Perspectives on Responsible Lending: The New Frontier for Local GovernmentP R E S E N TAT I O N BY H E R M A N J . M I L L I G A N , J R . , P H . D . , M A N A G I N G PA R T N E R , T H E F U LTO N G R O U P, L L C

E X E C U T I V E L E A D E R S H I P I N S T I T U T E 2 0 1 4 , S P O N S O R E D BY T H E N AT I O N A L F O R U M F O R B L A C K P U B L I C A D M I N I S T R ATO R S A N D T H E R OY W I L K I N S C E N T E R F O R H U M A N R E L AT I O N S A N D S O C I A L J U S T I C E , H U B E R T H . H U M P H R E Y I N S T I T U T E - U N I V E R S I T Y O F M I N N E S OTA - T W I N C I T I E S , O C TO B E R 3 0 , 2 0 1 4

1COPYRIGHT OCTOBER 30, 2014 . REPRODUCTION OF THIS PRESENTATION IS PROHIBITED WITHOUT THE EXPRESSED PERMISSION OF THE AUTHOR, THE NATIONAL FORUM FOR BLACK PUBLIC ADMINISTRATORS AND THE ROY WILKINS CENTER FOR HUMAN RELATIONS AND SOCIAL JUSTICE, HUBERT H. HUMPHREY INSTITUTE, UNIVERSITY OF MINNESOTA-TWIN CITIES.

Greetings and Background Thank you to Sharon Sayles-Belton of Thomson Reuters and former Mayor for the City of Minneapolis, and Dr. Samuel Myers of the Roy Wilkins Center for Human Relations and Social Justice (HHH Institute, UMN-Twin Cities) for inviting me to speak

Invited in May 2014 to serve as a member of the Twin Cities-based Responsible Banking Advisory Committee, a local initiative organized by Jewish Community Action, the Center for Urban and Regional Affairs (UMN-Twin Cities), and the Organizing Apprenticeship Project (Minneapolis, MN)

Interest in this topic began while a Ph.D. Sociology graduate student here at the UMN-Twin Cities. Between 1977 and 1981, served as a Congressional Black Caucus Braintrust Member discussing issues

and policy recommendations related to financial services, criminal justice, and civil rights

Between 1984-1994 served on the Minneapolis Commission on Civil Rights

Between 2004-2010 served on the Housing Committee of the Pan African Community Endowment Fund of the Saint Paul Foundation

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Greetings and Background Joined Corporate Market Research at Norwest in 1989 and retired as a Vice President in Enterprise Marketing Customer Insights and Analysis at Wells Fargo in September 2010. Now work as a marketing research/competitive intelligence and arts consultant

Managed and conducted projects related to pricing analysis for the mortgage company; human resources/diversity; customer satisfaction/service quality; internet services; wealth management; branding and advertising; product design; community reinvestment; small business lending; insurance; IT; site analysis; new product development; credit/debit card; un/underbanked segments; mergers and acquisitions; government/legal relations; and competitive benchmarking

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Responsible Lending: A Global Phenomenon• A 2013 study by The World

Bank found that 80 of the 114 countries surveyed have some form of responsible lending laws and of these, half apply some provisions which restrict maximum loan-to-value or debt service ratios

4SOURCE: THE WORLD BANK. RESPONSIBLE LENDING: OVERVIEW OF REGULATORY TOOLS, OCTOBER 2013.

Summary of U.S. Responsible Banking Ordinance Activity and Characteristics Year Passed Cleveland was the first city to pass an ordinance in 1991

Among cities included in this analysis, 58% (7) passed ordinances in 2012

Minneapolis passed its ordinance in 2013

Oversight Body Eleven of the 12 cities (92%) have an Oversight Body. San Jose is the only municipality not having such a

requirement

Four of the 12 cities (33%) involve community representatives and/or business organizations in the oversight process (Cleveland, New York, Pittsburgh, and Boston)

Annual Data Disclosure Nine of the 12 cities (75%) require annual disclosure of data

Home Mortgage Disclosure Act (HMDA) data is the most commonly used

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Summary of Responsible Banking Ordinance Characteristics (CONT’D) Reinvestment Plan Seven or 58% of the cities require an annual Reinvestment Plan to be submitted for review

