Governor Acts on Financial Services Related Legislation

The California Legislature has adjourned for the year, sending just over 1,200 bills to the Governor for his consideration. This year, Governor Newsom vetoed nearly 16 percent of those bills. As we wrap up the legislative session, we thought it would be helpful to highlight the Governor’s recent action on several key financial services related measures.

Mortgage and Foreclosure

The Governor signed AB 3100 (Low) which requires a conventional home mortgage loan originated on or after January 1, 2027, to include provisions to allow for any of the existing borrowers to purchase the property interest of another borrower on the loan by assuming the seller’s portion of the mortgage in a divorce proceeding if the assuming borrower qualifies for the underlying loan, as determined by the lender. The measure applies to property secured by owner-occupied residential real property containing four or fewer dwelling units with multiple borrowers. Also signed, was AB 2424 (Schiavo) which aims to protect owner equity in foreclosure proceedings by imposing additional requirements that must be satisfied before exercising a sale. These include additional notification requirements, additional time before a foreclosure auction may begin and a requirement that prohibits trustees from selling the property at the initially scheduled date of sale for less than 67% of that fair market value.

Debt Collection

The Governor signed three debt collection measures into law:

AB 2837 (Bauer-Kahan) places a number of new timelines and specific parameters on bank levies, wage garnishment, and claims of exemption. For example, among other provisions, AB 2837 requires a judgment creditor to take additional steps to verify a judgment debtor’s address and provide notice of enforcement to a judgment debtor, by requiring a court to order the return of exempt property that has been levied upon, and limiting the time period during which an earnings withholding order may be enforced and the frequency with which such an order may be sought.

SB 1061 (Limón) prohibits reporting of medical debt to consumer credit reporting agencies, those agencies from including it in their reports, and others from relying on medical debt that appears on a report when making an underwriting decision. Finally, in the debt collection space, SB 1286 (Min) proposes to add commercial debts of up to $500,000 that are entered into, renewed, sold or assigned on or after July 1, 2025 to the Rosenthal Fair Debt Collection Practices Act.

Fees

The governor signed into law two measures related to the regulation of fees imposed by financial institutions. SB 1075 (Bradford) applies only to credit unions and limits fees for insufficient funds to $14, unless the federal Consumer Financial Protection Bureau lowers the limit further. AB 2017 (Grayson) prohibits banks and credit unions from charging a consumer a nonsufficient funds fee when the consumer’s attempt to initiate a transaction is declined instantaneously or near instantaneously due to nonsufficient funds. The measure comports with CFPB’s proposed rules issued in January of this year for federally chartered banks.

Elder Financial Abuse

The governor vetoed SB 278 (Dodd) which required financial institutions to establish an emergency financial contact program, whereby senior accountholders can designate a third-party to receive an alert about a suspicious transaction flagged by the accountholders bank. The measure also required banks to hold certain transactions when there is a reasonable suspicion of fraud.

By: Melanie Cuevas, VP, Government Relations

In 2023, Governor Newsom signed into law measures SB 253 and SB 261, both of which mandate climate-related disclosures. Both measures impact financial institutions that meet the qualifying factors for reporting entities. Note that one of the qualifying factors is doing business in the state of California (rather than, for example, being headquartered in California). The California state agency overseeing these mandates is the California State Air Resources Board (CARB), which is required to complete subsequent implementing regulations on or before January 1, 2025. Both measures also empower CARB with enforcement authority via administrative penalties.

SB 253 requires reporting entities to disclose on an annual basis its Scope 1, 2, and 3 greenhouse gas emissions. By 2026 entities are mandated to begin reporting scope 1 and scope 2 emissions on the prior fiscal year and obtain limited third-party assurance for these reports. By 2027, entities will begin reporting scope 3 emissions on the prior fiscal year. By 2023, companies will need to obtain reasonable, third-party assurance for their scope 1 and 2 emissions reporting and limited third-party assurance for their scope 3 emissions reporting. The measure does not contain exemptions for any sectors of scope 3 reporting, which indicates that Scope 3 Category 15 Financed Emissions will be required in a financial institution's report.

SB 261 requires reporting entities by January 1, 2026 and biennially thereafter to submit a climate-related financial risk report that is consistent with the recommendations of the Task Force on Climate-Related Financial Disclosure's (TCFD) framework in addition to its steps taken to reduce and adapt to the disclosed climate-related financial risk. Importantly, the measure allows for reporting entities to provide thorough explanations of gaps in reporting, in the event that the entity is unable to fulfill all of the recommended requirements and reports may be consolidated at the parent company level. This measure also states that a covered entity satisfies the reporting requirements if it prepares a publicly accessible, substantially similar report pursuant to another law or regulation.

When he signed SB 253 and SB 261 into law, California’s Governor Newsom instructed the legislature to work on subsequent legislation to address his concerns about cost and feasibility of timelines, for both covered entities as well as the state agency. Since convening the 2024 Legislative Session, neither author has introduced a measure to address such work.

In press statements, the author of SB 253 has vehemently defending the legislation, saying, “It’s both inexpensive and easy for corporations to make these disclosures … large corporations — particularly fossil fuel corporations and large banks — are absolutely terrified that if they have to tell the public how dramatically they’re fueling climate change, they’ll no longer be able to mislead the public and investors.”

Both measures will require a significant allocation from the state budget's general fund to CARB for the purpose of implementation and oversight. California is facing a sizable budget downfall – estimates range from approximately $30-$70 billion. As a result, the governor's draft state budget proposal, presented in January, delayed decisions on all recently enacted legislation; while not exclusive to SB 253 and SB 261, those measures were included in the decisioning delay. At that time, the governor announced that the administration would reexamine these funding allocations during the May Revise, a time when the state budget projections are updated with further data. Recently, the California Department of Finance posted its Budget Change Proposal to fully fund CARB for the implementation of SB 253 and SB 261. California lawmakers must approve a state budget by June 15, which is typically followed by Budget Trailer Bills that implement the language of the state budget.

The general practice of state agencies is to begin promulgation of regulations after the agency has received the funding to do so – CARB has confirmed that this practice will stand. In the event that the agency is not funded to implement the program, the statutory deadlines will still stand and would need to be updated, likely through a Budget Trailer Bill, which would happen sometime over the late weeks of summer in anticipation of the legislature’s final August 31 deadline.

Meanwhile, the U.S. Chamber of Commerce filed suit on both laws, based on a first amendment violation as well as a Dormant Commerce Clause violation. Most recently, the judge assigned to the case recused himself and a new judge was appointed. That case continues to move forward.

In this context it is also worth noting two measures that impact the voluntary carbon offset (VCO) space. Although it garnered less attention and the two aforementioned measures, AB 1305 was also signed into law last year and requires entities to disclose specified information in the event that the entity makes a net-zero or related claim. The measure also requires a number of disclosures associated with VCO transactions. This measure does not require implementing regulations by CARB. The author more recently asserted that he intended for reporting to begin January 1, 2025, and is pursuing a legislative path to codify that intent. Currently the legislature is also considering SB 1036, which adds claims made about VCOs to the False Advertising Law.

CBA continues to monitor these issues closely and will report on substantive updates

By: Jason Lane, SVP, Director of Government Relations

Federal and state lawmakers have been highly critical of bank fees this year. Most of the discourse around bank fees started with President Biden’s use of the term “junk fees” in his State of the Union Address last year. The Administration’s campaign against fees was primarily focused on the telecom, hotel and lodging, and ticketing industries but overdraft and non-sufficient funds fees also came under scrutiny. Prior to Biden’s announcement, the Consumer Financial Protection Bureau (CFPB) had already launched an initiative to scrutinize junk fees in 2022. That same year CFPB issued a circular advising that overdraft fees associated with authorize positive/settle negative transactions were likely a violation of rules governing unfair and deceptive practices. In January of this year, the CFPB issued a proposed rule subjecting overdraft fees to Regulation Z and the Truth In Lending Act, effectively making them a loan, followed by another proposed rule to prohibit non-sufficient funds fees assessed for instantaneously or near instantaneously declined transactions.

California State lawmakers entered the fray this year by introducing three measures. Assembly Bill 2017 (Grayson) specifies that a bank or credit union subject to the examination authority of the Department of Financial Protection and Innovation shall not charge a consumer a nonsufficient funds fee when the consumer’s attempt to initiate a transaction is declined instantaneously or near instantaneously by the bank or credit union due to nonsufficient funds.

Senate Bill 1075 limits the number of overdraft fees that a state-chartered credit union may assess on a member to no more than three per month. Additionally, a credit union must provide a member at least five business days before requiring payment of an overdraft fee to give the member an opportunity to repay the amount that triggered the overdraft fee.

