BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 2581 (Bradford) Hearing Date: June 30,
2010
As Amended: May 28, 2010
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor(06/02/10)48-27/Pass
Asm. Appr.
(05/28/10)12-05/Pass
Asm. B. & F.
(04/19/10)08-04/Pass
SUMMARY Would create a Banking Development District Program,
administered by the State Treasurer, to encourage the
establishment of banking branches in, and the provision of
additional product lines or services to, specified underserved
areas.
DIGEST
Existing federal law
1. Provides for the Community Reinvestment Act (CRA), which
contains findings that banks have a continuing and
affirmative obligation to help meet local community banking
needs, and to do so in a safe and sound manner;
2. Provides a corporation tax credit for up to 50% of
qualified contributions made to selected community
development corporations. Five percent of the amount
contributed may be claimed as a credit for each tax year,
over a ten-year period.
Existing state law
1. Provides a Community Development Financial Institution (CDFI)
tax credit to businesses and insurers, which sunsets on January
1, 2012;
AB 2581 (Bradford), Page 2
2. Places authority for regulating state-chartered depository
institutions with the Commissioner of the Department of
Financial Institutions (DFI).
This bill
1. Contains findings and declarations relating to the
challenges that unbanked individuals face as a result of
their unbanked status, the high percentage of lower-income
neighborhoods in California that lack a bank or a credit
union, the challenges that banks and credit unions face when
they choose to locate in an underserved area, and the
success of the New York State Banking Development District
(BDD) Program in encouraging financial institutions to open
branches in underserved areas of New York;
2. States the intent of the Legislature to use the BDD Program
to spur increased and enhanced banking services in
underserved communities, with the goal of ensuring that more
Californians enter the financial mainstream and build
savings and wealth;
3. Would create the BDD Program within the State Treasurer's
Office (STO), and authorize the Treasurer to compile a list
of underserved communities or regions;
4. Would define a BDD as a specifically designated geographic
location comprising an underserved community, which has been
designated as such by the Treasurer, and would define an
underserved community as a remote location or impoverished
area that lacks banking services commensurate with the
services provided to higher income areas with a population
of similar size;
5. Would authorize a local agency (defined as a city, county,
city and county, or town) to submit an application to the
Treasurer, in conjunction with a depository institution, for
the designation of an underserved community as a BDD. The
application would have to do all of the following, at a
minimum:
a. Clearly define the current and anticipated bank
product and service needs of the community;
b. Demonstrate that these needs are not currently being
met by existing institutions, including their branches in
AB 2581 (Bradford), Page 3
the community;
c. Demonstrate that by coming into the community or
introducing and effectively marketing additional product
lines or services suited for lower income consumers in an
existing branch, the depository institution in question
is prepared to specifically meet the community's needs;
6. Would require the Treasurer to set forth selection criteria
it will use to evaluate a local agency's application,
evaluate and approve applications, develop and provide a
range of incentives to help banks overcome short-term costs
that prevent them from offering products and services with
long-term business potential, adopt rules and regulations
for the establishment and maintenance of BDDs, and establish
a performance review process to ensure that depository
institutions taking part in the BDD Program are meeting
their goals, and that their services are having a
recognizable impact on underserved communities;
7. Would, upon designation of a BDD by the Treasurer, entitle
the depository institution located within that BDD to be
eligible for a range of incentives. These incentives could
include, but are not required to be limited to, priority
access to deposits of state funds, access to local agency
deposits, assistance from local agencies in locating
suitable commercial space for branches, local tax
incentives, and workforce development assistance.
AB 2581 (Bradford), Page 4
COMMENTS
1. Purpose of the bill To spur increased and enhanced banking
services in underserved communities, spur greater financial
inclusion, promote local economic development, and encourage
more Californians to enter the financial mainstream and
build savings and wealth.
2. Background This bill is based on a program pioneered in New
York State in 1998. Although New York State's program was
slow to get off the ground, local incentives offered by New
York City in 2002 grew the program into one now touted by
the Brookings Institution for its success. Since the
program's inception, New York has designated a total of 31
BDDs. The idea behind the program involves giving banks a
range of state and local incentives to get them over
short-term obstacles to profitability, enable them to branch
into neighborhoods with long-term business potential, and
better serve low-income consumers with these new bank
branches. As explained in the legislative findings section
of this bill, "While a financial institution may see the
long-term business potential of underserved areas, they may
have a short-term concern that it would take a number of
years before they can attract enough retail deposits to
become viable. These concerns are magnified by the fact
that lower income workers often need to use banking services
in off-business hours because they work in multiple jobs,
making it more difficult for banks to attract customers with
standard business practices." The short-term incentives
offered through a BDD program can be enough to draw
depository institutions into areas they would not have
otherwise located, absent the incentives.
