AB2: Bill Text

LRB-0636/3

RJM:cjs:pg

2003 - 2004 LEGISLATURE

2003 Assembly BILL 2

January 22, 2003 - Introduced by Representatives Jeskewitz, Plale, Montgomery, Richards, Gard, Hebl, Kaufert, Balow, Owens, Turner, Hundertmark, Kerkman, Huebsch, Pettis, Gronemus, Lassa, Rhoades, F. Lasee, Gunderson, Olsen, J. Fitzgerald, Friske, Kestell, M. Lehman, Ladwig, Hahn, Loeffelholz, McCormick, Ward, Freese, Jensen, Petrowski, Shilling, D. Meyer, Pocan, Huber, Kreibich, Ziegelbauer, Townsend, Grothman, Wieckert, Stone, Gielow, Towns, Van Roy, Johnsrud, Seratti, A. Williams, Krawczyk, Pope-Roberts, Lothian, Ott, Vrakas, Ainsworth, Boyle, Coggs, Hines, Suder, Vukmir, J. Lehman, Young, Musser, Wasserman, Nass, Colon, Powers, Staskunas, Sinicki, Plouff, Underheim, Bies, Zepnick, Sherman, Weber, Albers, M. Williams, Vruwink, Nischke, LeMahieu and Cullen, cosponsored by Senators Schultz, Moore, Panzer, Leibham, Brown, Hansen, Kedzie, S. Fitzgerald, Darling, Kanavas, Carpenter, A. Lasee, Breske, Stepp, Zien, Wirch, Welch, Risser, Decker, Roessler, M. Meyer, Lazich, Cowles, Reynolds, Ellis, George and Harsdorf. Referred to Committee on Financial Institutions.

AB2,2,5 An Act to repeal 186.235 (16) (b), 186.41 (1) (d), 186.41 (6) (b) and 186.41 (8); to renumber 186.41 (6) (a); to renumber and amend 186.02 (2) (d), 186.11 (4) (a), 186.113 (11), 186.235 (16) (a), 186.41 (1) (a) and 186.41 (1) (c); to amend 93.01 (1m), 186.01 (2), 186.02 (2) (a) 1., 186.02 (2) (b) 2., 186.02 (2) (c), 186.06 (4), 186.11 (4) (title), 186.11 (4) (c), 186.113 (1), 186.113 (1m) (a) (intro.), 186.113 (6) (b) and (c), 186.22 (12m), 186.235 (7) (a) (intro.), 186.36, 186.41 (title), 186.41 (2) and (3), 186.41 (4) (intro.), (a) to (d) and (f), 186.41 (5) (a), (b), (c) and (cr), 220.04 (9) (a) 2. and 409.617 (1) (c); to repeal and recreate 186.11 (4) (b) and 186.17 (1); and to create 186.02 (2) (b) 2m., 186.02 (2) (d) 2., 186.07 (3m), 186.11 (4) (a) 1., 186.11 (4) (bd) and (bh), 186.113 (11) (b), 186.113 (24), 186.113 (25), 186.20, 186.235 (7) (c), 186.235 (7m), 186.235 (16m), 186.45, 186.80, 220.14 (5) and chapter 222 of the statutes; relating to: credit union membership, powers, operation, and regulation; the application of agriculture, trade, and consumer protection statutes to credit unions; the creation of a new type of financial institution; the powers of and requirements applicable to the new type of financial institution; the discharge of governmental liens under the Uniform Commercial Code; providing an exemption from emergency rule procedures; granting rule-making authority; and providing a penalty.

Analysis by the Legislative Reference Bureau

Credit unions and universal banks

This bill makes numerous changes to the chapter that governs the formation, operation, and regulation of credit unions in this state and creates a new type of financial institution called a universal bank. The major provisions relating to credit unions and universal banks include the following:

Credit Unions

Credit union membership

Under current law, credit union membership is open to groups having a common bond of occupation or association; residents within a well-defined neighborhood, community, or rural district; employees of related industries or industries that operate within a well-defined neighborhood, community, or rural district; members of certain fraternal, labor, educational, or other similar organizations; and credit union employees. Furthermore, credit union membership is open to the immediate family of all individuals who are qualified for membership. Current law defines "members of the immediate family" as any relative of a member or of a member's spouse who is living with the member and as the member's spouse, parents, stepchildren, and children. In addition, current law permits a credit union to accept an organization or association as a member if a majority of the members of the organization or association are eligible for membership.