In February of this year, Attorney General Rob Bonta issued a press release to announce actions his office is taking on overdraft fees. Directed at banks and credit unions under $10 billion in assets, the announcement warned that overdraft and returned deposited item fees may violate California’s Unfair Competition Law (UCL) and the federal Consumer Financial Protection Act (CFPA). Bonta announced plans to send letters to state chartered financial institutions that will focus on unfair practices associated with overdraft fees assesses on authorized positive/settled negative transactions, and how the timing of those transactions can result in overdraft fees. The letter also warned about the use of returned deposited item fees, which are charged to consumers when the consumer deposits a check that is returned due to a problem with the check originator.

CBA continues to emphasize that the overdraft protection is a vital tool used by consumers to help manage their finances. A recent survey shows that consumers overwhelming value the service and continue to express a desire to have their bank cover a transaction when they overdraft their account, even if means paying a fee. We also continue to emphasize that accountholders must opt-in to the service, and there is no such thing as a “surprise” overdraft fee.

By Jason Lane, SVP, Director of Government Relations

The California State Legislature returned from interim recess in January to a sizeable budget deficit, which is likely to influence legislative outcomes this year. Governor Newsom unveiled his proposal to close the budget gap, which includes payment deferments on previous approved budget appropriations, particularly in the areas of climate change mitigation, transportation and housing. The Governor’s $291.5 billion budget anticipates a $37.9 billion deficit which is notably $30 billion lower than the Legislative Analyst’s Office deficit prediction. While the Governor’s budget did not call for tax increases, he has proposed an elimination of the bad debt deduction for lenders and retailers.

Most states that impose a tax on the sale of goods require the retailer to collect and remit the full amount of the sales tax at the time of a financed sale, even though the customer has financed the sales price for the goods. Some of these states, including California, have enacted bad debt statutes to provide for a refund of a pro rata share of the sales tax if the customer fails to pay the full price for a product. The intent in enacting bad debt statutes is to ensure that tax is only paid on the actual purchase price paid by the customer as opposed to the amount expected to be paid. Repealing the bad debt statute has the effect of increasing the tax rate on businesses by imposing the full tax rate on prices that were never paid.

Most major retailers do not self-finance the sale of goods, but rather contract with lenders to finance their sales. In many instances, the relationship between the retailer and the lender is blurred, particularly in the case of private label credit cards where a store-branded card may prominently display the retailer’s name but not the name of the lender providing the financial underwriting. In some cases, the lender may even provide warranty or repair services for the product sold. Small retailers providing lines of credit to their customers are able to sell their accounts to lenders as a means to raise capital. In doing so, the retailer contractually assigns the right to claim a sales tax refund to the lender if the account is deemed uncollectible. California’s existing bad debt statute recognizes these modern financial relationships, and importantly, current law acknowledges that when the purchaser of goods on credit fails to ultimately pay for a product, the transaction is economically incomplete and the lender

or retailer is entitled to a sales tax refund. In 2000, the Legislature overwhelming passed Assembly Bill 599 (Lowenthal) [Chapter 600, Statutes of 2000] to allow the assignee of an account to take the refund or deduction if the retailer has not done so before the account was sold. That measure allowed lenders and retailers to work out among themselves who would take the deduction. The Board of Equalization has called the bad deduction “a fair method of correcting the perceived double standard in the law where the state was able to retain sales and use tax dollars that would otherwise be refunded to a retailer had it not sold the debt to a lender or an assignee."

According to the Governor’s budget proposal, elimination of the bad debt deduction is projected to increase General Fund revenues by $23.5 million in 2024-25 and about $50.6 million per year thereafter. CBA has joined a coalition of lenders and retailers to express our concerns about this proposed change. At a time when state tax revenue is declining, now is not the time to enact legislation that might result in a tightening of credit for consumers.

By Melanie Cuevas, VP, Government Relations

When asked to foreshadow Sacramento lawmakers’ priorities and actions in 2024, the California Bankers Associations’ advocacy team predicted about 2,250 new measures and anticipated renewed focus in the issue areas of privacy and technology, taxation, housing, and the looming budget crisis and economic downturn. Many times, California is a proactive pioneer of public policy discussions. Other times, California serves as a catalyst for taking action in response to paralysis at the federal level. No matter the motivation, this year is already adding up to be dynamic.

February 16, 2024 was the deadline for legislators to submit new bill proposals. The California Legislature hit the ground running, introducing a total of 2,124 new ideas for California laws for consideration in the final year of the 2023-2024 Legislative Session. This year’s total number includes 1,505 introduced by assembly members and 619 introduced by members of the senate and is an average amount for the second year (even-numbered year) of a two-year session. As predicted, we’re seeing acute focus on artificial intelligence, housing, reparations and funding sources for the budget, among other bill ideas that range from daylight savings time to decriminalizing psychedelic drugs.

Having said that, a significant number of measures are “spot bills,” which means that they initially serve as placeholders and therefore fail at the outset to show the author’s ultimate intent – the substantive public policy of those placeholder measures will not be revealed until the middle of March. Sometimes “spot bills” are used strategically to delay discussion on a controversial topic, other times they may be used to intentionally create more space for ongoing negotiations and decisions.

Measures will move through the legislature’s multi-step vetting process of policy committees, fiscal analysis and votes by the bodies of the Senate and Assembly through August 31, the deadline for the legislature to conclude legislative work and send measures to the governor. The governor will have until September 30 to veto, sign or let pass without signature any measures that reach his desk. Last year, the legislature sent 1,046 measures – out of the nearly 3,000 that were introduced – to the governor, who signed 890 measures into new California law (he vetoed 156).

Overlaying the process of lawmaking, members of the California legislature will also grapple with state’s budget shortfall, the actual size of which is up for debate. While the governor initially suggested a $38 billion hole, the Legislative Analyst Office, which in January projected a more dire shortfall of nearly $60 billion, increased the likely shortfall to $73 billion as tax receipts are falling short of earlier estimates. Not only will the legislature need to find new budget solutions – which may include both spending reductions as well as new revenue sources – to ensure that the budget is balanced, the state’s complicated fiscal outlook may result in more costly legislative proposals being set aside due to lack of funding.

In fact, Assembly Speaker Robert Rivas recently cast doubt – and perhaps foreshadowed the fate that many measures will face this year – on the latest proposal to create a state-run single-payer healthcare system for Californians, a longtime priority of the Progressive Caucus, at an estimated cost of $314-391 billion in state and federal funds, stating, “It’s a good idea but it’s a tough, tough sell, especially in a budget climate that we are experiencing now.”

We’ll also concurrently see California’s primary election on March 5, 2024, followed by the presidential election on November 5. Assembly Members and Senators seeking reelection may be motivated to capture legislative wins to report back to their voting base or to work on hot button projects. In additional to federal level seats, this year California voters will elect all of the seats of the California State Assembly, all even-numbered seats of the California State Senate, plus local elected positions (like city council, for example) as well as statewide ballot propositions. Through a combination of termed out lawmakers and current elected officials seeking higher office, we’re likely to see nearly 30 new members to the California State Legislature this election cycle – in a body of 120 lawmakers, that is not an insignificant addition.

CBA’s advocacy team will be hard at work in 2024 to ensure that the interests of our members are well represented in Capitol conversations and to keep our members apprised of the quickly evolving work of the legislature throughout the session. Compounding the sheer number of potential new laws and the many ambitious measures already introduced with the state’s budget crisis, multiplied by a critical election cycle, you can count on an action-packed 2024 for California policy and politics.

By Jason Lane, SVP, Director of Government Relations

While CBA’s government relations team is often advocating in opposition to legislative proposals that are harmful to the industry, we do try to find opportunities to sponsor measures on behalf of our member banks. CBA is pleased to sponsor two state legislative measures this year.

Assembly Bill 2618 (Chen)

Until January 1, 2026, Government Code Section 53601.8 allows, but does not mandate, a local agency to deposit up to 50 percent of their overall surplus funds with a depository institution that uses reciprocal deposits as a means of collateralization.

These local agency funds may be deposited into a certificate of deposit or a demand deposit account. Using reciprocal deposits allows the depository institution to accept a deposit from a local agency exceeding the Federal Deposit Insurance Corporation or National Credit Union Association standard insurance limit of $250,000 (per depositor) while maintaining full insurance coverage over the entirety of the local agency’s deposit.

Unless extended, on January 1, 2026, the maximum 50 percent of local agency funds that may be placed using reciprocal deposits will be reduced to 30 percent.

