Boston and Minneapolis are using the power of the purse to force banks to make more loans in low-income neighborhoods, adding to the list of cities that seek to correct what they see as shortcomings in federal rules.

Laws passed in those two cities in the past month will require banks that hold municipal deposits to step up their lending activity in economically distressed neighborhoods. The banks face losing the city as a customer if they don't meet minimum requirements.

The so-called "responsible banking ordinances," as passed in Boston, Minneapolis and 10 other U.S. cities, also require banks to provide more data about the loans they make for affordable housing and to small businesses and nonprofits in economically depressed neighborhoods. Moreover, they will have to submit more information on their loan modifications and foreclosures in low- and moderate-income neighborhoods.

At least a dozen cities, including Boston, Minneapolis, New York and Los Angeles, have approved responsible banking ordinances, according to Josh Silver, vice president of research and policy at the National Community Reinvestment Coalition. More could follow, though Silver said he's unaware of other cities where a proposal has been filed or is awaiting a vote.

Some in the banking industry say responsible banking laws aren't needed because they are similar to existing federal laws. Warren Traiger, an attorney at BuckleySandler, says the laws are unnecessary because they are redundant to the Community Reinvestment Act.

Other bankers say the trend could spur more lending for affordable housing or to small businesses in struggling neighborhoods.

"To the extent it [were to drive] other institutions to partner with us, it would make a difference," says Brian Argrett, president and chief executive of City First Bank of D.C. in Washington.

The $219 million-asset City First Bank is a U.S. Treasury Department-approved community development financial institution (CDFI) that receives bond guarantees or tax credits for its loans in low and moderate-income neighborhoods. Banks that are not CDFI's can partner with City First Bank to meet their CRA requirements, Traiger says.

Neither Boston nor Minneapolis provided a list of the banks that currently serve as city depositories.

While responsible banking ordinances and CRA regulations have shared goals, the city ordinances are necessary because they have a sharper local emphasis, Silver says.

"The CRA has been effective" but applies to broad service areas, Silver says. "You won't see neighborhoods examined in a CRA exam."

In addition, most CDFI-certified banks, like City First Bank in Washington, are small institutions that have a limited financial impact, Silver says.

"Compare the loan volume of a typical CDFI to a [mainstream] bank, which has a lot more loan volume," Silver says.

The ordinances may repeat what the CRA already does, but the city councils that have passed the laws have good motives, Traiger says.

"Localities are certainly within their rights to factor in how well an institution has served its community when deciding which banks to do business with," Traiger says.

The responsible banking ordinances could produce more liquidity for affordable housing, says Joseph Reilly, president and CEO of Community Development Trust, a CDFI in New York. Some areas of the country do not currently face challenges in finding financial backers for these projects, he says.

"In certain markets and in certain instances there probably could be a need for more dollars," Reilly says. "In most instances [they] are finding dollars and interested lenders."

New York approved a responsible banking ordinance last year, but the law has not been implemented after Mayor Michael Bloomberg and the city council disagreed over the measure. Advocates expect the law to be in place next year, after Bloomberg's term expires, says Jaime Weisberg, an advocacy associate at the Association for Neighborhood and Housing Development.

Other cities that recently passed ordinances, including Kansas City and Pittsburgh, have not yet produced enough data to allow for a comprehensive assessment of their impact, Silver says.

Even though Washington does not have a responsible banking ordinance, City First Bank already produces maps that detail the low and moderate-income neighborhoods where it has made loans. The bank is not required to compile the maps by either the CRA or the Treasury Department's CDFI rules, Argrett says.

"One of the things that we need to be able to demonstrate is the impact we have in the community and one of the easiest ways is geography," Argrett says.

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