This bill expands the pool of individuals, organizations, and associations that are eligible for membership in a credit union. Under this bill, credit union membership is open to individuals who reside or are employed in well-defined, contiguous neighborhoods and communities, except that, if the Office of Credit Unions determines, subsequent to a merger, that it is inappropriate to require the members of a credit union to reside or be employed in contiguous neighborhoods and communities, the requirement that these neighborhoods and communities be contiguous does not apply. In addition, membership is open to individuals who reside or are employed in well-defined, contiguous rural districts or multicounty regions.

This bill also opens credit union membership to any organization or association that has a business location within any geographic limits of the credit union's field of membership. This bill also permits a credit union to accept any organization or association as a member, if a majority of the directors, owners, or members of the organization or association are eligible for membership. Furthermore, this bill repeals the definition of "members of the immediate family" contained in current law and instead requires a credit union's bylaws to specify the conditions that determine eligibility for membership.

Credit union investments and credit union service organizations

Under current law, a credit union may invest up to 1.5% of its total assets in an organization that is organized primarily to provide goods and services to credit unions, credit union organizations, and credit union members (credit union service organization). Under current law, a credit union may invest in a credit union service organization that is a corporation. Current law also specifies the types of goods and services that a credit union service organization may provide. These goods and services include, among other things, credit card services, automated teller services, financial planning, and insurance sales. However, current law is ambiguous as to whether the percentage limitation on a credit union's investment in credit union service organizations applies to the aggregate total of all credit union investments in credit union service organizations or to a credit union's investment in each particular credit union service organization.

This bill expands the types of organizations in which a credit union may invest. Under this bill, a credit union may invest in a credit union service organization that is a corporation, limited partnership, limited liability company, or any other entity that is permitted under state law and that is approved by the Office of Credit Unions.

This bill also provides that the Office of Credit Unions may permit a credit union to invest greater than 1.5% of credit union assets in a credit union service organization. In addition, this bill clarifies that the limitation on a credit union's investment in credit union service organizations applies to the aggregate total of all credit union investments in credit union service organizations.

This bill also expands the types of services that a credit union service organization may provide. Under this bill, a credit union service organization may provide the following types of services, among others, related to the routine daily operations of credit unions: 1) checking and currency services; 2) clerical, professional, and management services; 3) consumer mortgage loan origination services; 4) electronic transaction services; 5) tax preparation services; 6) services regarding the development and administration of individual retirement accounts, specified retirement plans for self-employed individuals, and personnel benefit plans; 7) financial counseling services, including estate planning; 8) fixed asset services; 9) insurance brokerage or agency services; 10) services with regard to leasing real property owned by the credit union service organization or personal property; 11) loan support services; 12) record retention, security, and disaster recovery services; 13) securities brokerage services; 14) shared credit union branch operations; 15) student loan origination services; 16) travel agency services; 17) trust and other fiduciary services; 18) real estate brokerage services. The bill further specifies additional services that are generally related to the 18 listed above. In addition, the bill authorizes the Office of Credit Unions to expand the list of services that are related to the routine daily operations of credit unions that a credit union service organization may provide. The bill also permits a credit union service organization to provide any of these services through an investment by the credit union service organization in a third-party service provider, subject to certain limitations.

Credit union powers

Currently, to the extent permitted by federal law, a credit union may act as trustee of member tax deferred funds and as a depository for member deferred compensation funds. This bill expands this authority, allowing a credit union, to the extent permitted by federal law, to act as a trustee or custodian of member tax deferred retirement funds, individual retirement accounts, medical savings accounts, and other employee benefit accounts or funds. In addition, this bill allows a credit union, to the extent permitted by federal law, to act as a depository for member qualified and nonqualified deferred compensation funds.