Depository institutions that use reciprocal deposits as a means to collateralize against local agency deposits are community banks operating within the geographical region of the local agency. This measure maintains flexibility for local agencies and banks as they work together in managing local agency funds and in serving their communities.

Assembly Bill 2618 (Chen) eliminates the January 1, 2026, sunset date contained in Government Code Section 53601.8 thereby extending an existing permissive authority where local agency’s may deposit up to 50 percent of their overall surplus funds with a depository institution that uses reciprocal deposits.

SB 1127 (Niello)

California Probate Code Section 15408 establishes how a trustee or beneficiary may terminate a trust when the fair market value of the principal of the trust is too low in relation to the cost of the trust’s administration. Existing Section 15408 authorizes the trustee or beneficiary to petition the court for the termination or modification of the trust, or the appointment of a new trustee. Existing Section 15408 also allows the trustee to terminate the trust without a court order when the principal has a value of $50,000 or less.

This proposal increases the amount where the trustee may terminate a trust without a court order from $50,000 to $100,000 or less and establishes a mechanism where the statutory threshold is adjusted based on the consumer price index every three years. Such an amendment helps preserve the principal balance of the trust, thereby avoiding additional fees and expenses associated with trust administration and costs associated with a court termination.

By Melanie Cuevas, VP, Government Relations

Every election matters. In California, primary elections can be especially important. California’s primary election occurs on March 5 this year, a day referred to as Super Tuesday because more than a dozen states hold their primary elections on the same day. As a California voter, you will have the opportunity to vote on elected offices at all levels of government; in addition to voting for a presidential candidate, you can directly impact state policies by voting.

The 2022 election was significant, shaping California politics for at least the next decade by bringing in 37 brand new state senators and assembly members, each with a term limit of 12 years maximum. In a legislative body of 120 total members, 2022’s freshmen class was especially and has already proven to be highly influential in California policy – and 2024 is likely to be similar, with at least 24 current legislators termed out, retiring, or seeking higher office. After the 2024 election, California is unlikely to see a freshmen classes of these large sizes again for quite some time.

California’s “Top Two” system allows the top two vote-getters, regardless of political affiliation to advance to the November election. This means that some races can be decided during the primary. This also means that some districts will see liberal democrats versus moderate democrats or conservative republicans versus moderate republican races on the November ballot. Both will directly impact the types of legislation that is introduced, contemplated, passed or failed in California.

Because politics in California impact, both positively and negatively, businesses and the banking industry daily, now more than ever it is important to help elect lawmakers who understand the needs of the banking industry and the communities that they serve. Fortunately, the California Bankers Association maintains a political action committee to help elect candidates who understand the banking industry’s needs. The PAC represents the combined force of California banks and raises contributions from banking leaders and members to support State Senate and State Assembly candidates that have been vetted by CBA’s government relations team and members of CBA’s PAC Committee.

By pooling resources, the industry amplifies its impact. This strategic engagement in the political process fortifies the work of CBA’s government relations team and helps promote and defend the industry, CBA members and the communities that they serve.

For more information on how to contribute to the PAC, please contact Elizabeth Clayberger at eclayberger@calbankers.com.

By Melanie Cuevas, VP, Government Relations

California this year enacted two new significant pieces of climate legislation, requiring reporting of both climate-related financial risk and greenhouse gas emissions. The measures – SB 253 (Wiener) [Chapter 382, Statues of 2023] and SB 261 (Stern) [Chapter 383, Statues of 2023] – will have a significant impact on reporting entities as well as on those that do not qualify as a reporting entity themselves but exist within the supply chain of reporting entities. It is important to note that although the statutes are the result of three years of negotiations, language to SB 253 and SB 261, as of the signing date, will likely not be the ultimate rule with which reporting entities must comply. Based on CBA advocates’ historic and ongoing engagement on this issue, we have compiled the below information for our members as they work with their internal compliance teams in addition to an explanation of how the policy is likely to evolve.

WHO?

“Covered Entity” is defined as a corporation, partnership, limited liability company, or other business entity formed under the laws of the state, the laws of any other state of the United States or the District of Columbia, or under an act of the Congress of the United States and that does business in California, with a denoted annual revenue minimum. The total annual revenue threshold established in SB 253 is $1 billion and is $500 million in SB 261. Mandated reports of SB 253 and SB 261 alike must be submitted to the California State Air Resources Board (CARB) and must be publicly available.

CBA was successful in securing language in SB 261 that allows consolidation of reports at the parent company level, ensuring that subsidiaries are not also required to prepare a separate report[1], as well as language stating that entities satisfy the reporting requirements of SB 261 if they comply with another disclosure requirement pursuant to another government entity or voluntarily use a framework that meets specified requirements[2].

(1)CA Health and Safety Code Section 38533 (b)(2)
(2)CA Health and Safety Code Section 38533 (b)(4)

WHAT?

SB 253
The Climate Corporate Data Accountability Act, SB 253, requires entities to publicly report their annual scopes 1,2 and 3 greenhouse gas (GHG) emissions. Scope 1 emissions include those stemming from sources an entity operates; scope 2 includes indirect emissions, such as those associated with electricity, heating, or cooling; and scope 3 includes upstream and downstream emissions, such as those associated with employee commutes, energy used to grow raw materials, transportation and use of products, end-of-life disposal of products, etc. It is important to note that scope 3 incorporates 15 subcategories, including S3C15 “financed emissions” linked to investments and lending activity. For a financial institution reporting entity, reporting of financed Emissions includes the emissions of all the companies in its portfolio apportioned based on how much of these companies’ activities are financed by the financing entity.

Reporting entities will be subject to an annual reporting fee, to be determined by CARB. Non-filing, late filing, or other failure to meet requirements may result in administrative penalties not to exceed five hundred thousand dollars ($500,000) in a reporting year. CBA was successful in securing language to protect reporting entities that make scope 3 disclosures with a reasonable basis and disclosed in good faith[3] in addition to language stating that penalties assessed through 2030 on scope 3 reporting shall only occur for non-filing[4].

SB 261
Reporting entities are required under SB 261 to biennially report climate-related financial risk in accordance with the recommended framework contained in the Final Report of Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as well as the entity’s efforts to reduce and adapt to the reported risk. CBA was successful in securing language that allows risk reports to be consolidated at the parent company level[5] in addition to a “comply-or-explain” provision, requiring reporting entities to provide detailed explanations in instances where reporting gaps exist[6].

Reporting entities will be subject to an annual reporting fee, to be determined by CARB. Non-filing or insufficient reporting may result in administrative penalties not to exceed fifty thousand dollars ($50,000) in a reporting year. CBA was successful in lowering the maximum allowable penalty as well as securing language stating that CARB shall consider whether the violator took good faith measures to comply[7].

(3)CA Health and Safety Code Section 38532 (f)(2)(B)
(4)CA Health and Safety Code Section 38532 (f)(2)(C)
(5)CA Health and Safety Code Section 38533 (b)(2)
(6)CA Health and Safety Code Section 38533 (b)(1)(B)

WHEN?

SB 253
According to the measure, CARB must promulgate enacting regulations by January 1, 2025. Beginning in 2026, reporting entities must annually report and publicly disclose their scopes 1 and 2 emissions for the prior fiscal year; beginning in 2027, reporting entities must annually report and publicly disclose scope 3 emissions for the prior fiscal year no later than 180 days after reporting scope 1 and 2 emissions. Scope 1 and 2 data must be audited by an independent third-party assurance provider at a limited assurance level beginning in 2026 and a reasonable assurance level beginning in 2023. Assurance engagement for scope 3 must be performed at a limited assurance level beginning in 2030; CARB may establish an additional assurance requirement for scope 3 emissions.

SB 261
This measure requires biennial reporting to CARB to commence no later than January 2026; the measure also requires entities to make reports publicly available on their websites. Under SB 261, CARB is required to contract with a climate reporting organization for the purpose of preparing a biennial public report reviewing the climate-related financial risk reported by industry and an analysis of sector-wide climate-related financial risk to California – including but not limited to potential impacts on economically vulnerable communities – and the identification of inadequate and insufficient reports.

WHY?

Through enacting some of the most aggressive policies in the nation, the California Legislature has long held and seeks to retain the title of leader in the fight against climate change; California Governor Gavin Newsom has similarly captured the designation as “The Climate Governor.” While attending Climate Week in New York on September 17, 2023, the

Governor highlighted California’s climate action – including a recent lawsuit filed in partnership with California Attorney General Rob Bonta against oil companies, claiming they deceived the public about the risks of fossil fuels – and previewed that he intended to sign both climate reporting measures, but that “some clean-up” would be necessary. The much-anticipated signing messages, released on October 7, 2023, indicate non-specific concerns around infeasible timelines, financial impact, and potentially inconsistent reporting.

