BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 2006| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 2006 Author: John A. Pérez (D) Amended: 8/6/12 in Senate Vote: 21 SENATE BANKING & FINANCIAL INST. COMM. : 6-1, 6/20/12 AYES: Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla NOES: Walters ASSEMBLY FLOOR : 57-13, 4/26/12 - See last page for vote SUBJECT : Credit union services SOURCE : Author DIGEST : This bill authorizes state-chartered credit unions (CUs) to offer so-called lifeline services to nonmembers who are eligible for membership, and to charge a fee for the provision of those services. The lifeline services that could be sold include check cashing, receipt and transmission of domestic and international electronic funds transfers, and sales of cashier's checks and money orders. Senate Floor Amendments of 8/6/12 clarify that a credit union which provides specified services to nonmembers within its field of membership cannot charge an amount for those services, which exceeds the cost to provide those services. CONTINUED AB 2006 Page 2 ANALYSIS : Existing federal law: 1. Pursuant to the Financial Services Regulatory Relief Act of 2006 (Public Law 109-351), allows federally-chartered CUs to: A. Sell, to persons in the field of membership, negotiable checks (including travelers checks), money orders, and other similar money transfer instruments (including international and domestic electronic fund transfers); and B. Cash checks and money orders and receive international and domestic electronic fund transfers for persons in their fields of membership, for a fee (12 United States Code (USC) 1757). 2. Defines a federal CU as a cooperative association organized in accordance with specified federal law for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes (12 USC 1752). Existing state law: 1. Defines a state CU as a cooperative, organized for the purposes of promoting thrift and savings among its members, creating a source of credit for them at rates of interest set by the board of directors, and providing an opportunity for them to use and control their own money on a democratic basis in order to improve their economic and social conditions (Financial Code (FIN) Section 14002). 2. Provides that every CU may admit to membership those persons eligible for membership, upon any of the following (FIN Section 14800): A. The purchase of a membership in the CU as provided in the CU's bylaws; B. The payment of an entrance fee established from CONTINUED AB 2006 Page 3 time to time by the board of directors; C. The purchase of one or more shares in the CU as provided in the CU's bylaws. 3. Further provides that no officer, director, committee member, or employee of any CU shall extend any benefit or service of the CU to any person, unless that person is admitted to membership in the CU (FIN Section 14800). This bill provides that a CU may provide all of the following to an individual who is within its field of membership, regardless of whether the person is admitted to membership, and charge a fee, not to exceed the CU's cost, to provide those services: 1. Sell checks (including cashier's checks and money orders) and other similar money transfer instruments, including international and domestic electronic fund transfers. 2. Cash checks (including cashier's checks and money orders) and other similar money transfer instruments, and receive international and domestic electronic fund transfers. Comments As of March 31, 2012, California was home to 157 California-chartered CUs, with $76 billion in assets, and 418 federally-chartered CUs, with $136 billion in assets. At present, federally-chartered CUs can offer the types of lifeline services this bill authorizes state-chartered CUs to offer. State-chartered CUs are prohibited from offering these services, absent a change in state law. The parity argument . This bill and the virtually identical bills that came before it have provided fertile ground for banks and CUs to wage their long-standing fight against each other. CUs assert that the lack of parity between state and federal law in this area is confusing to Californians who might wish to make use of the lifeline services this bill authorizes state-chartered CUs to offer. Banks assert that there would be no parity issue to CONTINUED AB 2006 Page 4 correct, if the CUs had not sponsored the federal bill authorizing federal CUs to provide lifeline services in the first place. According to the California Credit Union League (CCUL), seven other states have already enacted express statutory language authorizing state-chartered CUs to provide lifeline services to their nonmembers. Another 12 states have generic legislation, which authorizes their state regulators to follow federal CU laws and regulations. Thus, California is one of 31 states that lack parity between state-chartered and federally-chartered CUs with respect to the offer of lifeline services to nonmembers. The fee argument . Another argument underlying the fight between banks and CUs regarding this bill relates to the fees that CUs are allowed to charge for providing lifeline services to nonmembers. The federal law authorizing federal CUs to offer lifeline services to nonmembers allows the CUs to sell certain services and to offer other services for a fee. The National Credit Union Administration's (NCUA's) final rule interpreting the changes made by Public Law 109-351 observed that "FCUs are not required to charge persons for financial services under Section 503 of the Reg Relief Act or the rule, but 'may' sell or charge a fee for them." Thus, according to the NCUA, federal CUs need not charge for the services they are authorized to offer to nonmembers; instead, they have the option of whether, and how much, to charge. According to CCUL, some federal CUs charge for these services, and others do not. Those which do charge set their fees at levels which cover only their actual costs to provide the service. This bill authorizes state-chartered CUs to charge fees to nonmembers for lifeline services. CCUL indicates that it expects state-chartered CUs to mirror the policies of federal CUs with respect to their fees for these services. Some will charge; others will not. Those which do charge are likely to limit their fees to those that equal their actual costs to provide the service. Banks believe that CUs should have to pay taxes on the fees they charge to nonmembers. CCUL counters that, because CONTINUED AB 2006 Page 5 such fees would cover transactional costs only, the fees would not generate a "profit" and thus would not be considered by the CUs as unrelated business income (i.e., they would not be subject to taxation). The taxation argument . Banks and CUs have historically bickered over CUs' tax status. Banks dislike the fact that they pay income taxes, while CUs do not. CUs counter that they are non-profit entities which put their profits back into their