Of those reporting, the majority of plans have stated goals that are used to assess performance over a one or two-year period

Evaluation Model Ten or 83% of the cities have an evaluation system in place to assess compliance with the ordinance

Most common evaluation method is to conduct analysis of data relative to stated goals and objectives

Public Participation Five or 42% of cities have some form of public participation

New York City is the only municipality that holds public hearings and incorporates such feedback into their annual report

Minneapolis has received feedback from local community organizations regarding the RFP evaluation process, creating separate RFP process for certain services, and modifications related to evaluating overall performance of financial institutions relative to stated goals

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Summary of Responsible Banking Ordinance Characteristics (CONT’D) Affidavit Six or 50% of cities require an affidavit to be submitted

The majority of affidavits affirm that the financial institution will do its best to be a fair lender, train staff, and avoid predatory lending behavior

Anti-Predatory Safeguards 50% of cities have established Anti-predatory safeguards

The most common safeguards are to require statements that the financial institution will refrain from predatory lending and redlining behavior, and that contracts will be withheld if such behavior is detected

Branch Closures Five or 42% of cities require notification of branch/ATM closures

The most common periods of advance notice is 90 to 120 days

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Summary of Responsible Banking Ordinance Characteristics (CONT’D)

Penalties for Non-Disclosure Seven or 58% of the cities have penalties for non-disclosure

The most common sanction is to withhold renewal of the contract unless additional information can be provided to reverse the decision

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U.S. Responsible Lending Legislation Timeline for Cities

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Cleveland

1991

Philadelphia

2002

Chicago

Seattle

2011

San Jose

2010

BostonKansas CityLos AngelesPortlandNew YorkPittsburghSan Diego

2012

Minneapolis

2013

Local Ordinance TypologyProvision City Law

Cleveland Philadelphia

Year Passed 1991 2002; amended 2005

Oversight Body Reinvestment Review Committee has 8 members: Director of Finance; members from Dept. of Econ Dev and Dept. of Comm Dev; one member from citywide orgs.

City Treasurer certifies to City Council whether banks have complied with statutory requirements including disclosure, affidavit, and strategic plan requirements

Annual Data Disclosure HMDA (Home Mortgage Disclosure Act), small business loans incl. race and gender of owner; consumer loans; multifamily loans; home equity loans.

Annual statement of reinvestment goals including number of home, small business loans, & community development investments to be made in low- & moderate-income neighborhoods.

Reinvestment Plan A written initiative (a “Community Reinvestment Initiative or CRI) regarding community reinvestment within the City containing provisions acceptable to the Director of Community Development

Provide a long term strategic plan to address disparities in lending and investment activities, including how the depository will match or exceed peer lending performance. Strategic plan to address disparities identified in disparity studies commissioned by the City. Fair lending plan addressing disparities required from banks wishing to receive payroll deposits.

Evaluation Model Reinvestment Review Committee will review annual data and CRI and issue a report analyzing this information and make recommendation to City Council about which banks are in compliance with their affidavit. N/A

Public Participation Annual data and CRI shall be available for public inspection. N/A

Affidavit Bank attests it will make best efforts to undertake neighborhood lending programs; have trained loan officers in n’hood dev.; affirmatively market products; not make predatory loans.

Depository provides affidavit attesting that it is not a predatory lender as defined in City law.

Anti-Predatory Safeguards City Treasurer will not deposit funds in bank that makes predatory loans; City Treasurer shall not invest in stocks or securities of financial institution that make predatory loans.

Depository provides affidavit attesting that it is not a predatory lender as defined in City law.

Branch/ATM Closures Depository send notice to Mayor and Director of Finance 120 days in advance of closure; identify branch location, and reason for closure.

Depository provides notice to Mayor, City Council, & City Treasurer 90 days before branch closure including detailed reasons for closure.

Penalties for Non-Disclosures Data submission and CRI used to determine whether institution is in compliance with its affidavit and whether it will be deemed eligible to receive City business.

No funds shall be deposited in a bank that has not submitted its annual statement of reinvestment goals. City Treasurer certifies compliance with this provision.

