Committee Hearing, September 27, 2007

COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE ON COMMERCE AND ECONOMIC DEVELOPMENT - - - Room 400, City Hall Philadelphia, Pennsylvania Thursday, September 27, 2007 1:10 p.m. - - - PRESENT: COUNCILMAN W. WILSON GOODE, JR., CHAIR COUNCILMAN FRANK DiCICCO COUNCILWOMAN CAROL ANN CAMPBELL COUNCILMAN DARRELL L. CLARKE COUNCILMAN JUAN RAMOS COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO RESOLUTION 070601 - Resolution authorizing the Committee on Commerce and Economic Development to hold hearings on the study of lending disparities recently released by the City Treasurer. - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2

Good afternoon. This hearing is called to order. This is a public hearing of the Commerce and Economic Development Committee on Resolution No. 070601. My name is W. Wilson Goode, Jr., Chair of this Committee. We do not need a quorum for this hearing, although I expect other members to show up. To my left is Councilman Rizzo, also Councilwoman Blondell Reynolds Brown. To my right is Councilman Juan Ramos, Councilman Frank DiCicco. The title of the Resolution No. 16 070601, authorizing the Committee on Commerce and Economic Development to hold hearings on the study of lending disparities recently released by the City Treasurer. Our first panel will be John Nacchio, City Treasurer, as well as Econsult. You can please approach the witness table. Please state your name for the 3 9/27/07 - COMMERCE - RES. 070601 record and proceed with your testimony.

Yes. Good afternoon, Councilman. I am John Nacchio, the Treasurer for the City of Philadelphia. I'll read my written testimony first. Good day, Mr. Chairman and members of the Committee. I am John Nacchio, the City Treasurer for Philadelphia. I appreciate the opportunity to testify before you on matters related to financial institutions that are authorized to be City depositories. The City of Philadelphia has taken steps over the last 15 years to ensure that the institutions selected to be authorized depositories of City funds provide credit in a fair and unbiased manner to the citizens of Philadelphia. This is in addition to the various treasury and investment guidelines captured in the City's Philadelphia Code and the adoption of the City's Investment 4 9/27/07 - COMMERCE - RES. 070601 Policy for management of the City's cash. It has been recognized that the strategic economic viability and competitiveness that City depositories can invoke are vital to strengthening and building opportunities for not just some but all Philadelphians. The City's list of authorized depositories represents 10 both a cross section of the largest banks 11 in Philadelphia and a diverse mix of institutions. However, it is significant to note that depositories only represent one portion of the financial institutions that conduct lending business in Philadelphia. These other business entities also hold a huge potential for the positive impacts to stabilize and grow the City's tax base, add to the quality of life for the citizens and to support the Philadelphia region's viability and competitiveness in local and world markets. Particularly in response to City Council's Resolution No. 051161, the 5 9/27/07 - COMMERCE - RES. 070601 Office of the City Treasurer has commissioned its first annual study of lending disparities of City depositories. This completed report studies 2005 data and was delivered to the Mayor and to the City Council. The contents of the annual report commissions a comprehensive analysis of home lending, small business lending and branching patterns, as well as the measurement of the community reinvestment and fair lending performance of banks receiving City deposits. In support of this subject, the City Treasurer's Office website at Phila.gov has posted the 2005 report and both the prior reports that were independently commissioned by City Council for 2003 and 2004. Further, for the first time, the depository responses for annual community reinvestment goals for 2007 are posted to the website that discloses the authorized depositories' commitments to the City of Philadelphia. The purpose of examining City 6 9/27/07 - COMMERCE - RES. 070601 depositories serves both for compliance and policy discussion and development. Econsult Corporation and MFR Consultants authored the 2005 report. They are available here today to provide testimony pertaining to the specifics of the report. And that would conclude my written testimony.

Thank you for your testimony, Mr. Nacchio. I have several questions for you before Econsult presents the report. The first being, in your testimony you make the statement, "The City of Philadelphia has taken steps over the last 15 years to ensure the institutions selected to be authorized depositories of City funds provide credit in a fair and unbiased manner to the citizens of Philadelphia." Can you describe those steps taken over the last 15 years?

Yes. In my research of the City's process, in the 7 9/27/07 - COMMERCE - RES. 070601 early '90s the Finance Director's Office did begin to prepare a report to analyze the depositories' lending practices, and it seemed like it was probably 1992, 3, 4 and 5, as best that I can determine. Those were initial steps, but certainly the larger strides were taken in the last four years through City Council.

I was asking you to be a bit more specific. I'm aware of those reports that were done in the early '90s. What came of those reports? Why were the reports discontinued? Were there any policy changes related to the reports? How were the reports used?

I have to say I was unable to determine why the reports had stopped, except for the staff's participation or interest in producing the report.

How exactly can you make the statement, then, that the City of Philadelphia has taken steps over the last 15 years to ensure the 8 9/27/07 - COMMERCE - RES. 070601 institutions selected to be authorized depositories of City funds provide credit in a fair and unbiased manner to the citizens of Philadelphia? That's not really a fair statement if you just found some reports in the office from the early '90s.

Well, it looked to me as though, without having a person to talk to, the institutional knowledge there was not to be accessed, but it was an indication to me that there was an effort to disclose the information so that it would be used to encourage or to --

As I said, I'm aware of the reports, but let me put it a bit more bluntly.

I can't say that there was any --

The reports were sitting on the shelf.

Most likely, yes.

And that's 9 9/27/07 - COMMERCE - RES. 070601 all they were doing, was sitting on the shelf.

To the best of my knowledge, they were sitting on the shelf.

Before they were discontinued.

Yes.

Thank you. Let's get back to this report. Did you read the study?

Yes, I did.

And what were your conclusions?

I believe that Econsult and MFR Consultants did a very fine job in presenting the information. It's a very difficult subject to ascertain specifics, and I think in this presentation, it was a good presentation.

Did you agree with Econsult's recommendations?

Certainly I agreed with the fact that it was part of 10 9/27/07 - COMMERCE - RES. 070601 the disciplines that I asked him to do as part of the report, was to provide some policy recommendations, and I think the ones that they came up with are leading in the right direction.

Did you specifically agree with the recommendations? For instance, did you agree with the recommendation that there should be a reward and punishment system for fair lending practices?

Based on my observation of other cities, a direct relationship to using a penalty, I'm not sure that that was always the productive way. I mean, if you talk about a sanction such as a penalty fee, that might be a possibility, but withdrawing funds from deposits may not always be the --

Mr. Nacchio, I'm speaking about specific recommendations in the report. Let me read from the report. 11 9/27/07 - COMMERCE - RES. 070601

Sure.

"The City should use the annual rankings to identify underperforming depositories for possible sanctions if performance does not improve." Do you agree with that recommendation? Yes or no?

It should influence the --

"The City should use the annual rankings to identify underperforming depositories for possible sanctions if performance does not improve." Do you agree with that recommendation or not?

I would say I cannot agree with that from the basis of the report, which is an independent report, that the rankings should be taken as the sole decision-making item, and the report is informational.

The report 12 9/27/07 - COMMERCE - RES. 070601 is informational. There were two prior studies, but I'm going to try one more time. This is a very specific recommendation. "The City should use the annual rankings" -- 2003, 2004, now we have 2005, we're waiting 2006 -- "to identify underperforming depositories for possible sanctions if performance does not improve." Do you agree with that or don't agree with it? I'm not asking what sanctions should be used. I'm not asking whether it should be the ultimate sanction. I'm asking whether you agree that there should be some sanctions if depositories are still underperforming after several years, 2003, 2004, 2005, 2006.

