BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Steven Glazer, Chair
2015 - 2016 Regular
Bill No: SB 777 Hearing Date: August 22,
2016
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|Author: |Lara |
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|Version: |August 11, 2016 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: The California Finance Lenders Law: application
SUMMARY This bill exempts from the California Finance Lenders Law
(CFLL), until January 1, 2022, an entity that makes one
commercial loan in a 12-month period.
DESCRIPTION
1. Provides that the CFLL does not apply to any person who
makes one loan in a 12-month period, if that loan is a
commercial loan, as defined in Financial Code Section 22502.
EXISTING LAW
2. Defines a commercial loan, pursuant to the CFLL, as a loan
with a principal amount of $5,000 or more, or any loan under
an open-end credit program, the proceeds of which are
intended by the borrower for use primarily for other than
personal, family, or household purposes. Commercial loans
may be secured or unsecured. For purposes of determining
whether a loan is a commercial loan, the lender may rely on
any written statement of intended purposes signed by the
borrower (Financial Code Section 22502).
3. Provides that the CFLL does not apply to any person who
makes five or fewer commercial loans in a 12-month period,
if the loans are incidental to the business of the person
relying on the exemption (Financial Code Section 22050).
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COMMENTS
1. Purpose: This bill is sponsored by the East Los Angeles
Community Union (TELACU) to restore a de minimis exemption
to the CFLL that allows entities to make one commercial loan
in a 12-month period without triggering a licensing
requirement. Restoring the exemption is intended to allow
TELACU and others that facilitate federal New Markets Tax
Credit (NMTC) financing to continue creating subsidiaries
that raise tax credit equity and make loans to qualifying
borrowers, without having to obtain CFLL licenses for each
of these subsidiaries.
2. Senate Rule 29.10(d) : The current contents of SB 657 were
amended into the bill in the Assembly. Because this bill
has not previously been heard in the Senate in its current
form, it is back before this Committee pursuant to Senate
Rule 29.10(d). Pursuant to Senate Rule 29.10(d), this
Committee has two options when it considers SB 657: a)
concur in the Assembly amendments, and return the bill to
the Senate Floor; or b) hold the bill in Committee. The
bill cannot be amended.
3. Background: This bill would re-add language to the CFLL
that was first added in 1997 (AB 289, Baca, Chapter 229,
Statutes of 1997) and was deleted in 2013 (AB 1091, Skinner,
Chapter 243, Statutes of 2013). AB 289 was sponsored by the
Household Financial Group. Bill analyses prepared for AB
289 contain no explanation for the logic behind the addition
of the exemption. However, it remained in the CFLL,
unchanged, until 2013.
In 2013, AB 1091 replaced the one-loan de minimis exemption with
a five-loan de minimis exemption, crafted in a slightly
different manner. Instead of allowing entities to make one
commercial loan in a 12-month period without triggering a
licensing requirement, entities could make up to five
commercial loans in a 12-month period without triggering a
licensing requirement, as long as those loans were
incidental to the business of the entity making the loans.
Although AB 1091 had no sponsor and no official source, the
language of the bill originated with the Department of
Corporations (the predecessor department to the Department
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of Business Oversight; DBO). Bill analyses prepared for AB
1091 provide the purpose of the revised de minimis exemption
as minimizing unnecessary over-regulation of businesses and
exempting from the CFLL commercial financing transactions,
which are structured as loans by entities that are not
otherwise lenders.
As described below, the 2013 change to the de minimis exemption
created unintended, negative consequences for entities that
help facilitate loans eligible for federal NMTCs. By
re-adding the one-loan de minimis exemption, this bill
mitigates these negative consequences and returns to the
CFLL an exemption that existed from 1998 through 2013. This
bill leaves unchanged the newer five-loan de minimis
exemption. A January 1, 2022 sunset date was added to this
bill by the Assembly Banking and Finance Committee, to allow
DBO and others time to investigate whether both de minimis
exemptions should remain in the CFLL indefinitely.
4. Discussion: The CFLL exemption that this bill will restore
has the potential to benefit several different types of
entities (i.e., not only this bill's sponsor). However,
because the arguments in favor of this bill revolve around
NMTCs, a brief description of the NMTC program and the way
in which this bill will allow its sponsor to continue
facilitating NMTC financing is provided immediately below.
The federal NMTC program was first authorized in 2000 on a
temporary basis and has been periodically extended since
that time. The NMTC program is currently scheduled to
sunset in December, 2019, although legislation has been
proposed to make the program permanent. The NMTC program
was created to stimulate private investment and economic
growth in low-income urban neighborhoods and rural
communities that lack access to capital. NMTC financing can
be used to support a wide variety of projects, including
manufacturing, community facilities, health centers, retail
operations, environmentally green projects, certain forms of
residential housing, and industrial and commercial
properties. It cannot be used to finance rental residential
projects, farms, golf courses, country clubs, liquor stores,
gambling facilities, or intangibles.
