BILL ANALYSIS Ó
SB 1116
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Date of Hearing: June 26, 2012
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Pérez, Chair
SB 1116 (Leno) - As Amended: April 26, 2012
SENATE VOTE : 39-0
SUBJECT : California Pollution Control Financing Authority:
Capital Access Program
SUMMARY : Provides programmatic and administrative flexibility
to the requirements of the California Capital Access Program
(CalCAP) for the purpose of improving access to debt financing
through private sector financial institutions. Specifically,
this bill :
1)Extends a financial institution's notification deadline to the
California Pollution Control Financing Authority (CPCFA) that
a loan has been enrolled into CalCAP from 10 to 15 days.
2)Lowers the minimum fee that a financial institution may choose
when enrolling a small business loan within the CalCAP program
from 2% to 3.5% to 1% to 3.5% of the total value of the loan.
These fees are paid by both the lender and the borrower and
set the base for CPCFA's contribution to the loss reserve
account.
3)Provides that the fee provision changes in this bill sunset on
April 1, 2017.
EXISTING LAW:
1)Establishes CalCAP for the purpose of providing a small
business loss reserve account program through participating
financial institutions.
2)Requires CPCFA to establish a loss reserve account for each
financial institution participating in CalCAP, specifies that
all fees paid by the institution, borrowers, state or other
entity related to the CalCAP program and the individual
institution be deposited into the account, and that the
withdrawal of any moneys in the account be approved by CalCAP.
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3)Provides that the liability of the state and the CPCFA to the
financial institution is limited to the amount of money
credited to the loss reserve account of the specific financial
institution.
FISCAL EFFECT : Unknown
COMMENTS :
1)Bill Purpose : According to the author, "Since 1994,
California Capital Access Loan Program (CalCAP) lenders have
loaned almost $2 billion and created thousands of jobs.
CalCAP encourages banks and other financial institutions to
make loans to small businesses that are having difficulty
obtaining capital. In 2010, the Legislature voted to assist
CalCAP small business financing, granting it a $6 million
appropriation from the General Fund. In addition, CalCAP
received State Small Business Credit Initiative Act federal
funds in the amount of $84 million. SB 1116 expands the
CalCAP program making it more flexible and convenient for
lenders and borrowers to access this additional funding.
In order to increase access and participation, SB 1116 lowers
the CalCAP minimum contribution requirement for lenders and
borrowers from 2% to 1%. CalCAP lender participation is
largely dictated by the contribution requirements of the
lender, borrower and CalCAP to the loan loss reserve account.
The reduction to a 1% minimum loan requirement will encourage
more lenders to enroll small business loans in the program.
The lowered contribution amounts will sunset in 2017 to
coincide with the expiration of the federal funds.
The bill also extends the amount of time lenders have to
submit the necessary paperwork to enroll a loan in CalCAP from
ten days to 15 days. Smaller lenders have found it difficult
to meet the tight ten-day timeline to submit the necessary
paperwork to enroll the loan in the CalCAP program. SB 1116
will support increased access to much needed small business
loans and will help create more jobs."
2)How Loss Reserve Account Models Work : Even as many areas of
California are pulling out of the recession, small businesses
continue to report that they face challenges in accessing and
retaining credit through traditional financial institutions.
For their part, financial institutions report that stricter
federal regulations have left them with little flexibility in
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applying underwriting criteria to a small business community
that has been especially hard hit during the recession.
Credit enhancements, such as loan loss reserve accounts, can
play an important role in helping small businesses access
private lending, which would otherwise not be available. Under
the loan loss reserve model, a participating financial
institution establishes a loss reserve account in which fees,
based on a small percentage of the value of each enrolled
loan, are deposited into the by the lender, borrower and the
government financing authority. The financial institution,
with the approval of the government financing authority, can
later draw against the money in the loss reserve account to
cover defaults.
In the case of CalCAP, fees for the lenders and the borrower
are limited by statute to between 2% and 3.5% of the total
value of loan and are set on a loan by loan basis by the
lender. CalCAP's contribution to the loss reserve is at least
equal to the combined total contribution of the lender and
borrower, but can be higher based on the source of CalCAP's
funds and the location of the small business borrower, with
CalCAP contributing more in areas severely affected by high
unemployment and other poor economic conditions.
As an example, if the lender and the borrower each contribute
an amount equal to 2% of the loan amount, CalCAP would
contribute 4% into the loan reserve account. For loans in
"severely affected areas," CalCAP contributions can go as high
as 10.5% of the loan amount, i.e. 3.5% of the loan amount paid
by both the borrower and the financial institution and CalCAP
paying an amount equal to their contribution (7%), plus an
additional 3.5% that reflects the potentially higher risk of
the geographic region.
