Compliance Blog

Greetings, Compliance folks! It’s January, which means many of us will be making New Year’s resolutions. One of my resolutions this year is to get out and travel more – I’ve lived my entire life on the East Coast of the United States and have never traveled to most of the Western states. Sadly, this means I’ve never been to the great state of California. NAFCU is offering some great conferences this year across the U.S., so maybe I’ll have the opportunity to see some new places this year – and our Annual Conference is in Long Beach, so I like my chances of getting to California before the year is through.

Speaking of California, the state legislature there recently passed two laws that could affect credit unions in 2023. Typically, the NAFCU Compliance Team does not dive too deep into matters of state law, as the laws across all 50 states vary so widely. However, we do occasionally discuss state laws in our blog when they have a major impact on the credit union industry, such as our previous blogs on California’s privacy laws (like this one). As always, questions regarding how state laws may affect your credit union’s operations would be best directed to your legal counsel. With that disclaimer out of the way, let’s review these recent California legislative developments:  

California’s Military and Veteran Consumer Protection Act of 2022

In September, California passed a law called the Military and Veteran Consumer Protection Act of 2022.  The law states that its provisions apply to the same borrowers who are covered under the federal Military Lending Act (MLA), so the analysis to determine which borrowers are covered should be the same for both the California law and the MLA.

The intent behind this law is rather interesting, as it appears it is designed to prevent credit unions and other lenders from taking advantage of certain exceptions to the federal MLA. To review: the MLA imposes certain strict requirements on lenders, such as requiring them to calculate the military annual percentage rate (MAPR) and limiting it to no more than 36 percent, requiring MAPR specific disclosures, and more. Given those requirements, many credit unions may prefer to make loans that qualify for one of the exceptions to the MLA, and which therefore would not be required to comply with those requirements. Section 232.3(f)(2) of the MLA regulations provides some exceptions, and the two exceptions that are most relevant here are:

1. Any credit transaction that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased;
2.  Any credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased.

These types of loans – to purchase a vehicle or personal property and which are secured by the thing being purchased – are excluded from the definition of “consumer credit” under section 232.2(f)(2) and thus will not need to comply with the requirements of the MLA. As explained in this previous blog post, there has been some back and forth over the years on the exact boundaries of the motor vehicle exception. Originally, the Department of Defense (DOD) said in 2017 that loans which include the financing of credit-related ancillary products (like GAP insurance) would not qualify for the motor vehicle exception and would therefore be required to comply with the MLA. However, in 2020 the DOD changed their guidance again to remove that discussion of credit-related ancillary products and essentially reverted back to the pre-2017 guidance, in which financing credit insurance could still allow the loan to qualify for the motor vehicle exception. At the time, the DOD said it would examine this topic and release future guidance to clarify it, but nearly 3 years later no such guidance has been issued. This topic is currently being litigated in the courts.

As for the new California law, it states that a security interest in a personal property loan to a servicemember borrower cannot be perfected if the loan would qualify for the personal property exception to the MLA. This seems to indicate that the personal property exception can never be used for servicemember borrowers in California if the lender wants to have a security interest in the property being purchased.

Similarly, subsection (c) of section 5 discusses motor vehicle loans and states that a security interest in a motor vehicle loan to a servicemember cannot be perfected if the loan would qualify for the motor vehicle exception in section 232.2(f)(2), and if the loan also funds the purchase of a credit insurance product or credit-related ancillary product. With this language, California seems to address the DOD’s changing guidance on this topic (discussed above). In other words, California seems to be saying that lenders who make auto loans that also finance gap insurance will not be able to perfect their security interest in the vehicle if the loan is exempt from the MLA’s coverage.

So, what does this mean for credit unions? It seems that this bill will apply to California-chartered credit unions, as well as other state-chartered credit unions that make loans to servicemembers in California. State-chartered credit unions may have an issue moving forward with perfecting their security interests in loans made to servicemembers in California, if those loans are made under the personal property or vehicle exception to the federal MLA. For vehicle loans to servicemembers in California, credit unions subject to this law may want to avoid offering members the option to finance credit insurance, as that could possibly jeopardize the credit union’s security interest in the vehicle. Ultimately, credit unions may want to confer with their legal counsel regarding how this law affects their operations and whether certain lending practices could potentially allow a credit union to make similar loans without triggering this California law.

