Q&A with Cleveland on Responsible Banking Law, New in NYC
Since the recession began in 2008, New York City’s financial epicenter has been the symbolic target of growing populist distrust of banks and bankers. The subprime mortgage crisis, Bernard Madoff, Occupy Wall Street, J.P. Morgan’s $2 billion trading loss — the list of grievances goes on and on.
Many homes continue to be foreclosed upon and small businesses still have difficulty receiving loans here in the city. As a result, on May 15, City Council passed a responsible banking ordinance, the same day similar ordinances were passed in Los Angeles and Oakland.
Under the ordinance, if a bank wants to hold city money, it must prove to an eight-member advisory board that it has invested in local working class communities, made small business loans and engaged in foreclosure prevention programs. Mayor Michael Bloomberg has threatened to veto it, saying it would interfere with state and federal regulations.
San Diego has also introduced a responsible banking ordinance, and in recent years they’ve been passed in Philadelphia and Pittsburgh. But do these laws really do anything to make banks support working people and small businesses, and prevent predatory lending? To find out, we turned to Cleveland, which in 1990 became the country’s first city to enact a responsible banking ordinance.
MetroFocus interviewed Daryl Rush, director of Cleveland’s Department of Community Development, about the law’s impact over the past two decades. As part of its responsibilities, his department oversees the conservation and expansion of housing stock; the revitalization of commercial areas; acquires, maintains and markets vacant land; and improves the quality of human services.
Q: How did Cleveland’s responsible banking ordinance come about?
A: Our program has been operating since 1991. It arose out of advocacy activities in response to redlining by financial institutions, banks and insurance companies. The ordinance was a vehicle to seek commitments from financial institutions to invest in Cleveland’s neighborhoods and to provide financial services that were accessible to residents and businesses. The principal vehicle for doing that is a goal-setting process that is reflected in an agreement between the city and the institution. It covers the annual and aggregate goals over a four-year period.
Q: If a bank wants to open a new branch in Cleveland, and they want to do business with the city, what process must they go through?
A: Over the past few years banks realized that there’s value to a branch network. There was a period when banks started downsizing branches in the early 2000’s. But it is not uncommon now for us to work with an institution on where might be a good location to site a branch.
Q: According to your recent report, Cleveland has a lower percentage of unbanked residents than New York and Los Angeles. Do you think that has any relationship to the banking ordinance?
A: I think that the ordinance has been beneficial in several ways, but one way is that we have branches and ATMs throughout the city. We’ve been stable in our number of branches throughout the city. We’re at about the same number of branches across all the institutions that we had a few years ago.
Q: In the 2012 report on responsible banking in Cleveland, there are a number of statistics that suggest the law hasn’t pushed financial business out of the city — a fear that’s been raised regarding the responsible banking ordinance in New York City. But is there any way you can gauge whether this law has reduced unsavory lending practices, prevented foreclosures or pushed banks’ support low-income communities in other ways?
A: We were hard hit by foreclosures. Our foreclosures were subprime loans and a lot of those were not purchase loans. But a high percentage of the subprime loans came in through the home repair door. So, they were targeting minorities, seniors and people for whom English was a second language. And they were targeting people with high equity. The city introduced an ordinance in 2002 which caused a lot of predatory subprime lenders to not have a Cleveland address. As we looked at foreclosures and defaults, our depository banks had a fairly low inventory of REOs [Real Estate Owned properties] and foreclosures in their loan portfolios with the city, where they were working on development projects and development activity.
Q: From what I saw online, many of the big banks like Bank of America, Chase and Wells Fargo, seem to have a fairly small presence in Cleveland, if any. Do you think that has anything to do with the responsible banking ordinance?
A: Bank of America, through its chain of acquisitions, has never had a Cleveland presence. To the extent that your question is, “are there banks that have pulled out of the city as a result of our ordinance?” — again, our ordinance has been in place since 1991, and in those 22 years the industry has changed dramatically. I can’t recall a bank leaving the market because of the ordinance. The ordinance is not intended to have an adverse effect on business. I’d like to think the ordinance helps for stronger business. We want and we believe that business can be performed at a win-win level in the city of Cleveland.
Q: Are there any examples of positive activities this ordinance has encouraged?
A: At its core it’s looking at lending in key categories, but we also look at employment, utilization of employment, branch distribution, ATM distribution, investment in neighborhoods, products and how products align with the market need. For example, in the current market, we have an economic depression and housing depression. So we are talking about financial literacy, we are talking about housing loan programs, we’re talking about how banks respond to the REO portfolio.
Everything is geared toward us and the banks providing and doing activity that meets our market. And doing investments that support residents and businesses. Through that, there are loan products that the banks have created. There are banks that are providing home purchase loans that are 95 percent LTV [loan to value]. Approving people by those credit scores that don’t have to be 750.
We have a mortgage bulletin online that provides some of the loan products for home purchases that the institutions are providing. There are loan products we think are offered as a result of this program, which align with what we need locally. Banks are making investments in neighborhood and community deals like purchasing low-income tax credits or new market tax credits. Investments are being made in city institutions. That’s maybe a little verbose, but yes, there’s positive activity as a result of this.
Q: Anything else you’d like New Yorkers to know about how the ordinance has worked in Cleveland?
A: We try to keep our eye on the goal of access to lending. And that only works if it is beneficial. The business or the resident has to benefit and the institution has to benefit. The goal is not to drive an institution out of business and we haven’t seen that happen.
This interview has been edited and condensed by MetroFocus.