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Bankers Take on New York City

MANHATTAN (CN) - The New York City Council enacted an unconstitutional law that extends the council's power to designate which banks can handle the city's $6 billion in deposits, the New York Bankers Association claims in Federal Court.

At the heart of the complaint, the Bankers Association objects to the city's intent to collect and publish information on data such as bank foreclosures and mortgage modifications.

It claims the city thereby is making itself a bank regulator, illegally, "with the power to threaten deposit banks with public criticism and debarment if those banks do not conform to the CIAB's [Community Investment Advisory Board] subjective 'benchmarks, best practices and recommendations.'"

The Bankers Association challenges City Local Law Number 38, establishing the Community Investment Advisory Board, which "shall seek to collect" information from banks the city designates as "deposit banks" - "those banks with which the city and its agencies may deposit their funds - and to publish on the City Department of Finance's website evaluations of the extent to which such banks meet 'credit, financial and banking services needs throughout the City."

The bankers claim that "Local Law 38 impermissibly empowers the CIAB to become a local bank regulator, with the power to regulate the activities of any federal or state bank that does, or wishes to do, deposit business with the city."

The law violates the "clear prohibition" in federal law of local regulation of federally chartered depository institutions, which bars local laws that empower local authorities to collect information from, and supervise the banking activities, of such institutions, the bankers say.

A spokeswoman for the city's corporation counsel did not immediately return a phone call late Tuesday seeking comment.

The City Council passed the law despite "multiple deficiencies," both legal and practical, cited by the City Department of Finance, the New York State Department of Financial Services, Bloomberg and the NYBA, the plaintiffs say.

The Bankers Association claims Local Law 38 is pre-empted by federal and state laws regulating deposit banks, and is therefore invalid. It claims the City Council's regulation of deposit banks is not a "permissible exercise of its spending power as a consumer of financial services."

The City Council's creation of the Community Investment Advisory Board to seek collect and publish information - such as data on bank foreclosures and mortgage modifications - will change the council's role of participant in the banking market, and instead make it an "examiner and regulator" of deposit banks, "with the power to threaten deposit banks with public criticism and debarment if those banks do not conform to the CIAB's subjective 'benchmarks, best practices and recommendations,'" according to the lawsuit.

The NYBA represents more than 140 commercial banks and federal associations in New York State, whose members have aggregate assets of more then $9 trillion and 200,000 employees.

The City Council passed what was then Intro 485 on May 15, 2012. City Council Speaker Christine Quinn said at the time that Local Law 38 would ensure that the city's deposit banks "act in a transparent way" and "help us add information beyond what the community reinvestment acts require that banks disclose and will make information even included in the CRA transparent in a way that CRA is not," the lawsuit states.

Mayor Michael Bloomberg vetoed Intro 485 on May 30, 2012, saying it "represented a misguided attempt to influence banks ... by overlaying extensive existing federal and state bank regulation with yet another layer of city regulation. The bill extends beyond the city's competence and legal authority and risks reducing the number of banks who are willing or able to do business in the city."

According to an NYC Law Department spokesperson, "The lawsuit's allegations that Local Law 38 is preempted by federal and state law are consistent with, and supported by, the mayor's position in his veto message."

The Community Investment Advisory Board shall consist of eight people: the mayor, the comptroller, the speaker of the City Council, the commissioner of the Department of Housing Preservation and Development, the commissioner of the Department of Finance, a member of a community-based organization with ties to economic development, a representative of an organization representing small businesses, and a representative of the city banking industry.

It is to review public comments and collect data from deposit banks to "assess the credit, financial and banking services needs throughout the City with particular emphasis on low and moderate income individuals and communities."

It is to publish its first "needs assessment" on the Department of Finance's website by March 1, 2014.

The bankers seek declaratory judgment that the law is preempted by The National Bank Act, that it unconstitutionally conflicts with state and federal laws and regulations, and they want it enjoined.

They are represented by H. Rodgin Cohen with Sullivan & Cromwell.

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