MAYA BUENAVENTURA, VEGARD M. NYGAARD, KELSEY O'HOLLAREN, KATHERINE BURNHAM,
JIM MIGNANO, SHANNON PRIER, NATALIE COX, ANUJIN NERGUI, JAMES SYME, NICOLAS M.
ROBLES, ELIZABETH MARSOLAIS, JONATHAN W. WELBURN
Banking the
Unbanked
CalAccount Market Study and Feasibility Assessment—
Annex I: The State of Banking in California
This publication has completed RAND’s research quality-assurance process but was not professionally copyedited.
Annex
For more information on this publication, visit www.rand.org/t/RRA3117-1.
This annex was updated in August 2024 to reflect changes based on public comments, as described in Annex III, Appendix J.
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iii
About This Annex
This annex presents Appendixes A and B to the RAND report Banking the Unbanked:
CalAccount Market Study and Feasibility Assessment, available at www.rand.org/t/RRA3117-1.
Appendix A presents an analysis of the banking landscape in California, and Appendix B
presents an assessment of legal issues for CalAccount.
The study was funded by the California Treasurer’s Office and led by Principal Investigator
Jonathan Welburn and Project Director Robert Bozick. For all inquiries, email
[email protected].
RAND Social and Economic Well-Being
RAND Social and Economic Well-Being is a division of RAND that seeks to actively
improve the health and social and economic well-being of populations and communities
throughout the world. This research was conducted in the Social and Behavioral Policy Program
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being. For more information, email [email protected].
iv
Contents
About This Annex ......................................................................................................................... iii
Appendix A. Analyzing the California Banking Landscape ........................................................... 1
Appendix B. CalAccount Legal Issues .......................................................................................... 28
Abbreviations ................................................................................................................................ 61
References ..................................................................................................................................... 62
1
Appendix A. Analyzing the California Banking Landscape
Traditional Banking Institutions
This section reports the results from a data collection that RAND conducted to examine how
checking account fees vary across all banks and credit unions that offer this service in the state of
California. The data on fees and minimum balance requirements that we collected are well-
known barriers to banking access. This is also supported by findings from the RAND California
Survey of Household Finance reported in column 4 of Table A1.1, which show that, among
unbanked respondents, 41.1 percent cite "Bank or credit union account fees and service charges
are too high” and 31.9 percent cite "Bank or credit union account fees are too unpredictable” as
reasons for not having a checking or savings account. Similarly, 58.1 percent of these
respondents cite "You don’t have enough money to meet minimum balance requirements” as a
reason for being unbanked.
Table A1.1. Reasons for Not Having a Bank Account: Unbanked Respondents
RAND
FDIC
RAND
Primary Reason
Check All That Apply
Reason for Not Having a Bank Account
Bank or credit union locations are inconvenient
0.0%
4.4%
14.3%
Bank or credit union account fees and service charges are too high
10.0%
6.0%
41.1%
Bank or credit union account fees are too unpredictable
4.0%
1.5%
31.9%
Banks or credit unions do not offer products and services you need
0.0%
2.4%
12.2%
You don’t trust banks or credit unions
5.0%
13.2%
31.8%
You don’t have enough money to meet minimum balance requirements
19.0%
21.7%
58.1%
Avoiding a bank or a credit union gives you more privacy
1.0%
8.4%
22.4%
You don’t have the personal identification required to open an account
0.0%
2.7%
11.3%
You cannot open an account due to problems with past banking or credit
history
10.0%
5.3%
23.5%
It is not easy for you to speak with bank or credit union staff in your language
1.0%
NA
9.6%
Banks or credit unions do not feel welcoming or comfortable for people like
you
4.0%
NA
17.5%
Information given by banks or credit unions on account rules and fees are
confusing
2.0%
NA
17.6%
You do not have enough money to need a bank or credit union account
11.0%
NA
63.9%
2
RAND
FDIC
RAND
Banks and credit unions take too long to clear checks
1.0%
NA
20.8%
Banks and credit unions may close unexpectedly and you might lose all your
money
4.0%
NA
31.0%
You do not need to write enough checks to make it worthwhile to have a
bank or credit union account
7.0%
NA
30.8%
The people and businesses you usually make payments to only accept cash
2.0%
NA
20.8%
You are not sure how to open and/or to manage a bank or credit union
account
1.0%
NA
23.0%
You keep your savings in another country
0.0%
NA
6.0%
You prefer to handle your transactions with cash
19.0%
NA
53.3%
SOURCE: The numbers in the RAND columns are from the RAND California Survey of Household Finance. The
numbers in the FDIC columns are from the FDIC Survey of Unbanked and Underbanked Households.
NOTES: The table lists different reasons for not having a bank account. For the RAND columns, the “Check All That
Apply” reason is based on the full sample of the unbanked, whereas the “Primary Reason” is based exclusively on
those who reported a reason. For the FDIC columns, the numbers are from the 2021 version of the survey, using
Appendix Tables A.8 and A.9 (link: https://www.fdic.gov/analysis/household-survey/2021appendix.pdf). The sample
used is national and is restricted to all unbanked households. The statistics are weighted using weights that were
constructed to account for undercoverage and/or underresponse.
Sample Selection Criteria
We include all active banks that are insured by the Federal Deposit Insurance Corporation
(FDIC) and all active credit unions that are insured by the National Credit Union Administration
(NCUA) that fulfill three criteria.
1
First, they must have a physical branch
in California. For
banks, this means that they must have at least one physical address in the state as reported by the
Federal Financial Institutions Examination Center (FFIEC),
2
and for credit unions, this means
that they must have at least one physical address in the state as reported by the NCUA Quarterly
Call Report database.
3
Second, we exclude institutions with an entity type (or institution group)
classified as a data processor, financial or investment company, securities broker, foreign bank or
entity, edge corporation, and non-deposit trust company.
4
There are 478 institutions that match
1
Unlike banks, eligibility to join credit unions is generally restricted to individuals that work for specific companies,
reside in certain areas, are members of specific faith-based communities, etc. We include all credit unions that fulfill
the three sample criteria independent of their eligibility criteria.
2
The data can be accessed from the FFIEC National Information Center (NIC) available at
https://www.ffiec.gov/npw/ by choosing “Data Download” and downloading the file titled “Attributes – Branches.”
Data file downloaded on 01/29/24. Note that banks that only offer ATMs or alternative non-branch services in the
state (e.g., cafés or lounges) are not listed on the FFIEC NIC database and are not included in our sample.
3
The data can be accessed from https://ncua.gov/analysis/credit-union-corporate-call-report-data/quarterly-data. We
use data from the September 2023 Call Report. Location information for each credit union is reported in “Credit Union
Branch Information.txt” as updated on 11/22/23.
4
Institutions are excluded if their Entity Type is classified as “Finance Company,” “Foreign Bank,” “Foreign Banking
Organization (FBO),” “Foreign Banking Organization as a BHC,” “Foreign Branch of a U.S. Bank,” “Foreign Entity
Other,” “Investment Bank/Company,” “Uninsured Federal Branch of an FBO,” “Uninsured State Agency of an FBO,”
“Uninsured State Branch of an FBO,” “Edge Corporation – Domestic Branch,” “Edge Corporation – Investment,”
“Financial Holding Company – Domestic,” “Non-deposit Trust Company – Member,” “Non-deposit Trust Company
3
these two requirements in California. Then we restrict the sample to banks and credit unions that
offer personal checking accounts (also referred to as share draft accounts by credit unions). Our
final sample includes 418 institutions, of which 153 are banks and 265 are credit unions.
5
In
terms of distinct branches, the final sample consists of 7,196 branches, of which 5,629 belong to
banks and 1,567 belong to credit unions.
6
Figure A1.1 provides a map of the different branch locations in California, with banks
illustrated by red dots and credit unions illustrated by blue dots. We also show the total
population size for each zip code in the state. As expected, there is a strong correlation between
population count and branch density, with banks and credit unions mostly located in and around
major cities like Los Angeles, San Diego, San Francisco, and Sacramento. Moreover, banks and
credit unions generally locate in the same areas; banks, however, cover a larger share of the
state’s zip codes than credit unions, especially in the Northern parts of California.
– Non-Member,” “Representative Office,” “Securities Broker/Dealer,” “Bank Holding Company,” and “Domestic
Entity Other.” Information on Entity Type can be obtained from the FFIEC NIC database available from
https://www.ffiec.gov/npw/.
5
We exclude institutions that provide personal checking accounts exclusively to owners or managers of businesses
that have business accounts with the institution. We also exclude institutions that exclusively provide premier personal
checking accounts that require minimum opening balances of at least $10,000.
6
Among the 7,196 branches included in our final sample, 115 do not report a physical address.
4
Figure A1.1. Bank and Credit Union Branch Locations and Population Size by Zip Code
SOURCE: Bank branch locations are obtained from the FFIEC National Information Center database (accessed on
01/29/24). Credit union branch locations are obtained from the NCUA Quarterly Call Report database (using data
from September 2023). Population refers to total population in the zip code.
NOTES: The graph shows the location of bank branches (red dots) and credit union branches (blue dots) in
California. Only institutions that have at least one physical branch in the state and that offer personal checking
accounts are included.
Methodology Used to Collect Banking Fees
We collected data on fees and minimum balance requirements for the basic checking account
offered by the institutions in our sample.
7
Data on two types of fees were collected: monthly
service charge (also referred to as monthly maintenance fee) and overdraft/non-sufficient funds
(NSF) fees that banks and credit unions levy when customers engage in transactions that exceed
their account’s balance. Because banks and credit unions often offer ways to waive the monthly
service charge, we also collected data on whether the institution offers ways to waive the
maintenance fee. Lastly, we collected data on the minimum deposit required to open a checking
account.
7
By basic checking account, we mean a non-interest-bearing account that allows the customer to make purchases
both in-store and online using a debit card linked to the account, pay bills, deposit and withdraw cash at Automated
Teller Machines (ATMs), and receive online direct deposits (e.g., to receive paychecks).
5
Data on fees and minimum balance requirements were obtained directly from each bank and
credit union. While some institutions report the data on their website in a transparent and easily
accessible manner, several institutions only report this information on their Fee Schedule or on
various Disclosure Statements (e.g., Deposit Account Disclosures and Truth in Savings
Disclosures); forms that are generally hard, and sometimes impossible, to locate on the
institution’s website. Even when an institution reports these documents online, the exact details
regarding potential fees might not be understandable to most, or even all, customers. And, while
several banks offer low-cost checking accounts, they sometimes only promote their higher-cost
accounts because of the higher profit margin they bring, which adds to the information
asymmetry problem faced by prospective customers.
Missing data were obtained from phone calls with customer representatives. Note that some
credit unions were unwilling to disclose any information until they had verified that the
prospective customer was eligible to join the credit union, such as proof of employment in the
event that membership is restricted to specific workers. Similarly, some banks were unwilling to
disclose any information on the phone and required that prospective customers visit them at one
of their branch locations to obtain information about their services.
Overall, considering the amount of time that it took dedicated RAND staff to obtain the
required information for all institutions, it is unreasonable to assume that a regular customer has
the time or expertise required to adequately compare his or her potential banking alternatives.
The distribution of fees across the various institutions discussed below should be interpreted as
the lowest possible fees that institutions might offer, even though the specific checking accounts
incorporated in our analysis might not be readily available to all customers.
Monthly Service Charge
The CalAccount aims to offer fee-free checking accounts with no minimum opening deposit
requirements. Our data collection revealed that such accounts are nearly non-existent in
California. Among the 418 banks and credit unions with a physical branch in the state, only two
banks offer checking accounts with no minimum opening deposit requirement, no monthly
service charge, and no overdraft or NSF fee (however, other fees that were not collected by
RAND, and that would not be charged by the proposed CalAccount program, might still apply to
their accounts).
Rows 1 and 4 of Table A1.2 report, respectively, the distribution of the monthly service
charge (in dollars) across the banks and credit unions in our sample. Note that all institutions
receive equal weight in this table; hence, while several large institutions (e.g., Bank of America,
Chase Bank, and Wells Fargo) have multiple branches in the state and serve a larger share of the
state’s population, they receive equal weight to smaller institutions that serve only a small share
of Californians and that might have only a few branches in the state when deriving the
distributions reported in this table. About one-fifth of banks that operate in California provide
checking accounts with no monthly service charge. Most banks, however, charge such fees, with
a median fee of $7.88 and a fee of at least $12 per month for the banks in the top ten percent of
this distribution. Conversely, most credit unions do not charge monthly service fees for their
basic checking accounts. While about one-third of the credit unions charge such fees, the fee is
generally lower than for banks and is less than $10 for nearly all credit unions in our sample.
6
Table A1.2. Distribution Across Banks and Credit Unions by Type of Fee (in dollars)
Min
10
25
50
75
90
Max
Banks
Monthly Service Charge
0.00
0.00
4.00
7.88
10.00
12.00
30.00
Overdraft/NSF Fee
0.00
15.00
25.00
30.00
35.00
35.00
49.00
Minimum Deposit Requirement
0.00
25.00
50.00
100.00
100.00
500.00
1500.00
Credit Unions
Monthly Service Charge
0.00
0.00
0.00
0.00
4.00
5.50
10.50
Overdraft/NSF Fee
0.00
20.00
25.00
29.00
30.00
32.00
37.00
Minimum Deposit Requirement
0.00
0.00
0.00
20.00
25.00
50.00
500.00
SOURCE: Primary data collection from the institution’s website or from phone call with customer representative.
NOTES: Rows 1–3 report, respectively, the distribution of the monthly service charge, the overdraft/NSF fee, and
minimum deposit requirement (all in dollars) for the basic checking account offered by the banks that have at least
one branch office in California. Rows 4–6 report the corresponding distributions for credit unions that operate in the
state. All institutions are equally weighted in this table.
Figure A1.2 shows the spatial distribution of the monthly service charge. It depicts the
average monthly fee across all bank and credit union branches that are located in a particular zip
code, with darker shades of green associated with higher average monthly service charges. In this
map, white dotted zip codes illustrate zip codes that do not have any bank or credit union
branches that fulfill the selection criteria discussed earlier, including zip codes with potentially
missing data on monthly service charges. The map shows that there is limited spatial variation in
the monthly service charge in California.
7
Figure A1.2. Average Monthly Service Charge by Zip Code
SOURCE: Primary data collection from the institution’s website or from phone call with customer representative. Bank
branch locations are obtained from the FFIEC National Information Center database (accessed on 01/29/24). Credit
union branch locations are obtained from the NCUA Quarterly Call Report database (using data from September 2023).
NOTES: The map illustrates the average monthly service charge (also known as maintenance fee) across all bank and
credit union branches that are located in a particular zip code. White dotted zip codes illustrate zip codes that do not
have any bank of credit union branches, including zip codes with potentially missing data on maintenance fees.
Banks and credit unions often offer ways to waive the monthly maintenance fee; hence, the
de facto service charge difference between banks and credit unions, assuming the customer
qualifies for the waiver, is lower than what is reported in Table A1.2. Among the sample of
banks and credit unions that charge a monthly maintenance fee, more than 90 percent allow for
ways to waive the fee, the most common option of which is to maintain a sufficiently high
account balance.
8
For credit unions that offer this option, the monthly minimum balance
requirement ranges from $50 to $2,500, with $100 for the 10
th
percentile, $500 for the median,
and $1,500 for the 90
th
percentile. The corresponding monthly minimum balance requirement for
8
While institutions apply different metrics to assess minimum account balances, they are mostly based on either the
customer’s minimum daily balance or on the average account balance over the course of a month.
8
banks that offer this option ranges from $100 to $10,000, with $400 for the 10
th
percentile, $600
for the median, and $1,500 for the 90
th
percentile. A large share of institutions also waives this
fee, either partially or in full, if the customer opts to receive their monthly statements
electronically (i.e., by enrolling in E-Statements) or by having monthly direct deposits that
exceed a certain threshold.
Overdraft/NSF Fee
Most financial institutions that provide checking accounts charge overdraft or NSF fees if a
customer engages in transactions that exceed his or her account’s balance. Overdraft fees are
levied when banks and credit unions choose to cover the transaction, thereby leading to a
negative account balance,
9
whereas an NSF fee is levied when a presented check is returned, or a
payment cannot be made, due to insufficient funds.
Rows 2 and 5 of Table A1.2 report show, respectively, the distribution of the overdraft or
NSF fee (in dollars) across the banks and credit unions in our sample.
10
Most institutions charge
an overdraft/NSF fee that ranges between $25 and $35 per transaction. Among the banks in our
sample, the overdraft/NSF fee ranges from $0 to $49, whereas the corresponding fee for credit
unions varies from $0 to $37.
Figure A1.3 shows the spatial distribution of the overdraft/NSF fee by illustrating the average
overdraft/NSF fee across all bank and credit union branches that are located in a particular zip
code, with darker shades of green associated with higher average overdraft/NSF fees. White
dotted zip codes illustrate zip codes that do not have any bank of credit union branches that
fulfill the selection criteria discussed earlier, including zip codes with potentially missing data on
overdraft/NSF fees.
