State Legislative Update

California Banker
State Government Relations Article

Budget shortfall lends to scrutiny of financial institutions

With the current California budget shortfall amounting to $16 billion and growing, the California legislature has turned its attention to those matters they believe have negatively impacted state budget income or to measures that enhance revenue gains. Among their concerns is the impact on the economy from non-performing subprime mortgages that have lead to increased foreclosures.

While much attention will be focused on residential mortgage lending, the legislature has continued its focus on measures that increase burdens on the management of data security. Further, in an effort to close the budget gap by finding sources of funds, new efforts are emerging that increase corporate tax liability or that shift tax collection burdens to the private industry.

Upward of 20 separate measures have been introduced focusing on all aspects of residential mortgage lending. Measures range from significant limitations on the origination of mortgages to making it more difficult for a lender to recover their security interest through non-judicial foreclosure.

Fundamentally, the legislature must be mindful of the unintended consequences of overreacting. Lenders are tightening their underwriting standards making the acquisition of credit by borrowers more difficult. The reduced flow of capital and market illiquidity should be of concern to legislators as borrowers with less than perfect credit find it difficult to secure loans.

Within the area of data security, the California Credit Union League (CCUL) has re-introduced their data security measure. Last year, CCUL's sponsored data breach bill established unworkable data security standards, imposed additional duties for banks to report suspected data breaches by retailers, and required retailers to reimburse card issuers for credit and debit card replacement. Although the bill was well-intentioned, it established conflicting data security standards already in practice and expanded liability for banks to report retailer data breaches.

CBA was strongly opposed to last year's measure and was successful at securing a veto. This year, CCUL is actively seeking industry input in an effort to reach compromise. CBA has been in discussions with the credit unions and several other business interests and we remain optimistic that an agreement can be reached.

Given the multi-billion dollar deficit, the annual legislative discussion of whether to reduce expenditures or raise new revenue through new fees and taxes is being debated. Included in this dialogue is a review of existing corporate tax treatment. Much discussion has occurred regarding closing tax "loopholes" as a means to generate additional budget revenue or leveraging financial institutions like a collection agency for the state.

AB 1839 (Calderon) seeks to eliminate a perceived loophole that allows lenders to take a credit on uncollectible accounts where the sales tax has previously been paid by a retailer. Many lenders rely on this refund when they are forced to charge off receivables purchased from retailers.

Another proposal, introduced by the Franchise Tax Board (FTB), requires financial institutions to conduct a quarterly data match of approximately 1.8 million delinquent taxpayers. Once a match has been made, the bank will be issued a notice to withhold from the FTB. The impact of this measure will be costly and burdensome for banks as new system requirements will result.

While significant resources will be dedicated to defeating those measures that negatively impact banks, CBA is sponsoring two measures that provide much needed relief to our member banks.

AB 2116 (Portantino) clarifies ambiguity created by the Juarez v Arcadia Financial, Inc. appellate court decision regarding the right to reinstate a conditional sales contract after repossession. The proposed legislation provides certainty for borrowers and lenders by placing in statute the fees and payments necessary for a borrower to pay in order to reinstate a motor vehicle sales contract after the vehicle has been repossessed for non-payment. Although the bill has not been set for hearing, we expect a challenging task to get approval by the legislature and the governor.

SB 1421 (Harman), generated from CBA's Trust and Investment Services Committee, clarifies and updates several Probate Code Sections. Among the provisions, the measure increases the dollar amount threshold for the termination of small trust accounts. Another important provision provides clarity surrounding the assessment of charges against principal within the trust instrument on illiquid accounts with insufficient income.

California's budget shortfall promises to make this year difficult. CBA's state government relations team stands ready to protect the financial services industry under the guiding principles of striving to promote a competitive and free market, ensuring a level playing field with our competitors, and opposing state statutes that are overly-burdensome, inconsistent and/or duplicative of federal rules. We remain steadfast in defending our industry against those measures deemed harmful and we remain committed to advancing and supporting those measures that add value to our member banks.