Notwithstanding the overlap of both the scope of reporting entities and the similarity in disclosure reports between SB 253 and SB 261, proponents of the measures prioritized enacting California policy that intentionally reaches well beyond the anticipated climate reporting rule of the Securities and Exchange Commission in terms of both reporting entities captured and the reporting requirements themselves. Some reporting entities may find themselves filing three separate reports in the coming years.

(7)CA Health and Safety Code Section 38533 (e)(2)

NEXT STEPS

In his signing messages of SB 253 and SB 261, Governor Newsom instructed the legislature to find solutions to his concerns about timing and accuracy. Lawmakers will reconvene the Legislative Session in Sacramento on January 3, 2024; at this point, new measures may be introduced, and lawmakers begin work on the state budget. Due to CARB’s deadline to promulgate regulations no later than January 2025, we anticipate that any agreed-upon solutions may move through the process on an expedited basis, either by way of a measure containing an “urgency clause” or via a budget trailer bill.

CBA advocates are continuing conversations with relevant stakeholders regarding both potential rulemaking by agency and potential solutions to the Governor’s stated concerns, and we anticipate maintaining status as a resource to lawmakers and stakeholders. During the 2023 Legislative Session, the association maintained an “Oppose Unless Amended” position on SB 253 and SB 261, and submitted amendments on both measures that would remove the opposition of the association. CBA advocated, among other things, to delay timelines and to tie reporting of scope 3 GHG emissions data in SB 253 to the reporting entity’s publicly stated targets and goals; we anticipate continuation of prior CBA messaging and objectives.

Likewise, CBA’s advocacy team will keep members updated in real-time as negotiations evolve. If we can be a resource to your institution, please reach out.

The information contained in this bulletin is not intended to constitute, and should not be received as legal advice. Please consult with your counsel for more detailed information applicable to your institution.

By Jason Lane, SVP, Director of Government Relations

When the legislature convened for the 2023-2024 legislative session one-third of the legislature had never held state-wide office. This sizeable freshman class was the product of both redistricting, an event that coincides with the U.S. Census every ten years, and the announcement by some sitting legislators that they would retire and not return to office. CBA spent much of the early part of this year developing relationships with these new members and discussing the important role banks have in their communities.

Much of the early dialog, however, quickly pivoted to the collapse of Silicon Valley Business Bank. Immediately, the association engaged in discussions with state and federal lawmakers to address further speculation about the health of the industry. The California Senate Banking and Financial Institutions held a joint hearing with the Assembly Banking Committee in May titled The Failure of Silicon Valley Bank: Where Regulation and Supervision Fell Short. While CBA was not asked to provide testimony during this hearing, the committees heard from Clothilde V. Hewlett, Commissioner, Department of Financial Protection and Innovation (DFPI), Avy Mallik, General Counsel, DFPI, and Jeanette Quick, Deputy Commissioner of Investor Protection, DFPI. The committee was very engaged and asked questions relative to the speed at which the department responded to troubling warning signs, including the fact that 93.8 percent of Silicon Valley Bank’s total deposits were uninsured. During the hearing DFPI announced plans to increase oversight of banks with over $10 billion in total assets in coordination with federal regulators as part of its examination process.

In the weeks following the hearing, DFPI met with CBA to unveil a significant increase in assessments on state-chartered institutions to ostensibly defray the cost of enhanced supervision of licensees. The 27 percent increase in assessments for the 2023-24 fiscal year is, according to DFPI, also the result of a reduction of approximately $450 billion in assets under supervision by the Department following the failures of Silicon Valley Bank and First Republic Bank, Silvergate Bank’s liquidation, and merger activity within the industry. In response, CBA sent a letter to the DFPI expressing concerns with the recent increase in assessments against California state-chartered banks. Among other things, the letter requests an understanding of expense reductions and efficiencies that might be contemplated by the Department to minimize future increases and describes the consequences on state-chartered banks associated with the increase in assessments. Discussions about next year’s assessment increase are ongoing.

Legislatively, CBA saw the introduction of SB 278 (Dodd). Sponsored by the Consumer Attorneys of California, this measure makes financial institutions liable for elder financial abuse if the institution should have known that the likely result of a transaction initiated by an accountholder would result in fraud, and the institution failed to stop it. We opposed this expanded liability, which fundamentally alters the relationship between banks and their senior accountholders. Under the measure, a bank employee could take the appropriate steps to warn an accountholder that the transaction they’ve initiated with the bank may result in fraud, but if the employee honors the transaction, the bank could be held liable. With no clear safe harbor for institutions to utilize to avoid liability, banks will be forced to reevaluate their customer relationship with accountholders over the age of 65. We launched a successful media campaign opposing SB 278 and worked with aging experts at Stanford University and the Milken Institute to publish and opinion editorial related to the measure. This legislation was ultimately held in the Assembly Banking Committee and did not advance this year but remains eligible for consideration next year.

A CBA-sponsored measure adopting the Uniform Fiduciary Income and Principal Act has been signed by the governor. The Act recognizes modern portfolio theory by allowing trustees to invest for the maximum total return, whether the return is in the form of income or growth of principal and provides more flexible terms giving trustees discretion to accumulate income or access principal when advantageous to further the purposes of the trust. Another uniform measure headed to the governor, and supported by CBA, adopts the Uniform Directed Trust Act which provides a framework for allocating fiduciary power and duty between a trust director and a trustee by allocating the primary duty to the director while simultaneously maintaining a minimum core duty for the trustee to avoid willful misconduct.

We successfully negotiated several mortgage-related measures that are still active. We secured amendments requiring lender consent for borrowers that wish to separately convey an accessory dwelling unit from the parcel. We helped redraft a measure to improve compliance that requires a transferor mortgage servicer to furnish to a transferee mortgage servicer material written records regarding damaged residential 1-4 property resulting from a disaster where a state of emergency has been called. A measure adopting remote online notarization in California, supported by CBA, is nearing the legislative finish line.

Additionally, CBA was asked to join an opposition coalition to express concern about a package of water rights-related measures that are important to our agriculture lending community. CBA joined the coalition, and the package of measures were set aside for the remainder of the legislative year, though they will be eligible to move forward in 2024 as two-year measures.

Though the Governor vetoed a similar bill last year, CBA-supported Assembly Bill 39 (Grayson) was finally signed into law on October 13. This measure creates the Digital Financial Assets Law and grants regulatory authority to the Department of Financial Protection and Innovation (DFPI) to license and supervise all digital asset activity in the state unless the activity is conducted by a commercial bank or credit union. The measure broadly defines “digital assets” as any digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender. This measure requires that the implementation of the department’s new authority be finalized by January 1, 2024.

The Governor also signed CBA-opposed Senate Bill 253 (Wiener). The California Global Warming Solutions Act of 2006 requires the California Air Resources Board (CARB) to adopt regulations to require the reporting and verification of statewide greenhouse gas emissions and to monitor and enforce compliance with the act. Additionally, the Governor signed Senate Bill 261 (Stern) another greenhouse gas reporting measure. Under this measure, on or before January 1, 2026, and biennially thereafter, a covered entity is required to prepare a climate-related financial risk report disclosing the entity’s climate-related financial risk and measures adopted to reduce and adapt to climate- related financial risk. The measure requires the covered entity to make a copy of the report available to the public on its own internet website. While Governor Newsom signed SB 253 and SB 261, his signing message acknowledged significant flaws in both measures and a commitment to direct his administration to work with the legislature on “clean-up” legislation to address implementation deadlines and the financial impact to businesses.

The CBA advocacy team traveled to Capitol Hill five times this year including CBA’s Annual Washington D.C. Visit and our Joint D.C. with the Florida Bankers in September. We met with members of the congressional delegation and their staff to discuss pending legislation we oppose such as The Credit Card Competition Act, which requires card-issuing banks to offer a choice of at least two networks over which an electronic credit transaction may be processed, and measures we support such as the SAFE Banking ACT, aimed at allowing financial institutions to provide services to cannabis-related businesses legalized by the states. We also used these opportunities to discuss our support of the Access to Credit for our Rural Economy Act, and our opposition to CFPB’s enforcement of the Section 1071 final rule.

