Assembly Standing Committee on Banking and Finance

The Assembly Banking and Finance Committee is now called to order. Sergeants, please call all absent Members. Madam Secretary, please call the roll.

[Roll Call]

Awesome. We have a quorum. Do not see Ms. Banta. Okay, let's move the consent calendar. Do I have a motion? In a second. Great. Madam Secretary, please call the roll on the consent calendar.

[Roll Call]

The consent calendar has been adopted and we will hold the role open for any Members who are not present. Let's move on to Bill presentations. Ms. Fonta, the recommendation is do pass as amended to the Committee on Appropriations. Feel free to begin when you're ready.

Thank you. Chair and Members, I'm pleased to present my Bill, AB 801, which seeks to create a state level Community Reinvestment Act. I appreciate the very meaningful engagement by the Committee and I accept the Committee's amendments.

The Federal CRA was enacted in 1977 to address redlining and requires financial institutions to meet the credit needs of low and moderate income communities. The Federal CRA has driven billions of dollars into historically underserved communities through investments in affordable housing development and preservation, small business growth, good quality job creation, homeownership and intergenerational wealth building in our communities.

Unfortunately, persistent racial and economic disparities remain throughout the country and even here in California. Redlining in California has had a lasting negative effect on housing and communities, particularly for black, Latino and other minority neighborhoods. These impacts include reduced property values, increased environmental hazards and disparities in health outcomes. The federal CRA has its limitations.

It does not apply to many modern financial entities, such as fintechs or non-bank lenders, who now originate over half of all mortgages nationwide and often operate with minimal oversight. As a result, many financial institutions face no obligation to invest in the communities they profit from, especially communities of color.

To help address this issue, seven states, including Massachusetts, New York and Illinois, have passed their own state CRAs, strengthening accountability for financial institutions. AB801 does several things.

It establishes the California community reinvestment act and requires covered financial institutions to have a continuing and affirmative obligation to meet the financial services needs of the communities, including low and moderate income communities and communities of color in which the covered financial institution conducts substantial business.

The bill applies to the following institutions, state chartered banks, credit unions, residential mortgage lenders and money transmitters. It also directs the Department of Financial Protection and Innovation, or DFPI, to conduct a disparity study to evaluate unequal access to financial products and services and to identify patterns of discriminatory lending and investment practices.

It also mandates DFPI to assess each covered institution's community investments. And finally, it prohibits covered financial institutions with certain ratings from receiving state funds or contracts. The department can also issue a penalty if a financial institution receives a low rating in two consecutive examinations.

AB801 closes crucial gaps in the federal CRA and helps level the playing field to ensure that covered financial institutions that dominate the housing market have an opportunity to ensure that the investments that they are making actually reach our community.

With me today I am joined by Pauline Gonzalez Brito, Chief Executive Officer of Rise Economy and Tate Hill, President Chief Executive Officer of Access Plus Capital.

Thank you and welcome. Two minutes.

Good afternoon Mr. Chair and Members of the Committee, thank you for the opportunity to speak in support of AB801, the California Community Reinvestment Act. I'm Paulina Gonzalez Brito, the CEO of Rise Economy. We're an alliance of 300 non-profit organizations dedicated to equitable community development throughout California.

For nearly 40 years, our alliance has built productive partnerships with banks through the Federal Community reinvestment Act, securing $116 billion in the last five years alone in commitments for investments in affordable housing mortgages and down payment assistance for first time home buyers, small business lending and innovative projects like community land trusts.

Under the federal CRA, banks are able to receive CRA credit through a variety of activities such as investing in affordable housing tax credits, direct giving, direct lending, and where banks don't lend directly, they provide low interest capital to community development finance institutions.

These CDFIs make loans and expand access to capital for small businesses that are primarily black and brown owned, for homeowners who wouldn't otherwise get a loan or who need down payment assistance, and for affordable housing developments that are so badly needed in our communities.

However, the financial services industry has changed tremendously since the federal CRA came into existence. Independent mortgage companies make over 50% of the mortgage loans in California. If that business lived at banks, it would be reinvested. Money transmitters issue debit cards and credit cards and credit unions have become more geographically focused and are acquiring and merging with banks.

