BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 981| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 981 Author: Hueso (D) Amended: As introduced Vote: 21 SENATE GOVERNMENTAL ORGANIZATION COMM. : 12-0, 6/14/11 AYES: Wright, Anderson, Calderon, Cannella, Corbett, De León, Evans, Hernandez, Padilla, Strickland, Wyland, Yee NO VOTE RECORDED: Berryhill SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 ASSEMBLY FLOOR : 75-0, 5/26/11 (Consent) - See last page for vote SUBJECT : California Pollution Control Financing Authority: Capital Access Loan Program SOURCE : State Treasurer Bill Lockyer DIGEST : This bill provides additional incentives within the California Capital Access Program to encourage lenders to lend to small businesses. Specifically, this bill (1) expands the financial institution definition to include insured depository institutions, insured credit unions, and community development financial institutions, (2) authorizes the California Pollution Control Financing Authority (CPCFA) to withdraw a portion of the interest or other income that has been credited to the loss reserve CONTINUED AB 981 Page 2 account, and (3) requires CPCFA to contribute an amount not less than 150 percent of the amount of the fees paid by the participating financial institution if the business is located within a severely affected community. ANALYSIS : Existing law: 1. Establishes the California Capital Access Program (CalCAP), which operates a small business loss reserve account program through participating financial institutions. 2. Requires CPCFA to establish a loss reserve account for each financial institution, specifies that the account is fee driven and that all moneys in the account are the exclusive property of CPCFA. 3. Requires CPCFA to transfer to the loss reserve account an amount equal to 150 percent of the amount of the fees paid by the participating financial institution, if the business is located in a severely affected community. 4. Requires CPCFA to report to the Governor and Legislature on the financial condition and programmatic results of CalCAP. This bill provides additional incentives within CalCAP to encourage lenders to lend to small businesses. Specifically, this bill: 1. Expands the financial institution definition to include insured depository institutions, insured credit unions, and community development financial institutions. 2. Authorizes CPCFA to withdraw a portion of the interest or other income that has been credited to the loss reserve account. 3. Requires CPCFA to contribute an amount not less than 150 percent of the amount of the fees paid by the participating financial institution if the business is located within a severely affected community. AB 981 Page 3 Background CalCAP has traditionally been funded using fee revenues charged by the California Pollution Control Financing Authority (CPCFA) to private companies that receive the benefit of tax-exempt bonds. These revenues were adequate to sustain the CalCAP program through 2006. However, increased use of the program in combination with declining revenues led to necessary statutory and regulatory changes to constrain the program. The changes allowed CalCAP to continue at a reduced level as compared to prior years. One of the statutory changes allowed CalCAP to reduce the amount contributed to loan loss reserves from the combined lender and borrower contribution to a minimum of just the lender contribution (SB1311, 2008). Prior to the change, the lender and borrower would contribute between 2% and 3.5% and CalCAP would contribute 4% to 7% of loan value. Under the statutory change, the CalCAP minimum was dropped to 2%. Health and Safety Code Section 44559.4(d) sets the CalCAP contribution at 150 percent of the lender contribution in severely affected communities. The CalCAP statute (Health and Safety Code Section 44559.1(d)) allows community development financial institutions to be lenders in the program. However, the state statute limits community development financial institutions to non-profit community development financial institutions. The federal Small Business Jobs Act of 2010 (HR 5297) provided funds for state level loan assistance programs such as CalCAP. HR 5297 uses a definition of small business lenders that does not distinguish between for-profit and non-profit community development financial institutions. By regulation, CalCAP is authorized to adapt to the federal definition when federal funds are used. CalCAP has done this. With the regulation change, for-profit community development financial institutions are now allowed to use federal funds flowing through CalCAP, but are not allowed to use state funds for loans that don't fit the federal criteria and they are not allowed to receive added benefits in severely affected communities. Examples of loans not fitting federal criteria are loans for non-profit organizations and assistance for the AB 981 Page 4 un-covered portion of Small Business Administration loans. Comments Purpose of the bill . According to