BILL ANALYSIS



C.S.H.B. 1997
By: Giddings
April 17, 1995
Committee Report (Substituted)


BACKGROUND

The Historically Underutilized Business and Small Business Linked
Deposit Program was passed in the 73rd session of the Texas
Legislature in 1993.  The program encourages banks to lend to HUBs
and small businesses in distressed communities by providing lenders
and borrowers with a lower cost of capital.

Participating lenders receive deposits from the State Treasury in
the amount to be borrowed by the business.  The lender receives
those funds at up to 2 percent below the current 6 month U.S.
Treasury Bill rate and charges up to 4 percentage points above the
Treasury Bill rate to the borrower.  The rate charged the borrower
is generally lower than the interest rate the borrower would
normally be charged by the lender.  Under the original program,
financing is provided for purchase, construction, or lease of
capital assets, including land, buildings, and equipment.  Lenders
have indicated a loan guarantee program will encourage more
participation in the Linked Deposit Program.

PURPOSE

House Bill 1997 adds loan guarantees to the program.

RULEMAKING AUTHORITY

It is the committee's opinion that this bill does expressly grant
additional rulemaking authority to the Texas Department of Commerce
Policy Board in Section 482.200(b).

SECTION BY SECTION ANALYSIS

SECTION 1.  Amends Section 481.196, Government Code, by adding that
the state is not liable, except as provided by Section 481.198, to
a lending institution for payment of the principal, interest, or
any late charges on a loan made to an eligible borrower.  Removes
linked deposits as not being an extension of the state's credit.

SECTION 2.  Amends Subchapter N, Government Code, by adding 481.198
- 481.202 as follows:

     Section 481.198. LOAN GUARANTEES. (a) Subject to the
     availability of appropriations, the department may guarantee
     no more than 50% of a loan made by private lenders.  For each
     guarantee, the department shall determine:

               (1) the amount of equity the user must pledge or
               apply to the project;

               (2) the fees charged by the department are
               necessary to fund the administration of this
               subchapter;

               (3) the maximum and minimum guarantee amounts; and

               (4) any other terms or conditions relating to a
               guarantee.

           (b)  The department may not make a loan guarantee,
           except on approval of a qualified application submitted
           by a borrower or eligible lending institution.

           (c)  On approval of a qualified application, the
           department may provide a loan guarantee to a
           participating lender of up to 50% of the cost of the
           capital assets the borrower is to purchase or construct
           with the proceeds of the loan.  The borrower must holds
           funds or property worth at least 10% of the cost of the
           project.  The funds or property must be available and
           pledged to be applied to the purchase or construction
           of those capital assets.

           (d)  Before making a loan guarantee, the department must
           establish that the borrower has a commitment from all
           other funds for the project in excess of the loan
           guarantee and that the sum of those funds and the equity
           are provided by the eligible borrower are adequate for
           the purchase or construction of capital assets.

           Section 481.199.  PAYMENTS NOT TO BE MADE TO DEFAULTING
           USERS.  (a) The department is required to report to the
           comptroller the names of any borrower who is in default
           on a loan guarantee and which the department has been
           required to honor.  The comptroller is prohibited from
           issuing a warrant or an electronic funds transfer to the
           borrower while in default.

           (b)  Allows the comptroller to issue a warrant to the
           assignee of a borrower who is in default if the
           assignment became effective before the user defaulted.

           (c)  Allows the comptroller to pay the compensation of
           a state officer or employee for issuing a warrant or
           initiating an electronic funds transfer.

           (d)(1)  Subsection applies when payment is made to a
           borrower other than through the comptroller's issuance
           of a warrant or electronic funds transfer.

               (2)  Prohibits a state agency from using funds
               inside or outside the state treasury to pay a
               borrower if the agency knows that the borrower is
               in default on a loan guarantee that the department
               has been required to honor.

               (3)  Allows an agency to pay an assignee of a
               borrower in default if the assignment was effective
               before the default.

               (4)  Allows a state agency to pay the compensation
               of a state officer or employee.

               (5)  Prohibits the comptroller from reimbursing a
               state agency for payments that is made in violation
               of this subsection.

           (e)  This section defines "compensation," "state
           agency," and "state officer or employee."

     Section 481.200.  GUARANTEE-TO-RESERVE RATIO.  (a) The
     department may guarantee loans in an amount that exceed the
     amount available in the program.  Loan guarantees may not
     exceed the guarantee-to-reserve ratio set by the policy board
     under Subsection (b).

           (b)  Allows the policy board by rule to adopt a
           guarantee-to-reserve ratio that determines the amount
           of loan guarantees that may be made.  The ratio of
           guarantees to the money available may not exceed five-to-one.

           (c)  Gives the policy board authority to review and
           adjust the ratio as needed.

           (d)  Sets the deadline for the state auditor to make a
           recommendation to the policy board for the ratio.

     Section 481.202.  PENALTY FOR FALSE INFORMATION ON
     APPLICATION.  Applicants who knowingly use false information
     in an application:

               (1) may not submit another application; and

               (2) is liable to the state and any lending
               institution involved for expenses incurred that
               would not have been incurred if the applicant had
               not provided the false information

     Section 481.204.  GIFTS AND GRANTS.  Allows the department to
     accept gifts, grants and donations.

SECTION 3.  Effective date is September 1, 1995.

SECTION 4.  Emergency clause.

COMPARISON OF ORIGINAL TO SUBSTITUTE

The substitute removes from the original bill the definitions for "private lender," and "project" and
the legislative findings.  The substitute adds that there must be available appropriations for the
program to exist.  The substitute removes from the original bill the provisions that provided that the
department, for each guarantee, shall determine that the project is sponsored by a historically
underutilized business or a small business located in a distressed community; the permissible interest
rates and amortization requirements for a guaranteed loan; and the acceptable security of the
department.  

The substitute removes from the original bill provision that allows the use of money in the Texas
Historically Underutilized Business Linked Deposit Program fund in conjunction with any other
money available for this purpose.  

The original bill provided that an applicant who knowingly provides false information in an
application cannot submit an application for two years.  The substitute removes this provision and
inserts that they may not submit another application.  The substitute removes from the original bill
the additional powers and duties provisions which requires the department to cooperate with
industrial and economic development agencies, users, and private lenders to promote and develop
activity by historically underutilized businesses and small businesses in distressed communities;
determine whether the public purpose has been or will be accomplished by a project; accept grants
from and enter into contracts with a federal agency; and provide for staff to carry out the subchapter
and to act as liaison between the department, users, private lenders, industrial and economic
development agencies, organizations related to industrial development agencies, and other state
agencies.  The substitute corrects and changes language to conform with current department
standards.

SUMMARY OF COMMITTEE ACTION

H.B. 1997 was considered by the committee in a public hearing on April 10, 1995.  Testifying on
the bill was Dan McNeil, representing the Texas Department of Commerce.  Testifying in favor of
the bill was Kelly Rodgers, representing the Texas Bankers Association; and David Pinkus,
representing the Small Business United of Texas.  The committee considered a complete substitute
for H.B. 1997.  One amendment was offered to the substitute.  The one amendment was adopted
without objection.  The substitute as amended was adopted without objection.  H.B. 1997 was
reported favorably as substituted, with the recommendations that it do pass and be printed, by a
record vote of 8 ayes, 0 nays, 0 pnv, 1 absent.