BILL ANALYSIS
SENATE RULES COMMITTEE
Office of Senate Floor Analyses
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THIRD READING
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Bill No: AB 706
Author: Caldera (D), et al
Amended: 9/5/95 in Senate
Vote: 27 - Urgency
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SENATE FINANCE, INV. & INT. TR. COMMITTEE: 5-1, 8/29/95
AYES: Beverly, Hurtt, Solis, Russell, Killea
NOES: Johannessen
NOT VOTING: Calderon, Costa, Polanco
SENATE APPROPRIATIONS COMMITTEE: 12-0, 8/31/95
AYES: Alquist, Calderon, Dills, Hughes, Leslie, Mello,
Mountjoy, Polanco
NOES: Johnston, Kelley, Killea, Lewis
NOT VOTING: Leonard
ASSEMBLY FLOOR: 58-10, 6/1/95 - See last page for vote
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SUBJECT: Financial institutions
SOURCE: Author
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DIGEST: This bill allows the state to implement
provisions of the federal Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (Riegle-Neal) for
California in connection with industrial loan companies.
ANALYSIS: Under existing law, industrial loan companies
(also known as thrift and loan companies):
1. Are members of the Bank Insurance Fund (BIF) of the
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Federal Deposit Insurance Corporation (FDIC) under the
Federal Deposit Improvement Act (FDIA), therefore
depositors are insured by the FDIC.
2. Must maintain capital levels as required of commercial
banks under the FDIA.
3. Are examined by the FDIC on the same basis and standards
as commercial banks by the FDIC.
4. Are subject to all FDIC remedies and powers, including
termination of insurance. The directors and officers
are subject to FDIC remedies including cease and desist
orders, civil money penalties, criminal prosecution for
unlawful acts, removal, and suspension.
5. Are licensed for in state and out-of-state activities
and are regularly examined by the State Department of
Corporations.
6. Are authorized for multi-branch operations and loan
production offices upon application and approval by the
Commissioner of Corporations.
7. Make secured and unsecured loans with terms and
repayment schedules the same as commercial banks.
8. Are exempt from usury laws.
9. Are allowed to invest their funds in the same
investments as commercial banks.
10.Do not offer demand deposit checking accounts; however
may offer limited checking NOW and MMDA accounts.
11.Do not operate escrow or trust departments.
12.Are subject to the federal Community Reinvestment Act
and all other federal and state consumer protection
laws.
This bill:
1. Allows the Commissioner of Corporations to approve
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interstate merger transactions for industrial loans
companies subject to state and federal provisions
including Riegle-Neal.
2. Defines a facility when used with respect to a foreign
(other state) industrial loan company to mean an office
where the industrial loan company does not engage in
core business. Core business is defined as issuing
investment certificates, making loans, and other
activities the commissioner may specify.
3. Requires each foreign (other state) industrial loan
company that maintains a branch office or a facility in
California to file reports the commissioner may require
by rule or order , and pay fees or assessments as
required.
4. Permits early opt-in interstate merger transactions for
industrial loan companies pursuant to Riegle-Neal.
5. Prohibits against interstate branching through the
acquisition of branch business units located in the
state of an industrial loan company or a California bank
without the acquisition of the whole business unit.
Prohibits against interstate branching through de novo
establishment of branch offices.
6. Prohibits merging as the surviving corporation, or
purchasing a California Industrial loan company or a
California bank unless the industrial loan company or
bank has been in existence for at least five years.
7. Allows the minimum age requirement to not apply if the
industrial loan company or bank has been closed or
placed in conservatorship, the commissioner or the
superintendent of banks has taken possession of the
property and business of the industrial loan company, or
the purchase or merger is one in which the FDIC has
provided assistance, and sunsets these conditions
September 29, 1997.
8. Defines insured depository institution to mean any bank,
savings association and industrial loan company where
the deposits are insured by the FDIC. Defines
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authorized agency activities as receiving deposits,
renewing time deposits, closing loans, servicing loans,
and receiving payments on loans and other obligations.
9. Are allowed to have an insured depository institution
affiliate engage in authorized agency activities as its
agent. Allows a California industrial loan company to
engage in authorized agency activities as agent for an
insured depository institution affiliate.