Other N/A N/A

10SOURCE: NATIONAL COMMUNITY REINVESTMENT COALITION. SUMMARY OF LOCAL RESPONSIBLE BANKING ORDINANCES, JULY 2012. TABLE FORMAT MODIFIED AND MINNEAPOLIS DATA INCLUDED BY AUTHOR. NO DATA AVAILABLE FOR SAN DIEGO.

Local Ordinance Typology (CONT’D)

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Provision City Law

Los Angeles New York

Year Passed 2012 2012

Oversight Body City Treasurer receives annual data and statements. Community Investment Advisory Board has 8 members: Mayor; Comptroller; Speaker of City Council; Commissioners of Depts. of Housing and Dept. of Finance; 1 community org.; 1 small business representative; a representative of city’s banking industry.

Annual Data Disclosure Commercial banks; small business loans; home loans; comm. Dev loans and investments; loan mods & principal reduction by census tract. Investment bank: annual data related to their goals regarding philanthropy, scholarships, etc.

Annual data on census tract, borough, community district level regarding financial services & products; community development loans & investments; loan performance; loan modifications or other foreclosure prevention efforts.

Reinvestment Plan Annually, commercial banks provide reinvestment goals incl. loans and investments by census tract and participation in City’s foreclosure program; investment banks discuss philanthropy, scholarships, subcontracts with women and minority businesses.

Banks issue annual plan describing how bank will respond to credit, financial, and banking needs identified by City’s needs assessment. A bank’s plan is tailored to its size and type. To extent not deemed confidential, the bank’s plans or sections of plan are shared publicly.

Evaluation Model City Administrative officer will produce a matrix based on bank data when Council considers approval of financial transactions.

Advisory Board will conduct a needs assessment every two years, use bank data, establish benchmarks, and will assess how banks performed in meeting needs and benchmarks and areas of improvement for each bank. Board issues an annual report that considers banks’ applications to become depositories in light of needs assessment.

Public Participation Bank statements made public via City website within 90 days of filing.

Hearings in each borough; public comments considered by Board for its annual reports; bank data to be made publiclyavailable.

Affidavit N/A N/A

Anti-Predatory SafeguardsN/A N/A

Branch/ATM Closures N/A N/A

Penalties for Non-Disclosures Data disclosure required when institution applies to receiveCity business and shall be updated annually as long as institution receives City business.

The Advisory Board in its report notes the failure of any deposit bank to submit requested data.

Other N/A N/A

SOURCE: NATIONAL COMMUNITY REINVESTMENT COALITION. SUMMARY OF LOCAL RESPONSIBLE BANKING ORDINANCES, JULY 2012. TABLE FORMAT MODIFIED AND MINNEAPOLIS DATA INCLUDED BY AUTHOR.

Local Ordinance Typology (CONT’D)

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Provision City Law

Pittsburgh Seattle

Year Passed 2012 2011

Oversight Body Reinvestment Review Committee (RRC) has 9 members incl. Director of Finance, City Controller, Urban Redevelopment Auth., Mayor’s Office of N’hood Initiatives, Finance Com Chair of City Council, 2 other members of City Council, two community organizations.

City will review banking & investment practices to ensure funds are invested in responsible institutions.

Annual Data Disclosure HMDA, home equity loans, loan modifications, loan performance, small business loans including race of owner, community development loans & investments, branch & deposits, consumer loans.

N/A

Reinvestment Plan Every two years depositories submit a plan of how it will meet community financial needs, offer alternatives to payday loans, provide full service banking, engage in neighborhood development, & meet or exceed peer performance.

N/A

Evaluation Model City Controller shall prepare an annual report of bank performance. Banks with Satisfactory or higher Fed CRA ratings shall receive a score of 1 to 5 with 3 to 5 qualifies as a depository and 1 or 2 not qualified. Banks receive draft scores for 30 days; RRC also has input; report presented to Director of Finance and City Council, and is one factor along with health of bank that determines with whom City does business.

Council will identify effective approaches to access to banking & other financial services.

Public Participation Not specified. N/A

Affidavit Banks pledge to make best efforts to provide responsible loans; provide loan officers trained in neighborhood development, and affirmatively market their products.