The NMTC program attracts capital by providing private investors
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with a sizeable federal tax credit for investments made in
businesses or economic development projects that qualify for
NMTC financing. The tax credit, which equals 39% of an
investor's total qualified investment, must be claimed over
a seven-year period: 5% annually for the first three years,
and 6% in each of the remaining four years. If an investor
redeems a NMTC investment before the seven-year term, he or
she must repay, with interest, all prior credits claimed.
In this way, the program is intended to provide so-called
"patient capital;" investors do not expect to be repaid in
the short-term.
NMTC projects are typically funded, as follows: A community
development entity (CDE), such as TELACU or the Low Income
Investment Fund (LIIF), applies to the U.S. Department of
the Treasury Community Development Financial Institutions
(CDFI) Fund for an allocation of NMTC credits. The
application process is quite competitive, and the tax
credits are extremely oversubscribed; according to an expert
in NMTC financing consulted in connection with this
analysis, applications are submitted for approximately $30
billion to $35 billion in credit allocations annually, while
only $3.5 billion in credits are authorized. Once the CDFI
Fund allocates NMTC credits to a CDE, the CDE identifies
entities that meet NMTC criteria and investors (typically
banks) who wish to invest in those entities in exchange for
tax credits. When a project is ready to be funded, the CDE
creates a for-profit subsidiary (the entity that will be
exempt from CFLL licensure under the provisions of this
bill) to receive money from the investor, allocate tax
credits to that investor over the seven-year period of the
investment, disburse the proceeds of the investment to the
intended recipient, and act as an asset manager for the
project. Because CDEs typically split their tax credit
allocations across multiple projects, project investors
commonly require that their funds be segregated from the
funds of others; the creation of an individual subsidiary to
manage each separate NMTC project allows for that
segregation. The creation of a specific entity to
facilitate the flow of funds on NMTC projects is not only
demanded by investors; it is required by law when the CDE is
a non-profit, as is the case for TELACU and LIIF.
However, because the specific entity created by the CDE is
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formed specifically for the purpose of disbursing loan
proceeds, its lending activities are not incidental to its
business, and it is therefore not eligible for the CFLL
exemption in current law. This bill will ensure that
entities like TELACU and the LIIF can continue to facilitate
NMTC projects, without having to obtain a separate CFLL
license for each subsidiary established to fund an NMTC
project.
5. Unintentional Drafting Error: As described above, this bill
is intended to re-add the exemption that was deleted from
the CFLL in 2013. However, when this bill was amended
coming out of the Assembly Banking and Finance Committee in
August, 2016, three important words were mistakenly omitted
from the bill by the Legislative Counsel. Instead of
exempting persons who make no more than one commercial loan
in a 12-month period, this bill, as amended August 11, 2016,
exempts persons who make one commercial loan in a 12-month
period. The omission of these three words has the potential
to create confusion regarding which entities are (and are
not) eligible for the exemption. Because there was
insufficient time to return this bill to the Assembly for
corrective amendments prior to the deadline for amending
bills, cleanup legislation may be required.
6. Summary of Arguments in Support:
a. TELACU is sponsoring SB 777 to ensure that
California is awarded its fair share of federal NMTCs and
that these NMTCs can continue to be invested in
job-creating economic development projects. "TELACU,
along with other organizations who invest in the
revitalization of low-income communities, receives
significant NMTC allocations from the United States
Treasury Department. Since the Treasury Department
awarded the first NMTC allocations in 2003, the NMTC has
proven to be an effective, targeted, and cost-efficient
financing tool for important community development
investments highly valued by businesses, communities, and
investors across the country. Given the success of the
NMTC Program, TELACU has been able to more effectively
redevelop communities, create more jobs, and increase
economic activity. In order to continue these critical
investments in low-income urban and rural communities,
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TELACU supports restoring the prior one-per-year
exemption for commercial loans while maintaining the
exemption recently established for up to five loans a
year which are 'incidental' to the lenders business."
b. The LIIF supports the bill for the same reasons as
TELACU. The LIIF is a CDFI that invests in projects with
high social value, which are often unable able to access
traditional financing. "In order to continue these
critical investments in low income urban and rural
communities, LIIF supports restoring the prior
one-per-year CFLL exemption for commercial loans while
maintaining the exemption recently established for up to
five loans a year which are 'incidental' to the lenders
business."
7. Summary of Arguments in Opposition: None received.
8. Prior and Related Legislation:
a. AB 289 (Baca), Chapter 229, Statutes of 1997: Added
a one-loan de minimis commercial loan exemption to the
CFLL.
b. AB 1091 (Skinner), Chapter 243, Statutes of 2013:
Deleted the one-loan de minimis commercial loan exemption
from the CFLL in favor of a five-loan de minimis
commercial loan exemption, which requires the loans to be
incidental to the business of the person relying on the
exemption.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
The East Los Angeles Community Union (sponsor)
Low Income Investment Fund
Opposition
None received
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