Credit Unions Victorious in CA State Legislature

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Although California credit unions faced many difficult battles this year in the California State Legislature, they closed the session with numerous successes.

Those successes would not have been possible without the tireless efforts of the California Credit Union League working with member credit unions—as well as the great work those credit unions accomplish in their communities every day.

“We want to thank credit unions for their hard work and efforts throughout the year,” said Courtney Jensen, vice president of state government affairs for the League.

Here’s the latest update on three important pieces of legislation the League worked on this year that directly impact credit unions across the state (California Consumer Privacy Act, California State Charter Update, and Prize-Linked Savings Accounts).

California Consumer Privacy Act (CCPA)
On June 28, Assembly Bill 375 (authored by Assemblymember Ed Chau and Senator Robert Hertzberg) was passed by the California State Legislature and immediately signed by Gov. Jerry Brown. AB 375 created the CCPA and was a last-minute compromise with the proponents of a privacy initiative that had qualified for the November 2018 ballot. After AB 375 was signed, the proponents of the ballot initiative pulled it 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 the initiative to be removed from the ballot. June 28 was the final date for all initiatives to be removed from the ballot. The California Credit Union League took an “oppose” position on the initiative last year and submitted an “oppose unless amended” letter to AB 375 because of the broad negative implications for credit unions and their members.

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. The League appreciated the attempt in AB 375 to recognize the unique nature of financial institutions by providing a Gramm-Leach-Bliley Act (GLBA) exemption, but it identified to legislators that the way the exemption was drafted made it effectively meaningless. The League identified this as a high priority that needed to be addressed in August before the session adjourned for the year.

In August, Senate Bill 1121 (authored by Senator Bill Dodd) was amended and became the clean-up bill to AB 375. On the final day of session, Aug. 31, the California State Senate voted 39-0 on final approval of SB 1121. Also, earlier that same day the Assembly Appropriations Committee, Assembly Floor and Senate Judiciary Committee all approved SB 1121 unanimously. The governor signed SB 1121 on Sept. 24.

Most importantly for credit unions, SB 1121 clarifies the GLBA exemption that was included in AB 375. Under SB 1121, 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 be largely exempt from the provisions of AB 375 for data they collect subject to GLBA or CFIPA. The League will be providing a legal analysis and compliance information to all League-member credit unions. Please stay tuned for more legal information on this exemption and 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 the data breach section (1798.150) of AB 375, which goes into effect 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.” On a positive note, this new data breach section finally makes retailers have “skin in the game,” so to speak, for data breaches because now they will be liable for any breach their systems suffer.

California State Charter Update
The League-sponsored Assembly Bill 2862 (authored by Assembly Banking and Finance Chair Monique Limón, D-Santa Barbara) was also approved the California State Legislature with unanimous votes and signed by the governor on Sept. 5. 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. All provisions of the new law go into effect on Jan. 1, 2019.

AB 2862 includes five provisions:

  • 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.” AB 2862 amended the escrow law (Financial Code 17006) to reflect a clear exemption of credit unions.

  • Charitable Donation Accounts (Federal Parity): Charitable Donation Accounts (CDAs) are currently permitted for federally-chartered credit unions (FCUs) through National Credit Union Administration (NCUA) 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 percent 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. In 2013, no changes were made to California statute or regulations to provide parity for state-chartered credit unions (SCUs) to invest in a CDA. AB 2862 added a new code section to the Financial Code and states 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.

  • 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 state-chartered credit unions (SCUs) to purchase, sell or pledge all or part of a loan. Prior to AB 2862, SCUs could only acquire a partial interest in loans originated by another credit union. The Financial Code did 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.

  • 457(b) Plans (Federal Parity): Prior to AB 2862 457(b) plans were permissible, but the investments under the plan has to 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.

  • 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 FC 14862. These current requirements make the savings capital structure policy obsolete. AB 2862 repeals FC 14862 and amends FC 14400, 14456 and 14900 that reference the Savings Capital Structure Policy as well.

Prize-Linked Savings Accounts
Senate Bill 1055 (authored by Senator Steve Bradford, D-Gardena) was also unanimously approved and signed by the governor on Sept. 27.

The bill authorizes 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.

The new law goes into effect on Jan. 1, 2019—and as of that date credit unions are allowed to offer prize-linked savings accounts to their members. SB 1055 will allow credit unions to reward current, successful savers but also attract first-time savers.

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