N/A

Anti-Predatory Safeguards Director of Finance shall not keep deposits with financial institutions that make predatory loans and shall not invest in securities of businesses that make predatory loans.

N/A

Branch/ATM Closures Depository shall provide a 90 day notice to City regarding branch closures & reasons for closing branch; and a 30 day notice of a branch opening.

N/A

Penalties for Non-Disclosures No institution shall be eligible to receive City business unless it has executed a Community Reinvestment Plan. N/A

Other Bank investing in Northern Ireland businesses must determine if such companies do not discriminate on basis of ethnicity or race. N/A

SOURCE: NATIONAL COMMUNITY REINVESTMENT COALITION. SUMMARY OF LOCAL RESPONSIBLE BANKING ORDINANCES, JULY 2012. TABLE FORMAT MODIFIED AND MINNEAPOLIS DATA INCLUDED BY AUTHOR.

Local Ordinance Typology (CONT’D)

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Provision City Law

Portland Boston

Year Passed 2012 2012

Oversight Body Council directs City Treasurer to seek opportunities to place 10 deposits with local institutions, incl. one credit union, during 2012.

Municipal Banking & Community Reinvestment Commission will analyze data & make recs; 6 members appointed by Mayor, 1 member by City Council President, 3 ex-officio members, Members are Treasurer; 2 City Council; 2 from community orgs; 1 individual from redlined n’hood; 1 public agency; 1 from business community; 1 from union; 1 from public

Annual Data Disclosure N/A Census tract & citywide: HMDA; loan mods HAMP and non- HAMP; loan performance, foreclosures and REOs; small business loans incl.those to minority women; community development loans and investments; consumer loans; student loans; branches & deposits; workforce composition.

Reinvestment Plan N/A Community Reinvestment goals for loans, investments, and services; policies for addressing credit needs; goals for reasonable account fees and interest rates; goals for loan mods for unemployed, for REO purchase by nonprofit.

Evaluation Model Treasurer will research national best practice for selecting banks including evaluations of their local lending and community investments, workforce data, & small business lending.

Commission shall conduct an annual evaluation; use a scoring system of 1 to 100 points to rank the banks seeking contracts. Categories to be scored include lending, investments, Boston resident hiring, loan performance, compliance with state usury laws, proper foreclosure procedures, fair lending practices. Banks scoring in the top 25% can receive increase in contracts; terminate contracts for those in bottom 25%.

Public Participation N/A Data and reinvestment plans shall be posted on City’s website.

Affidavit N/A Make best efforts to undertake a defined lending program in support of neighborhoods; to establish whistle blowing protections; to abide by state usury laws; to refrain from making predatory loans; to avoid discrimination and redlining.

Anti-Predatory Safeguards N/A No contract for banking services shall be awarded to a bank that has engaged in discrimination or other illegal credit practices or committed past criminal or civil violations harming Boston residents.

Branch/ATM Closures N/A Institution to give 120 day notice to Mayor, City Council, Treasurer of branch closure and reasons for the closing.

Penalties for Non-Disclosures N/A If institution refuses to submit data, sign pledge, or issue community reinvestment goals, City Council and Mayor may withdraw designation of institution as eligible to receive city business. Treasurer is to make publicly available a list of institutions that fail to provide this information.

Other N/A N/A

SOURCE: NATIONAL COMMUNITY REINVESTMENT COALITION. SUMMARY OF LOCAL RESPONSIBLE BANKING ORDINANCES, JULY 2012. TABLE FORMAT MODIFIED AND MINNEAPOLIS DATA INCLUDED BY AUTHOR.

Local Ordinance Typology (CONT’D)

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Provision City Law

Chicago Kansas City San Jose

Year Passed 2011 2012 2010

Oversight Body Department of Finance on behalf of City and Board of Education issues a Request For Proposal (RFP) for depository services.

City Manager N/A

Annual Data Disclosure When banks bid to become depositories, submit HMDA data enhanced with data on interest rates, points and fees. Disclosure of multi-family lending including purchase, improvement, and refinance loans. Citywide data on foreclosures. Data on consumer lending, savings accounts, & checking account by tract.