Under current law, funds held in trust under a burial agreement (commonly known as a funeral trust) must be deposited in a bank, savings bank, savings and loan association, or credit union. This bill clarifies that a credit union may accept these deposits if the deposits are made by a credit union member.

Currently, a federal credit union is permitted to accept deposits from nonmembers if the federal credit union is designated as a low-income credit union by the National Credit Union Administration. To obtain such a designation, a federal credit union must serve predominantly low-income members. This bill permits a state credit union to accept deposits from any person if the state credit union satisfies the federal requirements for designation as a low-income credit union and files a statement with the Office of Credit Unions agreeing to be bound by requirements and conditions that are substantially identical to those imposed on federally designated low-income credit unions.

This bill also permits credit unions to sell insurance products.

Branch offices of Wisconsin credit unions

Under current law, if the need exists, a credit union may establish branch offices within this state or no more than 25 miles outside of this state. In addition, if certain conditions are met, a credit union may establish a limited service office outside of this state to serve members of the credit union. A credit union seeking to establish a branch office or limited service office must first obtain the approval of the Office of Credit Unions.

This bill expands the authority of a credit union to establish branch offices. Under this bill, with the permission of the Office of Credit Unions, a credit union may establish branch offices anywhere inside or outside of this state. This bill repeals the authority for a credit union to establish a limited service office, although a credit union may continue to operate a limited service office that is in existence on the effective date of this bill.

Branch offices of non-Wisconsin credit unions

Current law does not specifically permit a credit union organized under the laws of another state (non-Wisconsin credit union) to establish a branch office in this state. This bill specifies that a non-Wisconsin credit union may establish a branch office in this state if the Office of Credit Unions finds that certain conditions apply to the non-Wisconsin credit union. For example, the non-Wisconsin credit union must be organized under laws similar to ch. 186, must be financially solvent, and must have federal insurance for member deposits. In addition, the Office of Credit Unions must find that credit unions organized under the laws of this state are allowed to do business under similar conditions in the home state of the non-Wisconsin credit union.

Interstate mergers and acquisitions of credit unions

Under current law regarding interstate mergers and acquisitions of credit unions, a credit union organized in this state may only merge with, acquire, or be acquired by a state or federal credit union that has its principal office in Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, Missouri, or Ohio. This bill repeals this geographic limitation on mergers and acquisitions of credit unions and, thus, expands the number of credit unions that are eligible to merge with, acquire, or be acquired by a credit union organized in this state.

Credit union reports and financial privacy

Current law contains several credit union reporting requirements and, with certain exceptions, requires the Office of Credit Unions annually to examine the records and accounts of each credit union. The employees of the Office of Credit Unions and members of the Credit Union Review Board must keep information obtained in the course of examinations confidential, with limited exceptions. A violation of this confidentiality requirement is subject to a forfeiture of up to $200.

This bill expands the confidentiality requirement to also include information contained in certain reports that a credit union provides to the Office of Credit Unions. In addition, this bill specifies that, with certain exceptions, any employee of the Office of Credit Unions or member of the Credit Union Review Board who discloses any information about the private account or transactions of a credit union or who discloses any information obtained in the course of an examination is subject to a fine of not less than $100 nor more than $1,000, imprisonment for not less than six months nor more than three years, or both, and may be required to forfeit his or her office or position.

This bill also requires credit unions to comply with certain federal laws relating to customer financial privacy and requires the Office of Credit Unions to examine credit unions for compliance with these federal laws.

Board of directors action by unanimous, written consent

Currently, if an action is required or permitted to be authorized at a credit union board of directors meeting, the directors must either meet in person or via certain approved communications media to authorize the action. This bill permits an action to be authorized without a meeting, if that action is authorized by all directors and is evidenced by one or more written statements, signed by each director, describing and consenting to the action.

Other credit union changes

Under current law, a credit union is required to semiannually determine its gross income and transfer amounts to its reserve account, which is an account established by the credit union to cover losses. The National Credit Union Administration determines the required amount of the transfer. This bill repeals the requirement that a credit union determine its gross income and semiannually transfer amounts to its reserve account. Under this bill, a credit union must establish and maintain a reserve account and must transfer amounts to the reserve account as required by the National Credit Union Administration.

