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 ----------------------------------------------------------------- |Author: |Lara | |-----------+-----------------------------------------------------| |Version: |August 11, 2016 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- 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). SB 777 (Lara) Page 2 of ? 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 SB 777 (Lara) Page 3 of ? 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 SB 777 (Lara) Page 4 of ? 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 SB 777 (Lara) Page 5 of ? 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, SB 777 (Lara) Page 6 of ? 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 SB 777 (Lara) Page 7 of ? -- END --