SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2019 - 2020 Regular

Bill No: SB 747 Hearing Date: April 24, 2019

Subject: Banking development districts

SUMMARY

This bill creates a Banking Development District Program, administered by the Department of Business Oversight, as specified.

EXISTING FEDERAL LAW provides for the Community Reinvestment Act (CRA; 12 USC 2901 et seq.), which ranks banks on their ability and willingness to help meet the credit needs of their local communities, including low- and moderate-income neighborhoods where they are chartered, consistent with safety and soundness principles. Banks are evaluated for compliance with the CRA based on their size (small, intermediate small, and large, as defined) and on their performance on specified lending, investment, service, and community development tests described in CRA regulations. Banks’ CRA performance yields one of four possible ratings: outstanding, satisfactory, needs to improve, and substantial noncompliance. CRA ratings are typically used by regulators when analyzing banks’ applications for mergers, acquisitions, and branch openings.

EXISTING LAW

1. Provides for the Department of Business Oversight (DBO) and gives DBO authority to regulate state-chartered banks and savings associations (Financial Code Section 1000 et seq. and 5000 et seq.), state-chartered credit unions (Financial Code Section 14000 et seq.), as well as 22 other financial services and securities laws in the Financial and Corporations Codes.
   
2. Establishes the Office of the State Treasurer in the California Constitution (Article 5, Section 11). Among her many duties, the Treasurer manages the State’s Pooled Money Investment Account (PMIA), which invests monies on behalf of state government and local jurisdictions to help them manage their fiscal affairs.
   

THIS BILL

1. Contains findings and declarations relating to the challenges that unbanked individuals face as a result of their unbanked status, the high percentage of lower-income neighborhoods in California that lack a bank or credit union, the challenges that banks and credit unions face when they choose to locate in an underserved area, and the decision of New York State to form a Banking Development District (BDD) Program in 1999 to address the aforementioned problems in New York. States the intent of the Legislature to create a BDD in California to spur greater financial inclusion, promote local economic development, and enable more Californians to enter the financial mainstream and build savings and wealth.
   
2. Defines the terms “bank,” “banking development district,” “department,” “local agency,” “unbanked,” “underbanked,” and “underserved community.”
   
   1. “Bank” means any commercial bank, savings bank, savings association, or credit union.
      
   2. “Banking development district” means a geographic location comprising an underserved community that has been specifically designated by DBO.
      
   3. “Department” means DBO.
      
   4. “Local agency” means a city, county, or city and county, whether general law or chartered.
      
   5. “Unbanked” means a person who lacks both a basic checking account and a savings account.
      
   6. “Underbanked” means a person who has a bank account but is not fully integrated into the financial mainstream.
      
   7. “Underserved community” means a remote location or impoverished area that lacks banking services commensurate with the services provided to higher income areas with a population of similar size.
      
3. Establishes the BDD Program within DBO to encourage the establishment of banking branches in specifically designated geographic locations where there is an underserved community.
   
   1. Authorizes DBO and local agencies to compile a list of underserved communities or regions that lack a concentration of banks and services, to provide banks with a clear understanding of those areas that are most in need.
      
   2. Requires DBO to provide information on the BDD program to the State Treasurer, and authorizes the Treasurer to use the BDD Program when promoting the Treasurer’s Time Deposit Program and when authorizing participation by financial institutions in the Time Deposit Program.
      
4. Requires banks seeking to participate in the BDD Program to open a new outlet in a BDD or to develop and market a new product line or group of services in an existing outlet in a BDD.
   
5. Requires a local agency wishing to participate in the BDD program to submit an application in conjunction with a bank to DBO requesting the designation of an underserved community as a BDD and approval of the bank to participate in the BDD program. Requires each application to include the following, at a minimum:
   
   1. A clear description of the current and anticipated bank product and service needs of the community.
      
   2. A demonstration that existing institutions, including the applicant bank’s own branches in the community, are not meeting these needs.
      
   3. A demonstration that by coming into the community or introducing and effectively marketing additional product lines or services suited for lower-income consumers in an existing branch, the bank in question is prepared to specifically meet the community’s needs.
      
6. Provides specified criteria for use by DBO when evaluating applications from local agencies and banks to participate in the BDD program.
   
7. Provides that, upon designation of a BDD by DBO, the bank located within the BDD is eligible for all of the following: access to interest-bearing time deposits of public funds, as deemed appropriate and approved by DBO; incentives offered by local agencies, as deemed appropriate by the local agency and the Treasurer; and any other incentive developed by DBO and/or local agencies and economic development officials, as described in Numbers 8 and 9, below.
   
8. Requires DBO to develop and provide a range of incentives to help banks located within a BDD overcome short-term costs that prevent them from offering products and services that have long-term business potential. The incentives must be all of the following: valuable to banks; significant enough to encourage banks to locate in an underserved community or develop new products and services within existing branches, but small enough that a branch’s financial success requires services to the community; and require reauthorization every two years.
   
9. Authorizes DBO to work with local agencies and economic development officials to develop additional local incentives for participating banks, such as local agency deposits, assistance locating suitable commercial space for branches, local tax incentives, and workforce development.
   