The state has no financial responsibility to cover defaults
beyond the fees that are deposited in the individual financial
institution's loss reserve account. This model encourages
the financial institution to use sound underwriting criteria
and to set appropriate loss reserve account fees, which
reflect the risk associated with the loan. If the institution
does a poor job of either selecting loans or setting fees, the
money in the loss reserve account will be depleted prior to
the repayment of all enrolled loans.
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Historically, funding for CalCAP came from fees related to the
issuance of private activity revenue bonds. In late 2010,
legislation passed (AB 1632, Chapter 731, Statutes of 2010) to
provide additional funds to CalCAP and to expand the
definition of severely affected communities to include
communities with high unemployment. With the $6 million in
additional state, and later $84 million in federal funds from
the Small Business Jobs Act, CalCAP has significantly
increased its role within small business capital markets.
Among other distinctions, the CalCAP program is one of the few
sources of funding for business start-ups and
microentrepreneurs. By partnering with community development
financial institutions and other microlenders, CalCAP enrolled
896 loans to microenterprises (business with less than 5
employees) out of the 1,509 total loans made in 2011, which
leveraged $11.3 million in loans.
With 80% to 90% of net new job growth coming from businesses
with less than 20 employees, addressing the capital access
challenges of these smallest size and new businesses is
essential to the state's recovery and long term growth.
3)Regulatory Relief : SB 1116 proposes to increase the number of
days a financial institution has to notify CPCFA regarding an
enrolled loan by an additional five days. According to the
CPCFA, this additional time is necessary to accommodate some
of the smallest size lenders that may have challenges in
meeting all the paperwork requirements in a short period of
time.
The Committee may wish to consider whether additional
administrative flexibility would be useful and authorize the
CPCFA Executive Director to grant, on a case by case basis, an
additional amount of time to submit a complete enrollment
report. There may be instances beyond the reasonable control
of the financial institution, such as natural disasters,
extended federal and state holidays, or serious illness of the
borrower that could impede the completion of all of the
enrollment materials. Completed paperwork is an important
administrative criterion; however, regulatory flexibility may
provide a better functioning program and allow the program to
better serve the access to capital needs of small businesses.
4)California Capital Access Program for Small Businesses:
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CalCAP was established by legislation enacted in 1994. The
program assists small businesses in obtaining loans through
participating financial institutions using a loss reserve
account model, which is described in comment #2.
The objective of CalCAP is to incentivize financial
institutions to provide small businesses with the capital to
maintain and grow their business. Unlike a direct loan, a
loss reserve account serves as a credit enhancement to loans
made by private for-profit and non-profit financial
institutions. Loans can be used to finance the acquisition of
land, construction or renovation of buildings, the purchase of
equipment, other capital projects and working capital. There
are limitations on real estate loans and loan refinancing.
The maximum loan amount is $2.5 million; however, no loan of
that size has been made since 2008. The average loan size in
2011 was $66,000. Lenders set the terms and conditions of the
loans and decide which loans to enroll into CalCAP. Loan
fees, which are used to capitalize the loan reserve account,
are set by the lender as a small percentage of the total loan
amount. SB 1116 proposes to increase the percentage from 2%
to 3.5% to 1% to 3.5%. Loans can be short- or long-term, have
fixed or variable rates, be secured or unsecured, and bear any
type of amortization schedule.
In 2011, CalCAP enrolled 1,509 loans, which leveraged $101
million in loans to 1,441 California small businesses.
Approximately, $2.3 million was paid from the loss reserve
accounts in 2011; representing an 85% reduction in claims from
2010.
Legislation passed in 2011 ÝAB 901 (V.Manuel Pérez), Chapter
483, Statutes of 2011], required CPCFA to begin to separately
track new and retained jobs and to also report loans by the
industry sector of the small business borrower. CPCFA begins
disclosing information under this more refined system
following the first quarter of 2011, therefore the reporting
is divided into two parts. In the first quarter of 2011,
CalCAP facilitated lending created or affected 866 jobs. In
the final three quarters, 836 new jobs and 6,393 jobs were
retained through CalCAP supported loan activity.
Small transportation and warehousing firms had the largest
proportion of loans accessed through CalCAP in 2011,
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representing 589 loans, which leveraged $37.9 million.
Manufacturing businesses received the second largest number of
loans, which accessed $12.1 million in loans and accounted for
11% of all dollars enrolled in loss reserve accounts.
As of December 31, 2010, the total number of loans enrolled in
the program since 1994 was 10,301. CalCAP lenders have
cumulatively loaned over $2.07 billion since the program's
inception in 1994.
