A bill expected to sail through its Legislature would make California the first state to let state credit unions - even small ones - run their own tax-free trust departments.
Banks oppose the plan.
The state is already one of a handful that let their credit unions operate taxable for-profit subsidiaries called "credit union service organizations" to provide trust services, said Colleen Kelly, the vice president of state governmental affairs for the Credit Union National Association. But no state gives credit unions full fiduciary responsibility of its members' trust accounts, she said.
Setting one up a trust subsidiary can be prohibitively expensive for a small credit union, said Monica Cisneros, state regulatory analyst for the California Credit Union League, the bill's sponsor. "It takes a lot of capital" - usually about $50,000 - she said. "This bill would help a lot of smaller credit unions."
Even at small credit unions, members are increasingly requesting trust services, Ms. Cisneros said. Banks have refused to establish trust accounts for many of these people because they did not have enough money, she said.
"Many large banks have raised the minimum initial value" to open a trust account to $1 million, Ms. Cisneros said, "but there are many credit union members who want trust services but only have about half of that. They are starting to receive inheritances from parents and grandparents, and they are not finding anyone to meet their special needs."
Not so, said Peggy J. Standefer, senior vice president and senior counsel at $8 billion-asset California Bank and Trust, a subsidiary of Zions Bancorp of Salt Lake City. "I have never heard of any bank turning away trust business based solely on the value of a trust," she said, and her bank has no minimum.
California Bank and Trust, other banks, and the state's banking trade groups are actively opposing the bill, which was introduced by Assemblywoman Christine Kehoe.
Maurine Padden, vice president and chief legislative counsel for the California Bankers Association, said the measure would give credit unions an unfair advantage because they would no longer have to pay taxes on the money they make from their trust activities.
The banking group and others also object to a clause in the bill saying credit unions can engage in any financial activity not expressly prohibited. "They would have a blank check to do anything they wanted," said Craig Hudson, the executive director of the California Independent Bankers. "If they are not going to have limited powers, then we don't think they ought to be exempt from paying taxes."
But Bob Arnould, vice president of governmental affairs for the California Credit Union League, said that because the clause was lifted from a state code regulating the incorporation of credit unions, it would create no new powers.
Ms. Padden adamantly disagreed. "This particular provision would remove any existing limitations on the types of products and services that credit unions could offer," she said.
Credit unions should not have the same powers as banks, Ms. Padden said. "They don't have the same capital requirements, they don't operate with as much regulatory oversight, and they're not subject to the requirements of the Community Reinvestment Act," she said. "They want everything [that banks have] but without the responsibility."
Still, the bill cleared the Assembly's Banking Committee on April 16 on a 6-2 vote, and bank opposition is unlikely to derail it, said David Haithcock, the director of bank relations for the California Independent Bankers. "Credit unions are really powerful here - just about everything they want to put on the books rolls right through the Legislature," Mr. Haithcock said. "Legislators view credit unions as service organizations and banks as businesses, so legislators automatically think that we're always trying to gouge customers."
