A New York City law requiring banks bidding on municipal deposits and investments to submit community development plans describing the loans, investments, and bank services they would provide to minority and low-income neighborhoods is unconstitutional, according to a federal district judge. “While the animating concerns of the City Council are valid, the means by which it sought to harness banks to redress those concerns intrudes on the province of the federal and state governments,” the court said (The New York Bankers Association v. The City of New York, Aug. 7, 2015, Failla, K.).
The City’s Responsible Banking Act established a Community Investment Advisory Board (CIAB), to assess the “credit, financial and banking services needs throughout the City with a particular emphasis on low and moderate income individuals and communities.” The CIAB was authorized to seek information from banks about the number of foreclosure actions, loan modifications, and the number of loans at least sixty days delinquent.
Based on the information gathered, the CIAB was to “establish benchmarks, best practices, and recommendations” for meeting needs it identified. The CIAB’s findings were to be published in an annual report evaluating how each Deposit Bank performed and identifying improvement areas. This report was allowed to be used by the Banking Commission when evaluating whether to designate or de-designate an institution as a Deposit Bank.
A change in mayoral administrations had a major impact on the history of the Act. The Bloomberg administration concluded that the RBA was thoughtful but misguided, delaying implementation of the Act. Subsequently, the de Blasio administration concluded that the Act was an appropriate exercise of the City’s discretion and moved ahead with appointment of CIAB members.
Preemption analysis. In determining whether the RBA was preempted by federal law, the issues were whether the law was regulatory in nature and in conflict with federal and state law.
The legislation arose from concerns that federal and state laws were ineffectual in the collection of information and influence over bank conduct regarding community reinvestment in New York City. The RBA was intended to remedy these shortcomings by “encouraging” banks to modify loans, increase lending, and provide more products and services to underserved or poorly-served segments of the population. This left little doubt in the court’s mind that the purpose of the law was to regulate banks.
It was also found that the law did not serve a proprietary purpose. The district judge pointed to the fact that the RBA would cost the City more than $500,000 per year, but would “yield the City—as banking customer—no discernible financial benefits.”
In addition, the court found that the RBA regulates conduct through public shaming of banks and threatening to withdraw deposits from banks that do not provide information to the CIAB. Banking Commission discretion in considering the CIAB Report was viewed as irrelevant. The law authorizes the Banking Commission to consider its rankings, even encouraging it, by requiring the CIAB to send the Banking Commission its Annual Report. “A law need not remove all discretion from an agency’s hands to be considered regulatory.”
The RBA conflicted with federal law in various ways:
- authorizing examination of bank books and records;
- regulating or influencing core banking activities; and
- imposing greater burdens and a different focus than the Community Reinvestment Act.
The court also agreed that the RBA is preempted by New York state law because the New York Banking Law evinces its intention to occupy the field of banking regulation for state-chartered institutions.
