BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2209
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           CONCURRENCE IN SENATE AMENDMENTS
          AB 2209 (Dickinson)
          As Amended  August 4, 2014
          Majority vote
           
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          |ASSEMBLY:  |73-0 |(May 23, 2014)  |SENATE: |36-0 |(August 13,    |
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           Original Committee Reference:    B. & F.  

           SUMMARY  :  Makes various changes to the Money Transmission Act  
          (MTA). Specifically,  this bill :  

          1)Exempts from licensure a retail transaction in which the  
            recipient of the money, or other monetary value is an agent of  
            the payee pursuant to a preexisting written contract, and  
            delivery of the money or other monetary value to the agent  
            satisfies the payor's obligation to the payee.

          2)Specifies that the commissioner of the Department of Business  
            Oversight (commissioner) may impose certain conditions on a  
            license, approval, or order if it is necessary for the safety  
            and soundness of the licensee, or reasonable or necessary to  
            maintain or enhance consumer protection.

          3)Provides that in relation to reports that must be filed with  
            the commissioner, that in addition to transaction volume, a  
            licensee must report whether such money transmission activity  
            occurred via mobile or other electronic application.

          4)Extends the existing exemption from training agents for signs  
            of elder abuse for licensees that offer services via the  
            Internet to those that offer services by mobile electronic  
            application.

          5)Specifies that the statutorily required "right to refund  
            statement" is not required in cases where the customer sends  
            the payment for goods or services in an e-commerce  
            transaction.

          6)Allows the statutorily required transmission receipt to be  
            provided electronically for transactions that were initiated  
            electronically and states that except for receipts provided  








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            electronically the receipt shall be in a minimum eight-point  
            font.

          7)Provides that in cases in which a licensee does not operate  
            out of a branch office and instead uses the Internet or a  
            mobile application then the commissioner may authorize  
            alternative disclosures concerning rates, fees and other  
            details about the licensee.

          8)Specifies that currently required complaint notice posting  
            within a branch office location may be substituted with an  
            alternative notice authorized by the commissioner in the event  
            the licensee or agent conducts money transmission activity via  
            an Internet Web site or mobile application.  

          9)Requires licensees to maintain any other records, not already  
            required by statute, if required by the commissioner.

          10)Clarifies that the guidance offered to prospective applicants  
            by the commissioner is informal guidance and that such  
            guidance will be based on information supplied by the  
            applicant.  

          11)Provides that at any time, if the commissioner deems it  
            necessary for the general welfare of the public, he or she may  
            exercise any power set forth in this division with respect to  
            a money transmission business, regardless of whether an  
            application for a license has been filed with the  
            commissioner, a license has been issued, or, if issued, the  
            license has been surrendered, suspended, or revoked.

          12)Makes the following technical corrections to the MTA:

             a)   Makes changes to the legislative findings and  
               declarations;

             b)   Moves the definition of "material litigation" to the  
               definition section of the statute;

             c)   Clarifies that credit unions that are exempted from  
               licensing are those with an office in California;

             d)   Provides for revisions to mandatory receipt requirements  
               and contents.









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             e)   Corrects several outdated cross-references; and,

             f)   Changes the term "securities rating service" to "credit  
               rating agency." 

           EXISTING LAW  provides for the MTA, Financial Code Sections 2000  
          to 2172 and provides for the following:

          1)Defines "payment instrument" as a check, draft, money order,  
            traveler's check, or other instrument for the transmission or  
            payment of money or monetary value, whether or not negotiable.  
             The term does not include a credit card voucher, letter of  
            credit, or any instrument that is redeemable by the issuer for  
            goods or services provided by the issuer or its affiliates.

          2)Defines "receiving money for transmission" or "money received  
            for transmission" as receiving money or monetary value in the  
            United States for transmission within or outside the United  
            States by electronic or other means.  The term does not  
            include sale or issuance of payment instruments and stored  
            value.

          3) Defines "stored value" as monetary value representing a claim  
            against the issuer that is stored on an electronic or digital  
            medium and evidenced by an electronic or digital record, and  
            that is intended and accepted for use as a means of redemption  
            for money or monetary value or payment for goods or services.   
            The term does not include a credit card voucher, letter of  
            credit, or any stored value that is only redeemable by the  
            issuer for goods or services provided by the issuer or its  
            affiliates, except to the extent required by applicable law to  
            be redeemable in cash for its cash value.