In November, CBA held it’s annual Legislative Forum where we heard from key policymakers and political thought leaders including California State Treasurer Fiona Ma, Assembly Budget Committee Chair, Phil Ting and the Chair of the Assembly Banking and Finance Committee, Tim Grayson. We also received panel presentations on Artificial Intelligence, Elder Financial Abuse, the state of California politics, and a Department of Financial Protection and Innovation presentation on the bank regulatory landscape.

As we look to next year, we expect that some of these legislative topics will resurface, along with new legislative proposals impacting the banking industry. The advocacy team, armed with the expertise and guidance of our member banks who tirelessly support our efforts, will be ready for whatever comes next.

By Jason Lane, SVP, Director of Government Relations

The California Legislature adjourned for the year on September 14 and they are now in interim recesses until January. Legislatively, CBA was successful in opposing SB 278 (Dodd). Sponsored by the Consumer Attorneys of California, this measure makes financial institutions liable for elder financial abuse if the institution should have known that the likely result of a transaction initiated by an accountholder would result in fraud, and the institution failed to stop it. We opposed this expanded liability, which fundamentally alters the relationship between banks and their senior accountholders. Under the measure, a bank employee could take the appropriate steps to warn an accountholder that the transaction they’ve initiated with the bank may result in fraud, but if the employee honors the transaction, the bank could be held liable. With no clear safe harbor for institutions to utilize to avoid liability, banks will be forced to reevaluate their customer relationship with accountholders over the age of 65. We launched a successful media campaign opposing SB 278 and worked with aging experts at Stanford University and the Milken Institute to publish and opinion editorial related to the measure. This legislation was ultimately held in the Assembly Banking Committee and will not advance this year but remains eligible for consideration next year. The legislature is highly focused on passing legislation in 2024 and we have committed to work with the committee during the fall to craft legislation intended to be an alternative to SB 278.

A CBA-sponsored measure adopting the Uniform Fiduciary Income and Principal Act has been signed by the governor. The Act recognizes modern portfolio theory by allowing trustees to invest for the maximum total return, whether the return is in the form of income or growth of principal and provides more flexible terms giving trustees discretion to accumulate income or access principal when advantageous to further the purposes of the trust. Another uniform measure headed to the governor and supported by CBA adopts the Uniform Directed Trust Act which provides a framework for allocating fiduciary power and duty between a trust director and a trustee by allocating the primary duty to the director while simultaneously maintaining a minimum core duty for the trustee to avoid willful misconduct.

We successfully negotiated several mortgage-related measures that are still active. We secured amendments requiring lender consent for borrowers that wish to separately convey an accessory dwelling unit from the parcel. We helped redraft a measure as a means to improve compliance that requires a transferor mortgage servicer to furnish to a transferee mortgage servicer material written records regarding damaged residential 1-4 property resulting from a disaster where a state of emergency has been called. A measure adopting remote online notarization in California, supported by CBA also passed out of the legislature.

On the labor and employment front, SB 399 (Wahab), a measure that would have restricted employer communications, was held and will not move forward this year. It is eligible to move forward on 2024 as a two-year bill. CBA opposed the measure on the basis that it would have restricted communications about pending or recently enacted legislation and regulations, which is highly concerning from a compliance perspective. This measure was the highest priority of CBA’s current engagement in labor and employment-related legislation.

Additionally, CBA was asked to join an opposition coalition to express concern about a package of water rights-related measures that are important to our agriculture lending community. CBA joined the coalition, and the package of measures were set aside for the remainder of the legislative year, though they will be eligible to move forward in 2024 as two-year measures.

Two important climate-related measures passed out of the legislature this year. SB 253 (Wiener) requires all entities that do business in California and earn an annual revenue of more than $1 billion to publicly disclose their greenhouse gas emissions, including scope 3 emissions associated with supply chains. SB 261 (Stern), the Climate-Related Risk Disclosure Act, is modeled on a framework proposed by the Task Force on Climate-Related Financial Disclosures (TCFD), mandating the report for entities doing business in California with more than $500 million in annual revenue.

By Melanie Cuevas, VP, Government Relations

With about one month until the final legislative deadline, the finish line to this year’s California legislative session is in sight. What will this remaining month hold?

To know where you’re going, it’s essential to know where you’ve been. This legislative year commenced on January 4, 2023, when the legislature officially convened. Up until this point, we’ve passed a bevy of legislative deadlines, including:

• The January 20 bill request deadline, when policy ideas must be drafted by the legislative council into official bill format;
• The February 17 bill introduction deadline, when measures must be introduced by an Assembly Member or Senator and a bill number is assigned;
• And the June 2 house of origin deadline, when the Senate must finish all business on Senate bills and the Assembly must finish all business on Assembly bills.

The legislature recently returned from its summer recess, a time when committee hearings and voting in Sacramento take a brief pause so that elected officials may reconnect with constituents in their districts or even take family vacation time. Official legislative work in the Capitol resumed on August 14 with a five-week sprint to the end of the session on September 14. The Governor will have until mid-October to decide the fate – sign, veto, or let pass without signature – the measures that are sent to him by the legislature. This year alone the Governor will likely review anywhere from 1,000 to 2,500 measures.

When the legislature reconvened on August 14, measures that have a fiscal impact on the state – like SB 253 (Wiener) – were heard by an Appropriations Committee so that elected officials could assess not only the policy but the monetary cost of the proposal. This is a measure that mandates reporting of greenhouse gas emissions by the business community to the California Air Resources Board. That state agency must aggregate, organize, make public, and report on the data that it receives, which, according to the Department of Finance, will likely cost millions of dollars annually from the state’s General Fund.

Measures that have little to no fiscal impact on the state – like AB 1414 (Kalra) – will bypass the Appropriations Committee step and instead go immediately to the Senate or Assembly Floor for a vote by the entire body. This is a measure that eliminates the use of a common count claim, forcing lenders, collectors, and debt buyers to instead sue on breach of contract, producing the original contract in addition to “records of all debits and credits forming each and every transaction used to determine the amount alleged to be due.”

Inactive measures, or measures that have been set aside earlier in the deadline process – like SB 278 (Dodd) – likely will not move for the remainder of the legislative year. It is important to note, however, that California conducts legislative business in two-year sessions. Because we are in the first year of a two-year session, measures like SB 278 will be eligible to be heard again as early as January 2024 when the Legislature reconvenes to begin the bill-making process all over again.

In November, CBA will host the Annual Legislative Forum to discuss the legislative session and plan for the 2024 legislation session.

By Kevin Gould, President & CEO

The California Legislature is getting closer to adjourning for the year. After they return from their month-long summer recess on August 14, the Legislature will have until September 14 to conclude their business. Hundreds of measures will be up for a vote in the final weeks with many of them being sent to the governor for signature or veto. In this edition, I thought we would share a few mortgage-related measures that we expect will make it to the Governor’s Desk.

As a means to promote more affordable housing, a measure moving through the Legislature allows for the separate conveyance of accessory dwelling units (ADU) from a primary dwelling. The measure, Assembly Bill 1033, is part of a multi-year effort to remove barriers associated with the construction and sale of ADUs. CBA raised initial concerns with the measure because of the impact the separate conveyance of the ADU could have on existing lienholders who may be negatively impacted by a change in the nature of the collateral.

We successfully negotiated amendments that require that all lienholders consent to the separate conveyance and that the consent be recorded in the land title records where the real property is located. The language makes it clear that a lienholder may refuse to give consent and a lienholder may consent provided that any terms and conditions required by the lienholder are satisfied. In addition, CBA requested and secured amendments requiring that local agencies provide consumer disclosures so that individuals wishing to separately convey an ADU is aware that lienholder consent is required should the owner subsequently wish to separately convey the ADU.

Another measure authorizes the use of remote online notarization in California and requires the Secretary of State (SOS) to adopt rules implementing remote online notarizations by January 1, 2025. Senate Bill 696 updates state law by authorizing a notary public, or an applicant for appointment as a notary public, to apply for registration to be authorized to perform online notarizations. This measure also requires an entity to register with the SOS as an online notarization platform or depository and establishes requirements for online notarization platforms to ensure consumer personal information is protected. For purposes of this measure, a “depository” is an individual or entity capable of storing a journal entry or audio-video recording on behalf of a notary public.

While CBA supports the underlying public policy objective of allowing California notaries to join the vast majority of the nation in providing notarization services in a remote manner, we remain concerned with a private civil cause of action in the measure that could be imposed against an online notarization platform or depository for a violation of the law. We don’t expect the private right of action to be removed. While we remain supportive, we thought it was important to state our concerns about private rights of action, even if they are not directly impactful in this circumstance to banks.

