BILL ANALYSIS �
SB 976
Page 1
Date of Hearing: July 2, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
SB 976 (Vargas) - As Amended: April 12, 2012
SENATE VOTE : 37-0
SUBJECT : Finance lenders: exemptions.
SUMMARY : Exempts certified development companies (CDCs) from
the California Finance Lenders Law (CFLL). Specifically, this
bill :
1)Defines "certified development companies" as a development
company participating in the program under Title V of the
federal Small Business Investment Act of 1958.
EXISTING FEDERAL LAW
1)Defines a "certified development company" as an entity
authorized by the U.S. Small Business Administration to
deliver 504 financing to small businesses. �13 CFR 120.10.]
EXISTING STATE LAW
1)Establishes the CFLL, administered by the Department of
Corporations (DOC) that authorizes both secured and unsecured
consumer and commercial lending and loan brokering, subject to
certain restrictions, depending on the type of loan and the
loan amount. �Financial Code, Section 22000]
2)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
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 pursuant
to the CFLL. �Financial Code, Section 22502]
3)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
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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]
4)Exempts from the CFLL any person doing business under any law
of any state or of the United States relating to banks, trust
companies, savings and loan associations, insurance premium
finance agencies, credit unions, small business investment
companies, California business and industrial development
corporations, or licensed pawnbrokers. Also exempts, check
cashers, a college or university making a loan for the purpose
of permitting a person to pursue a program or course of study
leading to a degree or certificate, a broker-dealer, to any
person who makes no more than one loan in a 12-month period as
long as that loan is a commercial loan, or any public
corporation. �Financial Code, Section 22050]
FISCAL EFFECT : None.
COMMENTS :
CDCs
Small Business Administration (SBA) CDCs are nonprofit
organizations set up to contribute to the economic development
of the communities in which they are located. CDCs are
authorized by SBA to market, package and service SBA 504 loans.
The SBA has requirements for an organization to operate as a CDC
which include:
Be a nonprofit corporation in good standing
Have at least 25 members representing the following groups:
o Government organization responsible for economic
development in the specific community and acceptable to
SBA;
o Financial institutions that provide long-term fixed
asset financial in the community where it operates;
o Community organizations dedicated to the local
economic development; and,
o Businesses located in the area of operation
Have a board of directors chosen from among the members and
representing at least three of the four membership groups
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Meet a minimum level of lending activity
Must remain independent of banks, governmental agencies and
other institutions
There are over 260 CDCs nationwide each having a defined area of
operations covering a specific geographic area. The area of
operation for most CDCs is the state in which they are
incorporated. California has 34 CDCs established in the state.
CDCs are supervised by the SBA and must submit annual reports to
the SBA. The SBA's Office of Lender Oversight oversees CDC's
compliance with all applicable rules and regulations. To retain
its certification, a CDC must provide at least four 504 loan
approvals during two consecutive fiscal years. As part of its
oversight process, the SBA assigns a CDC to one of eight tiers
based on annual approval volume and provides every CDC with
financial data and ratios, including loan loss rate for its tier
average.
The SBA is the largest backer of commercial loans for small
business in the U.S. offering a variety of loan guaranty
programs to accommodate most small business financial needs.
The CDC/504 loan program is one of the most popular loan
programs offered by SBA and is designed to encourage economic
development within a community by providing small businesses
with long-term, fixed rate financing to acquire major fixed
assets for expansion or modernization on reasonable terms and to
stimulate employment through a job retention/creation goal.
SBA CDCs participate in the 504 loan program. This program is
designed for financing fixed assets such as equipment or real
estate. Typically it is structured as follow:
A loan or first mortgage secured with a senior lien from a
private sector lender covering 50 percent of the project cost,
A second mortgage secured with a junior lien from an SBA CDC
backed by a 100 percent SBA guaranteed debenture covering up
to 40 percent of the cost, and
A contribution of at least 10 percent equity from the small
business borrower
The SBA 504 Loan program is a powerful economic development loan
program that offers small businesses another avenue for business
financing, while promoting business growth, and job creation.
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As of February 15, 2012, the $50 Billion in 504 loans has
created over 2 million jobs. This program is a proven success
and win-win-win for the small business, the community and
participating lenders.
The 7(a) Loan Program is a SBA 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.
7(a) loans are 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.
Community Advantage Pilot Loan Program
Previously, CDCs did not fall under DOC regulation under the
CFLL. This measure was brought forward because recently the SBA
launched a new pilot program that allows CDCs to act as lenders
under the Community Advantage Pilot Loan Program. As of June
14, 2012, 8 CDCs are Community Advantage Approved Lenders. As
amended, this measure will exempt Community Advantage Lenders
from the CFLL.
The sponsor of the measure, California Small Business Finance,
who is an approved lender to participate in the new Community
Advantage Pilot Loan Program, wants to make sure that under this
program they do not fall under DOC's regulation under the CFLL.
The sponsor believes they are heavily regulated by the SBA.
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CDCs are audited on a regular basis by the SBA and the SBA
Office of the Inspector General. Onsite reviews and
examinations cover portfolio performance, operations management,
and credit administration, compliance with loan program
requirements, capital adequacy, asset quality, management
quality, earnings, and liquidity.
On February 15, 2011, SBA created a new pilot program. SBA
created the pilot program to increase and expand access to
capital for businesses and entrepreneurs in underserved
communities. Community Advantage is a pilot initiative aimed at
increasing the number of SBA 7(a) lenders who reach underserved
communities, targeting community-based, mission-focused
financial institutions which were previously not able to offer
SBA loans. The maximum loan Size is $250,000 with a guarantee
of 85 percent for loans up to $150,000 and 75 percent for those
greater than $150,000. Community Advantage is open to
mission-focused lenders, including Community Development
Financial Institutions, SBA's Certified Development Companies
and SBA's nonprofit micro-lending intermediaries. Community
Advantage lenders will be expected to maintain at least 60
percent of their SBA loan portfolio in underserved markets.
Community Advantage is a three-year pilot initiative. Community
advantage will operate through March 15, 2014 and may be
extended or made permanent at SBA's discretion.
According to the SBA, community advantage loans will enable
mission-oriented lenders to increase the flow of capital to
underserved communities and achieve a greater impact. Through
participation in the pilot program, community advantage lenders
should be able to build capacity and stronger balance sheets and
may have greater access to the kind of patient capital that
complements mission lenders proven track record of low overall
defaults and high percentage of loan repayments. Community
advantage lenders will be responsible through the lending
process for administering their loans in compliance with all SBA
loan programs requirements and furnishing to SBA all appropriate
information.
RECOMMENDED AMENDMENTS:
The recommended amendments clarify the intent of the sponsor.
According to the sponsor, CDCs do not fall under the CFLL for
504 financing but under the new pilot program CDCs may be
regulated both under the CFLL and SBA. These amendments makes
sure those CDCs approved to participate under the Community
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Advantage Pilot Program do not also have to be regulated under
the CFLL since the SBA has strict guidelines and regulations.
1)Delete on page 1, line 7- "certified development companies"
and insert "community advantage lenders"
2)On page 2, delete lines 2-5 and insert "Community advantage
lenders" means an entity authorized by the U.S. Small
Business Administration to deliver community advantage loans.
REGISTERED SUPPORT / OPPOSITION :
Support
CDC Small Business Finance
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081