Finally, there is a question regarding this law’s applicability to Federal Credit Unions (FCUs). Section 701.21(b) of the NCUA’s rules and regulations notes that state laws which address specific topics are preempted by NCUA’s rules and therefore will not be applicable to FCUs. However, section 701.21(b)(2) describes when state laws will not be preempted, and specifically states that NCUA regulations do not preempt “[l]aws related to transfer of and security interests in real and personal property.” Because this California law is specifically written to address the security interest in the loans, it is possible that it was written specifically to avoid preemption. If not preempted, FCUs will also have to comply with the law’s restrictions when making loans to servicemembers in California. NAFCU is continuing to look into this preemption issue and will update our members as more information becomes available. Ultimately, it may take action in the courts or guidance from federal regulators to settle this question.

California Requires CUs to Report on Fee Revenue

Signed by Governor Gavin Newsom on September 29, 2022, SB 1415 amends California’s Financial Code. The law states that a “credit union subject to the examination authority” of the California Department of Financial Protection and Innovation (DFPI) “shall report annually, on or before March 1…on the amount of revenue earned from overdraft fees and nonsufficient funds fees collected in the most recently completed calendar year and the percentage of that revenue as a proportion of the net income of the…credit union.”

Thus, California law now requires credit unions to report on the revenue earned from overdraft and NSF fees in 2022, and to do so by March 1, 2023 (and to report every year thereafter by March 1 for the preceding calendar year). Additionally, the law requires the California DFPI to publish a report on the data it receives and to make it available on its website and requires the 2022 report to be published by March 31, 2023.

Notably, however, this law does not apply to all credit unions. The law itself stats that it applies to credit unions that are “subject to the examination authority” of the DFPI. Thus, when determining if this new reporting law applies to them, credit unions will want to review whether they are subject to DFPI’s examination authority. For example, Federal Credit Unions (FCUs) are examined by NCUA (and the CFPB if the credit union has at least $10 billion in assets), and are not examined by state regulators, including the DFPI. Additionally, the California Financial Code explicitly states that it does not apply to FCUs, so FCUs would be excluded from this new law’s coverage.

California-chartered federally-insured credit unions (FICUs), on the other hand, are still subject to DFPI’s examination authority and would be covered. Notably, the question is a bit less clear when it comes to FICUs chartered in states other than California. The California Financial Code states that it applies to “any person… engaging in the business of a credit union in this state.” With regards to what it means to “engage in the business of a credit union,” California law defines  “credit union” to mean:

“A credit union is a cooperative, organized for the purposes of promoting thrift and savings among its members, creating a source of credit for them at rates of interest set by the board of directors, and providing an opportunity for them to use and control their own money on a democratic basis in order to improve their economic and social conditions. As a cooperative, a credit union conducts its business for the mutual benefit and general welfare of its members with the earnings, savings, benefits, or services of the credit union being distributed to its members as patrons.”

(emphasis added).

Notably, the definition above and other provisions of the California Financial Code are not explicitly limited to credit unions chartered in California, which means that state-chartered FICUs that “engage in the business of a credit union” in California could be covered by this new reporting law, even if they are chartered in a state other than California. In fact, the California Code has a chapter that requires “foreign” credit unions (i.e. credit unions chartered in other states) to obtain a state license to operate branches in California, and an article which grants the DFPI examination authority over “foreign” credit unions which have obtained licenses to operate in California. Thus, it would seem that state-chartered FICUs which are chartered in other states, but which are licensed to operate branches in California, would be subject to DFPI’s examination authority and thus could be required to report on their NSF and overdraft fees under this new California law.

EDITOR'S NOTE: After publishing this blog, this FAQ from the California DFPI's website came to our attention. Question #16 states that the DFPI does not ordinarily exercise its examination authority over out-of-state CUs with branches in California. Therefore, DFPI is interpreting this reporting law to only apply to California-chartered CUs. Here is the quote: 

"16) We are headquartered outside of California but have branches in the state. Are we subject to the reporting requirements?

No. The Department does not ordinarily examine out-of-state banks or credit unions with offices in California; therefore, your institution is not considered to be subject to the examination authority of the Commissioner."

As mentioned above, credit unions may want to confer with their legal counsel when determining the impact of state legislation on their operations. NAFCU will continue to monitor for legal developments – at both the state and federal level – of importance to credit unions, and will continue to update compliance professionals via the Compliance Blog.