BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
AB 2006 (J. Perez) Hearing Date: June 20,
2012
As Amended: April 11, 2012
Fiscal: No
Urgency: No
SUMMARY Would authorize state-chartered credit unions (CUs) to
offer so-called lifeline services to nonmembers who are eligible
for membership, and to charge a fee for the provision of those
services. The lifeline services that could be sold include
check cashing, receipt and transmission of domestic and
international electronic funds transfers, and sales of cashier's
checks and money orders.
DESCRIPTION
1. Would provide that a state-chartered credit union may
provide all of the following to an individual who is within
its field of membership, regardless of whether the person is
admitted to membership, and charge a fee to provide those
services:
a. Sell checks (including cashier's checks and money
orders) and other similar money transfer instruments,
including international and domestic electronic fund
transfers.
b. Cash checks (including cashier's checks and money
orders) and other similar money transfer instruments, and
receive international and domestic electronic fund
transfers.
EXISTING LAW
Existing federal law
1. Pursuant to the Financial Services Regulatory Relief Act
of 2006 (Public Law 109-351), allows federally-chartered CUs
to:
AB 2006 (J. Perez), Page 2
a. Sell, to persons in the field of membership,
negotiable checks (including travelers checks), money
orders, and other similar money transfer instruments
(including international and domestic electronic fund
transfers); and
b. Cash checks and money orders and receive
international and domestic electronic fund transfers
for persons in their fields of membership, for a fee
(12 USC 1757).
2. Defines a federal CU as a cooperative association
organized in accordance with specified federal law for the
purpose of promoting thrift among its members and creating a
source of credit for provident or productive purposes (12
USC 1752).
Existing state law
1. Defines a state CU as a cooperative, organized for the
purposes of promoting thrift and savings among its members,
creating a source of credit for them at rates of interest
set by the board of directors, and providing an opportunity
for them to use and control their own money on a democratic
basis in order to improve their economic and social
conditions (Financial Code Section 14002).
2. Provides that every CU may admit to membership those
persons eligible for membership, upon any of the following
(Section 14800):
a. The purchase of a membership in the CU as provided
in the CU's bylaws;
b. The payment of an entrance fee established from time
to time by the board of directors;
c. The purchase of one or more shares in the CU as
provided in the CU's bylaws.
3. Further provides that no officer, director, committee
member, or employee of any CU shall extend any benefit or
service of the CU to any person, unless that person is
admitted to membership in the CU (Section 14800).
COMMENTS
AB 2006 (J. Perez), Page 3
1. Purpose: This bill is sponsored by the author to allow
state-chartered CUs to offer so-called "lifeline" services
to nonmembers who are eligible to become members, and in
doing so offer unbanked Californians greater access to
low-cost services, and encourage them to join mainstream
financial institutions.
2. Background and Discussion: As of March 31, 2012, California
was home to 157 California-chartered credit unions, with $76
billion in assets, and 418 federally-chartered credit
unions, with $136 billion in assets. At present,
federally-chartered CUs can offer the types of lifeline
services this bill would authorize state-chartered CUs to
offer. State-chartered CUs are prohibited from offering
these services, absent a change in state law.
The Parity Argument: This bill and the virtually identical
bills that came before it (see Prior and Related
Legislation, below) have provided fertile ground for banks
and CUs to wage their long-standing fight against each
other. CUs assert that the lack of parity between state and
federal law in this area is confusing to Californians who
might wish to make use of the lifeline services this bill
would authorize state -chartered CUs to offer. Banks assert
that there would be no parity issue to correct, if the
credit unions hadn't sponsored the federal bill authorizing
federal CUs to provide lifeline services in the first place.
According to the California Credit Union League (CCUL), seven
other states have already enacted express statutory language
authorizing state-chartered CUs to provide lifeline services
to their nonmembers. Another twelve states have generic
legislation, which authorizes their state regulators to
follow federal CU laws and regulations. Thus, California is
one of 31 states that lack parity between state-chartered
and federally-chartered CUs with respect to the offer of
lifeline services to nonmembers.
