CUs Experience Successful Year as CA Legislature Adjourns

Image of capitol building in Sacramento, California.

The California Legislature adjourned the 2017 – 2018 legislative session on Aug. 31, and now Gov. Jerry Brown has until Sept. 30 to sign or veto the more than 900 bills on his desk.

Legislators will return for organizational session on Dec. 3 to swear in the 2019 – 2020 legislature.

SB 1121: Privacy Protection
On the final day of session, the California State Senate voted 39-0 on final approval of Senate Bill 1121, authored by Senator Bill Dodd (D-Napa). SB 1121 was the highest priority legislation for the California Credit Union League and its member credit unions. The vote count on this bill showed the legislative recognition of the importance of this bill for the credit union movement. Also, earlier in the day on Aug. 31, the Assembly Appropriations Committee, Assembly Floor and Senate Judiciary Committee all approved SB 1121 unanimously.

A Connect For The Cause call-to-action was heard by credit unions up and down the state, and credit union leaders sent 284 letters to assembly members and senators in support of SB 1121. A big “thank you” goes out to Brett Martinez, CEO of Redwood CU, and Howard Welinsky, board member of First Entertainment CU, who were able to utilize their long-term relationships with key legislators to support the clarification of the Gramm-Leach-Bliley Act (GLBA) exemption in SB 1121.

SB 1121 was the clean-up bill to Assembly Bill 375, which was approved by the legislature and signed by the governor in June 2018 and created the California Consumer Privacy Act. Most importantly for credit unions, SB 1121 clarifies the GLBA exemption that was included in AB 375. With SB 1121, if signed into law, credit unions will have to remain in compliance with the strict privacy protections under GLBA and the California Financial Information Privacy Act (CFIPA) but will not be subject to the overburdensome and duplicative requirements of AB 375.

The exemption amendment says: “(e) This title shall not apply to personal information collected, processed, sold, or disclosed pursuant to the federal Gramm-Leach-Bliley Act (Public Law 106-102) and implementing regulations or the California Financial Information Privacy Act (Division 1.4 (commencing with Section 4050) of the Financial Code). This subdivision shall not apply to section 1798.150.”

Credit unions will still be subject to is the data breach section (1798.150) of AB 375, which goes into effect on Jan. 1, 2020. This section includes a private right of action for consumers if their personal information is breached because of a business’s “violation of the duty to implement and maintain reasonable security procedures and practices appropriate to the nature of the information to protect the personal information.” In a way, this new data breach section finally makes retailers have skin in the game for data breaches because now they will be liable for any breach their systems suffer.

AB 375, which was authored by Assemblymember Chau and Senator Hertzberg, passed by the legislature on Thursday, June 28 and was then signed by Brown. AB 375 was a last-minute compromise with Alastair Mactaggart, the proponent of a privacy initiative that qualified for the November ballot. After AB 375 was signed, Mactaggart pulled his initiative from the ballot. The bill language was introduced on June 22 and needed to pass the legislature and be signed by the governor by June 28 for Mactaggart to be able to remove his initiative from the ballot. June 28 was the drop-dead date for all initiatives to be removed from the ballot. The League’s legislative advocacy committee took an oppose position on Mactaggart’s initiative last year because of the broad negative implications for credit unions and their members.

In June, the business community largely opposed this bill but also decided AB 375 was better than the initiative, which if passed would have taken effect immediately and would have required a 70 percent vote of the legislature to fix any provision. AB 375 received bi-partisan support, mainly because it allows legislators to make changes to the law. Most laws passed through the legislative process, including AB 375, can be amended by a simple majority vote of the legislature.

In June, the League submitted “oppose unless amended” letters to the legislature and testified in committee expressing our concerns with the issues the bill presents for credit unions. The League appreciated the attempt in AB 375 to recognize the unique nature of financial institutions by providing a GLBA exemption, but identified to legislators that the way the exemption was drafted made it effectively meaningless.

The League identified this as a high priority fix that needed to be addressed in August before session adjourned. The new, duplicative and problematic requirements as introduced under AB 375 would have resulted in higher administrative costs for credit unions, leading to higher loan rates, reduced services and products, consumer inconvenience and longer wait times for loan processing.

AB 2862: State Charter Update
The League’s sponsored Assembly Bill 2862, authored by Assembly Banking and Finance Chair/Assemblymember Monique Limón (D-Santa Barbara), was also approved the California Legislature with unanimous votes and is awaiting the governor’s signature. AB 2862 is an update to the state charter and includes five provisions to clean-up the code and give state-chartered credit unions parity with federally-chartered credit unions.