A report published by the New York State Banking Department in
May 2010, reviewing ten years of operation of New York's BDD
Program, concluded that the most significant incentive
drawing financial institutions to the New York program is
the eligibility of these institutions for below market-rate
(subsidized) deposits from New York State. Under New York's
program, each participating financial institution is
eligible to receive $10 million in state deposits, on which
they are allowed to pay below-market rates of return. The
institutions may retain this money at below market rates for
up to two years. Banks are eligible to renew these below
market-rate accounts, if approved to do so by the New York
State Banking Department. Participating institutions are
AB 2581 (Bradford), Page 5
also eligible to receive state deposits of up to $25 million
at market rates, which they may retain for five years, and
which may also be renewed. To date, no funding source for
the BDD program proposed by AB 2581 has been identified.
3. Existing Programs, Laws, and Tax Credits Geared Toward
Offering Financial Services in Underserved Areas and to
Underserved Populations: If enacted, this bill would join
with other California and federal laws, and California and
local programs, in trying to provide needed services to
unbanked individuals. Some examples of these include the
following:
Bank on California: In January 2008, Governor Schwarzenegger
announced the formation of the Bank on California program,
run through his Office of Planning and Research. That
effort, which involves a partnership with certain financial
institutions and cities, is intended to increase the supply
of starter account products offered by participating
financial institutions, raise awareness among unbanked
individuals about the benefits of account ownership, and
make quality money management education more easily
available to un- and underbanked individuals. To date, six
cities (Los Angeles, Oakland, San Jose, Fresno, San
Francisco, and Sacramento) are participating in the Bank on
California program, and have established their own "Bank on"
programs, targeting the specific needs of their residents.
Long before the state pioneered its Bank on California program,
the federal government and California enacted laws intended
to increase the financial resources available in communities
that are underserved by financial institution branches.
California's Time Deposit Program: The Time Deposit Program was
first authorized in 1945, with the goal of depositing funds
held by the State Treasurer in depository institutions
throughout the state. Once deposited, these funds can be
used by the depository institutions to reinvest in the
California communities in which they are located. All
federally-insured banks and credit unions in California that
meet financial stability criteria established by the
Treasurer's Office are eligible to receive deposits through
the Time Deposit Program. Money invested by the Treasurer
through the program consists of state and local government
funds held in trust by the Treasurer in the Pooled Money
Investment Account (PMIA). The program assures a yield to
AB 2581 (Bradford), Page 6
the PMIA which is higher than the yield of comparable-length
U.S. Treasury bills, and makes money available to community
banks and credit unions at rates better than they can
receive from other sources. During the 2008-09 fiscal
year, the Treasurer invested in, and renewed in aggregate
over $52 billion in California depository institutions
participating in its Time Deposit Program. Deposits made
through the Time Deposit Program are not prioritized; the
Treasurer gives equal priority to all depository
institutions that request deposits through this program, and
spreads out its available funds to ensure that each
qualifying depository institution which requests a deposit
receives one.
Community Reinvestment Act: The federal CRA arose out of
concern that banks were accepting deposits from households
and businesses in their local communities, while at the same
time failing to award loans to qualified local loan
applicants from within these communities, and instead
awarding loans to people outside of these communities. The
CRA does not mandate any action by a bank. Instead, it
calls on federal supervisory agencies, including the Office
of the Comptroller of the Currency, Federal Reserve Board,
Federal Deposit Insurance Corporation, and Office of Thrift
Supervision, to encourage each bank to help meet local
credit needs, particularly the needs felt by low and
moderate-income communities, in a manner consistent with
safe and sound operation. Every year, the Federal Financial
Institutions Examinations Council, the agency formed to
prescribe uniform principles, standards, and report forms
for the federal examination of financial institutions,
publishes a list of distressed or underserved tracts,
together with the methodology used to select the tracts.
