BILL ANALYSIS                                                                                                                                                                                                    Ó






                  SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
                             Senator Juan Vargas, Chair


          SB 976 (Vargas)                         Hearing Date:  April 11, 
          2012  

          As Introduced: January 19, 2012
          Fiscal:             Yes
          Urgency:       No
          

           SUMMARY    Would exempt certified development companies from the 
          California Finance Lenders Law (CFLL).  
          
           DESCRIPTION
           
            1.  Would add CDCs to the list of business entities exempt from 
              the CFLL, where they would join other entities with 
              exemptions from that law, including banks, trust companies, 
              savings and loan associations, insurance premium finance 
              agencies, credit unions, small business investment 
              companies, California business and industrial development 
              corporations, and licensed pawnbrokers.  

           EXISTING LAW
           
           2.  Provides for the CFLL, administered by the California 
              Department of Corporations (DOC; Financial Code Section 
              22000 et seq.).  The CFLL authorizes both secured and 
              unsecured consumer and commercial lending and loan 
              brokering, subject to certain restrictions, depending on the 
              type of loan (consumer versus commercial) and the loan 
              amount.  

           3.  Defines a commercial loan, pursuant to the CFLL, as one 
              with a principal amount of five thousand dollars ($5,000) or 
              more, or any loan under an open-end credit program, whether 
              secured by either real or personal property, or both, or 
              unsecured, the proceeds of which are intended by the 
              borrower for use primarily for other than personal, family, 
              or household purposes (Financial Code Section 22502).  The 
              CFLL does not cap the allowable interest rate, nor limit the 
              loan length, nor otherwise regulate the terms of commercial 
              loans.  All of the loans made by certified development 
              corporations meet the definition of commercial loans 




                                                SB 976 (Vargas), Page 2




              pursuant to the CFLL.

           4.  Requires all CFLL licensees to obtain and maintain a surety 
              bond in a minimum amount of twenty-five thousand dollars 
              ($25,000; Financial Code Section 22112), maintain a minimum 
              net worth of $25,000; Financial Code Section 22104), and 
              file an annual report with the commissioner of DOC, 
              providing information that the commissioner reasonably 
              requires concerning the business and operations of the 
              licensee within the state during the preceding calendar year 
              (Financial Code Section 22159).







































                                                SB 976 (Vargas), Page 3




           COMMENTS

          1.  Purpose:    This bill is sponsored by CDC Small Business 
              Finance, which is approved as a certified development 
              company and a Small Business Lending Company by the federal 
              Small Business Administration (SBA).  CDC Small Business 
              Finance is seeking an exemption from the CFLL, to eliminate 
              what it views as costly and duplicative regulation.  The 
              company asserts that it is already heavily regulated by the 
              federal SBA, and that the terms of the loans it makes are 
              already established by federal statute and regulation.  This 
              bill's sponsor believes that continuing to subject CDCs to 
              regulation by both DOC (through its oversight of the CFLL) 
              and the federal SBA is unnecessary, and does not further the 
              interests of either borrowers or lenders.  

           2.  Background and Discussion:   CDCs are nonprofit corporations, 
              which are established to further economic development within 
              the communities in which they operate. CDCs work with the 
              SBA and private sector lenders to provide financing to small 
              businesses, which accomplishes the goal of community 
              economic development.  

          The SBA is an independent federal government agency, which helps 
              Americans start, build, and grow businesses.  The SBA 
              administers multiple loan programs to help aid small 
              business development, including a microloan program, the 
              7(a) program, and the CDC/504 program.  

          The sponsor of this bill administers both 7(a) and 504 loans on 
              behalf of the SBA.  The 7(a) and CDC/504 programs are 
              discussed below, because they describe the types of lending 
              activity that would no longer be regulated by the state, if 
              this bill's author and sponsor are successful in obtaining 
              an exemption from the CFLL for CDCs.  

           The 7(a) Loan Program  is the SBA's primary program to help 
              start-up and existing small businesses obtain financing when 
              they might not be eligible for business loans through normal 
              lending channels. The name comes from section 7(a) of the 
              Small Business Act, which authorizes the SBA to provide 
              business loans to American small businesses. The SBA itself 
              does not make loans, but rather guarantees a portion of 
              loans made and administered by commercial lending 
              institutions.