9
Overdraft fees are sometimes referred to as courtesy pay fees due to the service, or courtesy, that the institution
offers by covering transactions that exceed the customer’s account balance.
10
We combine overdraft and NSF fees because nearly all banks and credit unions charge the same fee whether they
cover the transaction, which results in an overdraft, or if the payment cannot be made or the presented check is
returned, which results in an NSF fee.
9
Figure A1.3. Average Overdraft Fee by Zip Code
SOURCE: Primary data collection from the institution’s website or from phone call with customer representative. Bank
branch locations are obtained from the FFIEC National Information Center database (accessed on 01/29/24). Credit
union branch locations are obtained from the NCUA Quarterly Call Report database (using data from September 2023).
NOTES: The map illustrates the average overdraft/NSF fee across all bank and credit union branches that are located
in a particular zip code. White dotted zip codes illustrate zip codes that do not have any bank of credit union branches,
including zip codes with potentially missing data on overdraft/NSF fees.
Overdraft fees are generally levied on a per-transaction basis, which means that every
purchase that results in an overdraft, as well as every “bounced” check or rejected payment due
to insufficient funds, can result in an overdraft or NSF fee.
11
Following an overdraft, customers
might also be charged exorbitant interest penalties that sometimes compound daily until they
11
While there are exceptions, these fees are generally independent of the size of transactions or the amount by
which the customer’s account balance falls below zero (Bakker, Trevor, Nicole Kelly, Jesse Leary, and Éva
Nagypál, Data Point: Checking Account Overdraft, Consumer Financial Protection Bureau, July, 2014. )
10
restore their account to a positive balance.
12
Repeat overdrafts may also result in involuntary
account closures. Such involuntary account closures have long been common in the U.S., with
6.4 million accounts involuntarily closed in 2005, nearly all of which were due to repeated
overdrafts and NSF activities.
13
Note that an involuntary account closure with one financial
institution might also impair a customer’s ability to open accounts with another institution or
limit their future options to high-fee accounts (sometimes referred to as fresh start or second
chance accounts). This follows because banks usually report such activities and involuntary
account closures to ChexSystems, an agency that collects information on customers’ deposit and
debit history. Several banks and credit unions use the statistics reported by ChexSystems to
assess the financial risk that a prospective customer might present.
14
Minimum Opening Deposit Requirement
Finally, rows 3 and 6 of Table A1.2. report, respectively, the distribution of the minimum
deposit required to open a checking account (in dollars) across the banks and credit unions in our
sample. This deposit requirement only applies at the time when the customer opens the account
and is hence different from the minimum balance that several institutions require to waive the
monthly service charge. The minimum opening deposit for the banks in our sample ranges from
$0 to $1,500, with $100 for the median.
15
In contrast, nearly half the credit unions in our sample
do not require minimum opening deposits for their basic checking account. Note, however, that
this comparison of minimum opening deposits between banks and credit unions is somewhat
misleading because prospective customers at credit unions cannot open a checking (or draft)
account until they have opened a savings (or share) account with the same institution. While the
minimum deposit requirement for savings accounts varies across credit unions, it mostly ranges
from $5 to $25.
16
12
Some institutions limit the number of overdraft fees that customers can be charged daily, and some also grant
customers a grace period (generally limited to at most a few days) to bring their account back to a positive balance
before levying an overdraft fee. Several institutions also allow their customers to pay for an overdraft protection
plan that enables funds from another linked account, such as a savings account, to be automatically transferred to
cover transactions that exceed the customer’s checking account balance. While some banks do not charge overdraft
fees, customers are still liable for potential interest penalties that accrue as long as the account balance remains
negative.
13
Campbell, D., F. A. Martínez-Jerez, and P. Tufano, "Bouncing out of the banking system: An empirical analysis
of involuntary bank account closures," Journal of Banking & Finance, Vol. 36, No. 4, 2012, pp. 1224-1235.
14
See Section A1.6 for a literature review on the impact of ChexSystems on access to financial services for
unbanked individuals.
15
The minimum opening deposit tends to be lower than the minimum balance required to waive the monthly service
charge. Hence, customers often have to deposit additional funds during the first month after opening an account (in
excess of the minimum opening deposit) to avoid having to pay the monthly maintenance fee at the end of the first
statement cycle.
16
These savings accounts can also come with monthly service charges. While most of them do not, a subset of
credit unions charge about $5 per month for their savings accounts. Unlike for banks, prospective customers at credit
unions must also pay a non-refundable membership fee, most commonly at a cost of $5, before they can open any
account with the institution.
11
F1.2 Non-Traditional Banking and Payment Services
We collected data on fees for non-traditional banking and payment services that are used
disproportionately by unbanked households, including check cashing, money orders, nonbank
money transfer services (e.g., for international remittances), and prepaid cards.
17
Sample Selection Criteria
The list of registered nonbank institutions in the state that offer money orders, nonbank
money transfers, and/or check cashing services are obtained from the State of California’s Check
Casher Permit Program.
18
A list of 252 establishments were sampled randomly, spanning 56 of
the 58 counties in the state. Fees associated with these services were obtained from phone calls
with each establishment. Several establishments did not have a phone number listed on Google
Maps or on their website.
19
Among the 124 establishments that RAND managed to contact,
20
36
were either no longer providing these services or were unwilling to disclose any information on
the phone, leaving a final sample of 88 establishments that provide at least one of these three
services.
A random sample of 136 prepaid cards were obtained from the Prepaid Product Agreements
Database administered by the Consumer Financial Protection Bureau (CFPB).
21
This database
provides account disclosures for each prepaid card, including detailed information on different
fees. We restrict our sample to general purpose reloadable prepaid cards, excluding Play+ cards.
A total of 56 cards with missing account disclosures were excluded, leaving a final sample of 80
prepaid cards.
Fees for Check Cashing, Money Orders, Money Transfers, and Prepaid Cards
Fees for check cashing services generally scale with the value of the check, with vendors
either providing a schedule of fees that varies with the check amount or charging a fee that is
equal to some percentage of the check amount. Because a large share of the unbanked
households in the U.S. tends to be lower income according to data from the FDIC Survey of
Unbanked and Underbanked Households, RAND restricted the data collection to the cost of
cashing a $100- and a $500-check.
The first row of Table A1.3 reports the distribution of fees associated with cashing a $100-
check across the sampled vendors. This fee ranges from $1 to $10 in our sample, with a median
fee of $2.25. The corresponding fee to cash a $500-check reported in the second row of the table
ranges from $1 to $50, with a median of $6.75 and a fee of at least $12.50 among the top 10
percent of the sample. These fees may cause considerable financial strain for unbanked
17
Certain credit products or services are also used disproportionately by un/underbanked households, including pawn
shops, payday loans, tax refund anticipation loans, and auto title loans. Given the scope of the proposed CalAccount
program, and following communication with STO, RAND restricted the primary data collection to fees associated
with non-credit and non-loan services.
18
State of California Office of the Attorney General, "Check Casher Permit Program," Undated.
19
Google Maps: google.com/maps.
20
At least three attempts were made to contact each of the sampled establishments.
21
Consumer Financial Protection Bureau, "Prepaid Product Agreements Database," Undated.
12
households, who might have to routinely rely on these services to cash paychecks or other forms
of payments.
The third row in Table A1.3 reports the distribution of fees associated with money order
services. This fee ranges from $0.60 to $4.00. Half the sampled vendors, however, charge at
most $1.00 for this service. This is mostly due to the relatively low money order fees charged by
large grocery store chains (e.g., Safeway) that are included in our sample. Customers must pay
this fee for each money order, with a maximum amount per money order that ranges from $500
to $1,000 across the sampled vendors.
22
While the fees per money order for the median vendor is
relatively low, the cost of using these services can result in large cumulative expenses for
unbanked households that might not have access to other secure ways of sending money. A
report from the Federal Reserve Bank of Boston found that the fees associated with check
cashing and money order services for unbanked households can run from $30–$318 a year.
23
Table A1.3. Distribution of Fees for Non-Traditional Banking or Payment Services (in dollars)
Min
10
25
50
75
90
Max
Type of Service
Check Cashing ($100-check)
1.00
1.00
1.73
2.25
2.25
5.00
10.00
Check Cashing ($500-check)
1.00
5.00
6.38
6.75
10.00
12.50
50.00
Money Order
0.60
0.99
1.00
1.00
2.00
3.00
4.00
Prepaid Cards
Monthly
0.00
0.00
0.00
0.00
0.75
5.00
9.95
Per Purchase
0.00
0.00
0.00
0.00
0.50
1.00
3.00
ATM Withdrawal
0.00
0.00
1.75
2.00
2.50
2.50
3.15
Cash Reload
0.00
0.00
0.00
4.95
5.95
5.95
5.95
Customer Service Call
0.00
0.00
0.00
0.00
0.00
0.00
5.00
Balance Inquiry
0.00
0.00
0.50
0.90
1.00
1.50
3.00
Inactivity
0.00
0.00
0.00
2.97
4.95
5.95
10.00
SOURCE: Primary data collection from phone call with each sampled vendor.
NOTE: The table lists select percentiles of the distribution of fees (in dollars) for check cashing services and money
orders, as well as the most common fees associated with general purpose reloadable prepaid cards.
22
Several traditional banks also offer check cashing and money order services to non-relationship customers. As an
example, Bank of America charges $8 per check for amounts that exceed $50 and Chase Bank charges $5 per money
order for amounts up to $1,000.
23
Desmond, Tyler and Charles Springer, Estimating the Cost of Being Unbanked, Federal Reserve Bank of Boston,
2007.
13
The CFPB reports disclosure agreements for prepaid debit cards, including the various fees
associated with these cards. These prepaid cards function like conventional debit cards and can
be used to make purchases (both in-store and online) and to pay bills. While these cards are not
linked to a checking account like conventional debit cards, they can still be reloaded with
additional funds, albeit potentially at a cost to the customers.
24
The final rows of Table F1.3 list
the 7 most common fees associated with these cards. The majority of prepaid cards do not have
monthly fees; those that do, however, come at a high cost, with $5.00 per month for the 90
th
percentile. Furthermore, while most prepaid cards do not charge per transaction fees, a quarter of
them charge at least $0.50 per transaction; a subset of the cards also charge percentage-based
transaction fees that can be as high as 3.5percent of the purchase amount. Similar to conventional
debit cards, customers can withdraw funds from their prepaid cards at ATMs. Doing so at out-of-
network ATMs, however, usually comes at a cost.
Depositing funds in a checking account generally comes at no cost to customers of banks and
credit unions; conversely, reloading prepaid cards usually comes at a cost, with a fee of $4.95 for
the median prepaid card. Most prepaid cards also charge balance inquiry and inactivity fees, and
5 percent of the sampled prepaid cards also charge a fee to talk to a customer representative.
Note that nearly all prepaid cards also come with additional fees. Among the prepaid cards in our
sample, the median card has 7 fees in addition to those listed in Table A1.3.
Finally, we collected data on the cost of nonbank money transfer services. Both banked and
unbanked households sometimes use these services to make international money transfers, for
example for remittances. Given the demographics in California, we collected data on the cost of
a $1,000 money transfer to Tijuana, Mexico. There is almost no variation in this fee in our
sample, with nearly all vendors charging $10 for this service.
Benefits and Harms of Non-Traditional Banking and Payment Services
The non-traditional banking and payment services discussed above can substitute for some of
the services that are available to banked households. For example, check cashing services
provide a substitute for direct deposits and prepaid cards might provide a substitute for some of
the services that banked customers can access by having a debit card linked to their checking
account. Our data collection, however, shows that these non-traditional banking and payment
services come at considerably higher costs to customers in California. CalAccount can lessen the
unbanked population’s financial burden by reducing their dependence on expensive non-
traditional banking services. The following discussion outlines certain benefits and harms of
these non-traditional services for unbanked households compared to traditional banking and
payment services.
Amongst the benefits of non-traditional money services are accessibility and
convenience. These services are often available in various locations, including convenience and
grocery stores, making them potentially more accessible than traditional banking services in
underserved areas. Figure A1.4 shows the location of all bank and credit union branches (blue
dots) and all the registered nonbank institutions in the state that offer money orders, nonbank
24
Our report focuses on prepaid cards issued by companies. The government, at both the federal and state level, also
use these cards, for example to issue unemployment insurance benefits, Social Security payments, and Economic
Impact Payments (more commonly referred to as stimulus checks). Such government issued cards can only be reloaded
by the government and are not included in our sample.
14
money transfers, and/or check cashing services (red dots). The nonbank institutions are mostly
located in densely populated areas of the state and are hence mostly located in the same areas as
the traditional banking institutions. The nonbank institutions, however, improve access to
banking and payment services in Central California and certain rural parts of the state.
Figure A1.4. Population Count and Bank, Credit Union, and Check Cashing Locations by Zip Code
SOURCE: Bank branch locations are obtained from the FFIEC National Information Center database (accessed on
01/29/24). Credit union branch locations are obtained from the NCUA Quarterly Call Report database (using data
from September 2023). Check Cashing Vendors are obtained from the State of California’s Check Casher Permit
Program. This includes all registered nonbank institutions in the state that offer money orders, nonbank money
transfers, and/or check cashing services. Population refers to total population in the zip code.
Recall from Table A1.1 that 58.1 percent of the unbanked households in the RAND
California Survey of Household Finance cite “You don’t have enough money to meet minimum
balance requirements” as a reason for not having a checking or savings account and that 19.0
percent of the respondents cite this as their main reason for being unbanked. The non-traditional
services discussed here might offer a convenient, albeit more costly, alternative for these
15
unbanked households due to the barriers that they face to opening and maintaining a traditional
bank account.
Greater perceived privacy and trust is another potential benefit of non-traditional banking
services. This is consistent with the findings from the RAND California Survey of Household
Finance reported in Table F1.1, which show that 22.4 percent of the unbanked respondents cite
“Avoiding a bank or a credit union gives you more privacy” as a reason for being unbanked, with
31.8 percent citing “You don’t trust banks or credit unions” as a reason for not having a checking
or savings account.
Non-traditional banking services do not provide credit-building opportunities. This leaves the
unbanked without avenues to establish a credit history, which is crucial for financial mobility.
25
Unbanked households might therefore have to opt for high-cost credit alternatives for their
borrowing needs, such as payday lenders, automobile title loans, tax refund anticipation loans,
and pawn shops. Indeed, both the RAND California Survey of Household Finance and the FDIC
Survey of Unbanked and Underbanked Households show that unbanked households are
considerably more likely to use these high-cost credit alternatives.
26
While non-traditional
lenders can be providers of helpful liquidity when credit-constrained households face unexpected
expenses or income shocks, this liquidity comes at an incredibly high cost. Research by the
CFPB found that payday loans, for example, have such high associated costs that borrowers
often become “trapped” in a debt cycle, with over 80 percent of payday loans rolled over or
followed by another loan within 14 days.
27
While having a bank account does not eliminate the
risk of incurring unexpected expenses or income shocks, gaining access to traditional banking
services, including loans and credit cards, might still enable unbanked households to better
smooth their consumption by reducing their reliance on non-traditional alternatives with
exorbitant fees.
Finally, while there have been some efforts by the CFPB and state governments to monitor
non-traditional banking services, they generally exist in a less regulated environment compared
to traditional banks. This can potentially expose users to fewer consumer protections and
exploitative practices.
A1.3 Banking Access Across Ethnic and Racial Groups
Figure A1.1 showed that certain areas of California are underserved in the sense that they are
mostly void of physical bank branches. Limited access to physical branches can be a barrier to
banking, with 14.3 percent of the unbanked households in the RAND California Survey of
Household Finance citing inconvenient bank and credit union locations as a reason for not
having a checking or savings account; none of the respondents, however, cite this as their main
reason for being unbanked (confer Table A1.1).
25
For a literature review on the importance of a credit history for the ability to receive loans (mortgages or auto
loans) or to receive these loans at a good rate see: Toh, Ying Lei, "Addressing Traditional Credit Scores as a Barrier
to Accessing Affordable Credit," 2023.
26
Federal Deposit Insurance Coporation, "2021 FDIC National Survey of Unbanked and Underbanked
Households," July 24, 2023.
27
Burke, Kathleen, Jonathan Lanning, Jesse Leary, and Jialan Wang, Data Point: Payday lending, Consumer
Financial Proteciton Bureau, March, 2014.
16
Current Banking Access
RAND leveraged 2020 Decennial Census block level data to quantify the share of the
population located in underserved areas.
28
To do so, we first computed the share of the total
population that reside more than x miles from the nearest branch office. Given the large
differences in travel times between urban and rural areas, we computed this statistic using a
locale-specific range, where the locales are as defined by the National Center for Education
Statistics: city, suburban, town, and rural.
29
We also used the block level demographic data
reported by the Census to compute this statistic separately for different ethnic and racial groups
to examine whether certain demographic groups are more likely to be located in underserved
areas.
