1-1 By: Ellis, et al. S.B. No. 266 1-2 (In the Senate - Filed January 22, 1997; January 23, 1997, 1-3 read first time and referred to Committee on Economic Development; 1-4 February 13, 1997, reported adversely, with favorable Committee 1-5 Substitute by the following vote: Yeas 8, Nays 0; 1-6 February 13, 1997, sent to printer.) 1-7 COMMITTEE SUBSTITUTE FOR S.B. No. 266 By: Ellis 1-8 A BILL TO BE ENTITLED 1-9 AN ACT 1-10 relating to the establishment of a program in the Texas Department 1-11 of Commerce to secure certain loans made to small and medium-sized 1-12 businesses and nonprofit organizations. 1-13 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-14 SECTION 1. Chapter 481, Government Code, is amended by 1-15 adding Subchapter BB to read as follows: 1-16 SUBCHAPTER BB. CAPITAL ACCESS PROGRAM 1-17 Sec. 481.401. DEFINITIONS. In this subchapter: 1-18 (1) "Capital access loan" means a loan that is 1-19 entitled to be secured by the fund. 1-20 (2) "Financial institution" includes a bank, trust 1-21 company, banking association, savings and loan association, 1-22 mortgage company, investment bank, credit union, or nontraditional 1-23 financial institution. 1-24 (3) "Fund" means the capital access fund. 1-25 (4) "Loan" includes a line of credit. 1-26 (5) "Medium-sized business" means a corporation, 1-27 partnership, sole proprietorship, or other legal entity that: 1-28 (A) is domiciled in this state or has at least 1-29 51 percent of its employees located in this state; 1-30 (B) is formed to make a profit; and 1-31 (C) employs 100 or more but fewer than 500 1-32 full-time employees. 1-33 (6) "Nonprofit organization" means a private, 1-34 nonprofit, tax-exempt corporation, association, or organization 1-35 listed in Section 501(c)(3), Internal Revenue Code of 1986, that is 1-36 domiciled in this state or has at least 51 percent of its members 1-37 located in this state. 1-38 (7) "Participating financial institution" means a 1-39 financial institution participating in the program. 1-40 (8) "Program" means the capital access program. 1-41 (9) "Reserve account" means an account established in 1-42 a participating financial institution on approval of the department 1-43 in which money is deposited to serve as a source of additional 1-44 revenue to reimburse the financial institution for losses on loans 1-45 enrolled in the program. 1-46 (10) "Small business" means a corporation, 1-47 partnership, sole proprietorship, or other legal entity that: 1-48 (A) is domiciled in this state or has at least 1-49 51 percent of its employees located in this state; 1-50 (B) is formed to make a profit; 1-51 (C) is independently owned and operated; and 1-52 (D) employs fewer than 100 full-time employees. 1-53 Sec. 481.402. CAPITAL ACCESS FUND. (a) The capital access 1-54 fund is a special account in the state treasury. 1-55 (b) Appropriations for the implementation and administration 1-56 of this subchapter, investment earnings, fees charged under this 1-57 subchapter, and any other amounts received by the state under this 1-58 subchapter shall be deposited in the fund. 1-59 (c) Money in the fund may be appropriated only to the 1-60 department for use in carrying out the purposes of this subchapter. 1-61 Sec. 481.403. TRANSFER OF MONEY FROM OTHER FUNDS TO THE 1-62 CAPITAL ACCESS FUND. (a) At the beginning of each fiscal year, 1-63 the department shall compute for the Texas exporters loan fund 1-64 established under Subchapter D and the Texas rural economic 2-1 development fund established under Subchapter F: 2-2 (1) the amount sufficient for that fiscal year to 2-3 cover loan guarantees made under Subchapter D or F, as applicable 2-4 to each fund; 2-5 (2) the amount sufficient for the fiscal year to repay 2-6 bonds issued under Subchapter D, to carry out the purposes of 2-7 Section 481.059, or for projects that are eligible under Subchapter 2-8 F, as applicable to each fund; and 2-9 (3) the amount of loan repayments for loans made under 2-10 Subchapter D or F that will be expected to be received during the 2-11 fiscal year, as applicable to each fund. 2-12 (b) At the beginning of each fiscal year, the comptroller 2-13 for each fund described by Subsection (a) shall subtract the sum of 2-14 the amount computed by the department under Subsections (a)(1) and 2-15 (a)(2) for the respective fund