BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                   SB 976|
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                              UNFINISHED BUSINESS


          Bill No:  SB 976
          Author:   Vargas (D)
          Amended:  7/5/12
          Vote:     21

           
           SENATE BANKING & FINANCIAL INST. COMMITTEE  :  6-0, 4/11/12
          AYES:  Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla
          NO VOTE RECORDED:  Walters

           SENATE FLOOR  :  37-0, 4/26/12
          AYES:  Alquist, Anderson, Berryhill, Blakeslee, Calderon, 
            Cannella, Corbett, Correa, De León, DeSaulnier, Dutton, 
            Emmerson, Evans, Fuller, Gaines, Hancock, Harman, 
            Hernandez, Huff, Kehoe, La Malfa, Leno, Lieu, Liu, 
            Lowenthal, Negrete McLeod, Pavley, Price, Rubio, 
            Simitian, Steinberg, Vargas, Walters, Wolk, Wright, 
            Wyland, Yee
          NO VOTE RECORDED:  Padilla, Runner, Strickland

           ASSEMBLY FLOOR  :  77-0, 8/9/12 - See last page for vote


           SUBJECT :    Finance lenders:  exemptions

           SOURCE  :     CDC Small Business Finance


           DIGEST  :    This bill exempts community advantage lender 
          from the California Finance Lenders Law.  
          
           Assembly Amendments  delete the term certified development 
          company and replace it with community advantage lender, as 
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          defined.

           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 
             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:

          1. Adds community advantage lender 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 







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             business investment companies, California business and 
             industrial development corporations, and licensed 
             pawnbrokers.  

          2. Defines community advantage lender as an entity 
             authorized by the U.S. Small Business Administration to 
             deliver community advantage loans.

           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.  

          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 







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          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.

          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 







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          unnecessary, and does not further the interests of either 
          borrowers or lenders.  

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No   
          Local:  No

           SUPPORT  :   (Verified  8/9/12)

          CDC Small Business Finance (source)



           ASSEMBLY FLOOR  :  77-0, 8/9/12
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, 
            Bill Berryhill, Block, Blumenfield, Bonilla, Bradford, 
            Brownley, Buchanan, Butler, Campos, Carter, Cedillo, 
            Chesbro, Conway, Cook, Davis, Dickinson, Donnelly, Eng, 
            Feuer, Fletcher, Fong, Fuentes, Furutani, Beth Gaines, 
            Galgiani, Garrick, Gatto, Gordon, Gorell, Grove, Hagman, 
            Halderman, Hall, Harkey, Hayashi, Hill, Huber, Hueso, 
            Huffman, Jeffries, Jones, Knight, Lara, Logue, Bonnie 
            Lowenthal, Ma, Mansoor, Mendoza, Miller, Mitchell, 
            Monning, Morrell, Nestande, Nielsen, Olsen, Pan, Perea, 
            V. Manuel Pérez, Portantino, Silva, Skinner, Smyth, 
            Solorio, Swanson, Torres, Valadao, Wagner, Wieckowski, 
            Williams, Yamada, John A. Pérez
          NO VOTE RECORDED:  Charles Calderon, Roger Hernández, Norby


          JJA:m  8/10/12   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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