BILL ANALYSIS �
AB 981
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CONCURRENCE IN SENATE AMENDMENTS
AB 981 (Hueso)
As Amended September 2, 2011
Majority vote
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|ASSEMBLY: |75-0 |(May 26, 2011) |SENATE: |37-0 |(September 7, |
| | | | | |2011) |
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Original Committee Reference: B. & F.
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.
The Senate amendments make technical, conforming changes so the
measure does not conflict with other pending legislation affecting
the same code section.
EXISTING FEDERAL LAW enacted the Small Business Jobs Act (H.R. 5297)
on September 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
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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;
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)
AS PASSED BY THE ASSEMBLY , this bill was substantially similar to
the measure passed by the Senate.
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FISCAL EFFECT : According to the Assembly Appropriations Committee,
there is neither direct fiscal impact to the state nor any increased
liability for loans.
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 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 (Budget Committee), Chapter 731, Statutes of 2010. 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. This bill 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. This bill 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.
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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 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
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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 (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.
FEDERAL ACTION:
Federal Small Business Jobs Act of 2010 (H.R. 5297) On September 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
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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 (Environmental Quality Committee), 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 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.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0002565