30
The findings are reported in Table A1.4. Most Californians that live in cities have good
access to branch offices. While about one-quarter of the population that live in cities reside more
than 1 mile from a branch office, only 4 percent reside more than 2 miles from the nearest
branch. A comparison across demographic groups shows moderately worse banking access for
certain minorities conditional on living in cities, with 29.3–31.7 percent of the Black, Hispanic,
and Native American population residing more than a mile from the nearest branch, compared to
25.7–26.8 percent for the Asian American and White population. Banking access is worse in less
densely populated areas of the state. It is particularly poor for Native Americans that reside
rurally, with nearly one-third of this demographic group residing more than 10 miles from the
nearest branch office and about 10 percent residing more than 20 miles away.
Table A1.4. Population Living with Poor Physical Bank Access
Demographic Group
Asian
American
Black
Hispanic
Native
American
White
Full
Population
28
"California Census 2020 Redistricting Blocks," edited by ArcGIS: ESRI, 2021.
29
Given that travel times can differ between urban and rural areas. WRAND conducted an additional analysis where
we compared the average distance to the nearest branch with the average travel time (by car) to the nearest branch.
We did this by merging our data on branch offices with travel time from Google Maps. Doing this at scale for the
entire state is computationally very costly due to the number of combinations that must be considered. We therefore
restricted this analysis to four locations. We found that the two measures are positively correlated for this small
sample of areas, suggesting that our results based on travel distance are likely robust to an alternative measure based
on travel time.
3030
RAND examined whether areas that were subjected more extensively to redlining, a discriminatory practice
embedded in the history of mortgage lending, have worse banking access as measured by the share of the population
residing more than x miles away from the nearest branch. Due to data limitations, this analysis was restricted to
cities for which we have historical redlining data from the ArcGIS Living Atlas (Lavery, Diana, "Historical
redlining data now in ArcGIS Living Atlas," in ArcGIS Living Atlas: ESRI, 2020. https://www.esri.com/arcgis-
blog/products/arcgis-living-atlas/announcements/redlining-data-now-in-arcgis-living-atlas/). We did not find a clear
relationship between the severity of redlining and banking access. However, given that this study is restricted to a
few cities in California, it is not necessarily representative of the implications of redlining for the overall state (e.g.,
our data does not include cities such as Oakland). Future research using other measures of banking access and more
comprehensive data on redlining should therefore re-examine the relationship between redlining and banking access
in California. See Section F1.6 for a literature review on the impact of redlining on the unbanked population.
17
Demographic Group
Locale
Range
City
1 mile
25.7%
31.7%
29.3%
31.4%
26.8%
27.9%
2 miles
3.9%
4.4%
3.6%
5.3%
4.4%
4.0%
Suburban
2 miles
6.4%
10.5%
9.9%
15.6%
13.2%
10.6%
5 miles
0.2%
0.8%
0.8%
1.7%
0.8%
0.7%
Town
5 miles
21.6%
22.5%
11.4%
10.7%
11.9%
12.2%
10 miles
3.4%
10.9%
5.0%
2.6%
3.2%
4.3%
Rural
10 miles
5.3%
12.2%
16.9%
31.2%
17.1%
16.4%
20 miles
0.7%
4.6%
4.5%
10.3%
3.5%
3.8%
SOURCE: Bank branch locations are obtained from the FFIEC National Information Center database (accessed on
01/29/24). Credit union branch locations are obtained from the NCUA Quarterly Call Report database (using data
from September 2023). Population count for each demographic group is obtained from the 2020 Decennial Census
block level data.
NOTE: For a given locale, percentages represent the share of either the total population or a particular demographic
group that resides more than x miles from the nearest branch office. Resident locations are approximated by the
centerpoints of U.S. Census Blocks.
Banking Access Under Alternative Scenarios
Academics, policy researchers, and politicians have advocated for reviving the U.S. postal
banking system, which was robust while active in the U.S. from 1910 until 1966.
31
Post offices
could use their natural economies of scale and scope to offer transaction services at a lower cost
than banks.
32
Piloting postal banking in California is one avenue that could be explored with the
U.S. Postal Service (USPS) and its Postmaster General.
33
Given this, RAND examined how banking access would be affected under an alternative
scenario where post offices are used as CalAccount branch offices, using location data reported
by the U.S. Geological Survey: Government Structures. We also examined the implications of
using town halls and schools as potential branch offices. Overall, we found that expanding the
network of branches to include post offices would lead to improved banking access, especially in
rural areas. The share of the rural population that resides more than 10 miles from the nearest
branch would decline would 16.4 percent to 3.5 percent. This would also result in better banking
31
Baradaran, Mehrsa, "Credit, Morality, and the Small-Dollar Loan," Harvard Civil Rights- Civil Liberties Law
Review, Vol. 55, No. 1, September 8, 2021. Noting endorsements of postal banking by Senators Bernie Sanders and
Kirsten Gillibrand and the 2016 Democratic National Platform. See also American Postal Workers Union, "Postal
Banking," Undated. https://apwu.org/postal-banking. ; Solomon, Danyelle, Mehrsa Baradaran, and Lily Roberts,
Creating a Postal Banking System Would Help Address Structural Inequality, Center for American Progress, October
15, 2020.
32
Baradaran.
33
45
Note, however, that a 2021 postal pilot program launched in four locations across Baltimore, Maryland; the
Bronx, New York; Falls Church, Virginia; and Washington, D.C., which allowed customers to transfer business and
payroll checks up to $500 to gift cards for a flat fee of $5.95 notably only had six customers (see Anthony, Nicholas,
"Only Six People Used the Postal Banking Pilot Program," in CATO at Liberty: CATO Institute, March 30, 2022. )
Thus, exploring a pilot with USPS for CalAccount purposes should involve an examination of why this 2021 pilot
failed.
18
access for certain minorities. For example, while nearly one-third of Native Americans that
reside rurally currently reside more than 10 miles from the nearest branch, this share would
decline to 5.2 percent if post offices are used as branch offices.
We also conducted additional analyses to examine how banking access varies across racial
and ethnic community boundaries, such as majority White, majority Black, and majority Native
American Census blocks. We also considered alternative banking access measures (e.g., the
average number of residents per traditional bank for the different communities) and how those
measures would change under the alternative scenarios discussed above. The findings from these
analyses are in line with the findings above: expanding the network of branch offices would
improve banking access across all communities.
A1.4 Bank Fee Revenues
While the banking fees discussed in Section A1.1 come at a cost to customers, they also
represent key sources of revenues for financial institutions. Given that an implementation of
CalAccount may result in lower bank revenues, we report the annual revenues that banks make
from specific fees next. This analysis is restricted to national bank revenues because
corresponding state-level revenue statistics are not available.
Banks with assets exceeding $1 billion are mandated to report their revenues from four
specific fees on Schedule RI – Income Statement of their quarterly Consolidated Reports of
Condition and Income (more commonly known as Call Reports): overdraft-related service
charges, periodic maintenance charges, ATM fees, and all other service charges on deposit
accounts.
34
Table A1.5 reports these fees for the year 2023 for the banks in our sample with the
10 highest fee revenues. Aggregate fee revenues are correlated with the size of a bank’s customer
base, which in turn tends to be positively correlated with total assets. It is therefore not surprising
that the largest banks in the country (Chase Bank, Wells Fargo, and Bank of America) are at the
top of the list in terms of total fee revenues, with revenues of $3.5–$4.6 billion in 2023. The third
column reports annual revenues from overdraft or NSF-related activities. Both Chase Bank and
Wells Fargo made more than $900 million in overdraft/NSF fees in 2023, more than three times
the amount that any of the other banks made from these activities. Most banks, however, have
recently experienced considerable reductions in their overdraft and NSF fee revenues. Between
2019 and 2023, inflation-adjusted annual revenues from overdraft/NSF charges declined by $1.0
billion, $1.3 billion, and $1.7 billion for Wells Fargo, Chase Bank, and Bank of America,
respectively, with similar proportional reductions experienced by most of the other banks listed
in Table F1.5.
35
34
Credit unions file their call reports with NCUA and are not subject to similar requirements regarding reporting of
specific fee revenues (Nagypál, Éva, Data Point: Overdraft/NSF Fee Reliance Since 2015 – Evidence from Bank Call
Reports, Consumer Financial Protection Bureau, December, 2021. )
35
Similar findings were reported by the CFPB, whose report showed that aggregate overdraft/NSF fee revenues were
stable between 2015 and 2019 but started declining rapidly during the pandemic (———.)
19
Table A1.5. Banks’ National Fee Revenues for 2023 (in millions of dollars)
Institution
Overdraft
Maintenance
ATM
Other
Chase Bank
1,104
831
307
2,400
Wells Fargo Bank
937
554
309
2,332
Bank of America
140
1,047
290
2,005
PNC Bank
258
178
82
1,085
Citibank
2
131
17
962
U.S. Bank
214
147
39
682
BMO Bank
27
18
22
319
Comerica Bank
14
8
5
162
Zions Bancorporation
17
12
3
154
First-Citizens Bank & Trust Company
22
11
0
125
SOURCE: Call Reports as of 12/31/23 reported by the FFIEC Central Data Repository’s Public Data Distribution.
NOTE: The table lists national fee revenues (in millions of dollars) for the year 2023 for the banks in our sample with
the 10 highest total fee revenues. The four last columns report annual revenues from overdraft and NSF fees,
monthly maintenance fees, ATM withdrawal fees, and all other service charges.
The next two columns report revenues from maintenance charges and ATM withdrawal fees.
Revenues from maintenance fees are generally lower than the revenues from overdraft/NSF fees;
however, 6 of the banks (Chase Bank, Wells Fargo, Bank of America, PNC, Citibank, and U.S.
Bank) made at least $131 million from monthly service charges, with Bank of America making
more than $1 billion from these periodic maintenance fees. Although banks often allow their
customers to withdraw cash from in-network ATMs free-of-charge, albeit potentially limited to a
few withdrawals per month, these institutions generally charge fees for out-of-network ATM
withdrawals. Table A1.5 shows that each of the 3 largest banks made about $300 million from
ATM withdrawal charges. The final column reports revenues from all other charges on deposit
accounts, one example of which is the cost of printing checks. These fees account for the
majority of bank fee revenues for most institutions, with 2023-revenues exceeding $2 billion for
each of the 3 largest banks.
A1.5 Bank Profitability Indicators
The State of California might choose to contract with major banking institutions in the state
to provide CalAccount. Given the recent banking failures in the U.S., this section provides an
assessment of the “healthiness” of the 20 largest banks in the country that offer personal
checking accounts and that have branch offices in California. While a complete stress test of
each potential collaborator bank is outside the scope of RAND’s analysis, this section can help
inform the State of California on the current financial well-being of the largest banks.
We use Call Reports for December 2023 to compute 6 commonly used measures of financial
profitability indicators: total assets, equity-to-assets, net income-to-assets, net interest margin,
loans-to-assets, and non-performing loans to total loans. The findings are reported in Table A1.6.
20
Column two reports total assets (in millions of dollars) for each of the banks. Chase Bank is
the most dominant by this measure, followed by Bank of America, Wells Fargo, and Citibank, all
of which have total assets exceeding $1 trillion. While this measure is a proxy for bank size, it is
not necessarily a good indicator of profitability or financial health. For example, banks with high
total assets do not necessarily make a lot of income on those assets or might have a large
proportion of risky, non-performing loans. Therefore, we look at ratios of other key metrics to
total assets next. Equity-to-assets reports the ratio of book equity to total assets. If there are any
write-downs or losses on assets, equity holders will absorb those losses first; therefore, equity-to-
assets can be interpreted as a measure of how much risk-absorption capacity a bank has. Holding
the riskiness of bank assets fixed, a higher equity-to-assets ratio implies a larger “distance to
default.” In our sample, this ratio is consistently above 5 percent.
The net interest margin reported in column four is informative about how profitable a bank’s
business is when abstracting from loan charge-offs. It measures the difference between the
interest earned on loans net of the interest paid on deposits and other liabilities. If loans were risk
free, it would provide a proxy for the profitability of the classic bank business of lending and
borrowing. Among the banks in our sample, the net interest margin typically ranges between 2–4
percent. However, given that loans can default and because banks face fixed and variable
operating costs, a more accurate measure of bank profitability must account for these additional
factors.
Net income-to-assets (column five) provides this measure of realized bank profitability. It
takes into account a bank’s fixed costs to operate and charge-offs on non-performing loans, as
well as the net interest margin. While this measure can vary from year-to-year, the December
2023 data show that the largest banks typically have positive profitability between 1–2 percent.
We do not observe a clear correlation between bank size and the net income-to-assets ratio.
The remaining columns of Table A1.6 analyze the banks’ loan business. The loan-to-assets
ratio is an indicator of a bank’s dependence on lending. Small and medium sized banks tend to
do more lending to firms and households, whereas larger banks generally do more trading and
securities activities, which suppresses the loan number. Therefore, we generally see an inverse
relationship between bank assets and loans-to-assets.
Finally, the non-performing loan ratio (NPL-to-total loans) is a backward-looking measure of
how past investments are currently performing. A higher value indicates that, among the bank’s
total loan portfolio, there is a higher proportion of loans that are currently behind on their
scheduled payments, which poses a risk of loss to the bank. Most banks have an NPL ratio at or
below 1 percent.
21
Table A1.6. Bank Profitability Indicators
Institution
Total
Assets
(Millions $)
Equity-
to-
Assets
(%)
Net
Interest
Margin (%)
Net Income-
to-Assets
(%)
Loans-to-
Assets
(%)
Chase Bank
3,395,126
8.8%
2.7%
1.4%
35.7%
Bank of America
2,540,116
9.3%
2.4%
1.1%
37.1%
Wells Fargo Bank
1,733,244
9.4%
3.2%
1.3%
50.0%
Citibank
1,684,710
9.7%
2.8%
0.7%
26.7%
U.S. Bank
650,659
9.5%
2.8%
0.9%
57.7%
PNC Bank
557,463
9.0%
2.6%
1.0%
56.9%
BMO Bank
265,658
12.4%
2.9%
0.2%
55.9%
First-Citizens Bank & Trust Company
213,618
10.0%
3.2%
5.4%
62.5%
Flagstar Bank
116,257
10.0%
2.7%
2.1%
73.8%
City National Bank
93,373
11.0%
2.9%
-1.7%
68.8%
Zions Bancorporation
87,203
6.5%
2.8%
0.8%
66.3%
Comerica Bank
85,902
6.6%
3.0%
1.0%
60.5%
East West Bank
69,479
9.4%
3.3%
1.7%
71.9%
Valley National Bank
60,944
11.9%
2.8%
0.9%
82.4%
CIBC Bank USA
54,847
16.7%
3.2%
1.5%
60.8%
Umpqua Bank
52,167
10.3%
3.5%
0.7%
71.8%
Midfirst Bank
36,651
10.0%
2.7%
1.3%
82.4%
Bank Ozk
34,237
15.0%
4.2%
2.0%
77.3%
Firstbank
28,121
5.1%
2.4%
1.0%
58.2%
Sofi Bank
24,063
14.1%
4.7%
1.5%
82.4%
SOURCE: Call Reports as of 12/31/23 reported by the FFIEC Central Data Repository’s Public Data Distribution.
NOTE: The table lists different bank profitability indicators for the year 2023 for the banks in our sample on the top-20
list in terms of total assets.
A1.6 Literature Reviews
Redlining
Redlining, a discriminatory practice embedded in the history of mortgage lending, continues
to significantly contribute towards financial exclusion in the U.S. To explore the impact of
redlining on the unbanked population in California, a literature search was conducted using
22
Google Scholar.
36
The search focused on publications from 1984 onwards using the keywords
“bank* desert AND California AND redlin*”, resulting in 125 relevant articles.
Each article was initially reviewed to determine its relevance to the impact of redlining on
the unbanked. Out of these, 11 articles that addressed this impact were selected for further
analysis. The key findings from the selected articles were synthesized to summarize the broader
implications of redlining on access to banking services and financial inclusion.
Analysis shows that redlining continues to significantly contribute to financial exclusion.
37
Literature highlighting the impact of redlining on unbanked populations focuses on long-
standing urban infrastructure inequities and the effectiveness of regulatory mechanisms designed
to promote fair access to credit, such as the Community Reinvestment Act (CRA).
Established in 1977, the CRA requires lenders to be rated based on their success in serving
the diverse credit needs across all income segments within their communities. Despite its critical
role as a benchmark for assessing bank performance and community access to financial services,
the effectiveness of the CRA and similar measures continues to face scrutiny. A key issue
identified in the literature review is grade inflation with CRA evaluations, whereby a
disproportionate number of banks receive high ratings that do not accurately reflect their actual
service to low- and moderate-income communities. The findings suggest that introducing a
grading curve could establish a relative ranking among banks based on their actual performance,
thus limiting the number of top ratings and compelling a more discerning and potentially more
accurate assessment of bank activities. Expanding CRA regulation to include non-bank lenders is
also recommended to ensure broader investment in communities impacted by redlining.
38
Research findings further indicate that historical discriminatory practices have resulted in
persistent disparities in urban neighborhood infrastructures.