Following a series of devastating wildfires in California, a measure nearing the final stages of the legislative process requires better communication between mortgage servicers when mortgage servicing rights are transferred. More specifically, Senate Bill 455 requires a transferor mortgage servicer servicing a mortgage that is within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the borrower’s election to use insurance proceeds to repair or replace property damaged by a disaster for which the state of emergency or local emergency was proclaimed. The measure is applicable to mortgages secured by residential real property that is improved by four or fewer residential dwelling units.

A second provision in the bill prohibits a transferee mortgage servicer from dishonoring a previous written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note. Earlier versions of this measure were problematic as they applied more broadly to all property and required mortgage servicers to forward borrower’s verbal intentions. The final version of the measure reflects CBA-requested amendments.

The governor will have an extended period of time to take action on measures that reach his desk given the high volume of bills passed at the end of the legislative session. This year, the governor will have until October 14 to sign, veto, or allow measures to become law without his signature. We look forward to sharing more updates on legislation and actions taken by the governor.

By Melanie Cuevas, VP, Government Relations

California’s banks are reflections of the communities that they serve. Empowering the state’s youth through strong financial literacy and empowerment enhances the quality of life and is a cornerstone to helping those communities grow. This year, the California Bankers Association is pleased to support several measures that aim to support and enhance financial literacy efforts.

SB 342 (Seyarto) – Requires the Instructional Quality Commission (IQC) to include age-appropriate information for kindergarten through grade 12 when the commission next revises the history-social sciences curriculum framework. Status: Failed Deadline

SB 531 (Ochoa Bogh) – Requires the Student Aid Commission and the Department of Financial Protection and Innovation to prominently display a link to a resource made by the Federal Student Aid Information Center about financial literacy. Status: Advanced to the Assembly

AB 431 (Papan) – Requires the State Board of Education to integrate age-appropriate financial literacy components into the K12 curriculum and directs the Superintendent of Public Instruction to allocate one-time funds for instructional materials and for professional development in that content. Status: Failed Deadline

AB 546 (Ta) – Requires the State Board of Education to integrate age-appropriate financial literacy components into the K12 curriculum and directs the Superintendent of Public Instruction to allocate one-time funds for instructional materials and for professional development in that content. Status: Failed Deadline

AB 984 (McCarty) – Requires the development and adoption of a one-semester personal finance course as a requirement for graduation commencing with the graduating class of 2028-29, and requires local educational agencies (LEAs) and charter schools to offer a one-semester course in financial literacy commencing with the 2025-26 academic year. Status: Failed Deadline

AB 1161 (Hoover) – Changes the requirements for the Instructional Quality Commission (IQC) to include age-appropriate information about estate planning and the use of trusts and wills when the history-social sciences curriculum framework is next revised. Status: Failed Deadline

ACR 34 (Chen) – Designates April 2023 as Financial Capability Month. Status: Signed by the Governor

Existing California law contains some financial literacy content for pupils in kindergarten through grade 12 and gives school districts the choice to provide financial literacy lessons, including permission for a financial literacy elective. Currently, less than one-third of California high school students attend schools that offer personal finance classes, according to the State Superintendent of Public Instruction. While 17 states require students to take a personal finance class, California does not. For years, advocates have supported efforts to strengthen financial literacy, particularly personal finance, programs in California schools. Unfortunately, those efforts have been stymied by populations expressing concern about the mandatory, rather than permissive, nature of these efforts and the burdens placed on educators who often struggle to keep up with the myriad mandatory coursework. This year is no different. Of these seven measures, five failed to advance through the legislative process thus far.

Sidebar: National Financial Literacy Month is recognized each year in April to raise public awareness of the importance of financial literacy and maintaining smart money management habits. CBA is pleased to support financial literacy and empowerment efforts through legislation in Sacramento as well as our members’ efforts throughout California communities.

By Kevin Gould, President & CEO

Despite recent bank failures, the U.S. banking system remains safe, resilient and on a solid foundation. The banking industry is well-capitalized and has strong liquidity. As always, banks stand ready to meet the needs of their customers and communities and we continue to play a critical role in supporting and fueling the economy.

Following the failure of Silicon Valley Bank (SVB) and Signature Bank, several investigative reports have now been issued by banking regulators. On April 28, the Federal Reserve issued a report with respect to their oversight of SVB, the FDIC published its report with regard to the supervision of Signature Bank, and the Government Accountability Office released a report covering both failures. The California Department of Financial Protection and Innovation (DFPI) produced its report on SVB on May 8.

Key takeaways from the report issued by the Fed on SVB include findings that: SVB’s board of directors and management failed to manage their risks; Fed supervisors did not fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity; supervisors did identify vulnerabilities but did not take sufficient steps to ensure SVB fixed those problems quickly; and, the Fed’s tailoring approach in response to regulatory relief impeded effective supervision.

Similarly, the DFPI’s report found that: SVB was slow to remediate regulator-identified deficiencies; regulators did not take adequate steps to ensure the bank resolved problems as fast as possible; recent rising interest rates led to SVB’s startup deposits decreasing and its investments losing value; SVB’s unusually rapid growth was not sufficiently accounted for in risk assessments; SVB’s high level of uninsured deposits contributed to the bank run; and, digital banking technology and social media accelerated the volume and speed of the run.

Distilling down the hundreds of pages from these reports, the findings affirm what many in the banking industry suspected, bank management and the board of directors failed to manage risk, regulators were aware of percolating issues and didn’t respond or escalate the matter soon enough, and technology has increased the velocity for which money can move.

In many ways, the fundamentals of banking were missed. Interest rate risk, liquidity risk, and concentration risk are foundational. Shocking the balance sheet to understand what might happen in different interest rate environments is innate. Notwithstanding, the debate has begun on whether more or less regulation would have avoided SVB’s failure or whether it will prevent future occurrences.

Several oversight hearings diving into these very questions have been conducted both before Congress and in California. Back in DC, back-to-back hearings were conducted on March 28 and 29 before the US Senate Banking Committee and the House Financial Services Committee, respectively. The California Assembly Committee on Banking and Finance held a preliminary hearing on April 10 followed by a joint oversight hearing between that committee and the Senate Committee on Banking and Financial Institutions on May 10. And then, three hearings took place in one week, two by the US Senate Banking Committee (May 16 and 18) and one in the House Financial Services Committee (May 17).

Meanwhile, the FDIC issued its proposed rule for the special assessment to address the $15.8 billion impact on Deposit Insurance Fund, a figure down from the $22 billion originally estimated. In issuing the draft rule, the FDIC noted that: in general, large banks with large amounts of uninsured deposits benefitted the most from the systemic risk determination; no banking organizations with total assets under $5 billion will be subject to the special assessment; the special assessment will be collected at an annual rate of approximately 12.5 basis points over eight quarterly assessment periods; and, collection will begin with the first quarterly assessment period of 2024.

With the failure of SVB and concerns regarding FDIC insurance coverage limits, especially those related to a business’ ability to meet payroll, the FDIC has published a comprehensive overview of potential options for deposit insurance reforms. Three options have been identified: maintaining the current deposit insurance framework, providing insurance up to a specified limit; extending unlimited deposit insurance coverage to all depositors; and, different deposit insurance limits across account types, where business payment accounts receive higher coverage than other accounts. While not an endorsement, the FDIC believes targeted coverage best meets the objectives of deposit insurance for financial stability and depositor protection. It’s important to note that all options require Congressional approval.

Legislatively, we will likely see proposals that roll back regulatory relief achieved just a few years ago from the Dodd-Frank Act, relief designed to create a more tailored and sophisticated approach to bank supervision. Proposals will likely focus on executive compensation, claw-backs, the barring of future employment in the industry, and the minimum qualifications of individuals serving on certain bank boards and committees.

As we move forward, there will be efforts to divide the industry based on asset size, the value of the dual banking system will be questioned, and some will wonder about the capacity for state regulators to supervise institutions that reach a particular asset size. During these times, it’s especially critical that we stand together, unified, to preserve the diversity of banks serving communities across the country. Community banks, midsize banks, regional banks, and large banks are integral to the success of our customers, communities and the overall economy. Banks of every size and business model add unique value and are a source of strength for our economy.

By Kevin Gould, President & CEO

When we started this legislative year, we anticipated that much of our time would be focused on public policy debates surrounding environmental, social and governance issues, such as climate-related financial risk disclosures and the financing of fossil fuel companies or gun manufacturers, a debate that is diametrically different depending on whether you find yourselves in a red or blue state. And then Silicon Valley Bank (SVB) failed.

