The Office of Inspector General (OIG) conducted an audit of the Department of Finance’s (DOF) administration of the process for designating municipal depositories under what is generally referred to as the City’s “responsible banking ordinance” (RBO) and concluded that, although DOF ensures that banks submit all required Request for Proposal (RFP) documentation, it does not evaluate whether the banks provide inclusive and equitable financial services throughout Chicago. Additionally, DOF, the City Council, and the Treasurer’s Office have not coordinated their roles in the municipal depository designation process to achieve the City’s inclusivity and equity goals.
Banks designated as depositories hold and pay interest on funds deposited by the City and the Chicago Board of Education, essentially serving as the City’s checking accounts. A community’s access to financing is critical to its prosperity. Recent studies and investigations have found that, for years, the amount of money banks invest in majority non-White neighborhoods has been far less than that of majority-White neighborhoods. Inequitable patterns and discriminatory lending practices based on race, ethnicity, and wealth have obstructed home ownership for many people, also hindering community and generational wealth, specifically for Black and Latinx communities.
To address these inequalities, Chicago and other cities have established RBOs to encourage equitable lending by the banks that hold their deposits. DOF administers Chicago’s RBO through an annual RFP process. DOF solicits and reviews banks’ submissions, then identifies eligible depositories in an ordinance, which is transmitted to the City Council’s Committee on Finance. The Committee does not always present the ordinance for consideration by the full Council. When it does, following Council proceedings, the Treasurer’s Office determines which of the eligible depositories will hold the City’s deposits. If the full Council does not consider the ordinance, the list of eligible depositories established by the most recent enacted ordinance remains in effect. This audit focused on DOF’s role as the administrator of the process.
OIG made several recommendations to help DOF encourage and evaluate equitable lending by the banks that hold their deposits and to develop a coordinated municipal depository designation process that aligns with the City’s equitable investment goals:
- Collaborate with the City Council Committee on Finance to develop and implement a process to evaluate the equitable service provision practices of banks seeking designation as municipal depositories.
- Collaborate with the City Council and the Treasurer’s Office to develop a coordinated municipal depository designation process that aligns with the City’s equitable investment goals and maximizes the City’s ability to deposit public funds in banks that share those goals by: defining goals; determining how progress will be measured; and exploring other banking options that may better leverage the City’s deposits for greater financing in Chicago’s impoverished and disinvested communities.
In response to our audit findings and recommendations, DOF stated that it is committed to sharing information related to banks’ predatory and equitable lending and is working with the Treasurer’s Office and City Council committees to determine the information it will request and review from banks in the future. DOF also stated that, along with the Treasurer’s Office, it is updating the 2022 RFP process—in a manner compliant with applicable law—and has committed to forming an evaluation committee to ensure banks have met the requirements. Additionally, DOF expressed its perspective that municipal depositories may not be the best vehicle for achieving equitable lending goals, so it has formed a task force along with the Treasurer’s Office, State Treasurer, and banking institutions to explore alternative solutions.
“The City has long been a leading municipality in the codification of the important aspiration of promoting diversity, inclusion, and equity in the lending and financing practices of banks. OIG’s audit revealed rigorous collection of the legally required information needed to make an informed assessment of the operational commitment to those important societal aspirations by the City’s depositories. Unfortunately, it also revealed that the City continues to shy away from undertaking the evaluation of the materials needed to make that important assessment. In short, the rubber meets the road, but for a car we have historically kept in park. It is imperative that the City evaluate the practices of banks that profit from holding public dollars, and ensure that the biases that have historically plagued communities of color aren’t continuing with discriminatory and predatory lending practices. And it is equally important that the City do so with transparency for the benefit of the public and City Council, which approves the choice of banks,” said Inspector General Joe Ferguson. “Investing in our communities is necessary to even the playing field for home ownership, small businesses, investment, and generational wealth. The City should create a process for evaluating the equity of services provided for all 13 of the banks deemed as municipal depositories. Without proper evaluation, measurements, and procedures in place, there will continue to be to racially and geographically inequitable income and lending practices. We are encouraged by DOF’s responses and we hope to see collaborative change in the near term.”