REPORT TITLE:
Capital Access


DESCRIPTION:
Establishes a capital access program in the department of
business, economic development, and tourism.  (HB2258 HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2258
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
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                   A  BILL  FOR  AN  ACT

RELATING TO CAPITAL ACCESS PROGRAM.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The legislature finds that as of 1999 about
 
 2 nineteen states operated capital access programs.  Hawaii was not
 
 3 one of them.  The legislature recognizes that these programs,
 
 4 first launched by Michigan in 1986, are operated by states to
 
 5 encourage small business lending in a cost-efficient and simple
 
 6 way.  Under these programs the bank and the borrower pay an up-
 
 7 front insurance premium, which goes into a reserve fund held at
 
 8 the originating bank.  The state matches the combined bank and
 
 9 borrower contribution with a deposit into the same reserve fund.
 
10 The reserve fund allows a lending bank to make slightly higher
 
11 risk loans than conventional underwriting, with the protection of
 
12 the reserve fund for its entire pool of loans.  These programs
 
13 allow banks to use their own underwriting standards for eligible
 
14 loans, without governmental approval of the loan-making decision.
 
15 Compared with the staff intensiveness of other credit enhancement
 
16 programs, capital access programs require little administrative
 
17 costs for banks, borrowers, or the government.
 
18      The legislature further finds that capital access programs
 
19 reach borrowers that are not well served by other credit
 
20 enhancement programs such as minority-owned businesses and low-
 

 
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 1 and moderate-income communities in substantial numbers.  Capital
 
 2 access programs reach businesses, such as building contractors
 
 3 and wholesale trade companies, that are not typically reached by
 
 4 other small business lending programs.  Furthermore, capital
 
 5 access programs in some states are used significantly for start-
 
 6 up businesses and for working capital, both of which are often
 
 7 cited as needs unsatisfied by the private market without public
 
 8 support.  Lastly, lending through capital access programs retains
 
 9 and creates a significant number of jobs.
 
10      The purpose of this Act is to establish a capital access
 
11 program to be operated by the department of business, economic
 
12 development, and tourism.
 
13      SECTION 2.  The Hawaii Revised Statutes is amended by adding
 
14 a new chapter to title 22 to be appropriately designated and to
 
15 read as follows:
 
16                             "CHAPTER
 
17                      CAPITAL ACCESS PROGRAM
 
18      §   -1  Definitions.  As used in this chapter, unless the
 
19 context otherwise requires:
 
20      "Capital access loan" means a loan that is entitled to be
 
21 secured by the fund.
 
22      "Department" means the department of business, economic
 
23 development, and tourism.
 

 
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 1      "Financial institution" includes a bank, trust company,
 
 2 banking association, savings and loan association, mortgage
 
 3 company, investment bank, credit union, or nontraditional
 
 4 financial institution.
 
 5      "Fund" means the capital access fund.
 
 6      "Loan" includes a line of credit.
 
 7      "Medium-sized business" means a corporation, partnership,
 
 8 sole proprietorship, or other legal entity that:
 
 9      (1)  Is domiciled in this State or has at least fifty-one
 
10           per cent of its employees located in this State:
 
11      (2)  Is formed to make a profit; and
 
12      (3)  Employs one hundred or more but fewer than five hundred
 
13           full-time employees.
 
14      "Nonprofit organization" means a private, nonprofit, tax-
 
15 exempt corporation, association, or organization listed in
 
16 section 501(c)(3), Internal Revenue Code of 1986, as amended,
 
17 that is domiciled in this State or has at least fifty-one per
 
18 cent of its members located in this State.
 
19      "Participating financial institution" means a financial
 
20 institution participating in the program.
 
21      "Program" means the capital access program.
 
22      "Reserve account" means an account established in a
 
23 participating financial institution on approval of the department
 

 
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 1 in which money is deposited to serve as a source of additional
 
 2 revenue to reimburse the financial institution for losses on
 
 3 loans enrolled in the program.
 
 4      "Small business" means a corporation, partnership, sole
 
 5 proprietorship, or other legal entity that:
 
 6      (1)  Is domiciled in this State or has at least fifty-one
 
 7           per cent of its employees located in this State;
 
 8      (2)  Is formed to make a profit;
 
 9      (3)  Is independently owned and operated; and
 
10      (4)  Employs fewer than one hundred full-time employees.
 
11      §   -2  Capital access fund.(a)  The capital access fund
 
12 shall be a special fund administered by the director of business,
 
13 economic development, and tourism.
 
14      (b)  Appropriations for the implementation and
 
15 administration of this chapter, investment earnings, fees charged
 
16 under this chapter, and any other amounts received by the State
 
17 under this chapter shall be deposited in the fund.
 