Under current law, the Office of Credit Unions must conduct an annual examination of each credit union, unless the Office of Credit Unions accepts an audit report of the condition of the credit union that satisfies certain conditions. This bill requires the Office of Credit Unions to conduct an examination of each credit union at least once every 18 months, and repeals the authority of the Office of Credit Unions to accept an audit report.

Current law specifically requires any officer or employee of a credit union who sells credit life insurance or credit accident or sickness insurance on behalf of the credit union to pay to the credit union all commissions received from the sale. This bill clarifies that an officer or employee of a credit union must pay to the credit union all commissions received from the sale of any authorized insurance product sold on behalf of the credit union.

This bill also creates a crime for knowingly falsifying certain credit union reports or statements. Any person who commits this crime may be fined not less than $1,000 nor more than $5,000 or imprisoned for not less than one year nor more than 15 years or both.

Under current law, credit unions are subject to the provisions of chs. 93 to 100 (agriculture, trade, and consumer protection statutes) that apply to businesses generally. Banks, savings banks, and savings and loan associations are specifically exempted from the definition of "business" that applies in the agriculture, trade, and consumer protection statutes. This bill specifically exempts credit unions from this definition.

Universal banks

Generally

Under current law, the Division of Savings Institutions regulates state savings banks and state savings and loan associations, and the Division of Banking regulates state banks. This bill allows a state savings bank, state savings and loan association, or state bank (financial institution) to apply to the Division of Banking to become certified as a universal bank. If certified as a universal bank, a financial institution may exercise certain powers, in addition to those that are granted under the statutes under which the financial institution is organized. A universal bank retains its status as a savings and loan association, savings bank, or state bank and remains subject to existing regulatory and supervisory requirements, except to the extent that these requirements are inconsistent with the requirements applicable to universal banks. Universal banks are subject to the following provisions:

Certification of universal banks

A financial institution may apply to become certified as a universal bank by filing a written application with the Division of Banking. In order to be certified as a universal bank, the financial institution must meet all of the following requirements: 1) the financial institution must have been in existence and continuous operation for at least three years; 2) the financial institution must be "well-capitalized," as defined in federal law; 3) the financial institution must not exhibit moderately severe or unsatisfactory financial, managerial, operational, and compliance weaknesses; 4) the financial institution must not have been the subject of any enforcement action within the 12 months preceding the application; 5) the most recent evaluation of the financial institution under the federal Community Reinvestment Act must rate the financial institution as "outstanding" or "satisfactory" at helping to meet the credit needs of its entire community; and 6) the most recent report received by the financial institution evaluating the financial institution's compliance with certain federal laws relating to customer privacy must indicate that the financial institution is in substantial compliance with these federal laws. If these requirements are met, the Division of Banking must certify the financial institution as a universal bank. If a universal bank fails to maintain compliance with these requirements, the Division of Banking must limit the universal bank's exercise of universal banking powers. In addition, a universal bank may be decertified if it fails to maintain compliance with these requirements. With the approval of the Division of Banking, a universal bank may also elect to terminate its certification. As a precondition to elective decertification, the universal bank must terminate the exercise of all universal banking powers.

Organization and regulation of universal banks

A financial institution that is certified as a universal bank remains subject to all of the requirements and duties, and remains able to exercise all of the powers, that applied to the financial institution prior to its certification as a universal bank, except to the extent that such requirements, duties, and powers are inconsistent with the requirements, powers, and duties of universal banks. After a financial institution becomes certified as a universal bank, the Division of Banking is responsible for establishing the capital requirements applicable to the universal bank.

A universal bank continues to operate under the articles of incorporation and bylaws that were in effect prior to its certification as a universal bank, and these articles and bylaws may be amended in accordance with the law governing savings banks, savings and loan associations, or state banks, whichever is applicable to the financial institution. Current law generally prohibits a savings bank or a savings and loan association from using the term "bank" in its corporate name without also using the term "savings." Notwithstanding these provisions, the bill allows any financial institution that becomes certified as a universal bank to use the term "bank" in its corporate name without using the word "savings," subject to certain limitations relating to the distinguishability of the name.

