BILL ANALYSIS                                                                                                                                                                                                    Ó




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          |SENATE RULES COMMITTEE            |                       AB 2274|
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                                      CONSENT 


          Bill No:  AB 2274
          Author:   Dababneh (D) 
          Amended:  8/1/16 in Senate
          Vote:     21 

           SENATE BANKING & F.I. COMMITTEE:  7-0, 6/15/16
           AYES:  Glazer, Vidak, Galgiani, Hall, Hueso, Lara, Morrell

           SENATE APPROPRIATIONS COMMITTEE:  Senate Rule 28.8

           ASSEMBLY FLOOR:  79-0, 4/21/16 (Consent) - See last page for  
            vote

           SUBJECT:   Credit unions


          SOURCE:    California Credit Union League 

          DIGEST:   This bill makes several changes to the California  
          Credit Union Law, which are intended to provide state-chartered  
          credit unions greater flexibility to conduct their operations.


          ANALYSIS:


          Existing law:


          1)Is silent on the frequency with which a credit union board of  
            directors must meet.


          2)Authorizes a credit union board of directors to delegate the  
            power to approve membership applications to any officer,  








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            director, committee member, or employee of that credit union,  
            pursuant to a written membership plan adopted by the board of  
            directors, provided the board reviews a report of membership  
            applications approved by those delegates at least quarterly  
            (Financial Code Section 14456).


          3)Requires every credit union to have a supervisory committee,  
            as specified (Financial Code Section 14550).


          4)Authorizes a credit union to permit non-members to act as  
            joint applicants and co-obligors on obligations and extensions  
            of credit to a member (Financial Code Section 14950).


          5)Requires a credit union to ask loan applicants and applicants  
            for extensions or guarantees of credit the purpose for which  
            the loan, extension, or guarantee is being sought (Financial  
            Code Section 14951).  


          6)Defines an "official," for purposes of the provision of law  
            that imposes conditions on loans made by a credit union to one  
            of its officials, as a director, officer, member of the  
            supervisory committee, or member of the credit committee  
            (Financial Code Section 15050).


          7)Provides that any obligation with a member that is not a  
            natural person may not result in liability to the credit union  
            in excess of that member's investment in the credit union,  
            unless an exception is authorized in the credit union's bylaws  
            and approved by the Commissioner of Business Oversight  
            (commissioner; Financial Code Section 15100).


          This bill:


          1)Requires the board of directors of a credit union to meet on a  
            regular basis, as reasonably determined by the board, but not  








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            less than quarterly.  


          2)Upholds the authority of a credit union board of directors to  
            delegate the power to approve membership applications to any  
            officer, director, committee member, or employee of that  
            credit union, pursuant to a written membership plan adopted by  
            the board of directors, but deletes the requirement that the  
            board review a report of membership applications approved by  
            those delegates at least quarterly.  


          3)Authorizes a credit union to establish an audit committee, as  
            specified, in lieu of a supervisory committee, and makes  
            conforming changes.  


          4)Authorizes a credit union to permit non-members to act as  
            joint applicants, co-obligors, coborrowers, sureties, or  
            guarantors on loans or extensions of credit taken out by  
            members (the language in italics is being added).


          5)Deletes the requirement that a credit union ask loan  
            applicants and applicants for extensions or guarantees of  
            credit the purpose for which the loan, extension, or guarantee  
            is being sought.  


          6)Clarifies the definition of an official in the provision of  
            law that imposes conditions on loans made by a credit union to  
            one of its officials.  Under the clarified definition, a  
            credit union "official" is a director, member of the  
            supervisory committee, member of the credit committee, member  
            of the audit committee, credit manager, president, or chief  
            executive officer of a credit union (the titles in italics are  
            being added by this bill). 


          7)Authorizes a credit union to extend a loan to a business  
            customer, which exceeds that business' investment in the  
            credit union, without requiring the loan to be authorized in  








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            the credit union's bylaws and approved by the commissioner.  


          Background


          This bill is sponsored by the California Credit Union League to  
          update and strengthen the state credit union charter, make the  
          state charter more competitive with the federal charter, give  
          state-chartered credit unions greater flexibility in the ways  
          they may organize, and improve their ability to serve their  
          members.  


          Like banks, credit unions operate in a dual-charter system and  
          may, subject to regulatory approval, choose to operate as either  
          a state-chartered depository institution or a  
          federally-chartered depository institution.  According to this  
          bill's sponsor, the rules governing California state-chartered  
          credit unions have not been significantly modernized in over a  
          decade and are in need of an update.  This bill accomplishes  
          that update.


