BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                AB 981
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        CONCURRENCE IN SENATE AMENDMENTS
        AB 981 (Hueso)
        As Amended  September 2, 2011
        Majority vote
         
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        |ASSEMBLY:  |75-0 |(May 26, 2011)  |SENATE: |37-0 |(September 7,  |
        |           |     |                |        |     |2011)          |
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         Original Committee Reference:    B. & F.  

         SUMMARY  :  Provides additional incentives within the California 
        Capital Access Program (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 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 account. 

        3)Requires the CPCFA to contribute an amount not less than 150% of 
          the amount of the fees paid by the participating financial 
          institution if the business is located within a severely affected 
          community.  

         The Senate amendments  make technical, conforming changes so the 
        measure does not conflict with other pending legislation affecting 
        the same code section. 

         EXISTING FEDERAL LAW  enacted the Small Business Jobs Act (H.R. 5297) 
        on September 27, 2010 which creates the Small Business Lending Fund 
        Program to direct the Secretary of the Treasury to make capital 
        investment in eligible institutions in order to increase the 
        availability of credit for small business and to amend the Internal 
        Revenue Code of 1986 to provide tax incentives for small business 
        job creation.  (15 U.S.C. Sec. 631 et seq.)  

        EXISTING STATE LAW  

        1)Defines "California Capital Access Fund" as a fund created within 
          the (CPCFA) to be used for the purposes of the program.  (Health 








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          and Safety Code, Section 44559.1)

        2)Defines a "community development financial institution" as person 
          (other than an individual) that has:

           a)   a primary mission of promoting community development; 

           b)   serves an investment area or targeted population; 

           c)   provides development services in conjunction with equity 
             investments or loans, directly or through a subsidiary or 
             affiliate; 

           d)   maintains, through representation on its governing board or 
             otherwise, accountability to residents of its investment area 
             or targeted population; and,

           e)   is not an agency or instrumentality of the United States, or 
             of any State or political subdivision of a State.  (Section 
             4701 of Title 12 of the United States Code)

        1)Defines an "insured depository institution" as any bank or savings 
          association with deposits of which are insured. (Section 1813 of 
          Title 12 of the United States Code)

        2)Defines an "insured credit union" as any credit union member 
          accounts of which are insured. (Section 1752 of Title 12 of the 
          United States Code)

        3)Defines "severely affected community" as any area classified as an 
          enterprise zone pursuant to the Enterprise Zone Act, any area, 
          designated by the executive director, and any other comparable 
          economically distressed geographic area so designated by the 
          executive director from time to time. (Health and Safety Code, 
          Section 44559.1)

        4)Requires the CPCFA to transfer to the loss reserve account an 
          amount equal to 150% of the amount of the fees paid by the 
          participating financial institution if the business is located 
          within a severely affected community.  (Healthy and Safe Code, 
          Section 44559.4)

         AS PASSED BY THE ASSEMBLY  , this bill was substantially similar to 
        the measure passed by the Senate. 









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         FISCAL EFFECT  :  According to the Assembly Appropriations Committee, 
        there is neither direct fiscal impact to the state nor any increased 
        liability for loans.

         COMMENTS  :  Why is this bill necessary?  Unlike other small business 
        loan assistance programs, CalCAP, enacted in 1994, 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.

        CalCAP has traditionally been funded using fee revenues charged by 
        the 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. 

        In late 2010, the legislature allocated funds to CalCAP through AB 
        1632 (Budget Committee), Chapter 731, Statutes of 2010.  These funds 
        allowed CalCAP to increase the contribution to loan loss reserve 
        accounts.  Prior to AB 1632, CalCAP was contributing an amount equal 
        to the lender contribution (between 2% and 3.5%).  After the funds 
        became available, CalCAP increased the CalCAP contribution to 3% to 
        5.25%.  AB 1632 also contained language to expand the definition of 
        severely affected communities to include high unemployment areas.  
        When CalCAP raised the contribution for all enrolled loans, it 
        became restricted in severely affected communities to 150% of the 
        lender contribution.  Thus, when CalCAP increased the contribution 
        to a minimum of 3%, it could not provide any further added incentive 
        in severely affected communities.  This bill would fix this anomaly 
        in the statute and allow CalCAP to provide an increased incentive to 
        encourage lending in high unemployment and other severely affected 
        areas.

        The U.S. Department of the Treasury certifies Community Development 
        Financial Institutions (CDFIs) and does not make a distinction 
        between for-profit and non-profit CDFIs.  There are for-profit CDFIs 
        in California that would like to participate in CalCAP and make more 
        loans to small businesses.  This bill would remove the requirement 
        that a CDFI be a non-profit CDFI to participate in CalCAP.  Other 
        for-profit entities such as banks participate in CalCAP.








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        Current statutory language implies that if CalCAP sweeps interest 
        from a loan loss reserve account, all interest must be swept.  When 
        this provision was placed in statute, it was not envisioned that 
        CalCAP would have a noticeably growing amount of funds in loan loss 
        reserve accounts.  CalCAP is the recipient of over $84 million from 
        U.S. Treasury to expand the program.  It is possible that these 
        funds will result in more interest in loan loss reserve accounts 
        than CalCAP needs.  CalCAP would like the flexibility to reduce the 
        amount of interest collected from accounts to an amount less than 
        100% of the interest earned.

