BILL ANALYSIS �
AB 981
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Date of Hearing: April 25, 2011
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 981 (Hueso) - As Introduced: February 18, 2011
SUBJECT : California Pollution Control Financing Authority:
Capital Access Loan Program.
SUMMARY : Provides additional incentives within the California
Capital Access Program (CalCAP) to encourage lenders to lend to
small businesses. Specifically, this bill :
1)Expands the financial institution definition to include
insured depository institutions, insured credit unions, and
community development financial institutions.
2)Authorizes the California Pollution Control Financing
Authority (CPCFA) to withdraw a portion of the interest or
other income that has been credited to the loss reserve
account.
3)Requires the CPCFA to contribute an amount not less than 150%
of the amount of the fees paid by the participating financial
institution if the business is located within a severely
affected community.
EXISTING FEDERAL LAW enacted the Small Business Jobs Act (H.R.
5297) on Sept. 27, 2010 which creates the Small Business Lending
Fund Program to direct the Secretary of the Treasury to make
capital investment in eligible institutions in order to increase
the availability of credit for small business and to amend the
Internal Revenue Code of 1986 to provide tax incentives for
small business job creation. (15 U.S.C. Sec. 631 et seq.)
EXISTING STATE LAW
1)Defines "California Capital Access Fund" as a fund created
within the (CPCFA) to be used for the purposes of the program.
(Health and Safety Code, Section 44559.1)
2)Defines a "community development financial institution" as
person (other than an individual) that has:
a) a primary mission of promoting community development;
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b) serves an investment area or targeted population;
c) provides development services in conjunction with equity
investments or loans, directly or through a subsidiary or
affiliate;
d) maintains, through representation on its governing board
or otherwise, accountability to residents of its investment
area or targeted population; and,
e) is not an agency or instrumentality of the United
States, or of any State or political subdivision of a
State. (Section 4701 of Title 12 of the United States
Code)
1)Defines an "insured depository institution" as any bank or
savings association with deposits of which are insured.
(Section 1813 of Title 12 of the United States Code)
2)Defines an "insured credit union" as any credit union member
accounts of which are insured. (Section 1752 of Title 12 of
the United States Code)
3)Defines "severely affected community" as any area classified
as an enterprise zone pursuant to the Enterprise Zone Act, any
area, designated by the executive director, and any other
comparable economically distressed geographic area so
designated by the executive director from time to time.
(Health and Safety Code, Section 44559.1)
4)Requires the CPCFA to transfer to the loss reserve account an
amount equal to 150% of the amount of the fees paid by the
participating financial institution if the business is located
within a severely affected community. (Healthy and Safe Code,
Section 44559.4)
FISCAL EFFECT : Unknown
COMMENTS :
Why is this bill necessary? Unlike other small business loan
assistance programs, CalCAP, enacted in 1994, provides a form of
portfolio insurance for participating lenders. CalCAP will
contribute funds to a loan loss reserve account associated with
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a lender. The lender and borrower also contribute funds. These
funds are pooled and can then be used to cover losses associated
with any enrolled loan that is charged off.
CalCAP has traditionally been funded using fee revenues charged
by the CPCFA to private companies that receive the benefit of
tax-exempt bonds. These revenues were adequate to sustain the
CalCAP program through 2006. However, increased use of the
program in combination with declining revenues led to necessary
statutory and regulatory changes to constrain the program. The
changes allowed CalCAP to continue at a reduced level as
compared to prior years.
In late 2010, the legislature allocated funds to CalCAP through
AB 1632. These funds allowed CalCAP to increase the
contribution to loan loss reserve accounts. Prior to AB 1632,
CalCAP was contributing an amount equal to the lender
contribution (between 2% and 3.5%). After the funds became
available, CalCAP increased the CalCAP contribution to 3% to
5.25%. AB 1632 also contained language to expand the definition
of severely affected communities to include high unemployment
areas. When CalCAP raised the contribution for all enrolled
loans, it became restricted in severely affected communities to
150% of the lender contribution. Thus, when CalCAP increased
the contribution to a minimum of 3%, it could not provide any
further added incentive in severely affected communities. AB
981 would fix this anomaly in the statute and allow CalCAP to
provide an increased incentive to encourage lending in high
unemployment and other severely affected areas.
The U.S. Department of the Treasury certifies Community
Development Financial Institutions (CDFIs) and does not make a
distinction between for-profit and non-profit CDFIs. There are
for-profit CDFIs in California that would like to participate in
CalCAP and make more loans to small businesses. AB 981 would
remove the requirement that a CDFI be a non-profit CDFI to
participate in CalCAP. Other for-profit entities such as banks
participate in CalCAP.
Current statutory language implies that if CalCAP sweeps
interest from a loan loss reserve account, all interest must be
swept. When this provision was placed in statute, it was not
envisioned that CalCAP would have a noticeably growing amount of
funds in loan loss reserve accounts. CalCAP is the recipient of
over $84 million from U.S. Treasury to expand the program. It
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is possible that these funds will result in more interest in
loan loss reserve accounts than CalCAP needs. CalCAP would like
the flexibility to reduce the amount of interest collected from
accounts to an amount less than 100% of the interest earned.
Background: CalCAP encourages banks and other financial
institutions to make loans to small businesses that fall just
outside of their conventional underwriting standards.
