BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Carol Liu, Chair
2013-2014 Regular Session
BILL NO: AB 2377
AUTHOR: John A. Perez
AMENDED: May 23, 2014
FISCAL COMM: Yes HEARING DATE: June 25, 2014
URGENCY: No CONSULTANT:Kathleen Chavira
SUBJECT : California Student Loan Refinancing Program.
SUMMARY
This bill establishes the California Student Loan
Refinancing Program, to be administered by the California
Educational Facilities Authority (CEFA), to assist in the
refinance of private student loan debt at favorable rates,
and establishes eligibility requirements for the program.
BACKGROUND
Current law establishes the California Educational
Facilities Authority (CEFA) to administer programs that
provide tax-exempt, low-cost financing to private,
non-profit higher educational facilities. Current law
specifically outlines the following purposes of the CEFA:
a) To provide private institutions of higher education
within the state an additional means by which to
finance and refinance existing higher education
facilities.
b) To provide private and public institutions of
higher education with an additional means to assist
students in financing their costs of attendance.
c) To develop student, faculty and staff housing on or
near institutions of higher education.
d) To make grants to private institutions of higher
education to assist students in preparation for and
entrance to higher education.
Additionally, current law grants the CEFA various powers
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relative to student loans including the authority to
finance or purchase student loans, hold or invest in
student loans, create pools of student loans, sell interest
bearing bond backed by pools of student loans, and the
ability to contract or otherwise provide for distribution,
processing, origination, purchase, sale, servicing,
securing, and collection of student loans, payment of fees,
charges, and administrative expenses therewith. Current law
also authorizes the funding of reserves required for
purposes of securing CEFA financing for student loan
purposes.
(Education Code §94100-94213)
ANALYSIS
This bill :
1) Establishes the California Student Loan Refinancing
Program (CSLRP) and outlines the following goals for
the new program:
a) Help college graduates who are
"qualified borrowers" refinance student loan debt
at favorable rates.
b) Create a revolving fund to assist
more "qualified loan" borrowers.
c) Create a "loan loss reserve
account" that can be leveraged by private lenders
in the private student loan market.
2) Defines various terms for purposes of the bill
including the following:
a) Defines a "qualified borrower" to
be a resident of California who has completed a
bachelor's degree, is employed in a public
service program or by a nonprofit in California,
has the ability to repay, as determined by CEFA,
and that meets other criteria as established by
the CEFA and the financial institution
b) Defines a "qualified loan" to mean
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a loan or portion of a loan made by the financial
institution to a "qualified borrower" to
refinance a private student loan.
c) Defines a "loan loss reserve" as
an account established and maintained by the
CEFA for purposes of depositing fees paid by
financial institutions and qualified borrowers,
and state, federal, or other sources of
contribution, for purposes of covering any losses
on enrolled qualified loans sustained by a
participating financial institution.
3) Outlines the following authorities and
responsibilities for the CEFA under the CSLRP:
a) Authorizes the CEFA to contract
with any financial institution, including a
credit union, to the extent participation
complies with specified California Credit Union
Law, for purpose of participation in the program.
b) Requires the CEFA to establish a
loss reserve account for each financial
institution with which it contracts.
c) Establishes a CEFA notification
process for a financial institution seeking to
enroll a qualified loan in the program.
d) Requires the authority to
establish procedures under which a financial
institution may submit claims for reimbursement
for losses incurred as a result of qualified loan
defaults and outlines the conditions under which
a claim for reimbursement may be filed.
e) Requires the CEFA to annually
submit a report describing the program's
financial condition to the Governor and the
Legislature.
f) Authorizes the CEFA to enter
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agreements to provide assistance in carrying out
the program, including origination and servicing
of qualified loans.
4) Authorizes the CEFA to facilitate the development of a
secondary market for a qualified loan program, and
outlines specific actions that may be taken for this
purpose.
5) Authorizes the adoption of emergency regulations for
purposes of implementing the bill's provisions.
STAFF COMMENTS
1) Need for the bill . According to the author, while the
Legislature has been extensively involved in college
affordability for entering students, very little has
been done to assist students that have already
incurred loan debt. For many students, certain types
of student loans can limit their options for reducing
debt repayment or tying repayment to their employment.
