BILL NUMBER: SB 1558 CHAPTERED 07/14/04 CHAPTER 143 FILED WITH SECRETARY OF STATE JULY 14, 2004 APPROVED BY GOVERNOR JULY 13, 2004 PASSED THE SENATE JULY 1, 2004 PASSED THE ASSEMBLY JUNE 24, 2004 AMENDED IN ASSEMBLY JUNE 17, 2004 AMENDED IN ASSEMBLY JUNE 8, 2004 INTRODUCED BY Senator McPherson FEBRUARY 19, 2004 An act to amend Sections 14010, 14021, 14025, 14028, 14030, 14030.2, 14036, 14037, 14037.5, 14037.6, 14038, 14062, 14064, 14070, 14075, 14076, 14085, and 14086 of the Corporations Code, relating to small business financial development corporations, and declaring the urgency thereof, to take effect immediately. LEGISLATIVE COUNSEL'S DIGEST SB 1558, McPherson. Small business financial development corporations. Existing law, the California Small Business Financial Development Corporation Law, establishes small business financial development corporations and provides for their regulation by the Executive Director of the California Office of Small Business Development in the Trade and Commerce Agency. Chapter 229 of the Statutes of 2003 abolished the Trade and Commerce Agency and provided for the Business, Transportation and Housing Agency to assume various duties of the Trade and Commerce Agency, including duties of the California Office of Small Business Development with regard to the Small Business Loan Guarantee Program. This bill would make various changes to the California Small Business Financial Development Corporation Law to reflect the duties assumed by the Business, Transportation and Housing Agency. The bill would make other related changes. This bill would declare that it is to take effect immediately as an urgency statute. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 14010 of the Corporations Code is amended to read: 14010. Unless the context otherwise requires, the definitions in this section govern the construction of this part. (a) "Corporation" or "the corporation" means any nonprofit California small business financial development corporation created pursuant to this part. (b) "Financial institution" means banking organizations including national banks and trust companies authorized to conduct business in California and state-chartered commercial banks, trust companies, and savings and loan associations. (c) "Financial company" means banking organizations including national banks and trust companies, savings and loan associations, state insurance companies, mutual insurance companies, and other banking, lending, retirement, and insurance organizations. (d) "Expansion Fund" means the California Small Business Expansion Fund. (e) Unless otherwise defined by the director by regulation, "small business loan" means a loan to a business defined as an eligible small business as set forth in Section 121.3-10 of Part 121 of Chapter 1 of Title 13 of the Code of Federal Regulations, including those businesses organized for agricultural purposes that create or retain employment as a result of the loan. From time to time, the director shall provide guidelines as to the preferred ratio of jobs created or retained to total funds borrowed for guidance to the corporations. (f) "Employment incentive loan" means a loan to a qualified business, as defined in subdivision (h) of Section 7082 of the Government Code, or to a business located within an enterprise zone, as defined in subdivision (b) of Section 7072 of the Government Code. (g) "Loan committee" means a committee appointed by the board of directors of a corporation to determine the course of action on a loan application pursuant to Section 14060. (h) "Board of directors" means the board of directors of the corporation. (i) "Board" means the California Small Business Board. (j) "Agency" means the Business, Transportation and Housing Agency. (k) "Director" means the person designated to this title by the secretary. (l) "Secretary" means the Secretary of Business, Transportation and Housing Agency. (m) "Trust fund" means the money from the expansion fund that is held in trust by a financial institution or a financial company. A trust fund is not a deposit of state funds and is not subject to the requirements of Section 16506 of the Government Code. (n) "Trust fund account" means an account within the trust fund that is allocated to a particular small business financial development corporation for the purpose of paying loan defaults and claims on bond guarantees for a specific small business financial development corporation. (o) "Trustee" is the lending institution or financial company selected by the office to hold and invest the trust fund. The agreement between the agency and the trustee shall not be construed to be a deposit of state funds. SEC. 2. Section 14021 of the Corporations Code is amended to read: 14021. The board consists of the following membership: (a) The Secretary of Business, Transportation and Housing or his or her designee. (b) Six members appointed by the Governor, one of whom will serve as chair of the board, who are actively involved in the California small business community. (c) Two persons actively involved in the business or agricultural communities, one appointed by the Speaker of the Assembly and one appointed by the Senate Committee on