from the amount in the fund at the 2-16 beginning of the fiscal year. 2-17 (c) If a positive amount results from a computation made 2-18 under Subsection (b), the comptroller shall transfer an amount 2-19 equal to the computed amount from the fund to which the computation 2-20 relates to the capital access fund. 2-21 (d) As loan repayments are received for each fund described 2-22 by Subsection (a), the comptroller shall transfer the payments to 2-23 the capital access fund. 2-24 Sec. 481.404. POWERS OF DEPARTMENT IN ADMINISTERING CAPITAL 2-25 ACCESS FUND. In administering the fund, the department has the 2-26 powers necessary to carry out the purposes of this subchapter, 2-27 including the power to: 2-28 (1) make, execute, and deliver contracts, conveyances, 2-29 and other instruments necessary to the exercise of its powers; 2-30 (2) invest money at the department's discretion in 2-31 obligations determined proper by the department, and select and use 2-32 depositories for its money; 2-33 (3) employ personnel and counsel and pay the persons 2-34 from money in the fund legally available for that purpose; and 2-35 (4) impose and collect fees and charges in connection 2-36 with any transaction and provide for reasonable penalties for 2-37 delinquent payment of fees or charges. 2-38 Sec. 481.405. CAPITAL ACCESS PROGRAM. (a) The department 2-39 shall establish a capital access program to assist a participating 2-40 financial institution in making loans to businesses and nonprofit 2-41 organizations that face barriers in accessing capital. 2-42 (b) The department shall use money in the fund to make a 2-43 deposit in a participating financial institution's reserve account 2-44 in an amount specified by this subchapter to be a source of money 2-45 the institution may receive as reimbursement for losses 2-46 attributable to loans in the program. 2-47 (c) The department shall determine the eligibility of a 2-48 financial institution to participate in the program and may set a 2-49 limit on the number of eligible financial institutions that may 2-50 participate in the program. 2-51 (d) To participate in the program, an eligible financial 2-52 institution must enter into a participation agreement with the 2-53 department that sets out the terms and conditions under which the 2-54 department will make contributions to the institution's reserve 2-55 account and specifies the criteria for a loan to qualify as a 2-56 capital access loan. 2-57 (e) To qualify as a capital access loan, a loan must: 2-58 (1) be made to a small or medium-sized business or to 2-59 a nonprofit organization; 2-60 (2) be used by the business or nonprofit organization 2-61 for any project, activity, or enterprise in this state that fosters 2-62 economic development; and 2-63 (3) meet any other criteria provided by this 2-64 subchapter. 2-65 Sec. 481.406. RULEMAKING AUTHORITY. (a) The policy board 2-66 shall adopt rules relating to the implementation of the program and 2-67 any other rules necessary to accomplish the purposes of this 2-68 subchapter. The rules may: 2-69 (1) provide for criteria under which a certain line of 3-1 credit issued by an eligible financial institution to a small or 3-2 medium-sized business or nonprofit organization qualifies to 3-3 participate in the program; and 3-4 (2) authorize a consortium of financial institutions 3-5 to participate in the program subject to common underwriting 3-6 guidelines. 3-7 (b) To qualify for participation in the program, a line of 3-8 credit must: 3-9 (1) be an account at a financial institution under 3-10 which the financial institution agrees to lend money to a person 3-11 from time to time to finance one or more projects, activities, or 3-12 enterprises that are authorized by this subchapter; and 3-13 (2) contain the same restrictions, to the extent 3-14 possible, that are placed on a capital access loan that is not a 3-15 line of credit. 3-16 Sec. 481.407. PROVISIONS RELATING TO CAPITAL ACCESS LOAN. 3-17 (a) Except as otherwise provided by this subchapter, the 3-18 department may not determine the recipient, amount, or interest 3-19 rate of a capital access loan or the fees or other requirements 3-20 related to the loan. 3-21 (b) A loan is not eligible to be enrolled under this 3-22 subchapter if the loan is for: 3-23 (1) construction or purchase of residential housing; 3-24 (2) simple real estate investments, excluding the 3-25 development or improvement of commercial real estate occupied by 3-26 the borrower's business or organization; 3-27 (3) refinancing of existing loans not originally 3-28 enrolled under this subchapter; or 3-29 (4) inside bank transactions, as defined by the policy 3-30 board. 