39
These disparities are likely
contributors to the high rates of unbanked households in certain areas, particularly in
predominantly low-income and marginalized areas. Limited access to banking services in these
communities intensifies their financial exclusion.
The role of data mining in identifying discriminatory practices like redlining is critically
examined. Challenges such as frequent reliance on statistical analysis to detect discrimination,
data misuse, and the potential for misinterpreting statistical results complicate efforts to address
the root cause of financial exclusion.
40
36
Google, "Google Scholar." https://scholar.google.com/
37
Bybee, Jared, "Fair Lending 2.0: A Borrower-Based Solution to Discrimination in Mortgage Lending," University
of Michigan Journal of Law Reform, Vol. 45, No. 1, 2011.
38
Conti-Brown, Peter and Brian Feinstein, "Banking on a Curve: How to Restore the Community Reinvestment
Act," Harvard Business Law Review Vol. 13, No. 2, 2023.
39
Li, Zheng, Equity Of Urban Neighborhood Infrastructure: A Data-Driven Assessment, Civil and Environmental
Engineering Theses and Dissertations: Southern Methodist University, 2022.
40
Bunting, William, "The Impact of Data Mining on Information Disclosure by Regulatory Agencies: With an
Application to Redlining," Harvard Journal on Legislation, Vol. 355, August 20, 2018, 2019.
23
Additional research on historically redlined areas shows persistent issues, including lower
income levels, poor health outcomes,
41
and pronounced segregation. These areas are also
targeted by predatory lending practices, a trend that was particularly notable during the 2008
financial crisis.
42
These findings underscore the need for targeted reforms to address redlining and enhance
financial inclusion. Such measures are essential to effectively reduce the rate of unbanked
individuals.
ChexSystems
We conducted a systematic literature review on the impact of ChexSystems on access to
financial services for unbanked individuals. We reviewed academic journals and government
reports by searching multiple databases with a Title-Abstract keyword search for
“ChexSystem*”: EBSCO (Academic Search Complete, Business Search Complete, Military &
Government Collection), Web of Science, and Google Scholar. When the full text of an article
was not available, we reviewed the abstract. This initial search yielded 43 non-duplicative
results, of which 3 were not relevant to the CalAccount proposal. we reviewed and summarized
each relevant article.
43
The articles included in the literature review highlighted the possible significant impact that
ChexSystems has on both individuals and financial institutions. Much of the available literature
consists of articles and announcements from financial industry trade publications or news stories
around former New York State Attorney General Eric Schneiderman’s efforts to change the
banking industry’s use of ChexSystems. Some banks reported increased customer satisfaction
after adopting ChexSystems due to the decreased time needed to open an account. Several articles
interviewed individuals that were negatively impacted by ChexSystems and raised concerns
around the use of ChexSystems data disproportionately impacting low-income individuals.
Another area of the literature that included reference to ChexSystems focuses on the impact of
financial education and benefits programs broadly, to the extent that the programs mention
participants reported to ChexSystems or interventions designed to respond to ChexSystems.
ChexSystems Literature Review Reference List
The following reference list includes relevant articles identified as part of the ChexSystems
literature review. Full citations are included in the reference list at the end of this Annex.
41
Rocha, Erika and Gabriela Herrera, "Salinas’ Health Struggles as Manifestations of Historical Processes: A
Report on the History of Health of Salinas Residents," Pathways: Stanford Journal of Public Health, Vol. 1, No. 1,
2023.
42
Ray, Rashawn and Hoda Mahmoudi, Systemic Racism in America
Sociological Theory, Education Inequality, and Social Change: Routledge, 2022.
43
This annotated reference list is included as appendix F.1 to this annex.
24
1. Teller Vision (2022): Describes how Putnam State Bank in Connecticut supports
individuals opening their first checking account, including explaining the bank’s use of
ChexSystems.
2. Wollenberg (2005): Provides instructions for consumers to access ChexSystems reports.
3. Campbell (2012): Describes how one bank, Central Bank, uses ChexSystems and
considered using QualiFile to inform decisions around account opening and its impact on
the number of accounts opened.
4. Beckett (2000): Describes changes made by banks, including Wells Fargo and
Washington Mutual, to change their use of ChexSystems data.
5. Beckett (2000): Describes bank’s agreement to consider changes in their use of
ChexSystems data in response to concerns from stakeholders.
6. Beckett (2000): Describes criticism of bank’s use of ChexSystems data to prevent
individuals from opening bank accounts.
7. Bjerke (2004): Describes how credit unions can use ChexSystems to reduce fraud risk.
8. Boel (2022): Reviews reasons individuals are underbanked in the United States, including
NSF fees. The article explains the role of ChexSystems in reporting checking account
information, such as overdrafts, but notes that limited information is available on how
banks use ChexSystems information to inform decisions around opening accounts.
9. Callaway (2014): Responds to a question and clarifies that ChexSystems is considered a
consumer reporting agency according to the Fair Credit Reporting Act.
10. Collins (2012): Describes the literature on financial education programs, including a
program for individuals who have been reported to ChexSystems. The article reported
mixed results on the effectiveness of financial literacy programs and noted concerns
related to selection bias and attrition in examining program effectiveness.
11. Collins (2007): Describes financial coaching as a separate model from financial planning
and financial counseling. It described the theory and training opportunities informing
financial planning. It specifically speaks to the role financial coaching can play to low-
income individuals.
12. Campbell (2012): Describes a multivariate analysis to identify driving factors of
involuntary bank account closures using data from a variety of sources, including
ChexSystems. The analysis found that increased and/or more frequent involuntary
account closures were related to several variables, including low wealth and education
levels and high rates of property crime.
13. Chu (2004): Describes how banks use ChexSystems and how identify theft may impact
consumers.
14. Emple (2013): Describes an HUD rental assistance program that aims to help participants
build wealth by providing credits equal to a portion of rent equivalent to any rent
increases due to wage increases into an escrow account on their behalf. The report
summarizes evaluations of the program. The report mentions that participants may
receive financial education services, including assistance accessing financial services
after receiving a report in ChexSystems.
15. Fellowes (2008): Discusses the reasons that some individuals do not have checking
accounts, including nonfinancial reasons. The article further discusses the geographic
distribution of banks and non-bank institutions at the national level. The calculates the
potential impact of access to checking accounts on wealth building. The article describes
the possibility of a public-private partnership increasing access to checking accounts.
25
16. Franz (2015): Uses mixed methods research to examine the extent to which the Family
Scholar House program impacted health and financial outcomes of participants. One
variable considered was whether the participant knew they had a ChexSystems report.
17. Gerstner (2017): Explains identify theft risks associated with bank accounts. The article
describes the information collected by ChexSystems and how consumers can access their
ChexSystems reports.
18. Kim (2014):Summarizes concerns about low-income individuals being negatively
affected by ChexSystems.
19. Miller (2015): Reviews the impact of financial education interventions. One of the
included papers examines an interventions specifically targeted to individuals who had
been reported to ChexSystems.
44
20. Murphy (1998): Describes services, including ChexSystems, that help companies identify
sources of fraud risk.
21. Newberger (2006): Describes challenges immigrants face in opening bank accounts,
including ChexSystems, as well as ways in which banks accommodate the specific needs
of immigrants.
22. Perez (2005): At the time of the article, “ChexSystems maintains negative records on
more than 19 million checking accounts.” Perez (2005) argues that standards for
reporting can vary by the customer where minor infractions may lead to disproportionate
impacts to a customer’s ability to bank as banks can reject customers for a single
infraction. With these characteristics in mind, Perez argues that ChexSystems gives a
disproportionate amount of power to banks. Notably, this system does not identify
problematic banking behavior as you may expect from a credit reporting system. Rather,
banks report accounts and what constitutes as problematic behavior is up to the reporting
bank. Furthermore, positive banking information is not required for reporting.
Part I of this article explains the development of banking services and their impact on
low-income communities. Part II discusses ChexSystems in more detail, including how
the system differs from credit bureau reporting. Part III outlines the implications of the
system described in Part II on the population described in Part I.
23. Peterson (2004): Describes Gold Coast Federal Credit Union’s Fresh Start Checking
Account, which is available to individuals with a ChexSystems report.
Articles about New York State ChexSystems Changes: The news and industry articles below
report on former New York State Attorney General Eric Schneiderman’s efforts to change the
banking industry’s use of ChexSystems, including which announcements of the banks that made
changes in response to his efforts.
1. Teller Vision (2014).
2. Caruthers (2015).
3. Huang (2015).
4. McCormick (2014).
44
Haynes-Bordas, Rebecca, D. E. Kiss, and Tansel Yilmazer, "Effectiveness of Financial Education on Financial
Management Behavior and Account Usage: Evidence from a ‘Second Chance’ Program," Journal of Family and
Economic Issues, Vol. 29, 2008.
26
Announcements of Banks Adopting ChexSystems: The news and industry articles below
report on individual banks adopting ChexSystems.
1. Bills (2006).
2. Jepson (2004).
3. Jepson (2004).
4. Ramsaran (2004).
5. Tech Bytes (1998).
Full Text Unavailable (list currently includes source summary):
1. Credit Union Journal (2009): Presents information about the Fresh Start Checking
Account scheme offered by First Class American Credit Union for members who fail to
quality for regular checking accounts due to past account and check abuse or overdrawn
accounts. In the process of account review after 12 months, if the member is found
responsible for the account and has settled the ChexSystems claims, his account will be
converted to the free checking account of the credit union with over-draft protection.
2. Pratt’s Letter (2014): Reports on the statement of New York Attorney General Eric T.
Schneiderman claiming on June 16, 2014 that bank holding company Capital One
Financial Corp. has agreed to adopt policies governing its ChexSystems, a consumer
credit reporting agency. He commends the company for working the government in
eliminating unnecessary barrier in opening a checking or savings account. Schneiderman
adds that the system pushes lower-income Americans for relatively small financial errors.
3. Pratt’s Letter (2015): Reports on the announcement of New York attorney general Eric T.
Schneiderman regarding the commitment of Citibank NA to adopt new policies
concerning its consumer reporting agency ChexSystem, which screens customers who
want to open checking or savings accounts.
4. Bills (2006): eFunds Corp. of Scottsdale, Arizona, said Monday that MicroBilt Corp., a
division of the venture firm Bristol Investments Ltd., will offer its financial services
clients identity-verification services from eFunds' ChexSystems Inc. MicroBilt, of
Kennesaw, Georgia, already provides financial companies with credit bureau reports and
other data on criminal convictions, bankruptcies, liens, judgments, motor vehicle,
employment background, and bank history. Financial companies can access the offerings
through MicroBilt's CreditCommander.com Web site or integrate them into an in-house
system using MicroBilt's software tools.
5. Hollister (2007): Reviews both attempts to evaluate the impacts of community
development financial institutions (CDFIs) and methods of evaluation.
6. McKendry (2015): New York Attorney General Eric Schneiderman is urging banks to
reevaluate how they use credit bureaus like ChexSystems, after his investigation found
that inaccurate data reported by banks is preventing some consumers from opening
checking and savings accounts. Three banks already have agreed to modify their use of
ChexSystems in screening potential customers.
7. Nemeroff (2015): Reports on the decision of financial services firm Citigroup to change
its policies as of January 2015 that prevented low-income consumers from opening
checking and savings accounts. Topics include the plan of the company to update its use
27
of ChexSystems, a consumer reporting agency, the revamp to be done on its account-base
screening, and Citi's support for U.S. Attorney General Eric Schneiderman's aim to
remove unnecessary barriers to banking products and services.
8. Passy (2015): Details the plan of Santander Bank to change its customer screening
policies in 2015. Topics discussed include the bank's decision to allow more lower-
income applications to open checking and savings accounts, the changes in the way the
company uses the ChexSystems consumer reporting database, and New York attorney
general Eric Schneiderman's inquiry into the ChexSystems' role in the screening process.
9. Robins (1994): Reports on the creation of the Bankcheck Fraud Task Force by the
National Retail Federation (NRF) and the American Bankers Association (ABA). Goals;
Participation of banks in Southern California; Data sharing program for closed accounts;
SCAN and ChexSystems.
Not Relevant:
1. Sun (2023).
28
Appendix B. CalAccount Legal Issues
This appendix analyzes potential legal issues posed by CalAccount. Below, we discuss law
related to CalAccount features described in AB 1177, legal issues noted in the RFP for this
study, and legal issues raised during stakeholder interviews.
Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”), Know Your Customer, and
Customer Identification Program obligations
Background
Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) compliance obligations consist of
an intertwined set of statutes and regulations.
45
Although the sections below discuss the three
separate types BSA/AML compliance obligations, an overarching theme is that compliance
obligations will vary by each financial institution. As one commentator notes: “[T]he core
concept of BSA/AML compliance is one of a risk-based approach, that is, that a financial
institution should match regulatory obligations to methodologies of revenue generation and
operations as applicable to different financial institutions, based on a myriad of factors such as
the size, business model, and geographic location of the bank.”
46
As further detailed below, three
primary categories of BSA/AML compliance obligations include: (1) Know Your Customer
(“KYC”), (2) reporting requirements, and (3) sanctions compliance.
47
Of these three
compliance obligations, the language of the California Public Banking Option Act (AB
1177) and our interviewees suggest that KYC obligations (and particularly Customer
Identification Programs implemented pursuant to KYC obligations) are of primary
concern. As further detailed below, KYC obligations require banks to verify the identity of
customers using documents, non-documentary methods, or a combination of both.
The California Public Banking Option Act (AB 1177) notes that CalAccount is intended to
serve:
• “individuals who may not have federal or state government-issued photo
identification”
48
and
45
Howard, Cory, "The Applicability of the BSA/AML Regulatory Regime to Indirect Lending Business Models,"
Transactions: The Tennessee Journal of Business Law, Vol. 19, No. 1, 2017.
46
———.
47
See ———.19, 45, 52-56.
48
Section 100104(a)(1)(K) of the California Public Banking Option Act (AB 1177) states, in part, that “the board,
in establishing processes for enrollment in the CalAccount Program: (i) Shall facilitate the opening of a CalAccount
by individuals who may not have federal or state government-issued photo identification while taking all reasonable
steps to maintain the confidentiality of personal information consistent with all applicable law.”
29
• “individuals who do not have permanent housing.”
49
Some interviewees
50
noted that BSA/AML compliance, and KYC obligations in particular,
may pose one of the greatest risks for financial institutions partnering to provide CalAccounts,
but other interviewees,
51
including interviewees with knowledge of the Bank On program and an
attorney who represents unbanked and underbanked individuals in California, do not believe that
KYC obligations would pose a particularly high risk.
52
Interviewees who took the latter position
noted that financial institutions can accept tribal IDs, passports from other countries, consular
IDs, and city-issued IDs like those offered in San Francisco.
53
Relevant Laws, Policy, and Guidance
Know Your Customer – Customer Identification Program, Generally
Federal anti-money laundering (AML) laws, notably the Bank Secrecy Act (BSA), 31 U.S.C.
§ 5311 et seq., aim to prevent the flow of illicit money by requiring financial institutions
authenticate customer identities. After the events of September 11, 2001, the USA PATRIOT
Act, which requires banks to adopt a customer identification program (CIP), was incorporated
into the BSA.
54
The regulations define customers as (1) “[a] person that opens a new account” or
(2) “[a] n individual who opens a new account for [a]n individual who lacks legal capacity, such
as a minor or “[a]n entity that is not a legal person, such as a civic club.”
55
Federal regulations
require banks, savings associations, credit unions, and certain non-federally regulated banks
56
to
implement a CIP “based on the bank’s assessment of the relevant risks, including those presented
by the various types of accounts maintained by the bank, the various methods of opening
accounts provided by the bank, the various types of identifying information available, and the
bank’s size, location, and customer base.”
57
However, at a minimum, the procedures for opening
an account must include collection of: (1) name, (2) date of birth for an individual, (3) address
49
Section 100104(a)(1)(K) of the California Public Banking Option Act (AB 1177) states, in part, that “the board,
in establishing processes for enrollment in the CalAccount Program: … (ii) Shall design and establish rules
governing the enrollment and participation in the program of individuals who do not have permanent housing.”
50
Interviews with banking services and industry experts (Participants 108, 109, and 110)/
51
Interviews with State and legal SMEs (Participants 131-133).
52
Interviews with Participants 131-133.
53
Interviews with Participants 131-133.
54
Office of the Comptroller of the Currency, "Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination
Manual." As of October 31: https://www.occ.treas.gov/topics/supervision-and-examination/bsa/index-bsa.html
55
31 C.F.R. § 1020.100(c).
56
The regulations refer to “banks” when describing CIP requirements, but as noted in the title of 31 C.F.R. §
1020.220, CIP regulations apply to banks and credit unions. The CIP requirements described in this section of the
Appendix apply to both banks and credit unions.
57
31 C.F.R. § 1020.220(a)(2).
30
(see section below on Individuals who do not have permanent housing), and (4) identification
number (taxpayer identification number for “U.S people,” other options for “non-U.S.
people”).
58
With respect to the identification number requirement, the regulations explicitly
allow noncitizens to provide Individual Taxpayer Identification Numbers (ITINs) from the U.S.
government, foreign passports, or “any other government-issued document evidencing
nationality or residence and bearing a photograph or similar safeguard.”
