BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 1116 (Leno) Hearing Date: April 11,
2012
As Introduced: February 17, 2012
Fiscal: Yes
Urgency: No
SUMMARY Would decrease the minimum contribution required of
borrowers who participate in the Capital Access Loan Program
(CalCAP) from 2% to 1% of the principal amount of the loan, and
would increase the length of time that a financial institution
has in which to apply to the California Pollution Control
Financing Authority (CPCFA; the authority) to enroll a qualified
loan in CalCAP.
DESCRIPTION
1. Would decrease the minimum contribution required to be paid
into a CalCAP loan loss reserve account by a qualified
business borrower from 2% of the principal amount of the
loan to 1% of the principal amount of the loan. The maximum
required borrower contribution would remain at 3.5% of the
principal amount of the loan.
2. Would increase the length of time that a participating
financial institution has in which to enroll a qualified
loan in CalCAP, from ten to fifteen days after the date on
which the loan is made.
EXISTING LAW
3. Provides for CalCAP, administered by the authority (Health
and Safety Code Section 44559 et seq.), authorizes the
authority to contract with eligible financial institutions
for the purpose of allowing those financial institutions to
participate in CalCAP, requires the authority to establish a
loss reserve account for each financial institution with
which the authority enters into a contract, requires
participating borrowers and participating financial
institutions to pay the same amount into the lender's loan
loss reserve account, and caps the amount that may be
SB 1116 (Leno), Page 2
deposited by any single participating financial institution
into any individual loan loss reserve account over a
three-year period, in connection with any single borrower or
any group of borrowers among which a common enterprise
exists, at $100,000.
COMMENTS
1. Purpose: This bill is sponsored by the State Treasurer's
Office (STO), to increase borrower participation in CalCAP,
and enable the STO to expend the full amount of its $84
million allotment of federal funds for CalCAP from the
federal State Small Business Credit Initiative Act of 2010.
Any portion of those federal funds which California fails to
spend by the end of 2016 will revert to the federal
government.
2. Background: CalCAP was authorized in 1994, to help small
businesses obtain loans for which they would otherwise be
ineligible. CalCAP is run by the California Pollution
Control Financing Authority (the authority), and, until
2010, had received all of its funding from the sale of bonds
by the authority. In 2010, the program was augmented with a
$6 million infusion of General Fund money (AB 1632, J.
Perez, Chapter 731, Statutes of 2010) and with $84 million
in federal funds, via the aforementioned Small Business
Credit Initiative Act of 2010.
CalCAP is a loan loss insurance program, rather than a direct
lending program. Small businesses that fall outside of
traditional lending or underwriting criteria can apply for
CalCAP loans from participating financial institutions. The
participating financial institutions establish all of the
terms and conditions of CalCAP loans (i.e., these terms and
conditions are not set by the authority, nor in statute).
The maximum loan amount currently available under CalCAP is $2.5
million, although no loan of that size has been made since
2008, and most loans are far smaller (the average size loan
in 2010 was $82,500, and the largest loan was $1 million).
Loans may be short- or long-term, have fixed or variable
rates, be secured or unsecured, and carry any type of
amortization schedule. Loan proceeds may be used to provide
working capital, finance the acquisition of land, construct
or renovate buildings, purchase equipment, or for other
capital projects.
SB 1116 (Leno), Page 3
Once it decides to approve a CalCAP loan, a participating
financial institution establishes a loan loss reserve
account. Funds in the loan loss reserve account are
available for use by the financial institution to backfill
itself for possible losses resulting from the loan.
Borrowers, lenders, and the authority are all required to
contribute to each CalCAP loan loss reserve account.
Amounts contributed by borrowers and lenders are identical,
are established by the lender, and currently range from 2%
to 3.5% of the loan amount, depending on the lender's
perception of the borrower's creditworthiness.
The amount contributed by the authority equals or slightly
exceeds the contributions made by the lender and borrower
(higher amounts may be contributed by the authority, if the
loan qualifies for federal funds �not all loans do], or if
the loan is being made in a "severely affected community").
The authority's contributions currently range from 4% to 7%
if the loan qualifies for federal funds and is not in a
severely affected community (from 6% to 10.5% if the loan
qualifies for federal funds and is in a severely affected
community). The authority's contributions are lower, if the
source of funds for its contribution comes only from state
funds (3% to 5.25% in non-severely affected communities, and
5% to 8.75% in severely affected communities).
