Real Issue in Banks’ Case Is the Freedom to Hound Consumers

The American Banking Assn. and several of its industry cronies want you to know that they’ve taken the state of California to court on a matter of principle.

You might think that the principle at the core of the ABA’s lawsuit, which is now before the U.S. 9th Circuit Court of Appeals, is personal privacy. That’s because the state law the group is suing to overturn, the California Financial Information Privacy Act, sharply restricts the ability of financial institutions to deluge customers with marketing pitches by using their personal information without their consent.

But no. The ABA contends that the real issue is whether federal law trumps state law. “This issue is bigger than privacy,” ABA General Counsel Dawn Causey told me last week. “It’s the overarching issue.”

In other words, we’re supposed to believe that it’s merely secondary, if not irrelevant, that federal regulations are a lot more permissive than California’s new law.

The state law, which went into effect July 1, was designed to combat the way banks have been treating customer data as raw material for their marketing grinders. You know how it works: Open a checking account or take out a mortgage from a bank, and you’re inundated with calls from its telemarketers, who now know your phone number and financial particulars.

The law doesn’t prohibit the in-house information-sharing that makes cross-marketing possible; it merely mandates that before any unit of a bank can share a customer’s information with an affiliated unit in a different line of business, it must give the customer a chance to forbid the sharing -- to “opt out.”

The three main lines of business that can’t cross-market if the customer objects are banking, including mortgage lending; securities brokerage; and insurance. In the words of California Deputy Atty. Gen. Susan Henrichsen, who is supervising the state’s legal defense, the law is “the most comprehensive financial privacy law in the country.”

As such, in the eyes of bankers nationwide, it’s poison.

The industry maintains that the state law is preempted by the federal Fair Credit Reporting Act of 1970 and its later amendments, which allow banks to disseminate most customer information in-house and include language forbidding states to enact their own laws.

But California says those measures apply only to consumer credit reports. Most other information, the state contends, is covered by the 1999 federal Gramm-Leach-Bliley Act, which eliminated Depression-era rules prohibiting banks from combining with brokerages and insurance companies.

That act expressly invited states to enact their own tougher information-sharing regulations. In June, a federal judge in Sacramento agreed with the state, setting the stage for the appeals court fight.

It’s worth noting that the 9th Circuit is merely the latest battleground for the bankers. When California legislators first proposed tightening the rules on customer privacy, the industry tried to kill the idea the traditional way: by paving the streets of Sacramento with dollars and lobbying like crazy. Two versions of the bank privacy bill went down to defeat in committee as financial services companies showered committee members with campaign donations.

After these defeats fueled a campaign to place an even stricter measure on the March 2004 ballot -- this version would have prohibited information-sharing even among in-house affiliates -- the lobbyists backed off and allowed the relatively milder law, known as SB 1, to pass.

The ABA claims that having a single federal standard is the only logical way to function at a time when customers can order banking services by phone or online from many institutions across the country. “State lines are not relevant anymore,” Causey says. “Credit is nationwide. We need a consistent federal approach to credit, which allows you to shop to find the best products.”

The ABA’s appellate brief spins the issue somewhat differently. It says that affiliate information-sharing is necessary “to provide comprehensive, seamless services and products that customers expect, especially from commonly branded entities.”

To me, that sounds like the banks regard the “overarching issue” to be ease of marketing.

You’ll notice that the industry treats as self-evident the idea that the disparate services offered by any one institution are invariably comprehensive, seamless -- and a boon to the customer. I wonder how many people actually feel this way.

I’ve dumped several big banks over the years because they couldn’t keep my accounts straight, and I’m still looking for one that can consistently offer a package rate on checking, mortgage, stockbroking and insurance that beats what I can get by shopping around individually for each service.

That belies the industry’s insistence that laws such as SB 1 are obstacles to creating a paradise of integrated bank services. If the banks could really demonstrate that we’re all missing out on a great opportunity, then what would be the harm of requiring that they obtain our permission before they call us?

In truth, the industry’s opposition to SB 1 was never based on the forgone benefits to consumers, but on the burden imposed on banks. The so-called Financial Services Privacy Coalition, the industry front that waged the war against SB 1 in Sacramento, complained, among other things, that “any regulation of information exchange will impose costs on business.”

The group, of course, was silent about the costs imposed on consumers who prefer not to be harassed by bank salespeople. But as the ABA keeps telling us, that’s simply not the issue.

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Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at

latimes.com/hiltzik.