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 14, 2014                                
          Consultant: Jacqueline Wong-Hernandez                       
          
          SUSPENSE FILE. AS PROPOSED TO BE AMENDED.
          

          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 (as approved on August 14, 2014): 
              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.








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             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. 









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          4)   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.

          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.









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          Staff Comments: The intent of this bill is to create a  
          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. 

          Committee Amendments would limit the CSLRP to insuring  
          refinanced loans that are still considered to be "student loans"  
          under federal law.








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