Once the authority contributes to an individual loan loss
reserve account, it has no further financial exposure in
connection with the loan; any losses experienced by a
financial institution, which are not covered by the loan
loss reserve account, are borne by the financial
institution.
Under existing law, a wide range of financial institutions, both
depository and non-depository, are eligible to apply to the
authority for approval as participating CalCAP financial
institutions. As of March 22, 2012, 63 financial
institutions were on the authority's list of approved CalCAP
lenders, ranging from small community development centers
and community development financial institutions, to small
community banks and credit unions, to large, multinational
banks. To date, the authority has enrolled over 10,300
loans into CalCAP.
3. Discussion: According to the STO, lender participation in
SB 1116 (Leno), Page 4
CalCAP is largely dictated by the program's loan loss
reserve account. Current state law requires the borrower
and lender to each contribute between 2% and 3.5% of the
loan principal into the loan loss reserve account. Federal
law, however, authorizes borrowers and lenders to contribute
between 1% and 3.5% of the loan principal into the loan loss
reserve account. By decreasing the minimum required
contribution of borrowers from 2% to 1%, the STO is seeking
to attract more borrowers to CalCAP. Under the STO's logic,
more borrowers will result in more federal funds going out
the door.
The second half of this bill would increase the length of time
that participating financial institutions have in which to
submit required CalCAP paperwork to the authority, from ten
days to fifteen days. The STO is seeking this change, in
response to its observation that smaller lenders have found
it difficult to meet the 10-day requirement.
4. Summary of Arguments in Support: The STO is sponsoring the
bill to increase access to CalCAP among businesses and
ensure that the full amount of federal funds for small
business development received through the Small Business
Credit Initiative Act of 2010 are spent. SB 1116 will lower
the amount that lenders and borrowers must contribute to
CalCAP loan loss reserve accounts, thus enabling more
lenders and borrowers to participate in CalCAP. Lowering
the existing 2% floor will also make the program consistent
with federal law and make the program easier to administer
for both CalCAP and participating lenders.
SB 1116 also increases the time period for a lender to submit
its loan enrollment application to CalCAP from ten days to
fifteen days. This is intended to allow lenders, especially
smaller lenders with limited staff, more time to complete
the necessary paperwork and make more loans available for
small businesses.
5. Summary of Arguments in Opposition: None received.
6. Amendments:
a. Should this bill have a sunset date? SB 1116 is
intended to attract more borrowers to CalCAP and allow
the authority to expend the full amount of its $84
million federal funds allotment, before that allotment
SB 1116 (Leno), Page 5
expires at the end of 2016. At present, there is no
identified source of federal funding to augment the
state's contribution to CalCAP past 2016. Yet, the
reduction in minimum borrower and lender contributions
this bill would enact would remain on the books. A
January 1, 2017 sunset date would help ensure that the
changes in this bill, which are intended to help get
federal money out the door, don't end up bankrupting the
CalCAP fund, once the federal funding allocation expires.
Adding a sunset date will also allow the Legislature to
revisit this bill's reduction in borrower and lender
contribution percentages to 1%, to see if the change has
worked as intended.
7. Prior and Related Legislation:
a. AB 796 (Blumenfield): Would increase the maximum
allowable contribution by a financial institution
participating in CalCAP to $200,000, provided that the
matching contribution made by the authority is funded
exclusively from funds made available pursuant to the
federal Small Business Jobs Act of 2010. Double-referred
to the Senate Governance and Finance Committee and Senate
Energy, Utilities and Communications Committee. Pending
in the Senate Governance and Finance Committee.
b. AB 901 (V. Manual Perez), Chapter 483, Statutes of
2011: Added microbusiness lenders and small business
financial development corporations to the list of
financial institutions eligible to participate in CalCAP.
c. AB 981 (Hueso), Chapter 484, Statutes of 2011:
Restored CalCAP's severely affected area funding
augmentations; authorized the authority to withdraw less
than the full amount of accumulated interest from loan
loss reserve accounts, to offset its costs to administer
CalCAP; and added community development financial
institutions to the list of financial institutions
eligible to participate in CalCAP.
d. AB 1632 (J. Perez), Chapter 731, Statutes of 2010:
Transferred a total of $32.4 million from the General
Fund to the California Small Business Expansion Fund,
California Capital Access Fund, and the California
Economic Development Fund, to support small businesses
and facilitate matching funds that would ensure a full
SB 1116 (Leno), Page 6
complement of federal funding for these programs.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Treasurer Bill Lockyer (sponsor)
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102