The best I can respond to that is that there would be no 22 basis for the decision-making to make that possible even if I did agree with the recommendation.

I don't 13 9/27/07 - COMMERCE - RES. 070601 understand your answer.

There's nothing in the City's Philadelphia Code and/or the procedures of the City that would permit taking a sanction just based on a ranking. There's nothing specific that says that a ranking determines sanctions.

What does determine where you put our money? That's a hard question, I guess.

Presently it's past practice, and the accounts that are open are the accounts that have been open.

So you've made no decisions about where you put our money?

During the time that I've been City Treasurer since 2004, I would say none of them are of -- they're just cosmetic or hygiene kind of.

Let me get to the second recommendation. 14 9/27/07 - COMMERCE - RES. 070601

We haven't redirected to any banks new deposits.

Let me get to the second recommendation by Econsult. "Conversely, banks with better performance should be rewarded with a larger share of the City's financial transactions." Do you agree with that recommendation?

I would say that there's a possibility that it may influence the bank's behavior based on who gets the deposits, but I don't believe on my observation on the national level that other cities were successful in making the direct relationship and they've used other programs which are more direct rather than just deposits, and one of them is the link deposits. You can find that in the City of Boston, New York and Chicago where a specific amount of city funds are deposited and where bank or banks are matching the 15 9/27/07 - COMMERCE - RES. 070601 activity based on that deposit.

Let me get to a third recommendation by Econsult. Do you agree with Econsult's recommendation about the creation of banking development districts to encourage branching in underserved areas?

I believe that would be a good one and the City should move in that direction.

How does that not relate to the first two recommendations?

Well, the first --

That is not, in essence, a link deposit program?

I'm going to say the first two are more in reference about the City Treasurer's Office and how it operates and the decisions upon which it can validate or certify as being appropriate for actions; whereas, this one is related to policy, and the policy 16 9/27/07 - COMMERCE - RES. 070601 requires the action of policymakers, which is the City Council and the Mayor.

So how would the City Treasurer go about developing banking development districts?

I'm going to say the City Treasurer's Office could not under the current description of the office. I would say that more would fall under the City Commerce Director.

Have you discussed any of these recommendations with the Finance Director?

The City Finance Director has a copy of the report and he has not discussed them with me.

Has the City Finance Director read the study?

Excuse me, sir?

Has the Finance Director read the study?

As far as I know, he has, yes.

Have all of 17 9/27/07 - COMMERCE - RES. 070601 the City depositories submitted strategic plans to address disparities found in the study?

They have responded, yes, in writing, and those copies have been shared.

Have all the City depositories submitted strategic plans to address disparities found in the study?

I'm sorry. Not all of the depositories have.

Which have and which haven't?

Currently, I believe it's only Wachovia and PNC.

You believe or you know?

I'd have to check, but off the top of my head, those are the only two I recall.

Wachovia, PNC and Bank of America.

And Bank of 18 9/27/07 - COMMERCE - RES. 070601 America. I'm sorry.

For those depositories that have not submitted strategic plans, are they not out of compliance with The Philadelphia Code?

I haven't gotten to the point where I've been able to determine whether that's true or not, but I have asked them to comply as part of good business practice. And I have not heard from --

Essentially, The Philadelphia Code says if they're not in compliance, they cannot receive any deposits. Any deposits which they have have to be returned until they are in compliance. Is that not what the City Code says?

Yes, sir.

So if they're not in compliance, they're not in compliance.

Well, the part that's unclear to me is if the 19 9/27/07 - COMMERCE - RES. 070601 disparities mentioned require them to respond. And they haven't told me that they haven't responded because of that, but they haven't responded to either of my repeated requests.

You can make your own determinations with the aid of your consultant whether any of these institutions have disparities that are disclosed in the report, and if they have disparities disclosed in the report, then essentially they're supposed to submit strategic plans. That's what the Code says. And, in fact, you sent out a description of who should comply and how they should comply.

Right. I've asked for everyone to comply whether they felt as though they should comply or not, because I felt it was their responsibility as a City depository to respond to the City of Philadelphia since they're on the list of authorized depositories and have gone as far as to 20 9/27/07 - COMMERCE - RES. 070601 say that they wanted to have City deposits, that they should comply with all of the items.

You sent out this sheet, which says Office of the City Treasurer, Frequently Asked Questions, what is required, long-term strategic plan, guideline if disparities are disclosed, guideline if disparities are not disclosed. So you sent this out to those institutions that are authorized and you were expecting something back from each and every one of them.

That's correct.

Regardless of whether they had disparities or not.

That's correct.

So if you did not receive it, they are not in compliance; is that correct?

That's one conclusion. I haven't gotten that far with that part of it. 21 9/27/07 - COMMERCE - RES. 070601

So when are you going to get there?

Well, Councilman, as I explained to you, my staff is generally dedicated to treasury management. We don't have the depth of analysis provided in my office.

That's why you have a consultant.

Well, the consultant did the study, but I don't have the consultant for that purpose. That would be helpful.

You put out a request for qualification or request for proposal with regard to payroll depositories?

Yes. An RFP for payroll has gone out in accordance with the ordinance requiring that the City Treasurer do an RFP for payroll deposits.

And that bid process has been completed?

It's in the final 22 9/27/07 - COMMERCE - RES. 070601 stage.

So has any depository or depositories been selected?

There has not been a selection.

Are you part of that selection process?

A panel representing the Finance Department, the Computer Center and the Finance Director's Office was assembled. I was not a part of the committee directly.

What was your involvement in the process or what is your involvement in the process?

Well, I would say facilitating the side part of it, but at the end, product recommendation will be made to myself and the Finance Director.

So recommendations will be made to you?

Yes.

Will you take into consideration the strategic 23 9/27/07 - COMMERCE - RES. 070601 plans on selecting which institutions should be authorized as payroll depositories?

Excuse me? I didn't get the question.

I said will you take into consideration the submission of the strategic plans and what those strategic plans say related to disparities disclosed in these reports when you make a decision about who should be authorized as payroll depositories?

Yes. I'm going to say that the RFP was posted on June 8th. It closed August 6th. And in that process and of the RFP being posted, there's clear indication that CRA or CRG goals were an important part of their presentation and their submission, and it was integrated into the discussion and presentations that were required of those banks that submitted their request for the RFP proposals.

But my 24 9/27/07 - COMMERCE - RES. 070601 question was --

So it's clear that the subject matter is --

My question was, will you take into consideration --

It's one of the rating factors.

So the answer is yes, that you personally will take into consideration the strategic plans --

Well, sir, I want to avoid being personal about it saying that the RFP process -- has it weighted as part of the integrated --

I'm not asking about the process. I'm asking about the rest of the committee. I'm not asking about the Finance Director, because he's not here. I'm asking about your participation in the process.

I want to say --

Will you take into consideration lending 25 9/27/07 - COMMERCE - RES. 070601 disparities that were disclosed in this report and past reports and strategic plans that were supposed to be submitted to address those disparities in decision-making about who should be authorized as payroll depositories?

Well, I'm going to take that in two steps. The RFP process is independent of the compliance as being an authorized depository.

Actually, it's not. I wrote the payroll deposits legislation.

