The Latest Strong Arm Tactics From Large Cities

Critics of the Community Reinvestment Act and similar efforts to compel lenders to lend to lower income borrowers in lower income neighborhoods during the last twenty years or so, and who blame such efforts for the subprime mortgage market meltdown (a proposition I never supported), must be apoplectic over the latest efforts by some large cities to replicate the sins of the past. According to a recent article by Andy Peters in the American Banker, some cities are using the stick of municipal deposits to beat some low-income loans out of banks.

City councils in New York, Los Angeles and Pittsburgh have passed ordinances this year requiring banks that hold city government deposits to provide detailed accounts of their lending practices in low-income communities. Boston, Milwaukee, Minneapolis and San Diego are considering similar proposals.

Banks could lose deposits if city governments determine that they aren't doing enough in low-income neighborhoods. Lending data, broken down by neighborhood, will be made available for public inspection.

Cleveland and Philadelphia pioneered the concept of so-called responsible banking acts several years ago.

As banking lawyer Warren Traiger points, the dreaded CRA makes such efforts superfluous. When did that ever stop local hacks from PR stunts meant to convince voters that the city solons were sticking it to the big bad bankers?

Consumer advocates disagree, of course, on the basis that the CRA is a bust and that federal bank regulators aren't doing enough to make banks make the high risk loans to people who are poor credit risks and who otherwise have to resort to payday lenders, pawn shops, and guys like Paulie Walnuts. There's a reason that loans to lower-income, high risk borrowers carry high fees and interest rates: those borrowers default in greater numbers than lower risk, higher income borrowers. Banks shouldn't be taking greater credit risk unless they receive higher returns on the loans, to make up for the higher losses they'll take on the loans that aren't paid back. Pretty simple stuff. Nevertheless, municipal pols don't care about credit risk, rates of return, blah...blah...blah. They care about how this all looks to the voters whose favor they're trying to curry in order to retain their political positions.

I think Mike Bloomberg got it right when he recently vetoed New "Yawk" City's attempt to enact a similar measure. As the New York Bankers Association complained, such legislation adds "an unneeded layer of regulation that could discourage banks from doing business with city governments."

We don't need smoke and mirrors to improve people's lives. We need more private sector jobs. A lot more private sector jobs. In the words of this nation's First Black President, "It's the economy, stupid."