But these entities are not covered by federal CRA. The proposed state CRA, AB801 would incentivize state banks, credit unions, mortgage companies and money transmitters to invest in meeting community needs. It levels the playing field and acknowledges that these institutions profit from California's economy and should be invest accordingly.

AB801 would unlock billions of dollars annually to help our state fund the housing development it needs, bring bustling economic corridors to bedroom communities and increase community development in rural areas. I would like to end by thanking the author for prioritizing this issue and I respectfully ask for your aye vote on AB801.

Good afternoon chair and Members of the Assembly Banking and Finance Committee. My name is Tate Hill. I'm the CEO of Access Plus Capital. We are a mission based community development financial institution headquartered in Fresno and also serve as Vice Chair of the California Coalition for community investment, CCCI. It's a statewide alliance of CDFIs.

I'm here today to voice support of AB801, the California Community Reinvestment Act. Access Plus Capital has developed over 2,000 loans totaling $65 million. Over 75% of those have gone to entrepreneurs of color, low income individuals and businesses located in under resourced neighborhoods across Central California. These are not just numbers.

These represent bankers, bakers, barbers, mechanics, small manufacturers whose dreams create jobs and build wealth and overlook communities. Despite our efforts, the need far outweigh the resources available.

In a study that we conducted, we commissioned, we found that over $3 billion gap between the credit requested and capital received by businesses in the Fresno region alone. For too many Central Valley. Excuse me. For too many Central Valley business. Let. Me change my orientation. Excuse me apologies.

For too many Central Valley communities remain disconnected from mainstream services, particularly those particularly with the rise of fintech and non bank lenders in our communities. AB801 is a smart future facing solution by expanding the reinvestment obligation to all lenders and establishing the Community Reinvestment Fund.

This bill will drive targeted investments into small development, affordable housing and climate resilient investments that are critical to our region. California has a proud history of leading on equity.

AB801 continues this legacy by ensuring that all financial institutions contribute to inclusive economic opportunities especially in regions like Central California that have been loaned underbanked and underinvested. Thank you for your support for 801.

Thank you for that. Is there opposition testimony? And before we get to that additional support Please state your name. Organization.

Mr. Chair Members Tiffany Whiten with SEIU California. Proud Co- sponsors in support of the bill. Thank you.

Mark Stivers of the California Housing Partnership. Clap proud to co-sponsor this bill for its beneficial impact on affordable housing.

Louis Castro with Inclusive Action For the City. We're a CDFI, community development financial institution in support of AB801.

Rene Bayarda for one of the co-sponsors. Rise Economy.

Christopher Sanchez on behalf of Consumer Federation of California and strong support.

Rami Abraham with the Green Lighting Institute. Very strong support.

Eric Payne, Executive Director of Central Valley Urban Institute. Strong support.

Good afternoon. On behalf of Small Business Majority, strong support.

Chris Schultz with the California Bankers Association. Banks have a national position that credit unions should be subject to the federal CRA. So for that reason we have a support if amended position.

We do continue to have concerns about the disparate treatment of state charter banks vis a vis federally chartered banks which are preempted and not included in the bill. Thanks.

Good afternoon. Lindsey Goblehorn with the California Community Banking Network. Align my comments with the Bankers Association. More support if amended. Thank you.

Thank you for that. Moving on now to opposition testimony. Would you mind if we can grab one of those seats? I'm happy standing. You're fine there.

Mr. Chair and Members, Indira Mcdonald on behalf of the California Mortgage Bankers Association, in opposition. We appreciate the Committee amendments as outlined in the analysis. However, as proposed to be amended, our fundamental concerns remain. First, mortgage banks were not made subject to the federal CRA because they do not collect deposits from local communities.

The policy objectives of the federal CRA is to require institutions that accept deposits to reinvest those deposits back into the communities for which deposits are collected. For this reason, the federal CRA does not apply to mortgage banks because they do not take deposits.

Rather, mortgage banks are non-depository institutions that play an important role in the market and have done so for more than a century. Rather than funding lending from deposits, mortgage banks finance loans through their own credit facilities and then sell those loans to secondary market investors like Fannie Mae and Freddie Mac.

