BILL ANALYSIS Ó SENATE COMMITTEE ON EDUCATION Carol Liu, Chair 2013-2014 Regular Session BILL NO: AB 2377 AUTHOR: John A. Perez AMENDED: May 23, 2014 FISCAL COMM: Yes HEARING DATE: June 25, 2014 URGENCY: No CONSULTANT:Kathleen Chavira SUBJECT : California Student Loan Refinancing Program. SUMMARY This bill establishes the California Student Loan Refinancing Program, to be administered by the California Educational Facilities Authority (CEFA), to assist in the refinance of private student loan debt at favorable rates, and establishes eligibility requirements for the program. BACKGROUND Current law establishes the California Educational Facilities Authority (CEFA) to administer programs that provide tax-exempt, low-cost financing to private, non-profit higher educational facilities. Current law specifically outlines the following purposes of the CEFA: a) To provide private institutions of higher education within the state an additional means by which to finance and refinance existing higher education facilities. b) To provide private and public institutions of higher education with an additional means to assist students in financing their costs of attendance. c) To develop student, faculty and staff housing on or near institutions of higher education. d) To make grants to private institutions of higher education to assist students in preparation for and entrance to higher education. Additionally, current law grants the CEFA various powers AB 2377 Page 2 relative to student loans including the authority to finance or purchase student loans, hold or invest in student loans, create pools of student loans, sell interest bearing bond backed by pools of student loans, and the ability to contract or otherwise provide for distribution, processing, origination, purchase, sale, servicing, securing, and collection of student loans, payment of fees, charges, and administrative expenses therewith. Current law also authorizes the funding of reserves required for purposes of securing CEFA financing for student loan purposes. (Education Code §94100-94213) ANALYSIS This bill : 1) Establishes the California Student Loan Refinancing Program (CSLRP) and outlines the following goals for the new program: a) Help college graduates who are "qualified borrowers" refinance student loan debt at favorable rates. b) Create a revolving fund to assist more "qualified loan" borrowers. c) Create a "loan loss reserve account" that can be leveraged by private lenders in the private student loan market. 2) Defines various terms for purposes of the bill including the following: a) Defines a "qualified borrower" to be a resident of California who has completed a bachelor's degree, is employed in a public service program or by a nonprofit in California, has the ability to repay, as determined by CEFA, and that meets other criteria as established by the CEFA and the financial institution b) Defines a "qualified loan" to mean AB 2377 Page 3 a loan or portion of a loan made by the financial institution to a "qualified borrower" to refinance a private student loan. c) Defines a "loan loss reserve" as an account established and maintained by the CEFA for purposes of depositing fees paid by financial institutions and qualified borrowers, and state, federal, or other sources of contribution, for purposes of covering any losses on enrolled qualified loans sustained by a participating financial institution. 3) Outlines the following authorities and responsibilities for the CEFA under the CSLRP: a) Authorizes the CEFA to contract with any financial institution, including a credit union, to the extent participation complies with specified California Credit Union Law, for purpose of participation in the program. b) Requires the CEFA to establish a loss reserve account for each financial institution with which it contracts. c) Establishes a CEFA notification process for a financial institution seeking to enroll a qualified loan in the program. d) Requires the authority to establish procedures under which a financial institution may submit claims for reimbursement for losses incurred as a result of qualified loan defaults and outlines the conditions under which a claim for reimbursement may be filed. e) Requires the CEFA to annually submit a report describing the program's financial condition to the Governor and the Legislature. f) Authorizes the CEFA to enter AB 2377 Page 4 agreements to provide assistance in carrying out the program, including origination and servicing of qualified loans. 4) Authorizes the CEFA to facilitate the development of a secondary market for a qualified loan program, and outlines specific actions that may be taken for this purpose. 