JKM C.S.H.B. 2545 75(R)BILL ANALYSIS ECONOMIC DEVELOPMENT C.S.H.B. 2545 By: Greenberg 4-15-97 Committee Report (Substituted) BACKGROUND The Community Investment Program is an initiative to strengthen Texas communities through investing in the state's multi-bank Community Development Corporations. Multi-bank CDCs play a crucial role in rebuilding communities by making sound, high impact loans to small businesses in distressed and working class areas. These organizations focus on building a sustainable economic base in order to create jobs, generate wealth, attract newcomers, expand the tax base, encourage socio-economic mobility, motivate youth to achieve, improve the physical environment, and help these communities to become integral players in Texas society and economy at large. PURPOSE The purpose of this bill is to create a community investment program enabling multi-bank CDCs to use public money to leverage private and public dollars for the betterment of our communities. RULEMAKING AUTHORITY It is the committee's opinion that this bill does expressly grant additional rulemaking authority to the Department of Housing and Community Affairs in SECTION 1, Chapter 2306, Government Code, Subchapter AA, Sec. 2306.623 and to the board of the department in Sec. 2306.633 which requires the board to adopt rules relating to the format of the audit. SECTION BY SECTION ANALYSIS SECTION 1 SUBCHAPTER AA. TEXAS COMMUNITY INVESTMENT PROGRAM Sec. 2306.621. Defines (1) "Multi-bank community development corporation" (CDC) to mean a corporation organized to provide community development loans to businesses that employ low and moderate income persons by investing in and making loans to businesses located in distressed areas. (2) "program" as the community investment program established in this chapter. Sec. 2306.622 COMMUNITY INVESTMENT PROGRAM (a) Notwithstanding any other law, the department will award grants to or purchase stock of certain CDCs to make loans to or invest in businesses in distressed areas, unable to qualify for conventional bank loans. (b) The department will determine the number of awards and the eligibility requirements to receive loans. (c) A CDC must raise at least $500,000 in private investments to be eligible for department awards. (d) An eligible CDC must enter into a participation agreement with the department to receive grants or have the department purchase stock in the CDC. Sec. 2306.623 RULE-MAKING AUTHORITY The department is granted rulemaking authority to adopt rules relating to the implementation of the program and any other rules necessary to accomplish the purposes of this subchapter. Sec. 2306.624 GRANT APPLICATION (a) An eligible CDC may file a grant application form approved by the board, that includes the type and number of businesses to whom they plan to make loans. (b) The director shall act on an application within 30 days of the day it was filed. Sec. 2306.625 PROVISIONS RELATING TO GRANTS (a) Approved loans or investments must be made by the 18th month after the grant was received. (b) Any amount, not invested within 18 months, must be returned to the department within 10 days. (c) If the CDC loses more than 25% on loans or grants awarded under the program, it shall return all unencumbered money to the department and provide the director with all documentation and related instruments concerning program investments. Sec. 2306.626 ELIGIBLE LOANS (a) Requires each CDC to create an investment committee to approve loan requests made by businesses. Each committee must have at least 5 members. Fifty percent of whom must be bankers and 30 percent representatives of the community. (b) All loans, from department grant money, must be approved by the investment committee. (c) The loan may be in the form of debt, subordinated debt, or equity investment. Sec. 2306.627 LIMITATION ON USE OF GRANT At least 60% of the amounts received by CDC must be invested in businesses that have been in existence for at least one year prior to the date the investment was made. Sec. 2306.628 COLLABORATIVE EFFORT A CDC may make a loan or investment in conjunction with one or more financial institutions through partnerships or joint investments. Sec. 2306.629 PROVISIONS RELATING TO LOANS (a) Places requirements on the maximum amount loaned under this program: (1) $200,000 if all of the loan is direct, (2) $100,000 if any debt to CDC is subordinated. (b) Maximum term of a loan made is 15 years. Sec. 2306.630 PROVISION RELATING TO EQUITY INVESTMENTS (a) $50,000 is the maximum equity investment that may be made by a CDC, for a maximum term of seven years. (b) States that the maximum amount of ownership a CDC may acquire in a business is 50 percent of the business's equity. Sec. 2306.631 INTEREST INCOME States that all income made on investments is the property of the CDC. Sec. 2306.632. SEMI-ANNUAL REPORT (a) A report must be submitted by the CDC to the Department within 30 days of the date the sixth month period for which there is a participation agreement ends. The report must detail the status of each investment or loan made under the program. (b) The board will determine the form and content of the report. Sec. 2306.633 ANNUAL AUDIT The agreement between the CDC and the Department must contain an annual audit of all amounts awarded to the CDC under the program. The board will adopt rules relating to the format of the audit. SECTION 2. This act takes effect September 1, 1997. SECTION 3. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE SECTION 1. Sec. 2306.622 COMMUNITY INVESTMENT PROGRAM The committee substitute adds new language to subsection (a) that requires the department to establish a community investment program, notwithstanding any other laws, to award grants to or purchase stocks of certain CDCs to make loans or invest in businesses in distressed areas that cannot qualify for conventional bank loans. The committee substitute adds language to subsection (d) to require an eligible CDC to enter into a participation agreement with the department in order to receive grants or permit the department to purchase stock. Sec. 2306.623 The committee substitute deletes the Subsection (b) found in HB 2545 that required the department to develop criteria for determining a business to be a disadvantaged business. Sec. 2306.625 The committee substitute in Subsection (c) deletes (2) of HB 2545 which required a CDC to assign the department interest in outstanding investments if the CDC experienced losses of more than 25 percent on certain loans or investments. Renumbers remaining sections accordingly. Sec. 2306.626 The committee substitute requires each CDC to form an investment committee. HB 2545 required that the department create an investment committee in each area. Sec. 2306.627 The committee substitute eliminates language requiring the department to ensure that at least 50 percent of all amounts awarded under the program are invested in small businesses owned primarily by minorities or women. The committee substitute renumbers Sec. 2306.627 accordingly. Sec. 2306.628 HB 2545 requires the approval of the department to make joint investments or partnerships. The committee substitute does not explicitly refer to the approval of the department. Sec. 2306.629 The committee substitute in Subsection (a) clarifies that the section is referring to loans made by a community development corporation. CSHB 2545 Subsection (a)(1) replaces "nonsubordinated" with "direct." CSHB 2545 Subsection (a)(2) clarifies that debt is subordinated to a bank or other entity. Sec. 2306.631 CSHB 2545 states that all income made on investments is the property of the CDC, but removes language that assigns investments to the department under Sec. 2306.625(c).