Denver, responding to bankers complaints that it had gone too far in fighting predatory lending, now says it will not rule out doing business with banks that make subprime loans.
In March the city issued a request for proposal to banks interested in competing for the citys deposits, but only to those that do not engage in predatory lending practices. It was following the lead of Chicago, which last year passed an ordinance banning city agencies from doing business with predatory lenders.
But bankers took issue with Denvers definition of predatory lending which appeared to include any subprime loan with a higher-than-normal interest rate, said Jenifer Waller-Ditch, senior vice president of the Colorado Bankers Association. Many banks, including Wells Fargo & Co., holder of the citys current banking contract, have subsidiaries that make subprime loans to borrowers with spotty credit histories.
On Monday the city amended its request for proposal, which now states that the city will not do business with banks that make subprime loans to borrowers who could qualify for traditional, lower-interest loan products.
According to Ms. Waller-Ditch, the Denver banking community can live with that. Borrowers who take out subprime loans at Denver banks would not be able to qualify for loans at better interest rates, she said so the subprime loans made at area banks would not be considered predatory under the citys revised definition.
Bank regulators do not have a problem with subprime loans, Ms. Waller-Ditch said, and neither should the City of Denver.
The request for proposal contains other lending-related restrictions for banks bidding on the three-year city contract. (Bids are due Friday.) The winning bank or banks would be prohibited from charging borrowers any prepayment penalty that exceeds 3% of the loan value or extends beyond the third year of the loan. Also, they could not charge balloon payments on any subprime loan that comes due less than 15 years from when the loan was made, or charge points or fees in excess of 5% of the total loan amount.
Area bankers accept those provisions, Ms. Waller-Ditch said. But the citys well-intended efforts will do little to curb most predatory lending activities in the area, she said.
It still completely misses the target, because the unregulated companies engaged in predatory lending remain untouched, she said.
Predatory lenders are usually individual scam artists or specialty finance companies, Ms. Waller-Ditch said, that would never solicit municipal deposits from the city. These people and companies still roam Denver, she said, preying on unsuspecting borrowers.
The citys RFP gives the public a false sense of hope that something is actually being done about predatory lending in the city, Ms. Waller-Ditch added.
But Steve Hutt, Denvers treasurer, said that he believes it is clear to citizens that the citys actions against predatory lending are narrow in scope.
We arent looking to change the world and stamp out every instance of predatory lending, Mr. Hutt said. All were looking to do is make sure the banks that we do business with arent engaging in the practice.
The city is also requiring banks that accept municipal deposits to conduct some sort of public campaign to educate would-be borrowers about the perils of predatory lenders, he added. The Colorado Bankers Association has already agreed to participate such a campaign.
In the campaign, wed like to tell the public that banks are still the safest place to put their money, Ms. Waller-Ditch said.