CalCAP is a form of loan portfolio insurance which may provide
up to 100% coverage on certain loan defaults. By participating
in CalCAP, lenders have available to them a proven financing
mechanism to meet the financing needs of California's small
businesses. CalCAP insures loans made to small businesses to
assist them in growing their business. Loans can be used to
finance the acquisition of land, construction or renovation of
buildings, the purchase of equipment, other capital projects and
working capital. There are limitations on real estate loans and
loan refinancing. CalCAP prohibits financing certain projects.
Examples of ineligible uses of loan proceeds include gambling
facilities, bars and adult entertainment businesses.
The maximum loan amount is $5 million and the maximum enrolled
amount is $2.5 million. The maximum premium the Authority will
pay is $100,000 (per loan). Lenders set all the terms and
conditions of the loans and decide which loans to enroll into
CalCAP. Lenders determine the premium levels to be paid by the
borrower and lender. Loans can be short or long-term, have
fixed or variable rates, be secured or unsecured, and bear any
type of amortization schedule.
Under CalCAP almost any business loan is eligible with a few
exceptions. CalCAP provides insurance on a lender's portfolio
of loans. Funds are placed in the loss reserve account as each
CalCAP loan is enrolled. A Lender can enroll all or a portion
of a loan. CalCAP allows a lender to cover loans beyond its
conventional risk threshold whether it is for all of a loan or
only a portion. Lenders can restructure loans by extending the
terms of CalCAP loans, amending covenants or releasing
collateral. Loans up to $5 million ($2.5 million enrollment
max) can be included in the CalCAP portfolio.
Any federal or state-chartered bank, savings association or
credit union is eligible to participate in CalCAP. A lender must
certify that it is in good standing with its regulatory body
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(Federal Reserve, Federal Deposit Insurance Corporation (FDIC),
Comptroller of Currency, Thrift Supervision, National Credit
Union Administration (NCUA), or state banking authority). As of
March 25, 2011, 46 financial institutions participate in CalCAP.
The process of the program works like this: when a lender's
first loan is enrolled, CalCAP establishes a loss reserve
account for that lender. Each time a loan is enrolled under
CalCAP, premiums are paid into the portfolio loss reserve
account and CalCAP matches the premiums. For instance, if the
lender and borrower each pay a 2% premium, CalCAP will typically
pay 4%. For this one loan a total of 8% is added to the lender's
loss reserve account for its entire CalCAP portfolio. The more
loans a lender makes, the more dollars are deposited into the
loss reserve account for its CalCAP portfolio.
Over time, as more loans are enrolled, a lender's loss reserve
account grows, providing 8% to 14% loss coverage on a portfolio
of loans that will likely only experience a lower rate of loss.
For example, if a lender makes 10 loans totaling $500,000, the
lender may have as much as $60,000 in its loss reserve account
(using an average premium of 3% each from the lender and
borrower, 6% from the Authority). If one loan of $50,000
defaults, the lender has immediate coverage of 100% of the loss.
The lender must return recoveries from the borrower, less
expenses, to the portfolio loss reserve account.
SUPPORT: According to the Sponsor, the California State
Treasurer, "AB 981 would do three things: would allow CalCAP to
provide added incentives for loans to businesses in high
unemployment areas and other distressed communities, would allow
CalCAP to make more lenders eligible to provide
assistance-specifically, for-profit community development
financial institutions, and would allow CalCAP to reduce the
amount of interest it takes from loan loss reserve accounts to
cover program costs."
In addition, the Treasurer states, "Over the next few years,
CalCAP is projected to create over $1.3 billion in small
business lending. AB 981 makes changes that will allow CalCAP
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to attract new lenders and better assist small businesses in our
most distressed communities."
FEDERAL ACTION:
Federal Small Business Jobs Act of 2010 (HR 5297) On Sept. 27,
2010, President Obama signed into law the Small Business Jobs
Act, the most significant piece of small business legislation in
over a decade. The new law provides critical resources to help
small businesses continue to drive economic recovery and create
jobs. The new law extended the successful small business
enhanced loan provisions while offering billions more in lending
support, tax cuts, and other opportunities for entrepreneurs and
small business owners. It established State Small Business
Credit Initiative that provides up to $15 billion to support
state-run small business lending programs. It is estimated that
the incentives included in the act could provide up to $300
billion in new small business credit in the coming years and
create 500,000 new jobs.
California, so far, has received $56 million from the Small
Business Jobs Act. If California makes use of the money,
California could end up receiving $168 million to go to small
business loan programs such as CalCAP and the Small Business
Loan Guarantee Program (SBLGP).
RELATED LEGISLATION:
AB 901 (V.Manuel Perez) expands the definition of financial
institutions in CalCAP and increases CalCAP reporting
requirements. To be heard in Assembly Banking and Finance
Committee on April 25, 2011.
PREVIOUS LEGISLATION:
AB 1632 (Blumenfield) (Chapter 731, Statutes of 2010)
transferred $32.4 million from the General Fund to support four
small-business and jobs programs that exist in current law.
SB 832 (Comm. Env. Quality) (Chapter 643, Statutes of 2009)
allowed CalCAP to include Finance Lenders for programs that are
funded by other agencies.
SB 1311 (Simitian) (Chapter 401, Statues of 2008) permitted
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CalCAP to contribute an equal amount to an enrolled loan's loss
reverse account as the lender, and to withdraw all accrued
interest from enrolled loss reserve accounts to assist with
administrative cost.
REGISTERED SUPPORT / OPPOSITION :
Support
California State Treasurer (Sponsor)
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081