          4)Requires licensing for domestic money transmittal services.  

          5)Provides for regulation of non-bank issued stored value cards  
            that may be offered by licensees.  

          6)Prohibits a person from engaging in the business of money  
            transmission in California or advertising, soliciting, or  
            holding itself out as providing money transmission unless  
            licensed.

          7)Requires specified information to be included in an  
            application for a license which shall be in the form  








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            proscribed by the commissioner. 

          8)Authorizes the commissioner to conduct an examination of an  
            applicant, at the applicant's expense, and would require the  
            commissioner to approve an application for a license if the  
            commissioner makes specified findings, including that the  
            applicant has adequate net worth and is competent to engage in  
            the business of receiving money for transmission.  In order to  
            meet the net worth requirements a licensee that sells or issue  
            payment instruments or stored value must maintain securities  
            on deposit on a surety bond of no less than $500,000 or 50% of  
            the average daily balance of outstanding payment instruments  
            and stored value in California.  A licensee engaged in money  
            transmission must either maintain securities or a surety bond  
            not less than $250,000 and no more than $2 million.

          9)Requires licensees to file audit reports with the commissioner  
            within 90 days after the end of each fiscal year. 

          10)Imposes various fees and would require the commissioner to  
            levy assessments on licensees for the purposes of  
            administering these provisions regulating money transmission  
            including:

             a)   A $5,000 application fee;

             b)   An annual license fee of $2,500;

             c)   An annual branch office fee of $125 per branch office; 

             d)   An annual $25 fee for each branch employee; and,

             e)   For licensees that sell or issue payment instruments, an  
               annual assessment based on the volume and aggregate face  
               amounts of payment instruments and stored value issued or  
               sold in California.

          11)Provides that an applicant shall possess, and a licensee  
            shall maintain at all times, tangible shareholder's equity of  
            $250,000 to $500,000, depending on estimated or actual  
            transaction volume, as determined by the commissioner based on  
            the factors listed below in a through k.  The commissioner may  
            increase the amount of net worth required of an applicant or  
            licensee if the commissioner determines, with respect to the  
            applicant or licensee, that a higher net worth is necessary to  








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            achieve the purposes of this division based on the factors  
            described in subdivision (c).  When making a determination,  
            the commissioner shall consider the following factors:

             a)   The nature and volume of the projected or established  
               business;

             b)   The number of locations at or through which money  
               transmission is or will be conducted;

             c)   The amount, nature, quality, and liquidity of its  
               assets;

             d)   The amount and nature of its liabilities;

             e)   The history of its operations and prospects for earning  
               and retaining income;

             f)   The quality of its operations;

             g)   The quality of its management;

             h)   The nature and quality of its principals;

             i)   The nature and quality of the persons in control;

             j)   The history of its compliance with applicable state and  
               federal law; and,

             aa)  Any other factor the commissioner considers relevant.

          12)Gives the commissioner authority to require a licensee to  
            write down any asset held by the licensee to a valuation that  
            will represent its then fair market value.  Any receivable or  
            debt due to a licensee that is past due and unpaid for the  
            period of one year shall be charged off, unless it is well  
            secured or is in process of collection.

          13)Specifies that the aggregate value of a licensee's accounts  
            receivable, excluding money transmission receivables, loans or  
            extensions of credit to any one person, or that person's  
            affiliates, cannot exceed 50% of the licensee's tangible  
            shareholders' equity without the advanced written approval of  
            the commissioner.  Whenever such amount equals or exceeds 20%  
            of the licensee's tangible shareholders' equity, the licensee  








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            shall maintain records evidencing such amount and any security  
            or other source of payment for the amount owed, and such other  
            records as the commissioner may require by order or  
            regulation.

          14)Requires a licensee to provide specified notices and  
            disclosures to customers, including a notice relative to a  
            customer's right to a refund, disclosures relating to rates of  
            exchange, a notice indicating that payment instruments are not  
            insured, and a notice providing information on making  
            complaints to the commissioner against a licensee. 

          15)Requires licensees to maintain financial records for a  
            three-year period.

          16)Mandates each licensee to file with the commissioner a  
            certified copy of every receipt form used by it or by its  
            agent for receiving money for transmission prior to its first  
            use.

