LA Officials Wrestle With Responsible Banking Reform
The Responsible Banking Ordinance (RBO) regained momentum this fall in the wake of the city’s Occupy movement. On paper, the proposed report card system would address a number of the protesters’ demands. But local government agencies charged with evaluating the program have voiced skepticism about the feasibility of such an effort.
“This is where policy and finance meet,” said Natalie Brill, chief of debt management under L.A.’s city administrative officer. “I’m not personally opposed, as a representative of the city, to doing something to make banks more responsible. But the question is what, and at what cost to the taxpayers?”
The city council will take up an amended version of the RBO for discussion Nov. 21, after Brill and other officials have had a chance to make their changes.
She said her office’s primary objections to the program concern redundancy and financial waste, all in an attempt to guarantee transparency from banks. “What’s the cost-benefit to the taxpayers? Knowing the information versus the expense of getting the information.”
She nodded toward the window of her office in city hall and the Occupy L.A. tents beyond its glass. “To the people sitting down there, what do they really want?”
Like many city officials, Brill understood the outrage coming from Occupiers. “I don’t think that anybody objects to the movement, per se,” she said. “There’s no doubt that there’s validity to what they’re saying. The banks have been allowed to do their business with very little regulation. We’re finally getting back to regulating them.”
A march downtown for Bank Transfer Day over the weekend blurred the line between Occupy loyalists and the larger public, underscoring shared frustrations with inadequate enforcement so far. Numbers for the march itself were not available at time of publishing, but according to the Credit Union National Association, 600,000 people had already transferred to credit unions between Sept. 29 and Nov. 5.
Councilman Richard Alarcon, who originally sponsored the RBO in 2010, seemed to sympathize with the more vocal factions of an incensed public. "We felt the resolution kind of captured the spirit of the entire movement," Alarcon told TIME magazine in October. "We were sort of kindred spirits."
Alarcon’s program would have charged the city treasurer with evaluating banks on four basic criteria: the number and type of fixed-rate, 30-year loans; the number and type of loan modifications approved; detailed information on the number of rate- and principal-reduction actions of modifications; and certification that the institution allows unemployed borrowers to qualify for loan modifications or allows tenants to rent properties until they are sold.
If a bank demonstrated low community giveback or showed evidence of fraudulent lending, the city would then choose to cut ties. "If we find that companies are bid-rigging and defrauding the city's taxpayers out of money with their actions, then why should we do business with them?" Alarcon said.
But Brill’s boss, City Administrative Officer (CAO) Miguel Santana, reported the initiative would cost L.A. $58 million to put into place. The bulk of that hefty price tag would come in the form of termination fees. Setting up the system could also potentially lead to higher interest rates, according to Santana’s Oct. 18 memo to Mayor Antonio Villaraigosa.
Considering the city’s budget for 2011-12 is $6.8 billion, these costs might seem reasonable to those camped out at city hall. In theory, the RBO would yield higher transparency and accountability from major banks. But Brill and other officials have questioned whether creating an entirely new regulatory system for the city would be the best use of funds.
“I’m not saying it’s right or wrong,” Brill said. “I’m saying, when money is tight, what do the taxpayers want? Do they want us to be gathering data from the banks? Or do they want their streets paved?”
Brill said Alarcon’s proposed system would attempt to do work on a local level that is already being carried out by federal agencies under the Community Reinvestment Act of 1977. The law discourages redlining, in which banks avoid lending and investing in low-income communities. The Federal Reserve among other agencies oversees the review process, auditing institutions for their lending records. The Fed uses this information when approving future branches or mergers.
Additionally, the Home Mortgage Discovery Act requires banks to report numbers of loans approved, modifications made and foreclosures carried out. Brill said under these laws, the federal process is about as effective as it can be. “I don’t know if we have the expertise in the city to rank the banks,” she said.
But the city is not oblivious to the questionable practices of some banks. In 2008, the city attorney filed a lawsuit against 35 financial institutions for bid-rigging, a type of fraud in which banks collude to manipulate bidding and win investments from cities.
“The banks have not been honest brokers. We know that,” Brill said. “We’re kind of in a bind here. We’ve created these large banking institutions that are federally regulated. But the feds can’t be everywhere.
“How can we steer the banks in the right direction?” she said. “That’s the goal of the Responsible Banking Ordinance. And that itself is not a bad goal.”
Brill said she hopes to see some version of the RBO enacted in the near future. The CAO’s office is working with the treasurer’s office and other city agencies to draft recommendations for changes to the program. Specifically the groups are looking to other cities with similar initiatives to find how they are ranking banks after the review process, where that information should be posted for public access and what actions should be taken against fraudulent institutions.
But even as they look to smooth out the RBO's kinks, city officials still struggle with the bigger picture. Speaking to one of core complaints from the Occupy movement, Brill reflected on what the city’s level of involvement should be as it tries to “reform” banking regulation. “Everybody throws that word around, but what are you gonna do to the banks?” she said.
“Is that the role of government? I don’t think we’ll ever know the answer to that.”
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