BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 2581|
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THIRD READING
Bill No: AB 2581
Author: Bradford (D)
Amended: 8/17/10 in Senate
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 8-2, 6/30/10
AYES: Calderon, Correa, Florez, Kehoe, Liu, Lowenthal,
Padilla, Price
NOES: Cogdill, Runner
NO VOTE RECORDED: Cox
SENATE APPROPRIATIONS COMMITTEE : 7-4, 8/12/10
AYES: Kehoe, Alquist, Corbett, Leno, Price, Wolk, Yee
NOES: Ashburn, Emmerson, Walters, Wyland
ASSEMBLY FLOOR : 48-27, 6/2/10 - See last page for vote
SUBJECT : Banking development districts
SOURCE : New America Foundation
DIGEST : This bill creates a Banking Development District
Program, administered by the Department of Financial
Institutions, to encourage the establishment of banking
branches in, and the provision of additional product lines
or services to, specified underserved areas.
ANALYSIS :
Existing federal law:
CONTINUED
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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 percent
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 10-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.
2. Places authority for regulating state-chartered
depository institutions with the Commissioner of the
Department of Financial Institutions (Department).
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. Creates the BDD Program within the Department, and
authorizes the Department to compile a list of
underserved communities or regions.
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4. Defines a BDD as a specifically designated geographic
location comprising an underserved community, which has
been designated as such by the Department, and defines
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. Authorizes a local agency (defined as a city, county,
city and county, or town) to submit an application to
the Department, 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 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. Requires the Department 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. Entitles, upon designation of a BDD by the Department,
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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 interest-bearing time 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.
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
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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 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 this bill has been
identified.
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 State Treasurer's Office are eligible to
receive deposits through the Time Deposit Program. Money
invested by the State Treasurer through the program
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consists of state and local government funds held in trust
by the State Treasurer in the Pooled Money Investment
Account (PMIA). The program assures a yield to the PMIA
which is higher than the yield of comparable-length United
States 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 State 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
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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 1997 in order to encourage businesses and insurance
companies to make community development investments. The
credit equals 20 percent 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
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Major Provisions 2010-11 2011-12 2012-13 Fund
Administration expenses $255 $460
$460General
SUPPORT : (Verified 8/16/10)
New America Foundation (source)
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
OPPOSITION : (Verified 8/16/10)
Department of Finance
Department of Financial Institutions
ARGUMENTS IN SUPPORT : The New America Foundation is
sponsoring this bill 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 consumers."
New America believes that the creation of a BDD program in
California will ensure that more Californians enter the
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financial mainstream and build savings through
participating banks' offerings and the marketing of
treasonably-priced, transactional loan and credit products.
ARGUMENTS IN OPPOSITION : The Department of Finance
opposes this bill for the following reasons:
The BDD program is intended to help the underserved
communities to have access to enhanced banking services;
however, there is evidence to show that a similar program
in the state of New York (established in 1998) has not
been able to achieve the desired outcome.
A number of financial institutions are already
participating voluntarily in programs to provide banking
to the underserved in many cities throughout the state.
ASSEMBLY FLOOR :
AYES: Ammiano, Arambula, Bass, Beall, Block, Blumenfield,
Bradford, Brownley, Buchanan, Caballero, Charles
Calderon, Carter, Chesbro, Coto, Davis, De La Torre, De
Leon, Eng, Evans, Feuer, Fong, Fuentes, Furutani,
Galgiani, Hall, Hayashi, Hernandez, Hill, Huffman, Jones,
Bonnie Lowenthal, Ma, Mendoza, Monning, Nava, V. Manuel
Perez, Portantino, Ruskin, Salas, Saldana, Skinner,
Solorio, Swanson, Torlakson, Torres, Torrico, Yamada,
John A. Perez
NOES: Adams, Anderson, Bill Berryhill, Blakeslee, Conway,
DeVore, Emmerson, Fletcher, Fuller, Gaines, Garrick,
Gilmore, Hagman, Harkey, Huber, Jeffries, Knight, Logue,
Miller, Nestande, Niello, Nielsen, Norby, Silva, Smyth,
Tran, Villines
NO VOTE RECORDED: Tom Berryhill, Cook, Lieu, Audra
Strickland, Vacancy
JJA:mw 8/16/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
SUPPORT/OPPOSITION: NONE RECEIVED
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