Rules. (d) Two Members of the Legislature or their designees, one appointed by the Speaker of the Assembly and one appointed by the Senate Committee on Rules, shall serve on the board insofar as it does not conflict with the duties of the legislators. SEC. 3. Section 14025 of the Corporations Code is amended to read: 14025. The director shall do all of the following: (a) Administer this part. (b) In accordance with program resources, stimulate the formation of corporations and the use of branch offices for the purposes of making this program accessible to all areas of the state. (c) Expeditiously approve or disapprove the articles of incorporation and any subsequent amendments to the articles of incorporation of a corporation. (d) Require each corporation to submit an annual written plan of operation. (e) Review reports from the Department of Financial Institutions and inform corporations as to what corrective action is required. (f) Examine, or cause to be examined, at any reasonable time, all books, records, and documents of every kind, and the physical properties of a corporation. The inspection shall include the right to make copies, extracts, and search records. SEC. 4. Section 14028 of the Corporations Code is amended to read: 14028. (a) Upon a finding by the director that irreparable harm may occur if guarantee authority is not temporarily withdrawn from a corporation, the director may temporarily withdraw guarantee authority from a corporation. The notice of temporary withdrawal sent to the corporation shall specify the reasons for the action. As used in this section, "guarantee authority" means the authority to make or guarantee any loan that encumbers funds in a trust fund account or the expansion fund. The director shall make one of the determinations specified in subdivision (c) within 30 days of the effective date of the temporary withdrawal unless the corporation and the director mutually agree to an extension. The corporation shall have the opportunity to submit written material to the director addressing the items stated in the temporary withdrawal notice. If the director does not make any determinations within 30 days, the temporary withdrawal shall be negated. The corporation's yearly contract shall remain in effect during the period of temporary withdrawal, and the corporation shall continue to receive reimbursement of necessary operating expenses. (b) Failure of a corporation to substantially comply with the following may result in the suspension of a corporation: (1) Regulations implementing the Small Business Development Corporation Law. (2) The plan of operation specified in subdivision (d) of Section 14025. (3) Fiscal and portfolio requirements, as contained in the fiscal and portfolio audits specified in Section 14027. (4) Milestones and scope of work as contained in the annual contract between the corporation and the agency. (c) Pursuant to subdivision (a) or (b), the director may do the following: (1) Terminate the temporary withdrawal. (2) Terminate the temporary withdrawal subject to the corporation' s adoption of a specified remedial action plan. (3) Temporarily withdraw, or continue to withdraw, guarantee authority until a specified time. This determination by the director requires a finding that the corporation has failed to comply with the Small Business Development Corporation Law. (4) Suspend the corporation. (5) Suspend the corporation, with suspension stayed until the corporation provides a remedial action plan to the director, and the director decides whether to repeal or implement the stayed suspension. The determinations contained in paragraphs (4) and (5) require a finding that irreparable harm will occur unless the corporation is suspended. (d) In considering a determination regarding the recommended suspension and possible remedial action plans, the director shall consider, along with other criteria as specified in subdivision (b), the corporation's history and past performance. (e) Upon suspension of a corporation, the director shall transfer all funds, whether encumbered or not, in the trust fund account of the suspended corporation into either the expansion fund or temporarily transfer the funds to another corporation. (f) If the director decides to take any action against the corporation pursuant to paragraphs (2) to (5), inclusive, of subdivision (c), the corporation shall be notified of the action 10 days before the effective date of the action. The corporation shall have the right to appeal the director's decision to the board within that 10-day period by sending notice to the director and to the chair of the board. Once the director receives notice that the action is being appealed, the director's action shall be stayed except for temporary withdrawal of guarantee authority. Upon receipt of the notice, the director shall schedule a properly noticed board meeting within 30 days. The board may elect to take any of the actions listed in subdivision (g). The temporary withdrawal of corporation guarantee authority shall remain in effect until the board issues its decision. (g) Pursuant to subdivision (f), the board may do any of the following: (1) Terminate the action taken by the