CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No. 6 June 7, 2002

Vol 2002 No. 6 June 7 2002

Mid-Year Regulatory Update

This is a summary of significant bank regulatory issues as of June 2002. If you have any questions, CBA members feel free to call the contact person listed under each issue.

Financial privacy. With the defeat of SB 773 (Speier) on the Assembly Floor last fall, the effort shifted to finding an alternative legislative proposal that would meet the objections raised by CBA and other business interests. Assembly Member Joe Nation introduced AB 1775 with three objectives in mind: first, the bill must not create winners or losers in the marketplace; second, the transfer of "sensitive financial" information to "nonfinancial" entities for marketing purposes must be subject to an "opt-in"; and third, the transfer of information to an entity for the marketing of financial products must be subject to an "opt-out." AB 1775 died in the Assembly Judiciary Committee due to opposition from consumer groups who believed that the bill did not go far enough.

The death of AB 1775 has breathed new life into SB 773. Over the next two and one-half months the consumer groups will be working feverishly to get another floor vote on SB 773. CBA will be working just as hard to make sure that if that happens that the bill will fail again. The consumer groups, sensing that they have lost the momentum in the State Capitol, are following the same path that they pursued on ATM fee regulation--the enactment of local ordinances. A San Francisco supervisor announced in early June his intention to introduce an opt-in ordinance based on SB 773. Questions may be directed to James Clark at 916- 441-7377 x209.

Overdrafts involving social security payments. The federal ninth circuit court of appeal should soon decide whether it will agree to rehear Lopez v. Washington Mutual Bank. This case prohibits the charging of overdrafts and overdraft fees on accounts containing social security benefit payments without some form of heightened consent. The case has attracted national attention, including from the US Department of Treasury, which filed a friend of the court brief urging support for the bank's request for reconsideration, and from AARP, which opposes the request. CBA's brief was joined by a number of national trade associations. There is also an effort to have the Social Security Administration issue regulations clarifying that the federal preemption statute under which Lopez was brought is not intended to affect overdrafts.

Meanwhile, banks across the nation, but particularly those in the western states that are within the jurisdiction of the ninth circuit court, are considering options to comply with Lopez. Partly because of the difficulty of doing so, starting with the task of identifying accounts that contain social security funds, most banks are putting off implementing changes pending resolution of the case. The request for rehearing makes the published decision something less than final, though nothing bars a potential plaintiff from relying on the decision (but it is another matter whether a judge will treat Lopez as binding precedent while it is still being reviewed). If the same, three-judge panel that decided Lopez denies the request to reconsider, then the request may be taken up by the full ninth circuit court. If the full court denies rehearing, then the bank could appeal to the U.S. Supreme Court. Questions may be directed to Leland Chan at 415-284- 6999 x214.

Display of social security numbers. SB 168, which was passed last year and which will become effective on July 1, prohibits the display of a consumer's social security number. One of the most difficult challenges of the bill is suppression or truncation of a customer's social security number on an account statement that lists an ACH credit from the U.S. Treasury. The ACH field in which the number is usually imbedded is not one that is easily excised or altered in an automated fashion without also removing other information. Many banks and their service providers are still struggling with how to comply.

CBA is presently working with the bill author's office to attempt to craft a solution, which may come in the form of a clean up bill providing for a delayed effective date of one year for Treasury ACH payments. In the mean time, CBA and others will work with NACHA and Treasury to have ACH originators remove or truncate the SSN from the personal identification field. Unfortunately, the earliest that a bill would become effective is October this year. SB 168 does not create a private right of action, but violators may be subject to an unfair competition law action (Business & Professions Code Section 17200), which provides for injunctive relief and allows recovery of attorneys fees and restitution. Also, for your information, a federal bill (S. 848) has been introduced by Senator Feinstein that is similar to SB 168. Questions may be directed to James Clark at 916-441-7377 x209 or Leland Chan at 415-284-6999 x214.

Credit card minimum payment disclosure. AB 865, passed last year, requires credit card issuers, among other things, to disclose on billing statements how long it would take a card holder to pay off a balance by making only the minimum payment amount. The requirements are effective this July 1 and no bills have been introduced to amend AB 865. The Department of Financial Institutions (DFI) has generated tables that issuers may rely on when providing disclosures. The tables are available at DFI's web site at http://www.sbd.ca.gov/ab865.htm.

Several major card issuers and national trade associations have filed suit against the State of California on the grounds that federal law preempts AB 865 as applied to federally chartered institutions. The suit would have no legal impact on state chartered institutions. If the court orders an injunction as requested by the plaintiffs, then the effective date of the bill could be delayed pending final outcome of the suit. Questions may be directed to James Clark at 916-441- 7377 x209 or Leland Chan at 415-284-6999 x214.

Notice of errors on credit reports. Last year, the California legislature passed an identity theft bill, AB 655, which included a requirement that a creditor contact a consumer when it discovers that the address in a credit report does not match the address of the credit applicant. A bill (AB 1068) has been introduced this year amending AB 655 to make the verification requirement applicable only where the creditor extends credit to the applicant. AB 1068 is an urgency bill that would take effect immediately upon passage. Questions may be directed to James Clark at 916-441-7377 x209.

Mother's maiden name. A bill (SB 1237) has been introduced to restrict the use of a consumer's mother's maiden name as an account identifier. The bill was introduced because a government agency and certain private companies have made certain records available to the public that contained individuals' mothers' names. The latest version of the bill would require a bank that, prior to January 1, 2003, required an individual's mother's maiden name as an identifier to notify its customers of the risks of such use, and provides that the customer may instruct the bank to use another descriptive word instead. The written notification may be delivered together with other mailings. The bill would also prohibit banks from requiring the name as an identifier for accounts established after January 1, 2003. CBA is seeking to delay the effective date of the bill to July 1, 2003. Questions may be directed to Pat Zenzola at 916-441-7377 x210.

DFI security guidelines. The DFI has issued a bulletin requiring institutions licensed by the DFI, including state chartered banks, to comply with certain security related procedures. These include:

DFI also notes that it is "advisable" for banks to ensure compliance with all applicable federal and state statutes pertaining to the making of employment references. It specifically refers to Section 355 of the USA Patriot Act, which amends Section 18 of the Federal Deposit Insurance Act (12 U.S.C. 1828). Thatlaw states that a bank may disclose, in a written employment reference to another bank in response toa request, information concerning a person or entity's potential involvement in unlawful activity. It also provides that a bank may be liable to the subject of a voluntary disclosure if it is made with malicious intent. It is unclear whether Section 355 preempts state law in creating a safe harbor for such disclosures subject only to the making of malicious statements. California Financial Code Section 4991 provides a similar safe harbor for written bank employee references but includes the additional requirement of sending a copy of the reference to the subject of the reference at the person's last known address.

Board resolutions required by the bulletin must be sent to DFI by September 30, 2002, at the following address: The Department of Financial Institutions, Attention: Patrick Carroll, 111 Pine Street, Suite 1100, San Francisco, California 94111-5613. If a bank is unable to comply with the September 30, 2002 date because a regular board meeting does not occur prior to that date, or if you have any other questions about the reporting requirements, please contact Patrick Carroll at (415) 263-8559 or by e-mail at pcarroll@dfi.ca.gov

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.