I'm going to take it in two steps. So the first step is that the RFP process is proceeding in that the community reinvestment goals has been fully integrated into the request of those who made their submissions and they know that it is being weighted and it is a weighted factor. Part of the ordinance does say that they must be authorized depositories 9/27/07 - COMMERCE - RES. 070601 in compliance and meet all the requirements. So that's going to be a secondary issue in the review of the finalists for the RFP.

So if they're not in compliance in terms of having submitted strategic plans, they can't quality as a payroll depository?

The possibility is -- right. That is correct.

Okay. I'm glad you took away the word "possibility." Either you're in compliance or you're not in compliance.

We haven't gotten that far. We're in the final stages of doing that.

How many employees have direct deposited paychecks?

Right now I'm very happy to say that about 74 percent are direct deposits.

I'm looking 27 9/27/07 - COMMERCE - RES. 070601 for a number.

Because I started out when it was like 60, maybe 62. So we're up to 74 percent now.

I'm looking for a number, rough numbers.

Twenty-three thousand, I think, is where we're at now.

And how many pensioners?

We have a total of -- there's about 32,000 paychecks that go out. Not all of them are full time, part time.

How many pensioners have direct deposit?

I believe with the pensioners they're up to 84 percent. We only send out about 6,000 paper checks currently.

Which is about how many people?

It's actually on par. I think there's 36,000 pensioners 28 9/27/07 - COMMERCE - RES. 070601 now. So we're probably talking 24,000, 25,000, -- I'm sorry -- 4

About 23,000 5 employees that have direct deposited 6 paychecks, but 25,000 pensioners have 7 direct deposited paychecks. So how many 8 employees and pensioners are affected by 9 your selection of payroll depositories? 10

Well, this is an 11 interesting subtlety in that pensioners 12 are not considered part of the payroll 13 deposits, because the Pension Board is 14 separate from the payroll system. 15

Who handles 16 the payroll account for pensioners? 17

So the pensioners 18 are paid through a process handled by the 19 Pension Board. The City Treasurer has a 20 disbursement account upon which the 21 pensioners are paid from. 22

So how many 23 employees are affected by your selection 24 of the payroll depository? 25

Right now we're 29 9/27/07 - COMMERCE - RES. 070601 only looking at the payroll for the City of Philadelphia for active employees, which will be approximately 32,000 paid employees.

Should a payroll depository have to meet certain fair lending standards?

Should meet what kind of standards?

Should a payroll depository have to meet certain fair lending standards?

I'm going to say the answer to that question is, it's a balance. The first issue is treasury management and whether they can do the job.

That's not the question I'm asking you. Should a payroll depository have to meet certain fair lending standards?

As part of the total consideration --

It's a yes 30 9/27/07 - COMMERCE - RES. 070601 or no question for me.

Well, my responsibility is for the treasury management of the City of Philadelphia, that every City employee gets paid on time and that we keep our balances correct.

Actually, that's not correct, according to The Philadelphia Code, because I changed it. I changed The Philadelphia Code to include fair lending --

Again, so my response --

So your job is actually also defined by The Philadelphia Code.

Right. I'm saying it includes it as part of the decision.

But you know what I'm asking you. I'm asking you, should a payroll depository have to meet certain fair lending criteria? 31 9/27/07 - COMMERCE - RES. 070601

And I'm responding that it is not the primary consideration.

I already understand that. Should they have to meet any fair lending criteria?

Yes.

What should that criteria be?

Whatever it is that's in the Philadelphia City Code. We're to follow that.

When will the next study be completed?

The date is going to be available in September. So we're hopeful to have that report --

Excuse me. The date --

-- by the end of December.

The date is already available?

Not to my 32 9/27/07 - COMMERCE - RES. 070601 understanding. It's not available until September.

This is September.

I mean September 30th. I'm sorry. The month is not over. I'm informed it just came out.

The date is available. So when will the next report be completed?

We're working for a target date of December, end of December, which has expedited over the last years.

Let me ask you the next and most important question. What do you view as the purpose for the next study or any of these studies?

Well, part of the response is that this is a new piece of business for the Treasurer's Office, and integrating it into the operation of the department is each and every day becoming more clear about how it plays a role in 33 9/27/07 - COMMERCE - RES. 070601 our decision-making. So I would say that the next report would help play a bigger role than the previous reports because it's now institutionalized as a piece of our business.

So what purpose does it have?

One, to encourage any of the depositories that have City deposits to do a better job and a better focus on their lending practices, because to my observation, it may not always be clear to the institution whether they're doing a good job or the job that we want them to do, and I think that this has brought it into focus.

You say the purpose of the report is to encourage them to do better?

Information like this, to my understanding, nationally is to have indicators so that people would have better practices in their banking and lending practices. 34 9/27/07 - COMMERCE - RES. 070601

Let me just ask you one last question again for the record. Should there be a reward and punishment system for fair lending performance?

Well, I'm going to say that's up to the policymakers and not to me as City Treasurer. I certainly take it into consideration and I think every institution --

What would your recommendation be to the next Administration? Should there be a reward and punishment system for fair lending performance?

Well, one of the things I think is an advisory board where the banks are joined together in some kind of committee where they supervise and report on this activity. The department -- I would say like in Boston, Boston has a very good reporting system about the program. So we have a report which is now being prepared by Econsult, 35 9/27/07 - COMMERCE - RES. 070601 but I think a report by the banks themselves about what their goals are and where they want to go and how well they're doing would be an approach that would include a reward and penalty system.

Explain to me what you just said. How would getting the banks to come together to examine their data create a reward and penalty system for them?

I'm going to take a look at -- the State of Pennsylvania has the Department of Banking. The City of Philadelphia doesn't. So on a state level, we have banking being supervised by a department that is solely dedicated to banking; whereas, in the Treasurer's operation, we're more concerned with the City's cash needs. So to have banking in Philadelphia more in focus, because, to my knowledge, there is no banking association in Philadelphia that's 36 9/27/07 - COMMERCE - RES. 070601 strictly Philadelphia. There's the Philadelphia --

Let me stop you. None of the fair lending/community reinvestment legislation deals with the entire banking market. It deals strictly with City depositories, those institutions authorized to receive City deposits. This Council does not have the authority to say where the money goes. We have the authority to determine who can receive the money, and then after we determine who can receive the money, it's then your job to determine where the money goes among those authorized City depositories. My question to you is, would you recommend to the next Administration that there be a reward and punishment system based upon fair lending performance? After reviewing the 2003 report, the 2004 report, the 2005 report and the 2006 report that will be done at the end of December, would you recommend 37 9/27/07 - COMMERCE - RES. 070601 that there be a reward and punishment system or not? That's a yes or no 4 question.

I am a positive guy and I say rewards are always better than punishment.

So you would not recommend a reward and punishment system?

I would say that it is best to organize the focus of the banking community. According to the Econsult report, only 12 percent of the lending is done by the depositories. So it would be in the best interest of the City of Philadelphia to leverage that 12 percent to the 100 percent of the entire marketplace in some fashion, and how we get there is probably in lots of different steps.

Mr. Nacchio, the City treasury is not some endless pot. It's a certain amount of money. So there actually is no way to reward 38 9/27/07 - COMMERCE - RES. 070601 without punishment, because if you're making deposits, if you're choosing institutions to invest in and if you're going to a reward, then you're taking it from somewhere. So would you or would you not recommend a reward and punishment system based upon fair lending practice?

