Illinois Bankers Association - Legislative Issues

IBA Announces 2008 State Legislative Agenda . . . and Your Grassroots Efforts Will Be Critical!

As we enter the second year of the 95th Illinois General Assembly, the IBA Government Relations Committee and the IBA Board of Directors have set an ambitious legislative agenda for several initiatives that will benefit the entire banking industry. We plan to initiate legislation addressing:

state and local taxation of banks and savings institutions
security breaches of credit and debit card data retained by retail merchants
clarification of a bank’s liability for garnishments, deductions and citations to discover assets
notifications to lienholders of towed motor vehicles
authorization for “domestic asset protection trusts” held by Illinois corporate fiduciaries
a joint industry effort to lower state supervisory fees

We also have established several working task forces to study future legislative efforts: (1) in conjunction with the State Treasurer, to consider “banking development districts” that would create tax and other incentives to locate branches in “underserved” markets, (2) in conjunction with the State Treasurer, to examine less costly alternatives for collateralizing public deposits, and (3) in conjunction with the Illinois Attorney General, to consider new ways to more effectively combat identity theft and other forms of financial fraud.

Meanwhile, we expect to face an ongoing state budget deficit, calls by the Governor for more tax and fee increases, a raft of proposals spurred on by the growing number of mortgage foreclosures, and an ever-expanding list of “hostile” bills aimed at the banking industry under the guise of “consumer protection.” All of the above will pose difficult challenges for our legislative agenda and for the entire financial services industry.

To overcome these challenges successfully, we are going to need the active involvement and grassroots help of all Illinois bankers! So please stand ready to respond to our Calls to Action when we need you!!!

Below are the highlights of our 2008 state legislative agenda. Position papers for these issues will soon be available soon.

ILLINOIS TAXATION. The IBA expects to see another round of tax proposals aimed at financial institutions in 2008. Illinois’ fiscal condition has not improved, a backlog of outstanding bills continues to mount, and a state capital funding plan has yet to be enacted. Meanwhile, the Governor continues to promise that he will not raise income taxes and continues to point to closing “business tax loopholes” as a means for generating new revenue. The IBA believes that our banking industry pays more than its fair share of taxes every year, and we will aggressively oppose any new tax proposals that specifically target the banking industry.

At the same time, the IBA is pursuing legislation that would prevent the Illinois Department of Revenue from retroactively taxing captive Real Estate Investment Trusts (REITs) owned by financial organizations for taxable years prior to 2009. As you know, Senate Bill 1544, which passed last year and was enacted into law as Public Act 95-233, specifically provides that dividends issued in connection with captive REITs owned by financial organizations will become taxable starting with the 2009 tax year. Unfortunately, the Department of Revenue has indicated that it intends to disregard last year’s legislation by invoking another section of the Income Tax Code – Section 404 – to impose taxes retroactively on many of these REITs, dating back seven to eight years in some cases. That was not the result intended by the General Assembly last year in Public Act 95-233, and further clarification of the law now appears to be necessary.

LIMITED PRE-EMPTION OF HOME RULE POWERS FOR THE TAXATION OF BANKS AND SAVINGS INSTITUTIONS. In the past few years, a growing number of municipalities have attempted to limit the growth of bank branches, principally because, unlike retail merchants, banks do not generate local sales taxes. Some municipalities have done this by enacting zoning ordinances. Recently, one municipality proposed an ordinance that would assess a $500 per month tax on each branch of a bank located within its borders. There are over 190 “home rule” municipalities in this state, and if more of them were to begin imposing similar taxes on the banking industry – which maintains more than 5,000 branches in Illinois – the result would be an economic disaster. It also would create yet another unfair competitive advantage for credit unions, which compete directly with banks for deposits and loans in their communities but are exempt from local taxation under Illinois law.

The IBA is proposing legislation that would eliminate this taxing authority at the local level. The IBA is not proposing to limit home rule powers in any other respect. In other words, the legislation would not remove home rule powers with respect to zoning, anti-predatory lending ordinances, or other matters traditionally reserved for units of home rule government with respect to the regulation of businesses generally and banking specifically. In addition, the legislation would not affect a bank’s responsibility to pay local property taxes. The IBA’s proposal addresses only the piecemeal taxation of banks at the local level, which would adversely affect not only the Illinois banking industry itself, but ultimately the local communities imposing such taxes. The IBA proposal is modeled after similar (but far broader) protections already afforded to the insurance industry under Illinois law.

RETAIL DATA SECURITY BREACHES. The IBA is initiating legislation to limit the types of personal information that can be captured by retail merchants in credit and debit card transactions, and also to limit the length of time that this information may be retained by the merchants. Retention of such information after a short period of time typically serves no purpose other than to “data mine” the information for marketing purposes, yet its unfettered retention creates vulnerabilities in the payment system and needless risks for cardholders. Limiting the retention of card information by merchants would effectively limit the risks and costs incurred by cardholders and card-issuing banks when data breaches do occur and threaten to compromise the financial information of customers.

GARNISHMENTS, DEDUCTIONS AND CITATIONS. The IBA is proposing to amend the Illinois Code of Civil Procedure to clarify that financial institutions are liable for their customers’ wage garnishments, deductions and citations to discover assets only to the extent of the amount of deposits that the customer has with the financial institution. Under current law, depository institutions frequently must undertake expensive efforts to vacate and amend court orders calling for them to provide funds in excess of the funds held in the accounts of a subject of the garnishment, deduction or citation. Several states, including Michigan, Ohio and Wisconsin, have passed similar laws protecting depository institutions from these unintended consequences.