3-31 (c) The borrower of a capital access loan must apply the 3-32 loan to working capital or to the purchase, construction, or lease 3-33 of capital assets, including buildings and equipment used by the 3-34 business or nonprofit organization. Working capital uses include 3-35 the cost of exporting, accounts receivable, payroll, inventory, and 3-36 other financing needs of the business or organization. 3-37 (d) A capital access loan may be sold on the secondary 3-38 market under conditions as may be determined by the department. 3-39 Sec. 481.408. RESERVE ACCOUNT. (a) On approval by the 3-40 department and after entering into a participation agreement with 3-41 the department, a participating financial institution making a 3-42 capital access loan shall establish a reserve account. The reserve 3-43 account shall be used by the institution only to cover any losses 3-44 arising from a default of a capital access loan made by the 3-45 institution under this subchapter or as otherwise provided by this 3-46 subchapter. 3-47 (b) When a participating financial institution makes a loan 3-48 enrolled in the program, the institution shall require the borrower 3-49 to pay to the institution a fee in an amount that is not less than 3-50 two percent but not more than three percent of the principal amount 3-51 of the loan, which the financial institution shall deposit in the 3-52 reserve account. The institution shall also deposit in the reserve 3-53 account an amount equal to the amount of the fee received by the 3-54 institution from the borrower under this subsection. 3-55 (c) For each capital access loan made by a financial 3-56 institution, the institution shall certify to the department, 3-57 within the period prescribed by the department, that the 3-58 institution has made a capital access loan, the amount the 3-59 institution has deposited in the reserve account, including the 3-60 amount of fees received from the borrower, and, if applicable, that 3-61 the borrower is located in or financing a project, activity, or 3-62 enterprise in an area designated as an enterprise zone under 3-63 Chapter 2303. 3-64 (d) On receipt of a certification made under Subsection (c) 3-65 and subject to Section 481.409, the department shall deposit in the 3-66 institution's reserve account for each capital access loan made by 3-67 the institution: 3-68 (1) an amount equal to the amount deposited by the 3-69 institution for each loan if the institution: 4-1 (A) has assets of more than $1 billion; or 4-2 (B) has previously enrolled loans in the program 4-3 that in the aggregate are more than $2 million; 4-4 (2) an amount equal to 150 percent of the total amount 4-5 deposited under Subsection (b) for each loan if the institution is 4-6 not described by Subdivision (1); or 4-7 (3) notwithstanding Subdivisions (1) and (2), an 4-8 amount equal to 200 percent of the total amount deposited under 4-9 Subsection (b) for each loan if: 4-10 (A) the borrower is located in or financing a 4-11 project, activity, or enterprise in an area designated as an 4-12 enterprise zone under Chapter 2303; or 4-13 (B) the borrower is a small or medium-size 4-14 business or a nonprofit organization that operates or proposes to 4-15 operate a day-care center or a group day-care home, as those terms 4-16 are defined by Section 42.002, Human Resources Code. 4-17 Sec. 481.409. LIMITATIONS ON STATE CONTRIBUTION TO RESERVE 4-18 ACCOUNT. (a) The amount deposited by the department into a 4-19 participating financial institution's reserve account for any 4-20 single loan recipient may not exceed $150,000 during a three-year 4-21 period. 4-22 (b) The maximum amount the department may deposit into a 4-23 reserve account for each capital access loan made under this 4-24 subchapter is the lesser of $35,000 or an amount equal to: 4-25 (1) eight percent of the loan amount if: 4-26 (A) the borrower is located in or financing a 4-27 project, activity, or enterprise in an area designated as an 4-28 enterprise zone under Chapter 2303; or 4-29 (B) the borrower is a small or medium-size 4-30 business or a nonprofit organization that operates or proposes to 4-31 operate a day-care center or a group day-care home, as those terms 4-32 are defined by Section 42.002, Human Resources Code; or 4-33 (2) six percent of the loan amount for any other 4-34 borrower. 