City of Angels Keeps Watch Over Banks

(MoneyWatch)  Los Angeles is cracking down on banks. City officials on Friday approved an ordinance requiring financial institutions that do with business with the city to report on their local lending, foreclosure relief and other activities in the city.

That could be big. With financial reform tied up in Washington, municipalities nationwide could follow L.A.'s lead to tighten the leash on banks. Under L.A.'s "Responsible Banking" initiative, institutions that handle the city's nearly $30 billion in pension and other funds must report annually on their small business lending, community development investments and efforts to help stem foreclosures, among other things. Institutions that fail to comply could be barred from city business.

The ordinance requires banks to detail what steps they've taken to help keep struggling borrowers in their homes, including the number of mortgages they've permanently modified. In a related requirement, lenders must offer unemployed homeowners a minimum six-month forbearance on their loans or allow them to continue renting a property until it's sold. L.A. officials will study whether to withdraw city deposits from any financial institution that fails to offer a temporary moratorium on foreclosures and renegotiate mortgages.

L.A. city council member Richard Alarcón, who sponsored the proposal and who plans to present it to other U.S. city officials this week, said in a statement that the ordinance will help ensure that banks meet their community investment and other obligations to local residents:

A slightly lower interest rate isn't much of a deal if the same bank is taking advantage of homeowners, refusing to issue small business loans, or not opening branches or ATMs in low-income areas.

L.A. isn't the first major U.S. city to pass such rules. Philadelphia passed a bill in 2007 that requires banks handling city business to notify officials in advance of any local branch closing. At the state level, New Mexico lawmakers are also considering whether to transfer state funds out of big national banks into local community institutions. But Alarcón's ordinance has more bite than both.

Of course, it remains to be seen to what extent L.A. applies the new rules. Any regulation is only as strong its enforcer. But it's a promising start.

Image courtesy of Flickr user Floating Imitations