        Background:  CalCAP encourages banks and other financial 
        institutions to make loans to small businesses that fall just 
        outside of their conventional underwriting standards.
        
        CalCAP is a form of loan portfolio insurance which may provide up to 
        100% coverage on certain loan defaults.  By participating in CalCAP, 
        lenders have available to them a proven financing mechanism to meet 
        the financing needs of California's small businesses.  CalCAP 
        insures loans made to small businesses to assist them in growing 
        their business.  Loans 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 
        limitations on real estate loans and loan refinancing.  CalCAP 
        prohibits financing certain projects.  Examples of ineligible uses 
        of loan proceeds include gambling facilities, bars and adult 
        entertainment businesses.

        The maximum loan amount is $5 million and the maximum enrolled 
        amount is $2.5 million. The maximum premium the Authority will pay 
        is $100,000 (per loan).  Lenders set all the terms and conditions of 
        the loans and decide which loans to enroll into CalCAP.  Lenders 
        determine the premium levels to be paid by the borrower and lender.  
        Loans can be short or long-term, have fixed or variable rates, be 
        secured or unsecured, and bear any type of amortization schedule.

        Under CalCAP almost any business loan is eligible with a few 
        exceptions.  CalCAP provides insurance on a lender's portfolio of 
        loans.  Funds are placed in the loss reserve account as each CalCAP 
        loan is enrolled.  A Lender can enroll all or a portion of a loan.  
        CalCAP allows a lender to cover loans beyond its conventional risk 
        threshold whether it is for all of a loan or only a portion.  
        Lenders can restructure loans by extending the terms of CalCAP 
        loans, amending covenants or releasing collateral.  Loans up to $5 








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        million ($2.5 million enrollment max) can be included in the CalCAP 
        portfolio. 

        Any federal or state-chartered bank, savings association or credit 
        union is eligible to participate in CalCAP.  A lender must certify 
        that it is in good standing with its regulatory body (Federal 
        Reserve, Federal Deposit Insurance Corporation (FDIC), Comptroller 
        of Currency, Thrift Supervision, National Credit Union 
        Administration (NCUA), or state banking authority).  As of March 25, 
        2011, 46 financial institutions participate in CalCAP.  


        The process of the program works like this:  when a lender's first 
        loan is enrolled, CalCAP establishes a loss reserve account for that 
        lender.  Each time a loan is enrolled under CalCAP, premiums are 
        paid into the portfolio loss reserve account and CalCAP matches the 
        premiums.  For instance, if the lender and borrower each pay a 2% 
        premium, CalCAP will typically pay 4%.  For this one loan a total of 
        8% is added to the lender's loss reserve account for its entire 
        CalCAP portfolio.  The more loans a lender makes, the more dollars 
        are deposited into the loss reserve account for its CalCAP 
        portfolio.


        Over time, as more loans are enrolled, a lender's loss reserve 
        account grows, providing 8% to 14% loss coverage on a portfolio of 
        loans that will likely only experience a lower rate of loss.  For 
        example, if a lender makes 10 loans totaling $500,000, the lender 
        may have as much as $60,000 in its loss reserve account (using an 
        average premium of 3% each from the lender and borrower, 6% from the 
        Authority). If one loan of $50,000 defaults, the lender has 
        immediate coverage of 100% of the loss.  The lender must return 
        recoveries from the borrower, less expenses, to the portfolio loss 
        reserve account.


        FEDERAL ACTION:

        Federal Small Business Jobs Act of 2010 (H.R. 5297) On September 27, 
        2010, President Obama signed into law the Small Business Jobs Act, 
        the most significant piece of small business legislation in over a 
        decade.  The new law provides critical resources to help small 
        businesses continue to drive economic recovery and create jobs.  The 
        new law extended the successful small business enhanced loan 
        provisions while offering billions more in lending support, tax 








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        cuts, and other opportunities for entrepreneurs and small business 
        owners.  It established State Small Business Credit Initiative that 
        provides up to $15 billion to support state-run small business 
        lending programs.  It is estimated that the incentives included in 
        the act could provide up to $300 billion in new small business 
        credit in the coming years and create 500,000 new jobs.

        California, so far, has received $56 million from the Small Business 
        Jobs Act.  If California makes use of the money, California could 
        end up receiving $168 million to go to small business loan programs 
        such as CalCAP and the Small Business Loan Guarantee Program 
        (SBLGP). 

        RELATED LEGISLATION: 

        AB 901 (V.Manuel Perez) expands the definition of financial 
        institutions in CalCAP and increases CalCAP reporting requirements.  
        To be heard in Assembly Banking and Finance Committee on April 25, 
        2011.  

        PREVIOUS LEGISLATION: 

        AB 1632 (Blumenfield), Chapter 731, Statutes of 2010, transferred 
        $32.4 million from the General Fund to support four small-business 
        and jobs programs that exist in current law.  

        SB 832 (Environmental Quality Committee), Chapter 643, Statutes of 
        2009, allowed CalCAP to include Finance Lenders for programs that 
        are funded by other agencies.

        SB 1311 (Simitian), Chapter 401, Statues of 2008, permitted CalCAP 
        to contribute an equal amount to an enrolled loan's loss reverse 
        account as the lender, and to withdraw all accrued interest from 
        enrolled loss reserve accounts to assist with administrative cost.
         

        Analysis Prepared by  :    Kathleen O'Malley / B. & F. / (916) 
        319-3081 

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