BILL ANALYSIS Ó AB 2377 Page 1 ASSEMBLY THIRD READING AB 2377 (John A. Pérez) As Amended May 23, 2014 Majority vote HIGHER EDUCATION 13-0 APPROPRIATIONS 13-0 ----------------------------------------------------------------- |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 AB 2377 Page 2 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 AB 2377 Page 3 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. AB 2377 Page 4 Analysis Prepared by : Laura Metune / HIGHER ED. / (916) 319-3960 FN: 0003801