10.Will become operative only if AB 1482 is also enacted on
or before January 1, 1996.
11.Is an urgency statute to eliminate conflicts between
California laws and the Riegle-Neal Act , to enact laws
to implement the act, and otherwise respond to the
Riegle-Neal Act in a timely manner.
AB 1482 (Weggeland) also addresses issues related to the
deregulation of interstate banking. It amends the current
state banking law to provide for interstate banking and
branching, and would include provisions that would allow
foreign (other state) banks to enter the California market
by merging with state banks as industrial loan companies.
COMMENTS
A History of Industrial Loan Companies in California
Industrial loan companies, also known as thrift and loan
companies, have existed in California for over 75 years.
The entrepreneurial heritage of the industry dates back to
the turn of the century, when early commercial banks only
accepted established business accounts. Thrift and loan
companies emerged in California by 1917 to serve the
financial needs of wage earners, families, and small
businesses with both loans and savings accounts. By 1983,
the California State Legislature recognized the industry as
"an important source of funds for consumers" in Chapter 858
(Statutes of 1983). All of California's industrial loan
companies are state-chartered financial institutions.
California's industrial loan companies have established a
special niche within the financial services industry. Run
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as "no frills" consumer operations, they typically have
loan portfolios composed of secured, intermediate term
loans (three to ten years). Unlike banks or savings
associations, customers of industrial loan companies
generally are more interested in earning higher interest
rates than in obtaining extra services. Demand deposit
checking accounts and general checking services for
example, are not offered by these companies.
Several California state statutes also restrict industrial
loan companies from engaging in several activities open to
banks and savings associations. The companies may not make
any loans to shareholders, officers, or directors. They
are prohibited from operating escrow or trust departments
or services. In addition, the Commissioner of Corporations
sets special reserve requirements that must be meet.
California law has, however, allowed unrestricted
intrastate branching (since 1908) and the establishment of
loan production offices outside the state.
The thrift and loan industry has been increasingly
regulated at the federal level as well. These corporations
were able to expand geographically with relative ease
because many industrial loan companies are exempt from the
Bank Holding Company Act of 1956, which requires state
authorization for interstate bank acquisitions. In 1982,
Congress enacted the Garn-St. Germain Depository Act,
allowing the companies to become FDIC members and qualify
for federal deposit insurance. By 1984, the FDIC statement
of policy declared that all industrial loan companies would
be treated equally when applying for insurance. All of
California's industrial loan companies are insured members
of the FDIC, where they are defined and treated as "banks".
These companies are subject to the same regulations under
the FDIC's Bank Insurance Fund, and the Federal Depository
Improvement Act's provisions as any other insured bank or
savings association.
The FDIA of 1991 had a significant impact on the industry.
The FDIC's powers in the supervision of all insured
financial institutions were considerably expanded.
Since industrial loan companies are treated as state
non-member banks, the provisions of Riegle-Neal that apply
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to state-chartered banks apply equally to them. Now
federal law permits thrift and loan companies to act as
agents for any affiliated institution, wherever it is
located. Furthermore, any thrift and loan company that has
been in existence at least five years is authorized to
merge with any bank headquartered in another state.
Finally, California chartered thrift and loan companies are
expressly permitted to establish out-of-state branches just
as out-of-state companies are permitted to enter the
California market. However de novo interstate branching is
prohibited. This new legislation opens the national market
to interstate banking and branching in many ways.
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The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994
Riegle-Neal covers four principal areas of interstate
activity: interstate bank holding company acquisitions,
interstate bank mergers, de novo interstate branching, and
interstate bank agency provisions.
A. Interstate Bank Holding Company Acquisitions:
As of September 29, 1995, an adequately capitalized and
well-managed bank holding company may acquire banks in
another state without regard to state law. A state law
in effect as of September 29, 1994 permitting an
out-of-state bank or bank holding company to enter by
acquisition only will continue to apply. States may
establish up to five years as the minimum age of the
bank to be acquired. This limit can be applied only to
out-of-state bank holding companies if the state so
chooses. States ability to adopt, apply and administer
any tax or method of taxation to any bank, bank holding
company, or foreign bank to the extent permitted by
federal law will remain unaffected. Federal and state
antitrust laws remain unaffected but may not
discriminate against out-of-state banks, bank holding
companies or their subsidiaries.