the author's office, CalCAP recently received $84 million in funding from the federal Small Business Lending Act of 2010. This funding will greatly increase the lending ability of CalCAP and increase access to capital for California businesses. In fact, this funding is expected to help provide loan portfolio insurance for an additional $1.5 to $2 billion in loans. The author's office notes that the proposed changes in this bill will expand access to the benefits of CalCAP by aligning CalCAP's regulations to the federal capital access program. This alignment will allow CalCAP to maximize the use of the $84 million allocated to CalCAP by the United States Treasury. Additionally, the bill will help encourage lending in high unemployment areas and other distressed communities. CalCAP . CalCAP was established by legislation enacted in 1994. Unlike other small business loan assistance programs, CalCAP provides a form of portfolio insurance for participating lenders. CalCAP will contribute funds to a loan loss reserve account associated with a lender. The lender and borrower also contribute funds. These funds are pooled and can then be used to cover losses associated with any enrolled loan that is charged off. Loans to small businesses under the program can be used to finance the acquisition of land, construction or renovation of buildings, the purchase of equipment, other capital projects and working capital. There are established limitations on real estate loans and loan refinancing. The maximum loan amount is $2.5 million. The maximum premium lenders will pay is $100,000 (per borrower). Lenders set the terms and conditions of the loans and decide which loans to enroll into CalCAP. Loan fees, which are used to capitalize the loan reserve account, are fixed by the lender and range from 2% to 3.5% of the total loan amount. Loans can be short or long-term, have fixed or variable rates, be secured or unsecured, and bear any type AB 981 Page 5 of amortization schedule. In 2009, CalCAP enrolled 523 loans to California small business owners, 335 of which were made to microenterprises totaling $4.7million. CalCAP loans in made 2009 totaled $45.8 million. Related Legislation AB 1632 (Blumenfield), Chapter 731, Statutes of 2010, specifies that severely affected communities includes areas with unemployment above 110 percent of the statewide average for purposes of expending allocated funds. Also allows CalCAP to establish regulations necessary for participation in programs associated with funds from other sources. SB 1311 (Simitian), Chapter 401, Statutes of 2008, permits CalCAP to contribute an equal amount to an enrolled loan's loss reserve account as the lender, and to withdraw all accrued interest from enrolled loss reserve accounts to assist with administrative cost. SB 1119 (Alarcon), Chapter 756, Statutes of 1999, authorized CPCFA to issue revenue bonds to assist responsible parties pay their liability toward the clean-up of federal Superfund sites. It also made other changes to improve small businesses' access to capital under CPCFA's program. AB 253 (Bronshvag), Chapter 1163, Statutes of 1994, expanded the CalCAP program to all small businesses instead of only those industries with operations that adversely affected the environment. Also, it provided greater risk coverage for loans made to small businesses located in geographic areas affected by military base closures or aerospace downsizing. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No SUPPORT : (Verified 8/16/11) State Treasurer Bill Lockyer (source) AB 981 Page 6 ARGUMENTS IN SUPPORT : According to the State Treasurer, "AB 981 would do three things: it would allow CalCAP to provide added incentives for loans to businesses in high unemployment areas and other distressed communities, would allow CalCAP to make more lenders eligible to provide assistance-specifically, for-profit community development financial institutions, and would allow CalCAP to reduce the amount of interest it takes from loan loss reserve accounts to cover program costs." In addition, the State Treasurer states, "Over the next few years, CalCAP is projected to create over $1.3 billion in small business lending. AB 981 makes changes that will allow CalCAP to attract new lenders and better assist small businesses in our most distressed communities." ASSEMBLY FLOOR : 75-0, 5/26/11 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Carter, Chesbro, Conway, Cook, Dickinson, Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Grove, Hagman, Halderman, Hall, Harkey, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Knight, Lara, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza, Miller, Mitchell, Monning, Morrell, Nestande, Nielsen, Norby, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Silva, Skinner, Smyth, Solorio, Swanson, Torres, Valadao, Wagner, Wieckowski, Williams, Yamada, John A. Pérez NO VOTE RECORDED: Campos, Cedillo, Davis, Gorell, Jones PQ:mw 8/16/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** AB 981 Page 7