The proceeds from selling those loans are recycled into new loans. In this way, mortgage banks essentially import money from national sources to make loans in local communities. This increases the funds available for funding more mortgages.

Second, we believe that extending CRA obligations to non bank mortgage lenders as proposed in this Bill is unwarranted because the success independent mortgage bankers have achieved serving low and moderate income borrowers and minority communities.

A 2023 study conducted by the Urban Institute which reviewed 2023 home mortgage disclosure act data found that independent mortgage banks have significantly grown their market share of mortgage lending and the proportion of that lending to low and moderate income borrowers.

The study also found that independent mortgage banks outperformed banks and other depository lenders in serving low income communities. This strong performance was achieved without CRA mandates.

Specifically, mortgage banks originated 73% of loans to minority borrowers, up from 34% in 2008 and 84% of loans to low and moderate income borrowers in 2023 and this was up from 29% in 2008.

In addition, the evidence from the few states that have imposed CRA requirements on non bank mortgage lenders does not show that the mandate worked to increase home lending to low and moderate income borrowers. In fact, California outperformed Massachusetts since that state enacted CRA requirements on the non bank mortgage lenders.

The bottom line is that subjecting non-bank mortgage lenders to costly new CRA regulation obligation is unlikely to produce significant benefit, but these regulatory obligations will create ongoing cost burdens that will certainly increase origination and the servicing of loans.

Finally, we are also very concerned about the new cost to the Department of Financial Protection Innovation because the LAO has determined that the Financial Protection Fund, which support is supported by regulated entities, will become insolvent within the 25-26 fiscal year.

We believe that the extensive requirements of this bill will compound the DFPI's current fiscal challenges leading to substantial new assessments and fees from the Department upon the licensees. Mortgage banks regulated by DFPA are already looking at tripling our annual assessments and the audit costs also have gone up 50%.

So we're concerned this measure will further drive up the cost of mortgage loans in California make it harder to attract mortgage capital to the state. For all these reasons, we strongly oppose the bill and would ask for your no vote unless amended to exclude independent mortgage banks and I'm happy to answer any questions.

Please Good afternoon Chair Members Robert Wilson on behalf of the California Credit Union League, I'm here in respectful opposition to AB801. I want to start my comments with thanking the Chair Members and all their staff for their time on this bill and I would also like to say CCUL agrees with the intent to serve the underserved.

That's why credit unions were started and we seek that normal goal. However, subjecting community based not for profit member and cooperatives to a state CRA is simply unnecessarily costly to implement and subjects credit union to unnecessary risk and ultimately devalues the State charter for credit unions.

As was outlined in the analysis and was previously stated, the federal CRA was passed in 1977 to counteract the discriminatory lending practices of large commercial banks characterized by redlining, which is truly an awful practice worthy of the legislation. Credit unions were not included in that federal legislation and can continue to be excluded.

Federally credit unions exist to offer pool, savings and lending services for Member owners. Each serves at the exclusive pleasure of its members. None have stockholders. Each is governed by an unpaid volunteer board of directors and each one works to advance the interests of the communities geographic, workplace, faith based or educational where those members live and work.

In light of this, credit unions are already doing a better job than CRA compelled banks when it comes to key home lending metrics. A recent Home Mortgage Disclosure act analysis shows that California credit unions Exceed or equal CRA compelled lenders in 150 out of 159 metrics.

California Credit unions already have a higher portion of their mortgage portfolio lent to various minority groups. Low to moderate income borrowers, women, low to moderate income minorities and minority and women borrowers. Excuse me, and other underserved communities.

Credit unions also invest heavily in the communities in which they operate, both via financial support and community hours donated by credit union team members and leadership as financial cooperatives. Profits go back to the Members of the credit unions in terms of better interest rates, higher yields and dividends.

Which is why placing burdensome reporting reporting requirements on credit unions is a disservice to the Members of the credit union as it would eat directly into the bottom line. This bill is not asking credit unions to submit current data. This is a whole new data collection project that will have significantly cost for institutions.