Upon consummation of acquisition bank holding companies
cannot control more than 10 percent of insured deposits
nationwide. If acquiring bank holding companies have a
depository institution affiliate in the same state where
an acquisition is proposed, the acquisition may not
result in the bank holding company controlling more than
30 percent of insured deposits in that state. However,
states may waive the 30 percent cap or establish a more
stringent cap so long as these limits do not
discriminate against out-of-state banks or bank holding
companies.
B. Interstate Bank Mergers:
As of June 1, 1997, national and state banks may merge
across state lines creating interstate branches. States
may individually opt out of this type of interstate
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branching by enacting laws prior to June 1, 1997. These
laws must apply equally to all out-of-state banks, and
banks located in a state that opts out may not merge
interstate with any bank. Or states may permit
interstate mergers early by enacting a law prior to June
1, 1997. Each state involved in an interstate merger
must have enacted legislation permitting the merger.
States that host the branches of interstate banks may
impose special conditions on all in-state bank branches
provided such conditions do not discriminate against
out-of-state banks. States may also similarly establish
a minimum age (up to five years) for all in-state banks
or branches participating in an interstate merger. The
same concentration limits apply as for interstate
acquisitions, however neither concentration limit bars
approval of interstate mergers involving only affiliate
banks.
The resulting bank must both be adequately capitalized
and well-managed. History of compliance with the
Community Reinvestment Act will be considered for all
mergers involving a bank's initial entry into a state.
Following the consummation of the merger, the resulting
bank may establish branches at any location previously
allowed for banks operating in that state. A state may
pass a law permitting out-of-state banks to acquire a
branch of an insured bank within the state, without
acquiring the entire bank, however this requires
legislation by the state before such an acquisition is
permitted.
C. De Novo Interstate Branching:
Upon a state's enactment of a law opting-in to permit de
novo interstate branching, a state or national bank may
apply to establish de novo branches in a state where the
bank does not already have branches. A state's law
permitting interstate de novo branching must apply
equally to all banks.
D. Interstate Agency Provisions:
Beginning September 29, 1995 a bank may receive
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deposits, renew time deposits, close loans, service
loans and receive loan payments and other obligations as
an agency of any bank or thrift affiliate. State banks
can participate so long as state law does not prohibit
these types of agency activities. A bank may not
conduct any activity as an agent that it is prohibited
from conducting as a principal under any applicable
state or federal law.
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E. Examination Authority:
Host state bank examiners may examine host state
branches of an out-of-state bank for compliance with
host state law and safety and soundness. In addition,
home state examiners may examine out-of-state branches
of home state banks.
F. Prohibition Against Deposit Production Offices:
The appropriate federal banking agencies are to adopt
uniform regulations by June 1, 1997 prohibiting any
out-of-state bank from using any interstate branching
authority primarily for the purpose of deposit
production. The regulations shall include guidelines to
ensure that banks operating interstate branches are
reasonably helpful to meet the credit needs of the host
state communities where the branches are located.
This Bill
This bill establishes the statutes for the opening of
California to interstate banking and branching for
industrial loan companies. It is noted that the authors
received technical assistance from the State Banking
Department and the Department of Corporations. The major
issues are:
A. Interstate branching provisions become effective
September 29, 1995 or upon enactment, allowing
California industrial loan companies to branch out of
California, and out-of-state industrial loan companies
to establish branches within California after first
acquiring an existing five-year-old industrial loan
company or commercial bank.
B. De novo interstate branching is prohibited.
C. Initial entry by out-of-state institutions into
California, until September 29, 1997, must be by
acquisition of, or merger with an existing whole
industrial loan company or commercial bank which has
been in existence for at least five years. After
September 29, 1997 initial entry may occur by branch or
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whole bank acquisition.
D. California industrial loan companies will be able to
conduct activities through their holding company
affiliates in other states, called affiliate agency
authority. National banks will be able to exercise
these same powers through their affiliates automatically
under Riegle-Neal effective September 29, 1995.
