BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2377
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          ASSEMBLY THIRD READING
          AB 2377 (John A. Pérez)
          As Amended  May 23, 2014
          Majority vote 

           HIGHER EDUCATION    13-0        APPROPRIATIONS      13-0        
           
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          |Ayes:|Williams, Chávez, Bloom,  |Ayes:|Gatto, Bocanegra,         |
          |     |Fong, Fox, Jones-Sawyer,  |     |Bradford,                 |
          |     |Levine, Linder, Medina,   |     |Ian Calderon, Campos,     |
          |     |Olsen, Quirk-Silva,       |     |Eggman, Gomez, Holden,    |
          |     |Weber, Wilk               |     |Linder, Pan, Quirk,       |
          |     |                          |     |Ridley-Thomas, Weber      |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           SUMMARY  :  Establishes the California Student Loan Refinancing  
          Program (Program) to provide student loan refinancing options to  
          qualified borrowers.  Specifically,  this bill  :  

          1)Establishes the Program, to be administered by the California  
            Educational Facilities Authority (CEFA) to help eligible  
            students and graduates refinance loan debt at favorable rates,  
            to create a revolving fund so that additional refinancing may  
            occur to help more students and graduates, and through the  
            creation of a loan loss reserve that can be leveraged by  
            private lenders in the private student loan market.

          2)Authorizes CEFA to contract with qualified financial  
            institutions and requires CEFA to establish a loss reserve  
            account for each financial institution with which CEFA  
            contracts.  Provides that the combined amount to be deposited  
            by the financial institution into any individual loss reserve  
            account over a three-year period, in connection with any  
            single qualified borrower, cannot exceed $75,000.

          3)Provides that a financial institution that seeks to enroll a  
            qualified borrower must provide specified disclosures to the  
            borrower and follow required protocol for notifying CEFA of  
            the provision of the qualified loan.  Requires a borrower to  
            pay an administration fee, as determined by CEFA.

          4)Requires CEFA to establish a process, as specified, for  








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            qualified financial institutions to submit claims for  
            reimbursement for losses incurred as a result of qualified  
            loan defaults.

          5)Requires annual reporting to the Governor and the Legislature  
            regarding the program's financial condition and its results.  

          6)Authorizes CEFA to facilitate a secondary market for a  
            qualified loan under the program by providing security for  
            that loan.  Approved actions include assigning loss reserve  
            accounts to other entities transferring a qualified loan from  
            a financial institution to a securitization trust, and  
            assisting underwriters in marketing a qualified loan to the  
            secondary market.

          7)Authorizes CEFA to adopt emergency regulations for  
            implementation of the Program.

           EXISTING LAW  establishes CEFA, housed in the State Treasurer's  
          Office, for the purpose of issuing revenue bonds to:  (1) assist  
          postsecondary education institutions in the expansion and  
          construction of educational facilities; (2) provide public and  
          private institutions with additional means to assist students in  
          financing cost of attendance; (3) to develop housing on or near  
          institutions; and, to make grants to private institutions to  
          assist students in preparing for higher education.  CEFA is  
          authorized to issue tax-exempt bonds, and therefore may provide  
          more favorable financing than might otherwise be obtainable.   
          The law specifically provides that bonds issued by CEFA shall  
          not be a debt, liability, or claim on the faith and credit or  
          the taxing power of the State of California or any of its  
          political subdivisions.  The full faith and credit of the  
          participating institution is normally pledged to the payment of  
          the bonds.  The CEFA consists of:  1) the Director of Finance,  
          2) the Controller, 3) the Treasurer, who serves as chairperson,  
          and 4) two members appointed by the Governor for four year  
          terms, as specified.  

           FISCAL EFFECT  :  According to the Assembly Appropriations  
          Committee, the loan loss reserve would need an initial infusion  
          of $5 million to $10 million in state funds. (Of this amount, up  
          to several million may be available from the balance of funds in  
          a loan program at CEFA that is winding down.)  CEFA's  
          administrative costs would be covered by transaction fees to  








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          program participants.

           COMMENTS  :  In the 1980s, the California State Treasurer  
          administered the California Student Loan Authority (CSLA); a  
          student loan program to purchase federally reinsured educational  
          loans from eligible lending institutions by issuing tax-exempt  
          revenue bonds, thereby expanding student access to such low-cost  
          federally reinsured loans.  In 1995, the California Student Loan  
          Authority merged with CEFA, the functions were expanded under  
          CEFA to include direct student lending from proceeds of  
          tax-exempt revenue bonds issued by CEFA.  After the CSLA & CEFA  
          merger, CEFA developed two fixed rate student loan programs for  
          higher education: Cal Loan Bond Program (needs-based); and,  
          Cal-Edge Bond Program (credit-based).

          According to information provided by the Treasurer's Office, the  
          minimum loan amount was $2,500 and the maximum loan amount was  
          $50,000 (undergrad) and $75,000 (graduate). Most loans were  
          between $5,000 to $10,000.  Some individuals took out multiple  
          loans.  The last loan made was about 10 years ago. In October of  
          2013:  outstanding bond amounts totaled $5.1 million; 1,404  
          loans were outstanding, totaling $12.1 million; 875 loans were  
          in default, totaling $10.9 million; and, average interest rates  
          ranged from 7.5% to 8.4%.  Earlier this year, CEFA made the  
          decision to sell the remaining debt and begin to wind-down the  
          program.

          According to the author, "While the Legislature has continued to  
          fight for college affordability on the front end, very little  
          has been done to assist the students that have already incurred  
          loan debt.  College graduates must begin the process of  
          servicing their student loan debt very shortly after they  
          graduate; however, depending on the type of loans they have,  
          their options for reducing debt repayment or creating other  
          repayment pathways tied to their employment circumstances are  
          limited."  The author notes that student loan refinancing can  
          have a huge impact on a borrower, potentially saving thousands  
          in interest over the life of the loan(s).  This bill provides  
          CEFA authority for loan consolidation, interest rate buy-down,  
          debt restructuring, establishing a loan loss reserve account,  
          and alignment with various federal student loan alternative  
          repayment programs.
           









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          Analysis Prepared by  :    Laura Metune / HIGHER ED. / (916)  
          319-3960 


                                                                FN: 0003801