NYC's Responsible Banking Act on Trial

The fate of the Responsible Banking Act (RBA) now lies with one person – US District Judge Katherine Polk Failla. On September 19th, Judge Failla heard oral arguments from lawyers for the NYC City Council, the Mayor, and the New York Bankers Association as to whether the RBA is or isn’t legal. Tens of billions of New York City’s dollars flow to and through banks that hold roughly $6 billion in deposits at any given time. The RBA lets the city use the power of that money to hold banks accountable to better meet the needs of our local communities.

In October 2013, 15 months after the RBA was passed, the New York Bankers Association (NYBA) sued the City Council over the law.  They claim that (1) it turns the City into a regulator by making banks change their behavior and (2) that the law will cause banks irreparable monetary and reputational harm if they are labeled as non-compliant or as performing below standards, and even worse if they are removed as a designated depository bank.

The court’s resolution of the case will rest on three overarching principles, known in legalese as “Standing,” “Ripeness” and “Preemption”.  Preemption is related to the powers of government to regulate banks.  The State and Federal government have multiple regulatory powers over banks, including the Community Reinvestment Act.  If the judge decides that the law does indeed make the city another regulator, the law would be struck down as “preempted” by the State and Federal laws, which the City is not allowed to replicate.

Standing and Ripeness have to do with whether the banks can even make these claims of harm this time, or if it is too early to demonstrate any harm since the bill has not yet been implemented.

The key issue at stake is whether the city is acting as a regulator or as a participant in the market. If the city is acting as a market participant, then the issue is what goals it can take into account when choosing where it can put its money, including banks’ records of meeting the credit needs of lower-income neighborhoods.

The oral arguments lasted just under three hours. The judge asked thoughtful, detailed questions on each topic, with some moments of levity throughout.

• We learned that the city expects to be ready to implement the RBA by November with a fully constituted Community Investment Advisory Board, two new staff to support them, and a contractor to oversee the process of data collection and reporting.
• The City conceded that banks could possibly suffer consequences, including being removed as a depository bank, as a result of this law, if the banking commission takes the RBA reports into account. The City also reminded the court that the banking commission currently has the power to ask the same information and use it in their decision-making if they chose to do so – community service is already part of the decision-making process for banks seeking to hold City deposits.
• The City made a strong argument that this bill will first and foremost provide neighborhood level data on banking and credit needs that will help identify key areas to focus on in future legislative strategies. The bill will also evaluate how banks are responding, which will be presented to the banking commission as “another tool in their toolbox” as they consider the community service record of banks seeking to hold city deposits.
• The Bankers Association continued to claim that the law will cause them all sorts of harm and headaches, from reporting issues to loss of business to being publicly shamed as being non-compliant or unresponsive.
• The Bankers Association claimed that compliance with this law will cost them substantial amounts of money in addition to what they currently spend to comply with State and Federal CRA laws. However   .

ANHD members and allies worked tirelessly with the NY City Council over a two year period to pass the RBA in 2012 and many showed up Tuesday at the courthouse to see what will come of that work. While ANHD fully understands the powers and limitations of this bill – including the fact that it does not mandate that the banks do anything, we still believe this bill can be a strong tool to hold banks accountable for their actions and reward good behavior.

The power of this bill comes not from any new regulatory powers by the City, but rather from the people. If all the RBA did was to gather and publish data and issue reports, nothing would happen.  The power comes from people participating in the process to ensure that the banking commission and the City at large have information that truly reflects the vast experiences of our diverse neighborhoods and people, including banking needs and how banks are responding.

The RBA is a reasonable, commonsense, tool to increase transparency and hold banks accountable to the local needs of our community