SACRAMENTO / BRADLEY INMAN : State’s Thrift Industry Has a Credibility Problem Among Lawmakers

This fall when Assemblyman Dave Elder (D-Long Beach) received a $1,000 contribution from the California League of Savings Institutions he sent it back to the trade association’s executive office in Los Angeles.

“They should be using their limited resources for something other than political contributions,” said Elder. “Quite frankly, I’m not sure there’s any real reason for having (savings and loans) around anymore, so it would be kind of silly for me to be taking their money.”

Not all state lawmakers have so much disdain for the California thrift lobby, but there’s no question that the industry’s credibility in Sacramento has suffered.

The message from the legislature to the industry is, “you’re not our friends anymore,” said Richard Damm, adviser to Sen. Dan McCorquodale (D-San Jose), who introduced the bill to wipe out state-chartered thrifts altogether.

The bill would also have done away with the savings and loan commissioner, who is responsible for regulating California thrifts. Unable to obtain passage this year, McCorquodale plans to reintroduce the same bill next year, according to Damm.

Staff turnover is another sign that this once-powerful banking group is suffering. Lead lobbyist David Milton resigned last week to take a job with a smaller and lower-profile trade group that represents mobile home park owners. One reason the 11-year league veteran said he decided to leave was that he “wasn’t sure how long the (thrift) industry would be around,” said Milton.

This year alone the league saw its membership drop by 15%, according to league Senior Vice President Kathy Wedeking, who said the falloff in members parallels the number of institutions going out of business.

Faced with a decline in revenues, the league has cut at least one staff position in its Sacramento office and has curtailed political contributions to state lawmakers by more than 40%, according to league Vice President John Hartnett.

And, “we gave virtually nothing to candidates for (U.S.) Congress,” said Hartnett. “We are taking a low-key, wait-and-see approach,” he said.

With its political apparatus in limbo, the league faces a horde of legislative measures that are hostile to the industry.

“Today, there’s a very healthy suspicion of positions taken by savings and loans because everything they did in the past was so self-promoting,” said Damm.

In response to this hostile political environment, the league has moderated its positions on some controversial issues.

For example, it supported passage of a bill that cracks down on bank fraud. Introduced by Sen. Rose Ann Vuich (D-Dinuba), SB 2496 prohibits former thrift executives who have been convicted of financial-related crimes from entering the business again. It also requires them to pay restitution.

The measure, which goes into effect Jan. 1, also gives banks and thrifts access to criminal records of convicted executives.

“Five years ago, thrift lobbyists would have opposed this bill claiming that there’s no fraud in the industry,” said Terry Miller, chief consultant to the Senate Committee on Banking and Commerce. “Now, these same institutions are coming out in favor of the reforms.”

The league also changed its position on direct-investment rules, which give savings and loans the power to invest in risky real estate developments and junk bonds. In 1982, the league championed a bill that removed legal barriers to this type of investment. The expanded powers got many institutions into financial problems and helped push up the price of the S&L; bailout.

This year, however, the league supported a bill that reinstated restrictions on direct investments. Beginning in January, state-chartered thrifts can only have 10% of their assets in real estate development and they cannot invest in junk bonds. Introduced by Assemblyman Pat Johnston (D-Stockton), AB 3643 brought state rules in line with federal laws that also curtail direct investments.

The league hasn’t been as strident about defending direct investment as people might think, according to Milton. He offers a little bit of revisionist history on the controversial 1982 legislation that permitted direct investments. The 8-year-old law has been singled out in several new books as a primary cause of the thrift debacle.

At the time, it was not a controversial and heavy-handed lobbying push by the industry, according to Milton. “The Republican Caucus came to us with a bill and we got behind it,” he said.

He also pointed out that there was no opposition to the measure until the end of the legislative process when Bank of America objected to allowing thrifts to make automobile loans. The bill was amended to prohibit car loans and it sailed through the Legislature. A legislative analysis at the time of the 1982 measure said permitting thrifts to make direct investments was necessary “to help the industry survive the present financial crisis.”

Getting Tough on Independent Workers

The State Employment Development Department and the Internal Revenue Service have joined forces to crack down on businesses who misclassify employees as independent contractors.

The two agencies recently sent out warning letters to 700,000 California businesses that hire independent contractors. The IRS and EDD are convinced that thousands of employers are bending independent contractor rules to get around paying taxes.

Employers can avoid social security taxes, unemployment insurance charges and state disability taxes when they designate workers as independent contractors instead of employees. But they must follow several strict rules to avoid going afoul of the IRS and EDD.

The letter warned that there would be stepped-up enforcement efforts. The IRS and EDD also recommended that employers submit a special tax form so that the IRS could determine whether the firm’s use of an independent contractor is appropriate.

“I was furious about the letter,” said consultant Carolyn Usinger, who has written extensively about independent contractor rules. “It was meant to be a warning letter, but (the information in the form) could actually be used to entrap employers into paying back taxes when they didn’t understand the law.”