CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2002 No.23 November 27, 2002

Vol 2002 No. 23 November 27, 2002

11-2002 Legal/Regulatory Update

This is a summary of some of the significant judicial and regulatory issues affecting the business of banking in California. Some of these items have been discussed in an earlier Bulletin but are included to convey recent developments.

Financial privacy. The federal district court (Northern District-San Francisco) in the law suit against Daly City and San Mateo County over their nearly identical financial privacy ordinances has denied the industry's motion for summary judgment, which means that discovery is under way. The cities will delay the effective date of their ordinances to September, 2003, which roughly coincides with the end of the 2003 Sacramento legislative session. Thus, the litigation will be a factor in next year's legislative effort to pass a state financial privacy bill. CBA is an amicus party in the suit.

At the same time, there will be pressure on Congress next year to pass a bill reauthorizing the Fair Credit Reporting Act (FCRA). Such a bill would create an opportunity to establish a national standard on affiliate sharing (if not third party sharing) that preempts state and local regulations. The affiliate sharing provision of the FCRA, which preempts state and local regulation covering the same activities, will sunset at the end of 2003.

A wildcard in the financial privacy fight is the looming possibility of a statewide initiative that can be placed on the ballot as early as March 2004. The likelihood of an initiative would be greatly enhanced if a bill is not passed next year. And there is little doubt that, no matter how one-sided and onerous such an initiative is written, it will pass by a large margin in this state.

ATM surcharges. The Ninth Circuit Court of Appeals finally ruled, as expected, in the industry's favor in a suit challenging the validity of identical ordinances in San Francisco and Santa Monica banning ATM surcharges. The written decision affirms in all respects the industry's primary arguments, namely, that the National Bank Act and Home Owners Loan Act, and their respective regulations, preempt the cities' actions, and that the Electronic Funds Transfer Act does not bestow any authority upon the cities to regulate ATM fees. CBA is a plaintiff in the suit.

Neither the district court's order nor the Ninth Circuit's affirmation distinguishes between state and federally chartered institutions. The ordinances are void in all respects. The cities have asked for a rehearing, and if that is denied, there is an opportunity to appeal further to the U.S. Supreme Court, but either outcome appears unlikely.

Banks in San Francisco that have been keeping accounts of non-customer surcharges pending the outcome of the case are in a position to discontinue the practice. This favorable appellate court decision has the additional benefit of bolstering the industry's cause in other pending litigation, particularly the privacy litigation against Daly City and San Mateo County, and the minimum payment disclosure suit (see below). In both instances, the issue of federal preemption lies at the core of the industry's case.

Credit card minimum payments law litigation. Last year, California passed a law (AB 865) requiring credit card issuers to disclose how long it would take consumers to pay off their debt if they made only minimum payments. Before the law came into effect as scheduled on July 1 this year, the law was challenged in federal district court (Eastern District--Sacramento), resulting in a June 28 court order suspending implementation of the law. On December 6, the court will hear arguments on motions for partial summary judgment and preliminary injunction, and decide whether the law will continue to be enjoined and whether the case (or part of it) will continue to the next phase.

As previously discussed, the challenge is based on federal preemption, as applied to federally chartered institutions, and on commerce clause grounds as applied to all institutions. It is uncertain what the outcome would be for card issuers if the court denies one or both of the motions. Conceivably, AB 865 could become effective immediately as of December 6 or on a later date on which the judge issues a ruling. Alternatively, the court (and the state) might be persuaded to allow a more reasonable implementation date to be set some time after a ruling is issued. It is not likely that the judge would order the law to apply as of the original effective date of July 1, 2002, given its initial order of suspension.

Customer ID program (USA PATRIOT Act). The US Treasury Department is still working on a final regulation to implement section 326 of the USA PATRIOT ACT, which requires banks to establish a program to identify bank customers and maintain records for five years. In an October 11, 2002 press release, Treasury announced that financial institutions are not required to comply with section 326 or the proposed rules until final implementing regulations are issued and become effective. The release also noted that the final rules will provide covered institutions with a reasonable amount of time in which to come into compliance.

In a comment letter on the proposed regulation, CBA urged Treasury not to require collection and retention of identification cards, and to allow banks more flexibility in the level of due diligence to apply depending on the risks that are present. Preliminarily, there are indications that Treasury may minimize the requirements related to identification cards.

Moratorium on law enforcement/FinCEN information requests. The federal banking agencies and FinCEN have announced a moratorium on information requests issued to financial institutions authorized under section 314(a) of the USA PATRIOT Act. The final regulation, which became effective on September 26, 2002, establishes a new procedure for law enforcement agencies to obtain information from financial institutions by working through FinCEN. (See CBA Regulatory Compliance Bulletin No. 2002-19).

Responding to industry concerns about the logistics of responding to information requests, FinCEN, in coordination with relevant law enforcement agencies, has put into place a "brief moratorium" on new information requests and compliance with existing requests. Additional guidance is being developed and will be released at a later time. In the interim, FinCEN reserves the right to take necessary steps to respond to immediate threats to national security and other emergencies, including reinstating section 314(a).

Escheat. According to a letter from the State Controller's Office delivered in early November, the office will conduct seminars, depending on demand, in the San Francisco and Los Angeles areas regarding the escheat amnesty program. Businesses have until December 31, 2002 to transfer property that was required to be reported to the Controller's Office on or before November 1, 1999. The Controller's Office invites businesses to receive notices of these seminars by completing an electronic form in the amnesty section of the Controller's web site at www.sco.ca.gov.

Also on the subject of escheat, thanks to Ted Kitada of Wells Fargo for pointing out that CBA's Regulatory Compliance Bulletin 2002-20 covering AB 1772 failed to note that the revised escheat notice amendments in the bill apply not only to funds in bank accounts but the escheat of bank obligations such as teller's checks, cashier's checks, and money orders.

Lopez aftermath. The stunning 9th Circuit reversal in Lopez v. Washington Mutual, the case that would prohibit the charging of overdrafts and overdraft fees on accounts containing social security funds, was not a perfect victory. While the outcome was correct, the court's reasoning raises questions that might not be resolved without further litigation.

First, rather than disposing of the case by simply declaring the obvious--that an overdraft does not constitute legal process--the court held to the notion that it does, but because the customer consented to the "taking" through the account agreement, the bank was not liable.

An effort is now under way to persuade the Social Security Administration to issue a regulation clarifying that the exemption statute was not intended to cover bank overdrafts. This effort is important despite the favorable Lopez ruling because other judicial jurisdictions are wrestling with the same issue.

The Ninth Circuit created a second source of uncertainty by suggesting that the state's exemption statute (Code of Civil Procedure Section 704.080) also includes overdrafts within the meaning of legal process, but went on to decide that the state law was preempted by OTS regulations as to Washington Mutual. Does this mean that non-OTS institutions could be found liable under the Civil Procedure Code? Probably not. The court's finding that Washington Mutual's standard account agreement covering overdrafts constituted appropriate consent as to the federal law should apply equally as to the state law. Still, the court's unsatisfactory handling of the matter may mean that this saga may continue in some unforeseen fashion. CBA was an amicus party in the case.

CBA identity theft brochure. CBA has developed a brochure explaining how consumers may avoid identity theft and what steps to take should they become a victim of identity theft. The brochures are intended to be distributed by banks to their customers, and may be printed under a bank's name. Interested banks may call Anissa Yates at 916-441-7377 x208.

Questions regarding the matters covered in this Bulletin may be directed to Leland Chan at 415-284-6999 x214 or lchan@calbankers.com.