AB 2862 includes five provisions:

  • 1) Clear Exemption for Credit Unions in the Escrow Law (Clean-up). Currently California escrow law does not apply to “any person doing business under any law of this state or the United States relating to banks, trust companies, building and loan or savings and loan associations and insurance companies.” The proposed language amends the escrow law (Financial Code 17006) to reflect a clear exemption of credit unions.

  • 2) Charitable Donation Accounts (Federal Parity). Charitable Donation Accounts (CDAs) are currently permitted for federally-chartered credit unions (FCUs) through the National Credit Union Administration’s rule Part 721.3(b)(2) which was finalized in December 2013. This means that CDAs are preapproved and a FCU does not need prior approval from NCUA to invest in a CDA if the CDA satisfies all the required conditions. NCUA will determine CDA compliance during their regular, periodic examinations. A CDA is a hybrid charitable and investment vehicle that FCUs may fund as a means to provide charitable contributions and donations to qualified charities. The credit union donates a minimum of 51% of investment earnings to the 501(c)(3) charity of their choice. In short, a CDA is an easy way for a credit union to give more back to their community while strengthening the credit union at the same time. No changes were made to California statute or regulations to provide parity for state-chartered credit unions (SCUs) to invest in a CDA. The proposed language adds a new code section to the financial code state a SCUs may invest in a CDA if all required conditions are satisfied. The California Department of Business Oversight (DBO) will determine CDA compliance during their regular, periodic examinations.

  • 3) Whole Loans (Federal Parity). Currently FCUs, under NCUA rule 701.23, are allowed to purchase, sell or pledge all or part of a loan to one of its own members where no continuing contractual obligation between the seller and purchaser is contemplated. For purchases of eligible obligations, except as described in paragraph (b)(2) of NCUA rule 701.23, the borrower must be a member of the purchasing FCU before the purchase is made. (b)(2) of the rule provides an exception that allows FCUs to purchase whole loans of nonmembers. AB 2862 amends Financial Code 14959 to allow SCUs to purchase, sell or pledge all or part of a loan. Currently SCUs may only acquire a partial interest in loans originated by another credit union. The Financial Code does not provide an exception, as NCUA regulations do, for the purchase of whole loans made to members or nonmembers. Whole loans are a common and important power for individual credit unions and the industry.

  • 4) 457(b) Plans (Federal Parity). Currently 457(b) plans are permissible, but the investments under the plan must be deemed as qualified investments by the DBO prior to the investment because the investments are technically held on the credit union’s books (Financial Code 14653.5). 457(b) plans are an executive’s retirement funds, already expensed from payroll, due to the executive, but held on the credit union’s balance sheet per IRS requirements for deferred compensation. The DBO recognizes these investments do not represent a risk to the credit union and the only risk is to the executive’s plan. The NCUA rule 701.19(c) states a FCU “investing to fund an employee benefit plan obligation is not subject to the investment limitations of this Act and part 703 or, as applicable, part 704, of this chapter and may purchase an investment that would otherwise be impermissible if the investment is directly related to the …obligation… under the employee benefit plan…” AB 2862 mirrors the NCUA rule by clarifying that an investment made to fund an employee benefit plan obligation does not require prior approval by the DBO.

  • 5) Savings Capital Structure Policy (Clean-up). Currently Financial Code 14862 requires a SCU to have a written savings capital structure policy. This policy is out of date and not useful in the current regulatory environment. The concepts required by this law related to the terms and conditions upon which shares, and dividends are governed were replaced by the requirements of Regulation DD and Part 707 of the NCUA Rules and Regulations (Truth in Savings), and Regulation CC (Availability of Funds and Collection of Checks). Liquidity and asset/liability management policies maintained by credit unions serve to avoid instability in a credit union’s savings capital. Furthermore, the tenets of safety and soundness require credit unions to maintain cash management and liquidity policies, which go beyond the requirements of Financial Code 14862. These current requirements make the savings capital structure policy obsolete. The proposed language repeals Financial Code 14862 and amends Financial Code 14400, 14456 and 14900 that reference the Savings Capital Structure Policy as well.

SB 1055: Prize-Linked Savings Accounts
Senate Bill 1055, authored by Sen. Steve Bradford (D-Gardena), was also unanimously approved and would authorize state- and federally-chartered credit unions located in California to offer prize-linked savings accounts to their members. These accounts would not be considered a lottery or raffle under California law and would not be held to lottery or raffle rules. Credit union members could open a prize-linked savings account and for example, for every $25 deposit a member would earn one entry into a monthly and quarterly cash prize drawing. Each financial institution could structure these accounts in their own way, but important conditions must be satisfied. Depositors cannot be charged to participate, each entry in the savings promotion must have an equal chance of winning and participants are not required to be present to win. SB 1055 will allow credit unions to reward current, successful savers but also attract first-time savers.