          17)Authorizes the commissioner to suspend or revoke a license if  
            the commissioner finds that a licensee or agent of a licensee  
            has, among other things, violated the provisions of the MTA or  
            engaged in fraud or unsound practices and would authorize the  
            commissioner to assess specified civil penalties against a  
            person that violates these provisions. 

          18)Makes it a crime for a person to engage in the business of  
            money transmission without a license or for a person to  
            intentionally make a false statement, misrepresentation, or  
            false certification in a record filed or required to be  
            maintained under these provisions. 

          19)Exempts from licensing:

             a)   The United States or a department, agency, or  
               instrumentality thereof, including any federal reserve bank  
               and any federal home loan bank;

             b)   Money transmission by the United States Postal Service  
               or by a contractor on behalf of the United States Postal  
               Service;

             c)   A state, county, city, or any other governmental agency  
               or governmental subdivision of a state;








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             d)   A commercial bank or industrial bank, the deposits of  
               which are insured by the Federal Deposit Insurance  
               Corporation or its successor, or any foreign (other nation)  
               bank;

             e)   Electronic funds transfer of governmental benefits for a  
               federal, state, county, or local governmental agency;

             f)   A board of trade designated as a contract market under  
               the federal Commodity Exchange Act (7 United States Code  
               Sections 1-25, inclusive) or a person that, in the ordinary  
               course of business, provides clearance and settlement  
               services for a board of trade to the extent of its  
               operation as or for such a board;

             g)   A person that provides clearance or settlement services  
               pursuant to a registration as a clearing agency or an  
               exemption from registration granted under the federal  
               securities laws to the extent of its operation as such a  
               provider;

             h)   An operator of a payment system to the extent that it  
               provides processing, clearing, or settlement services,  
               between or among persons excluded by this section, in  
               connection with wire transfers, credit card transactions,  
               debit card transactions, stored value transactions,  
               automated clearing house transfers, or similar funds  
               transfers, to the extent of its operation as such a  
               provider;

             i)   A person registered as a securities broker-dealer under  
               federal or state securities laws to the extent of its  
               operation as a broker-dealer; and,

             j)    A person that delivers wages or salaries on behalf of  
               employers to employees or facilitates the payment of  
               payroll taxes to state and federal agencies, makes payments  
               relating to employee benefit plans, makes distribution of  
               other authorized deductions from employees' wages or  
               salaries, or transmits other funds on behalf of an employer  
               in connection with transactions related to employees.   
               Notwithstanding this exemption, a person described herein  
               that offers money transmission services or provides stored  
               value cards directly to individual customers shall comply  








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               with this division to the extent of such activity.

          20)If the commissioner finds all of the following with respect  
            to an application for a license, the commissioner shall  
            approve the application:

             a)   The applicant has adequate tangible shareholders'  
               equity, as specified in Financial Code Section 2040 to  
               engage in the business of money transmission and the  
               financial condition of the applicant is otherwise such that  
               it will be safe and sound for the applicant to engage in  
               the business of money transmission;

             b)   The applicant, the directors and officers of the  
               applicant, any person that controls the applicant and the  
               directors and officers of any person that controls the  
               applicant are of good character and sound financial  
               standing;

             c)   The applicant is competent to engage in the business of  
               money transmission;

             d)   The applicant's plan for engaging in the business of  
               money transmission affords reasonable promise of successful  
               operation; and,

             e)   It is reasonable to believe that the applicant, if  
               licensed, will engage in the business of money transmission  
               and will comply with all applicable provisions of this  
               chapter and of any regulation or order issued under this  
               chapter.

           EXISTING  FEDERAL LAW  :

          Federal Regulation E, the Electronic Funds Transfer Act (EFTA)  
          was amended via the Dodd-Frank Wall Street Reform and Consumer  
          Protection Act (Dodd-Frank) to include regulation of  
          international remittances and money transfer.  Section 1073 of  
          Dodd-Frank expanded the scope of EFTA to include requirements  
          concerning remittance disclosures to consumers.  The Consumer  
          Financial Protection Bureau (CFPB) released draft rules that  
          went into effect October 1, 2013.  A brief description of the  
          new requirements:










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          1)Money transmitters are required to provide customers with  
            written pre-payment disclosures containing information about  
            the specific transfer, such as the exchange rate, applicable  
            fees and taxes, and the amount to be received by the  
            designated recipient. 