director. (2) Modify the action taken by the director subject to the adoption by the corporation of a specified remedial action plan. (3) Affirm the action taken by the director. (h) Following suspension, the corporation may continue its existence as a nonprofit corporation pursuant to the Nonprofit Public Benefit Corporation Law (Part 2 (commencing with Section 5110) of Division 2) but shall no longer be registered with the Secretary of State as a small business development corporation. A corporation shall not enjoy any of the benefits of a small business development corporation following suspension. (i) The funds in the trust fund account of a corporation under temporary withdrawal shall be transferred to the expansion fund. Upon termination of the temporary withdrawal, unless the termination is caused by suspension, the funds of the corporation that were transferred to the expansion fund from the trust fund account shall be returned to the corporation's trust fund account, notwithstanding Section 14037. While the funds of a corporation's trust fund account reside in the expansion fund, use of the principal on the funds shall be governed by the implementing regulations specifying use of funds in the expansion fund. Interest on the funds moved from a corporation's trust fund account upon temporary withdrawal shall be limited to payment of the corporation's administrative expenses, as contained in the contract between the corporation and the agency. SEC. 5. Section 14030 of the Corporations Code is amended to read: 14030. There is hereby created in the State Treasury the California Small Business Expansion Fund. All or a portion of the funds in the expansion fund may be paid out, with the approval of the Department of Finance, to a lending institution or financial company that will act as trustee of the funds. The expansion fund and the trust fund shall be used to pay for defaulted loan guarantees issued pursuant to Article 9 (commencing with Section 14070), administrative costs of corporations, and those costs necessary to protect a real property interest in a defaulted loan or guarantee. The amount of guarantee liability outstanding at any one time shall not exceed four times the amount of funds on deposit in the expansion fund, including each of the trust fund accounts within the trust fund, unless the director has permitted a higher leverage ratio for an individual corporation pursuant to subdivision (b) of Section 14037. SEC. 6. Section 14030.2 of the Corporations Code is amended to read: 14030.2. (a) The director may establish accounts within the expansion fund for loan guarantees and surety bond guarantees, including loan loss reserves. Each account is a legally separate account, and shall not be used to satisfy loan or surety bond guarantees or other obligations of another corporation. The director shall recommend whether the expansion fund and trust fund accounts are to be leveraged, and if so, by how much. Upon the request of the corporation, the director's decision may be repealed or modified by a board resolution. (b) Annually, not later than January 1 of each year commencing January 1, 1996, the director shall prepare a report regarding the loss experience for the expansion fund for loan guarantees and surety bond guarantees for the preceding fiscal year. At a minimum, the report shall also include data regarding numbers of surety bond and loan guarantees awarded through the expansion fund, including ethnicity and gender data of participating contractors and other entities, and experience of surety insurer participants in the bond guarantee program. The director shall submit that report to the Secretary of Business, Transportation and Housing for transmission to the Governor and the Legislature. SEC. 7. Section 14036 of the Corporations Code is amended to read: 14036. The expansion fund and trust fund are created solely for the purpose of receiving state, federal, or local government money, and other public or private money to make loans, guarantees, and restricted investments pursuant to this article. Funds in the expansion fund may be allocated by the director, with the approval of the Department of Finance, to the trust fund accounts. SEC. 8. Section 14037 of the Corporations Code is amended to read: 14037. (a) The state shall not be liable or obligated in any way beyond the state money that is allocated and deposited in the trust fund account from state money and that is appropriated for these purposes. (b) The director may reallocate funds held within a corporation's trust fund account. (1) The director shall reallocate funds based on which corporation is most effectively using its guarantee funds. If funds are withdrawn from a less effective corporation as part of a reallocation, the office shall make that withdrawal only after giving consideration to that corporation's fiscal solvency, its ability to honor loan guarantee defaults, and its ability to maintain a viable presence within the region it serves. Reallocation of funds shall occur no more frequently than once per fiscal year. Any decision made by the director pursuant to this subdivision may be appealed to the board. The board has authority to repeal or modify