I'm just going to use the models of other cities that they found the best approach is --

I'm not asking about other cities. I'm asking about this city. I'm asking in your role --

Well, I would recommend for this city that --

-- in your role as City Treasurer, would you recommend to the next Administration -- I already know this Administration is not going to do it. That's not the purpose of this hearing. The purpose of this hearing is not to discuss this 39 9/27/07 - COMMERCE - RES. 070601 Administration. The purpose of this hearing is to discuss this report as a transition document for the next Administration and to begin that discussion now and deal with the primary recommendation within this report, which is that there should be a reward and punishment system for fair lending/community reinvestment performance. Do you agree with that recommendation for the record? Yes or no? And would you make that recommendation to the next Administration?

I would think that the best --

That's a yes or no question.

I can't answer yes or no. 22

It's a yes or no question.

Well, then the answer -- 40 9/27/07 - COMMERCE - RES. 070601

Do you believe in a reward and punishment system or not? Yes or no?

It's not part of the policy, so I can't agree to it.

Thank you. Any questions from members of the Committee? Councilwoman Brown.

Good afternoon, Mr. Treasurer.

Good afternoon.

I was reviewing the report here now and looking to see if any consideration has been given to women as one of the many factors, and I see that is not the case.

Gender was one of the requirements that I asked the report to address, and it has been addressed in the report.

Did I miss it?

Specifically. 41 9/27/07 - COMMERCE - RES. 070601 Yes. Because I just want to say that on the Philadelphia website under the City Treasurer, I also put the guidelines that I requested for the report.

Forgive me. Repeat that.

On my website, on Phila.gov, City Treasurer, I also posted there what I said that a report like this should contain. So since this is an independent report, what I did was just give a guideline to the subject matter, and gender was definitely one of the considerations, because I knew that was one of the concerns or issues of City Council in particular.

Yes, yes, yes.

What was the question, Councilwoman?

The issue of gender and how that is one of the factors considered with regards to how banking depositories -- 42 9/27/07 - COMMERCE - RES. 070601

It is with regard to home loans. It is not with regard to small business loans, which is how Mr. Nacchio should have answered. Small business lending is not tracked by gender.

And that decision is made by whom?

It's federal law.

Okay. So the next report is due when? Thank you, Mr. Chairman. The next report is due when?

We're hopeful to have it by the end of December based on the fact that Econsult did this study so they have a format to expedite the processing. So if the data is available now, they can start working towards that end.

Okay, then. Thank you. Thank you, Mr. Chairman. 43 9/27/07 - COMMERCE - RES. 070601

I do want to also add predatory lending was also a concern in the report.

Yes. I do see that.

Other questions from members of the Committee?

Thank you, Councilman. Good afternoon. This question is somewhat unrelated, but in a way it is related, and it talks about location of lending institutions. And the reason why I say it's related to some degree is because the reality is if an institution is in a particular community, there's a likelihood that that person in that community would use that institution and establish a relationship usually just for purposes of cashing their check and then as they move along establishing those relationships, it would end up being probably home equity loans, things of that nature and, therefore, having some 44 9/27/07 - COMMERCE - RES. 070601 relationship to this discussion about lending practices. Is that in any way a part of the equation as you determine your policies associated with the depositories? And the reason I bring that up, because I'm from a particular section. In the Strawberry Mansion community I've actually had this conversation with a couple of the City depositories about the fact that in the Strawberry Mansion community where there's a significant number of residents, high home ownership as North Philadelphia goes, and there's not a single lending institution in that community, and I'm wondering as we make these decisions, do we take that into account also? And if we don't, would it be a possibility?

I want to say at every turn in my office with our authorized depositories I make it known to them what the City's objectives and 45 9/27/07 - COMMERCE - RES. 070601 concerns are about this subject and that they should work towards that end to incorporate into any strategic or marketing plans that they have about the location of branches.

Mr. Nacchio --

But I do want to bring the point that we have depository-type institutions operating in the City of Philadelphia, which are banks, and you have non-depository kinds of entities that do loans, et cetera, which we don't have any input on that may be also operating in those areas.

Mr. Nacchio, I believe Councilman Clarke's question was whether a bank's branching patterns determines at all whether they will receive City deposits and how much they receive in City deposits and whether --

Well, certainly it was not a weighted factor in the past, but it is -- 46 9/27/07 - COMMERCE - RES. 070601

There are no 3 new factors. You said that everyone inherited the accounts and the business that they received, for the most part, and that people who used to get the business still get the business and you're not going to take fair lending into consideration, you're not going to take community reinvestment into consideration, you're also not going to take branching patterns into consideration.

I said all those things were being taken into consideration because they're a weighted factor in the RFP for payroll.

No, that's not what you said. You said that they were included in the RFP. You didn't say that you were going to take it into consideration.

Well, certainly in the universe of decision-making there's many factors that contribute to 47 9/27/07 - COMMERCE - RES. 070601 the final decision. Our primary one is the security of City funds.

And the honest answer to Councilman Clarke's question is, I don't care if there are no 7 banks in the parts of the district that need it the most, that doesn't make a difference in my decision-making about where the money is going to go. That's the honest answer to Councilman Clarke's question. I don't care if there are no 13 banks in North Philly, and where you have the money now in places where the depositories will not lend to is not going to change my mind about where the money goes.

Well, one of the approaches that the City of New York and New York state has done is to give real estate tax abatements to locations that are in those areas to encourage banks to locate in those areas.

He asked whether it weighs into your consideration 48 9/27/07 - COMMERCE - RES. 070601 of where to put the money. That's what he asked.

On a daily basis?

Am I right?

Yes. It's pretty straightforward.

On a daily basis? It doesn't, because it only comes up in the process like the RFP for payroll.

So the answer is no. 13

Mr. Chair?

Councilman Rizzo.

It just made me think. Chairman Goode said that we create the authority of the depository. How do you decide -- how many depositories do we have today now?

We have 11 on the authorized list.

How do you decide who gets what piece of the pie?

If they had 49 9/27/07 - COMMERCE - RES. 070601 it, they keep it. Is that fair?

It's been a process over time which has led to the decision for these accounts to be kept at certain institutions.

So what you're telling me, if they had this much when there were four and now it's 11, they still have that same amount of money?

Well, the primary banks that the City does business with is Wachovia, PNC and Mellon Bank. So those are the primary three that we deal with. On that scale, Wachovia is the legacy bank of other institutions, which at the time were the largest institutions in the City of Philadelphia. To match the needs of the City of Philadelphia's cash management, you have to have an organization that can match the needs of the City. I mean, the delivery of the payroll is the -- 50 9/27/07 - COMMERCE - RES. 070601

Well, Mr. Nacchio, when you became City Treasurer, what percentage of City money was in Wachovia?

I would say on an average basis we have an average balance of only 50 million there. And I want to say as Treasurer --

My question was what percentage of City money was in Wachovia when you became City Treasurer.

Yeah, but this is a point that needs to be expressed very clearly, is that it is not the intent of any City Treasurer, including myself, to keep deposits at a bank.

I understand that.

It's to be invested, fully invested.

I understand that. I didn't ask the dollar amount. I asked the percentage. I understand you shifted more money investments away from 51 9/27/07 - COMMERCE - RES. 070601 cash, which is a smart thing to do, but you still have money in banks that isn't just invested. So when you became City Treasurer, what percentage of City money was in Wachovia?

Other than saying that the highest percentage was, because payroll and vendor payments are processed through that.

Seventy-five percent sounds like a fair number, maybe 80 percent?

Yeah.

And what percentage was in PNC?

Well, there's a question there. It's the next largest percent. I would say -- I can tell you like $500 million of City electronic payments go through PNC. They don't go to Wachovia; they go through PNC. So that's $500 million. So I don't know how you judge that.