The bill also subjects membership well being to a subjective CRA score. The language states the score shall be considered for branch openings and receiving state funds. There are more concerns especially around some of the limitations credit unions have, which I know some of the Committee Members tried to address. But we don't have time for that.

So for that reason we expect less for a no vote on AB801. Thank you.

Thank you for that additional opposition. Please state your name. Organization Seeing none, we will bring the conversation back to the Committee. We have any questions? Vice Chair Chen.

Thank you. Mr. Chair. I actually have a question for Mr. Wilson from the credit unions. I kind of want to get an understanding of what do you feel are. Potential costs associated with 801, especially for DFPI and also for the credit unions themselves, if any.

Thank you. Appreciate that question. I think you know for the credit unions themselves, we're asking our members, or member credit unions, hey, you know, what do you think this is going to cost you? And it's, it is significant drain on resources for the credit union.

We're talking additional staff to be brought on for this data collection, updating software and all this, you know, to be reported to the department, sort of for the department. I'm, I can't really speak for them. I think that's probably a conversation that's being ongoing with them.

But you know, from my members perspective, we enjoy what's called a dual charter system. So it can be federally chartered institution or a state chartered institution. And the member doesn't really know much of the difference between the institutions.

There are some important distinctions in the back office and when we see bills like this, however well intended that they really are, my members are to see and say, look, we're doing all this work already in the community, we don't need to be compelled to do so.

And zero, by the way, this is going to cost us a lot of money. So it kind of, like I mentioned, kind of devalues the state charter and the membership of our eyes.

And that has a domino impact on, you know, if you start losing licensees that, that impacts what happens to the department in terms of assessment fees and things along those lines.

Assembly Member Dixon, did you have a question?

Mr. Chair, I had no idea about the potential bankruptcy of the Department of Finance and Innovation. Do we know about that anyway?

We have no idea either. I think it's completely inappropriate for, for people who are not sitting in an oversight hearing talking to the Department of Finance and Innovation to make any speculation about that. I would leave that to our Budget Committee colleagues to be able to get more information about that.

I would like to know when that information is available regarding these two financial institutions making your case that you're already investing. The federal law does not apply. And that was 1977 when the federal law was enacted.

Have there been efforts over the years at the federal level to include your type of the mortgage lending or the credit union into the federal law? And if you'd like to talk about that, first from the credit union side and then the independent mortgage.

Sure. Thank you for the question. There have been attempts to update the federal CRA and there have been various drafts that would include credit unions and then eventually do not include credit unions. I don't represent the credit unions on the federal level.

But that is, you know, they've, they have brought bills forward and in recent Congresses to kind of update CRA and add more people or take people out. And we have not ever kind of made it across that finish line being included in the federal cra.

I think Member, I would share with you that we are in an unprecedented time where we actually can't count on the fact that the Federal Government might continue to actually have this vital program in place.

The reason why we've had nine different states actually implement statewide CRA programs is to ensure that the state, in our instance, that the State of California has the ability to provide a strong framework around ensuring that the investment dollars go to go to communities.

And what I would say to the opposition's concerns about the fact that they are already providing, already providing resources.

The point of this bill is to be able to have clarity around what that looks like around whether or not there's actual equitable distribution of the resources and mortgage provision into those communities and whether or not there's any steering that may or may not be happening to particular communities that perhaps create a scenario where there are higher cost mortgages going to particular types of individuals or not.

So while I appreciate the fact that our credit unions play a vital role, we should also recognize the fact that many of them are very big at this time. One credit union in particular has 1.1 million members and has $19.6 billion in assets and they receive a significant amount of government benefits.

To be able to serve low to moderate income individuals at some point you have to be able to recognize that you are at a scale where you have to provide more specificity than we're already doing it to the State of California and its borrowers to ensure that we don't engage in discriminatory practices.

And that is essentially what this bill is trying to do.

Okay, thank you. I just wanted to finish. Allow the independent mortgage broker to speak to. Just if you would provide kindly the information about any attempts at the federal level or congressional level.

Yeah, thank you. The federal CRA does not affect independent mortgage banks. The other states like Massachusetts that have had enough period of time now to look at the data, it's shown that in California, California has outperformed serving on all.

