Federal Legislative Update

In March, we were pleased to return to Washington, D.C. with California bankers for the American Bankers Association’s Washington, D.C. Summit. During this visit, we met in-person with representatives from the California Congressional delegation. We will plan to travel back to Washington, D.C. a couple of more times this year, including our joint visit with the Florida Bankers Association, scheduled for September 27-29.

Momentum continues to build relative to providing financial services to cannabis-related businesses. The SAFE Banking Act has passed the House no less than six times. Support in the Senate is growing and there is optimism that if a bill were put up on the Senate Floor, that it would easily pass. The challenge is to convince Senate leadership to put the bill up.

With Sarah Bloom Raskin withdrawing her nomination as a board member of the Federal Reserve, the Senate Banking Committee moved forward in approving Fed nominees – Jerome Powell, Phillip Jefferson, and Lisa Cook. Approval by the full Senate is forthcoming. 

On the regulatory front, March was busy. The SEC published draft rules on climate-related financial risk disclosures applicable to publicly traded companies. The FDIC issued a request for information on bank mergers and a separate request for comment on draft principles providing a framework for the safe and sound management of exposures to climate-related financial risks applicable to institutions with over $100 billion in assets. The FDIC framework resembles principles drafted in December by the OCC.

Meanwhile, the CFPB is sharpening its focus on over-draft protection and has been critical of what the bureau describes as “exploitive junk fees”. In early April, the California Bankers Association joined a letter with peer state banking trade associations and the American Bankers Association responding to the bureau’s request for information on this very topic.

How the federal government tackles cryptocurrency and a central based digital currency remain unclear. In March, President Biden issued an executive order outlining a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.” The order prioritizes: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. Bottom line, a lot more research and study by governmental agencies will be required.

California State Legislative Update

As predicted, more than 2,000 measures have been introduced by California state lawmakers. The California Bankers Association’s advocacy team reviewed each of them, identified those that are impactful, and is working with our volunteer-led association policy committees to establish positions. We wish to express much gratitude for our volunteer leaders and all they do to support the association and the industry. Meanwhile, the California Legislature is conducting first house policy committee hearings on these measures. While not exhaustive, below are a few bills worth mentioning.

SB 1176, as introduced, sought to establish a California Community Reinvestment Act (CRA) applicable to: state-chartered banks; state-chartered credit unions; state licensed residential mortgage lenders; and, money transmitters. While supportive of subjecting credit unions to the CRA, we oppose applying a state-level CRA to California state-chartered banks, which in the case of SB 1176 went beyond the scope of the federal CRA.

The measure has now been amended to require the Department of Financial Protection and Innovation to: 1) conduct a peer group analysis of each licensee’s mortgage-related activities as reflected in data provided pursuant to the Home Mortgage Disclosure Act; 2) seek information from regulators in other states that have enacted laws modelled after the CRA and identify best practices in administering such laws; and, 3) review the department’s statutory authority, regulations, and processes related to the examination of a licensee and determine whether the department has adequate authority to examine a licensee for how well the licensee meets the financial services needs of underserved communities.

The California Legislature is also very focused on climate change. Senate Bill 260 requires entities with total annual revenues exceeding $1 billion and that do business in California to publicly disclose annually to the Secretary of State starting in 2025 Scope 1, 2 and 3 greenhouse gas (GHGs) emissions. More specifically, the measure defines Scope 1 to mean all direct GHGs that stem from sources that an entity owns or controls, Scope 2 means indirect GHGs from electricity purchased and used, and Scope 3 measures “indirect greenhouse gas emissions, other than Scope 2 emissions, from activities of a reporting entity that stem from sources that the reporting entity does not own or directly control and may include, but are not limited to, emissions associated with the reporting entity’s supply chain, business travel, employee commutes, procurement, waste, and water usage, regardless of location.” The measure will need to be reconciled with recently published draft regulations by the SEC applicable to publicly traded entities.

Another measure, Senate Bill 1301, for taxable years beginning on or after January 1, 2023, and before January 1, 2049, imposes a net income tax between 0.25 and 0.75 percent on financial institutions engaged in lending or underwriting of corporate bonds, government bonds, or equity issuances by a taxpayer that provided fossil fuel financing, that exceeds the fossil fuel financing threshold, in the previous taxable year. The tax will be assessed on any entity that finances fossil fuels in an amount equal to $1 billion annually.

The California Legislature continues to struggle with addressing the supply of affordable housing with some legislative solutions misguidedly imposing restrictions on the sale of residential real property. Assembly Bill 2710 prohibits owners of residential real property from selling their property until they have first offered it to a qualified entity which includes a tenant or certain organizations, like non-profits or community land trusts. Residential real property includes single-family dwellings occupied by a tenant and multi-family residential property whether occupied by tenants or vacant. The owner must provide notice to qualified entities and give them time to express an interest in purchasing the property.

Another measure, Senate Bill 1323 bifurcates the sale of property at foreclosure by requiring that properties where there is equity, defined as debt not exceeding 90 percent of appraised market value, be sold by a licensed realtor. Property that does not have equity, defined at debt exceeding 90 percent of appraised value, would proceed under the existing trustee auction sales process. For equity sales, the price must be set at the appraised value for at least 20 days. If not sold within that time-period, the price may be reduced by four percent and listed for another 20 days. This process repeats itself six times, or 120 days, at which point the unsold property may be sold by a trustee’s auction.

Privacy continues to be highly topical. Among dozens of other privacy-related measures, the business community has prioritized the continuation of the employee and business-to-business exemptions within the California Privacy Rights Act (CPRA) that are otherwise set to expire on January 1, 2023. Three measures are pending legislative consideration – Assembly Bill 2871/Senate Bill 1454 extending the exemptions indefinitely and Assembly Bill 2891, extending the exemptions until January 1, 2026.

Simultaneously, the California Privacy Protection Agency is embarking on their CPRA mandated rulemaking. The agency conducted informational sessions in late March as a means to inform their rulemaking and they plan to conduct stakeholder sessions in April. Final adopted rules are expected in Q3/Q4 of 2022. The rulemaking will consider, among other things, cyber security audits and risk assessments (that must be regularly sent to the Agency), examinations of a business’ compliance with the law by the agency, and the use of automated decision-making systems by businesses subject to the CPRA.

The California State Legislature will adjourn no later than midnight on August 31. A lot can, and will, happen between now and then. We will look forward to sharing updates in future articles. In the meantime, please let us know how we can support you.