Chicago fails to flex muscle to stop predatory lending practices, audit shows

Chicago continues to deposit millions of tax dollars in banks that engage in predatory lending practices because the Department of Finance is not using the tools at its disposal to stop it, an internal audit disclosed Tuesday.

Banks designated as “municipal depositories” have long been accused of investing far more money in majority white neighborhoods than they have in communities of color.

Those discriminatory lending practices have made it more difficult for African Americans and Hispanics to secure home mortgages, business loans or loans for home improvements. That has perpetuated a wealth gap and the historic disinvestment in South and West Side neighborhoods.

The most recent study documenting those inequities was conducted by WBEZ-FM (91.5). It showed banks lend 12 cents in Black neighborhoods and 13 cents in Hispanic neighborhoods for every $1 they lend in white neighborhoods.

To promote “diversity, inclusion and equity” in lending, Chicago’s “Responsible Banking Ordinance” requires banks receiving city deposits to submit detailed information about their lending practices.

Retiring Inspector General Joe Ferguson audited the city’s process for designating so-called “municipal depositories” to determine whether the city’s goals were being enforced.

The audit revealed “rigorous collection” of the legally-required information, but “no substantive evaluation” of that information.

The Department of Finance “does identify potentially predatory loans” and follows up with banks to inquire about the “specific conditions underlying” those loans. But the department has “never declined to designate a bank as a municipal depository on the basis of such lending conduct.”

“Without undertaking a substantive evaluation of each bank seeking designation,” the audit states, the finance department “cannot identify demographic disparities in banking activities. Banks may then continue to lend inequitably across Chicago while the city continues to partner with them.”

Even after the finance department uses a request for proposals to identify eligible banks, the full City Council does not regularly vote on that municipal depository ordinance.

Further hampering the process is the fact that the Department of Finance, the city treasurer’s office and Council “have not coordinated their efforts” to achieve the city’s objective of encouraging equitable banking practices.

“The three entities largely act in isolation and Council designates depositories infrequently. … This lack of coordination has hindered meaningful discussion of alternative banking options,” the audit states.

“For example, the Department of Finance, the City Council and the Treasurer’s Office have all separately expressed interest in allowing credit unions to become municipal depositories. ... Without a coordinated effort, the initiative has failed to gain traction.”

In a press release accompanying his audit, Ferguson was quoted as saying the Responsible Banking Ordinance is where “the rubber meets the road, but for a car we have historically kept it in park.”

He added: “Without proper evaluation measurements and procedures in place, there will continue to be racially and geographically inequitable income and lending practices.”

The finance department responded to the audit with a promise to “share information related to banks’ predatory and equitable lending” and work with City Treasurer Melissa Conyears-Ervin to “determine the information it will request of banks in the future.”

In addition, the finance department is working with the treasurer’s office to update the 2022 RFP process and form an evaluation committee to ensure banks meet those requirements. It already has created a task force to “explore alternative solutions” to lending inequities.

Ald. Harry Osterman (48th), chairman of the City Council’s Housing Committee, said the audit “shows what a lot of us already know” — that there’s “a lot of work we need to do as a city” to put Chicago’s money where its mouth is.

“We just came through a census. Parts of our city lost great population and part of our city grew. Part of that’s access to capital dollars and access to loans. It’s a historic disinvestment. Lenders have been a part of that,” Osterman said.

“Look at the housing sales that have increased in the last five months and the loans that are part of that. Are those in communities that need it most in Chicago? Or are they on the North Side? It’s gotta be equitable. It’s got to be in communities we care about that need the help.”

Earlier this year, the Finance Committee delayed a vote that would have designated 13 banks as municipal depositories to turn up the heat on banks to start lending to Black and Hispanic Chicagoans and businesses, invest in South Side and West Side neighborhoods, and get them to attend a hearing about their lending practices.

It didn’t work.

Eight banks declined invitations to attend: Associated Bank; Bank of America; Citi Bank; Fifth Third Bank; PNC Bank; U.S. Bank; Wells Fargo; and Wintrust. J.P. Morgan did not respond, Osterman said.