any decision to reallocate funds. (2) The director may authorize a corporation to exceed the leverage ratio specified in Section 14030, subdivision (b) of Section 14070, and subdivision (a) of Section 14076 pending the annual reallocation of funds pursuant to this section. However, no corporation shall be permitted to exceed an outstanding guarantee liability of more than five times its portion of funds on deposit in the expansion fund. SEC. 9. Section 14037.5 of the Corporations Code is amended to read: 14037.5. The Director of Finance, with the approval of the Governor, may transfer moneys in the Special Fund for Economic Uncertainties to the Small Business Expansion Fund for use as authorized by the director, in an amount necessary to make loan guarantees pursuant to Chapter 1 (commencing with Section 14000) of Part 5 of Division 3 of Title 1 of the Corporations Code. SEC. 10. Section 14037.6 of the Corporations Code is amended to read: 14037.6. (a) (1) The Director of Finance, with the approval of the Governor, may transfer moneys in the Special Fund for Economic Uncertainties to the California Small Business Expansion Fund for use as authorized by the director, in an amount necessary to make loan guarantees pursuant to this chapter. However, no more than five million dollars ($5,000,000) may be transferred pursuant to this section in connection with any single declared disaster. (2) The Director of Finance, or his or her designee, within 30 days of any transfer made pursuant to this section, shall provide notice of the amount of the transfer to the Chair of the Joint Legislative Budget Committee and the chair of the committee in each house that considers appropriations. (b) The Governor should utilize this authority to prevent business insolvencies and loss of employment in an area affected by a state of emergency within the state and declared a disaster by the President of the United States or by the Administrator of the United States Small Business Administration, or by the United States Secretary of Agriculture or declared to be in a state of emergency by the Governor of California. (c) This section shall remain in effect until January 1, 2007, and as of that date is repealed, unless a later enacted statute, which is enacted before January 1, 2007, deletes or extends that date. SEC. 11. Section 14038 of the Corporations Code is amended to read: 14038. (a) The funds in the expansion fund shall be paid out to trust fund accounts by the Treasurer on warrants drawn by the Controller and requisitioned by the director, pursuant to the purposes of this chapter. The director may transfer funds allocated from the expansion fund to accounts, established solely to receive the funds, in lending institutions designated by the office to act as trustee. The lending institutions so designated shall be approved by the state for the receipt of state deposits. Interest earned on the trust fund accounts in lending institutions may be utilized by the corporations pursuant to the purposes of this chapter. (b) Except as specified in subdivision (c), the director shall allocate and transfer money to trust fund accounts based on performance-based criteria. The criteria shall include, but not be limited to, the following: (1) The default record of the corporation. (2) The number and amount of loans guaranteed by a corporation. (3) The number and amount of loans made by a corporation if state funds were used to make those loans. (4) The number and amount of surety bonds guaranteed by a corporation. Any decision made by the director pursuant to this subdivision may be appealed to the board within 15 days of notice of the proposed action. The board may repeal or modify any reallocation and transfer decisions made by the director. (c) The criteria specified in subdivision (b) shall not apply to a corporation that has been in existence for five years or less. The director shall develop regulations specifying the basis for transferring account funds to those corporations that have been in existence for five years or less. SEC. 12. Section 14062 of the Corporations Code is amended to read: 14062. Reasonable costs incurred by a corporation in the creation and maintenance of a central staff shall be paid to the corporation from state funds including a portion of the interest earned on the expansion fund and the corporation's trust fund account, if the corporation has a trust fund account, otherwise, on the expansion fund. SEC. 13. Section 14064 of the Corporations Code is amended to read: 14064. The use of state funds paid out to the trust fund and the return on those funds from investment pursuant to Section 14038 is conditional pursuant to Sections 14028 and 14039. Each corporation shall enter into a written signed agreement with the state at the beginning of each fiscal year. The agreement shall govern the activities in which the corporations engage, the investment of state funds and its return, and the budgeted administrative expenses the corporations may incur. In the event the state and corporation do not reach an agreement, or the state finds the corporation has violated the terms of an active agreement, the state may take action under Sections 14028 