          2)Money transmitters are required to provide a written receipt  
            when payment is made.  The receipt must include the  
            information provided on the pre-payment disclosure, as well as  
            additional information, such as the date of availability, the  
            recipient's contact information, and information regarding the  
            customer's error resolution and cancellation rights.  As an  
            alternative, the new money transmitter regulation allows money  
            transmitters to give customers a single written disclosure  
            prior to payment containing all of the information required on  
            the receipt, so long as the money transmitter also provides  
            proof of payment such as a stamp on the earlier document. 



          3)The pre-payment disclosures and receipts must be provided in  
            English and in each of the foreign languages principally used  
            by the money transmitter to advertise, solicit, or market  
            money transfer services at a particular office.  If you offer  
            customers the ability to make money transfers using text  
            message or a mobile application, the new money transmitter  
            regulation provides additional guidance on how to provide the  
            required disclosures. 



          4)If, (a) due to the laws of a recipient country or (b) the  
            method by which transactions are made in the recipient  
            country, a money transmitter cannot determine certain amounts  
            that are required to be disclosed, exceptions permit the money  
            transmitter to disclose an estimate of the amount of currency  
            to be received, rather than the actual amount. 



          5)Money transmitters are required to provide customers with a  
            30-minute cancellation period that allows a customer the  
            opportunity to review both the prepayment disclosure and the  








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            receipt to ensure that the transfer was sent as the customer  
            intended.  If a customer requests, a money transmitter must  
            promptly provide the customer a notice describing the  
            customer's "error resolution" and cancellation rights, using  
            specified language or substantially similar language.  Even  
            after the cancellation period has passed, customers will have  
            a right to a refund or other remedy if an error occurs in a  
            transaction. 



          6)In the event a customer timely requests the cancellation of a  
            money transfer, the new money transmitter regulation requires  
            money transmitters to provide customers with a refund, at no  
            additional cost to the customer, the total amount of funds  
            provided by the customer, including any fees and, to the  
            extent not prohibited by law, taxes imposed in connection with  
            the money transfer, within three business days of receiving  
            the request to cancel the money transfer. 


           FISCAL EFFECT  :  Unknown

           COMMENTS  :   

          This bill is a follow up to AB 786 (Dickinson), Chapter 533,  
          Statutes of 2013.  Last year, the Assembly Banking and Finance  
          Committee passed AB 786 with a vote of 12-0.  AB 786 originated  
          out of an Assembly Banking and Finance oversight hearing on  
          March 11, 2013, titled, Emerging Technology and the Money  
          Transmission Act, as well as, subsequent research on growing  
          technological changes in the payments and money transmission  
          industries.  AB 786 made numerous changes to the MTA to update  
          its application in a changing marketplace, but also ensure that  
          it does not create unnecessary barriers to entry for new  
          entities wishing to enter the payments space.  The rise of  
          mobile applications to transmit money and to purchase goods or  
          services gave rise to several grey areas in the application of  
          the MTA as the definition of "money transmission" is circular  
          and open to very broad interpretation where any movement of  
          money from one party to another party while using a third party  
          intermediary could be interpreted as money transmission.

          According to the author:









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               The rise of the mobile smart phone and tablet has  
               helped drive and popularize the expanded use of mobile  
               payment applications.  Additionally, consumers are  
               expanding their use of apps and online platforms that  
               collect and hold their financial data for purpose of  
               making retail purchases more convenient, or even to  
               send money to family and friends.  This expansion has  
               raised numerous questions about the progress of  
               payments technology and the role of our existing state  
               and federal laws to keep up with these technologies.

               The lessons learned from AB 786 of 2013 and two  
               oversight hearings on this issue brought about the  
               changes proposed in AB 2209.   AB 2209 provides for  
               further clarification to the money transmission act  
               through updating and revising its application as it  
               relates to various payment platforms.  The Money  
               Transmission Act is California's legal framework for  
               the growing payments world and potentially  
               developments in crypto-currency.

          This bill continues the work of updating the MTA through several  
          technical changes, as well as, a small number of substantive  
          changes.  The following are descriptions of the major policy  
          changes within this bill:

          Retail Transactions and "Money Transmission"

          Current law provides that money transmission includes 1) selling  
                                   or issuing payment instruments; 2) Selling or issuing stored  
          value; or 3) receiving money for transmission.  The third aspect  
          of the definition is cause for confusion.  At best the current  
          definition is a circular explanation.  At worst, it is a  
          complicated and overly broad definition that fails to address  
          the nuances of the modern payments economy.  