N/A N/A

Reinvestment Plan N/A N/A N/A

Evaluation Model N/A City Manager should consider the following criteria when considering bids for banking services: community investment, loan modifications, small business loans, affordable home loans, absence of payday loans, numbers and locations of branches and services provided at branches.

To the extent that competing institutions offer the City substantially equal liquidity and safety, the City will use the extent of participation in HAMP and a CRA rating of Satisfactory and above as criteria for deciding in which institutions to invest.

Public Participation N/A N/A N/A

Affidavit Bank bidding must pledge to avoid predatory lending as defined by the City, must pledge to avoid redlining, and will adhere to reporting requirements concerning vacant property and will maintain vacant property in compliance with City Code.

N/A N/A

Anti-Predatory Safeguards Bank bidding must pledge to avoid predatory lending as defined by the City, must pledge to avoid redlining, and will adhere to reporting requirements concerning vacant property and will maintain vacant property in compliance with City Code.

N/A N/A

Branch/ATM Closures N/A N/A N/A

Penalties for Non-Disclosures N/A N/A N/A

Other N/A N/A N/A

SOURCE: NATIONAL COMMUNITY REINVESTMENT COALITION. SUMMARY OF LOCAL RESPONSIBLE BANKING ORDINANCES, JULY 2012. TABLE FORMAT MODIFIED AND MINNEAPOLIS DATA INCLUDED BY AUTHOR.

Local Ordinance Typology (CONT’D)

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Provision City Law

Minneapolis

Year Passed 2013

Oversight Body City Finance Officer and/or designee which could be an appropriate city office or agency to analyze data.

Annual Data Disclosure HMDA data at census tract level; loan modifications; foreclosures; mortgages missing one payment, number that are 6-+ days late, percentage actively seeking a workout option, number that have completed or started a workout option, number completed a workout arrangement by various outcomes; number of REO properties for sale; number of completed foreclosure sales; number of REO properties donated or discounted to non-profits or the city; end of previous year: number of banking service locations, number of small business loans less than or equal to $100K or greater than but less than $250K.

Reinvestment Plan File a Community Reinvestment Act Plan every two years addressing the financial needs of the city, its residents and businesses along with a discussion related to: affordable check cashing and other transactional services used by consumers with limited banking accounts or experiences; small consumer loans including those that serve as an alternative to payday loans; participation in city sponsored neighborhood development programs;

Evaluation Model City Finance Officer initiates RFP review process for renewing and new applicants and review of data submitted for annual disclosure on continuing contracts. City Finance Officer can refer information to the Minneapolis Civil Rights Department for further review if needed.

Public Participation Feedback on RFP process and ordinance content has been provided by local Responsible Banking Community Advisory Committee. University of Minnesota-Twin Cities Roy Wilkins Center for Human Relations and Social Justice (HHH Institute) to provide analysis of HMDA and CRA data and will report findings to the city upon completion.

Affidavit To promote the long term economic well-being of the city and its residents and to ensure economic growth by encouraging fair lending practices and equitable provision of banking services throughout the city.

Anti-Predatory Safeguards To promote the long term economic well-being of the city and its residents and to ensure economic growth by encouraging fair lending practices and equitable provision of banking services throughout the city.

Branch/ATM Closures At end of previous year, the number of branch or ATM closings along with affirmative statement that institution is in compliance with Section 42 of the FDIC Act.

Penalties for Non-Disclosures City may refuse financial institutions to provide any banking services for the city. No financial institutions will be considered to be in compliance until all such errors, omissions, defects or deficiencies have been remedied.

Other N/A

SOURCE: NATIONAL COMMUNITY REINVESTMENT COALITION. SUMMARY OF LOCAL RESPONSIBLE BANKING ORDINANCES, JULY 2012. TABLE FORMAT MODIFIED AND MINNEAPOLIS DATA INCLUDED BY AUTHOR.