10. Requires DBO to promulgate rules and regulations to establish and maintain the BDD program and to establish and post a performance review process on its Internet web site. The performance review process must be designed to ensure that a bank taking part in the BDD program is meetings its goals and initiatives, and that its services are having a recognizable impact on underserved communities.
    

COMMENTS

1. Purpose: This bill is sponsored by the author to encourage banks to locate branches in underserved areas and to develop and offer products and services geared to the need of un- and underbanked Californians.
   
2. Background: This bill is substantially similar to a bill authored by then-Assemblyman Bradford in 2010 (AB 2581), which was vetoed by Governor Schwarzenegger (veto message unavailable). Like AB 2581, SB 747 is based on a program pioneered in the State of New York in 1997. New York State’s BDD Program was designed to encourage the establishment of bank branches in areas across that state with a demonstrated need for banking services (https://www.dfs.ny.gov/apps_and_licensing/banks_and_trusts/bdd_about) According to New York’s BDD website, the New York program seeks to “reduce the number of unbanked and underbanked New Yorkers; enhance access to credit for consumers and small businesses; reduce reliance on alternative providers of financial services; and promote an asset building consciousness.”
   
   To encourage bank participation in the BDD program, New York State makes $10 million in subsidized (below market-rate) public deposits and other benefits available to each bank that opens a branch in an underserved community. These deposits are intended to lower the financial risk that the branch may incur when opening in an underserved community, usually comprised of low- and moderate-income households.
   
   A report published by the New York State Banking Department in May 2010, reviewing ten years of operation of New York’s BDD Program, concluded that the most significant incentive drawing financial institutions to the New York program is the eligibility of these institutions for below market-rate (subsidized) deposits from New York State. Participating institutions may hold state money at below-market rate interest rates for up to two years and are eligible to renew these below market-rate accounts if approved to do so by the New York State Banking Department (since renamed the New York State Department of Financial Services).
   
   The State of New York currently has 48 banks accepted to participate in its BDD program. BDD banks are located all over the state and range in size from small community banks to large national banks (https://www.dfs.ny.gov/apps_and_licensing/banks_and_trusts/bdd_districts). The most recent bank was approved to participate in New York’s BDD Program in January, 2019, suggesting that the program has not outlived its appeal.
   
3. Discussion: California currently lacks any state-supported programs intended to incentivize banks and credit unions to open branches in underserved communities. The State Treasurer does administers a program that deposits money into creditworthy community banks, savings banks, and credit unions (the Time Deposit Program) but, as noted below, deposits made through the Time Deposit Program are not prioritized.
   
   The Time Deposit Program was created in 1945 for financial institutions authorized to accept deposits in the state. Creditworthy, federally-insured community banks, savings banks, and credit unions must be headquartered in California and have a “satisfactory” or better Community Reinvestment Act rating to be eligible for deposits. Money invested by the State Treasurer through the program consists of state and local government funds held in trust by the State Treasurer in the PMIA. The Time Deposit program assures a yield to the PMIA that is slightly higher than the yield of comparable-length United States Treasury bills and makes money available to community banks and credit unions at rates typically better than they can receive from other sources. Deposits made through the Time Deposit Program are not prioritized; the Treasurer gives equal priority to all eligible financial institutions that request deposits through the program, and spreads out available funds to ensure that each qualifying financial institution that requests a deposit through the program receives one. According to the Treasurer’s Office, $4.9 billion was invested by the Treasurer through the Time Deposit Program on June 30^th, 2018. This bill authorizes the Treasurer to take BDDs into account when deciding whether to approve a depository institution for participation in the Time Deposit program.
   
4. Support: None received.
5. Opposition: The California Association of County Treasurers and Tax Collectors (CACTTC) is opposed to the provision of this bill that contemplates the utilization of local agency deposits to help provide incentives to banks in BDDs. CACTTC’s members take very seriously their responsibility to safeguard public dollars. “Any legislation, regardless of merit, that seeks to redirect or use county pool funds (or deposits) for any specific purpose immediately raises the concern of county treasurers.”
   
6. Amendments: Staff suggests the following amendments to address technical and implementation issues. These amendments are not expected to remove CACTTC’s opposition.
   
   1. Page 4, line 25, after “either” insert: or both
      
   2. Page 4, line 26 and page 4, line 29, strike “outlet” and insert: branch
      
   3. Page 5, strike lines 1 and 2 and insert: “Unbanked” means a person who lacks a checking account or a savings account at a depository institution.
      
   4. Page 7, line 13, strike “the bank” and insert: a bank
      
   5. Page 7, line 16, strike “department” and insert: Treasurer
7. Prior and Related Legislation:
   
   1. AB 2581 (Bradford), enrolled in 2010, was substantially similar to this bill. The bill was vetoed by Governor Schwarzenegger.
      
   2. AB 1502 (Lieu), from the 2007-2008 Legislative Session would have established a BDD program, jointly administered by the Department of Financial Institutions (predecessor department to DBO) and the State Treasurer’s Office. The bill passed the Assembly but was gutted and amended into a financial literacy education bill before being heard by a Senate policy committee. The bill was vetoed by Governor Schwarzenegger.

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

None received

Opposition

California Association of County Treasurers and Tax Collectors

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