OAL Approves Department of Financial Protection and Innovation’s Public Banking Regulations to Become Effective January 1, 2022

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By Summer M. Bosse

On September 14, 2021, the Office of Administrative Law (OAL) approved regulatory action PRO 1/20 from the Department of Financial Protection and Innovation (DFPI), which amends and adopts various sections in Subchapter 1 in Title 10, Chapter 10 of the California Code of Regulations (CCR) to implement and administer legislation authorizing public banks, a first for the State of California. On March 5, 2021, DFPI published its notice of modifications and modified text. The 15-day public comment period concluded March 26, 2021. In DFPI’s final statement of reasons, the Department responded to four comment letters received during the initial notice period from December 4, 2021, through January 21, 2021, and three comment letters received during the 15-day comment period.

This rulemaking action implements AB 857 (Chiu) (Chapter 442, Statutes of 2019), which establishes the process for a local agency to apply for a bank charter. The bill requires local agencies to conduct and approve a study of viability of a public bank and authorizes local agencies to deposit funds into and invest in a public bank, subject to specific requirements. The bill also prohibits a public bank from competing with local financial institutions.

DFPI’s rulemaking action further defines terms used in the public banking process and clarifies the process itself. Under this rulemaking action, public banks may offer local agency banking, infrastructure lending, participation lending, and wholesale lending. DFPI intends for this rulemaking action to allow local agencies to achieve greater return rates on their investment through involvement with public banks which would, in turn, improve infrastructure. The text of the final rule adopts and amends 13 code sections. The adopted code sections of Title 10 are as follows: 10.131.7, 10.135.1, 10.140.1, 10.140.6, 10.141.1, 10.116.1, 10.3301.1. The amended code sections are as follows: 10.112, 10.141, 10.151, 10.3000, 10.3100, 10.3402.

In the final statement of reasons, the Department provided additional clarification on pertinent provisions of the modified text and continued to stress the necessity for each of the proposed rules within the initial statement of reasons. Section 10.131.7 expands the factors upon which the Commissioner of the DFPI will determine whether a financial product or service is offered by a local financial institution within the jurisdiction of a public bank. The Department intends for this to allow public banks to demonstrate that the product they want to offer is substantially different from the product offered by a local financial institution within the public bank jurisdiction. Section 10.140.6 clarifies that local financial institutions must have a physical presence within the jurisdiction of a public bank, which does not include ancillary facilities such as automated teller machine(s), loan production offices, or offices that perform administrative, corporate, or back-office functions.

As stated in the final statement of reasons, DFPI uses this regulatory action to “strike a balance between supporting the benefits which may be realized by Californians and protecting against a public bank’s failure by ensuring that public bank applicants demonstrate the financial ability, stability and experience to ensure a likelihood of success.” The regulatory changes go into effect January 1, 2022.

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