BILL ANALYSIS                                                                                                                                                                                                    Ó

          |SENATE RULES COMMITTEE            |                        SB 777|
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                                UNFINISHED BUSINESS 

          Bill No:  SB 777
          Author:   Lara (D) 
          Amended:  8/11/16  
          Vote:     21 


           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.


          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.

          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.  

          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


          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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