BILL ANALYSIS                                                                                                                                                                                                    

                            Senator Steven Glazer, Chair
                                2015 - 2016  Regular 

          Bill No:             SB 777         Hearing Date:     August 25,  
          |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.  
            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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          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  

           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  

           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  

               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  

          The East Los Angeles Community Union (sponsor)
          Low Income Investment Fund
          None received


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