Under current law, the Division of Banking regulates mergers and acquisitions of state banks, and the Division of Savings Institutions regulates mergers and acquisitions of savings banks and savings and loan associations. Under the bill, the Division of Banking assumes responsibility for reviewing and approving the mergers and acquisitions of all financial institutions that have been certified as universal banks, including savings banks and savings and loan associations. The standards to be used by the Division of Banking in reviewing a merger or acquisition of a universal bank generally track the standards currently applicable to the various financial institutions that may become certified as universal banks, except that universal banks may generally acquire or merge with any type of financial institution.

Powers of universal banks

The bill expands the powers of a financial institution that becomes certified as a universal bank. Currently, savings banks, savings and loan associations, and banks have differing powers under both state and federal law. Under the bill, a universal bank is authorized to engage in any activity authorized for any savings bank, savings and loan association, or state bank beginning on the first day of the third month beginning after the bill's publication. In addition, the bill specifically permits a universal bank to exercise all of the following powers:

1) Federal powers: Under the bill, a universal bank may exercise all powers that may be exercised directly by a national bank, a federally chartered savings and loan association, or a federally chartered savings bank. In addition, a universal bank may exercise through a subsidiary all powers that a subsidiary of these federal financial institutions may exercise. The Division of Banking must approve the initial exercise of a federal power by a universal bank under these provisions, but thereafter any universal bank generally may exercise that power. The Division of Banking may, however, require a universal bank to exercise a federal power through a subsidiary of the universal bank to limit the risk exposure of the universal bank.

2) Lending powers: Under current law, the lending powers of a financial institution depend on whether the financial institution is organized as a savings bank, savings and loan association, or state bank. The lending powers granted to universal banks under the bill are most similar to the lending powers granted to state banks under current law. Current law imposes some restrictions on the types and purposes of loans that savings banks and savings and loan associations may make. Under the bill, a universal bank may make, sell, purchase, arrange, participate in, invest in, or otherwise deal in loans or extensions of credit for any purpose. Like state banks, the limitations imposed on a universal bank's lending generally focus on the total amount of liabilities of any one lender at any one time. Although the limit varies depending on the lender and on the type of security pledged for the loan, the general rule is that the total liabilities of any one person to a universal bank may not exceed 20% of the universal bank's capital.

The lending limits for universal banks are generally the same as for state banks, except that universal banks are granted additional authority to lend, through the universal bank or its subsidiaries, an aggregate amount to all borrowers from the universal bank and all of its subsidiaries not to exceed 20% of the universal bank's capital. Generally, however, the loans to any one borrower made under any lending authority of the universal bank may not exceed 20% of the universal bank's capital. Loans made under this additional authority are not subject to rules regarding bad debts or classification of losses for a period of two years from the date of the loan. This additional authority may be suspended by the Division of Banking. Among the factors that may be considered by the Division of Banking in suspending this authority are a universal bank's capital adequacy, management, earnings, liquidity, and sensitivity to market risk. The bill prohibits a universal bank, in determining whether to make a loan or extension of credit, from considering any health information obtained from the records of an affiliate of the universal bank that is engaged in the business of insurance, unless the person to whom the health information relates consents.

3) Investment powers: A universal bank may purchase, sell, underwrite, and hold investment securities, consistent with safe and sound banking practices, in an amount up to 100% of the universal bank's capital. Investment securities include commercial paper; banker's acceptances; marketable securities in the form of bonds, notes, and debentures; and similar instruments. A universal bank may not invest greater than 20% of its capital in any one obligor or issuer. A universal bank may purchase, sell, underwrite, and hold equity securities, consistent with safe and sound banking practices, in an amount up to 20% of the universal bank's capital, unless the Division of Banking approves a greater percentage. A universal bank may also invest in certain housing properties and projects, except that the total investment in any one project may not exceed 15% of the universal bank's capital and except that the total amount invested in housing properties and projects may not exceed 50% of the universal bank's capital. A universal bank may take equity positions in profit-participation projects, including projects funded through loans from the universal bank, in an aggregate amount not to exceed 20% of the universal bank's capital. The Division of Banking may suspend a universal bank's authority to invest in profit-participation projects.

