BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 777|
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UNFINISHED BUSINESS
Bill No: SB 777
Author: Lara (D)
Amended: 8/11/16
Vote: 21
PRIOR VOTES NOT RELEVANT
SENATE BANKING & F.I. COMMITTEE: 7-0, 8/25/16 (Pursuant to
Senate Rule 29.10
AYES: Glazer, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
ASSEMBLY FLOOR: 78-0, 8/18/16 - See last page for vote
SUBJECT: The California Finance Lenders Law: application
SOURCE: The East Los Angeles Community Union
DIGEST: This bill exempts from the California Finance Lenders
Law (CFLL), until January 1, 2022, an entity that makes no more
than one commercial loan in a 12-month period.
Assembly Amendments delete the Senate version of the bill
relating to gambling and insert the current language.
ANALYSIS:
Existing law:
1)Defines a commercial loan, pursuant to the CFLL, as a loan with
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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).
2)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).
This bill 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.
Background
This bill re-adds 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 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.
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As described below, the 2013 change to the de minimis exemption
created unintended, negative consequences for entities that help
facilitate loans eligible for federal New Markets Tax Credits
(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.
Comments
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
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
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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 the East Los Angeles Community
Union (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
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.
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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.
Related/Prior Legislation
AB 289 (Baca, Chapter 229, Statutes of 1997) added a one-loan de
minimis commercial loan exemption to the CFLL.
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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
Unknown.
SUPPORT: (Verified8/15/16)
The East Los Angeles Community Union (source)
Low Income Investment Fund
OPPOSITION: (Verified8/15/16)
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None received
ARGUMENTS IN SUPPORT: 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, 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."
ASSEMBLY FLOOR: 78-0, 8/18/16
AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,
Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke,
Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley,
Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth
Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,
Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Harper, Holden,
Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder,
Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina,
Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen,
Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago,
Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber,
Wilk, Williams, Wood, Rendon
NO VOTE RECORDED: Hadley, Roger Hernández
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
8/25/16 17:30:37
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