And you look at all the loans to low and moderate income and minority communities that the growth over that period of time between when Massachusetts had their law and now that in California we've outperformed.

And so that's the main point that I want to drive home is that we are serving our members, are serving this community and the additional cost is going to have such an impact on the affordability of finance and the cost for servicing, for origination and for servicing means that those costs will get passed down to the borrower and increase the costs.

And so that is why we are opposed to the new regulatory structure. When the data is in, the data does show that we're serving these communities.

All right, thank you very much. Can my witness respond to that question?

Chair thank you. Thank you. Assembly Member, please. Thank you. So I am, I think we should be concerned about whether independent mortgage companies are serving communities of color fairly. We our studies have shown that independent mortgage companies potentially are steering conventional loan qualifying borrowers to higher cost loans. So this is a concern.

And there's been federal suits charging discrimination against mortgage companies like Trident Mortgage Company with discrimination against minority families, Townstone Financial for discrimination against black borrowers and residents in majority black neighborhoods. So we do need extended oversight or independent mortgage companies.

Thank you. Any other Committee Members?

Thank you. Chair I did just want to point out, and I don't know if I didn't hear this in the points, but so there are already other states that have led efforts to create cra. How many states?

We have seven states, Connecticut, Illinois, Massachusetts, New York, Rhode Island, Washington, West Virginia and District of Columbia that have already implemented a state level cra. And just to break that down a little further, all of those states include state chartered banks. Several of Those states, Connecticut, D.C. Illinois, Massachusetts, New York and Rhode Island include credit unions.

And D.C. Illinois, Massachusetts, New York include non-bank mortgage companies. California would be the first to include fintech companies.

And then just in terms of what state other states are doing, I know I raised this issue and a concern that I had in terms of smaller credit unions. I understand there's bigger credit unions that may be able to have the capacity to bear maybe the additional cost that folks are speaking about that.

But just wondering if the structures of other states carve out or do some exceptions for the smaller credit unions. I know like in my area there are smaller credit unions that may be severely impacted or burdened by some of the additional requirements.

So I don't know if other states have also done that, but that's something that I'm interested in seeing and I know that I've spoken to the author of the bill about potentially doing that to be able to support it today.

I appreciate that, Assembly member. I know that you are always rightly so concerned with particularly our rural communities and making sure that we are tailored in our approach at the state level to ensure that we have an opportunity to address the needs of our smaller or kind of less resourced parts of the State of California.

I think we are certainly open to continued conversation around ensuring that we have streamlined exams and assessments that take a more tiered approach, particularly for small credit unions. And would appreciate being able to continue working on this bill to be able to clarify that with you.

Great. I appreciate that. That's one of the concerns that I did have. And I do want to say thank you to the folks that were here from my region that are obviously in support of this piece of legislation.

I understand in terms of the attempt to try to ensure that communities like mine don't get left behind when it comes to investments, I know that that's extremely important. I actually used to sit was a board member of Axis plus Capital previously.

And so I understand very intimately the issues of accessing capital for small businesses in communities like mine. Also understand very well the issues of the crisis that we have at hand when it comes to housing and affordable housing in particular, and maybe how we can create policies to incentivize those types of things.

I know that this is an attempt to do some of that. I do applaud obviously your efforts to try to bring some equity when it comes to, you know, state financial institutions. But I do want to make sure that we're mindful about potential impacts.

The other things that you know, just want to point out or want to comment. I think that we also as a state should be looking at incentives. Not just saying like hey, this is the regulation and this is what you have to abide by.

But what are we doing as a state to incentivize to make these types of policies more effective and attractive for these states institutions? So I hope that as this continues to be a conversation over this legislative session that we are looking at, okay, what will the state do?

Will the state do some state guarantees or backstop loans to loans made to those people that are hard to serve borrowers? So what is the state going to also do? I'm interested in looking at that other regulatory incentives.

I know that state chartered banks sometimes want to merge or are we going to provide any regulatory incentives to try to support, especially those that are meeting the benchmarks of CRA? Are we looking at that?

Are those some of the things that we can do, other partnership incentives that I think that we should also be looking at for those banks or credit unions that are exceeding the policies that we are going to put in place.

