BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 976 (Vargas) Hearing Date: April 11,
2012
As Introduced: January 19, 2012
Fiscal: Yes
Urgency: No
SUMMARY Would exempt certified development companies from the
California Finance Lenders Law (CFLL).
DESCRIPTION
1. Would add CDCs to the list of business entities exempt from
the CFLL, where they would join other entities with
exemptions from that law, including banks, trust companies,
savings and loan associations, insurance premium finance
agencies, credit unions, small business investment
companies, California business and industrial development
corporations, and licensed pawnbrokers.
EXISTING LAW
2. Provides for the CFLL, administered by the California
Department of Corporations (DOC; Financial Code Section
22000 et seq.). The CFLL authorizes both secured and
unsecured consumer and commercial lending and loan
brokering, subject to certain restrictions, depending on the
type of loan (consumer versus commercial) and the loan
amount.
3. Defines a commercial loan, pursuant to the CFLL, as one
with a principal amount of five thousand dollars ($5,000) or
more, or any loan under an open-end credit program, whether
secured by either real or personal property, or both, or
unsecured, the proceeds of which are intended by the
borrower for use primarily for other than personal, family,
or household purposes (Financial Code Section 22502). The
CFLL does not cap the allowable interest rate, nor limit the
loan length, nor otherwise regulate the terms of commercial
loans. All of the loans made by certified development
corporations meet the definition of commercial loans
SB 976 (Vargas), Page 2
pursuant to the CFLL.
4. Requires all CFLL licensees to obtain and maintain a surety
bond in a minimum amount of twenty-five thousand dollars
($25,000; Financial Code Section 22112), maintain a minimum
net worth of $25,000; Financial Code Section 22104), and
file an annual report with the commissioner of DOC,
providing information that the commissioner reasonably
requires concerning the business and operations of the
licensee within the state during the preceding calendar year
(Financial Code Section 22159).
SB 976 (Vargas), Page 3
COMMENTS
1. Purpose: This bill is sponsored by CDC Small Business
Finance, which is approved as a certified development
company and a Small Business Lending Company by the federal
Small Business Administration (SBA). CDC Small Business
Finance is seeking an exemption from the CFLL, to eliminate
what it views as costly and duplicative regulation. The
company asserts that it is already heavily regulated by the
federal SBA, and that the terms of the loans it makes are
already established by federal statute and regulation. This
bill's sponsor believes that continuing to subject CDCs to
regulation by both DOC (through its oversight of the CFLL)
and the federal SBA is unnecessary, and does not further the
interests of either borrowers or lenders.
2. Background and Discussion: CDCs are nonprofit corporations,
which are established to further economic development within
the communities in which they operate. CDCs work with the
SBA and private sector lenders to provide financing to small
businesses, which accomplishes the goal of community
economic development.
The SBA is an independent federal government agency, which helps
Americans start, build, and grow businesses. The SBA
administers multiple loan programs to help aid small
business development, including a microloan program, the
7(a) program, and the CDC/504 program.
The sponsor of this bill administers both 7(a) and 504 loans on
behalf of the SBA. The 7(a) and CDC/504 programs are
discussed below, because they describe the types of lending
activity that would no longer be regulated by the state, if
this bill's author and sponsor are successful in obtaining
an exemption from the CFLL for CDCs.
The 7(a) Loan Program is the SBA's primary program to help
start-up and existing small businesses obtain financing when
they might not be eligible for business loans through normal
lending channels. The name comes from section 7(a) of the
Small Business Act, which authorizes the SBA to provide
business loans to American small businesses. The SBA itself
does not make loans, but rather guarantees a portion of
loans made and administered by commercial lending
institutions.
SB 976 (Vargas), Page 4
7(a) loans are the most basic and most commonly used types of
loans. They are also the most flexible, because financing
can be guaranteed for a variety of general business
purposes, including working capital, machinery and
equipment, furniture and fixtures, land and building
(including purchase, renovation and new construction),
leasehold improvements, and debt refinancing (under special
conditions). Loan maturity is up to 10 years for working
capital and generally up to 25 years for fixed assets.
Most American banks participate in the program, as do some
non-bank lenders, which expands the availability of loans.
Participating lenders agree to structure loans according to
the SBA's requirements, and apply for and receive a guaranty
from the SBA on a portion of each 7(a) loan. The SBA does
not fully guarantee 7(a) loans; instead, the lender and the
SBA share the risk that a borrower will be unable to repay
the loan in full.
The CDC/504 Loan Program is a long-term financing tool, designed
to encourage economic development within a community. The
504 Program accomplishes this by providing small businesses
with long-term, fixed-rate financing to acquire real estate
or major fixed assets for expansion or modernization.
Typically, a CDC/504 project includes: a) a loan secured from a
private sector lender with a senior lien covering up to 50
percent of the project cost; b) a loan secured through a CDC
(backed by a 100 percent SBA-guaranteed debenture) with a
junior lien covering up to 40 percent of the project cost;
and c) a contribution from the borrower of at least 10
percent of the project cost (equity).
a. Summary of Arguments in Support: As noted above, the
sponsor of this bill, CDC Small Business Finance, is
approved as a CDC and a Small Business Lending Company
(SBLC) by the SBA, and administers both 7(a) and 504 loans
on behalf of the SBA. As part of its certifications, CDC
Small Business Finance's officers and paid employees are
subject to federal background checks and stringent ethical
requirements intended to prevent self-dealing and conflicts
of interest, and to ensure protection of the public. The
company itself must maintain fidelity insurance of at least
$2 million, as well as directors' and officers' liability
insurance of at least $1 million. CDCs and SBLCs are also
audited on a regular basis by the SBA and the SBA Office of
SB 976 (Vargas), Page 5
the Inspector General. Onsite reviews and examinations
cover portfolio performance, operations management, credit
administration, compliance with loan program requirements,
capital adequacy, asset quality, management quality,
earnings, and liquidity.
CDC Small Business Finance is seeking an exemption from the
CFLL, to eliminate what it views as costly and duplicative
regulation. The company asserts that it is already heavily
regulated by the federal SBA, and that the terms of the
loans it makes are all established by federal statute and
regulation. Continuing to subject CDCs to regulation by
both DOC (through its oversight of the CFLL) and the federal
SBA is unnecessary, and does not further the interests of
either borrowers or lenders. CDC Small Business Finance
also observes that the proposed exemption is narrow; this
bill's sponsor is one of only 27 CDCs in California.
Finally, this bill's sponsor observes that the CFLL already
contains an exemption for small business investment
companies (SBICs), another type of entity approved and
regulated by the federal SBA. According to the SBA, SBICs
are privately owned and managed investment funds, licensed
and regulated by SBA, that use their own capital, plus funds
borrowed with an SBA guarantee, to make equity and debt
investments in qualifying small businesses.
3. Summary of Arguments in Opposition: None received.
4. Prior and Related Legislation: None relevant.
5. Amendments:
a. The Department of Corporations has requested a
technical amendment, which would strike the paragraph
designations in the subdivision of the Financial Code
being amended by the bill. As proposed to be amended,
the text of the bill would remain identical, but
references to "(1)" and "(2)" would be deleted from
Financial Code Section 22050(a).
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
SB 976 (Vargas), Page 6
CDC Small Business Finance (sponsor)
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102