BILL ANALYSIS Ó
SB 976
Page 1
SENATE THIRD READING
SB 976 (Vargas)
As Amended July 5, 2012
Majority vote
SENATE VOTE :37-0
BANKING & FINANCE 11-0
--------------------------------
|Ayes:|Eng, Achadjian, Charles |
| |Calderon, Fletcher, |
| |Fuentes, Gatto, Harkey, |
| |Roger Hernández, Lara, |
| |Morrell, Torres |
| | |
--------------------------------
SUMMARY : Exempts community advantage lenders from the
California Finance Lenders Law (CFLL). Specifically, this bill
defines a "community advantage lender" as an entity authorized
by the U.S. Small Business Administration (SBA) to deliver
community advantage loans.
EXISTING FEDERAL LAW defines a "certified development company"
(CDC) as an entity authorized by the U.S. Small Business
Administration to deliver 504 financing to small businesses.
(13 Code of Federal Regulations 120.10)
EXISTING STATE LAW :
1)Establishes the CFLL, administered by the Department of
Corporations (DOC) that authorizes both secured and unsecured
consumer and commercial lending and loan brokering, subject to
certain restrictions, depending on the type of loan and the
loan amount. (Financial Code Section 22000)
2)Defines a commercial loan, pursuant to the CFLL, as one with a
principal amount of $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 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.
SB 976
Page 2
(Financial Code Section 22502)
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)
4)Exempts from the CFLL any person doing business under any law
of any state or of the United States relating to banks, trust
companies, savings and loan associations, insurance premium
finance agencies, credit unions, small business investment
companies, California business and industrial development
corporations, or licensed pawnbrokers. Also exempts, check
cashers, a college or university making a loan for the purpose
of permitting a person to pursue a program or course of study
leading to a degree or certificate, a broker-dealer, to any
person who makes no more than one loan in a 12-month period as
long as that loan is a commercial loan, or any public
corporation. (Financial Code Section 22050)
FISCAL EFFECT : None
COMMENTS :
Community Advantage Pilot Loan Program . Previously, CDCs did
not fall under DOC regulation under the CFLL. This measure was
brought forward because recently the SBA launched a new pilot
program that allows CDCs to act as lenders under the Community
Advantage Pilot Loan Program. As of June 14, 2012, eight CDCs
are community advantage approved lenders. This measure will
exempt those SBA approved community advantage lenders from the
CFLL.
The sponsor of the measure, California Small Business Finance,
who is an approved lender to participate in the new Community
Advantage Pilot Loan Program, wants to make sure that under this
program they do not fall under DOC's regulation under the CFLL.
The sponsor believes they are heavily regulated by the SBA.
CDCs are audited on a regular basis by the SBA and the SBA
Office of the Inspector General. Onsite reviews and
SB 976
Page 3
examinations cover portfolio performance, operations management,
and credit administration, compliance with loan program
requirements, capital adequacy, asset quality, management
quality, earnings, and liquidity.
On February 15, 2011, SBA created a new pilot program to
increase and expand access to capital for businesses and
entrepreneurs in underserved communities. Community advantage
is a pilot initiative aimed at increasing the number of SBA 7(a)
lenders who reach underserved communities, targeting
community-based, mission-focused financial institutions which
were previously not able to offer SBA loans. The maximum loan
size is $250,000 with a guarantee of 85% for loans up to
$150,000 and 75% for those greater than $150,000. Community
advantage is open to mission-focused lenders, including
Community Development Financial Institutions, SBA's CDCs and
SBA's nonprofit micro-lending intermediaries. Community
Advantage lenders will be expected to maintain at least 60% of
their SBA loan portfolio in underserved markets. Community
advantage is a three-year pilot initiative. Community advantage
will operate through March 15, 2014, and may be extended or made
permanent at SBA's discretion.
According to the SBA, community advantage loans will enable
mission-oriented lenders to increase the flow of capital to
underserved communities and achieve a greater impact. Through
participation in the pilot program, community advantage lenders
should be able to build capacity and stronger balance sheets and
may have greater access to the kind of patient capital that
complements mission lenders proven track record of low overall
defaults and high percentage of loan repayments. Community
advantage lenders will be responsible through the lending
process for administering their loans in compliance with all SBA
loan programs requirements and furnishes to SBA all appropriate
information.
Certified Development Companies (CDCs) . SBA CDCs are nonprofit
organizations set up to contribute to the economic development
of the communities in which they are located. CDCs are
authorized by SBA to market, package and service SBA 504 loans.
The SBA has requirements for an organization to operate as a CDC
which include: be a nonprofit corporation in good standing;
have at least 25 members representing the following groups:
government organizations responsible for economic development in
SB 976
Page 4
the specific community and acceptable to SBA; financial
institutions that provide long-term fixed asset financing in the
community where they operate; community organizations dedicated
to the local economic development; and, businesses located in
the area of operation that have a board of directors chosen from
among the members and represent at least three of the four
membership groups, meet a minimum level of lending activity and
must remain independent of banks, governmental agencies and
other institutions.
There are over 260 CDCs nationwide each having a defined area of
operations covering a specific geographic area. The area of
operation for most CDCs is the state in which they are
incorporated. California has 34 CDCs established in the state.
CDCs are supervised by the SBA and must submit annual reports to
the SBA. The SBA's Office of Lender Oversight oversees CDC's
compliance with all applicable rules and regulations. To retain
its certification, a CDC must provide at least four 504 loan
approvals during two consecutive fiscal years. As part of its
oversight process, the SBA assigns a CDC to one of eight tiers
based on annual approval volume and provides every CDC with
financial data and ratios, including loan loss rate for its tier
average.
The SBA is the largest backer of commercial loans for small
business in the U.S., offering a variety of loan guaranty
programs to accommodate most small business financial needs.
The CDC/504 loan program is one of the most popular loan
programs offered by SBA and is designed to encourage economic
development within a community by providing small businesses
with long-term, fixed rate financing to acquire major fixed
assets for expansion or modernization on reasonable terms and to
stimulate employment through a job retention/creation goal.
SBA CDCs participate in the 504 loan program. This program is
designed for financing fixed assets such as equipment or real
estate. Typically it is structured as follows: a loan or first
mortgage secured with a senior lien from a private sector lender
covering 50% of the project cost; a second mortgage secured with
a junior lien from an SBA CDC backed by a 100% SBA guaranteed
debenture covering up to 40% of the cost; and, a contribution of
at least 10% equity from the small business borrower.
SB 976
Page 5
The SBA 504 loan program is a powerful economic development loan
program that offers small businesses another avenue for business
financing, while promoting business growth and job creation. As
of February 15, 2012, the $50 billion in 504 loans has created
over two million jobs. This program is a proven success and
win-win-win for the small business, the community and
participating lenders.
The 7(a) Loan Program is a SBA 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 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 expand 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.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0004453
SB 976
Page 6