and 14039 or other action as appropriate. In the event the state and corporation do not reach agreement or the state finds the corporation has violated the terms of an active agreement, the corporation shall have no authority to withdraw or encumber the trust fund or the return of those funds by the issuance of guarantees, by incurring expenses against the fund and its return in any manner whatsoever, and the state may take action under Sections 14028 and 14039 or other action as appropriate. Any guarantee or other encumbrance made by the corporation in violation of this section shall be null and void, and neither the state nor the trust fund will be liable therefor. SEC. 14. Section 14070 of the Corporations Code is amended to read: 14070. (a) The corporate guarantee shall be backed by funds on deposit in the corporation's trust fund account. (b) Loan guarantees shall be secured by a reserve of at least 25 percent to be determined by the director, unless the director authorizes a higher leverage ratio for an individual corporation pursuant to subdivision (b) of Section 14037. (c) The expansion fund and trust fund accounts shall be used exclusively to guarantee obligations and pay the administrative costs of the corporations. A corporation located in a rural area may utilize the funds for direct lending to farmers as long as at least 90 percent of the corporate fund farm loans, calculated by dollar amount, and all expansion fund farm loans are guaranteed by the United States Department of Agriculture. The amount of funds available for direct farm lending shall be determined by the director. In its capacity as a direct lender, the corporation may sell in the secondary market the guaranteed portion of each loan so as to raise additional funds for direct lending. The agency shall issue regulations governing these direct loans, including the maximum amount of these loans. (d) In furtherance of the purposes of this part, up to one-half of the trust funds may be used to guarantee loans utilized to establish a Business and Industrial Development Corporation (BIDCO) under Division 15 (commencing with Section 33000) of the Financial Code. (e) To execute the direct loan programs established in this chapter, the director may loan trust funds to a corporation located in a rural area for the express purpose of lending those funds to an identified borrower. The loan authorized by the director to the corporation shall be on terms similar to the loan between the corporation and the borrower. The amount of the loan may be in excess of the amount of a loan to any individual farm borrower, but actual disbursements pursuant to the agency loan agreement shall be required to be supported by a loan agreement between the farm borrower and the corporation in an amount at least equal to the requested disbursement. The loan between the agency and the corporation shall be evidenced by a credit agreement. In the event that any loan between the corporation and borrower is not guaranteed by a governmental agency, the portion of the credit agreement attributable to that loan shall be secured by assignment of any note, executed in favor of the corporation by the borrower to the agency. The terms and conditions of the credit agreement shall be similar to the loan agreement between the corporation and the borrower, which shall be collateralized by the note between the corporation and the borrower. In the absence of fraud on the part of the corporation, the liability of the corporation to repay the loan to the agency is limited to the repayment received by the corporation from the borrower except in a case where the United States Department of Agriculture requires exposure by the corporation in rule or regulation. The corporation may use trust funds for loan repayment to the agency if the corporation has exhausted a loan loss reserve created for this purpose. Interest and principal received by the agency from the corporation shall be deposited into the same account from which the funds were originally borrowed. (f) Upon the approval of the director, a corporation shall be authorized to borrow trust funds from the agency for the purpose of relending those funds to small businesses. A corporation shall demonstrate to the director that it has the capacity to administer a direct loan program, and has procedures in place to limit the default rate for loans to startup businesses. Not more than 25 percent of any trust fund account shall be used for the direct lending established pursuant to this subdivision. A loan to a corporation shall not exceed the amount of funds likely to be lent to small businesses within three months following the loan to the corporation. The maximum loan amount to a small business is fifty thousand dollars ($50,000). In the absence of fraud on the part of the corporation, the repayment obligation pursuant to the loan to the corporation shall be limited to the amount of funds received by the corporation for the loan to the small business and any other funds received from the agency that are not disbursed. The corporation shall be authorized to charge a fee to the small business borrower, in an amount determined by the director pursuant to