It is the intent of this bill to provide individuals
that have borne the cost of their higher education
through private loans the ability to refinance,
consolidate, buy-down interest rates, and restructure
debt for these loans, in alignment with various
federal student loan alternative repayment programs.
This bill, in essence, creates a kind of "insurance"
for financial institutions that refinance these
private student loans through a credit enhancement
feature that provides for payment of these loans in
the event of default. The risk of default is
transferred from the lender to the statutorily created
program, and underwritten by the resources in the loan
loss reserve account established by the bill's
provisions.
2) Prior loan program . Under the authority granted in
current law, the CEFA has previously administered a
student loan program. Unlike the program proposed by
this bill, that program utilized bonds for purposes of
funding student loans. According to the CEFA, the
program was unsustainable in the long-term as the
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fixed rate bonds underlying the student loans made
interest rates on the program's loans noncompetitive
relative to other student loan options, and the
program no longer exists.
Distinct from the prior program, the CSLRP proposed by
this bill would be funded by fees and state and
federal contributions for the purpose of reimbursing
financial institutions in the event of default on
loans that they have extended to students. This bill
does not propose, or fund, a state administered loan
program for students.
3) Similar existing programs . Current law authorizes two
similar programs under the State Treasurer's Office.
These include the CalCAP, administered by the
California Pollution Control Financing Authority and
the PACE Loss Reserve Program, administered by the
California Alternative Energy and Advanced
Transportation Financing Authority (CAEATFA).
a) California Capital Access Program (CalCAP):
This program encourages banks and other financial
institutions to make loans to small businesses
that may have difficulty obtaining financing.
Small businesses and truck owners must still meet
lending criteria established by the financial
institution. CalCAP provides a form of loan
portfolio insurance which may provide up to 100%
coverage on certain loan defaults. The
availability of CalCAP serves as an incentive for
banks and other lenders to approve loans at lower
interest rates than might otherwise be available
to these small businesses. (Health and Safety
Code §44559-44559.12)
b) Property Assessed Clean Energy (PACE) Loss
Reserve Program: This program, created in 2013,
was designed to address Federal Housing Finance
Agency (FHFA) concerns about PACE financing for
renewable energy, energy or water efficiency
retrofits, or electric vehicle charging stations
for residential and commercial properties. The
Loss Reserve program created in 2013 ensures that
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first mortgage lenders are made whole for any
losses in a foreclosure or a forced sale that are
attributable to a PACE loan. If a mortgage lender
forecloses on a home that has a PACE lien, the
reserve can be used to cover PACE payments during
the foreclosure period. Additionally, if a local
government sells a home for unpaid taxes and the
sale price falls short of the outstanding tax and
first mortgage amounts, the reserve can be used
to cover the shortfall. By covering these types
of losses, the Loss Reserve Program puts the
first mortgage lender in the same position it
would be in without a PACE lien. This program
was funded with $10 million through the Budget
Act of 2013. (Public Resources Code §
26060-26064)
4) Related TICAS study . According to a recent report,
Student Debt and the Class of 2012, issued by the
Institute for College Access and Success (TICAS),
nationally, 71 percent of college seniors who
graduated last year had student loan debt, with an
average debt of $29,400 per borrower. The report
highlighted high debt and low debt states, and
California was noted as being among the low debt
states. The report noted that private (non-federal)
loans are one of the riskiest ways to pay for college
with interest rates that are highest for those who can
least afford them. The report also noted that these
loans lack the basic consumer protections and flexible
repayment options of federal student loans. National
data indicate that 30 percent of bachelor's degree
recipients graduate with private loan debt with the
average amount of this type of debt being $13,600.
Private loans were noted as being most prevalent at
for-profit colleges with 41 percent of their seniors
graduating with private loans. Nationally about 20
percent of graduates' debt is comprised of private
loans.
5) Fiscal . The bill currently limits the total to be
deposited into the loan loss reserve account by the
financial institution for any single qualified
borrower to $75,000 over a three year period. It is
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unclear where the initial funding for the state
contribution to the program will come from. The bill
currently makes no provision for the source of funding
for this purpose.
SUPPORT
Associated Students of the University of California, Davis
California Teachers Association
Los Angeles Community College District
Los Rios Community College District
South Orange County Community College District
Yosemite Community College District
OPPOSITION
None received.