CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2004 No.11
July 1, 2004

Vol 2004 No. 11 July 1, 2004

SB 1 Survives Judicial Challenge

In a surprise decision, the Federal District Court in the Eastern District of California yesterday ruled that the Fair Credit Reporting Act does not preempt the affiliate-sharing provisions of SB 1, the state financial privacy law passed last year and effective beginning today, July 1. The ruling directly contradicts the June 29, 2003 ruling by another Federal District Court in San Francisco (Northern District) in the same federal circuit, that invalidated the affiliate-sharing provisions of the Daly City and San Mateo County financial privacy ordinances.

Construing the same two federal laws-FCRA and GLBA-the courts came to opposite conclusions. In the earlier Daly City decision, Judge Claudia Wilkin found that the preemption provision for affiliate information-sharing in the FCRA, which was renewed by the Fair and Accurate Credit Transactions Act (FACT Act), "expressly preempt[ed] State laws that impose a requirement or prohibition on information-sharing among affiliates," and that "'information' as used in section 1681t(b)(2), encompasses the confidential consumer information that is the subject of the ordinances."

1) Section 1681t(b)(2) of the FCRA reads: "No requirement or prohibition may be imposed under the laws of any State . . . with respect to the exchange of information among persons affiliated by common ownership or common corporate control . . .."

Judge Wilkin also found that the savings clause in GLBA, which permits states to enact financial privacy legislation that is more protective to consumers, applies only to GLBA and not the FCRA. Since GLBA does not regulate the sharing of information among affiliates, she argued, the affiliate-sharing provisions of the ordinances are not even addressed by GLBA, and therefore could not enjoy the savings clause of GLBA. She added that, because FCRA does regulate affiliate information-sharing, applying the FCRA preemption and disregarding the GLBA savings are consistent constructions of both statutes, and cause no conflict.

Almost a year later, Judge Morrison England in the Eastern District, hearing essentially the same arguments on a similar law, construed both laws differently. The purpose of the FCRA, he argued, is to protect consumers from unfair or inaccurate credit reporting, rather than information sharing more generally. A consumer report, which the FCRA regulates and defines, is specific information that goes to the credit standing of consumers. Information not constituting a consumer report is not governed by the FCRA.

The judge also added that experience information shared among affiliates does not constitute a consumer report and is therefore not regulated by the FCRA. "[T]he only reasonable reading of the FCRA preemption provision is that it prevents states from enacting laws that prohibit or restrict the sharing of consumer reports among affiliates." [Emphasis original].

Section 6807(a) and (b) of GLBA

Moving to GLBA, Judge England found that the statute does in fact regulate affiliate information-sharing by requiring banks to disclose policies and procedures regarding disclosure of customers' personal information. Congressional intent supports the enactment by states of more protective statutes like SB1. Therefore, the GLBA savings clause directly contemplates a law like SB1. As to the provision that GLBA does not affect the effectiveness of the FCRA, the judge noted that this was intended only to preserve the FCRA's specific provisions with respect to consumer credit reporting.

The plaintiffs in the case, ABA and other national bank trade associations, did not raise preemption arguments under the National Bank Act or the Home Owners Loan Act. The narrow focus of the suit was a challenge to the affiliate information-sharing provision of SB1. The non-affiliate sharing provisions of SB1 are not affected by the decision. The plaintiffs will appeal the decision to the Ninth Circuit court of appeals. At the moment, the plaintiffs will not be seeking an injunction pending appeal. Updates will be provided as information is available.

What it means. The decision leaves banks in the same position as before. SB1 applies in its entirety. In order to avoid interrupting existing information disclosure practices subject to SB 1, banks must have delivered SB 1 privacy notices 45 days prior to July 1 (i.e., by May 15) and comply with any opt-out requests. Please refer to previous CBA bulletins on the details of SB1.

If you have any questions about the issues discussed in this Bulletin, please contact Leland Chan at lchan@calbankers.com or James Clark at jclark@calbankers.com.