59
Banks may not always
need to collect customer information directly, as they can rely on information collected by
another financial institution where the second institution has established similar banking
services.
60
However, this reliance must be reasonable, evidenced by a written contract, and
subject to anti-money laundering compliance responsibilities.
61
A person, including a bank
employee, who willfully violates the BSA or its implementing regulations is subject to a criminal
fine of up to $250,000 or five years in prison, or both.
62
Individuals who may not have federal or state government-issued photo identification
On their website, the CFPB addresses the question of whether individuals can get bank
accounts without a driver’s license. The CFPB notes:
“Banks and credit unions are required to verify your identity when you apply to open an
account. If you don’t have a driver’s license, ask what other types of identification will be
accepted. The most common way to verify your identity is with a driver’s license. There
are other ways banks and credit unions can verify your identity, so if you don’t have a
driver’s license, ask the bank or credit union what types of identification it will accept.
The rules leave some discretion to banks and credit unions on what forms of ID to
accept” (emphasis added).
63
Federal regulations require banks to include a description of how banks verify the identity
of customers, including “when the bank will use documents, non-documentary methods, or
58
31 C.F.R. § 1020.220(a)(2)(i)(A). See Federal Financial Insitutions Examination Council, BSA/AML Manual,
2014.
https://bsaaml.ffiec.gov/manual/Introduction/01#:~:text=For%20example%2C%20a%20person%2C%20including,y
ears%20in%20prison%2C%20or%20, p. 3, footnote 15.
For “non-U.S. people, identification numbers may include: “Customer’s TIN, Passport number and country of
issuance, Alien identification card number, and Number and country of issuance of any other (foreign) government-
issued document evidencing nationality or residence and bearing a photograph or similar safeguard.” p. 8.1-10.
59
31 C.F.R. § 1020.220(a)(2)(i)(A)(4)(ii).
60
Howard.
61
———., citing 31 C.F.R. § 1020.220(a)(6); 31 U.S.C. § 5318(h)(1).
62
Federal Financial Insitutions Examination Council.
63
Consumer Financial Protection Bureau, "Can I get a checking account without a driver's license?," August 19,
2020. As of 2023.
31
a combination of both methods.” The regulations explicitly provide for verification through
both documentary and nondocumentary methods:
“(A) Verification through documents. For a bank relying on documents, the CIP must
contain procedures that set forth the documents that the bank will use. These documents may
include:
(1) For an individual, unexpired government-issued identification evidencing nationality
or residence and bearing a photograph or similar safeguard, such as a driver’s license or
passport; and
(2) For a person other than an individual (such as a corporation, partnership, or trust),
documents showing the existence of the entity, such as certified articles of incorporation,
a government-issued business license, a partnership agreement, or trust instrument.
(B) Verification through non-documentary methods. For a bank relying on non-
documentary methods, the CIP must contain procedures that describe the non-documentary
methods the bank will use.
(1) These methods may include contacting a customer; independently verifying the
customer’s identity through the comparison of information provided by the customer with
information obtained from a consumer reporting agency, public database, or other source;
checking references with other financial institutions; and obtaining a financial statement.
(2) The bank’s non-documentary procedures must address situations where an
individual is unable to present an unexpired government-issued identification
document that bears a photograph or similar safeguard; the bank is not familiar with
the documents presented; the account is opened without obtaining documents; the
customer opens the account without appearing in person at the bank; and where the bank
is otherwise presented with circumstances that increase the risk that the bank will be
unable to verify the true identity of a customer through documents” (emphasis added).
64
Note that under 31 C.F.R. § 1020.220(a)(2)(ii)(B), financial institutions relying on non-
documentary methods must already address “situations where an individual is unable to present
an unexpired government-issued identification document that bears a photograph or similar
safeguard” in their CIPs.
With respect to documentary methods, the FDIC notes: “A bank that accepts items that are
considered secondary forms of identification, such as utility bills and college ID cards, is
encouraged to review more than a single document to ensure that it has formed a ‘reasonable
belief’ of the customer’s true identity.”
65
In official guidance, the National Credit Union
(NCUA) association has noted that although CIP regulations reflect an “expectation that banks
64
31 C.F.R. § 1020.220(a)(2)(ii)(B).
65
Federal Deposit Insurance Corporation, DSC Risk Management Manual of Examination Policies 8.1-55 Bank
Secrecy Act (12-04). As of October 31, 2023:
32
will obtain government-issued identification from most customers,… other forms of
identification may be used if they enable the bank to form a reasonable belief that it knows the
true identity of the customer.”
66
In light of this, the NCUA notes that other forms of
identification, including an employee identification card, “may be used if they enable the bank to
form a reasonable belief that it knows the true identity of the customer,” but cautions that, “given
the availability of counterfeit and fraudulently obtained documents, a bank is encouraged to
obtain more than a single document to ensure that it has a reasonable belief that it knows the
customer’s true identity.”
67
With respect to non-documentary methods, the FDIC also notes that “in instances when an
account is opened over the Internet, a bank may be able to obtain an electronic credential, such
as a digital certificate, as one of the methods it uses to verify a customer’s identity” (emphasis
added).
68
In addition, the FDIC provides the following guidance on verifying customer identity
information:
“The CIP should rely on a risk-focused approach when developing procedures for
verifying the identity of each customer to the extent reasonable and practicable. A bank
need not establish the accuracy of every element of identifying information obtained
in the account opening process, but must do so for enough information to form a
“reasonable belief” that it knows the true identity of each customer. At a minimum,
the risk-focused procedures must be based on, but not limited to, the following factors:
• Risks presented by the various types of accounts offered by the bank;
• Various methods of opening accounts provided by the bank;
• Various sources and types of identifying information available; and
• The bank’s size, location, and customer base” (emphasis added).
69
Implementation of REAL ID requirements likely will not impact the analysis above. In its
Final Rule on Minimum Standards for Driver's Licenses and Identification Cards Acceptable by
Federal Agencies for Official Purposes, DHS noted that it “does not intend that REAL ID
documents become a de facto national ID and does not support the creation of a national ID” and
66
National Credit Union Administration National Credit Union Administration, "Interagency Interpretive Guidance
on Customer Identification Program Requirements under Section 326 of the USA PATRIOT Act," April 28, 2005.
As of October 31: https://www.fincen.gov/resources/statutes-regulations/guidance/interagency-interpretive-
guidance-customer-identification.
67
———.
68
Federal Deposit Insurance Corporation.
69
Federal Deposit Insurance Corporation. “DSC Risk Management Manual of Examination Policies 8.1-55 Bank
Secrecy Act (12-04),” p. 8.1-10. Accessed on Oct. 31, 2023,
https://www.fdic.gov/regulations/safety/manual/section8-1.pdf. See also https://www.fdic.gov/news/financial-
institution-letters/2021/fil21012b.pdf.
33
that it has “limited ‘official purposes’ to those set forth in the Act--accessing Federal facilities,
boarding Federally-regulated commercial aircraft, and entering nuclear power plants.”
As one interviewee noted, financial institutions sometimes use third-party KYC services such
as Socure.
70
Individuals who do not have permanent housing
According to federal CIP regulations, for an individual, banks need to obtain “a residential or
business street address, or if the individual does not have such an address, an Army Post Office
(APO) or Fleet Post Office (FPO) box number, or the residential or business street address of
next of kin or of another contact individual.”
71
Guidance provided by the Board of Governors of
the Federal Reserve System, the FDIC, Financial Crimes Enforcement Network, the NCUA, the
OCC, the Office of Thrift Supervision, and the U.S. Department of the Treasury notes that for
purposes of compliance with this requirement, the number on the roadside mailbox on a rural
route, a residential or business address for next of kin or another contact individual, or a
description of a customer’s physical location will suffice:
“[T]he number on the roadside mailbox on a rural route is acceptable as an address. A
rural route number, unlike a post office box number, is a description of the approximate
area where the customer can be located. In the absence of such a number, and in the
absence of a residential or business address for next of kin or another contact individual,
a description of the customer’s physical location will suffice.”
72
In the context of veterans experiencing homelessness who wish to open a bank account, the
Department of Veterans’ Affairs (VA) notes that “A VA Homeless Coordinator’s office address
can be used in place of a home address when the accountholder has a valid VA ID and does not
have a permanent address to provide to the financial institution. A financial institution can accept
the residential or business address of another contact individual, such as the aforementioned VA
Homeless Coordinator.”
73
70
Interview with banking industry and service experts (Participants 121 and 122). See also PYMNTS, "Dibbs Taps
Socure for ‘Know Your Customer’ Platform, Identity Verification," 2022. https://www.pymnts.com/nfts/2022/dibbs-
taps-socure-for-know-your-customer-platform-identity-verification/..
71
31 C.F.R. § 1020.220(a)(2)(i)(A)(3).
72
Financial Crimes Enforcement Network, Interagency Interpretive Guidance on Customer Identification Program
Requirements under Section 326 of the USA PATRIOT Act, Treasury, U.S. Department of the, 2005.
73
Veterans Benefits Administration, Opening an Account at A Financial Institution for Veterans without Permanent
Housing Opening an Account at A Financial Institution for Veterans without Permanent Housing, U.S. Department
of Veterans Affairs.
34
Responsibility For Customer Identification Programs
Agent responsibility for Customer Identification Programs will also require legal analysis
once the structure of the program is more certain. As reflected in the statutory history of AB
1177: “Banks and credit unions oppose this bill and cite a number of challenges that prevent their
participation. The program’s structure – with enrollment facilitated through a state could
raise issues about who is fulfilling Know Your Customer (KYC) regulatory obligations or
federal obligations around consumer privacy and security” (emphasis added).
74
Because the CalAccount program design is in early stages, it is difficult to determine whether
an agency relationship will exist between the program and banks for CIP purposes. Nonetheless,
guidance issued by the Board of Governors of the Federal Reserve System, the FDIC, Financial
Crimes Enforcement Network, the NCUA, the OCC, the Office of Thrift Supervision, and the
U.S. Department of the Treasury on the subject of CIP requirements and holders of prepaid cards
seems instructive.
75
The purpose of this guidance was to clarify that “a bank should apply its CIP
to the cardholders of certain prepaid cards issued by the bank” even if “a bank issues prepaid
cards under arrangements with third-party program managers that sell, distribute, promote, or
market the prepaid cards issued by the bank.”
76
As the guidance notes:
“General purpose prepaid cards can be used at multiple, unaffiliated merchants and can
allow cardholders to perform a variety of functions, including those that have
traditionally been conducted using other payment mechanisms, such as checks, debit
cards tied to bank accounts, or credit cards. These functions include withdrawing cash at
automated teller machines (ATMs), paying bills, purchasing goods and services, and
transferring funds to other cardholders and receiving funds transfers. Employers use
prepaid cards to provide wages and other compensation or benefits, such as pre-tax
flexible spending arrangements for healthcare expenses or dependent care. State, federal,
and local governments use these financial products to distribute government benefits and
tax refunds.”
Although the CalAccount program is not a pre-paid card program, like third-party providers of
prepaid cards, CalAccount administrators will be conducting outreach/marketing, interfacing
with customers, and providing them with a tool to withdraw cash, pay bills, make purchases, and
receive wages and benefits. The guidance notes:
“Third-party program managers should be treated as agents of the bank for purposes of
the CIP rule, rather than as the bank’s customer. The preamble to the final CIP rule
makes clear that the rule does not affect a bank’s authority to contract for services to be
performed by a third party either on or off the bank's premises, nor does it alter a bank’s
74
AB-1177 California Public Banking Option Act, 2021.
75
Financial Crimes Enforcement Network.
76
———.
35
authority to use an agent to perform services on its behalf. However, as with any other
activity performed on behalf of the bank, the bank ultimately is responsible for
compliance with the requirements of the bank’s CIP rule as performed by that agent or
other contracted third party.
Third-party program managers may establish pooled accounts in their names for the
purpose of holding funds ‘on behalf of’ or ‘in trust for’ cardholders or processing
transactions on behalf of other issuing banks. However, the fact that these funds are held
in a pooled account should not affect the status of the cardholder as a bank customer,
assuming the cardholder has established an account with the bank by activating the
reloadable functionalities of a general purpose prepaid card, or its credit or overdraft
features.”
77
The guidance concludes by recommending that banks “enter into well-constructed, enforceable
contracts with third-party program managers that clearly define the expectations, duties, rights,
and obligations of each party.”
78
The contract or binding agreement should:
• “outline CIP obligations of the parties;
• ensure the right of the issuing bank to transfer, store, or otherwise obtain immediate
access to all CIP information collected by the third-party program manager on
cardholders
• provide for the issuing bank’s right to audit the third-party program manager and to
monitor its performance (generally, banks need to ensure that periodic independent
internal and external audits are conducted to ensure prudent operations and compliance
with applicable laws and regulations); and
• if applicable, indicate that, pursuant to the Bank Service Company Act (BSCA) or other
appropriate legal authority, the relevant regulatory body has the right to examine the
third-party program manager.”
79
One of our interviewees who works for a bank noted that liability for CIP requirements will
depend on how CalAccount is structured, e.g., will the individuals with CalAccounts have their
own individual accounts with a participating financial institutions or will the state-run program
hold FBO accounts (umbrella account that pools funds “for the benefit of” end-users.)
80
The
interviewee noted that from a practical perspective, CIP/KYC requirements may ultimately be
handled through a third-party entity like Socure that specializes in CIP/KYC requirements.
81
77
———.
78
———.
79
———.
80
Interview with banking industry and services experts on January 3, 2024 (Participants 121 and 122).
81
Interview with Participants 121 and 122.
36
Know Your Customer – Customer Due Diligence Programs
Financial institutions must also develop Customer Due Diligence programs to understand
“the nature and purpose of customer relationships for the purpose of developing a customer risk
profile” so that the institution can monitor transactions and detect and report suspicious
transactions.
82
A customer risk profile (which rate customers for potential money laundering and
terrorist financing risks) is a key part of these requirements.
83
High-risk customers may require
“Enhanced Due Diligence.”
84
Reporting Requirements
Financial institutions are subject to reporting requirements as part of the anti-money
laundering regulatory framework.
85
Currency Transaction Reports (CTRs) and Suspicious
Activity Reports (SARs) are two of “the more prominent and encompassing” reporting
obligations.
86
CTRs must be filed when there has been a “deposit, withdrawal, exchange of
currency or other payment or transfer, by through, or to such financial institution which involves
a transaction in currency of more than $10,000.”
87
SARs must be filed when a transaction is
suspected to violate a law or regulation.
88
Sanctions Compliance
Financial institutions must comply with economic and trade sanctions imposed by the federal
government on entities, people, ports, and vessels.
89
The Treasury Department’s Office of
Foreign Asset Control (OFAC) maintains sanctions lists of entities with whom it is generally
illegal for U.S. entities to do business.
90
Like other BSA/AML requirements, sanctions
compliance practices vary based on risks and OFAC does not mandate how financial institutions
should comply.
91
Sanctions screening is a standard practice in the industry, involving screening
the names of parties, entities, and vessels involved in a transaction.
92
82
Howard.
83
———.
84
———.
85
———.
86
———.
87
———, citing 31 C.F.R. § 103.22(b)(1) (2011).
88
———, citing 31 U.S.C. 5318(g)(1).
89
———.
90
———.
91
———.
92
———.
37
Takeaway
Financial institutions must comply with three primary categories of BSA/AML compliance
obligations include: (1) Know Your Customer (“KYC”), (2) reporting requirements, and (3)
sanctions compliance. Practical aspects of compliance with these obligations will vary by
financial institution because these risk-based obligations will vary based on factors such as the
size, business model, and geographic location of the bank.
Of these three compliance obligations, the language of the California Public Banking Option
Act (AB 1177) and our interviewees suggest that KYC obligations (and particularly Customer
Identification Programs implemented pursuant to KYC obligations) are of primary concern.
Under 31 C.F.R. § 1020.220(a)(2)(ii)(B), financial institutions relying on non-documentary
methods must already address “situations where an individual is unable to present an unexpired
government-issued identification document that bears a photograph or similar safeguard” in their
CIPs.
Regulations and official guidance afford considerable discretion to financial institutions to
verify accountholder identity, but financial institutions are responsible for weighing the risk of
accepting non-governmental identification. Under CIP regulations, banks must collect: (1) name,
(2) date of birth for an individual, (3) address (see Section 4 below on Individuals Without
Permanent Housing), and (4) identification number (taxpayer identification number for “U.S
people,” other options for “non-U.S. people”) of its customers. Banks can use documents and
non-documentary method to verify the identifying information obtained in the account opening
process, but CIP procedures must ensure that banks have a “reasonable belief” that it knows the
true identity of each customer. Bank employees who willfully violate the BSA are subject to
criminal fines and/or imprisonment.
The address requirement under federal CIP regulations appears to be flexible. Official
guidance suggests that a rural route number, a residential or business address for next of kin or
another contact individual, a description of a customer’s physical location, or the office address
of a VA Homeless Coordinator would suffice.