NOTIFICATION TO LIENHOLDERS OF TOWED VEHICLES. The IBA is pursuing legislation that would require Illinois towing companies to notify the “lienholder of record” at the same time that they notify a vehicle owner of the towing of the vehicle. Today, towing companies are required by Illinois law to notify vehicle owners within a prescribed number of days after a vehicle has been towed, but there is no requirement to notify the lienholder of the towing. When the owner of a towed vehicle makes no attempt to retrieve the vehicle, the potential for damage to the vehicle – whether by weather, vandalism or negligence of the towing company – increases significantly, as do the costs of storage fees charged by the towing company. This results in devalued collateral and unnecessary costs for the lienholder, all without the lienholder’s knowledge or opportunity to intercede. It is only fair that towing companies notify lienholders, and typically, they already have the information necessary for this notice when they obtain the records from the Secretary of State needed to notify vehicle owners.

DOMESTIC ASSET PROTECTION TRUSTS. The IBA is seeking legislation to enable Illinois corporate fiduciaries to offer “domestic asset protection trusts” to their customers. These trusts – already permitted in several states, including Alaska, Delaware, Nevada, Rhode Island, South Dakota and Utah – have become increasingly popular estate-planning tools throughout the country. However, they can only be established in the states that specifically authorize them, and the laws of those states require these trusts to be administered by corporate fiduciaries located in those states. Consequently, the vast majority of Illinois banks with trust powers cannot offer these trusts to their customers.

Domestic asset protection trusts grant certain general creditor protections to the settlor (creator) of a trust, even though the settlor also is a beneficiary of the trust. This authority overturns a “common law” principle, last codified in 1959 in the Second Restatement of Trusts, which denies “spendthrift protection” to a person who creates a trust for his or her own benefit. Even with these new trusts, however, there are exceptions for matters involving public policy, including exceptions for fraudulent transfers, claims for spousal support, alimony and child support, and claims by creditors that rely on express writings making the assets in the trust available to secure a debt, among other exceptions.

Approximately 300 banks with trust powers in Illinois would benefit by adding these trusts to their menu of services, which would help Illinois corporate fiduciaries attract and retain this business instead of losing it to corporate fiduciaries located in other states. Allowing these types of trusts to be created in Illinois also would encourage out-of-state corporate fiduciaries to locate offices here, too, creating more jobs in our state.

DEDICATED FUNDS LEGISLATION. The IBA, together with the Community Bankers Association, the Illinois League of Financial Institutions and the Illinois Credit Union League, has been involved in negotiations with the Governor’s office concerning a possible settlement of our lawsuit regarding the Administration’s attempts to “sweep” our dedicated funds into the state’s General Revenue Fund. As you know, our dedicated funds – consisting of the supervisory fees paid by state-chartered banks, savings institutions and credit unions – currently are protected by a court injunction. As of this writing, we believe we may be close to achieving a settlement with the Administration, which will require, among other things, legislation that would “roll back” the 2004 fee increase by approximately 50% and would provide state-chartered banks and savings institutions with refunds for the fees they paid in excess of the “rolled back” amount since that fee increase.

IBA BANKING DEVELOPMENT DISTRICT TASK FORCE. The IBA has created a “Banking Development District Task Force” to work with State Treasurer Alexi Giannoulias and the Illinois Department of Financial and Professional Regulation on legislation intended to create tax and other incentives that could encourage banks to locate branches in areas designated to have a “demonstrated need for banking services.” Our goal is to find ways that our industry can help the “unbanked” find traditional alternatives for financial services without having to resort to payday loan companies or less optimal sources for small loans, mortgages, check cashing and other financial services.

IBA PUBLIC FUNDS TASK FORCE. The IBA has been the industry leader in obtaining reforms to the state’s public funds laws and practices. Our accomplishments in recent years include legislation that harmonized the state laws addressing deposits and investments of public funds, and a 2005 “Collateral Reduction Agreement” with the State Treasurer’s office. Our ongoing efforts include encouraging the Treasurer to resume accepting surety bonds as collateral and to accept Illinois Finance Authority loan guarantees as collateral.

In the next few months, the IBA Public Funds Task Force will be working with the State Treasurer’s office to explore the development of a statewide “insurance fund” that can be used by participating community banks – on a voluntary basis – as a means of securing public deposits in lieu of collateral. Meanwhile, the task force will continue its ongoing efforts to find more ways for the private sector to better compete with the state’s “Illinois Funds” program, and the IBA will continue to offer assistance to local treasurers to help them better understand their legal obligations and discretionary powers under Illinois law.

IBA FINANCIAL FRAUD TASK FORCE. The IBA has been the industry leader in finding new ways to crack down on bank fraud and prevent identity theft. Yet problems in these areas continue to grow. According to a recent survey conducted by the American Bankers Association, check fraud has more than doubled nationwide in the past three years, growing from $5.5 billion in 2003 to an estimated $12.2 billion in 2006. Losses related to identity theft amounted to nearly $1 billion nationwide in 2006.

In the next few weeks, the IBA plans to conduct a survey of Illinois financial institutions to obtain our own fraud loss estimates on a statewide basis. Over the next year, the IBA’s Financial Fraud Task Force, working together with the Illinois Attorney General’s office, will initiate discussions with law enforcement agencies, consumer groups and other financial trade associations throughout the state in an effort to develop legislation that furthers the deterrence and prosecution of financial fraud. Among other things, the IBA intends to seek increased authority and funding for the Illinois Attorney General’s Financial Fraud Unit in order to provide that office with greater resources for investigations and prosecution of financial fraud. In addition, the IBA will seek to implement a statewide educational program, in conjunction with other groups, to provide Illinois residents ready access to meaningful financial education opportunities.