BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  AB 2006|
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                                 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.

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           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 

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                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 

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          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 

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          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       |

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          |                   |                   |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.  

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          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

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          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, 

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            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

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