War on banks comes to City Hall

| | Comments (0) | TrackBacks (0)

Investor's Business Daily
May 17, 2012

War on banks comes to City Hall

Regulation: A leftist movement to pass local "responsible banking ordinances" is sweeping the nation. Now banks will be harassed into making risky loans by city, not just federal, diversity cops.

The two largest cities this week approved laws requiring banks doing business with them to meet race-based quotas for mortgage and small-business lending. They'll also have to stop foreclosures on previous bad loans and vow to open new branches in urban neighborhoods.

New York and Los Angeles officials who voted for the laws say they're trying to "build on the Community Reinvestment Act." This is the same federal banking regulation that fed the subprime bubble by requiring banks to make riskier mortgages in "underserved communities."

Los Angeles Mayor Antonio Villaraigosa, a strong President Obama ally who agrees the CRA's power and scope should be expanded, is expected to sign the ordinance. New York Mayor Michael Bloomberg is likely to veto it, though the city council will be able to override it.

The moves effectively turn local authorities into bank regulators along with the federal government, adding another layer of CRA enforcement and creating additional pressure on banks to make risky loans.

They also create an unnecessary paperwork burden for banks in these large markets. Bank officials now have to regularly report lending data to city contracting agencies, in addition to federal bank regulators (who already post CRA ratings for any city official to see).

This added compliance cost ultimately will be passed on to bank customers. And taxpayers will have to pick up the cost of the new city bureaucracies that will be set up to police bank lending practices.

Still, New York and Los Angeles are joined by several other major cities in passing such social banking laws, including Pittsburgh, Kansas City and Cleveland. In addition, San Diego, Oakland, Seattle, Boston, Austin, Philadelphia and Portland have drafted similar laws.

Cleveland pioneered the so-called responsible banking movement before the crisis when it adopted the first city ordinance with the help of the nation's largest CRA lobbyist, the National Community Reinvestment Coalition. Cleveland's law, now used as the model for other cities to "meet the credit needs" of the poor and minorities, requires banks to:

VSit down with city officials and CRA shakedown groups and commit to four-year urban "lending and investing goals" for home loans and modifications and small-business loans.

VNegotiate plans for branch distribution.

VPledge to hire a larger share of minorities for executive jobs.

After signing contracts with the city, banks submit to performance reviews and receive points for meeting quotas and timetables. Points are subtracted for closing inner-city branches, as well as charging "excessive interest rates." Review panels made up of city officials and reps from inner-city groups and unions issue report cards each year.

Banks with weak minority lending records and high foreclosure rates have less chance of landing city contracts, deposits and other business. Those accused of "predatory lending," "discrimination" or "redlining" are shut out of the bidding process.

Do the pressure tactics work? Cleveland has shaken down banks for more than $10 billion in CRA loans and investments.

And despite a rash of branch closings across the country -- 2011 marked the first time in 15 years that more closed than opened -- Cleveland banks doing business with the city agreed not to shutter any banks even in unprofitable areas devastated by foreclosures.

What's tragically ironic here is that many of the shuttered branches across the urban landscape were the same ones federal regulators and prosecutors ordered banks to open before the crisis under the CRA.

Will these affordable-housing zealots ever learn?

Another irony: The local responsible banking movement is justified under the false pretense that banks caused the crisis when in fact, it was their regulators.

This is a dangerous pincer movement on banks, since now both local and federal governments can squeeze risky loans out of them.

Shaking down bankers is not the answer. It will only invite another crisis.

0 TrackBacks

Listed below are links to blogs that reference this entry: War on banks comes to City Hall.

TrackBack URL for this entry: http://blogs.cfed.org/cgi-sys/cgiwrap/cfed/managed-mt/mt-tb.cgi/4591

Leave a comment

About this Entry

This page contains a single entry by CFED published on May 17, 2012 4:43 PM.

Minorities are now majority of U.S. births, Census says was the previous entry in this blog.

Food stamps and the $41 cake is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.