4-35 Sec. 481.410. STATE'S RIGHTS WITH RESPECT TO RESERVE 4-36 ACCOUNT. (a) All of the money in a reserve account established 4-37 under this subchapter is property of the state. 4-38 (b) The state is entitled to earn interest on the amount of 4-39 contributions made by the department, borrower, and institution to 4-40 a reserve account under this subchapter. The department shall 4-41 withdraw monthly or quarterly from a reserve account the amount of 4-42 the interest earned by the state. The department shall deposit the 4-43 amount withdrawn under this subsection into the fund. 4-44 (c) If the amount in a reserve account exceeds an amount 4-45 equal to 33 percent of the balance of the financial institution's 4-46 outstanding capital access loans, the department may withdraw the 4-47 excess amount and deposit the amount in the fund. A withdrawal of 4-48 money authorized under this subsection may not reduce an active 4-49 reserve account to an amount that is less than $200,000. 4-50 (d) The department shall withdraw from the institution's 4-51 reserve account the total amount in the account and any interest 4-52 earned on the account and deposit the amount in the fund when: 4-53 (1) a financial institution is no longer eligible to 4-54 participate in the program or a participation agreement entered 4-55 into under this subchapter expires without renewal by the 4-56 department or institution; 4-57 (2) the financial institution has no outstanding 4-58 capital access loans; and 4-59 (3) the financial institution has not made a capital 4-60 access loan within the preceding 24 months. 4-61 Sec. 481.411. ANNUAL REPORT. A participating financial 4-62 institution shall submit an annual report to the department. The 4-63 report must: 4-64 (1) provide information regarding outstanding capital 4-65 access loans, capital access loan losses, and any other information 4-66 on capital access loans the department considers appropriate; 4-67 (2) state the total amount of loans for which the 4-68 department has made a contribution from the fund under this 4-69 subchapter; 5-1 (3) include a copy of the institution's most recent 5-2 financial statement; and 5-3 (4) include information regarding the type and size of 5-4 businesses and nonprofit organizations with capital access loans. 5-5 Sec. 481.412. REPORTS; AUDITS. (a) The department shall 5-6 submit to the legislature an annual status report on the program's 5-7 activities. 5-8 (b) The financial transactions of the fund are subject to 5-9 audit by the state auditor as provided by Chapter 321. 5-10 Sec. 481.413. STATE LIABILITY PROHIBITED. The state is not 5-11 liable to a participating financial institution for payment of the 5-12 principal, the interest, or any late charges on a capital access 5-13 loan made under this subchapter. 5-14 Sec. 481.414. GIFTS AND GRANTS. The department may accept 5-15 gifts, grants, and donations from any source for the purposes of 5-16 this subchapter. 5-17 SECTION 2. Section 481.059, Government Code, is amended by 5-18 adding Subsection (h) to read as follows: 5-19 (h) The department may not guarantee or make a loan under 5-20 this section after August 31, 1997. 5-21 SECTION 3. Section 481.084, Government Code, is amended by 5-22 adding Subsection (g) to read as follows: 5-23 (g) The department may not guarantee or make a loan under 5-24 this section after August 31, 1997. 5-25 SECTION 4. The policy board to the Texas Department of 5-26 Commerce shall adopt rules required by Section 481.406, Government 5-27 Code, as added by this Act, not later than December 1, 1997. 5-28 SECTION 5. This Act takes effect September 1, 1997. 5-29 SECTION 6. The importance of this legislation and the 5-30 crowded condition of the calendars in both houses create an 5-31 emergency and an imperative public necessity that the 5-32 constitutional rule requiring bills to be read on three several 5-33 days in each house be suspended, and this rule is hereby suspended. 5-34 * * * * *