Council members on the city’s budget committee took up suggested changes to the Responsible Banking Ordinance Monday that some say would dramatically reduce the potential for accountability from Los Angeles’ banks.

The office of the City Administrative Officer released a report Friday detailing its amendments to the ordinance. They proposed adjusting the current Contractor Responsibility Ordinance to include community reinvestment activities and participation in city-run housing programs, as well as contributions to "employment opportunities, and small businesses and economic growth."

If the committee votes Monday to approve these changes, they set in motion a plan that will alter the power dynamic between the city and its major banks. To what degree, however, is still to be determined.

Instructed by the city council Oct. 11 to review the RBO and report back, the office of City Administrative Officer Miguel Santana set out to "maintain a balance between two values,” according to Friday’s summary.

Those two values seemed straightforward enough: Avoid significant financial loss for the city, and use purchasing power to "promote, attract, develop and foster responsible business practices that enhance the quality of life for Angelenos and do not harm or take advantage of its consumers."

Banks would still be subjected to review by the treasurer's office, the results of which would be reported to the mayor and council on an annual basis and made public on the city's website.

The CAO’s changes focused heavily on establishing separate evaluative criteria for commercial banks and investment firms. This would essentially allow the latter, the majority of which primarily provide underwriting services, to avoid abiding by the same community reinvestment standards as major banks.

Since the beginning of its review, the CAO's office has had the same concerns about Councilman Richard Alarcon's original ordinance. "On the underwriting side, I'm not sure it's appropriate," Chief of Debt Management Natalie Brill said earlier this month. "When you hear of responsible banking ordinances throughout the country, they're really on the banking side, not on the investment side."

Brill pointed out that of L.A.’s 22 underwriters, only five or six are associated with commercial banks. The rest are independent investment banks, meaning their sole business is in buying and selling bonds. These institutions function differently from major banks. Brill said that requires a separate set of standards for an adequate review. "The way the RBO stands right now," she said Nov. 3, "that's not in there."

So she and the office set out to define distinct criteria for smaller investment firms to provide evidence of their community giveback. When subjected to a preliminary review, the 22 firms turned in responses that the CAO deemed in its Nov. 18 report "difficult to convert in a way the City can use to rank and score the financial institutions at the granular level as proposed in the draft RBO." The office also said the city's treasurer lacked both staff and expertise to evaluate the firms' affiliate lending information.

The CAO then proposed limiting the scope of review to three key indicators: a bank's score under the Community Reinvestment Act, its participation in the city's Housing Programs and its track record in lending to small businesses.

Dennis Santiago of The Huffington Post said this refocusing would paint an incomplete picture of bank behavior.

The banking industry is not a landscape where every bank looks like every other bank. Quite the contrary, just like any other competitive business, banks specialize and occupy service niches. Banks specialize. Some make home loans. Others make small business loans. Yet others serve the larger companies that have some of the biggest impact on regional economic strength. Some banks cater to private wealth while others pursue specific subsets of the community.

And regulations keep changing. For instance, did you know credit unions have recently been authorized to receive government deposits? All are part of the tapestry of a regional economy, one that has to grow as a whole if it is to be healthy. I've always believed it is unwise for a city like Los Angeles to focus on such a narrow band of criteria when it comes to identifying which banking and financial institutions to seek to do business with.

The City needs to say it wants to see bank responsibility as a holistic picture and come up with a way to ask the right strategic questions. So far, while this caters to political interests, I'm not convinced that it fully addresses regional economic needs.

Under the new RBO, investment banks would have to abide by Corporate Citizenship Criteria, providing information about participation in "charitable programs or scholarships and policies with regard to the use of women-owned, minority-owned and disadvantaged business enterprises."

Santiago noted these criteria could overlook banks that were responsible in avoiding troubled lenders, cautious practices that would appear as "little participation in repair programs even though they are strong investors in the community."

On top of these recommendations, the CAO will also address Monday the potential economic impact of removing fraudulent institutions from the list of those qualified to participate in bond programs. In its summary, the office discouraged the city from doing so, saying L.A. would end up paying between $58 and $65 million in "replacement costs."

Depending on the committee's vote, the new ordinance could land in front of the full council as early as Tuesday, giving members a chance to review the initiative in earnest before the council’s two-week recess in December. Brill and the CAO’s office certainly hope that’s the case.

“We’d like them to so we can get this over with and move on,” she said while the office was still in the midst of drafting RBO 2.0. “We’ll see what happens after Thanksgiving.”

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