BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 976| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 CONTINUED SB 976 Page 2 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 SB 976 Page 3 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 SB 976 Page 4 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 SB 976 Page 5 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 **** END ****