Given official guidance on third-party prepaid card programs (which are analogous to
CalAccount, though CalAccount is not a prepaid card), banks would likely still be responsible
for fulfilling CIP requirements for CalAccount users. CalAccount and partner financial
institutions should enter into agreements that clearly define CIP obligations of the parties.
Individuals under the age of 18 (but at least 14)
Background
Section 100104(a)(1)(K) of the California Public Banking Option Act (AB 1177) states,
in part, that “the board, in establishing processes for enrollment in the CalAccount Program: …
(iii) May design and establish rules governing the enrollment and participation in the program of
38
individuals who are under 18 years of age, including rules governing the opening of a
CalAccount by a person who is at least 14 years of age without a cosigner or guarantor on the
account consistent with all applicable law.”
Relevant Laws, Policy, and Guidance
According to a report by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the National Credit Union Administration, the Office of the
Comptroller of the Currency, and the U.S. Department of Treasury’s Financial Crimes
Enforcement Network:
“No federal law prohibits minors from opening savings accounts. Rather, a deposit
account relationship is based on a contract governed by state law. In general, minors are
deemed to not have the legal capacity to enter into a contract, including opening an
account at a financial institution, meaning that a contract with a minor is potentially
‘voidable.’ However, some states specifically allow a minor to open a savings account.
93
California law appears to allow minors to open non-custodial deposit accounts.
94
The Federal Reserve further notes that CIP regulations do not prohibit a minor from
opening an account, but “the minor is the financial institution’s customer” and therefore the
institution should use reasonable documentary or non-documentary methods to verify a minor’s
identity and the CIP must contain “procedures that describe the non-documentary methods that
the financial institution will use to verify a minor’s identity.” In addition,
93
Federal Reserve, Guidance to Encourage Financial Institutions’ Youth Savings Programs and Address Related
Frequently Asked Questions Treasury, U.S. Department of the, 2015. As of October 31, 2023:
94
Conference of State Bank Supervisors, "Statutory Requirements for Opening Bank Accounts for Minors," 2021.
As of October 31:
https://www.csbs.org/statutory-requirements-opening-bank-accounts-minors
• Cal. Fam. Code § 6700: Except as provided in Section 6701, a minor may make a contract in the same
manner as an adult, subject to the power of disaffirmance under Chapter 2 (commencing with Section
6710), and subject to Part 1 (commencing with Section 300) of Division 3 (validity of marriage).
• Cal. Fam. Code § 6710. Right of disaffirmance: Except as otherwise provided by statute, a contract of a
minor may be disaffirmed by the minor before majority or within a reasonable time afterwards or, in case
of the minor's death within that period, by the minor's heirs or personal representative.
• Cal. Fam. Code § 6711. Contract made under express statutory authority: A minor cannot disaffirm an
obligation, otherwise valid, entered into by the minor under the express authority or direction of a statute.
• Cal. Financial Code § 1400. Minors: A bank account by or in the name of a minor shall be held for the
exclusive right and benefit of such minor and shall be paid to such minor or to his order and payment so
made is a valid release and discharge to the bank for such deposit or any part thereof.
• Cal. Financial Code Sec. 850: A bank account by or in the name of a minor shall be held for the exclusive
right and benefit of such minor and shall be paid to such minor or to his order and payment so made is a
valid release and discharge to the bank for such deposit or any part thereof.
39
“[t]hese methods may include contacting a customer or independently verifying the
minor’s identity through the comparison of information provided by the minor with
information obtained from a consumer reporting agency, public database, or other source.
For example, the financial institution might verify a minor’s identity in an in-school
program by having a teacher confirm the minor’s identity.”
95
Note that the Children’s Online Privacy Protection Act (COPPA), Pub. L. No. 105-277 (codified
at 15 U.S.C. §§ 6501-6506), which restricts the collection of personal information from children,
only applies to children under 13 years of age.
Takeaway
There do not appear to be any state or federal laws that would prohibit minors from
participating in the CalAccount program.
1. Employer Direct Deposit
Background
Section 100104(a)(1)(O) of the California Public Banking Option Act (AB 1177) requires
that:
“an employer with more than 25 employees and a hiring entity with more than 25
independent contractors performing the same or similar labor or service, excluding
the federal government, to do all of the following: (i) Have and maintain a payroll
direct deposit arrangement that enables voluntary worker participation in the
program. (ii) Deposit all wages and other payments due a worker that the worker has
authorized to be directly deposited by electronic fund transfer into the worker’s
CalAccount in accordance with the worker’s authorization. (iii) Coordinate its payroll
process with the program administrator’s application program interface to facilitate
accurate and seamless payment by direct deposit in accordance with the authorization of
each worker participant. (iv) Cooperate with the program administrator in providing all
requested information available to the employer or hiring entity necessary for the opening
and administration of a worker’s CalAccount. (v) Upon request of the administrator,
provide additional forms or notifications to a worker. (vi) Refrain from discharging,
disciplining, threatening to discharge or discipline, or in any other manner retaliating or
taking an adverse action against a worker or applicant because of the individual’s
participation or manner of participation in the CalAccount Program.”
95
Federal Reserve.
40
As noted during the hearings on AB 1177:
“This bill also requires an employer, upon an employee’s request, to pay that employee’s
wages via direct deposit into their BankCal account. This is a new type of requirement for
employers. Under current state law, an employer is not required to pay workers’
wages via direct deposit”. Though worker participation in direct deposit is voluntary
under the bill, an employer would have to maintain a payroll direct deposit arrangement
in order to honor the employee’s request (emphasis added).”
96
Relevant Laws, Policy, and Guidance
The federal Electronic Fund Transfer Act (EFTA), also known as federal Regulation E,
permits employers to make direct deposit mandatory, as long as the employee is able to choose
the bank that his or her wages will be deposited into. Similarly, California Labor Code section
213 permits employers to pay employees via direct deposit, so long as the employee authorizes
direct deposit.
The Federal EFTA and California Labor Code prohibit employers from making direct deposit
mandatory. Citing California Labor Code Section 213 and the EFTA, the California Labor
Commissioner's Office’s Division of Labor Standards Enforcement (DLSE) notes:
“Employee choice is thus a fundamental condition for payment methods utilizing direct
deposits under California wage payment law.” Also, the optional nature of an employee's
participation is further mandated under FRB’s Regulation E which states: ‘No financial
institution or other person may require a consumer to establish an account for receipt of
electronic fund transfers with a particular institution as a condition of employment or
receipt of governmental benefit’ (12 CFR § 205.I0(e)).”
97
Direct deposit is voluntary for employees under California Public Banking Option Act (AB
1177), so no EFTA or Section 213 issues are apparent.
Though state and federal law prohibit employers from making direct deposit mandatory for
employees, there do not appear to be any laws that prohibit making direct deposit mandatory for
employers. In fact, as reflected in California Public Banking Option Act (AB 1177) statutory
history, California has already implemented a similar mandate under the CalSavers program,
96
AB-1177 California Public Banking Option Act.
97
California Division of Labor Standards Enforcement (DLSE). “Re: Payroll/Debit Cards -Payment of Wages
Labor Code§§ 212 and 213.” Accessed on October 31, 2023, https://www.dir.ca.gov/dlse/opinions/2008-07-07.pdf.
41
“which is an automatic payroll deduction retirement savings program for private sector
employees in California who lack access to a workplace retirement plan.”
98
As noted during the
hearings on AB 1177:
“The proposed employer mandate is similar to the CalSavers employer requirement. As
part of the CalSavers retirement program, an employer without an employer-sponsored
retirement plan must facilitate the opening of a CalSavers retirement account. The
mandate is the primary mechanism to boost participation so that more Californians save
for retirement and CalSavers has enough participants to be sustainable.”
99
In addition, as opined during the hearing, the CalAccount mandate might be easier to implement
than the CalSavers mandate because many employers already offer direct deposit:
“[A] vast majority of employers offer direct deposit already: According to an industry-
sponsored survey, 82% of US workers in 2016 received their paychecks via direct
deposit. In contrast, around half of US workers did not have access to an employer-based
retirement account when CalSavers began. Thus, the environment that necessitated the
creation of CalSavers’ employer requirement was much different than the environment in
which the direct depict requirement is being proposed.”
100
(Note that CalSavers has been challenged in court, but not on grounds that would apply to the
CalAccount context. The CalSavers lawsuit argued that this state law on retirement accounts was
preempted by federal law on retirement accounts. In addition, the U.S. Supreme Court declined
to hear the lawsuit and the CalSavers program continues.
101
)
Takeaway
Requiring employers to have and maintain a payroll direct deposit arrangement that enables
voluntary worker participation in the program does not pose any immediately apparent legal
issues.
98
California Secure Choice Retirement Savings Investment Board, Summary of Senate Bill 1234, Office, State
Treasurer’s, October 24, 2016.
99
AB-1177 California Public Banking Option Act.
100
“California Public Banking Option Act: Hearing on A.B.1177 Before the Assemb. Comm. on Banking & Fin.,
2020-2021 Reg. Sess. 7 (Cal. 2021).” Accessed on October 31, 2023,
https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=202120220AB1177#.
101
Adams, Nevin E. “SCOTUS Scuttles CalSavers Challenge.” National Association of Plan Advisors. March 01,
2022. Accessed on October 31, 2023, https://www.napa-net.org/news-info/daily-news/scotus-scuttles-calsavers-
challenge.
42
2. Limiting the late payment fees and penalties that registered payees
can impose
Background
Section 100104(a)(1)(I) of the California Public Banking Option Act (AB 1177) requires:
“the board to establish the process and terms and conditions for becoming a registered payee,
which shall at a minimum require the payee’s agreement to specified terms and conditions to be
established by the board in exchange for the benefits of transparency and accountability afforded
by participation in an automated payment system and which shall be designed to incentivize
account holders’ preauthorized electronic fund transfers to registered payees and application of
voluntary automatic disbursement rules by limiting the late payment fees and penalties that
registered payees can impose on accountholders who pay them using preauthorized electronic
fund transfers from their CalAccounts.”
Relevant Laws, Policy, and Guidance
Local governments prohibited late fees in the wake of the Covid pandemic.
102
However, the
legality and feasibility of requiring entities who register as payees to “limit[] the late payment
fees and penalties that registered payees can impose on accountholders” is unclear. A consumer
rights attorney whom we interviewed noted that they did not see any legal issues raised by this
requirement but noted that from a logistics standpoint, utility companies and other entities may
choose not to register as payees because of the late fee limitation.
103
Takeaway
Though limitation of late fees that registered payees may charge does not raise any
immediately apparent legal issues, from a logistics standpoint, utility companies and other
entities may choose not to register as payees because of the late fee limitation.
3. Payment of Rent via ETF from CalAccount
Background
Section 100104(a)(1)(P) of the California Public Banking Option Act (AB 1177) requires “a
landlord or a landlord’s agent to allow a tenant to pay rent and deposit of security by an
102
For example, CA Civ Code § 1942.9 provides, in part: “a landlord shall not, with respect to a tenant who has
COVID-19 rental debt, as that term is defined in Section 1179.02 of the Code of Civil Procedure, and who has
submitted a declaration of COVID-19-related financial distress, as defined in Section 1179.02 of the Code of Civil
Procedure, do either of the following: (1) Charge a tenant, or attempt to collect from a tenant, fees assessed for the
late payment of that COVID-19 rental debt…”
103
Interview with legal expert on December 13, 2023 (Participant 111).
43
electronic funds transfer from a CalAccount, except as provided in paragraph (2) of subdivision
(a) of Section 1947.3 of the California Civil Code.” [Section 1947.3(a)(2) provides that “[a]
landlord or a landlord’s agent may demand or require cash as the exclusive form of payment of
rent or deposit of security if the tenant has previously attempted to pay the landlord or landlord’s
agent with a check drawn on insufficient funds or the tenant has instructed the drawee to stop
payment on a check, draft, or order for the payment of money. The landlord may demand or
require cash as the exclusive form of payment only for a period not exceeding three months
following an attempt to pay with a check on insufficient funds or following a tenant’s instruction
to stop payment.”]
Section 100104(a)(1)(P) of the California Public Banking Option Act (AB 1177) makes clear
that rental payments made using electronic funds transfer to the landlord do not waive the landlord’s
right to establish the amount that the landlord charges for rent: “a landlord’s, or a landlord’s
agent’s, receipt of payment from a CalAccount pursuant to the requirements of the CalAccount
Program shall not be considered a waiver of any right the landlord or landlord’s agent may
otherwise have to establish the base rent on, or to raise rent for, the rental unit.”
104
Relevant Laws, Policy, and Guidance
There do not appear to be any state or federal laws that would prohibit the CalAccount
program from requiring a landlord or a landlord’s agent to allow a tenant to pay rent and deposit
of security by an electronic funds transfer from a CalAccount. A consumer rights attorney whom
we interviewed noted that they did not see any legal issues raised by this requirement, nor any
reason why landlords would object to being paid through a CalAccount electronic funds
transfer.
105
Though not directly on point, other California laws reflect a general intent to allow tenants to
pay rent via a method of their choosing: Under California Civil Code Section 1947.3(a)(a), “a
landlord or a landlord's agent shall allow a tenant to pay rent and deposit of security by at least
one form of payment that is neither cash nor electronic funds transfer.” Assembly Bill 2219
(codified as an amendment to Civil Code § 1947.3) requires a landlord or landlord’s agent to
allow a tenant to pay rent through a third party.
Takeaway
Requiring a landlord or a landlord’s agent to allow a tenant to pay rent and deposit of
security by an electronic funds transfer from a CalAccount does not pose any immediately
apparent legal issues.
104
AB-1177 California Public Banking Option Act.
105
Interview with legal expert Participant 111.
44
4. Authority for respective credit unions to admit members for purposes
of establishing a CalAccount
Background
California State Treasurer’s Office RFP No. SA000004-23 (p. 16 of 43) states that the
CalAccount Market Study and Feasibility Report should consider the following: “Do current state
and federal laws provide sufficient authority for respective credit unions to admit members for
purposes of establishing a CalAccount?”
Relevant Laws, Policy, and Guidance
A consumer rights attorney whom we interviewed noted that they did not see any statutory or
regulatory barriers or other immediately apparent legal issues associated with credit unions
admitting members for the purposes of establishing a CalAccount. However, the interviewee
noted that some credit unions charge very high overdraft fees and thus partnering with credit
unions may not be the best option.
106
That said, credit unions do participate in Bank On
107
and
thus some credit unions are able to provide accounts without overdraft fees (a core feature of
Bank On accounts).
108
The general legal framework for credit union membership is summarized
below.
Common Bond/Field of Membership
The NCUA regulates federal-chartered credit unions
109
and the DFPI regulates California
state-chartered credit unions.
110
Federal-
111
and state-chartered credit unions “are based on a
common bond, which establishes the membership eligibility requirements.”
112
There are three
types of federal credit union charters:
“(1) a single common bond (occupation or association based),
106
Interview with legal expert on December 13, 2023 (Participant 111).
107
Bank On, "Coalition Map." As of October 31:
https://joinbankon.org/coalition-map/.
108
Cities for Financial Empowerment Fund, "Bank On National Account Standards (2021-2022)," Undated.
https://cfefund.org/bank-on-national-account-standards-2021-2022/.
109
National Credit Union Administration, "About NCUA," May 9, 2024. As of October 31:
https://ncua.gov/about/.
110
Department of Financial Protection and Innovation, " Credit Unions," March 15, 2024. As of October 31:
https://dfpi.ca.gov/credit-unions/.
111
“The National Credit Union Administration (NCUA), an independent federal agency, charters and supervises
national-chartered credit unions for safety and soundness and insures members’ share deposits.” ()Congressional
Research Service, Introduction to Financial Services: Credit Unions, U.S. Congress, IF11713, January 13, 2022.
112
———.
45
(2) a multiple common bond (more than one group each having a common bond of
occupation or association), and
(3) a community-based (geographically defined) common bond.”
113
The common bond is referred to as the credit union’s “field of membership.”
114
California similarly requires a common bond amongst credit union members. Under
California Financial Code § 14155(a), the Commissioner of Financial Protection and Innovation
may deny “an application for a certificate to act as a credit union or an expansion of the field of
membership of an existing credit union” if “[t]he field of membership of the applicant is contrary
to the principles of organizing credit unions, including principles of organizing credit unions
based on common bond of occupation, association, or groups within a well-defined
neighborhood, community or rural district” (emphasis added).
115
As the Brookings Institution noted in a July 2017 Op-Ed (entitled “‘Everyone’ is the wrong
way to define credit union members”), the “restriction on field membership has been watered
down” and “essentially allowing national credit unions to be open to everyone appears to be the
direction the industry and its regulators are headed.”
116
In this Op-Ed, Brookings cautioned that
“[p]olicymakers need to engage and rethink the right role and mission for people who share a
common bond and wang to engage in low-cost financial services, thereby pooling risk and
sharing reward.”