And the 52 9/27/07 - COMMERCE - RES. 070601 amount that Mellon has isn't really that significant?

That's the pension fund basically and we also had foster parents there, and a reorganization of making efficiencies for foster parents, which was a major concern and objective and initiative of my office, is to get that straightened out about foster parents being paid on time. That did get moved.

So those are the three depositories that you are used to doing business with. You still do more business with Wachovia than anyone else.

I'm going to say in addition to other City departments. So we have other City departments doing banking.

You still do business with Wachovia more than anyone else, then PNC and to some extent Mellon?

That's correct. 53 9/27/07 - COMMERCE - RES. 070601

And it's based upon past practices?

Yes.

So Councilman Rizzo's question is, has that changed at all. The answer to that is probably no. 9

No. There's a benefit because the bundled banking of other departments, which do not come under the City Treasurer, are also included in the relationship of Wachovia.

We authorize a bank to become a depository. How do you decide how much then -- or do we have any banks that are depositories that you don't give anything to but they're authorized to be?

Absolutely.

That's correct.

Well, the point is, we're trying to spread this around, I think, a little bit. Explain to me, a layman, other than the 54 9/27/07 - COMMERCE - RES. 070601 investment portfolio, how does a bank make money from the City of Philadelphia being a depository? If the money is moving in and out so quickly, how do they really make money?

I'm going to say certainly our objective -- and I've increased that since I've been there -- is to keep as little on deposit as possible, because we want to invest in an investment like a treasury, et cetera, and we get more interest earnings. So we've increased our interest earnings based on the fact we keep low deposits. A bank would prefer that you keep a deposit at the bank because then they can use that for lending, et cetera.

Fifty million is a lot of --

What's that? Excuse me.

One number you used, 50 million.

As a composite of 55 9/27/07 - COMMERCE - RES. 070601 all City departments banking with Wachovia, we may have on an average of $50 million a month that sits there.

So you have some with none. You've got others that have 75 percent of the action. Again, the fact that we just have that money parked in, I would assume, some interest-bearing account, right, or is it basically no interest at all on that money?

Well, they're called demand accounts, so they're basically checking accounts. So they're not there for savings. They're only there for processing payments and for monies to go in and out.

At zero interest?

Some of them are interest-bearing and some of them are not. I'm going to say it's an initiative of my being City Treasurer is to get as many of those accounts back on the 56 9/27/07 - COMMERCE - RES. 070601 interest-bearing road as possible, because they haven't been on that road before.

Well, I would hope so. When I go shop for a bank account, I look for the highest -- Capital One just sent me a new money market that's paying five and a quarter percent. Well, guess what? I jumped right on that deal. I would hope you are doing the same thing, making sure that Wachovia with 50 million bucks is paying us some interest.

Well, I want to say the benefit on the other side is that the City does not then bear the cost of operating the account. So all the accounts have expenses. So instead of giving us interest earnings, we don't get charged for the expense of processing the account. So you have ACH expenditures, you have check payments, you have all those kinds of expenditures that a bank 57 9/27/07 - COMMERCE - RES. 070601 will charge you for the service that they provide. So instead of getting those charges, we may have a non-bearing interest account.

And your effort --

So does it balance out? Sometimes it balances out. Is it to the benefit of the bank sometimes? Yes. Is it to the benefit of the City sometimes? Yes. Do we need to look at it on a daily basis? Yes. We have to continue to do that.

Okay. Good. Thank you very much. Thanks, Mr. Chairman.

I want to be clear with Chairman Goode's questions. Currently, there are only three banks that the City currently does business with, Wachovia, PNC and Mellon?

There are some City business not only -- because there's other banking done under City 58 9/27/07 - COMMERCE - RES. 070601 departments, but you can include the Commerce Bank as also another bank, and there are smaller bankings going on at Citizens, and I bank with United. So I have banking with United.

Does the City bank with United?

Yes. I do, the Treasurer's Office does.

All right, then.

Yes. The rest of it would be just like minor, because it's up to a department. They can walk into any branch. As long as you've authorized them as an authorized depository, a department can walk up into any branch of those banks that are authorized and open up an account.

Is that right?

They can. So we're trying to get better control over that and organize it in a better way. 59 9/27/07 - COMMERCE - RES. 070601

How?

Basically through information. I set up a user group, and me and my staff have had some periodic meetings. I call it M-Bucks. So I invited every custodian and person in a department who does banking or does banking related, to let them know that we have subjects that are interrelated. So we talk about fraud prevention and opening up a bank account and best practices, and that if you open a bank account, the signature card requires the City Treasurer to be on it, which is basically standard procedure for the Finance Department. So they lose sight of that, but bringing them together and talking to them has been really helpful and just communicating the subject matter and we get better cooperation. Because they'll ask, Where should we bank? Is it to our benefit to be with this bank or that bank?

And so to 60 9/27/07 - COMMERCE - RES. 070601 the issues that have brought us to the table today, would those factors be additional information you would share in the meetings you just described?

I'm going to say banking practices like lending practices and CRA?

Yes.

I would say the type of staff would probably not be at that level that they would be interested in the subject that would determine what they do.

But you did say --

But it would determine my answer to them about my guidance about where they should bank.

Guidance versus instructive?

Yes, because under the City Charter and et cetera, I'm not permitted to tell them what to do.

I see. 61 9/27/07 - COMMERCE - RES. 070601

But I want to be the one with the information to guide them to best practices. So I've taken on that role as City Treasurer, to guide them through best practices.

And in your guidance, you have raised issues related to fair lending/community reinvestment?

I take to heart, Councilman, the concerns of City Council for disparities in lending, gender, immigrants and the subject matters that are brought before Council. Also, during the RFP process for payroll, we've brought up questions about the reentry program, which was not a part of the RFP, but we asked each of the submissions in their presentations to respond if they had any programs, et cetera, about it. So I do flow into the concerns.

Mr. Nacchio, what you said was that you can't tell other departments where to put their money. 62 9/27/07 - COMMERCE - RES. 070601

That's correct.

But you can offer them guidance. What Councilwoman Brown wanted to know, in offering them guidance on where to put their money, do you instruct them with regard to the fair lending/community reinvestment performance of those institutions? And my guess is the answer is no. 11

Because primarily it's the banking and treasury operation that guides as the first priority.

The answer is no. No, it doesn't come up.

But it's a part of the entire --

You tell them it's a safe place to put their money whether they lend fairly or not. That's what you tell them.

That would have to be correct, because my primary responsibility is the security of the City's cash. 63 9/27/07 - COMMERCE - RES. 070601

Just answer the questions honestly.

I am honest. The security of the City's cash is primary.

And you don't care about the fair lending/community reinvestment performance. You also don't care about the branching patterns.

Obviously I do care because I've expressed that more than once.

I take that back. I won't use the word "care." Does not enter into any of your decision-making about where to put taxpayers' money.

It has been integrated into the decision-making.

It has been integrated into the decision-making process.

That's correct.

But not into 64 9/27/07 - COMMERCE - RES. 070601 the decision-making. Because when you say that regardless of what we put in the process that at the end of the day the decision is made, you don't believe in a reward and punishment system for fair lending/community reinvestment performance, it means that you're going through the motions because we put things in The Philadelphia Code that are now law, but it really doesn't make a difference to you about where the taxpayer money is going to go.

Well, rather than saying that going through the motions, I've actually put it in the motion. So it's part of the process. Institutionalizing this is not an easy thing in the decision-making process when your primary responsibility is the security and safety of the City's cash, because we're taking a factor which is unrelated to security of the City's cash.

