Big Banks Wary of Plan For Grades From Council

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When the Los Angeles City Council this month revived its plan to grade financial institutions on their commitment to the local market, many of the nation’s biggest banks grew nervous.

Some community banks, though, reacted a little differently.

The “responsible banking” ordinance, introduced in early 2009 by Councilman Richard Alarcon, is driving a wedge between the large banks, which say the requirements will be costly and cumbersome, and the city’s smaller financial institutions, which see an opportunity for local banks to pick up more business.

The City Council is preparing to vote on the ordinance, which would require those financial institutions in the running for city contracts to submit data on their lending activities and charitable contributions in the city.

Though the proposal does not explicitly address the role of small financial institutions, and many of the city’s needs cannot be handled exclusively by community banks, some L.A. bankers believe the ordinance could open up opportunities for locally based firms to work with the city.

“If (the City Council is) going to support a business, they ought to confirm that the business is supporting the city,” said Paul Hudson, chief executive of Broadway Federal Bank, a small thrift in Los Angeles that has provided deposit services for the city. “I think that’s good business.”

Under the ordinance, banks would be assigned a “community reinvestment score” based on criteria including their small business loans, mortgage modifications, community development loans, local investments and charitable contributions. The measure would apply to financial institutions bidding to provide banking or investment services to the city of Los Angeles.

After the ordinance languished for nearly three years, the council took it up this month in a show of support for the Occupy Los Angeles movement, which has backed Alarcon’s proposal. Hundreds of protesters, angry over perceived excess of the nation’s financial industry, have camped out near City Hall the past few weeks, imitating the Occupy Wall Street movement in New York.

The Los Angeles City Council’s budget committee plans to consider the ordinance next month and the council expects to hold a final vote in December.

Regulatory burden

Large banks, including Bank of America Corp. and JPMorgan Chase & Co., have joined with local business groups such as the Central City Association in opposing the ordinance. Each of the major banks contacted by the Business Journal declined to comment; one person familiar with the banks’ positions said they did not want to inflame public opinion by speaking publicly.

Wells Fargo & Co. referred inquiries to the California Bankers Association trade group. CBA spokeswoman Beth Mills called the ordinance “seriously flawed.” She noted that banks currently provide most of the required information at the national level, but to break out L.A.-specific data would be challenging.

“It substantially increases the regulatory burden on banks,” Mills said. “From our perspective, it would be a significant amount of time, staff resources and certainly additional money.”

The ordinance could also cost the city a significant sum. Last week, City Administrative Officer Miguel Santana said canceling contracts with banking partners due to the ordinance could cost Los Angeles $58 million in fees and penalties, and imperil local projects.

Carol Schatz, chief executive of the Central City Association, accused Alarcon of using the Occupy Los Angeles movement to force through the ordinance over the objections of analysts such as Santana.

“In our view, he’s just pandering to this anti-bank, anti-Wall-Street sentiment,” said Schatz, who has met with city leaders in an effort to defeat the proposal.

Fighting back

Alarcon doesn’t deny that the recent protests at City Hall and in other cities around the country played a big role in bringing the ordinance back from limbo. He pointed out, though, that he has been pushing it since first presenting the ordinance in February 2009.

Since then, Alarcon noted, community banks such as Broadway Federal and Pan American Bank, as well as the Latino Business Chamber of Greater Los Angeles, have expressed support publicly. His fellow council members have backed the effort, too: Last year, the council unanimously approved the motion to draft the ordinance.

However, some council members are reportedly backing off their support over concern about the potential cost to the city.

But Alarcon said Santana’s claim that the ordinance could cost the city $58 million was incorrect because that calculation includes fees, penalties and other costs associated with canceling existing contracts with bank partners, but the ordinance does not necessarily call for the withdrawal of contracts.

Although the language of the ordinance could allow for the cancellation of contracts with low-scoring banks, Alarcon said that prospect is extremely unlikely. Instead, the data collected under the ordinance would simply be used to help the council make better decisions in the future about the banks with which it partners.

“When we’re making our decisions about who will perform our transaction services … then we would theoretically want to invest in those banks that have done a great job,” he said. “We should be driven to work with the companies that do the best for us.”

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