117
Close Relationship with a Common Bond Group
Under federal regulations, persons with a close relationship with a common bond group may
become members of the credit union. Specifically, 12 CFR, Appendix B to Part 701 states:
“A number of persons, by virtue of their close relationship to a common bond group, may be
included, at the charter applicant's option, in the field of membership. These include the
following:
• Spouses of persons who died while within the field of membership of this credit union;
• Employees of this credit union;
• Persons retired as pensioners or annuitants from the above employment;
• Volunteers;
• Members of the immediate family or household;
• Honorably discharged veterans who served in any of the Armed Services of the United
States listed in this charter;
113
———.
114
National Credit Union Administration, "Choose a Field of Membership," May 17, 2024. As of October 31:
115
See also Business Consumer Services and Housing Agency, Organizing a State Credit Union: Information
Booklet, Department of Financial Protection and Innovation, State of California DFPI-391, Rev. 2023, p. 3.
116
Klein, Aaron, "‘Everyone’ is the Wrong Way to Define Credit Union Members," July 12, 2017.
117
———.
46
• Organizations of such persons; and
• Corporate or other legal entities in this charter.”
Expanding Field of Membership & Underserved Area Expansion
Federally chartered credit unions must receive approval from the National Credit Union
Administration prior to make changes in a field-of-membership.
118
The following expansions are
permissible:
• “Occupational common-bond expansion – an employer-based group or persons employed
within a Trade, Industry or Profession;
• Associational common bond expansion – a member-based group meeting the NCUA’s
threshold requirement and totality of circumstances test;
• Underserved area expansion – a geographic area meeting the NCUA’s underserved area
requirements (available to only multiple common bonds);
• Community – a geographic area meeting the NCUA’s definition of a well-defined local
community or rural district; and
• Merged (or purchase and assumption) credit union’s field of membership meeting the
NCUA’s requirements.
”
119
With respect to the underserved area expansion, the Credit Union Membership Access Act
(CUMAA)
120
states that the NCUA Board has the discretion to allow a credit union to expand its
membership into that underserved area if: (1) the area is an “investment area,” as defined in
section 103(16) of the Community Development Banking and Financial Institutions Act of 1994”
(i.e., it must either “meet objective criteria of economic distress,” have “significant unmet needs
for loans or equity investments,” or encompass or be “located in an empowerment zone or
enterprise community designated under section 1391 of the Internal Revenue Code of 1986); (2)
the area is underserved by other banks, credit unions, or similar institutions, using data compiled
by both NCUA Board and other agencies; and (3) the credit union will “establish[] and maintain
an office” in the area where “credit union services are available.”
Under California law, a state-chartered credit union may expand its field of membership if
the Commissioner of the DFPI approves an application to expand the field of membership.
121
This application must include:
“(1) If the applicant proposes to serve an occupational group or association, the
application shall include the name and description of the proposed group or association.
118
National Credit Union Administration, "Field of Membership Expansion," December 13, 2021. As of October
31:
https://ncua.gov/support-services/credit-union-resources-expansion/field-membership-expansion.
119
———.
120
105th Congress, Credit Union Membership Access Act, H.R.1151.
121
10 CA Code of Regs 30.60.
47
If the proposed field of membership includes more than one group or association, the
application shall contain the name and description of each group or association. Other
than groups of employees of a common employer, the application shall include the
bylaws of each group or association, if the group or association has adopted bylaws.
(2) A complete list of the organizations, associations, and communities in the credit
union’s current field of membership.
(3) If the applicant proposes to serve one or more communities, the application shall
include information sufficient to demonstrate a common bond with regard to each
community.
(4) The number of potential members in each group or community to be included in the
field of membership.
(5) The geographic location of each group or community to be included in the field of
membership.
(6) If the proposed field of membership is a group the membership of which is equal to or
greater than 20 percent of the current membership of the credit union or the proposed
field of membership is a community, a copy of the business plan, and a copy of the
marketing plan which shall include the methods by which the credit union intends to
serve its expanded field of membership.
(7) Such other information that bears upon a finding that the proposed field of
membership is not contrary to the principles of organizing credit unions, including
principles of organizing credit unions based upon common bond of occupation,
association, or groups within a well-defined neighborhood, community or rural
district.”
122
Non-Member Accounts
Section 701.34 of the regulations of the NCUA (12 C.F.R. Sec. 701.34) provides that a credit
union may request a low-income designation if the majority of its members have household
incomes of 80% or less of the area median income as defined in Section 701.34. Under federal
and state law, low-income designated credit unions can accept nonmember accounts. According
to the NCUA
“Low-income designated credit unions can accept nonmember accounts. They can use
these nonmember accounts to (1) fund loans, (2) arbitrage and build reserves, or (3) cover
expansion or services costs. Generally, these deposits have interest rates at or below
market rates.”
123
122
10 CA Code of Regs 30.60.
123
National Credit Union Administration, Low-Income Credit Unions, p. 23-5.
48
However, “[u]nless the regional director has approved a greater amount, the maximum amount
of all public unit and nonmember shares cannot, at any given time, exceed the greater of 20
percent of the credit union’s total shares or $1.5 million.”
124
Under the California Financial Code:
“A credit union that has a low-income designation pursuant to Section 701.34 of the
regulations of the National Credit Union Administration (12 C.F.R. Sec. 701.34) may
issue shares to nonmembers. Except with the written approval of the commissioner, the
total number of shares issued by the credit union to nonmembers pursuant to this
subdivision shall not exceed 20 percent of the unimpaired capital and surplus of the credit
union.”
125
Par Value Shares
Under the Federal Credit Union Act, membership in a federal credit union requires an
approved membership application and payment and maintenance of at least a par value share (as
well as any applicable entrance fee).
126
However, the NCUA notes that “[t]here is no regulatory
minimum or maximum amount for credit union shares and par values are often nominal.” In
addition, “to promote membership, a credit union may pay the initial share from its own funds on
behalf of a potential member to begin their credit union membership.”
127
Takeaway
Federal- and state-chartered credit unions may admit new members who fall within
their field of membership. Under federal and state law, there are also provisions for
expanding the field of membership and federal and state law also provide for accepting
non-member accounts in the case of low-income designated credit unions.
5. ChexSystems
Background
ChexSystems is a private reporting agency that gathers data on past issues with deposit
accounts, such as checking and savings accounts.
128
This agency keeps a record of banking
124
———.
125
California Financial Code § 14851.
126
National Association of Federally Insured Credit Unions, "Back to Basics: Are All Members Created Equal?," in
Compliance, July 31, 2017, 2017. https://www.nafcu.org/compliance-blog/back-basics-are-all-members-created-
equal, citing 12 U.S.C. §1759(a); FCU Bylaws, Article III.
127
———.
128
Luthi, Ben, "What is ChexSystems?," in Ask Experian: Experian, April 18, 2020, 2020.
https://www.experian.com/blogs/ask-experian/what-is-chexsystems/
49
history, which banks and credit unions may consult to decide whether to approve applications for
new accounts.
129
Relevant Laws, Policy, and Guidance
No federal or state laws require the use of ChexSystems.
Although nothing in the language of AB1177 specifies whether and how financial institutions
may use ChexSystems, section 2(b) of the bill notes:
“Involuntary account closures that are reported to reporting agencies like ChexSystems,
which keeps records of customers’ deposit account histories, can then lead to further
exclusion from affordable financial services. The Consumer Financial Protection Bureau has
found that, based on the most recent data from 2005, up to 19 million people had
ChexSystems records. Although the majority of ChexSystems records result from repeated
overdrafts, situations where the customer was a victim of fraud, or bank errors, a
ChexSystems record can prevent a person from opening a new bank account, resulting in the
unbanking of customers.”
A 2013 New York Times investigation revealed that over one million consumers have been
denied bank accounts for “past errors” as minor as a single bounced check and negative reports
can stay in ChexSystems for seven years.
130
One of our interviewees noted that financial institutions that open Bank On accounts use
ChexSystems and Early Warning Services but only disqualify individuals who have been
convicted of fraud.
131
Similarly, in 2014, the New York Attorney General urged banks operating
within the state to adopt ChexSystems use policies that would only screen for past fraud.
132
Takeaway
CalAccount implementers should consider advising partner financial institutions to only use
ChexSystems to screen for past fraud.
6. Use of Deposits
Background
California State Treasurer’s Office RFP No. SA000004-23 states that the market analysis
should look at “whether deposits can be used by the participating depository financial institutions
129
———.
130
18, 144, 151, citing Jessica Silver-Greenberg, Over a Million are Denied Bank Accounts for Past Errors, N.Y.
TIMES, July 30, 2013, at A1.
131
Interview with banking industry expert on December 4, 2023 (Participant 106).
132
Sprague.
50
in the same manner as the institution’s current customer’s deposits (e.g., for loans to others, etc.).
(See Fin. Code, § 100104, subd. (a)(1)(N), (a)(3)(A), and (c)(5).)”
Relevant Laws, Policy, and Guidance
Here are the sections of the California Financial Code cited in the RFP section that discusses
the use of deposits issue:
• Fin. Code § 100104, subd. (a)(1)(N): “Would require the board to develop and negotiate a
fair and equitable program fee and program revenue sharing structure between the state and
the financial services network administrator in furtherance of attaining a financially self-
sustaining program, which agreement shall be reevaluated annually and renegotiated as
appropriate based on program scope and scale.”
• Fin. Code § 100104, subd. (a)(3)(A): “The market analysis required by this subdivision shall
also include whether or not CalAccount Program revenue is more likely than not to be
sufficient to pay for CalAccount Program costs within six years of the CalAccount Program's
implementation.”
• Fin. Code § 100104, subd. (c)(5): “The market analysis required by subdivision (a) shall
consider all of the following... Potential CalAccount Program revenue streams.”
Given the California Financial Code sections cited in the RFP, it appears that the revenue
sharing structure aspect of the CalAccount program gives rise to the concern about use of
deposits for purposes such as loans.
Code of Federal Regulations, Title 12 Banks and Banking, Part 204, Regulation D (10
CFR §§ 204.1- 204.1)(Reserve Requirements of Depository Institutions) address the use
of deposits for purposes such as loans. 10 CFR § 204.2. provides that reserve
requirements must be satisfied by holding vault cash and, if vault cash is insufficient, by
maintaining a balance in an account at a Federal Reserve Bank.
133
An institution may
hold that balance directly with a Reserve Bank or with another institution in a pass-
through relationship.
134
Reserve requirements are imposed on “depository institutions,”
defined as commercial banks, savings banks, savings and loan associations, credit unions,
U.S. branches and agencies of foreign banks, Edge corporations, and agreement
133
Federal Reserve, "Reserve Requirements," Januray 22, 2024. As of October 31:
https://www.federalreserve.gov/monetarypolicy/reservereq.htm see 10 C.F.R. § 204.5 (Maintenance of required
reserves).
134
———.; see 10 C.F.R. § 204.5 (Maintenance of required reserves).
51
corporations.
135
In March 2020, the Board lowered all reserve requirements to zero for
the first time.
136
On initial inspection, nothing in Regulation D appears to raise any CalAccount
related concerns, but as proposed revenue sharing arrangements between the state of
California and partner institutions under the CalAccount program take shape, the State
should explore potential deposit issues in conversations with federal regulators.
Takeaway
Legal analysis on the issue of use of CalAccount deposits is difficult in the absence of
details about the proposed revenue sharing arrangements between the state of California and
partner institutions under the CalAccount program. The state should explore potential deposit
issues in conversations with experts at federal regulators.
In addition, as noted in Section 10 above, federal and state law provide for accepting non-
member accounts in the case of low-income designated credit unions, and credit unions can use
these nonmember accounts to (1) fund loans, (2) arbitrage and build reserves, or (3) cover
expansion or services costs.
7. Legal Liabilities
Two of our interviewees who work in the banking sector noted that fear of legal liabilities on
the part of financial institutions is likely to pose a significant barrier to financial institution
partnership.
137
These interviewees mentioned Banking Secrecy Act/Know Your Customer
rules and regulations, liability for fraud and abuse, privacy laws, advertising laws, unfair
business practices laws, the Community Reinvestment Act, and liability for discrimination
as areas likely to be of concern for financial institutions considering partnering with the
state on CalAccount.
138
With respect to fraud and abuse, California State Treasurer’s Office
RFP No. SA000004-23 states that the market analysis should look at “[w]hat, if any, fraud and
abuse controls, or other requirements, would be expected from the participating depository
financial institutions” and “ [w]ho would bear the financial burden for mitigating fraud and
abuse.” Banking Secrecy Act/Know Your Customer rules and regulations are discussed in above.
Other potential areas of legal liability mentioned by the interviewees are discussed below.
135
———.; see 10 C.F.R. § 204.2 (Definitions).
136
See ———, Regulation D: Reserve Requirements of Depository Institutions, 85 Fed. Reg. 16525, June 1, 2021.
Federal Reserve.
137
Interview with banking industry and services experts (Participants 108 and 109).
138
Interview with banking industry and services experts (Participants 108 and 109).
52
Fraud and Abuse
Background
At the time of this writing, details of how California and financial institutions would partner
to implement the CalAccount program – including contractual obligation, roles, and technology
to be deployed - have not been finalized, so it is difficult to anticipate fraud risks and liability for
those risks. However, prior collaborations between California agencies and financial institutions
demonstrate the types of legal and financial liability that may make financial institutions hesitant
to participant in CalAccount. More specifically, the financial and legal liabilities that Bank of
America incurred after it contracted with California’s Employment Development Department
(EDD) to issue unemployment benefits debit card and the financial liabilities incurred by the
State of California as result of electronic benefits transfer (EBT) card fraud provide frameworks
for examining the liabilities that may prevent financial institutions from participating in the
program and liabilities that the State of California should strive to protect itself against as the
details of CalAccount are negotiated.
In 2010, Bank of America entered into an exclusive unemployment debit card contract
with EDD. According to CalMatters, under the terms of the contract, EDD did not pay the bank
directly for its financial services. Instead, EDD and Bank of America split revenue on merchant
transaction fees when the cards were swiped and the bank charged consumer fees for things like
ATM use or rush shipping on new debit cards. The contract specified that the state’s share of the
fee revenue will “assist in offsetting program costs.” According to CalMatters, EDD made $22.5
million on unemployment debit card fees. The managing director of transaction services for
Bank of America reported that although the bank shared in revenue from the contract, the bank
“lost hundreds of millions of dollars on the contract” due to fraud and having to hire customer
service workers to handle complaints.
139
Plaintiffs in a pending class action lawsuit against Bank of America allege that during the
pandemic, Bank of America’s failure to implement basic security measures such as chips
resulted in unemployment benefits being stolen from California benefits recipients.
140
Plaintiffs
also allege that rather than investigating cardholders’ reports of unauthorized transactions on the
cards, Bank of America summarily denied their claims, froze their accounts, and failed to handle
high volumes of calls from fraud victims.
141
The pending class action alleges several claims
under state and federal laws including:
139
Hepler, Lauren, "How EDD and Bank of America make millions on California unemployment," in CalMatters,
February 5, 2021.
140
Danitz, Brian and Andrew F Kirtley, "Claims Against Bank of America to go Forward for Failing to Protect
Unemployed Californians During Pandemic," May 26, 2023. As of February 1, 2024: See also Koury, Renee
"EXCLUSIVE: BofA says it wants out of unemployment benefits contract as EDD renews," ABC 7News, July 2,
2021. As of February 1, 2024:
141
Danitz.
53
• violation of the federal Electronic Funds Transfer Act (which required timely
investigation of unauthorized transaction claims);
• violation of the California Consumer Privacy Act by issuing EDD debit cards
without security chips and failing to ensure the confidentiality of Plaintiffs’
personal information;
• violation of Plaintiffs’ due process rights;
• negligence in failing to include security chips;
• negligence in the hiring and supervision of contractors;
• unfair business practices; and
• breached fiduciary duties owed to EDD cardholders.
142
The CFPB conducted an investigation and found that Bank of America engaged in unfair
and abusive acts and practices that resulted in Californians not getting their unemployment
benefits. Specifically, the bank used a faulty fraud filter, made it difficult for people to unfreeze
their prepaid debit cards, and directed consumers to EDD rather than assisting consumers who
sought help. As a result, CFPB fined Bank of America $100 million, to be paid to CFPB.
143
The
OCC separately imposed a fine of $125 million on Bank of America, to be remitted to the U.S.
Treasury.
144
In 2021, Bank of America reported to news media that it wanted out of the contract,
but that EDD renewed the contract for two years.
145
Very recently, EDD entered into a contract,
and beginning February 15, 2024, benefits will be issued to Money Network prepaid card rather
that to a Bank of America debit card.
146
California’s Electronic Benefit Transfer (EBT) Project automated government benefit
delivery through the use of on-line electronic funds transfer technology (i.e. magnetic stripe debit
cards).
147
According to a report by CalMatters, “in April 2022, California was losing nearly $2
million a month to EBT thieves, and although cash and food benefits are primarily federally
142
———.