Other Important Legislative Victories

  • Assembly Bill 2596, authored by Assemblymember Ken Cooley (D-Rancho Cordova), requires the Governor’s Office of Business and Economic Development (GO-Biz) to develop a statewide economic development plan that will help build a market-based, inclusive economy in California. AB 2596 calls for a critical third-party peer review of the state’s competitiveness and brings together a diverse advisory group of local, regional, and industry experts to work with GO-Biz in developing a statewide plan. The bill was approved by the California State Assembly by a vote of 78-0 and Senate 39-0.

  • Assembly Bill 2658, authored by Assemblymember Ian Calderon (D-Whittier), defines blockchain technology and established a blockchain working group, appointed by the Secretary of the Government Operations Agency, to evaluate the use of blockchain technology by California’s businesses and state government. The League, along with California business and technology groups, support this bill which would recognize blockchain technology in California law and continue to development of this technology that has potential to enable secure and efficient business transactions. The bill was approved by the California State Assembly by a vote of 76-0 and Senate 39-0.

  • Assembly Bill 2913, authored by Assemblymember Jim Wood (D-Santa Rosa), provides building projects with more time to begin construction by extending building permit deadlines. Currently, a building permit expires when work authorized by the permit has not commenced within 180 days from the date it was issued. AB 2913 would extend the permit deadline to allow every permit issued to remain valid if the work on the site is commenced within 12 months after its issuance. This is especially important in fire impacted areas of California that are rebuilding and are facing a shortage of construction workers. The bill was approved by the California State Assembly with a vote of 74-0 and the Senate 38-0.

  • Assembly Joint Resolution 28, authored by Assemblymember Reggie Jones-Sawyer (D-Los Angeles), urges Congress and the President to pass legislation that would allow financial institutions to provide financial services to the cannabis industry. In light of revocation of the Cole Memo and continued conflict between federal and state law, Congress and the President must act to allow financial institutions that choose to operate in this space to bank cannabis businesses and reduce the vast amounts of cash from California’s streets. By ensuring that the legitimate cannabis industry functions as any other business, Congress and the President would be addressing a serious threat to public safety. The resolution was approved by the California State Assembly with a vote of 58-3 and the State Senate 30-6.

Oppose unless amended:

  • Assembly Bill 2159, authored by Assemblymember Kansen Chu (D-San Jose), would have specified that a willful failure to report financial abuse by a mandated reporter, including credit union employees, would result in a civil penalty not exceeding $5,000 and full reimbursement to the victim for the financial loss suffered as a result of the financial abuse. The bill would have required the civil penalty and full reimbursement to be paid by the employer of the money transmitter to the party bringing the action. CCUL was able to negotiate amendments with Assemblymember Chu to remove credit unions from the bill and the bill subsequently failed to pass the Assembly Appropriations Committee. If passed, this legislation could have opened credit unions up to substantial litigation and financial losses.

  • Senate Bill 1201, authored by Senator Hannah-Beth Jackson (D-Santa Barbara), creates new foreign language translation requirements for mortgage loan modifications that are negotiated primarily in Spanish, Chinese, Tagalog, Vietnamese or Korean. CCUL was able to negotiate amendments with the author’s office and removed our opposition to the bill. The bill, as amended, follows the statutory model adopted during the past several years wherein the state, through the Department of Business Oversight, furnishes translated model forms for use by covered entities. These forms are now available on the DBO website, but are not required until Jan. 1, 2019.

  • Senate Bill 1412, authored by Senator Steven Bradford (D-Gardena), would require employers, including credit unions, to only consider “particular convictions” relevant to the position when screening job applicants using a criminal background check. The League believes the bill as written conflicts with credit union’s requirements under federal law, including 12 USC 1785(d) which states “any person who has been convicted of any criminal offense involving dishonesty or breach of trust, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense may not become, or continue as, an institution-affiliated party with respect to any insured credit union…” Credit unions must consider the complete criminal history of an applicant to review for disqualifying records. The League was able to negotiate amendments with Senator Bradford that simply state that if the employer must do a background check or consider crimes when hiring a potential employee, they do not have to comply with the provisions on the bill.

  • Assembly Bill 2708, authored by Assemblymember Eloise Reyes (D-Grand Terrace), would have amended current statute to require businesses to put contracts in the language spoken by the consumer when the consumer uses a minor to negotiate the transaction. Current statute requires a translated version of the contract if the business owner or agent negotiates in a language other than English. The League expressed concerns to the author’s office regarding altering the trigger for when a translated contract must be furnished. The League submitted amendments to the author’s office to clarify current law and the author chose to hold her bill for the year and not move forward with this issue.

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