The CRA is enforced through periodic examination by state and
local regulators. Regulators consider an institution's CRA
performance when evaluating an application for a charter,
deposit insurance, branch or other deposit facility,
relocation, or merger or acquisition. Banks are not fined
for low CRA scores, nor are they required to cease
operation. They may, however, have trouble expanding their
operations. The CRA does not cover credit unions or other
types of financial institutions, including the insurance and
investment subsidiaries that banks can establish.
CDFI Tax Credit : California's CDFI tax credit was enacted in
AB 2581 (Bradford), Page 7
1997 in order to encourage businesses and insurance
companies to make community development investments. The
credit equals 20% of the amount of each "qualified
investment" in a CDFI. CDFIs are community development
banks, loan funds, credit unions, micro-enterprise funds,
corporate-based lenders, or venture funds or non-regulated
non-profit institutions organized to gather private capital
for community development lending or investing.
Some CDFIs focus on a particular community, while others lend to
certain groups (e.g., people of color, women, low-income
families, social service providers, etc.). All CDFIs are
financial intermediaries that have a common mission of
community development. For purposes of the credit, a
qualified investment is a deposit or loan that does not earn
interest, or an equity investment, that is at least $50,000
and is made for a minimum duration of 60 months.
Credits may be claimed by individuals against their personal
income taxes, by corporations against their franchise taxes,
and by insurance companies against their gross premiums
taxes. Through 2008, a total of 211 investments totaling
$91 million have generated approximately $18 million in tax
credits. The majority of businesses making tax
credit-eligible investments have been banks. Only a handful
of insurance companies and private individuals have
participated in the credit to date. The credit sunsets on
January 1, 2012.
4. Support The New America Foundation is sponsoring AB 2581 to
spur increased and enhanced banking services in underserved
communities and stimulate greater financial inclusion.
"Currently, too many Californians are disconnected from the
financial mainstream. National estimates show that 10
percent of households, including nearly one-quarter of the
minority population, are 'unbanked,' meaning they lack a
basic checking or savings account. In California, over 1.5
million adults don't have a checking or savings account,
according to recent research from Pew Charitable Trust.
Recent market research indicates that Fresno and Los Angeles
have the highest and third highest percentages of un-banked
residents in the country. In addition, nearly 60 percent of
California's lower income neighborhoods do not contain a
bank or a credit union, according to the analysis done by
the Brookings Institution. Others may have bank branches
that lack products and services that work for local
AB 2581 (Bradford), Page 8
consumers." New America believes that the creation of a BDD
program in California will ensure that more Californians
enter the financial mainstream and build savings through
participating banks' offerings and the marketing of
treasonably-priced, transactional loan and credit products.
Several community development organizations sent identical
letters, echoing the points raised in New America
Foundation's letter.
The Greenlining Institute, which represents over 40 community
groups in California, supports the bill and observes, "The
result of a lack of financial services in low income
communities is a continued cycle of poverty and financial
illiteracy. Communities that would otherwise benefit from
the services and job opportunities provided by local
financial institutions must now rely on nonprofit
organizations that provide financial literacy seminars when
their funding affords them the opportunity to do so."
The City of Los Angeles supports AB 2581, and has additionally
approved a motion to create a BDD program in Los Angeles. A
resolution approved by the Los Angeles City Council states
that nearly 300,000 Angelenos are considered unbanked or
underbanked, and asserts that AB 2581 could enhance the
City's banking efforts, by strengthening incentives for
banks that choose to serve unbanked and underbanked areas of
the City. According to a motion presented by Councilmember
Richard Alarcon, and approved unanimously by the Council,
the Brookings Institution estimates that the average
unbanked Los Angeles household pays of $700 each year to
carry out simple financial necessities at storefront
providers, such as cashing checks and using money orders to
pay for bills. These are the same households that can least
afford to lose $700 per year. The mayor's office has
estimated that this translates into a loss of more than $54
million in check cashing fees and $88 million in payday loan
fees in Los Angeles every year. Mr. Alarcon's motion
directs the city attorney and city treasurer to draft an
ordinance establishing BDDs in Los Angeles. The ordinance
would provide participating banks and credit unions with
guaranteed municipal deposits and council district
discretionary fund deposits, property tax breaks, and
fast-track land use approval, and would offer incentives for
contractors that seek City business to bank with BDD
branches.
AB 2581 (Bradford), Page 9
The California Bankers Association (CBA) supports Assemblyman
Bradford efforts to tackle the issues of wealth creation and
financial literacy. CBA writes, "This bill will remove
barriers and provide incentives for expanding greatly needed
financial services to underserved areas in the state."