Are there 65 9/27/07 - COMMERCE - RES. 070601 other questions from members of the Committee of this particular witness at this time?

Yes. Define for me "institutionalizing." When you say "process," is there a manual that's like a standard operating procedure which has in it those factors that must be shared with department heads that inform and instruct them on the decisions they need to make with regards to selection of where they --

It hasn't gone that far, but I'm saying the RFP for the payroll process did include it as a weighted factor. On my web pages I have included now information that discloses the information with community reinvestment goals, this annual report and the whole subject matter as part of the dimension of consideration. At meetings that I have with depository banks it's one of the subjects that comes 66 9/27/07 - COMMERCE - RES. 070601 up and I ask them what are they doing, how are they improving, please inform us, keep us -- so it's always a subject before them as part of a concern or an issue.

So do they understand that now and going forward there is a penalty, there is a consequence that comes with not honoring the tenets of this legislation?

And as I was saying -- this is an honest answer -- there are big corporations and to digest this into their organization is difficult for them too, because you're talking to a representative, a representatives who goes back to another representative, who goes back to the bank president. And for it to be digested, it takes some time. But it's getting there. The message is definitely getting there.

What assures you of that?

Because of the 67 9/27/07 - COMMERCE - RES. 070601 feedback. The feedback changes over time. So we get better responses. I'm going to say the presentations that the banks did for the RFP for the payroll process, I heard much better responses than I have heard in the past, much more clarity of focus.

Mr. Nacchio, let me ask you two questions. Is there any institution authorized to receive City deposits that does not meet your safety standards?

In general, 99.9 percent. Everything is secure.

I'm sort of curious as to what you're advising these departments on. If you say you're advising them based upon safety and your primary concern as City Treasurer is to make sure the City's money is safely invested --

Or safely managed, yes.

-- haven't 68 9/27/07 - COMMERCE - RES. 070601 all the City depositories already reached that threshold of safety by being authorized and by going through the process of authorization?

Everybody who knows me, I'm into technology. So online banking was a primary initiative of mine, and all the banks do not offer the same online banking security and capabilities. So part of the decision is based on that ability to deliver online banking in a safe and secure way. Since we have less people to do less things -- or more things, I'm sorry, to do more things, we need to do them in a secure online way. So I may lean towards a bank that is not the favored bank having to do with lending practices, but because their technology is superior when it comes to handling cash, that may outweigh the factor.

But the bottom line position is not that you're determining whether one depository is 69 9/27/07 - COMMERCE - RES. 070601 safe to put money in and another is not. That's not even a consideration. If they're authorized as a City depository, then you already determined that it's a safe institution.

According to the criteria, they are considered safe institutions.

The second question is, if all these institutions are safe institutions, some better than others, in the course of deciding where you put money, it then is not necessarily a question of safety and to some extent it may be a question of, as you said, technology?

Yes.

Where in the City Charter or City Code do you find the issue of technology as it relates to where you should put deposits?

Well, it's a companion to security and fraud prevention, which has to do with the 70 9/27/07 - COMMERCE - RES. 070601 security of the funds. An item that I implemented --

You already said that all the institutions are safe.

Yeah, but they vary in terms of delivery of services. They're not all the same.

My question is, where in the City Charter or City Code does it mention technology as a means of decision-making for where you put City money?

Again, technology is the same as security of the funds. One of the important -- I'm going to say one of the important parts --

Is that your interpretation?

It's not an interpretation. It's just the way the business operates.

Where in the City Charter or City Code does it mention technology? 71 9/27/07 - COMMERCE - RES. 070601

Well, if you go by the City Charter, we're not able to do direct deposit. We only print paper checks.

The only reason I raise the issue is because you said that we cannot have a reward and punishment system because nowhere in the City Code or City Charter does it allow you to have one. But you can take into consideration technology?

Well, that's not a reward or punishment. That's the capability. When it comes to payroll, one of the items that I look for and we've implemented in the Treasurer's Office in the last three years is an item called positive pay. That means that every paycheck that the City puts out goes to an issue file to the bank and is confirmed as being a valid check, both by name and by amount. So a fraudulent check is determined on a day's notice.

Let me just 72 9/27/07 - COMMERCE - RES. 070601 skim through that.

But not all of our depository banks can do that. Not all of them can do that.

Let me just skim through the discussion. Are you restricted by the City Charter or Philadelphia Code in having a reward and punishment system?

I couldn't see any penalties listed in the Charter.

I said are you restricted by The Philadelphia Code and Philadelphia Charter in instituting a reward and punishment system?

I don't see where I'm empowered to penalize anyone.

Are you restricted by The Philadelphia Code and Philadelphia Home Rule Charter in instituting a reward and punishment system?

I don't know what empowers me to penalize. 73 9/27/07 - COMMERCE - RES. 070601

What empowers you to take into consideration technology?

That's because it's a business function. It's a business function related to the security of the City's funds.

Councilman Rizzo.

Do we have any insurance to protect our investment? I know most deposits, I guess, personal deposits, are protected by the FDIC.

That's a good question, Councilman, yes.

Do we have an insurance policy?

There's a difference. All the deposits that we have at a bank or institution is subject to Act 72, and they must collateralize that 102 percent. So if we have, let's say, $10 million on deposit at a bank, they must hold securities equal to $10 74 9/27/07 - COMMERCE - RES. 070601 million, 102 percent of value somewhere in case something happened. So it's not the $500,000 or $100,000 that there might be typically on a bank account. So we're fully insured under Act 72, and that's part of the requirements of a depository, that they do that. And not all banks can cover those kinds of collateralizations. Some banks can't do $10 million that are on our list. That's like their max. Other banks can do $50 million. So that's why we have larger deposits at the larger bank.

Well, it's interesting because we're into yes and no 17 answers. I thought I was going to get a no on that one. So I'm impressed that that is --

So that really contributes to the decision-making of going with the larger bank, is because if you have $50 million on deposit, they need to collateralize it. The smaller bank can't do the collateral. 75 9/27/07 - COMMERCE - RES. 070601

Mr. Treasurer, there's an announcement just this week that a new bank is coming to town. I think they're going to open branches, Citibank. 7

Citibank, yes. 8

Twenty-one 9 branches. And one of the things that 10 they're talking about is what 11 Mr. Chairman is discussing, positioning 12 some branches in areas that are 13 underserved. Well, I would hope that if 14 they're going to roll the dice and come 15 to Philadelphia and put some branches in 16 some of our neighborhoods that aren't 17 served presently well, that they should 18 be considered. But if you don't make 19 that adjustment and one bank is getting 20 75 percent of the business and that never 21 changes, these other banks, in my opinion -- I don't pretend to know a lot about this, but I'm here learning. That's why I come to these hearings, to learn -- won't really have a really good 76 9/27/07 - COMMERCE - RES. 070601 opportunity to do business with the City of Philadelphia, and they're doing the right thing coming to Philadelphia, opening branches. And I think they 6 realize that -- they're coming here 7 because they realize that there's 8 probably an opportunity to position 9 themselves in neighborhoods that don't 10 have a bank presently. 11 So I think we've got to 12 rethink -- and I don't pretend to know 13 how to do that and I'm going to turn to 14 my colleague, who is the best at this -- 15 to figure out how we push for some of 16 that money to be reallocated. To hear 17 that a bank is on the list and gets 18 nothing, I'm sure they went through a lot 19 of -- I don't know how much effort or 20 expense to get that credential and they 21 get nothing.