                                                SB 976 (Vargas), Page 4




          7(a) loans are the most basic and most commonly used types of 
              loans. They are also the most flexible, because financing 
              can be guaranteed for a variety of general business 
              purposes, including working capital, machinery and 
              equipment, furniture and fixtures, land and building 
              (including purchase, renovation and new construction), 
              leasehold improvements, and debt refinancing (under special 
              conditions). Loan maturity is up to 10 years for working 
              capital and generally up to 25 years for fixed assets.

          Most American banks participate in the program, as do some 
              non-bank lenders, which expands the availability of loans. 
              Participating lenders agree to structure loans according to 
              the SBA's requirements, and apply for and receive a guaranty 
              from the SBA on a portion of each 7(a) loan. The SBA does 
              not fully guarantee 7(a) loans; instead, the lender and the 
              SBA share the risk that a borrower will be unable to repay 
              the loan in full.  

           The CDC/504 Loan Program  is a long-term financing tool, designed 
              to encourage economic development within a community. The 
              504 Program accomplishes this by providing small businesses 
              with long-term, fixed-rate financing to acquire real estate 
              or major fixed assets for expansion or modernization.

          Typically, a CDC/504 project includes: a) a loan secured from a 
              private sector lender with a senior lien covering up to 50 
              percent of the project cost; b) a loan secured through a CDC 
              (backed by a 100 percent SBA-guaranteed debenture) with a 
              junior lien covering up to 40 percent of the project cost; 
              and c) a contribution from the borrower of at least 10 
              percent of the project cost (equity).

             a.  Summary of Arguments in Support:   As noted above, the 
              sponsor of this bill, CDC Small Business Finance, is 
              approved as a CDC and a Small Business Lending Company 
              (SBLC) by the SBA, and administers both 7(a) and 504 loans 
              on behalf of the SBA.  As part of its certifications, CDC 
              Small Business Finance's officers and paid employees are 
              subject to federal background checks and stringent ethical 
              requirements intended to prevent self-dealing and conflicts 
              of interest, and to ensure protection of the public.  The 
              company itself must maintain fidelity insurance of at least 
              $2 million, as well as directors' and officers' liability 
              insurance of at least $1 million.  CDCs and SBLCs are also 
              audited on a regular basis by the SBA and the SBA Office of 




                                                SB 976 (Vargas), Page 5




              the Inspector General.  Onsite reviews and examinations 
              cover portfolio performance, operations management, credit 
              administration, compliance with loan program requirements, 
              capital adequacy, asset quality, management quality, 
              earnings, and liquidity.  

            CDC Small Business Finance is seeking an exemption from the 
              CFLL, to eliminate what it views as costly and duplicative 
              regulation.  The company asserts that it is already heavily 
              regulated by the federal SBA, and that the terms of the 
              loans it makes are all established by federal statute and 
              regulation.  Continuing to subject CDCs to regulation by 
              both DOC (through its oversight of the CFLL) and the federal 
              SBA is unnecessary, and does not further the interests of 
              either borrowers or lenders.  CDC Small Business Finance 
              also observes that the proposed exemption is narrow; this 
              bill's sponsor is one of only 27 CDCs in California.

            Finally, this bill's sponsor observes that the CFLL already 
              contains an exemption for small business investment 
              companies (SBICs), another type of entity approved and 
              regulated by the federal SBA.  According to the SBA, SBICs 
              are privately owned and managed investment funds, licensed 
              and regulated by SBA, that use their own capital, plus funds 
              borrowed with an SBA guarantee, to make equity and debt 
              investments in qualifying small businesses.

           3.  Summary of Arguments in Opposition:    None received.
        
          4.  Prior and Related Legislation:   None relevant.

          5.  Amendments:  
           
                a.     The Department of Corporations has requested a 
                 technical amendment, which would strike the paragraph 
                 designations in the subdivision of the Financial Code 
                 being amended by the bill.  As proposed to be amended, 
                 the text of the bill would remain identical, but 
                 references to "(1)" and "(2)" would be deleted from 
                 Financial Code Section 22050(a).  

          
          LIST OF REGISTERED SUPPORT/OPPOSITION
          
          Support
           




                                                SB 976 (Vargas), Page 6




          CDC Small Business Finance (sponsor)
           
          Opposition
               
          None received

          Consultant: Eileen Newhall  (916) 651-4102