BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 38 (Bradford) Hearing Date: July 6,
2011
As Amended: June 27, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would direct the Department of Financial Institutions
(DFI) to work with local agencies to compile a list of
underserved communities or regions that lack a concentration of
depository institutions and financial services, as specified.
DESCRIPTION
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
Program in encouraging financial institutions to open
branches in underserved areas of New York.
2. Would direct DFI to work with local agencies to compile a
list of underserved communities or regions that lack a
concentration of depository institutions and services, in
order to provide depository institutions with a clear
demonstration of those areas that are in the most need, and
would require DFI to post its findings on the department's
Internet web site.
3. 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 populations of similar size.
EXISTING LAW
Existing federal law
AB 38 (Bradford), Page 2
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.
AB 38 (Bradford), Page 3
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 DFI.
COMMENTS
1. Background and Discussion: AB 38 is sponsored by the New
America Foundation, as the first step toward establishing a
Banking Development District (BDD) program in California.
The New America Foundation sponsored two prior bills to
create a California BDD program, both of which were vetoed
(AB 1502, Lieu, from the 2007-08 Legislative Session and AB
2581, Bradford, from the 2009-10 Legislative Session). This
year, New America and Assemblymember Bradford are pursuing a
more scaled-back approach, which would require DFI to work
with local agencies to compile a list of areas in California
that lack depository institutions. By identifying areas in
the state that lack depository institutions, the author and
sponsor hope to shine light on areas in the greatest need,
which, in turn, will encourage agencies and groups to work
with each other to offer financial incentives geared toward
banking the unbanked. The author and sponsor also hope
that the Bank on California can be expanded into the areas
identified by DFI.
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 (the program
has since been moved to the State and Consumer Services
Agency). The Bank on California effort, which involves a
partnership between 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, seven cities (Los
Angeles, Oakland, San Jose, Fresno, San Francisco, Santa
Ana, 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.
AB 38 (Bradford), Page 4
According to the author's office, the Bank on California
program has been replicated across the United States and is
supported by President Obama.
2. Existing Programs, Laws, and Tax Credits Geared Toward
Offering Financial Services in Underserved Areas and to
Underserved Populations: 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
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 2009-10 fiscal
year, the Treasurer invested in, and renewed in aggregate
over $55 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
AB 38 (Bradford), Page 5
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
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
AB 38 (Bradford), Page 6
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, though Speaker Perez is carrying AB 624
this year, to extend the sunset date of the credit by five
additional years.
3. Summary of Arguments in Support:
a. The New America Foundation (NAF) is sponsoring AB
38, as a first step on the path to establish a BDD
Program in California. "Now is the time for state
legislators to explore new ideas and initiatives to
financially empower low-income residents...National
estimates show that 10% of households, including nearly
one quarter of the minority population, are unbanked...In
California, over 1.5 million adults don't have a checking
or savings account...Market research indicates that
Fresno and Los Angeles have the highest and third highest
percentages of unbanked 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."
b. The California Credit Union League (CCUL) observes
that too many Californians are disconnected from the
financial mainstream. CCUL commends Assemblymember
Bradford for his efforts to promote economic opportunity
and prosperity among Californians.
c. The Alameda County Board of Supervisors states that,
while the state is making an effort to expand access to
starter checking accounts through the Bank on California
program, this effort should be matched with an outreach
program that identifies where access to and use of the
financial system is most limited. AB 38 provides this
complementary approach and represents an economic
development investment the state should not pass up.
4. Summary of Arguments in Opposition: None received.
AB 38 (Bradford), Page 7
AB 38 (Bradford), Page 8
5. Prior and Related Legislation:
a. AB 2581 (Bradford), 2009-10 Legislative Session:
Would have established a BDD program within DFI, and
directed DFI to share specified information about the BDD
program with the State Treasurer, for the Treasurer's use
in promoting his Time Deposit Program. Vetoed by the
Governor.
b. AB 1502 (Lieu), 2007-2008 Legislative Session:
Would have established a BDD program, jointly
administered by DFI and the State Treasurer. 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.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
New America Foundation (sponsor)
Alameda County Board of Supervisors
California Credit Union League
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102