          This bill clarifies that money transmission does not include a  
          transaction in which the recipient of the payment (currency or  
          other value) is an agent of the payee and delivery of payment  
          satisfies the payor's obligation to the payee.  What does this  
          mean in less complex terms?  Many entities may use third  
          parties, or due to their relationship with vendors may  
          themselves be third parties that provide payment facilities for  
          the purchase of goods or services.  For example, a consumer goes  
          to an online marketplace to purchase an item.  To the consumer,  








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          it may appear from all visible evidence that the online  
          marketplace is both providing the item and accepting the payment  
          for the item.  On the contrary, the item is provided by a third  
          party merchant, potentially unseen by the consumer.  In this  
          scenario, the consumer's payment obligation and potential future  
          warranty, return, or exchange issues are the responsibility of  
          the online merchant, not the third party merchant.  In this  
          example, under a broad interpretation of the literal meaning of  
          the statute the transaction could be considered money  
          transmission activity.  This bill clarifies, through the use of  
          the "payee" and "agent" language that online marketplace  
          transactions are not money transmission.

          At least four states have formally recognized the payee-agent  
          exception to the definition of money transmitter.  In New York,  
          Nevada, and Ohio, the exception has been codified.  See N.Y.  
          Banking Law Section 641.1; Nevada Revised Statute Annotated  
          Section 671.040; Ohio Revised Code Annotated Section 1315.01(G).  
           In Texas, the exception is reflected in published regulation.   
          See 7 Texas Administrative Code Section 33.3.

          Questions have been raised as to whether the payee/agent  
          exemption could apply to a digital currency transaction or a  
          bill payment service.  First, it appears that digital currency  
          exchanges or wallets would not qualify for the payee/agent  
          exemption as they would not meet the requirements that the  
          payment to the agent satisfies payment to the payee and the  
          author does not attend that the exemption apply in these  
          circumstances. Finally, the extent of the payee/agent exemption  
          is to clarify that retail transactions for goods and services  
          are not money transmission.  A bill payment service would not  
          qualify under the proposed exemption as a payment to the bill  
          payment service (agent) would not satisfy the obligation of the  
          consumer (payor) to the entity to which the payment is owed  
          (payee).  Under a bill payment scenario, only when the payee  
          receives the funds is the bill deemed paid.  Again, a bill  
          payment service would not qualify for this limited payee/agent  
          exemption.

          Use of mobile applications

          As money transmission activity has increased via mobile  
          applications or Internet based sites, it is necessary to change  
          various requirements concerning notices and receipts that  
          originally were only contemplated in a face-to-face transaction.  








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           First, it provides that licensees that exclusively offer their  
          services via mobile electronic applications are exempted from  
          the requirement to train agents for monitoring for signs of  
          elder abuse.  Under current law those licensees that offer  
          services via an Internet Web site are already exempt.  

          Existing law requires that each branch office location of a  
          licensee must disclose the exchange rates, fees and commissions,  
          post a sign with the name of the licensee and provide a posting  
          concerning where consumers may direct complaints.  This bill  
          clarifies that in cases in which the licensee uses an Internet  
          website or mobile application, the commissioner may authorize an  
          alternative disclosure.

          Receipt requirements

          Existing law requires that a consumer receive a receipt that  
          states they have a right to a refund if the licensee does not  
          forward the money received within 10 days.  This receipt makes  
          sense in a traditional money transmission transaction, but does  
          not make sense if the transmission was made for an e-commerce  
          transaction.  This bill would provide that the receipt is not  
          required in an e-commerce transaction and that it may be  
          provided electronically if the consumer opts for an electronic  
          receipt.

          Guidance

          AB 786 authorized the commissioner to offer guidance to  
          prospective applicants regarding licensing requirements,  
          including the potential net worth that may be required of an  
          applicant.   This change was intended to allow applicants to  
          received informal guidance that could be helpful during the  
          official application process.  The changes proposed in this bill  
          would clarify that the guidance is informal and only based on  
          the information actually provided by the applicant concerning  
          its plan to do business.


           Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081 


          FN: 0004558  










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