The bill permits a universal bank to invest without limitation in certain types of securities, including: 1) obligations of certain federal agencies or federally chartered corporations and associations; 2) deposit accounts or insured obligations of insured financial institutions; 3) securities of certain business development corporations and urban renewal investment corporations; 4) certain securities of bank insurance companies; 5) securities of certain corporations operating automated teller machines; 6) securities of service corporation subsidiaries of the universal bank; 7) advances of federal funds; 8) risk management instruments, including financial futures transactions, financial operations transactions, and forward commitments, but solely for the purpose of reducing, hedging, or otherwise managing its interest rate risk exposure; 9) securities of subsidiaries exercising certain fiduciary powers; and 10) securities of certain agricultural credit corporations. A universal bank may invest in other financial institutions. The investment powers of a universal bank may be exercised directly or indirectly through a subsidiary, unless the Division of Banking requires the investment to be made through a subsidiary to limit the risk exposure of the universal bank. The bill contains specific provisions governing the purchase by a universal bank of its own stock and of stock in banks and bank holding companies.

4) Deposit and trust powers: The bill permits a universal bank to establish the types and terms of deposits that the universal bank will solicit and accept. A universal bank may pledge its assets as security for deposits. With the approval of the Division of Banking, a universal bank may securitize its assets for sale to the public, subject to any procedures established by the Division of Banking. A universal bank may exercise safe deposit powers and have a lien for its safekeeping charges on the contents of property accepted for safekeeping. If these charges remain unpaid for two years or if property accepted for safekeeping is not called for within two years, a universal bank may sell the property at public auction. The bill authorizes a universal bank to exercise the same trust powers that trust company banks are permitted to exercise under current law.

5) Incidental and related powers: Under the bill, a universal bank may exercise all powers necessary or convenient to effect the purposes for which the universal bank is organized or to further the businesses in which the universal bank is lawfully engaged. Current law does not have a similar provision.

In addition to these necessary or convenient powers, the bill allows a universal bank to engage in activities that are reasonably related or incident to the purposes of the universal bank. With certain exceptions, a universal bank may engage in these activities either directly or indirectly through a subsidiary. Under the bill, any activity permitted under the federal Bank Holding Act satisfies the reasonably related or incidental criterion. The bill also contains a list of specific activities that meet the reasonably related or incidental criterion. The listed activities include: 1) business and professional services; 2) data processing; 3) courier and messenger services; 4) credit-related activities; 5) consumer services; 6) real estate-related services; 7) insurance services, other than insurance underwriting; 8) securities brokerage; 9) investment advice; 10) securities and bond underwriting; 11) mutual fund activities; 12) financial consulting; 13) tax planning and preparation; 14) community development and charitable activities; and 15) debt cancellation contracts.

A universal bank may also engage in activities that the Division of Banking determines are reasonably related or incidental to these listed activities. In addition, the Division of Banking may determine that other activities are reasonably related or incidental activities.

A universal bank must give 60 days' prior written notice to the Division of Banking of the universal bank's intention to exercise a necessary or convenient power or to engage in a reasonably related or incidental activity. The Division of Banking may deny a universal bank the authority to exercise a necessary or convenient power or to engage in a reasonably related or incidental activity, other than an activity that is contained in the specific list of reasonably related or incidental activities, if the Division of Banking determines that the activity is not a reasonably related or incidental activity, that the financial institution is not well-capitalized, that the financial institution is the subject of an enforcement action, or that the financial institution does not have sufficient management expertise for the activity. The Division of Banking may also require a universal bank to engage in certain of these activities through a subsidiary, with appropriate safeguards to limit the risk exposure of the universal bank. Amounts invested in a single subsidiary that engages in these activities may not exceed 20% of the universal bank's capital, unless a higher percentage is approved by the Division of Banking.