Could they qualify to participate in some of the funding that we provide as a state for businesses, for home, for affordable housing or building homes and so forth. So I think looking at matching funds also.

So I want to make sure that we're not just creating rules, but that we're also creating the incentives to allow these banks and institutions that are doing some good work already in our community.

And I do want to acknowledge that, especially the smaller credit unions, the credit unions in communities that are already doing some investments that we're not just saying, like, hey, you got to do this or you got to do more, without the state also stepping up and saying, hey, we want to be a partner, because we recognize that you guys are central to our community.

So those are some of the things that I'm interested in, hoping that you guys are having those conversations I will support today. But I do want to be. I want to watch this carefully, that we are creating a policy that at the end of the day, is going to be truly effective in communities like mine.

So those are my comments, and I move the bill with a commitment that will make, you know, work on making sure that the small credit unions are.

That we look at where we draw the line and then also looking at how the state can be a partner and create some incentives to really leverage resources for these underserved communities.

I really appreciate those comments, and I think you rattled off with ease 10 different ways that we can ensure that we're creating more specific investments to our communities of need. I will say, though, that I think a foundational piece of it is to actually establish the Community Reinvestment act in the State of California.

So I think that this measure, with very thoughtful Committee amendments, allow us to be able to create a foundation policy that will allow us to do things like many of the opportunities to invest in our communities that you outlined. So I appreciate that.

Thank you. Absolutely. Ms. Dixon

I'm trying to be thoughtful or want to be thoughtful because of the need of investing in communities and rural communities and lower economically deprive communities, it seems to me, about incentives, I don't know where regulations create incentives. To me, really, regulations create disincentives.

I think the marketplace creates the incentive with where the financial institution, whether it's a mortgage lender, credit union, or a bank, they see the opportunity to have a thriving community, to. To have their lending standards that are in compliant with state and federal regulations to make sure that they are investing.

That's their marketplace in the credit union industry. That's their Members who are workers, educators from schools, universities, unions. They're investing in their Members of their credit union. So who's the management and the board of a credit Union to support their membership, where they live and work. So I trying to understand what a regulation is going to do.

And similarly with the mortgage bankers, it's to invest in communities so they have the funds that come in so they can reinvest back into the community. So I've always challenged myself to understand where regulations actually help businesses or industries thrive and be successful. To me it just sounds like a lot of more regulations.

If they've already have the data and they could produce the data that shows that they are investing at a higher rate. I'd like to see the data in Massachusetts and Illinois and the other states that were mentioned. Are they truly investing larger, making opportunities for people to be successful in their, in their communities?

So I'm the jury's still out of my mind to see what, where, where will regulations with a hammer make doing business in California or in these deprived communities where it will be better to be successful? You can't force a company to be successful. They've got to have the clientele and be attractive to do business in a community.

Instead of putting a hammer on their head and say do this or what, they'll leave, they'll go invest in other places. So there's a balance. So I'm trying to figure that out.

I appreciate that, Assembly Member. I think a free market approach to ensuring that we have the ability to make sure that bakers, hairdressers, people buying their first home, people seeking to ensure that they have the ability to retain the home that they have, are essentially what we hope to consider.

I'm more concerned about making sure that everyday Californians who are faced with such incredible challenges in order to be able to sustain the life that they have right now, have the ability and means to be able to have a mortgage that is not priced higher by virtue of where their community is.

And I do think that it requires our intervention to ensure that that happens. And I don't know if my witnesses have comment about that, but I think that we were your comments making me feel like we were headed into more of a free market mentality. And that is not, I think, what the intention of this bill is.

And I just wanted to refocus our intention around ensuring that we have everyday Californians who face challenges around keeping their doors open, their companies thriving, their small businesses engaged, keeping themselves in their homes and having mortgages that are affordable to them have the ability to do so by establishing in the state a community reinvestment act.

I would add that if a mortgage company or a credit union or state chartered bank is doing well and serving the community. They have nothing to fear from a Community Reinvestment act here in California.

And I would also add that there are incentives in the legislation so the State of California can look at where it's putting its deposits and look at their CRA evaluations for these institutions. And also when there's a merger or an acquisition, being able to evaluate these institutions based on their CRA exams.