Ensuring Meaningful Implementation of Responsible Lending Laws The overall goal of a responsible lending philosophy/legislation is to ensure that the greatest proportion of citizens/businesses have access to affordable credit and that they know how to use it responsibly. This in turn should lead to healthier economic growth along with increased access to capital; improved socio-economic stratification and improved opportunities for the disenfranchised; decrease in the politicization of regulators and financial supervisors’ roles; and an improved sense of justice, that is, reduced predatory lending behaviors due to better laws/regulations and their enforcement

Research shows that consumers at the time of borrowing, may have problems estimating their overall ability to repay and may also not consider the occurrence of events that can negatively impact their ability to repay debt in a timely manner (e.g., job loss, divorce, illness, etc.). This more than likely results in late payment behavior that adversely impacts credit ratings and makes it increasingly more expensive to borrow again, or not at all*

16*SOURCE: THE WORLD BANK. RESPONSIBLE LENDING: OVERVIEW OF REGULATORY TOOLS, OCTOBER 2013.

Ensuring Meaningful Implementation of Responsible Lending Laws Educate and monitor consumer attitudes and behaviors related to: Cost of servicing debt--% of gross monthly income spent on paying debt; % households debt repayment

taking them below the poverty line

Late payment history--% of households more than two months late on paying bills

Number of loans

Subjective perception of burden--% indicating that debt repayment is a burden

Institutional Arrangements Regulatory agencies must exist for both traditional and non-traditional financial service providers to be

most effective and they must work in concert with professional trade organizations that represent these groups along with community organizations working with both the consumer and financial services sector

17*SOURCE: THE WORLD BANK. RESPONSIBLE LENDING: OVERVIEW OF REGULATORY TOOLS, OCTOBER 2013.

Ensuring Meaningful Implementation of Responsible Lending Laws (CONT’D) Disclosure Credit and product disclosures should be understandable, complete, and comparable. Such documents

should be tested with the consumer in mind and provide important and relevant information for the consumer to make an informed decision. Such disclosures such be designed to make comparisons possible across competitors. Providing in-language options for consumers is critical

Business Practices Companies should clearly define how salespersons should be selling and handling loans and other

financial products. Companies need to find the legitimate balance between meeting the needs of the customer and making a sufficient return on investment

Consumer Redress Financial service providers need to insure that consumers have a clear and easy channel to address their

grievances. Such opportunities should allow for the company to uncover behaviors that will lead to effective solutions as well as spotting future trends to ensure that such behaviors will be curtailed in the future

18*SOURCE: THE WORLD BANK. RESPONSIBLE LENDING: OVERVIEW OF REGULATORY TOOLS, OCTOBER 2013.

Ensuring Meaningful Implementation of Responsible Lending Laws (CONT’D) Financial Capability All sectors of society need to ensure that

consumers are prepared to make sound financial decisions based on their needs and capacities when entering into financial agreements. Information and initiatives related to financial training for consumers must be continued and encouraged in communities where they are absent

Consumer and Data Privacy Financial service providers must ensure that their

customers and potential customers are aware of their rights to privacy and how the information they submit is protected and under what conditions the information can be shared within their own institutions and with third parties. Just as important, financial institutions must be ever more diligent in protecting their customer information from unlawful access

*SOURCE: THE WORLD BANK. RESPONSIBLE LENDING: OVERVIEW OF REGULATORY TOOLS, OCTOBER 2013.

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Ensuring Meaningful Implementation of Responsible Lending Laws (CONT’D) Consumer and Data Privacy Within the last 12 months, the FBI’s Criminal Cyber Response and Service Breach estimates that over

500 million records have been stolen or hacked within the U.S. financial services and consumer goods sectors. About 110 million Americans or 50% of adults have had their personal data exposed in some form in the past year (USA Today, 10/21/2014, p.1)

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Ensuring Meaningful Implementation of Responsible Lending Laws (CONT’D) Create free private/public sector online financial platforms to better educate consumers about the best financial products and services for them Finansportalen website in Norway allows consumers to compare financial services products and services

based on various scenarios with the goal of selecting the best option based on their personal situation

21SOURCE: THE WORLD BANK. RESPONSIBLE LENDING: OVERVIEW OF REGULATORY TOOLS, OCTOBER 2013.

THANK YOU !

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Contact InformationHerman J. Milligan, Jr., Ph.D.

Managing Partner, The Fulton Group, LLC

hmilligan@thefultongroup.com

612-272-8491

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