5) Authorizes the adoption of emergency regulations for purposes of implementing the bill's provisions. STAFF COMMENTS 1) Need for the bill . According to the author, while the Legislature has been extensively involved in college affordability for entering students, very little has been done to assist students that have already incurred loan debt. For many students, certain types of student loans can limit their options for reducing debt repayment or tying repayment to their employment. It is the intent of this bill to provide individuals that have borne the cost of their higher education through private loans the ability to refinance, consolidate, buy-down interest rates, and restructure debt for these loans, in alignment with various federal student loan alternative repayment programs. This bill, in essence, creates a kind of "insurance" for financial institutions that refinance these private student loans through a credit enhancement feature that provides for payment of these loans in the event of default. The risk of default is transferred from the lender to the statutorily created program, and underwritten by the resources in the loan loss reserve account established by the bill's provisions. 2) Prior loan program . Under the authority granted in current law, the CEFA has previously administered a student loan program. Unlike the program proposed by this bill, that program utilized bonds for purposes of funding student loans. According to the CEFA, the program was unsustainable in the long-term as the AB 2377 Page 5 fixed rate bonds underlying the student loans made interest rates on the program's loans noncompetitive relative to other student loan options, and the program no longer exists. Distinct from the prior program, the CSLRP proposed by this bill would be funded by fees and state and federal contributions for the purpose of reimbursing financial institutions in the event of default on loans that they have extended to students. This bill does not propose, or fund, a state administered loan program for students. 3) Similar existing programs . Current law authorizes two similar programs under the State Treasurer's Office. These include the CalCAP, administered by the California Pollution Control Financing Authority and the PACE Loss Reserve Program, administered by the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA). a) California Capital Access Program (CalCAP): This program encourages banks and other financial institutions to make loans to small businesses that may have difficulty obtaining financing. Small businesses and truck owners must still meet lending criteria established by the financial institution. CalCAP provides a form of loan portfolio insurance which may provide up to 100% coverage on certain loan defaults. The availability of CalCAP serves as an incentive for banks and other lenders to approve loans at lower interest rates than might otherwise be available to these small businesses. (Health and Safety Code §44559-44559.12) b) Property Assessed Clean Energy (PACE) Loss Reserve Program: This program, created in 2013, was designed to address Federal Housing Finance Agency (FHFA) concerns about PACE financing for renewable energy, energy or water efficiency retrofits, or electric vehicle charging stations for residential and commercial properties. The Loss Reserve program created in 2013 ensures that AB 2377 Page 6 first mortgage lenders are made whole for any losses in a foreclosure or a forced sale that are attributable to a PACE loan. If a mortgage lender forecloses on a home that has a PACE lien, the reserve can be used to cover PACE payments during the foreclosure period. Additionally, if a local government sells a home for unpaid taxes and the sale price falls short of the outstanding tax and first mortgage amounts, the reserve can be used to cover the shortfall. By covering these types of losses, the Loss Reserve Program puts the first mortgage lender in the same position it would be in without a PACE lien. This program was funded with $10 million through the Budget Act of 2013. (Public Resources Code § 26060-26064) 4) Related TICAS study . According to a recent report, Student Debt and the Class of 2012, issued by the Institute for College Access and Success (TICAS), nationally, 71 percent of college seniors who graduated last year had student loan debt, with an average debt of $29,400 per borrower. The report highlighted high debt and low debt states, and California was noted as being among the low debt states. The report noted that private (non-federal) loans are one of the riskiest ways to pay for college with interest rates that are highest for those who can least afford them. The report also noted that these loans lack the basic consumer protections and flexible repayment options of federal student loans. National data indicate that 30 percent of bachelor's degree recipients graduate with private loan debt with the average amount of this type of debt being $13,600. Private loans were noted as being most prevalent at for-profit colleges with 41 percent of their seniors graduating with private loans. Nationally about 20 percent of graduates' debt is comprised of private loans. 5) Fiscal . The bill currently limits the total to be deposited into the loan loss reserve account by the financial institution for any single qualified borrower to $75,000 over a three year period. It is AB 2377 Page 7 unclear where the initial funding for the state contribution to the program will come from. The bill currently makes no provision for the source of funding for this purpose. SUPPORT Associated Students of the University of California, Davis California Teachers Association Los Angeles Community College District Los Rios Community College District South Orange County Community College District Yosemite Community College District OPPOSITION None received.