Cities’ Banking Clout Serves Social Agenda

Without fanfare, the groundwork is being laid at City Hall to pressure banks and savings and loans to increase lending and improve consumer services in low-income neighborhoods of Los Angeles.

The city’s leverage would come from a new ordinance being developed to place deposits of millions of dollars in city funds in financial institutions with good records in serving low-income communities.

A City Council vote on the issue is several months away, according to its chief backer, Councilman Robert Farrell. But the drive gained momentum this summer from the controversial closing of a Bank of America branch in South-Central Los Angeles and from a model program for low-income neighborhoods promised by California First Bank.

“We want to design a policy to look at how well banks serve . . . (low-income communities) as one consideration in whether or not we let them do business with the City of Los Angeles,” Farrell said. “We want to balance social responsibility with prudent business.”

Linked-Deposit Laws

Farrell and other city officials propose that Los Angeles join a small list of U.S. cities using deposits of government funds and other business relationships to reward banks that serve low-income neighborhoods and punish those that do not.

The rewards are potentially large here. On any given day, as much as $350 million in city funds is on deposit at financial institutions.

“I’m very supportive of the concept,” said Leonard S. Rittenberg, the city treasurer. “It is good for the city and the banks that support the city.”

The mayor’s office and three city agencies plan to hire a consultant to study how the ordinance can be implemented, and Farrell asked the city attorney late last month to draw up the law for council consideration.

“Cities can encourage reinvestment in low-income neighborhoods by putting their money in institutions that lend there,” said Jean Pogge, president of the Woodstock Institute, a nonprofit organization in Chicago that promotes investment in low-income areas. “People are beginning to think through how this can be valuable for the cities.”

Three cities--Hartford, Conn., Cleveland and Chicago--have similar ordinances, called linked-deposit laws, although Chicago does not use its law actively, Pogge said. Several states also have some form of the law.

The treasurers of San Diego and San Diego County have a 2-year-old policy that restricts their deposits to financial institutions above the 50th percentile in rankings on home loans to low-income neighborhoods.

The latest rankings in San Diego exclude two of the state’s biggest banks, Wells Fargo and First Interstate, from consideration for deposits, said James D. Bliesner, director of a joint city-county reinvestment task force.

Mary-Liz Meany, a spokeswoman for the American Bankers Assn. in Washington, said the industry does not favor linked-deposit laws. She said banks already serve their communities in a number of ways and that cities should be concerned only with putting their money in safe and sound institutions offering the highest rate of return.

But Pogge said keeping banks involved in low-income areas is vital because federal support for low-income housing and similar anti-poverty programs has been slashed by the Reagan Administration.

For instance, spending for new federal housing assistance was cut more than any other major program during the Reagan Administration, and only 25,000 federally subsidized low-income housing units have been produced annually nationwide since 1982, according to the National Housing Task Force.

The cutbacks have forced community groups and local governments to search for ways to enlist private money to replace the lost federal funds, and banks have been a frequent target.

Community groups have become adept at using the federal Community Reinvestment Act to compel banks to increase loans and services to low-income neighborhoods. But the issue usually arises only when a bank merger is proposed, and backers say a local ordinance in Los Angeles would provide a consistent incentive to keep banks in low-income neighborhoods.

The effort here began in response to a proposal made last year by City Council members Michael Woo and Gloria Molina to investigate ways to increase the amount of affordable housing in the city. One target was persuading banks to lend more to low-income communities.

“Given the limited federal dollars to deal with housing, we asked what kind of incentives can be provided to get the private sector to put more of their dollars into low-income housing,” Woo said.

The drive gained momentum when Bank of America closed a branch at Central and Jefferson in the heart of South-Central Los Angeles earlier this summer. Local businessmen and residents complained, but the bank refused to reverse its decision.

“This is a historic neighborhood for the black community, and it was a blow when Bank of America packed up and left,” said Charles Marshall, chief attorney with the Greater Watts Justice Center, part of the Legal Aid Foundation.

Lending an Issue

The Watts center analyzed federal data on B of A’s home lending in Los Angeles over several years and discovered what Marshall described as a pattern of neglecting low-income neighborhoods. The fewest home mortgage loans went to areas with the highest concentrations of blacks and Hispanics--City Council Districts 1, 8, 9 and 10, according to the data.

Peter S. Magnani, a spokesman for Bank of America, said the branch was closed as a result of cost-cutting efforts within the bank and that “customers will be better served” by a branch less than two miles away. He also said race is not a criterion for loan approvals.

“The real issue,” he said, “is how we can increase our lending opportunities in low-income communities, where a variety of socioeconomic issues make lending difficult.”

The absence of conventional lenders in poor neighborhoods forces residents to seek other sources for mortgages and home improvements, opening them to higher interest rates and fly-by-night operators. Marshall said his office has more than 80 lawsuits pending against hustlers who charged exorbitant interest or used shoddy tactics to bilk homeowners.

Backers of the linked-deposit law believe that it would provide an incentive for traditional lenders to remain in low-income neighborhoods.

The basic description of the Los Angeles proposal is contained in Farrell’s request for an ordinance and the city’s outline for the consultant’s study.

The proposal calls for restricting city deposits and other city financial business to institutions with good records of performance in lending and consumer services to these poorer areas.

The financial stability of the bank or thrift would still be the first consideration. But institutions would be rated on the basis of such factors as their support for affordable housing, lending to businesses owned by minorities and women, and consumer services to low-income communities. The rankings would also examine branch closings in inner-city neighborhoods.

Gary Squier, Mayor Bradley’s housing coordinator, said the rankings would provide the city with a criterion for its investments and provide a basis for financial institutions to judge their own performance.

Rate-Bidding Process

Squier said the annual rankings would be made public, a move that backers said could widen the influence of the list by allowing individuals and businesses to follow the city’s lead in choosing banks.

City money is currently deposited with about 25 banks and savings and loans. The money is allocated through an interest-rate bidding process conducted by the treasurer’s office, but the city retains control over placement of the deposits.

Rittenberg, the treasurer, said the ordinance would be similar to another city law that prohibits city agencies from doing business with organizations with ties to South Africa.

Under that policy, for instance, the city does not deposit funds at Union Bank because its British owners have dealings with South Africa. Union Bank’s status will change once its acquisition by California First Bank is made final. California First is owned predominantly by the Bank of Tokyo.

As part of its acquisition of Union Bank, San Francisco-based California First promised $84 million in loans to low-income neighborhoods, free checking accounts for low-income consumers and increased recruitment of women and minorities.

The action was a result of pressure from community groups, who had vowed to use provisions of the federal Community Reinvestment Act to protest the acquisition of Union Bank unless California First undertook some positive steps toward helping minorities and low-income neighborhoods.

Squier said the settlement was a model for the city officials studying how to create incentives to keep lenders in low-income neighborhoods.