5)California's Small Business Economy : California's dominance
in many economic areas is based, in part, on the significant
role small businesses play in the state's $1.9 trillion
economy. Businesses with less than 100 employees comprise
nearly 98% of all businesses, and they are responsible for
employing more than 37% of all workers in the state.
Among other advantages, small businesses are crucial to the
state's international competitiveness and are an important
means for dispersing the positive economic impacts of trade
within the California economy. Small businesses have
consistently functioned as economic engines. According to the
Small Business Administration's Small Business Economy 2011,
small businesses nationally outperformed large firms in net
job creation nearly three out of four times from 1992 through
2010 when private-sector employment rose.
During the most recent recession, however, small businesses
have been especially hard hit. Equifax reported that
bankruptcies in California rose by 81% in 2009, as compared to
44% nationally. This trend continued in 2010. While in
general bankruptcies were down across the nation in 2011 (a
26% decrease), Equifax reported small business bankruptcies in
California accounted for almost 20% of all small business
bankruptcies in the nation. In 2011, the metropolitan
statistical areas (MSAs) in western states continued to lead
the nation in small business bankruptcies. Bankruptcies in
the western region overall, however, experienced the most
significant decrease in bankruptcy filings year over year from
Q1 2011 to Q1 2012 in the nation - more than a 40% decline in
some MSAs.
6)Related Legislation : Below is a list of related legislation
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from current and previous legislative sessions relating to
CalCAP:
a) AB 796 (Blumenfield) : This bill would increase the
maximum contribution by the financial institution to
$200,000, if the matching contribution made by CPCFA is
funded exclusively from funds made available pursuant to
the federal Small Business Jobs Act of 2010. The bill would
limit the amount of those funds used for matching
contributions for deposits exceeding $100,000 to not more
than 50% of the available funds. Status: The bill was
heard in the Senate Committee on Governance and Finance on
June 20, 2012.
b) AB 901 (V. Manuel Pérez) : This bill expanded the CalCAP
definition of financial institution and increased reporting
requirements. CalCAP is one of the programs which received
multimillions of dollars in federal and state funding for
small business through the federal and state Small Business
Jobs Act of 2010. Status: The bill was signed by the
Governor, Chapter 483, Statute of 2011.
c) AB 981 (Hueso) : This bill expanded the CalCAP
definition of financial institution, authorized the
withdrawal of a lower portion of the interest or other
income from a loss reserve account to cover program costs,
and required additional financial assistance to qualified
business in severely affected community such as an area
with high unemployment. CalCap is one of the programs
which received multimillions of dollars in federal and
state funding for small business through the federal and
state Small Business Jobs Act of 2010. Status: The bill
was signed by the Governor, Chapter 484, Statute of 2011.
d) AB 1632 (Blumenfield) : This bill provided the necessary
statutory changes in the area of job creation and small
business development in order to implement the 2010 Budget
Act. The bill transfers $32.4 million from the General
Fund to support four small-business and jobs programs that
exist in current law. The funding appropriated in this
bill goes to the Small Business Loan Guarantee Program ($20
million); California Capital Access Fund ($6 million);
Small Business Development Centers ($6 million); and the
Federal Technology Centers ($350,000). Status: The bill
was signed by the Governor, Chapter 731, Statutes of 2010.
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e) SB 225 (Simitian) : This bill authorized the authority
to establish loss reserve accounts for the purposes of
terminal rental adjustment clause leasing, if funds are
available for contribution into the loss reserve account
from any source other than the authority. Status: The
bill was signed by the Governor, Chapter 492, Statutes of
2011.
f) SB 832 (Senate Committee on Environmental Quality) : This
bill revised, under the tax-related provisions, the terms
"project" and "pollution control facility", as defined in
the California Pollution Control Financing Authority Act
that are eligible for the sales and use tax (SUT) exclusion
and includes public agencies in the definition of
"participating parties" that are eligible for financial
assistance in connection with the projects designed to
control or eliminate environmental pollution. Status:
Signed by the Governor, Chapter 643, Statutes of 2009.
g) SB 1311 (Simitian) : This bill reduced the CalCAP
monetary contribution of the CPCFA to an amount equal to
the amount of fees paid by a participating financial
institution. The bill also authorizes the withdrawal of
interest or other income from the loss reserve accounts for
the purpose offsetting administrative costs and
contributions. Status: The bill was signed by the
Governor, Chapter 401, Statutes of 2008.
REGISTERED SUPPORT / OPPOSITION :
Support
California State Treasurer (sponsor)
California Bankers Association
Opposition
None received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090
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