BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 2377 (J. Perez) - California Student Loan Refinancing Program Amended: May 23, 2014 Policy Vote: Education 5-1 Urgency: No Mandate: No Hearing Date: August 4, 2014 Consultant: Jacqueline Wong-Hernandez This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 2377 establishes the California Student Loan Refinancing Program (CSLRP), 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. Fiscal Impact: CSLRP: Significant one-time costs (General Fund) to the State Treasurer's Office (STO) to establish and staff the new program. Costs may be recoverable over time through participant fees, to the extent that the program is successful. Loan Loss Reserve: Substantial initial costs to establish a loan loss reserve fund. The program's ability to expand will partially depend on the amount of cash available to establish the fund; the STO has indicated that $10 million would be sufficient to serve 6,000 borrowers. To the extent that the program is successful, its growth could be self-sustaining over time. Risk: Insuring financial institutions against borrower default of refinanced student loan debt carries risk. If borrower default is higher than projected, the CEFA could lose a portion of the state's initial investment. Background: Existing law establishes the CEFA within the STO to administer programs that provide tax-exempt, low-cost financing to private, non-profit higher educational facilities. Existing 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. AB 2377 (Perez) Page 1 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. CEFA also has various authorities 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 bonds 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. (Education Code §94100-94213) Existing law authorizes two similar programs under other divisions of the STO. 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. Proposed Law: This bill establishes the CSLRP and outlines its operation. Specifically, this bill: 1) 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. 2) Requires the CEFA to establish a loss reserve account for each financial institution with which it contracts. 3) Establishes a CEFA notification process for a financial institution seeking to enroll a qualified loan in the program. 4) Requires the authority to establish procedures under which AB 2377 (Perez) Page 2 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. 5) Requires the CEFA to annually submit a report describing the program's financial condition to the Governor and the Legislature. 6) Authorizes the CEFA to enter into agreements to provide assistance in carrying out the program, including origination and servicing of qualified loans. 7) 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. 8) Authorizes the adoption of emergency regulations for purposes of implementing the bill's provisions. 9) Defines various terms for purposes of the bill including the following: a) A "qualified borrower" is a resident of California who has completed a bachelor's degree, is employed in a public service program or by a nonprofit, has the ability to repay, as determined by CEFA, and that meets other criteria as established by the CEFA and the financial institution b) A "qualified loan" is a loan or portion of a loan made by the financial institution to a "qualified borrower" to refinance a private student loan. c) A "loan loss reserve" is 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. Staff Comments: The intent of this bill is to create a AB 2377 (Perez) Page 3 refinancing program, using a loan loss reserve fund, under which qualifying individuals with outstanding student loans could refinance their loans at more favorable terms through private financial institutions, and CEFA would in turn place a portion of the loan amounts into a reserve fund to cover defaults, thus reducing the risk to the financial institutions. Such a program would need an initial infusion of state funds to both set up a loan loss reserve fund, and to dedicate staff to creating this new program. The STO has opined that $10 million would be an appropriate amount to establish the loan loss reserve fund. Before the program could begin accepting clients, the CEFA would need to adopt the emergency regulations, develop the contracts, approve the qualification guidelines, establish the claims procedures, and advertise its existence to financial institutions. While CEFA's administrative costs may be covered by transaction fees to program participants eventually, these activities will incur costs immediately, whether or not the program ever brings in fee revenue. The bill language gives broad authority for the CEFA to administer the program as it sees fit, and the costs and potential revenue will depend on CEFA's ability to design and implement a program that accurately predicts rates of default and claim amounts relative to the fees charged to participants. As with any insurance program, insuring financial institutions against borrower default of refinanced student loan debt carries risk. Generally, student loans are "safer" than other types of loans. Staff notes, however, that it is unclear whether the refinanced loans the CSLRP would insure would still be considered "student loans" in bankruptcy. Under existing federal law, it is very difficult to discharge student loans in bankruptcy. Consumer debt (i.e. other types of loans), however, are fully dischargeable. Refinancing a student loan through a bank is functionally the issuing of a new loan by an entity that paid off the initial student loan, and it is unclear how a bankruptcy court would treat the loan. The author may wish to add language specifying that CSLRP loans shall be treated as student loans. AB 2377 (Perez) Page 4