What has been widely reported is that the bank had significant uninsured deposits and a high concentration of tech and venture capital firms as depositors. The tech industries recent economic challenges resulting in higher than usual withdrawals to fund operations caused the bank to sell high-quality liquid securities from their investment portfolio at a loss. The combination of certain bank customers urging their clients to withdraw funds, the ability to move money rapidly electronically, and panic fueled by social media resulted in a historic $42 billion in withdrawals from the bank in one single day.

While failures are never ideal, regulators have tools in place to resolve a failed bank. The Friday morning seizure of SVB and the FDIC’s opening of a bridge bank with all the functionality of a traditional bank first thing Monday morning is evidence of the systems in place and the expertise and experience of banking regulators.

Formal analyses on what happened are underway with a report by the Federal Reserve Board due on May 1 and a Congressionally requested report by the Government Accountability Office due in interim format on April 28. In the meantime, many within and outside the banking industry are scratching their heads and are similarly eager to see the reports. Interest rate risk, concentration risk, and liquidity risk are hardly new concepts and are in fact fundamental. The practice of shocking the balance sheet, understanding the timing of when assets and liabilities are re-pricing, and having a grasp on asset or liability sensitivity is common.

Since the Friday morning when SVB failed, the association has been actively engaged. We opened lines of communication immediately and checked in frequently with state and federal lawmakers and regulators. Coincidentally, we had a visit to Washington, D.C. a week later with our peers from the other state banking associations. This was a previously planned conference convened by the American Bankers Association. The conference provided an opportunity to hear from key decision-makers, including Treasury Secretary Yellen and the chairs and ranking members of the Congressional banking committees. CBA staff and bankers in attendance, led by association chair, George Leis, also had the opportunity to meet with members of the California Congressional delegation, including those that serve on the House Financial Services Committee.

When meeting with elected officials, we took the opportunity to address the situation head on and underscored the strength and resiliency of the banking industry. It was important that we be present, that we share factual information and refrain from speculation. We urged that policymakers gather and analyze the facts before proposing solutions, a message that seemed to resonate.

Congressional hearings on SVB commenced the last week of March with back-to-back hearings in the Senate Banking Committee and the House Financial Services Committee. These first two hearings included testimony from Michael Barr at the Federal Reserve, Martin Gruenberg at the FDIC and Nellie Liang at Treasury. This was the first in what will be a series of hearings. Stateside, the California Legislature will likely convene hearings as well, with the Assembly Banking and Finance Committee planning to hold a hearing on Monday, April 10.

No matter how robust the supervisory infrastructure is, or the adequacy of current state and federal laws, it is expected that we will see calls for new regulation and legislation. The association is prepared to engage with stakeholders for what we hope will be a thoughtful conversation. It’s our hope that the reaction will be tailored and focused on potential gaps and that an overreaction be avoided. Some policymakers have a particular agenda that pre-dated the failure of SVB. Unfortunately, the bank’s failure will feed their narrative even if the facts don’t.

As we have always done, we will look forward to sitting at the table with policymakers to discuss solutions that avoid taking a sledge hammer to the industry where a surgical approach is more sophisticated and appropriate. The banking industry remains strong and resilient. And, despite what happened with SVB, the banking industry will continue to play a vital role in supporting communities and the overall economy.

By Jason Lane, SVP, Director of Government Relations

Purported to strengthen elder and dependent adult financial abuse protections by clarifying the duties of banks and financial institutions to safeguard against fraud, SB 278 was introduced earlier this year by Senator Dodd (SD 3). The measure is sponsored by the Consumer Attorney’s of California, a group representing trial attorneys who have filed numerous lawsuits against banks for “assisting” in elder financial abuse. In his press release introducing the measure, Dodd, who represents parts of Sacramento, Solano, Yolo, and Napa counties, stated that “banks must do a better job of preventing the most vulnerable Californians from getting ripped off. This bill clarifies that if these institutions assist in financial elder abuse – either knowingly or otherwise – they can be held liable. It will motivate them to detect predatory practices before victims are robbed of their resources, dignity and quality of life – losses from which they may never recover.”

A coalition of organizations in opposition this measure, led by the California Bankers Association, strongly disagrees with the notion that SB 278 is a mere clarification of existing law. This measure fundamentally changes the way businesses engage in commerce with seniors by establishing a de facto fiduciary or conservator relationship. It requires insurance providers, caregivers, technology service providers, real estate agents, banks, and credit unions to question their senior customers’ financial decisions and reject those decisions when they find them unwise. The problem, of course, is that these businesses are ill-equipped to second-guess their customers’ decision. Financial institutions, for example will be forced to make very conservative decisions about transactions initiated by seniors and this may lead to processing delays that will impair anything from the most routine transactions to time-sensitive wire transfers. Because the measure imposes the same civil liability on banks as the actual perpetrator of the crime, banks will be forced to apply enhanced scrutiny of transactions.

The measure also raises several questions about how financial institutions could even operationalize the measure’s requirements. There are numerous situations where a financial institution could not identify fraud. A senior could transfer money to an exploiter using online financial services. In this scenario, the mere fact that an institution provided the online financial platform could expose them to civil liability under this measure. Similarly, if a senior provided credential information and the exploiter uses the senior’s own device, a financial institution would have no way to detect that fact and could be deemed to have assisted.

While the proponents of this measure contend that it helps seniors, we believe it is discriminating because it is based on the premise that, as a class, people 65 and older are not as capable of making wise financial decisions as other customers. It forces financial institutions to treat seniors differently and requires a heightened scrutiny on their financial decisions- all so that trial attorneys can sue banks and exhort settlements from them under the guise of consumer protection

By Melanie Cuevas, Vice President of Government Relations

A new year also brings the start of California’s legislative process, where ideas are turned into measures in the hopes that they become law. And with our State Legislature creating an average of 1,000 new laws each year, a basic understanding of the “legislative process” is more important than ever – especially with veto-proof supermajorities in both houses of the California Legislature.

The Ground Rules

California’s full-time legislature generally begins the series of deadlines for committee hearings, votes, and Floor Session in January, running through September or October. Most measures require a simple majority vote. Some, including those with an “urgency” clause, meaning they go into effect immediately upon signature, as well as tax-related measures require a 2/3 vote to pass and are exempt from standard legislative deadlines. A series of deadlines, as outlined below, guide the process that moves an idea into a new California state law.

The Process

• Introduction of Measures

Members of the Legislature author measures, working with Legislative Counsel to turn an idea into an actual bill, which receives a bill number when it is officially introduced. California’s legislature is bicameral, which means there are two chambers: the Assembly, with 80 members, and the Senate, with 40. Each member is limited to introducing 40 measures per legislative session, which lasts two-years and begins each odd year. Typically we expect to see upwards of 4,000 – 5,000 measures introduced each two-year session, with about half of those making it through the legislative process, to the Governor’s desk for signature or veto. This year’s deadline to introduce measures is February 17.

• Committee Hearings

Thirty days after a measure has been introduced, it may be referred to the relevant policy committee within the house in which the measure was introduced (remember, Senators author Senate Bills and Assembly Members author Assembly Bills). Committees are comprised of a small subset of members in that house, appointed by leadership. The Assembly has 33 standing policy committees and is led by the Speaker; the Senate has 22 standing policy committees and is led by the President pro tempore. Through determination of the committees’ Chair, Vice Chair and membership positions, leadership can exercise significant influence over the fate of measures.

Committees vet measures though hearings, which includes testimony from key support and opposition witnesses as well as public comment, questions and debate by members of the committee, and a vote on whether to continue to move the measure through the process. The 2023 deadline for measures to receive approval from policy committees is April 28 for fiscal measures and May 5 for nonfiscal measures.

• Fiscal Committee

Measures that incur a cost to the state of California go through an additional step and are also vetted by the Appropriations Committee, whose purpose is to examine fiscal impact, rather than policy considerations. During these hearings, the Department of Finance also sits at the witness table to provide the Administration’s official fiscal analysis. Noncontroversial measures with minor fiscal impact and no dissenting votes in preceding policy committee may receive expedited passage. Conversely, measures with a significant cost to the state (defined as $150,000 by the Assembly and as $50,000 to the General Fund or $150,000 to a special fund by the Senate) are sent to the Suspense File, which is considered in one hearing after the state budget has been prepared and the committee has a better sense of available revenue. This year’s deadline for the Appropriations Committee to hear and report measures introduced in their house is May 19.