But, again, there's no rule or decision-making process that would lead to me saying that I can deposit in that bank because of 77 9/27/07 - COMMERCE - RES. 070601 those reasons. So it would be better to perceive like other cities and states, is to give them a tax incentive to locate in those areas, to actually have link deposits, like Chicago and Boston where you have $10 million set aside specifically for banks to do this. So it's tied to a program that has a direct relationship. So they're not just like, Give me whatever you got, like what can you give me in terms of a deposit, whatever business you can send my way. That way it's defined. It's specifically defined as being 10 million, or whatever the dollar amount is. And it's by policy and not by the City Treasurer just saying, You know what, I'm going to reward you for going in those areas and open up an account there.

Mr. Nacchio, what does the Home Rule Charter say about where you should put the money and where you can put the money?

Authorized 78 9/27/07 - COMMERCE - RES. 070601 depositories by City Council.

So you can give the money to any authorized depository and you can give them any share of the money.

I'm going to say that was more past practice. The new practice is that it appears as though it must be bid. An RFP process may take on a new dimension here -- I mean disclosure and the amendment to the --

But you had complete flexibility other than you had to use the list of authorized depositories.

I have to say that flexibility has been curtailed based on the amendment to the City Charter of 2006 having to do with bid and no-bid process.

Okay.

Because this becomes now a contract. You'd have a contract. It changes. 79 9/27/07 - COMMERCE - RES. 070601

You can decide how much money you want to give to each authorized depository. Yes or no?

I'm going to say that was general past practice, but it's not the same now because --

You put out a bid --

This is going under legal review of whether I have to go out and have a contract with these depositories for these bank accounts now. Prior to this I can just go to a bank and open a bank account. I could. And to put a deposit specifically that's in con-cash in, let's say, Citibank --

Mr. Nacchio, we're about to move forward with Mr. Mullin's testimony.

Okay.

If you don't decide, who decides?

Who decides?

Yes. 80 9/27/07 - COMMERCE - RES. 070601

Well, currently there is nothing on the table except the RFP for payroll.

No, no, no. 6 The money is actually in financial institutions right now, City depositories, City money. Who decided?

Who decided?

Yes.

Many City Treasurers before me.

Who decided how much money went where?

Well, one of the reasons for consolidation is for the efficiency of business operations.

Who decided?

City Treasurers.

Thank you. Mr. Mullin, please state your name for the record and proceed with your testimony.

Stephen Mullin, M-U-L-L-I-N, Econsult Corporation. I'm 81 9/27/07 - COMMERCE - RES. 070601 here to provide testimony on our report. And may I introduce a couple of my colleagues on the report?

Absolutely.

Alletta Emeno, who is with me here at Econsult, and Ellen Diebold, who is with MFR Consultants, who worked on this with us. Maria Roberts couldn't make it today, but will be working on the next round with us, and certainly this was a joint process. If I may, I thought I'd give a quick outline of our findings and sort of a little bit about the methodology, and then you've discussed some of the recommendations already. I'll hold there, and if you have some specific questions on that, would that be all right?

Yes.

As has been discussed here I know in earlier Council hearings too, we were hired by the -- we, along with MFR -- were hired by the City 82 9/27/07 - COMMERCE - RES. 070601 Treasurer's Office to conduct this analysis of lending practices by depository banks. And, again, that's defined, as everyone here knows, as the banks that are on the list that the City can deposit its funds, its banking funds. And what we looked at was, essentially we were taking a look at what are their lending practices in various ways to analyze their lending practices, and the first and overall one is, is there any evidence of discrimination in those lending practices. We looked at prime and subprime home lending in Philadelphia. And the bulk of the study was for home lending and three types of home lending: purchase money, home lending to purchase a house; refinancing; and home improvement lending. And in 2005, those numbers in all of those cases were higher than 2004. We anticipate the 2006 numbers will be higher than the 2005, too. We also took a look at 83 9/27/07 - COMMERCE - RES. 070601 Philadelphia compared to other areas; that is, Philadelphia versus the suburban areas in the Philadelphia metropolitan area, as well as Philadelphia versus other major cities, to see if there's any comparability with any of the trends or any of the findings. And then we took a look at -- we also took a look at non-occupant investors versus owner-occupied housing lending. And we created a measure, a ranking of the depositories. Followed the practice that was instituted in the two previous studies, but we added some variables in there, because we wanted to make sure that we sort of had two components in the rankings. One component was what is the extent of sort of the breadth of their lending coverage across racial, ethnic, gender and income lines, number one, but also wanted to make sure that we took into account sort of the scale. If you're a bank and you made one loan to a low-income minority, 84 9/27/07 - COMMERCE - RES. 070601 you'd look very, very good on a percentage scale, but you wouldn't look very good on sort of like how are you trying to address the big problem. So we wanted to try to keep both, so the performance as well as the scale, to note. And this is very important, as the Treasurer mentioned. Only in the home lending -- both City Council and the City's sort of hands are tied a little bit that you have the ability to say, Here, we're doing some business with you with City funds, and the commercial banking world is sort of sliding out of the residential mortgage world, as we all know here. And I'm not talking about subprime. I'm just talking about other lenders here. So we set up a ranking of the depositories and made sort of various factors, where were they lending, what were loan denials, what were relative prime to subprime applications, denials 85 9/27/07 - COMMERCE - RES. 070601 and acceptances in those. One of the things that we found -- let me step back. What we did was measured all of the banks and found out what is the City average and the City median in this sort of lending, and then compared the banks. The composite score on the ranking was based on how many sort of standard deviations above the average are you or how many standard deviations below the average to try to normalize, again, partly because of that scale issue. One of the things -- and we did find a ranking, and that is provided in the report there. One of the things I will note, that all of the composite scores were positive. So all of the depository banks that we looked at were actually better than the City average, but there was a variation still amongst those. We also looked at small business lending in Philadelphia, and that, as you and I think a couple of the 86 9/27/07 - COMMERCE - RES.

070601 other Councilmembers pointed out, the data, the underlying data, is far less detailed and disaggregated at that level for small business lending, but found some 20-odd thousand small business loans, as characterized by both CRA and the Small Business Administration, loans for just under $900 million. Now, one of the questions is -- one question is, is that a drop in the bucket compared to all of the debt going on, whether it's just the local banks or all other forms of debt. And one of the things that we hope to do in the 2006 data is be able to sort of disaggregate a little bit and get a little bit more information on that. So we did find that information about the small business lending. We also did take a look at branch banking only in the sense of a descriptive sense, branch banking in neighborhoods, where are the branches and are branches in census tracts with low 87 9/27/07 - COMMERCE - RES. 070601 income, minority, low to moderate income, and took a look at where those branches are. I'll summarize with our findings here. The first one, as we mentioned before, this key question: Is there statistical evidence that supports a contention, sort of a null hypothesis, that lending is somehow influenced by factors besides the things that you would normally expect in a pure economic sense, credit, the loan to value, housing, income, all the rest of these things, and are there other factors, race, ethnicity, sort of where do you live and gender, that might tweak those. And obviously we sort of anticipate certain of those to be -- the hypothesis is they have no 20 influence. If there is something that's statistically significant that says that this factor leads to what we observe as a statistically significant drop in the, say, acceptance rate or significantly increase in the denial rate loans, then 88 9/27/07 - COMMERCE - RES. 070601 we'd say there is statistical evidence that supports that thesis. What we found was there does -- with the data that we have, there does look like there's statistically significant disparities across these groups and with these characteristics here, racial and ethnic characteristics of borrowers, and the data are consistent with discrimination but don't prove the discrimination because of what we call omitted variables. The problem is, we can't -- and the main thing is with the HMDA data -- that was the main type of data that we used -- we had variables that are missing that really are important to characterize, and there's a big question about whether or not you can ever get those, whether or not we can find some proxies to try to ease or coax some of that information out. But the main problems are, we don't have the individual credit score. 89 9/27/07 - COMMERCE - RES. 070601 So someone could say, Here, your credit score is real low versus real high. If that's not shown up there, some other factor might be -- a denial might be attributed to another factor there. Second areas that we don't have the information on, the individual borrower's wealth. We expect in one sense greater wealth -- any level of income, greater wealth, you'd have a higher probability of being able to get a loan. And then the flip side of that is how much debt do you have. If you are a borrower with a ton of debt already, your odds, all else equal, the odds are that you're going to get a reduced opportunity.