I would just add also as one that actually does rule lending and rural communities in Central California and actually engaging with some of our CDFIs in places like Inland California and Northern California.

The ability to be able to engage with financial institutions through the example of the federal CRA creates an opportunity for us to interact with them about their investments in those particular communities.

It creates a space for us to engage with them about what kind of mortgages, what kind of lending that they're going to produce in those particular communities.

What we're seeing in many cases now is that the CRA Bill that was put in place by the Federal Government in the 70s, the style and the ways of lending has changed dramatically. In many cases, credit unions are now doing small business lending in the same space that traditional bank lenders, our CDFIs are doing that.

And so it creates. We now have a new environment of lending that is taking place within our communities.

And the state incorporated a CRA Bill creates a space for those local rural communities, small business owners, mortgagers, to be able to have an opportunity to interact with their financial institutions in partnership with community and even also the local municipalities.

Thank you. Seeing no further questions. Assembly Bonta, would you like to close?

I want to thank you, Chair, for all of the work that you and your Committee have done on this bill. Creating a robust state CRA AB801 ensures that modern financial institutions operating in California are held to the same community investment standards, helping close long standing racial and economic gaps in financial access.

AB801 is a top priority of the California Legislative Black Caucus. And I respectfully request your aye vote.

Thank you. I'd like to first and foremost acknowledge the investments that have been made by folks like the credit unions and the mortgage bankers. I don't think anybody on this dais is neglecting that.

But to Assembly Member Bonta's point, I do believe that clarity through this oversight will be helpful in understanding exactly where those investments are going and maybe the gaps that are needed considering the dynamics that we're dealing with today as Californians. So with that, do I have a motion?

Second.

First and second. Awesome. Madam Secretary, can we please take the roll?

[Roll Call]

The Bill is on call. We will leave the roll open.

Thank you, Chair.

Thank you. Moving on to AB 743, Assembly Member Rodriguez. The recommendation is do pass as amended to the Appropriations Committee. Please start when ready.

Okay. Thank you, Chair and Members. I want to thank the Committee staff for working on this bill with my staff. I will be accepting all the Committee amendments. Lawsuit financing, a largely unregulated financial sector, has expanded into a multibillion dollar industry within the United States.

While originally intended to provide financial assistance to primarily non-commercial plaintiffs, commercial lawsuits financing, which funds law firms and businesses, has exploded. Lacking oversight of transparency, commercial lawsuit financing has increasingly become a vehicle for foreign interest and dishonest investors to engage in fraudulent activities.

A 2022 US Government Accountability Office report found that the global commercial lawsuit financing industry conducts about 15 billion in loans and investments each year. This industry includes hedge funds, private equity firms, and foreign sovereign wealth funds, some controlled by countries including China and Russia. These finances provide funding as an investment in litigation to which they are not a party.

They will often take a large cut of the one paid out in the lawsuit, which at times is more than what the plaintiff receives. The absence of licensing requirements means that California policymakers and regulators have no means to identify or gauge which foreign and other lawsuit financiers are active in this state and to what degree any regulators lack enforcement tools address bad sectors.

AB 743 would require a person engaged in commercial lawsuit financing in California to obtain a license from the Department of Financial Protection and Innovation. The bill would include lawsuit financing and the definition of commercial loan. This bill would require a licensee who is and who is a lawsuit financier to maintain a surety bond.

This bill would make willfull violations of licensure requirements by lawsuit financier subject as a civil penalty. To be clear, this bill is intended to only cover commercial legal funding and not consumer legal funding. With me today to testify is Jonathan Stroud with United Patents.

Chairman Valencia, Vice Chair Chen, and Members of the Committee. Thank you for having me. My name is Jonathan Stroud, and I'm here today on behalf of Unified Patents to express our support for AB 743. Unified patents is a broad based membership organization with hundreds of members from all parts of the US economy, including banking, automotive, manufacturing, retail, network, entertainment, and financial companies. Our mission is to educate the public and to deter frivolous lawsuits and abuse by offering reliable public information, filing public challenges, and improving patent and legal quality and transparency.