membership, and are thus appropriate recipients of the tax treatment they receive. Some of the key differences between banks, federally-chartered CUs, and state-chartered CUs are summarized in the table below. ----------------------------------------------------------- | |Banks |Credit Unions | |-------------------+-------------------+-------------------| |Owned By |Stockholders |Their own members | |-------------------+-------------------+-------------------| |Profit Status |For profit |Not-for-profit | |-------------------+-------------------+-------------------| |Return Earnings To |Stockholders |Their own members | |-------------------+-------------------+-------------------| |Membership |No restrictions on |Only individuals | | |who may be a |within the field | | |customer |of membership are | | | |eligible | |-------------------+-------------------+-------------------| |Income Taxation |Subject to federal |Federally-chartered| | |corporation tax | and | | |and state bank tax |state-chartered | | |(which equals the |CUs are exempt | | |state franchise |from federal and | | |tax rate plus 2%) |state income | | | |taxation; however, | | | |state-chartered | | | |CUs are subject to | | | |state and federal | | | |taxes on unrelated | | | |business income | | | |derived from | CONTINUED AB 2006 Page 6 | | |activities | | | |unrelated to their | | | |core mission | |-------------------+-------------------+-------------------| |Sales Taxation |Federally-chartered|Federally-chartered| | | banks are exempt, | CUs are exempt, | | |state-chartered |state-chartered | | |banks are subject |CUs are subject to | | |to state and local |state and local | | |sales and use |sales and use | | |taxation |taxation | |-------------------+-------------------+-------------------| |Payroll Taxation |Subject to federal |Both federal and | | |and state payroll |state-CUs are | | |taxes (e.g., |subject to federal | | |Social Security, |and state payroll | | |Medicare, |taxes | | |withholding, | | | |unemployment | | | |insurance, | | | |employment | | | |training taxes, | | | |disability) | | |-------------------+-------------------+-------------------| |Real Property |Exempt (the |Both are subject | |Taxation |additional 2% | | | |income tax that | | | |banks pay is in | | | |lieu of property | | | |taxes) | | | | | | | | | | | | | | |-------------------+-------------------+-------------------| |Personal Property |Exempt (see above) |Federally-chartered| |Taxation | | CUs are subject; | | | |state-chartered | | | |CUs are exempt | | | | | ----------------------------------------------------------- Banks and CUs have fought for the last decade about the extent to which CUs should be able to offer lifeline services to nonmembers within their fields of membership. CONTINUED AB 2006 Page 7 Yet, on the basis of data recently provided by CCUL, it appears they may be fighting over an issue that impacts very few people. The following summarizes recent quarterly data from federally-chartered CUs operating in California. These figures reflect the number of people (both members and nonmembers), who sought various lifeline services from federally-chartered CUs in California. The CUs do not have a breakdown of member versus nonmember. Between 25 and 40 people sought international remittances each quarter. Between 100 and 125 people sought wire transfers each quarter. Between 110 and 140 people sought check cashing services each quarter. Approximately 130 people sought money orders each quarter. There are over two and a half times more federally-chartered CUs in California than state-chartered CUs. The number of people accessing lifeline services from federally-chartered CUs is minimal. Given the smaller number of state-chartered CUs, the number of nonmembers who might take advantage of the authority given to state-chartered CUs by this bill is likely to be miniscule. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 7/26/12) AARP California Credit Union League California Labor Federation California School Employees Association California State Conference of the NAACP Center for Responsible Lending Communication Workers of America, AFL-CIO, District 9 Consumer Federation of California Ella Baker Center's Green-Collar Jobs Campaign Greenlining Institute Insurance Commissioner Dave Jones Lieutenant Governor Gavin Newsom CONTINUED AB 2006 Page 8 Mexican American Legal Defense and Education Fund Silicon Valley Community Foundation United Farmworkers OPPOSITION : (Verified 7/26/12) California Bankers Association California Independent Bankers ARGUMENTS IN SUPPORT : The California Credit Union League supports this bill based on the bill's ability to help bank unbanked Californians and on the parity argument summarized above. The League states, "AB 2006 will level the playing field and provide unbanked Californians with potentially more than 700 points of access through state licensed credit unions to cash their check, purchase a money order, and transfer money back home. This access will build a relationship to ultimately enter the financial mainstream." ARGUMENTS IN OPPOSITION : The California Bankers Association (CBA) and California Independent Bankers (CIB) oppose this bill, for all of the historic reasons summarized above. Both banking trade groups use the fee and tax arguments summarize above. According to CBA, "when credit unions seek to offer products and services, such as those identified in AB 2006, to non-members for a fee, the income earned is inconsistent with the original purpose of the credit union to serve its members and must be subject to taxation." CIB argues that this bill will place community banks at a competitive disadvantage relative to CUs. "Community banks often compete head to head with credit unions, yet CIB members pay taxes." CBA also asserts that the measure is unnecessary, because state-chartered CUs may already provide services to non-members through for-profit subsidiaries known as credit union service organizations (CUSOs). Because of their for-profit status, the income earned by CUSOs is taxable. ASSEMBLY FLOOR : 57-13, 4/26/12 AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block, CONTINUED AB 2006 Page 9 Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Chesbro, Davis, Dickinson, Eng, Feuer, Fletcher, Fong, Fuentes, Galgiani, Garrick, Gatto, Gordon, Hagman, Hall, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Lara, Bonnie Lowenthal, Ma, Mitchell, Monning, Nestande, Norby, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Silva, Skinner, Solorio, Swanson, Torres, Valadao, Wieckowski, Williams, Yamada, John A. Pérez NOES: Achadjian, Bill Berryhill, Conway, Donnelly, Beth Gaines, Gorell, Grove, Jeffries, Logue, Miller, Morrell, Nielsen, Wagner NO VOTE RECORDED: Cedillo, Cook, Furutani, Halderman, Harkey, Jones, Knight, Mansoor, Mendoza, Smyth JJA:k 8/6/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED