Analysis of AB 2314 (Petrie-Norris) — State-Guaranteed Commercial Financial Products for Small Businesses
Summary
This is the Assembly Committee on Jobs, Economic Development, and the Economy analysis of AB 2314 (Petrie-Norris), as amended April 20, 2022, for a hearing on April 26, 2022, with Sabrina Cervantes as Chair. The subject is state-guaranteed commercial financial products for small businesses: Small Business Expansion Fund and Capital Access Loan Program. The analysis says California is set to receive nearly $1.2 billion in federal Small Business Credit Initiative Act of 2010 (SSBCI) funding. It says AB 2314 requires loans with a state loan guarantee or enrolled in the California Capital Access Program to meet specified fair lending practices if SSBCI money backs the credit enhancements. It lists no opposition on file.
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“Analysis of AB 2314 (Petrie-Norris) — State-Guaranteed Commercial Financial Products for Small Businesses.”
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AB 2314
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Date of Hearing: April 26, 2022
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY
Sabrina Cervantes, Chair
AB 2314 (Petrie-Norris) – As Amended April 20, 2022
SUBJECT: State-guaranteed commercial financial products for small businesses: Small Business
Expansion Fund and Capital Access Loan Program
POLICY FRAME: California is set to receive nearly $1.2 billion in federal Small Business Credit
Initiative Act of 2010 (SSBCI) funding. These funds are intended to be used by the state to expand access
to capital (debt and equity), promote economic resiliency, and create new jobs and economic
opportunities.
California’s application to the US Treasury proposes to divide these funds among three existing credit
enhancement programs and a new venture program as follows: $390.9 million to the existing Small
Business Loan Guarantee Program; $472.7 million to the existing California Capital Access Collateral
Support Program; $118.1 million to the existing California Capital Access Loss Reserve Program; and
$200 million to a new venture fund.
AB 2314 sets fair lending standards for privately issued loans that receive SSBCI-funded credit
enhancements. These standards generally align with those set in the Responsible Business Lending
Coalition’s Small Business Borrowers’ Bill of Rights, which they described as the first cross-sector
consensus on the rights of small businesses-owners when accessing debt capital.
The analysis includes information on the SSBCI, the joint legislative hearing on the state’s use of the
SSBCI in creating a more inclusive economy, the SSBCI-funded credit enhancement programs, Small
Business Borrowers' Bill of Rights, and related legislation. This bill was previously heard in the
Assembly Committee on Banking and Finance and passed the committee on a 12 to 0 vote. There is no
known opposition to this bill. Suggested amendments are included in Comment 11.
SUMMARY: AB 2314 requires all loans which receive a loan guarantee issued under the state’s Small
Business Loan Guarantee Program (Guarantee Program) or are enrolled in the California Capital Access
Program (CalCAP) to meet specified fair lending practices, as specified, if the funding used to back those
credit enhancements are moneys received by the state from the federal SSSBCI. Specifically, this bill:
1) Makes findings and declarations:
a) That the integrity of small business lending programs are of paramount importance to California’s
small business owners. Fostering a healthy small business lending marketplace will encourage the
equitable recovery of established businesses and foster new small business creation.
b) There are 4.1 million small businesses in California. Small business owners employ roughly one-
half of the private sector workforce and, since the Great Recession, have been the largest drivers
of new job growth in our country. Despite these facts, small business owners struggle to access
capital from traditional lending institutions like banks and credit unions. The commercial and
industrial lending index dropped below zero percent late in 2020 and continued to be below −10%
in September 2021. After the Great Recession, bank lending under $250,000 declined
significantly.
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c) New small business startups are rapidly growing. The United States Census Bureau’s data on new
firm formations shows that new business applications grew by almost 2 million between 2019 and
2021, a higher rate than ever before. This is especially true for non-White business owners. After
experiencing the largest number of small business closures in April 2020, the number of Black and
Latino-owned firms was significantly higher in September 2021 than in February 2020.
d) As a result, many small business owners turn to online lending as they struggle to find the capital
they need in order to grow and expand. Financial products that allow small businesses to access
hard-to-obtain capital often lack transparency, and recent research by the Federal Reserve
concluded Black and Hispanic entrepreneurs are twice as likely to be affected by “potentially
higher-cost and less-transparent credit products.”
e) A study by Accion Opportunity Fund demonstrates that California small business owners take out
online loans at an average Annual Percentage Rate of 94%. Many terms or conditions are not
made clear to business owners, like products that come with hidden fees and obscure rates. Most
small business owners cannot afford to make these mistakes.
f) Therefore, lenders participating in state lending programs funded by taxpayer dollars should use
fully transparent and fair lending practices to ensure that small business borrowers can access the
capital they need in order to grow and expand their businesses.
2) Requires loan guarantees issued by the Small Business Finance Center at the California Economic
Development and Infrastructure Bank (IBank) using SSBCI funds to be fully transparent and meet
specified fair lending practices. These requirements include all of the following conditions:
a) The guaranteed loan shall not require the borrower to sign a confession of judgment, as specified.
b) The guaranteed loan shall not be refinanced or renewed, nor shall it be used to refinance or renew
another loan, if the new loan to refinance or renew includes charges, as defined, to pay off the
balance of the previous loan.
c) The final payoff amount of the guaranteed loan shall not vary based upon the source of the funds
used to make the final payoff.
d) The terms of the guaranteed loan shall consider repayment funds from a third party as equivalent
to funds from the borrower.
e) The guaranteed loan repayment information shall be sent to a commercial credit reporting agency,
as defined, and credit data shall be consulted when underwriting the guaranteed loan.
f) The guaranteed loan’s borrower and any guarantors shall be informed if the financial institution or
corporation intends to report guaranteed loan repayment performance to a commercial credit
reporting agency if default occurs.
g) The guaranteed loan shall follow a schedule of conditions concerning hidden payment charges, as
follows:
i) The guaranteed loan shall disclose financing charges other than interest accrued since the last
payment as “prepayment charges.”
ii) The guaranteed loan shall disclose any additional charges or fees added in the case of
prepayment as “prepayment penalties.”
iii) The guaranteed loan shall disclose potential prepayment charges and penalties in any loan
offer summary.
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iv) The guaranteed loan shall disclose actual prepayment charges and penalties at the time of
prepayment.
h) The guaranteed loan shall be given to a borrower that can afford the loan, or that has a credible
path to profitability, meaning that the firm has a debt-service coverage ratio of greater than 1.00.
i) The guaranteed loan shall be given to a borrower that can afford the loan, or that has a credible
path to profitability if the financial institution received repayment directly from the borrower’s
gross receipts, such as through credit cards, payments process, or daily payments, that prevent the
borrower from paying for operating expenses first.
3) Prohibits certain financial institutions from participating in CalCAP, administered by the California
Pollution Control Financing Authority (CPCFA), when the state’s portion of the loss reserve account
is funded by moneys derived from the federal SSBCI. These requirements include all of the following
conditions:
a) The financial institution shall not require the borrower of the qualified loan to sign a confession of
judgment, as defined.
b) The financial institution shall not refinance or renew a qualified loan, nor shall it use a qualified
loan to refinance or renew another loan, if the new loan to refinance or renew includes charges, as
defined, to pay off the balance of the previous loan.
c) The financial institution may not provide the information required for prepayment beyond two
days from the date upon which the borrower requests to prepay or refinance a loan.
d) The financial institution shall not vary the final payoff amount of the guaranteed loan based upon
the source of the funds used to make the final payoff.
e) The financial institution shall consider repayment funds from a third party as equivalent to funds
from the borrower.
f) The financial institution shall send repayment information to a commercial credit reporting
agency, as defined in subdivision (b) of Section 1785.42 of the Civil Code, and credit data shall be
consulted when underwriting the guaranteed loan.
g) The financial institution shall inform the borrower and any guarantors if it intends to report
guaranteed loan repayment performance to a commercial credit reporting agency if default occurs.
h) The financial institution shall ensure that the borrower can afford the loan or that it has a credible
path to profitability, meaning that the borrower has a debt service coverage ratio greater than 1.00.
i) The financial institution shall ensure that the borrower can afford the loan or that it has a credible
path to profitability if the financial institution receives repayment directly from the qualified
loan’s borrower’s gross receipts, such as through credit card, payments processing, or daily
payments, that prevents that qualified loan’s borrower from paying for operating expenses first.
j) The financial institution shall follow a schedule of conditions concerning hidden payment charges,
as follows:
i) The qualified loan shall disclose financing charges other than interest accrued since the last
payment as prepayment charges.
ii) The qualified loan shall disclose any additional charges or fees added in the case of
prepayment as prepayment penalties.
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iii) The qualified loan shall disclose potential prepayment charges and penalties in any loan offer
summary.
iv) The qualified loan shall disclose actual prepayment charges and penalties at the time of
prepayment.
EXISTING LAW:
1) Establishes the Governor’s Office of Business and Economic Development (GO-Biz) within the
Governor’s Office for the purpose of serving as the lead state entity for economic strategy and
marketing of California on issues relating to business development, private sector investment, and
economic growth.
2) Establishes the IBank within GO-Biz and authorizes it to undertake a variety of infrastructure-related
financial activities, including, but not limited to, the administration of the Infrastructure State
Revolving Fund (ISRF), the oversight of the Small Business Finance Center, and the issuance of tax-
exempt and taxable revenue bonds.
3) Establishes the Small Business Finance Center within the IBank for the purpose of offering a range of
financial capital to small businesses, including direct loans, loan guarantees, and bond insurance.
Program delivery is provided through state-designated small business financial development
corporations (FDCs). FDCs are prohibited from issuing a guarantee unless it determines the following
conditions are satisfied:
a) There is a low probability that the loan being guaranteed would be granted by a financial company
or financial institution under reasonable terms and conditions and the borrower has demonstrated a
reasonable prospect of repayment.
b) The loan proceeds will be used exclusively within California.
c) The loan qualifies as a small business loan or an employment incentive loan.
d) The borrower has a minimum equity interest in the business as determined by the directives and
requirements.
e) The jobs generated or retained demonstrate reasonable conformance to any directives and
requirements specifying employment criteria.
4) Establishes the CPCFA, provides the authority with specified powers and duties, and authorizes it to
approve financing for pollution control projects and facilities, administer a loss reserve program to
serve the credit needs of small businesses, and provide grants and loans to remediate brownfields,
among other activities.
5) Establishes CalCAP for the purpose of providing a small business loss reserve account program
through participating financial institutions. In implementing the program, CPCFA is authorized to
establish a loss reserve account for each financial institution with which the authority makes a
contract. The loss reserve account consists of fees paid by borrowers, the financial institution, and
moneys transferred to the account from CPCFA.
FISCAL EFFECT: Unknown
COMMENTS & CONTEXT:
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1) Joint Hearing – Member Priorities: On March 29, 2022, the Assembly Budget Subcommittee on
State Administration and the Assembly Committee on Jobs, Economic Development, and the
Economy, held a joint informational hearing on the state’s implementation of SSBCI and its potential
contribution to a more inclusive economic recovery from the COVID-19 pandemic.
During the course of the hearing, the Members heard from the State Treasurer, the Legislative
Analyst’s Office, IBank, and CPCFA, as well as stakeholders with professional expertise on the needs
of small businesses and the barriers they are currently facing to access capital.
Among other issues and recommendations discussed, stakeholders emphasized the need to consider
new ways of connecting with those small business owners who have been most impacted by the
pandemic and have historically faced barriers to accessing traditional lending programs. In particular,
Members noted the importance of SSBCI funded program reaching undercapitalized small business
owners in rural areas, as well as women-business owners and business-owners of color.
The federal Payment Protection Program (PPP) was cited as an example of government intention,
which was not backed up by program outcomes. While the US Congress intended that the US Small
Business Administration takes steps to ensure PPP loans prioritized small businesses in “underserved”
markets, a term that includes low-income communities, rural areas and businesses owned by people of
color, women and veterans,” the delivery system and other program requirements which prioritized
speed resulted in underserved markets received comparatively few loans.
“(P)(iv) Sense of the senate.--It is the sense of the Senate that the Administrator should issue
guidance to lenders and agents to ensure that the processing and disbursement of covered loans
prioritizes small business concerns and entities in underserved and rural markets, including
veterans and members of the military community, small business concerns owned and controlled
by socially and economically disadvantaged individuals (as defined in section 8(d)(3)(C)), women,
and businesses in operation for less than 2 years.” [Section 1102, of Public Law 116-136]
In response to the hearing, Members called for the establishment of a written outreach and technical
assistance strategy, as well as making changes to existing small business lending programs to best
meet the current needs of all California small businesses. This includes small business owners who
face documented barriers to accessing capital, whether those barriers be geographically or
demographically expressed.
2) The Small Business Borrowers' Bill of Rights: The Responsible Business Lending Coalition
developed the Small Business Borrowers’ Bill of Rights in 2015 to address the emergence of
predatory practices in the small business lending market. Designed to foster transparency and
accountability, there are six core principles to the Small Business Borrowers Bill of Rights, which are
augmented by a set of specific practices that are required of lenders and brokers to comply with these
rights. According to the Aspen Institute website, on April 5, 2022, there are more than 90
organizations who have joined as signatories or endorsers. Their six core principles are:
The right to transparent pricing and terms
The right to non-abusive [financial] products
The right to responsible underwriting
The right to fair treatment from brokers
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The right to inclusive credit access
The right to fair collection practices
The Small Business Borrowers’ Bill of Rights also drives public policy and has been adopted in a
number of states, including Arizona, New York, and California. In California, the transparent pricing
and term standards were included in SB 1235 (Glazer) in 2018. Among other provisions, the bill
required disclosure to the borrower of the total amount of funds provided; total dollar cost of
financing; the loan term or estimated term; the method, frequency, and amount of payments; a
description of prepayment policies; and the total cost of the financing, as specified. The requirements
of SB 1235 do not apply to all financial institutions, depository institutions; lenders regulated under
the federal Farm Credit Act; and commercial financing transactions secured by real property, among
others are excluded. The Department of Financial Protection and Innovation is still in the process of
finalizing its rule to reflect SB 1235.
While not all items in the Small Business Borrowers Bill of Rights are included in AB 2314, the bill
incorporates a number of standards into the loan structure requirements of the Small Business Loan
Guarantee Program at the IBanks’ Small Business Finance Center and the participating lender
requirements for CalCAP administered through the CPCFA. The following, lifted directly from the
webpage of the Responsible Business Lending Coalition, are concepts found in this bill:
Alignment of Interests: Lenders who receive repayment directly from the borrower’s gross sales
must also verify, through documents, data from third parties, and/or due diligence, that the
borrower can repay all debt and remain profitable, or that it has a credible path to profitability.
Lenders should not make loans that the borrower cannot truly afford, even if the lender can find a
way to be repaid.”
Right-sized Financing: Size loans to meet the borrower’s need rather than maximize the lender’s
or broker/lead generator's revenue. Seek to offer the borrower the size of loan that they need,
rather than offering the largest amount they could qualify for.”
Responsible Credit Reporting: Report loan repayment information to major credit bureaus and
consult credit data when underwriting a loan. Such reporting enables other lenders to responsibly
underwrite the borrower and helps the borrower build a credit profile that may facilitate access to
more affordable loans in the future. Lenders must inform the borrower and any guarantors if they
intend to report loan repayment performance to guarantors’ credit bureaus only in certain
circumstances, such as after a default.
No Hidden Prepayment Charges: If, in the event of prepayment, the borrower will be required to
pay financing charges other than interest accrued since the last payment, disclose these charges as
“prepayment charges.” Also disclose any additional charges or fees added in the case of
prepayment as “prepayment penalties.” Disclose (a) the potential amount of these prepayment
charges and penalties in any loan offer summaries, and (b) the actual prepayment charge and
penalties at the time of any prepayment. In the case of financing with payments that vary as a
percentage of the borrower’s sales, a payoff event is considered prepayment if the borrower states
the intent to pay off the financing or in the event of refinancing.
Fair Prepayment: If a borrower requests to prepay or refinance a loan, provide any information
required for prepayment within two business days of the borrower's request. To enable small
businesses to access the most appropriate financing, the final payoff amount should not vary based
on the source of funds used for payoff, funds from a third-party should be considered equivalent to
funds from the borrower.
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The Responsible Business Lending Coalition is monitoring SSBCI guidance and released that the
Coalition “is encouraged by Treasury’s incorporation of small business borrower protections in its
program guidelines—many of which draw from the coalition’s recommendations to the agency, and,
more specifically, the Small Business Borrowers’ Bill of Rights.”
Several areas of the SSBCI guidance were highlighted by the Responsible Business Lending
Coalition’s announcement, including the requirement that “SSBCI-supported transactions must
include ‘disclosure by the lender or investor of all key terms in an easy-to-understand manner.’ The
RBLC recommends disclosing the annual percentage rate in addition to the loan or investment
amount, payment obligation and schedule, and any fees or additional costs.
AB 2314 proposes to further incorporate these transparency and fair lending standards into the state’s
largest credit enhancement programs that are slated to receive SSBCI funding.
3) SSBCI Fair Lending Practices: The SSBCI guidelines provide some clear direction on the
importance of transparency and fair lending practices.
As noted above, the SSBCI regulation states that “SSBCI-supported transactions must include
disclosure by the lender of all key terms in an easy-to-understand manner.” Examples of the type of
disclosures covered by this rule include the loan amount, payment obligation and schedule, and any
fees or extra costs. [Subsection (g) Disclosure of Terms, Section IX. Other SSBCI Program
Requirements]
There are also very specific fair lending regulations, two of which are in AB 2314, including the
following:
Confession of Judgement: SSBCI-supported transactions are prohibited from including
confessions of judgment. “A confession of judgment is usually a contractual clause in which the
debtor agrees to allow a creditor, upon the nonoccurrence of a payment, to obtain a judgment
against the debtor, often without advanced notice or a hearing.” [Subsection (f) Minimum National
Customer Protection Standards, Section IX. Other SSBCI Program Requirements]
Double Dipping: SSBCI-supported transactions are prohibited from including prepayment or
“double-dipping” fees. “Double dipping” occurs when a lender issues new credit to refinance prior
credit without forgiving a portion of the fee already paid and results in the borrower paying a fee
on top of a fee. [Subsection (f) Minimum National Customer Protection Standards, Section IX.
Other SSBCI Program Requirements]
Interest Rates: SSBCI regulation sets the maximum interest rate that may be changed on loans
receiving SSBCI funding to not exceed the National Credit Union Administration’s (NCUA)
interest rate ceiling for loans made by federal credit unions, as specified. The US Treasury noted
in the regulation that in choosing to adopt the “NCUA interest rate ceiling, Treasury aims to
ensure that small businesses that participate in SSBCI receive loans that are economically
beneficial to them. [Subsection (f) Minimum National Customer Protection Standards, Section IX.
Other SSBCI Program Requirements]
In addition, Section IX, Other SSBCI Program Requirements, states that SSBCI disclosure
requirements are to be considered a “minimum standard” and that these standards should not be
viewed as superseding other disclosure requirements as set in federal and state laws and regulations.
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4) CalCap’s Lender Participation Model: CalCAP is a loss reserve program that is intended to
provide flexibility to lenders to use their own underwriting criteria and set their own terms. A concern
was raised that AB 2314 placed inappropriate terms and conditions on lenders and required CPCFA to
independently assess the creditworthiness of a proposed enrolled bill.
The author has noted that she is in discussions with the Office of the State Treasurers, which Chairs
the CPCFA, to modify the requirements of the bill to better align within the CalCAP construct. To
assist in advancing this dialogue, the following is a summary of the existing program criteria and
existing CPCFA authority to engage with participating lenders.
CalCAP Regulation (Section 8071 – Application by Financial Institution): A financial
institution seeking to participate in CalCAP is required to complete an application and be
approved prior to being listed as a CalCAP lender and enrolling loans in CalCAP. The application
includes basic information about the financial institution, including the name, address, and
disclosure of its capital resources. The regulation also requires disclosure of specific information
relative to the financial institution’s operations, including, but not limited to:
o Certification that the applicant financial institution is not subject to a cease and desist order or
other regulatory sanction which would impair its ability to participate in the Program.
o A description of the board of directors, including their race, ethnicity, and gender.
o The financial institution's rating is from a nationally recognized credit rating agency which
assesses the financial soundness and stability of financial institutions.
o A statement that the financial institution agrees to follow CalCAP procedures, share annual
audited financial statements, and permit an audit of any of its records relating to CalCAP
enrolled loans, and supply such other information concerning CalCAP enrolled loans as
requested by the executive director of CPCFA.
Upon receipt of a completed application, the executive director reviews and is authorized to
determine whether additional information is required, or whether the application is sufficient to
permit the applicant to participate in CalCAP. The statutory authority for these requirements is
cited as Sections 44520, 44559.2, and 44559.5(f) of the Health and Safety Code.
CalCAP Regulation (Section 8072 - Loan Enrollment): Although CPCFA regulations provide
that the specific terms of the loan, including interest rates, fees, and other conditions, are
determined by the agreement between the financial institution and the borrower, CPCFA has the
authority and requires the financial institution to provide very specific information regarding every
enrolled loan. This includes, but is not limited to the amount and term of the loan, the intended
use of the proceeds of the loan, and whether the loan is secured or a refinance. The participating
financial institution is also required to disclose the following:
o The agreed amount of the fees payable by the borrower and the financial institution.
o Confirmation that the financial institution notified the borrower if the financial institution's
share of the fees for the loan has been paid by the borrower.
o The interest rate applicable to the loan.
o Whether the lending activities of the financial Institution are subject to any applicable safety
and soundness standards as set forth in applicable federal banking regulations.
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o Confirmation that the financial institution has validated that the borrower has secured or made
an application for all applicable licenses or permits needed to conduct business.
o The loan is not a refinance of a loan previously made to the borrower to the extent that the
outstanding balance is not increased.
o Confirmation that the financial institution has provided the borrower with the Authority’s
privacy notice, consistent with the California Information Practices Act,
o Obtain written certification from the Borrower that the loan is for a business purpose, not be
used to pay delinquent federal or state income taxes, or purchase ownership interest in the
business.
The Executive Director is authorized to review the financial institution’s application for
enrollment in advance of the making of the loan and notify the institution whether such loan meets
CalCAP’s requirements. The financial institution is required to keep CPCFA apprized of any
material changes to the terms of an enrolled loan, and loans can be disqualified from program
participation after being enrolled.
In summary, CPCFA already has many controls over which lenders are allowed to participate, the
authority to audit and ask questions regarding the loss reserve account, and may even dis-enroll a loan
or terminate a financial institution from participation in CalCAP.
One path forward is to clearly distinguish these new SSBCI-related standards from the negotiable
terms and conditions of a loan that receives a credit enhancement with public funds. These are not
loan terms, but rather a guardrail between fair and predatory small business lending.
5) The Small Business Loan Guarantee Program (SBLGP): In providing a general comment on the
concept of adding loan conditions to SSBCI-funded credit enhancements, GO-Biz noted that new
lender restrictions which might deter some lenders from participating those programs, which could
ultimately impair the ability of the state to deploy SSBCI funds.
To assist in advancing the discussion of predatory lending protections versus the expedient use of the
SSBCI funds, the following is a summary of the existing process used by FDCs to review and approve
individual loans under the state’s SBLGP.
Guarantee Term and Procedures (Sections 5001 and 5002 of Directives and Requirements):
Each lender applying for a guarantee under the SBLGP is required to submit a completed
Borrower application to the FDC. Prior to the execution of the guarantee, the loan committee of
the FDC is required to review application to ensure that it meets program requirements. Each
guarantee application is required to approved through the adoption of a resolution by the FDC’s
board of directors. The CDS board may delegate approval authority to the loan committee, as
specified. The terms and conditions set out in the resolution approving the resolutions must be
consistent with the terms and conditions of the guarantee and including, among other things:
o A provisions that the lender has not engaged, and will not engage, in fraudulent or negligent
practices in connection with the Borrower, Guarantee, the Loan or the related loan agreement.
o The terms of the guarantee, including the time period, percent coverage of the loan amount,
fees, and default provisions.
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o An agreement by the lender to abide by binding arbitration by the American Arbitration
Association in the event that either the Corporation or IBank denies the requested Demand.
o An acknowledgment by the Lender that in the event of a Demand, the Lender will allow a
bank examiner at the California Department of Business Oversight, or other independent
auditor selected by the Corporation, to examine the Lender's Loan files.
o Confirmation that the owner(s) of the business receiving a Loan guaranteed under the SBLGP
have at least $1.00 of equity interest in the business at the time of the Loan. This minimal
Directive and Requirement is intended to promote those businesses that may be under-
capitalized yet have been deemed creditworthy, due to its other attributes, by a Lender.
Guarantee Demand Procedures (Section 5003 of Directives and Requirements): In the case of
a default, the lender is authorized to file a demand for payment to cover the unpaid Loan principal
and interest, pursuant to a specified procedure. The procedure includes, but is not limited to all of
the following:
o Providing proof to the Corporation that the Borrower is in Default under the applicable loan
agreement and the lender has delivered to both the borrower and the FDC notice of the
delinquency, as specified.
o Within 10 days of the demand being filed with the FDC, the FDC is required to contract with
the California Department of Business Oversight or an independent auditor to conduct an
investigation to determine whether the lender complied with the terms of the guarantee, and to
issue a report to the FDC.
o The Directives and Requirements state the report is required to include a number of specified
things. This includes, but is not limited to:
Whether the loan agreement is consistent with the terms and conditions in the guarantee.
Whether all collateral for the loan and guarantee have been perfected and maintained.
Whether the Lender complied with the procedures for making a Demand, as specified.
In a section entitled “Loan Information” the report is required to include specific
information “obtained solely from a review of Lender files” that includes a description of
the Borrower's business and a discussion as to whether the Lender files contain any
reference to matters material to borrower's compliance with any environmental laws or
regulations.
SSBCI Compliance: To ensure that all applicable requirements were followed during the first
SSBCI funding round, the Directives and Requirements were amended to state: “Corporations
shall adhere to the State Small Business Credit Initiative (SSBCI) rules and guidance when
supporting a guarantee with SSBCI federal funds. The rules and guidance include, but are not
limited to, the following resources; the Small Business Jobs Act of 2010, the SSBCI Allocation
Agreement for Participating States dated February 17, 2011 between the United States Department
of the Treasury and the State of California, as amended from time to time, SSBCI Policy
Guidance, National Standards for Compliance and Oversight, the SSBCI F.A.Q’s, and the FDC
Policy Manual.”
In summary, it appears the FDCs have a sufficiently robust process currently in place to include fair
lending practices in their consideration of a loan guarantee application. Especially since many of
these requirements are either explicitly or implicitly provided for under SSBCI.
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6) California’s Use of Round One - Federal SSBCI Funds: In 2011, California received a significant
allocation of federal funds through the SSBCI, a program established under the federal Small Business
Jobs Act of 2010. Under the initial federal Allocation Agreement, $168.4 million was divided equally
between the CalCAP for Small Business program administered through CPCFA and the Small
Business Loan Guarantee Program administered through the Business, Transportation, and Housing
Agency (BTH) and later the IBank under the Governor’s Reorganization Plan GRP2.
Receipt of these funds was very timely as debt markets were frozen, and state resources were very
limited for these two small business credit enhancement programs. In fact, both CPCFA and BTH
were short on revenues to operate their programs and had received General Fund appropriations in
2010, with $6 million being approved for CalCAP and $20 million for the Small Business Loan
Guarantee Program [AB 1632 (Budget), Chapter 731, Statutes of 2010]. Unfortunately for small
business borrowers, BTH’s $20 million budget augmentation was eliminated in the following year’s
budget.
Due to federal accounting practices and slight variations in federal SSBCI loss reserve and guarantee
program requirements, CPCFA and the IBank each established new reserve accounts and adopted new
federal versions of their programs. Once CPCFA and the IBank received the federal funds, the
program priorities for each of the programs were to use the federal funds first and leave the state funds
for either nonconforming loans or use when the federal moneys had been exhausted.
Over the course of the six program years (2011 to 2017), the state amended the federal Allocation
Agreement several times. In the latter years, CPCFA sought authorization to administer a third credit
enhancement program, a Collateral Support Program. CPCFA used the federal funds as follows:
Loss Reserve Program ($20 million) and a Collateral Support Program ($65 million).
According to the Legislative Analyst’s Office (LAO), between 2010 and 2016, this SSBCI funding
supported 10,286 new loans, and about 40% of the dollar amount of these loans was made to
businesses in low-and-moderate-income communities.
The federal Allocation Agreement expired in March 2017. Both CPCFA and the IBank report that all
federal funds have been expended or allocated, meaning that as these moneys become unencumbered
from their current loans, the moneys can be re-deployed. As an example, funds in the Collateral
Support Program could be used to continue enrolling loans under the CalCAP for Small Business
program or used to fill a different small business financing gap.
7) California’s Use of Round Two - Federal SSBCI Funds: The American Rescue Plan Act of 2021
included $10 billion for the reauthorization of the State Small Business Credit Initiative. California
anticipates receiving approximately $1.8 billion in federal SSBCI funding. Chart 1 outlines
California’s anticipated federal SSBCI funding.
Federal law required each application to include detailed information on how SSBCI funds will
provide access to capital for small businesses in underserved communities and to business owners
who are from groups who meet the definition of socially and economically disadvantaged individuals,
also referred to as SEDI. According to the SSBCI Guidelines:
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A “Socially and economically disadvantaged individual” means an individual who is a socially
disadvantaged individual or an economically disadvantaged individual, as defined in the Small
Business Act.
“Underserved communities” mean small businesses located in low- and moderate-income,
minority, and other underserved communities, including women- and minority-owned small
businesses.
“Treasury encourages states to consider the following areas when including plans regarding ‘other
underserved communities’ in their report: rural communities; communities undergoing economic
transitions, including communities impacted by the shift towards a net-zero economy or
deindustrialization; and communities surrounding Minority-Serving Institutions.”
Under the SEDI incentive formula, California could receive up to $99.8 million for expending 48.87%
of SSBCI Capital funds in SEDI eligible businesses during the first tranche of SSBCI deployment.
States and tribal governments will receive SSBCI funds from the US Treasury in three tranches. In
order to access the next tranche of funding, the state or tribal government must demonstrate that at
least 80% of the current tranche of funding has been encumbered and/or used. To facilitate the
drawing down of federal funding, the IBank and CBCFA have stated that they will have an MOU in
place to enhance their ability to transfer moneys between programs.
Chart 1 - California’s Estimated SSBCI Funding*
Categories of Funding Funding Available
Total Federal Funding Authorized $10,000,000,000
Total CA SSBCI Allocation $1,181,997,613
Subtotal CA Prorated SSBCI Allocation $894,973,879
Subtotal CA SSBCI SEDI Allocation $187,189,392
Subtotal CA SSBCI SEDI Performance Allocation $99,834,342
Funding is Distributed in Three Tranches. States
Must Encumber 80% of their Funds to Access Funding in Tranche 80% Target
Next Tranche of Funding
Tranche 1 $357,113,879 $285,691,104
Tranche 2 $407,031,050 $661,315,944
Tranche 3 $417,852,683
*This is based on California’s allocation as of January 2022.
Source: Document submitted to the Legislature by the IBank and CPCFA, January 7, 2022
California’s application proposes to fund three existing small business capital programs and create at
least one additional program. Chart 2 provides details on California’s proposed allocation plan.
Chart 2 - California’s Proposed SSBCI Allocation Plan*
Existing Programs Funded Funding Allocated
Small Business Loan Guarantee (IBank) $390,998, 806
California Capital Access Program (CPCFA) $118,199,762
California Capital Access – Collateral Support Program (CPCFA) $472,799,045
New Program(s) Funded Funding Allocated
Venture Capital (IBank) $200,000,000
Loan Participation (CPCFA) – under consideration
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Total CA SSBCI Allocation $1,181,997,613
*This is based on California’s allocation as of January 2022.
Source: Document submitted to the Legislature by the IBank and CPCFA, January 7, 2022
Another key aspect of SSBCI are the leverage ratios. At a minimum, $1 of public expenditure must
result in $1 of new private investments. In the aggregate, the state’s SSBCI programs are required to
target an overall leverage ratio of at least $10 of new private investment for each $1 of public funds.
These leverage requirements, coupled with a drive to utilize SSBCI funds quickly in order to access
the next tranche of funds, create tension between undertaking strategic actions to reach small business
borrowers in underserved communities and/or SEDI-eligible. The Legislature, as the policy- making
body, should send clear signals about how to approach these multifaceted goals.
8) Potential Reduction in SSBCI Funds: California’s application is based on information provided by
the US Treasury as of January 2022. Recent conversations at the federal level, including those
involving the US Congress, propose reallocating some portion of SSBCI funding to pay for other
COVID-19 expenses. Any change in SSBCI’s overall program funds will likely impact California’s
allocation and possibly the mix of programs.
9) The Small Business Finance Center: The Small Business Finance Center was established in 2013
following the implementation of the Governor’s Reorganization Plan GRP2, which transferred the
IBank and the Small Business Loan Guarantee Program from the soon to be defunct Business,
Transportation, and Housing Agency to GO-Biz.
That same year, AB 1247 modified the GRP2 proposal for the placement of the Small Business Loan
Program and established the Small Business Finance Center within the IBank [AB 1247 (Medina and
Bocanegra), Chapter 537, Statutes of 2013]. It was the authors’ intent that the center becomes a
multipurpose small business financing entity. To accomplish this objective, the statutory framework
of the Small Business Finance Center was drafted to reflect existing programs, as well as the potential
need for new financial products. As an example, the Small Business Loan Guarantee Program was
specifically codified within the administrative control of the Small Business Center and general
statutory authority was also provided for the IBank board to approve and modify a range of financial
products, including loans and other debt instruments, as well as loan guarantees and other credit
enhancements.
According to information on the IBank website (2/24/2022):
More than 20,000 loan guarantees have been issued under this program since the early 2000s.
IBank loan guarantees have helped to create or retain 412,000 jobs.
During 2019-20, the Small Business Finance Center guaranteed 470 loans, resulting in $165
million in loan guarantees that supported $240 million in small business loans.
The IBank and the California Small Business Finance Center have very broad statutory authority to
meet the evolving needs of small businesses. In addition to the general loan guarantee program, the
Governor has the authority to activate a disaster-specific loan guarantee program. During the early
months of the COVID-19 pandemic, the Disaster Loan Guarantee Program was activated for
microloans, as well as new financing initiative launched, the California Rebuilding Fund.
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10) California Capital Access Program for Small Businesses: The CalCAP for Small Business
program was established under the administrative control of the CPCFA through legislation enacted in
1994 for the purpose of incentivizing financial institutions to provide small businesses with the capital
to maintain and grow their businesses.
The program uses a portfolio-based credit enhancement model, whereby a loss reserve account is
established to offset losses incurred in connection with small business loans enrolled in the program.
Funding in the loss reserve account consists of moneys paid by the participating borrower and
financial institution, with CPCFA matching these contributions.
Unlike a loan guarantee which ensures payment on a certain percentage of the defaulted loan [80% to
90% in the guarantee program], under the loss reserve fund model, the amount of the default payment
is based on the amount of funds available in the reserve account. This means a lender could
potentially recover 100% of the value of the defaulted loan to the extent that there are sufficient
moneys are in the account. The model encourages lenders to maintain good underwriting practices
because utilization of the loss reserve too often can quickly draw-down the reserve, leaving little for
other potential defaults of enrolled loans within the portfolio.
CalCAP loans can be used for working capital and to finance the acquisition of land, construction or
renovation of buildings, purchase of equipment, and other capital projects. There are some limitations
on real estate loans and loan refinancing. The maximum loan amount is $2.5 million. Lenders set the
terms and conditions of the loans and decide which loans to enroll into CalCAP. Loan fees, which are
used to capitalize the loss reserve account, are set by the lender and are in the range of 2% to 3.5% of
the total loan amount. Loans can be short- or long-term, have fixed or variable rates, be secured or
unsecured, and bear any type of amortization schedule.
CalCAP was initially funded through excess fees from the issuance of CPCFA pollution control tax-
exempt bonds. The Legislature appropriated $6 million in 2010 to expand the program, and in 2011
CalCAP received approximately one-half of the state's $168 million SSBCI allocation based on a joint
application to the US Treasury. Later, California amended its SSBCI application to re-direct $65
million to a collateral support program.
CPCFA contracts with several state agencies, including the California Air Resources Board and the
California Energy Commission, to provide lenders with loan loss reserve accounts to finance new,
cleaner-burning, heavy-duty, diesel trucks and buses and the acquisition of electric vehicle charging
station equipment.
According to the 2020 Annual Report, through the end of December 2020, the total number of loans
enrolled in each CalCAP program is as follows:
23,209 - CalCAP for Small Business since 1994 (proposed to receive SSBCI funds)
29,883 - CalCAP/CARB since 2009
329 - CalCAP Collateral Support Program since 2013 (proposed to receive SSBCI funds)
3 - CalCAP Electric Vehicle Charging Station Financing Program since 2015
3 - CalCAP Seismic Safety Program since 2016
0 - CalCAP American with Disabilities Act Program.
11) Proposed Amendments: Below is a list of amendments the committee members may wish to review
when considering the bill.
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a) Add legislative intent language relative to SSBCI.
b) Rearrange and clarify the CalCAP provisions between lender commitments to participate in the
program and conditions for enrolling a loan.
c) Conform the fair lending standards between CalCAP and Small Business Loan Guarantee
Program.
12) Related Legislation Current Session: Below is a list of bills from this session that are related to the
state’s implementation of the SSBCI program.
a) AB 2314 (Petrie-Norris) Transparent and Ethical Financial Practices: This bill sets fair and
ethical lending standards for loans issued guarantees under the California Small Business Loan
Guarantee Program and financial institutions that participate in the California Capital Access
Program. These changes are especially timely as the state anticipates receiving nearly $1.2 billion
in federal State Small Business Credit Initiative funds. Status: Pending in the Assembly
Committee on Jobs, Economic Development, and the Economy.
b) AB 2376 (Petrie-Norris) One-Stop Capital Shop: This bill establishes an online platform, the
One-Stop Capital Shop, in preparation for the state’s receipt of nearly $1.2 billion in federal State
Small Business Credit Initiative funds. The One-stop Capital Shop will assist small businesses in
accessing safe funding opportunities and to reduce barriers in access to affordable capital. Among
other objectives, the One-Stop Capital Shop platform is intended to serve as a loan marketplace
that allows small businesses to compare and access public and private financing programs. Status:
Pending in the Assembly Committee on Jobs, Economic Development, and the Economy.
c) AB 2400 (Cervantes) California Capital Access Program: This bill modifies California Capital
Access Program in preparation for the state’s receipt of nearly $1.2 billion in federal State Small
Business Credit Initiative funds. Proposed changes reflect issues that arose during the first round
of SSBCI funding. Status: Pending in the Assembly Committee on Jobs, Economic
Development, and the Economy.
13) Related Legislation from Prior Sessions: Below is a list of bills from prior sessions.
a) AB 29 (John A. Pérez, Feuer, and V. Manuel Pérez) Office of Business and Economic
Development: This bill establishes GO-Biz to include a newly codified California Business
Investment Services Program and the existing Office of the Small Business Advocate. Status:
Signed by the Governor, Chapter 475, Statutes of 2011.
b) AB 796 (Blumenfield) Matching Funds: This bill, as it related to the CPCFA, would have
increased the maximum contribution by the financial institution to $200,000, if the matching
contribution made by CPCFA were funded exclusively from funds made available pursuant to the
federal Small Business Jobs Act of 2010. The bill would also have limited the amount of
matching funds used for deposits exceeding $100,000 to not more than 50% of the available funds.