In our work, we have become experts on the emerging marketplace of third party litigation financing. Litigation financing is the most significant development in modern civil litigation. Since at least the 1990s, litigation financing in the United States has steadily expanded, largely unregulated in the United States, and it has grown into a multibillion dollar industry.

Litigation funding providing third party non-recourse funding contingent upon litigation recovery and outcomes undergirds huge swaths of US civil litigation today. Private estimates suggest that the industry sees at least tens of billions of dollars in funding annually and it is generally undisclosed.

By its very nature, litigation funding is a rather opaque new asset class that offers enticing outsized returns. The relationships with clients and lawyers tend to be confidential, agreements tend to be bound by mandatory arbitration clauses, and attorney IOLTA accounts are involved.

Funders can and often do seek upwards of 70% of the financial recovery and, in some cases, all. As with any new opaque financial product, the emerging industry has attracted its share of bad actors. Ponzi schemes, frivolous patent litigation abuses, and attempts to avoid state sponsored sanctions by foreign actors have all been documented to date.

But funding disclosure is limited and is often the result of dissatisfied investors feuding after the fact. Unsurprisingly, states, courts, and governmental bodies here and internationally are all considering several reforms. We believe AB 743 is a small but important first step that will help provide transparency and address concerns related to this emerging alternative investment financial product and growing billion dollar marketplace.

It will begin the process of treating these investments just like any other financial products and is critical in that it provides some transparency and protection from consumers who may be impacted. Licensing is a small but important first step in understanding and addressing concerns related to any opaque emerging financial product that drives billions of dollars in investment and affects civil justice. Thank you for your time and consideration, and I welcome your thoughts.

Mr. Chairman. Chris Micheli on behalf of the Civil Justice Association of California that supports the measure. We appreciate Assembly Member Rodriguez for tackling this issue. We think the bill is an important step in making public some of these litigation funding companies.

The bill contains seven... Or, sorry, 10 important legislative findings and declarations about this burgeoning industry. And lawsuit financing today is a largely unregulated sector of California's financial market, and AB 743 will shed some light on these litigation funders.

It'll do so by defining what is lawsuit financing and the transactions that these folks engage in and require a license from DFPI. The surety bond we hope will help protect those who might be impacted by unscrupulous financing companies. And for these reasons, we support the measure. Thank you sir.

Thank you.

Chair and Members. Roxanne Gould. I'm something of a tweener. We 100% support the objective of the bill. I'm here representing the Alliance for Responsible Consumer Legal Funding. That's a mouthful. But legal funding is different than litigation financing. Assemblyman Kalra has a bill on legal funding. And we're concerned that the terminology in this particular bill doesn't differentiate well enough. And so the Member and her staff have been wonderful to work with, and they've been very open going forward.

Thank you. Any additional support in the room? Please state your name, organization.

Good afternoon, Mr. Chair and Members. Robert Moutrie for the California Chamber of Commerce in support.

Good afternoon. Nick Chiappe on behalf of the California Trucking Association in support. Thank you.

Mark Sektnan with the American Property Casualty Insurance Association. We see this as an important step towards full disclosure for both the defendant and the justice system. Thank you.

Thank you. Moving on to opposition. No opposition testimony. Anybody in the room that would like to state opposition? Seeing none. Bringing the conversation back to Committee Members. Any questions? Seeing none. I think there's a motion and a second. Ms. Rodriguez, would you like to close?

I respectfully ask for an aye vote.

Thank you. Appreciate you working on this bill and taking the Committee amendments. Look forward to this bill moving forward. Madam Secretary, please take the roll.

AB 743, the motion is do pass as amended and refer to Committee on Appropriations. [Roll Call]

The bill passes. We will leave the roll open for absent members. We have completed the agenda. We will leave the roll open a few minutes for members to add on. Secretary, please call the roll for the absent members and the bills that are on call or need members to sign up.

[Roll Call]

She's on her way. She's in an elevator.

She's on her way.

Madam Secretary, please call the absent Members for bills that are on call or. That need members to add on on the consent calendar.

[Roll Call]

With that, the Assembly Banking Finance Committee is adjourned.