BILL ANALYSIS Ó
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THIRD READING
Bill No: SB 976
Author: Vargas (D)
Amended: 4/12/12
Vote: 21
SENATE BANKING & FINANCIAL INST. COMMITTEE : 6-0, 4/11/12
AYES: Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla
NO VOTE RECORDED: Walters
SUBJECT : Finance lenders: exemptions
SOURCE : CDC Small Business Finance
DIGEST : This bill exempts certified development
companies from the California Finance Lenders Law.
ANALYSIS :
Existing law:
1. Provides for the California Finance Lenders Law (CFLL),
administered by the 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.
2. Defines a commercial loan, pursuant to the CFLL, as one
with a principal amount of $5,000 or more, or any loan
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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 pursuant to the CFLL.
3. Requires all CFLL licensees to obtain and maintain a
surety bond in a minimum amount of $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).
This bill add certified development companies (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.
Background
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.
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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.
7(a) Loan Program . 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.
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.
CDC/504 Loan Program . 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.
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Typically, a CDC/504 project includes (1) a loan secured
from a private sector lender with a senior lien covering up
to 50 percent of the project cost; (2) 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 (3) a contribution from the borrower
of at least 10 percent of the project cost (equity).
Comments
Purpose of the bill . 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 4/11/12)
CDC Small Business Finance (source)
JJA:mw 4/12/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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