5. Opposition Although no opposition to this bill was
received, the State Treasurer's Office (STO) sent a letter
expressing several concerns with the May 28th version of AB
2581. The STO's primary concern relates to the deletion of
DFI from the bill (a prior version of the bill gave the
authority to administer the BDD program to both the STO and
DFI). If authority to administer the program is vested in
the STO, the STO will have to duplicate expertise already in
place at DFI. The STO notes that three other states, which
currently implement the BDD concept (New York, Illinois, and
Louisiana) place oversight with their respective
Department/Office of Financial Institutions.
The STO is also concerned about the bank participation
incentives authorized by the bill. AB 2581 suggests using
priority access to the PMIA as an incentive for bank
participation. The PMIA contains both state monies and
monies held in trust for local entities (cities, counties,
and special districts), which voluntarily invest with the
PMIA. About 40% of the money in the account belongs to
local governments. The PMIA is an account where the state
and local governments deposit cash for relatively short
periods of time, until they must withdraw their deposits for
ongoing obligations. The pool is focused first and foremost
on ensuring the safety and liquidity of money it holds; rate
of return is also important, but secondary to the primary
goals of safety and liquidity.
The STO is concerned that the PMIA will be directed to commit
resources to the BDD program. The local governments that
invest their money in the pool do so voluntarily, and can
withdraw from the pool for any reason, without notice.
Other states with successful BDD programs are funded by
state-only portfolios, and are not commingled like
California's local-state PMIA. Legislating the PMIA's
investment policy (by committing pool resources toward the
support of the BDD program) could drive a significant number
of local governments away from the pool, and toward other
investments.
AB 2581 (Bradford), Page 10
The STO also makes the point that, although not obligated to do
so by law, it already invests PMIA funds in underserved
communities, through its Time Deposit Program (described
earlier in this analysis), its small business loan program,
and a mortgage program. "To evidence the PMIA's ongoing
commitment to reach the underserved communities and citizens
of this state, the PMIA has made approximately $556 million
in small business loans. These loans are specifically
targeted to transactions less than one year old,
California-only, with a best efforts basis in targeting
geo-coded neighborhoods representing low-to-moderate or
underserved areas in this state. The underserved areas may
represent either the borrower's address or the address of
the small business...In addition, the PMIA is currently
invested in approximately $2 billion in single family
mortgages. These mortgages represent California-only home
loans on CRA-eligible mortgage originations. These loans
are new, conforming, non-subprime or Alt-A, and represent
home ownership for Californians with 80% of median income
and below."
Questions
a. This bill relies exclusively on public funds
(both state and local) for its operation. It does not
appear to allow for the infusion of private funds to
help subsidize the BDD program. Should the bill be
amended to allow corporations and/or non-profit
foundations to contribute toward the success of the
program?
b. AB 2581 was amended in the Assembly
Appropriations Committee to strike DFI from the bill.
Yet, as noted above, the STO believes that DFI is much
better suited to implementing the BDD program than the
STO. Assembly Appropriations Committee staff is
sympathetic to the STO's concerns and has expressed a
willingness for the author to amend DFI back into the
bill, if that is the desire of the Senate Banking,
Finance & Insurance Committee. Should DFI be amended
back into the bill?
c. The bill would provide that upon designation
of a BDD by the Treasurer, the bank located within the
BDD would be eligible for a range of incentives. What
AB 2581 (Bradford), Page 11
happens if more than one bank locates in a BDD? Are
all of them eligible for the incentives? Or just the
first one?
6. Suggested Amendments
a. To address some of the concerns raised by the
STO, staff suggests deleting the concept that public
deposits into BDD banks will receive higher priority
than other public deposits.
Page 6, delete lines 30 and 31 and insert: (a) Access
to deposits of public funds, as deemed appropriate and
7. Prior Legislation
a. AB 1502 (Lieu), 2007-2008 Legislative Session:
Would have established a BDD program, jointly
administered by DFI and the STO. Passed the Assembly,
but was gutted and amended into a financial literacy
education bill, before being heard by a Senate policy
committee. Later vetoed by the Governor.
POSITIONS
Support
New America Foundation (sponsor)
Burbank Housing Development Corporation
California Bankers Association
Catholic Charities of the East Bay
City of Los Angeles
Cope Family Center
Diamond Community Investors
EARN
Greenlining Institute
Opportunity Fund
Treasure Island Homeless Development Initiative
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102