143
Consumer Financial Protection Bureau, "Federal Regulators Fine Bank of America $225 Million Over Botched
Disbursement of State Unemployment Benefits at Height of Pandemic," July 14, 2022, 2022. As of February 1,
2024:
https://www.consumerfinance.gov/about-us/newsroom/federal-regulators-fine-bank-of-america-225-million-over-
botched-disbursement-of-state-unemployment-benefits-at-height-of-pandemic/
144
———.
145
Koury.
146
Employment Development Department, "New: Changes to Your Debit Card." As of February 1:
https://edd.ca.gov/en/about_edd/the_edd_debit_card/
147
Department of Financial Protection and Innovation, "California Electronic Benefit Transfer (EBT) Project,"
August 28, 2019. As of February 1:
https://dfpi.ca.gov/california-electronic-benefit-transfer-ebt-project/.
54
funded, California had to pay out of its own funds to reimburse theft victims.
148
According to
experts interviewed by CalMatters, chip cards could significantly cut the thefts, and California
earmarked $50 million for the upgrades scheduled to go into effect May 2024.”
149
CalMatters
reported that in 2013, the California started reimbursing welfare recipients who have their
benefits stolen electronically and that Congress recently passed a spending bill to reimburse
states for paying recipients back up to two months of stolen food benefits.
150
Relevant Laws, Policy, and Guidance
As noted above, absent details about contractual obligations, roles, and technology that will
be part of the CalAccount program, it is difficult to anticipate fraud risks and liability for those
risks. However, as demonstrated in the cases of the state and financial institution government
prepaid care partnerships above, fraud can result in substantial financial losses on the part of
financial institutions and government partners. In addition, financial institutions may be hesitant
to participate in CalAccount because efforts to partner on prepaid card programs resulted in
potential legal liability under federal law such as the Electronic Funds Transfer Act, state laws
such as the California Consumer Privacy Act, and common law causes of action such as
negligence and breach of fiduciary duty; as well as investigations and large fines imposed by
CFPB and OCC.
Privacy Laws
Background
One of our banking sector interviewees noted that potential legal liability under state and
federal privacy laws as a likely primary area of concern for financial institutions.
151
As discussed
below, there are a patchwork of state and federal privacy laws.
Relevant Laws, Policy, and Guidance
Two notable federal laws that cover personal financial privacy are the Fair Credit Reporting
Act and the Gramm-Leach-Bliley Act.
152
The Gramm-Leach-Bliley Act, Pub. L. No. 106-102
(codified as amended at 15 U.S.C. § 6803, “GLBA”) limits when a “financial institution” may
148
Kuang, Jeanne "California missed chances to stop EBT theft. It’s lost tens of millions of taxpayer dollars since,"
November 8, 2023. As of February 1, 2024:
https://calmatters.org/economy/2023/11/california-missed-chances-to-stop-ebt-theft-its-lost-tens-of-millions-of-
taxpayer-dollars-since/.
149
Department of Financial Protection and Innovation.
150
———.
151
Interview with banking industry and services experts (Participants 108 and 109).
152
Office of the Comptroller of the Currency, "Privacy," Undated. As of October 31:
https://www.occ.treas.gov/topics/consumers-and-communities/consumer-protection/privacy/index-
privacy.html#:~:text=Two%20federal%20laws%20cover%20your,Gramm%2DLeach%2DBliley%20Act.
55
disclose a consumer’s “nonpublic personal information (NPI)” to nonaffiliated third parties. The
FTC notes that under the statute, “financial institutions must notify their customers about their
information-sharing practices and tell consumers of their right to ‘opt-out’ if they don't want
their information shared with certain nonaffiliated third parties. In addition, any entity that
receives consumer financial information from a financial institution may be restricted in its reuse
and redisclosure of that information.”
153
Mobile payment providers and payment processors may
be considered “financial institutions,” “service providers,” or both for purposes of the GLBA (or
both) based on the specific services they supply.
154
In addition, the FTC’s Safeguards Rule under
the GLBA requires that entities that are “significantly engaged in financial activities, or
significantly engaged in activities incidental to such financial activities”
155
to “develop,
implement, and maintain an information security program with administrative, technical, and
physical safeguards designed to protect customer information.”
156
The Fair Credit Reporting Act (Title VI of the Consumer Credit Protection Act) Pub. L. No.
90-32 (codified as amended at 15 U.S.C. § 1681) protects information collected by consumer
reporting agencies. This information may not be provided to anyone who does not have a
purpose specified in the Fair Credit Reporting Act.
157
As the CFPB notes, “users of the
information for credit, insurance, or employment purposes must notify the consumer when an
adverse action is taken on the basis of such reports.”
158
In addition, the Right to Financial
Privacy Act, Pub. L. No. 95-360 (codified as amended at 12 U.S.C.§§3401-22) protects the
privacy of financial accounts from government scrutiny and sets forth
procedures that federal
government authorities must follow to obtain a customer’s financial records from financial
institutions.
159
These requirements include obtaining subpoenas, notifying the customer of the
request, and providing the customer with an opportunity to object.
160
At the state level, the California Financial Information Privacy Act, Cal. Fin. Code 4053,
prohibits financial institutions from sharing nonpublic personal information without consumer
153
Federal Trade Commission, How To Comply with the Privacy of Consumer Financial Information Rule of the
Gramm-Leach-Bliley Act, July 2002.
154
Fonte, Erin "2017 U.S. Regulatory Overview Of Mobile Wallets and Mobile Payments " Wake Forest Journal of
Business and Intellectual Property Law Vol. 17, No. 4, Summer 2017.
155
16 C.F.R. pt. 314
156
Federal Trade Commission, "FTC Safeguards Rule: What Your Business Needs to Know," May 2022.
https://www.ftc.gov/business-guidance/resources/ftc-safeguards-rule-what-your-business-needs-know.
157
Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq.
158
U.S. Code, Fair Credit Reporting Act, 2023.
159
Federal Deposit Insurance Corporation, Right to Financial Privacy Act.
160
———.
56
consent through an opt-in process.
161
The California Attorney General considers “a broad array
of businesses” to be subject to the GLBA and FIPA including, for example, “retailers that issue
their own credit cards directly to consumers, real estate appraisers, mortgage brokers, career
counselors in the finance area, check printing businesses, and accountants who prepare tax
returns.”
162
Advertising Laws
Background
On of our banking sector interviewees noted that potential legal liability under advertising
laws, particularly Regulation DD, would be a likely concern for financial institutions considering
partnering on CalAccount.
163
Relevant Laws, Policy, and Guidance
Advertising and marketing in the U.S. are subject to federal, state, and local laws and
regulations.
164
For example, Regulation DD (12 CFR 230), which implements the Truth in
Savings Act and applies to all depository institutions, requires uniform disclosures to enable
consumers to make informed decisions about their accounts at depository institutions.
165
With
respect to advertising and marketing, Regulation DD imposes requirements on any commercial
message that promotes deposit accounts, regardless of the medium used. Requirements include
that commercial messages not be misleading or inaccurate, that terms like “no cost” cannot be
161
States including California, Oregon, Montana, Utah, Colorado, Texas, Iowa, Indiana, Tennessee, Virginia,
Connecticut, and Delaware have also implemented more general consumer privacy laws. International Association
of Privacy Professionals (IAPP). (n.d.). US State Privacy Legislation Tracker. Retrieved from
https://iapp.org/resources/article/us-state-privacy-legislation-tracker/. For example, the California Consumer Privacy
Act of 2018, Cal. Civ. Code §§ 1798.100-1798.199 (2018) provides that “[a] business that controls the collection of
a consumer’s personal information” must inform consumers of the categories of personal information being
collected and used, the purposes for which the personal information are being collected and used, and the length of
time the business intends to retain each category of personal information. The CCPA also gives consumers the right
to delete personal information collected, subject to exceptions. A second privacy act, the California Privacy Rights
Act, took effect in 2023. This Act provides consumers with the right to limit the use and disclosure of sensitive
personal information collected about them and the right to correct inaccurate personal information that a business
has about them. In addition, California and every other state in the U.S. has enacted a data breach notification law,
which require businesses as well as governmental entities to notify individuals of security breaches that involve
personally identifiable information. National Conference of State Legislatures (NCSL). Security Breach Notification
Laws. Retrieved from: https://www.ncsl.org/technology-and-communication/security-breach-notification-laws.
162
California Attorney General’s Office, "Your Financial Privacy Rights."
https://oag.ca.gov/privacy/facts/financial-privacy/rights.
163
Interview with banking industry and services expert (Participant 108(.
164
Miller, Craig, Harold P. Reichwald, and Charles Washburn Jr., "Top 5 Legal Considerations for FinTech
Advertising," in JDSupra.
165
Federal Reserve, Truth in Savings, Board of Governors of the Federal Reserve. As of February 1, 2024:
https://www.federalreserve.gov/boarddocs/caletters/2009/0914/09-14-attachment.pdf.
57
used to describe an account if any maintenance or activity fees can be imposed, that rates of
return be expressed as an annual percentage yield, and that a record of commercial messages be
maintained for two years.
166
Community Reinvestment Act
Background
On of our banking sector interviewees noted that the Community Reinvestment Act would be
a likely concern for financial institutions considering partnering on CalAccount.
167
The logic
behind this potential concern is detailed in the next section, after the summary of the Act.
Relevant Laws, Policy, and Guidance
Congress enacted the Community Reinvestment Act of 1977 (CRA) to address concerns that
federally insured banking institutions were not providing enough credit in the areas where they
were chartered and acquiring deposits.
168
Pursuant to the CRA, federal banking regulators
(Federal Reserve, OCC, and FDIC) conduct examinations that assess whether a bank is meeting
local credit needs and assign CRA credits in each banks “assessment area.”
169
(Assessment areas
are “typically encompasses the geographic area that can reasonably be served by each of a bank's
locations, including its main office, any branches, and deposit-taking ATMs. It also usually
includes the surrounding areas in which the bank originated or purchased a substantial portion of
its loans.”
170
) Federal regulators then take these ratings into account when banks seek regulator
approval, e.g., applying for charters, branches, mergers, and acquisitions.
171
In 2023, federal banking regulators revamped the CRA implementing regulations to address
stakeholder concerns.
172
For example, one such concern was that as banks provide products and
services digitally, they may benefit broader communities outside of their geographical
166
———.
167
Interview with banking industry and services expert (Participant 109).
168
U.S. House of Representatives Better, Together: Examining the Unified Proposed Rule to Modernize the
Community Reinvestment Act: Hearing Before the Committee on Financial Services Subcommittee on Consumer
Protection and Financial Institutions 7-5700, July 13, 2022.
169
. at 1.
170
Horowitz, Ben "Defining ‘Low- And Moderate-Income’ and ‘Assessment Area’," March 8, 2018.
171
. , at 1.
172
Bonici, Max and Michael Aphibal, "Harder, Better, Faster, Stronger: The New Interagency Rule for the
Community Reinvestment Act," November, 2023, 2023. https://www.venable.com/-
/media/files/publications/2023/11/harder-better-faster-stronger-the-new-
interagency.pdf?rev=5dbee4486c2942b9b89703f028620b68.
58
assessment area and not receive credit for these products and services.
173
There was also a
general concern that federal regulators were awarding CRA credit inconsistently.
174
The new rule (which banks must comply with by 2026) is “long and complex, with more
than 60,000 words, 40 benchmarks, and 20 metrics” and the intricacies of the CRA are beyond
the scope of this report.
175
However, in short, the rule applies a new framework to the four tests
that federal regulators use to evaluate banks under the CRA:
1. Retail lending test: assesses how well large banks are providing services to low- and
moderate-income (LMI) borrowers, small businesses, and small farms
2. Retail services and products test: assesses the accessibility to credit and deposit products,
including branches, ATMs, and mobile banking platforms
3. Community development (CD) financing test: assesses bank’s community development
loans and investments.
4. CD services test: assesses volunteer activities that support community development such
as financial literacy activities.
176
Whether and how these tests are applied to banks depends on whether a bank’s assets qualify the
bank as large, intermediate, or small under the CRA.
177
The banking sector interviewee who cited the CRA in the interview noted that banks may be
hesitant to participate in CalAccount because participation would require them to undertake more
lending in LMI communities where they take CalAccount deposits.
178
The interviewee noted that
this can lead to a situation where banks do not provide loans to LMI communities and are
penalized under the CRA and other laws that prohibiting redlining.
179180
The interviewee further
noted that on the opposite side of the coin, if banks do increasing lending in LMI communities,
banks may consider these loans in and of themselves to be risky and may also perceive these
loans and creating potential liability for allegations of predatory lending.
181
173
., at 3.
174
., at 3.
175
Bonici., at 1.
176
———., at 2-3.
177
Federal Reserve, Interagency Overview of the Community Reinvestment Act Final Rule, October 24, 2023.
178
Interview with banking industry and services expert on December 8, 2023 (Participant 109)
179
“One type of redlining can be defined as the refusal of a bank to make credit available to all of the
neighborhoods in its immediate locality, including LMI neighborhoods where the bank may have collected deposits.
A second type of redlining is the practice of denying a creditworthy applicant a loan for housing located in a certain
neighborhood even though the applicant may qualify for a similar loan in another neighborhood. This type of
redlining pertains to circumstances in which a bank refuses to serve all of the residents in an area, perhaps due to
discrimination.” Getter (2022), at 2.
180
Interview with banking industry and services expert on December 8, 2023 (Participant 109).
181
Interview with banking industry and services expert on December 8, 2023 (Participant 109).
59
By contrast, two interviewees noted that banks may be incentivized to participate in
CalAccount because providing access to deposit products through CalAccount could result in
CRA credit under the retail services test.
182
Notably, “[p]roducts certified as meeting Bank On
National Account Standards have been called out by banking regulators as eligible for the
Community Reinvestment Act.”
183
Liability for Discrimination
Background
Two of our banking sector interviewees noted that potential legal liability laws prohibiting
discrimination.
184
One interviewee noted that banks may be hesitant to participate in CalAccount
because they may believe it would open them up to legal liability for perceived disparate
treatment of CalAccount holders with respect to complaint resolution times, amount of material
effort put into opening accounts, ability to access services, and fund availability.
185
Relevant Laws, Policy, and Guidance
The law that a banking sector interviewee specifically mentioned was the Consumer
Financial Protection Act (CFPA), which is enforced by the CFPB and prohibits unfair, deceptive
and abusive acts and practices (UDAAPs).
186
The CFPB notes that “discrimination may meet the
criteria for ‘unfairness’ by causing substantial harm to consumers that they cannot reasonably
avoid, where that harm is not outweighed by countervailing benefits to consumers or
competition” and that “[c]onsumers can be harmed by discrimination regardless of whether it is
intentional.”
187
Takeaway
One of the banking sector interviewees noted that financial institutions’ fear of legal
liabilities will be the single biggest barrier to CalAccount.
188
As detailed above, fraud by third
parties can lead to financial liability as well as lawsuits and large regulatory fines. In addition,
financial institutions may be hesitant to participate in CalAccount for fear of liability for
violation of privacy laws and advertising laws. As the design of the CalAccount program
182
Interviews with banking industry and services experts on December 8 and 13, 2023 (Participants 108 and 112).
183
Bank On, "Get Certified: Join the National Bank On Movement," Undated. https://joinbankon.org/certify/ .
184
Interviews with banking industry and services experts on December 8, 2023 (Participant 108 and 109).
185
Interviews with banking industry and services expert on December 8, 2023 (Participant 108).
186
Consumer Financial Protection Bureau, "CFPB Targets Unfair Discrimination in Consumer Finance," March 16,
2022. https://www.consumerfinance.gov/about-us/newsroom/cfpb-targets-unfair-discrimination-in-consumer-
finance/.
187
———.
188
Interview with banking services and industry expert on December 8, 2023 (Participant 109).
60
progresses, it is important to involve legal counsel from all potential partners as well as
representative from state and federal regulators in the dialogue.
61
Abbreviations
AB
Assembly Bill
AML
Anti-Money Laundering
ATM
Automated Teller Machine
BCA
Benefit Cost Analysis
BSA
Bank Secrecy Act
BSCA
Bank Service Company Act
CFPB
Consumer Financial Protection Bureau
CIP
Customer Identification Program
CRA
Community Reinvestment Act
CUMAA
Credit Union Membership Access Act
DFPI
Department of Financial Protection and Innovation
DLSE
Division of Labor Standards Enforcement
EBT
Electronic Benefits Transfer
EDD
Employment Development Department
EFTA
Electronic Fund Transfer Act
EMV
Europay, Mastercard, and Visa
FDIC
Federal Deposit Insurance Corporation
FFIEC
Federal Financial Institutions Examination Center
FIPA
Financial Information Privacy Act
GLBA
Gramm Leach Bliley Act
KYC
Know Your Customer
LMI
Low and Moderate Income
NCUA
National Credit Union Administration
NPI
Nonpublic Personal Information
NSF
Non-Sufficient Funds
OCC
Office of the Comptroller of the Currency
OFAC
Office of Foreign Asset Control
POS
Point of Sale
QCEW
Quarterly Census of Employment and Wages
RFP
Request for Proposal
SAR
Suspicious Activity Report
SME
Subject Matter Expert
STO
State Treasurer's Office
USPS
United States Postal Service
62
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