BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 708 (Corbett) Hearing Date: August
23, 2012
As Amended: August 16, 2012
Fiscal: No
Urgency: No
SUMMARY Would apply Division 11 of the California Commercial
Code to certain funds transfers made between commercial
entities.
DESCRIPTION
1. Would provide that Division 11 of the California Commercial
Code applies to a funds transfer that is a remittance
transfer, as defined by reference to the federal Electronic
Fund Transfer Act of 1978 (EFTA), unless that remittance
transfer is an electronic fund transfer, as defined by
reference to the EFTA.
2. Would clarify that if there is an inconsistency between the
applicable provision of Division 11 and the federal EFTA,
the applicable provision of the federal act shall control to
the extent of the inconsistency.
EXISTING LAW
3. Does not apply Division 11 of the California Commercial
Code to a funds transfer, any part of which is governed by
EFTA.
COMMENTS
1. Purpose: This bill is sponsored by the California Bankers
Association (CBA), to rectify a problem that was created by
an amendment that the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Public Law 111-203;
"Dodd-Frank Act") made to the federal EFTA.
2. Background and Discussion: Historically, the federal EFTA
SB 708 (Corbett), Page 2
has focused on providing certain rights and protections to
individual consumers who engage in electronic fund transfers
that credit or debit a consumer's account. The Uniform
Commercial Code (more specifically, Article 4A of the UCC;
incorporated as Division 11 of California's Commercial Code)
governs the rights and responsibilities of commercial
parties that engage in funds transfers.
According to this bill's sponsor, Article 4A was designed to
provide a set of rules governing wholesale wire transfers,
which are high-value commercial payments normally made
exclusively by business firms. These payments are made
through one of two systems - Fedwire, a wire service
operated by the Federal Reserve Board (FRB), and the
Clearing House Interbank Payments System (CHIPS), a wire
service privately operated by The Clearing House Payments
Company (Clearing House).
This distinction between the focus of EFTA and Article 4A was
changed, when Congress enacted the Dodd-Frank Act. Section
1073 of the Dodd-Frank Act amended the EFTA to provide
protections for senders of "remittance transfers," which
Dodd-Frank defines to include any electronic transfer of
funds from a consumer in the United States to a recipient
located in a foreign country, regardless of whether the
transfer would otherwise meet the definition of an
"electronic fund transfer" pursuant to the EFTA. This
change has the effect of including certain classes of funds
transfers in the EFTA, even if those transfers are made via
Fedwire or CHIPS (networks that carry high-value commercial
payments made by businesses).
The Consumer Financial Protection Bureau (CFPB) adopted a final
rule to implement Section 1073, which become effective
February, 2013 (Regulation E, subpart B, 12 C.F.R. Part
1005). This rule includes certain classes of funds
transfers within the EFTA, even if those transfers are sent
through a wholesale funds-transfer network like CHIPS or
Fedwire. Both the Dodd-Frank amendment and its implementing
rule have the effect of excluding transfers sent through a
wholesale funds-transfer network from Article 4A, and
including them under EFTA, which is problematic, because
EFTA does not govern transactions between large commercial
enterprises. Those rules remain in Article 4A.
In March 2012, the Clearing House fixed this problem for
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participating banks that originate transfers made via CHIPS.
It did so by amending the CHIPS Rules and Administrative
Procedures, to provide that funds transfers through CHIPS
will be governed by the laws of the State of New York,
including Article 4A of the New York Commercial Code,
regardless of whether the funds transfer is a remittance
transfer governed by the EFTA. In the case of an
inconsistency between New York law and EFTA, EFTA controls.
In a final rule that became effective in July 2012, the FRB
fixed this problem for participating banks that originate
transfers made via Fedwire. It did so by amending its
Regulation J, to clarify that Regulation J and Commercial
Code Article 4A continue to apply to Fedwire funds
transfers, even if the funds transfers also meets the
definition of remittance transfers under the EFTA. In the
case of an inconsistency between EFTA and Regulation J, EFTA
controls.
The one problem that remains (the one this bill would solve)
involves fund transfers that are originated in California on
behalf of a financial institution that is not a member of
Fedwire or CHIPS. From time to time, institutions that are
not members of Fedwire or CHIPS will use institutions that
are members to conduct funds transfers on their behalfs. If
Fedwire or CHIPS member institution fails to provide proper
notice to the nonmember institution regarding the
applicability of Fedwire or CHIPS rules to the transaction,
the transaction will not be covered by Fedwire or CHIPS
rules, and the EFTA/Article 4A fix that was made to the
CHIPS Rules and Administrative Procedures and to Regulation
J will not apply. This bill will ensure that, regardless of
whether the member institution provides the proper notice to
the nonmember institution regarding the applicability of
Regulation J or CHIPS rules, the EFTA/Article 4A fix will
apply.
3. Blessed by the CFPB, American Law Institute (ALI), and the
Uniform Law Commission (ULC): The change proposed by this
bill is consistent with statements issued by the CFPB, ALI,
and ULC, formerly known as the National Conference of
Commissioners on Uniform State Laws.
The CFPB addressed the likelihood that states might need to take
action of the type proposed by SB 708 in its Section 1073
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rulemaking. In that rulemaking, the CFPB stated, "The
Bureau recognizes that one consequence of covering
remittance transfers under the EFTA could be legal
uncertainty under the UCC for certain remittance transfer
providers. Specifically, to the extent that providers of
international wire transfers were previously able to rely on
UCC Article 4A's rules governing the rights and
responsibilities among the parties to a wire transfer, they
may no longer be able to do so. However...the Bureau
believes that the best mechanism for resolving this
uncertainty rests with the states, which can amend their
respective versions of the UCC Article 4A."
The language contained in SB 708 has been adopted by ALI and
ULC. Their logic for adopting the change was explained as
follows: "When the amendment to EFTA goes into effect in
2013, EFTA will govern 'remittance transfers,' whether or
not those remittance transfers are also 'electronic fund
transfers' as defined in EFTA. Thus, when the amendment and
its implementing rules go into effect, the result of UCC
Section 4A-108 will be that a fund transfer initiated by a
remittance transfer will be entirely outside the coverage of
Article 4A, even if the remittance transfer is not an
electronic fund transfer, so that those remittance transfers
will be governed neither by Article 4A or the EFTA."
4. Summary of Arguments in Support: CBA is sponsoring the bill
for the reasons stated above. The bill is also supported by
The California Credit Union League and California
Independent Bankers.
5. Summary of Arguments in Opposition: None received.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Bankers Association (sponsor)
California Credit Union League
California Independent Bankers
Opposition
None received
SB 708 (Corbett), Page 5
Consultant: Eileen Newhall (916) 651-4102