Status: Vetoed by the Governor, 2012, for provisions unrelated to CPCFA.
c) AB 901 (V. Manuel Pérez) Expand Financial Partners and Reporting Requirements: This bill
expanded the CalCAP definition of financial institution and increased reporting requirements.
CalCAP is one of the programs which received millions of dollars in federal and state funding for
small businesses through the federal Small Business Jobs Act of 2010. Status: Signed by the
Governor, Chapter 483, Statutes of 2011.
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d) AB 964 (Calderon, Gonzalez Fletcher, Gomez, and Cervantes) California Affordable Clean
Vehicle Program: This bill would have changed the name of an article within the Health and
Safety Code from “Capital Access Program for Small Business” to “Capital Access Program.”
Consistent with this change, the bill would have established the California Affordable Clean
Vehicle Program within the Capitol Loan Access Program to assist low-income individuals in
purchasing or leasing zero-emission vehicles or plug-in hybrid electric vehicles for personal or
commercial use by providing affordable financing mechanisms. Status: Died in the Senate
Committee on Appropriations, 2017.
e) AB 981 (Hueso) Expand Financial Partners: This bill expands the CalCAP definition of a
financial institution, authorizes the withdrawal of a lower portion of the interest or other income
from a loss reserve account to cover program costs, and requires additional financial assistance to
qualified businesses in severely affected communities, such as areas with high unemployment.
CalCAP is one of the programs which received millions of dollars in federal and state funding for
small businesses through the federal Small Business Jobs Act of 2010. Status: Signed by the
Governor, Chapter 484, Statutes of 2011.
f) AB 1247 (Medina and Bocanegra) Small Business Finance Center: This bill establishes the
California Small Business Finance Center at the IBank within the Governor’s Office of Business
and Economic Development and transfers the authority to administer the small business loan
guarantee program and other related programs to the California Small Business Finance Center.
Status: Signed by the Governor, Chapter 537, Statutes of 2013.
g) AB 1547 (Quirk-Silva) Community Development Financing Reforms: This bill modifies
definitions, updates eligible activities to reflect market conditions, and streamlines processes of
programs administered through the California Capital Access ADA Program, California Capital
Access Program Seismic Safety Program, California Industrial Development Financing Advisory
Commission, California Alternative Energy and Advanced Transportation Financing Authority,
Sales & Use Tax Exclusion Program, and PACE Loss Reserve Program. Status: Pending in the
Senate Committee on Business, Professions, and Economic Development.
h) AB 1553 (Cervantes) Direct Payments to Borrowers: This bill authorizes the use of moneys in
the California Americans with Disabilities Act Small Business Capital Access Loan Program
(ADA program) fund for payments to participating financial institutions or borrowers to provide
incentives to participate in the ADA program. The bill also allows small business assistance funds
to include contributions and nonreimbursable payments made directly to borrowers or
participating programs. Status: Signed by the Governor, Chapter 644, Statutes of 2017.
i) AB 1632 (Blumenfield) Small Business Capital Infusion: This bill provides the necessary
statutory changes in the area of job creation and small business development in order to implement
the 2010 Budget Act. The bill transfers $32.4 million from the General Fund to support four small
business and jobs programs that exist in current law. The funding appropriated in this bill went to
the Small Business Loan Guarantee Program ($20 million); California Capital Access Fund ($6
million); Small Business Development Centers ($6 million); and the Federal Technology Centers
($350,000). Status: Signed by the Governor, Chapter 731, Statutes of 2010.
j) SB 225 (Simitian) Loss Reserve Accounts for Truck Leases: This bill authorizes the
establishment of loss reserve accounts for the purposes of terminal rental adjustment clause
leasing, if funds are available for contribution into the loss reserve account from any source other
than the authority. Status: Signed by the Governor, Chapter 492, Statutes of 2011.
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k) SB 551 (Hueso) Transfer of California Capital Access Program: This bill would have
transferred certain funding and loan portfolios from the California Pollution Control Financing
Authority to the Small Business Finance Center administered by the California Infrastructure and
Economic Development Bank. Status: Held in the Assembly Committee on Appropriations,
2018.
l) SB 832 (Senate Committee on Environmental Quality) Code Maintenance: This bill revises the
Revenue and Tax Code definitions of “project” and “pollution control facility” to conform with
those used by the California Pollution Control Financing Authority Act under its sales and use tax
exclusion program and includes public agencies within the definition of a “participating party”
that is eligible for financial assistance in connection with the projects designed to control or
eliminate environmental pollution. Status: Signed by the Governor, Chapter 643, Statutes of
2009.
m) SB 1235 (Glazer) Commercial Financing Disclosures: This bill creates a new division within the
Financial Code, titled “Commercial Financing Disclosures” and requires providers of commercial
financing, as defined, to provide disclosures about the cost of that financing to the recipients of the
financing, as specified. Status: Signed by the Governor, Chapter 1011, Statutes of 2018.
n) SB 1311 (Simitian) Changes in Deposits and Withdrawals: This bill reduces the CalCAP
monetary contribution of the CPCFA to an amount equal to the amount of fees paid by a
participating financial institution. The bill also authorizes the withdrawal of interest or other
income from the loss reserve accounts for the purpose of offsetting administrative costs and
contributions. Status: Signed by the Governor, Chapter 401, Statutes of 2008.
14) Double Referral: The Assembly Committee on Rules referred this measure to two policy committee
for review. The Assembly Committee on Banking passed this measure on April 18, 2022 on a 12 to 0
vote.
REGISTERED SUPPORT / OPPOSITION:
Support
Accion Opportunity Fund
California Asian Pacific Chamber of Commerce (CAPCC)
CAMEO - California Association for Micro Enterprise Opportunity
Consumer Federation of California
Pacific Community Ventures
Small Business Majority
Opposition
None on File
Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090
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