taylor, the chief executive of the National Community Reinvestment Coalition. That leaves cities to deal with the fallout when a bank closes a neighborhood branch and "payday lenders, check cashers and pawn shops" step in, he says.
"Regulators have done a miserable job of protecting consumers," Taylor says.
The New York Bankers Association opposed the measure, calling it an unneeded layer of regulation that could discourage banks from doing business with city governments.
Taylor says his group has no special empathy for small banks and that big banks lend as much, if not more, than smaller banks in disenfranchised neighborhoods. "I don't see a big difference" based on asset size, he says. "I like locally owned banks for the reasons other people do, but it's not fair to assume they're always better."
The biggest U.S. banks have passed CRA exams with flying colors. JPMorgan Chase, Bank of America and Wells Fargo consistently receive "outstanding" ratings from regulators.
Bigger banks are examined more frequently than smaller ones for CRA compliance. Regulators review banks with $250 million or more in assets every three years. Banks below that mark are evaluated every five years.
Taylor says there is a financial justification for responsible lending acts. City resources are under greater strain, with police and fire departments stretched thin, and the cost of maintaining vacant properties is rising, he says.
In addition to helping neglected neighborhoods, Community Reinvestment Act loans are financially sound, Taylor says.
Some groups have claimed that CRA loans were a leading cause of the financial crisis, but a 2011 Federal Reserve Board study