This bill is supported by the California Association of
Thrift and Loan Companies, the California Bankers
Association (CBA), and various financial institutions. The
supporters of the bill contend that the enactment of this
bill, along with AB 1482, will allow California to take a
major step in shaping the destiny of its banking system to
include the following:
A. Retain and strengthen California's position as the
primary commercial banking center of the Western United
States and the evolving economies of the Pacific Rim and
the NAFTA trading partners.
B. Provide consumers and businesses with a broader range of
products and delivery systems as competition for their
business intensifies through the emergence of new
providers.
C. Increase the franchise value of all well-managed banks
particularly community banks, as the market driven
restructuring of the financial services business will no
longer be hindered by geographic restraints.
D. Prevent neighboring western states from exploiting an
early lead in the race to attract the relocation and
growth of new financial services players and jobs.
The California Bankers Association states their membership
is prepared to compete in an interstate branching
environment now, and believes that Congress did not set the
June 1, 1997 as a trigger date in Riegle-Neal in order to
allow community banks time to prepare for additional
competition. The CBA contends the date was set to allow
state legislatures time to decide whether they wanted to
opt in early or to opt out entirely.
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The following western states have enacted early opt-in:
Idaho, Nevada, Oregon, and Utah.
Industrial loan companies (ILC's) are regulated as
commercial banks at the federal level. ILC's pay insurance
premiums to the FDIC and are subject to the same capital
and other regulatory requirements as commercial banks,
therefore the comparable treatment by these two bills.
The federal legislation has removed most remaining barriers
to interstate banking and branching. Although banking
firms worked within the then existing laws to operate
across state lines, it is assumed that with the passage of
Riegle-Neal the cost of providing banking services will be
lowered in more than one state, and interstate activity
will increase as a result. Because banks may gain from
expanded business opportunities, their customers may
receive cheaper, more efficient, and more convenient
service. A public benefit of interstate branching is that
banks may become safer if they diversify their operations
across regions. Good results in one state or region might
offset poor results elsewhere. Reducing bank risk is
desirable from the perspective of public policy, since a
more stable banking system has fewer bank failures and
small deposit insurance losses. Removing the remaining
barriers to interstate banking and branching should bring
gains due to enhanced bank efficiency and competition, and
potentially greater convenience for bank customers.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes
Local: No
Regulation and enforcement costs; Unknown, but fully
reimbursable from Corporations fees, and industry
assessments.
This bill provides that out-of-state banks must pay to the
Department of Corporations an annual fee based on the
assets of the company, in relation to the aggregate assets
of all companies. STAFF NOTES that company assets
maintained outside of California are not exempted from the
annual assessment. The bill also authorizes the
Corporations Commissioner to collect an examination fee, as
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needed, to cover the cost of field enforcement.
STAFF NOTES that this bill proposes substantial changes to
the banking system in California. At this time it is
difficult to quantify the long-term effects of this bill.
SUPPORT: (Verified 9/5/95)
California Association of Thrift and Loan Companies
California Bankers Association
First Interstate Bank
Bank of Petaluma
Bank of America
ARGUMENTS IN SUPPORT: See Comment section.
ASSEMBLY FLOOR:
AYES: Aguiar, Alby, Alpert, Baca, Baldwin, Bates, Battin,
Boland, Bowler, V. Brown, Brulte, Bustamante, Caldera,
Campbell, Cannella, Conroy, Cortese, Cunneen, Davis,
Ducheny, Figueroa, Firestone, Friedman, Frusetta,
Gallegos, Goldsmith, Granlund, Hannigan, Harvey, Hauser,
Hawkins, Hoge, House, Isenberg, Katz, Knight, Knowles,
Knox, Kuykendall, Machado, Mazzoni, Miller, Morrissey,
Morrow, Olberg, Poochigian, Pringle, Rainey, Richter,
Rogan, Setencich, Sher, Speier, Sweeney, Takasugi,
Vasconcellos, Weggeland, Woods
NOES: Allen, Archie-Hudson, Bowen, Burton, Kuehl, Lee,
Martinez, McDonald, Napolitano, Villaraigosa
NOT VOTING: Bordonaro, Brewer, Escutia, Kaloogian,
McPherson, K. Murray, W. Murray, Thompson, Tucker, W.
Brown
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NC:ctl 9/5/95 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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