• Floor Vote

Measures that receive passing votes from policy committees and, if necessary, the Appropriations Committee, are then considered by all members of that house during Floor Session. Note that due to recently approved Proposition 54, measures must be in print for 72 hours before they are voted on. Measures must complete this crucial step by June 2 this year.

• Second House

Once measures receive approval from their respective house of origin, the process begins again – for example, Assembly measures would now go through Senate policy committees and the Senate Appropriations Committee. The 2023 deadline for measures to be approved by the other house is September 1.

• Governor’s Desk

Measures may generally be amended at any time throughout the process. When measures receive significant amendments in the second house, it must return to the house of origin for a full vote, giving opportunity to that body to review and concur in the new amendments. After passing both chambers, the measure goes to the governor’s desk for signature, veto or passage without signature. Veto rates tend to change based on who is doing the vetoing; current Governor Newsom currently has about an 85 percent signature rate for measures that reach his desk.

Representation

The steps outlined above summarize the lawmaking process, however, keep in mind additional nuances exist, including rule waivers, hearings of sub-committees, consent calendars, and even extraordinary sessions of the legislature, which we will also see in 2023. The California Bankers Association’s government relations team provides representation of our members, navigating the legislative process, providing input to decisionmakers, and expressing support or opposition on the many measures impacting the financial and business communities.

By Jason Lane, SVP, Director of Government Relations

This past year, the legislature passed a staggering $308 billion budget, which included a healthy surplus. Lawmakers used the surplus to provide $17 billion in inflation relief to Californians, including $9.5 billion in tax rebates. This is in addition to the $54 billion in climate related investments. Now, just six months removed from the passage of the 2022-23 budget, the state faces a fiscal test.

California is heavily dependent on income tax revenue. Consider that in 1963-1964, personal income tax represented 18 percent of general fund revenues. By 2003-2004 that number climbed to 45 percent and in 2022 personal income tax accounted for nearly 70 percent of the state’s general fund. Chiefly led by job losses in the tech sector, California’s income tax revenue has plummeted in 2022, and capital gains tax revenue has flatlined due to a lackluster stock market. Revenue estimates are lower than budget projections from 2021‑22 through 2023‑24 by $41 billion. In total, lawmakers will grapple with a $24 billion deficit when the legislature reconvenes for the 2023 session. But that number is illusory and subject to change as lawmakers look to pass a balanced budget by June 15^th.

The extent of the state’s budget woes is partly determined by the rate of inflation. According to the November report by the Legislative Analyst Office, titled The 2023‑24 Budget: California’s Fiscal Outlook, “…programmatic spending is adjusted somewhat automatically for inflation—either through formulas or administrative decisions…In other cases, spending increases are determined through legislative deliberation and are directly approved by the Legislature. Because our outlook reflects the current law and policy of the Legislature, our spending estimates only incorporate the effects of inflation on budgetary spending when there are existing policy mechanisms for doing so. This means that the actual costs to maintain the state’s service level are higher than what our outlook reflects. Consequently, our estimate of a $24 billion budget problem understates the actual budget problem in inflation‑adjusted terms. That is, assuming the Legislature wanted to maintain its current level of services, additional spending would be necessary.” If economic conditions continue to deteriorate, the Legislative Analyst’s Office predicts that revenue numbers could fall short as much as $50 billion by the time the legislature approves a spending plan this summer.

The good news is that California seems poised to weather the economic storm in the near term. Fiscal estimates show that the state will end the 2022-23 budget year with $28 billion in the budget reserve account. Additionally, the Proposition 98 reserve account, which is dedicated to school spending, will end the year with a $9.8 billion surplus. Assembly Democrats, who released their budget priories in early December, feel confident that these existing budget reserves will prevent major cuts to programs and services in the 2022-23 fiscal year. Beyond that, however, the future of the state’s fiscal condition seems dependent on a variety or external economic conditions, and the severity of the looming national recession.

Few lawmakers or legislative staff remain as holdovers from the dark days of the early 2000’s when California faced multi-year, multi- billion-dollar deficits. Then, programs and services were slashed, state workers were furloughed, tax refunds were delayed and IOU’s were issued by the State Controller’s office to keep the lights on. If lawmakers wish to avoid repeating history, legislative leaders and Governor Newsom may need to make some tough decisions and exercise fiscal discipline, all while managing a freshman class of legislators eager to make splash.

By Kevin Gould, President & CEO

The next couple of years at the federal level are going to be interesting. Republicans have taken control of the United States House of Representatives but Democrats continue to hold the Senate and the White House. The tension and inter-party fighting will only intensify leading into the 2024 Presidential Election.

While most of California’s Congressional incumbents who ran were re-elected, there are a handful of new California representatives. Accordingly, we will travel to Washington, D.C. in February for a freshman fly-in with the goal of conducting meet-and-greets with these newly elected non-incumbent Congressional Representatives. The CBA advocacy team will increase its presence in D.C. by making a few more visits throughout the year, including our CBA Annual Visit in March and our Joint Visit with the Florida Bankers Association in September.

California continues to benefit from having Congressional Representatives in leadership roles, including Kevin McCarthy who ascended to Speaker of the House, but will likely struggle to keep his party aligned given internal factions. Maxine Waters will pivot from the chair to vice-chair of the House Financial Services Committee.

With Republicans in charge of the House, there will be a focus on oversight and investigatory hearings. While much of this may not pertain to the banking industry, some of it will. Federal regulators appointed by President Biden will likely get a more challenging reception in the House Financial Services Committee and it’s likely that the industry will be whipsawed on fair lending criticisms, a no-win conflict that pits banks between conservative and progressive elected officials and between red and blue states on whether the industry finances fossil fuels and firearms companies.

So, while there may be a number of banking-related measures introduced, the possibility of many of these measures reaching the President is unlikely. Instead, we will likely see more regulatory activity as the current Administration will look to achieve its public policy results through rulemaking and enforcement instead of pursuing legislative vehicles.

What happens, or doesn’t happen, in Washington, D.C. will influence legislative activity at the state level. We’ve seen this in the past. Consumer advocates who are frustrated with the inability to advance reforms at the federal level, will appeal to the California Legislature to take action. There are a number of areas where this could be true.

Establishing a licensing and regulatory framework for entities issuing cryptocurrency will be a priority despite the governor vetoing a measure from last year. Recent events will only amplify the desire to enact meaningful consumer protections. CBA supported the measure from last year which included an exemption for banks. A new measure was introduced the first day the California Legislature convened for the new session just a few weeks ago.

Irrespective of what the SEC adopts as a final rule for climate disclosures, the California Legislature will re-introduce a measure requiring certain companies doing business in California to report Scope 1, 2 and 3 greenhouse gas emissions. We anticipate the California measure going beyond the federal requirements. It goes without saying that this will create substantial compliance burdens as reporting requirements will be duplicative in some regards, conflicting or expansive in other ways, and will most certainly have liability ramifications for failures to comply.

California has historically been a pioneer in advancing consumer privacy protections, evidenced in the past couple of years through the enactment of the California Consumer Privacy Protection Act of 2018 and the voter-approved strengthening of the Act through California Privacy Rights Act (CPRA) of 2020. Meanwhile, a national privacy standard has stalled in Congress. The California Privacy Protection Agency, created by the CPRA, is near finalizing its initial rulemaking, albeit late. The Agency still needs to promulgate regulations on the use of automated decision-making, an issue that has received heightened legislative attention regarding the technology’s use in various consumer products and services.

All of these public policy issues will unfold in a Legislature that has a sizeable new freshman class and where Republicans have fewer seats. Democrats held supermajorities in the state Senate and Assembly prior to the November General election and that stronghold wasn’t expected to materially change afterward. With the election behind us, Democrats have ultimately gained two seats in the Assembly, bringing their total to 62 members compared to 18 for the Republicans. Similarly, Republicans lost a seat in the Senate bringing their caucus to a total of eight members compared to 32 for the Democrats. All statewide Constitutional offices remain held by Democrats.

The February 17 bill introduction deadline is a few weeks away. We will see approximately 2,500 measures introduced. We will then have a better perspective on the Legislature’s priorities for the year. Having said that, a significant number of measures will initially serve as placeholders for more substantive public policy and will therefore fail at the outset to truly reveal the author’s ultimate intent.

Legislative efforts at the federal level and in California are intertwined. Many times, California is a pioneer and is a catalyst for public policy discussions at the federal level. Other times, action is California is taken because of paralysis federally. No matter the motivation, this year promises to be active. Stay tuned.

The State of the Banking Industry

Overdraft Protection

AB 2618 Chen Reciprocal Deposits

SB 1127 Niello Termination of Small Trusts Issue Brief