regulation. The program provided for in this subdivision shall be available in all geographic areas of the state. SEC. 15. Section 14075 of the Corporations Code is amended to read: 14075. (a) A corporation may, in an area declared to be in a state of emergency by the Governor, provide loan guarantees from funds allocated in Section 14037.5 to small businesses, small farms, nurseries, and agriculture-related enterprises that have suffered actual physical damage or significant economic injury as a result of the disaster. (b) The agency may adopt regulations to implement the loan guarantee program authorized by this section. The agency may adopt these regulations as emergency regulations in accordance with Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of the Government Code, and for purposes of that chapter, including Section 11349.6 of the Government Code, the adoption of the regulations shall be considered by the Office of Administrative Law to be necessary for the immediate preservation of the public peace, health and safety, and general welfare. Notwithstanding subdivision (e) of Section 11346.1 of the Government Code, the regulations shall be repealed within 180 days after their effective date unless the agency complies with Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of the Government Code, as provided in subdivision (e) of Section 11346.1 of the Government Code. (c) Allocations pursuant to subdivision (a) shall be deemed to be for extraordinary emergency or disaster response operations costs incurred by the agency. SEC. 16. Section 14076 of the Corporations Code is amended to read: 14076. (a) It is the intent of the Legislature that the corporations make maximal use of their statutory authority to guarantee loans and surety bonds, including the authority to secure loans with a minimum loan loss reserve of only 25 percent, unless the agency authorizes a higher leverage ratio for an individual corporation pursuant to subdivision (b) of Section 14037, so that the financing needs of small business may be met as fully as possible within the limits of corporations' loan loss reserves. The agency shall report annually to the Legislature on the financial status of the corporations and their portfolio of loans and surety bonds guaranteed. (b) Any corporation that serves an area declared to be in a state of emergency by the Governor or a disaster area by the President of the United States, the Administrator of the United States Small Business Administration, or the United States Secretary of Agriculture shall increase the portfolio of loan guarantees where the dollar amount of the loan is less than one hundred thousand dollars ($100,000), so that at least 15 percent of the dollar value of loans guaranteed by the corporation is for those loans. The corporation shall comply with this requirement within one year of the date the emergency or disaster is declared. Upon application of a corporation, the director may waive or modify the rule for the corporation if the corporation demonstrates that it made a good faith effort to comply and failed to locate lending institutions in the region that the corporation serves that are willing to make guaranteed loans in that amount. SEC. 17. Section 14085 of the Corporations Code is amended to read: 14085. It shall be unlawful for the director or any person who is an officer, director, or employee of a corporation, or who is a member of a loan committee, or who is an employee of the agency to: (a) Ask for, consent, or agree to receive, any commission, emolument, gratuity, money, property, or thing of value for his or her own use, benefit, or personal advantage, for procuring or endeavoring to procure for any person, partnership, joint venture, association, or corporation, any loan, guarantee, financial, or other assistance from any corporation. (b) Borrow money, property, or to benefit knowingly, directly or indirectly, from the use of the money, credit, or property of any corporation. (c) Make, maintain, or attempt to make or maintain, a deposit of the funds of a corporation with any other corporation or association on condition, or with the understanding, expressed or implied, that the corporation or association receiving the deposit shall pay any money or make a loan or advance, directly or indirectly, to any person, partnership, joint venture, association, or corporation, other than to a corporation formed under this part. SEC. 18. Section 14086 of the Corporations Code is amended to read: 14086. It shall be unlawful for the director or any person who is an officer or director of a corporation, or who is an employee of the agency, to purchase or receive, or to be otherwise interested in the purchase or receipt, directly or indirectly, of any asset of a corporation, without paying to the corporation the fair market value of the asset at the time of the transaction. SEC. 19. This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the Constitution and shall go into immediate effect. The facts constituting the necessity are: In order for the provisions of this act to reflect the current organization of state government as soon as possible, it is necessary that this act take effect immediately.