California Privacy Compromise Disadvantages Community Banks
At press time, lobbyists from large banks and consumer groups reportedly had reached agreement on a California financial privacy bill that could disadvantage community banks. A deadline early next week for filing a ballot initiative supported by consumer groups has spurred the final push this year to enact a bill in California more restrictive than federal law.
The ballot initiative would require financial institutions to get affirmative consent ("opt-in") from consumers before sharing information with affiliates or third parties. The financial privacy bill (SB 1) by contrast would give consumers the ability to "opt out" of information sharing with affiliates, and to "opt in" to sharing with third parties. Proponents of the ballot initiative have said they will not pursue the initiative if acceptable privacy legislation is enacted this year. Embattled Gov. Gray Davis is also said to want to sign a financial privacy bill to give him a victory with consumers as he faces recall.
Key to community banks on its face, SB 1 would put community banks that do not have affiliates-but partner with other financial institutions, such as broker-dealers or insurance agencies, to offer a full array of financial products-on the same footing as large banks with affiliates. (The bill requires opt-out, not opt-in, for sharing between two nonaffiliated financial institutions that are jointly offering financial products.)
However, this equal treatment of affiliates and "joint marketing" partners is upset by a recent court ruling enjoining enforcement of state law restrictions on affiliate sharing and placing community banks at a disadvantage. Last month, the U.S. district court ruled that the Fair Credit Reporting Act, which prohibits states from enacting laws restricting information sharing among affiliated companies, preempts several local California ordinances that restrict information sharing with affiliates. The court ruled, however, that the ordinances' restrictions on sharing with third parties are not preempted by the FCRA and may be enforced.
As a result of the court ruling, if SB 1 becomes law banks with affiliates will be able to avoid SB1's opt-out requirement for affiliate sharing, as it will be preempted by the FCRA. Banks, including community banks, that want to share information with nonaffiliated financial institution partners will be subject to the opt-out requirement.
Large California banks have reacted to these developments by negotiating a compromise that leaves SB1's structure intact, and allows them to end their public opposition to a popular consumer bill. Once enacted, however, the big banks can return to court seeking another ruling that exempts affiliate sharing from state regulation, putting community banks at a distinct competitive disadvantage.
Relying on procedural shortcuts, the compromise bill may go immediately to the Assembly for a floor vote. The California Bankers Association no longer opposes SB1. As Wells Fargo goes, so goes CBA. The California Independent Bankers, however, are promoting amendments to maintain equal treatment for affiliates and joint marketing partners and assure a level regulatory playing field between California's large and small institutions.