Mr. Mullin, not to interrupt you. I want you to get through your presentation, but just to question you on this point. You're speaking about the performance of depositories within the market and disparities that exist across the board? 90 9/27/07 - COMMERCE - RES. 070601

Correct.

But clearly, the performance of certain depositories is very different from the performance of other depositories.

Yes.

So, therefore, that shows some disparities that exist are related to the way certain financial institutions conduct their business or their lending criteria. Clearly, and I know over the course of the last three studies, by way of example, there is data on gender related to home purchase loans. I know in the first study that we conducted, I believe Citizens Bank did about 48 percent of their home purchase loans with female borrowers, and another institution, which I won't mention, did significantly less. And so it becomes clear that it was possible for Citizens Bank to do nearly half of their home purchase loans with female borrowers. And so it was not 91 9/27/07 - COMMERCE - RES. 070601 simply a matter of those specific borrowers' credit histories and other technical factors. But while we cannot prove gender discrimination by looking at the varying disparities among the City depositories, we can identify which depositories are not reaching out enough to certain demographic groups, one, and then, two, by also looking at the denial disparity ratios, we can also see that there are certain City depositories that are denying certain demographic groups more than others. And, once again, whether that proves discrimination or explains totally why those borrowers did not get those loans, it clearly shows that they are denying at a higher rate than other institutions and in some cases higher than the market.

I agree wholeheartedly. When I was just talking about this discrimination, that was in the marketplace, and part of the -- in one sense, a response is that even if 92 9/27/07 - COMMERCE - RES. 070601 everyone -- again, this is separate from the depository story. Even if everyone isn't providing services, if some people are, the competitive forces will -- they'll take advantage of that. So people do have opportunities. Less perhaps than others, but still have opportunities. Then going to the actual depositories -- when I was talking about the composite index that we were looking at, we identified several variables, not every single one of the possible permutations and combinations of characteristics, but several characteristics to try to take that into account, and we think that our index sort of gives a rough -- it doesn't say this group is worse in gender, this group is worse in poor census tracts, this group is worse in minority lending, but rather taking all of these, some factor in all of these, these banks -- I meant this group of banks here, this subset here -- 93 9/27/07 - COMMERCE - RES. 070601 these banks seem to, as we normalize or as we create this index, the higher number is associated with more sort of positive characteristics there and a lower number is associated with fewer positive characteristics. And that's -- we didn't go any deeper than that, is what I mean on that front. Does that make sense?

Yes.

And, actually, when I was mentioning that, I could go through some of the findings. A couple of things just descriptive that we find kind of interesting, that the total loan applications for residential went from 90,000 in 2004 up to 100,000 applications in 2006, and the originations, the actual acceptances and issuance of loans, went from 36,000 to 42,000. So in one general case, 42 percent of people who applied for loans received the loans in 2006. Now, when we look at that, as I mentioned before, those 42,000 loans are 94 9/27/07 - COMMERCE - RES. 070601 made up of 17,000 for people purchasing houses, 21,000 for people refinancing existing loans and about 3,000 for home improvement loans originated. Now, the main thing -- obviously characteristics for home improvements and refinancing take in different factors there, but the main thing that we looked at were the home purchase loans, the 21,000 there and an additional 20,000 loan applications and 10,000 loans originated by non-owner-occupied investor purchases there, and those are the -- the findings that we noted and they're reported throughout, we did find, again, that factors such as ethnicity and race and neighborhood, both described by income of neighborhood or percent minority of neighborhood and those neighborhoods by census tracts, we did find that there's statistically significant differences in rates of denials across those variables. We found in many cases statistically 95 9/27/07 - COMMERCE - RES. 070601 different numbers associated with prime loans and subprime loans across different areas and characteristics of the borrowers, different Philadelphia versus Philadelphia suburban counties, but not necessarily Philadelphia versus other cities there. In fact, when we looked at Philadelphia, when we looked at Philadelphia versus Baltimore, Detroit and Pittsburgh, Philadelphia had the lowest percentage of subprime loans out of those four cities, but Philadelphia had the greatest disparity between denial rates between white applicants and African-American applicants and Hispanic applicants than those cities. So we had lower subprimes but higher disparities in the denial rates there. And so what does that tell us? There are disparities. There are things that, as we note, we can't sort of put our finger on, this is because of this factor only, because there are omitted variables. But the fact that there is 96 9/27/07 - COMMERCE - RES. 070601 this disparity we note and we sort of conclude that there is some evidence that's consistent with discrimination and practices that result in disparities and that that should, one, be a concern and, two, the City ought to take a look at how to possibly address that. And, again, in our recommendations, our recommendations were sort of broken into roughly two categories. One is data, saying where you can possibly get more data, try to figure out ways, again, to coax out more information out of the data, because we're not going to change, at least not right now, HMDA data. What those variables are will be determined by the United States government and their rules. But how can you find other types of data that might give you some more insights into what's going on. And, second, the public policy-type recommendations, several of which were discussed earlier in this hearing, just sort of what are 97 9/27/07 - COMMERCE - RES. 070601 some things that the City can do.

And if I might note one thing, when we talked about the -- when we said sanctions or rewards and recognizing we're only talking about depositories because sort of in one sense other lenders can say, Hey, we don't really care necessarily what you're doing because we're not looking for business with you and we don't have that hook, but we do think that there is a possibility of using sort of, in a sense, this marketing hook, because a potential reward, even if it isn't directly City dollars, a potential reward might be something like making a note that Bank A, B and C, these three banks, seem to be doing a lot of good along some of these categories here, and that might be something that they might take in their own private marketing efforts. And to the extent that individuals assign a plus to that, that might be something that would be of value to them and show, just 98 9/27/07 - COMMERCE - RES. 070601 like the opposite side could be and say these are ranked fairly low in these categories. And, again, in their own private marketing, no bank really wants to have somebody say, This group has said you don't do things good in whatever category or something on this front. So that might be something that the City could do even without the caret or the stick of deposits there. So I'll end with that, if that is a brief enough summary for you.

That's fine. And if other Committee members have questions, then you can dig deeper into the report. I just have a couple of questions. I think you can anticipate what they might be. Mr. Mullin, you're the former Commerce Director for the City of Philadelphia?

Yes.

You're also 99 9/27/07 - COMMERCE - RES. 070601 the former Finance Director for the City of Philadelphia?

Yes, years and years ago.

And the City Treasurer's Office was under your purview as Finance Director?

Yes.

I assume that you agree with the recommendations within the Econsult report?

Yes.