          Comments


          Three of this bill's provisions provide parity between state-  
          and federally-chartered credit unions, including provisions:  1)  
          clarifying which individuals are "officials" for purposes of the  
          conditions under which a credit union may lend to one of its  
          officials; 2) deleting the requirement that state-chartered  
          credit unions ask the purpose of any loan they make; and 3)  
          allowing a credit union's loan to a business to exceed the  
          amount that business has on deposit with that credit union.


          Provisions of this bill that warrant further discussion include  
          the following.  


          1)Authority to establish an audit committee in lieu of a  








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            supervisory committee.  This bill's sponsor asserts that this  
            provision gives credit unions the ability to focus on  
            complying with their annual audit requirements, without taking  
            on duplicative oversight functions that are already performed  
            by the commissioner and credit union members.


            Under existing law, each credit union must have a supervisory  
            committee, which has several responsibilities, including: a)  
            reviewing the credit union's policies and control procedures  
            to safeguard against fraud and self-dealing; b) ensuring that  
            the books and records of the credit union are audited at least  
            once a year; and c) making a full report of the assets and  
            liabilities, receipts and disbursements of the credit union to  
            the board of directors of the credit union at the annual  
            meeting of members. In carrying out its duties, the  
            supervisory committee may: a) suspend the credit committee or  
            any member of that committee, the credit manager, any member  
            of the board of directors, or any officer; b) call a meeting  
            of the members to consider any violation of the Credit Union  
            Law or the credit union's bylaws or any practices of the  
            credit union, which the committee believes are unsafe or  
            unauthorized; c) inspect the securities, cash, and accounts of  
            the credit union; and d) declare and fill vacancies on its  
            committee, as specified.  


            If established in lieu of a supervisory committee, an audit  
            committee will be responsible for: a) reviewing the credit  
            union's policies and control procedures to safeguard against  
            fraud and self-dealing; b) ensuring that the books and records  
            of the credit union are audited at least once a year; c)  
            making a full report of the assets and liabilities, receipts,  
            and disbursements of the credit union to the board of  
            directors of the credit union at the annual meeting of  
            members; d) inspecting the securities, cash, and accounts of  
            the credit union; and e) ensuring that the credit union  
            maintains an effective internal audit program, including a  
            system of internal controls and individuals with sufficient  
            training and experience to adequately and timely review all  
            key areas of a credit union's operations. 









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            This bill's sponsor asserts that the responsibilities of the  
            supervisory committee, which will not be given to the audit  
            committee, already rest with other entities.  For example, the  
            commissioner already has the authority to suspend any or all  
            members of the credit committee, any member of the board of  
            directors, or any other officer of a credit union.  Members of  
            a credit union have the ability to request a special meeting  
            to remove a director and to bring a lawsuit against a credit  
            union for violating its bylaws or operating in an unsafe  
            manner. 


          2)Authority for non-members to be co-borrowers, sureties, or  
            guarantors.  Existing law allows non-members to be joint  
            applicants and co-obligors, but does not expressly clarify  
            that a co-obligor may be a co-borrower, surety, or guarantor.   
            The clarifying language in this bill will allow non-members to  
            act as additional security on more loans, a change that will  
            not only appeal to credit union customers, but will also  
            improve the safety and soundness of credit unions' loan  
            portfolios.  


          3)Allow business loans to exceed a business member's deposits.   
            Under existing law, credit unions must seek approval from the  
            commissioner before extending a business loan that exceeds the  
            amount a business has on deposit, even if that business  
            otherwise meets applicable underwriting criteria.  This bill  
            will allow member business loans to exceed a member's cash on  
            deposit, provided the business meets applicable underwriting  
            criteria, without the need for commissioner approval.  




          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No


          SUPPORT:   (Verified7/22/16)









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          California Credit Union League (source) 


          OPPOSITION:   (Verified7/22/16)


          None received

          ARGUMENTS IN SUPPORT:  California Credit Union League is  
          sponsoring the bill "to update and strengthen the state charter  
          credit union statute....In order to remain competitive in the  
          dual chartering system, individual states have periodically  
          updated their charters to meet the needs of state-chartered  
          credit unions and their credit union members.  The California  
          credit union charter has not been significantly modernized in  
          over a decade and must be updated through legislation to remain  
          competitive with the federal charter."


          ASSEMBLY FLOOR:  79-0, 4/21/16
          AYES:  Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,  
            Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke,  
            Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley,  
            Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth  
            Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,  
            Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper,  
            Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim,  
            Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis,  
            Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte,  
            O'Donnell, Olsen, Patterson, Quirk, Rodriguez, Salas,  
            Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner,  
            Waldron, Weber, Wilk, Williams, Wood, Rendon
          NO VOTE RECORDED:  Ridley-Thomas


          Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
          8/3/16 19:31:28


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