The Fee Argument: Another argument underlying the fight between
banks and CUs regarding this bill relates to the fees that
CUs are allowed to charge for providing lifeline services to
nonmembers. The federal law authorizing federal CUs to
offer lifeline services to nonmembers allows the CUs to sell
certain services and to offer other services for a fee. The
AB 2006 (J. Perez), Page 4
National Credit Union Administration's (NCUA's) final rule
interpreting the changes made by PL 109-351 observed that
"FCUs are not required to charge persons for financial
services under Section 503 of the Reg Relief Act or the
rule, but 'may' sell or charge a fee for them." Thus,
according to the NCUA, federal CUs need not charge for the
services they are authorized to offer to nonmembers;
instead, they have the option of whether, and how much, to
charge. According to CCUL, some federal CUs charge for
these services, and others do not. Those which do charge
set their fees at levels which cover only their actual costs
to provide the service.
This bill would authorize state-chartered CUs to charge fees to
nonmembers for lifeline services. CCUL indicates that it
expects state-chartered CUs to mirror the policies of
federal CUs with respect to their fees for these services.
Some will charge; others won't. Those which do charge are
likely to limit their fees to those that equal their actual
costs to provide the service.
Banks believe that CUs should have to pay taxes on the fees they
charge to nonmembers. CCUL counters that, because such fees
would cover transactional costs only, the fees would not
generate a "profit" and thus would not be considered by the
CUs as unrelated business income (i.e., they would not be
subject to taxation).
The Taxation Argument: Banks and CUs have historically bickered
over CUs' tax status. Banks dislike the fact that they pay
income taxes, while CUs don't. CUs counter that they are
non-profit entities which put their profits back into their
membership, and are thus appropriate recipients of the tax
treatment they receive.
Some of the key differences between banks, federally-chartered
CUs, and state-chartered CUs are summarized in the table
below.
-------------------------------------------------------------
| |Banks |Credit Unions |
|-----------------+---------------------+---------------------|
|Owned By |Stockholders |Their own members |
|-----------------+---------------------+---------------------|
|Profit Status |For profit |Not-for-profit |
AB 2006 (J. Perez), Page 5
|-----------------+---------------------+---------------------|
|Return Earnings |Stockholders |Their own members |
|To | | |
|-----------------+---------------------+---------------------|
|Membership |No restrictions on |Only individuals |
| |who may be a |within the field of |
| |customer |membership are |
| | |eligible |
|-----------------+---------------------+---------------------|
|Income Taxation |Subject to federal |Federally-chartered |
| |corporation tax and |and state-chartered |
| |state bank tax |CUs are exempt from |
| |(which equals the |federal and state |
| |state franchise tax |income taxation; |
| |rate plus 2%) |however, |
| | |state-chartered CUs |
| | |are subject to state |
| | |and federal taxes on |
| | |unrelated business |
| | |income derived from |
| | |activities unrelated |
| | |to their core |
| | |mission |
|-----------------+---------------------+---------------------|
|Sales Taxation |Federally-chartered |Federally-chartered |
| |banks are exempt, |CUs are exempt, |
| |state-chartered |state-chartered CUs |
| |banks are subject to |are subject to state |
| |state and local |and local sales and |
| |sales and use |use taxation |
| |taxation | |
|-----------------+---------------------+---------------------|
|Payroll Taxation |Subject to federal |Both federal and |
| |and state payroll |state-CUs are |
| |taxes (e.g., Social |subject to federal |
| |Security, Medicare, |and state payroll |
| |withholding, |taxes |
| |unemployment | |
| |insurance, | |
| |employment training | |
| |taxes, disability) | |
|-----------------+---------------------+---------------------|
|Real Property |Exempt (the |Both are subject |
|Taxation |additional 2% income | |
| |tax that banks pay | |
| |is in lieu of | |
AB 2006 (J. Perez), Page 6
| |property taxes) | |
|-----------------+---------------------+---------------------|
|Personal |Exempt (see above) |Federally-chartered |
|Property | |CUs are subject; |
|Taxation | |state-chartered CUs |
| | |are exempt |
-------------------------------------------------------------
Much Ado About Little? Banks and CUs have fought for the last
decade about the extent to which CUs should be able to offer
lifeline services to nonmembers within their fields of
membership. Yet, on the basis of data recently provided by
CCUL, it appears they may be fighting over an issue that
impacts very few people. The following summarizes recent
quarterly data from federally-chartered CUs operating in
California. These figures reflect the number of people
(both members and nonmembers), who sought various lifeline
services from federally-chartered CUs in California. The
CUs do not have a breakdown of member versus nonmember.
