California's foreclosure rate was the third highest in the country in August, with one
out of every 144 housing units receiving a foreclosure filing, according to RealtyTrac.
L.A. City Council is considering grading banks to encourage them to do more
to help communities hit hard by foreclosure.(Creative Commons Licensed)

Los Angeles City Councilman Richard Alarcon has proposed that the city rate banks based on "social responsibility" and consider divesting city funds in banks that score poorly.

"We are responsible to manage billions of dollars of taxpayer money," said Alarcon during a recent committee meeting. "I believe incumbent in the expenditure of that money is to ensure that those businesses that we fund...should not be doing things that hurt or harm or turn a blind eye to the problems in our communities."

At stake is hundreds of millions of city taxpayers' dollars. The city had $867 million invested in banks as of June 30th of this year, according to Roy Morales from the office of the Chief Legislative Analyst. That amounts to about 14.5 percent of the city's total $6 billion investment portfolio.

Alarcon advanced his idea last Tuesday at the Jobs and Development Committee meeting held at City Hall. Alarcon asked Morales to investigate rating banks on several standards of social responsibility.

Alarcon mentioned criteria that included foreclosure prevention efforts, lending to small businesses, local investment and "green" building investment. The goal would be to provide an incentive to financial institutions to benefit Los Angeles communities.

"We have some banks that don't even have ATM's in places that working-class people can access them," Alarcon remarked.

Under Alarcon's plan, the city would use the scores of each bank as a guide to invest in banks that score high and possibly divest from others that score low.

The office of the Chief Legislative Analyst will present findings on scoring banks at a Jobs and Development Committee meeting next month.

Alarcon's motion represents a different mode of attack by government to deal with the area's high foreclosure rates. Instead of changing the rules of the foreclosure process, the motion will use the tools of a ranking system and the threat of divestiture as a means of changing bank policy.

With this request, Alarcon amended an earlier motion that he created to deal specifically with preventing foreclosures. That motion called for investigating banks' foreclosure prevention efforts, including loan modification and subsequently divesting funds from banks deemed uncooperative.

The state of California has made its own attempt to compel banks to assist borrowers. Then Senate President Pro Tem Don Perata, D-Oakland, introduced SB1137, which required that lenders prove that they contact delinquent borrowers directly and discuss with them arrangements to avert foreclosure. The bill became law in 2008.

The California Foreclosure Protection Act, passed earlier this year, required an extra 90 days before a lender can send out notification that a foreclosed property will be sold.

Despite state and federal government efforts and loan modification programs by banks, foreclosure statistics remain a problem across California. According to RealtyTrac.com, a foreclosure listing site, California's foreclosure rate in July was the second highest in the country for the third month in a row.

The foreclosure tracking company ForeclosureRadar.com reported that the number of California properties scheduled for sale rose 93.3 percent in July this year compared to July 2008. In the same report, 3,008 L.A. County homes were listed as sold at auction in July.

"People are angry," remarked Alarcon. "They are angry because the banks have not responded enough."

Veronica Perez Becker of the Central City Association, a business advocacy group, spoke in opposition to the proposed motion during the committee's meeting. "We question the use of city funds to drive public policy decisions, especially in this context where we're talking about the city being the steward of taxpayer dollars."

Yvonne Mariajimenez from Neighborhood Legal Services of Los Angeles County, a private non-profit law firm, came to the defense of the divestiture motion. "Banks, frankly, have done very little if anything to work in a meaningful way to stabilize the health of our communities, our families and our homeowners," said Mariajimenez. "It's not about the volume of modifications being done. It's about the substance and quality of those modifications."

Perez Becker advised the council to allow existing regulations to work before enacting additional legislation. "Be concerned about the slippery slope of imposing social responsibility requirements on banks," said Perez Becker. "Where does it stop? We have to keep our fiduciary duties to the taxpayers in mind."

Speaking after the meeting, Alarcon commented on the danger of a "slippery slope" situation. "I would hope that we create a slippery slope that would inspire banks to be more socially responsible and give back to the communities that they're making money off of," the councilman said.

Beth Mills of the California Bank Association, reached by phone, said that efforts like Alarcon's are misguided. She said many institutions are already participating in loan modification programs such as the Obama administration's Making Home Affordable
program.

"The industry recognizes that there's more that can be done for folks to stay in their home," said Mills. She cited the recent hiring of additional employees by banks in order to field questions about loan modification programs as evidence of the banks' efforts to stave off foreclosures.

Sean O'Toole, CEO of ForeclosureRadar.com, also disagreed with Alarcon regarding government reactions to the foreclosure situation. While he agreed that there might be a case for a wide-scale principal balance reduction for borrowers, he said that most government programs are just encouraging people to not make payments.

"It has a potential for backlash after people see others who bought a new boat or monster truck not paying," O'Toole said.

When asked about the specific motion put forth by Councilman Alarcon, O'Toole said he was doubtful of the effectiveness of actions such as divesting city funds in the name of public policy.

"Is it really going to change the behavior of that bank? No. Their job is to get the best returns on the city's assets," he said.

Back at City Hall, Alarcon reaffirmed his belief in using city funds as an agent of change.

"The question is should we step in and create those standards for social responsibility amongst financial institutions. I think the answer is yes."