What impact have ‘responsible banking’ laws had elsewhere?

Today, the City Council is expected to pass the Responsible Banking Act, which would require banks to report to a new board within the New York City Department of Finance about how they are meeting the credit needs of the city’s lower-income neighborhoods. The city would then be required to consider the information when deciding where to deposit city funds. Mayor Bloomberg opposes the bill and said it would interfere with federal and state banking laws. But advocates say there is a need for local oversight and similar laws have been in place throughout the country, including in Pittsburgh and Philadelphia, and Los Angeles is considering adopting a law as well.

One of the pioneers of monitoring local lending by banks is Cleveland, which established its own law over two decades ago.

So today’s question is: What impact has the local-banking law had in Cleveland?

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What we found

Cleveland’s Neighborhood Reinvestment Program, dating back to the early 1990s, has become a national model for socially responsible banking laws. Before the city officials decide where to deposit city funds, banks must fill out a questionnaire detailing their lending and investment practices. The city is particularly interested in learning about how banks market loans to low-income and minority neighborhoods.

David Hanzel, deputy director at New York City’s Association for Neighborhood and Housing Development, a trade group of nonprofit affordable housing developers that is supporting the New York City Council bill, said a key component to the success of this program is agreements between banks and city officials on a total amount of money they will reinvest in small business loans, mortgages and other loans they need to reach within four years. If they don’t reach these goals, banks can effectively be banned from doing business with the city for a year.

“When banks are working within a structure where they know there’s going to be real economic incentive, which is holding city deposits, they’re going to be more responsive,” he said. “If they don’t meet their goals, there’s the potential financial hit.”

In the latest report from the Reinvestment Review Committee, six out of the seven banks doing business with the city reached their lending goals for 2008 through 2011, totaling about $1.6 billion.

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