Between 25 and 40 people sought international
remittances each quarter.
Between 100 and 125 people sought wire transfers
each quarter.
Between 110 and 140 people sought check cashing
services each quarter.
Approximately 130 people sought money orders each
quarter.
There are over 2-1/2 times more federally-chartered CUs in
California than state-chartered CUs. The number of people
accessing lifeline services from federally-chartered CUs is
minimal. Given the smaller number of state-chartered CUs,
the number of nonmembers who might take advantage of the
authority given to state-chartered CUs by this bill is
likely to be miniscule.
1. Summary of Arguments in Support: CCUL supports AB 2006
based on the bill's ability to help bank unbanked
Californians and on the parity argument summarized above.
"AB 2006 will level the playing field and provide unbanked
Californians with potentially more than 700 points of access
AB 2006 (J. Perez), Page 7
through state licensed credit unions to cash their check,
purchase a money order, and transfer money back home. This
access will build a relationship to ultimately enter the
financial mainstream."
Two state constitutional officers, including Lieutenant Governor
Gavin Newsom and Insurance Commissioner Dave Jones, support
the bill for similar reasons. They are joined by consumer
advocacy groups, organized labor, and community foundations,
including the Center for Responsible Lending, Consumer
Federation of California, Greenlining Institute, California
Labor Federation, United Farmworkers, California School
Employees Association, Silicon Valley Community Foundation,
and the Ella Baker Center's Green-Collar Jobs Campaign.
2. Summary of Arguments in Opposition: The California Bankers
Association (CBA) and California Independent Bankers (CIB)
oppose the bill, for all of the historic reasons summarized
above. Both banking trade groups use the fee and tax
arguments summarize above. According to CBA, "when credit
unions seek to offer products and services, such as those
identified in AB 2006, to non-members for a fee, the income
earned is inconsistent with the original purpose of the
credit union to serve its members and must be subject to
taxation."
CIB argues that this bill will place community banks at a
competitive disadvantage relative to CUs. "Community banks
often compete head to head with credit unions, yet CIB
members pay taxes."
CBA also asserts that the measure is unnecessary, because
state-chartered credit unions may already provide services
to non-members through for-profit subsidiaries known as
credit union service organizations (CUSOs). Because of
their for-profit status, the income earned by CUSOs is
taxable.
The final argument advanced by the banks relates to the federal
Community Reinvestment Act (CRA; another longstanding source
of bickering between banks and CUs). CUs are not subject to
the CRA; banks are. Banks have always resented the fact that
they have lending, investment, and reporting obligations
under the CRA, which do not apply equally to CUs. The
historic reasons for coverage of banks (but not CUs) under
CRA and the back-and-forth arguments made by both sides in
AB 2006 (J. Perez), Page 8
support of and in opposition to this reality are far too
lengthy to be summarized in this analysis, but they trace
back decades, to enactment of the CRA in 1977. CBA and CIB
would remove their opposition to this bill, if (in addition
to taxing CUs on their income derived from nonmembers) it
was amended to include a community reinvestment obligation.
3. Prior and Related Legislation:
a. SB 638 (Romero), 2007-08 Legislative Session:
Virtually identical to this bill. Never taken up by the
author in the Senate Banking, Finance & Insurance
Committee.
b. SB 1292 (Dunn), 2003-04 Legislative Session:
Virtually identical to this bill. Passed the Senate but
failed in the Assembly Banking and Finance Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Credit Union League
California Labor Federation
California School Employees Association
Center for Responsible Lending
Consumer Federation of California
Ella Baker Center's Green-Collar Jobs Campaign
Greenlining Institute
Insurance Commissioner Dave Jones
Lieutenant Governor Gavin Newsom
Silicon Valley Community Foundation
United Farmworkers
Opposition
California Bankers Association
California Independent Bankers
Consultant: Eileen Newhall (916) 651-4102