18      (c)  Moneys in the fund may be appropriated only to the
 
19 department for use in carrying out the purposes of this chapter.
 
20      §   -3  Powers of department in administering capital access
 
21 fund.  In administering the fund, the department shall have all
 
22 powers necessary to carry out the purposes of this chapter,
 
23 including the power to:
 

 
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 1      (1)  Make, execute, and deliver contracts, conveyances, and
 
 2           other instruments necessary to the exercise of its
 
 3           powers;
 
 4      (2)  Invest money at the department's discretion in
 
 5           obligations determined proper by the department, and
 
 6           select and use depositories for its money;
 
 7      (3)  Employ personnel and counsel and pay the persons from
 
 8           money in the fund legally available for that purpose;
 
 9           and
 
10      (4)  Impose and collect fees and charges in connection with
 
11           any transaction and provide for reasonable penalties
 
12           for delinquent payment of fees or charges.
 
13      §   -4  Capital access program.(a)  The department shall
 
14 establish a capital access program to assist a participating
 
15 financial institution in making loans to businesses and nonprofit
 
16 organizations that face barriers in accessing capital.
 
17      (b)  The department shall use money in the fund to make a
 
18 deposit in a participating financial institution's reserve
 
19 account in an amount specified by this chapter to be a source of
 
20 money the institution may receive as reimbursement for losses
 
21 attributable to loans in the program.
 
22      (c)  The department shall determine the eligibility of a
 
23 financial institution to participate in the program and may set a
 

 
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 1 limit on the number of eligible financial institutions that may
 
 2 participate in the program.
 
 3      (d)  To participate in the program, an eligible financial
 
 4 institution shall enter into a participation agreement with the
 
 5 department that sets out the terms and conditions under which the
 
 6 department will make contributions to the institution's reserve
 
 7 account and specifies the criteria for a loan to qualify as a
 
 8 capital access loan.
 
 9      (e)  To qualify as a capital access loan, a loan shall:
 
10      (1)  Be made to a small or medium-sized business or to a
 
11           nonprofit organization;
 
12      (2)  Be used by the business or nonprofit organization for
 
13           any project, activity, or enterprise in this State that
 
14           fosters economic development; and
 
15      (C)  Meet any other criteria provided by this chapter.
 
16      §   -5  Rulemaking authority.(a)  The policy board shall
 
17 adopt rules relating to the implementation of the program and any
 
18 other rules necessary to accomplish the purposes of this chapter.
 
19 The rules may:
 
20      (1)  Provide for criteria under which a certain line of
 
21           credit issued by an eligible financial institution to a
 
22           small or medium-sized business or nonprofit
 
23           organization qualifies to participate in the program;
 
24           and
 

 
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 1      (2)  Authorize a consortium of financial institutions to
 
 2           participate in the program subject to common
 
 3           underwriting guidelines.
 
 4      (b)  To qualify for participation in the program, a line of
 
 5 credit shall:
 
 6      (1)  Be an account at a financial institution under which
 
 7           the financial institution agrees to lend money to a
 
 8           person from time to time to finance one or more
 
 9           projects, activities, or enterprises that are
 
10           authorized by this chapter; and
 
11      (2)  Contain the same restrictions, to the extent possible,
 
12           that are placed on a capital access loan that is not a
 
13           line of credit.
 
14      §   -6  Provisions relating to capital access loan.(a)
 
15 Except as otherwise provided by this chapter, the department may
 
16 not determine the recipient, amount, or interest rate of a
 
17 capital access loan or the fees or other requirements related to
 
18 the loan.
 
19      (b)  A loan is not eligible to be enrolled under this
 
20 chapter if the loan is for:
 
21      (1)  Construction or purchase of residential housing;
 
22      (2)  Simple real estate investments, excluding the
 
23           development or improvement of commercial real estate
 
24           occupied by the borrower's business or organization;
 

 
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 1      (3)  Refinancing of existing loans not originally enrolled
 
 2           under this chapter; or
 
 3      (4)  Inside bank transactions, as defined by the policy
 
 4           board.
 
 5      (c)  The borrower of a capital access loan shall apply the
 
 6 loan to working capital or to the purchase, construction, or
 
 7 lease of capital assets, including buildings and equipment used
 
 8 by the business or nonprofit organization.  Working capital uses
 
 9 include the cost of exporting, accounts receivable, payroll,
 
10 inventory, and other financing needs of the business or
 
11 organization.
 
12      (d)  A capital access loan may be sold on the secondary
 
13 market under conditions as may be determined by the department.
 
14      (e)  When enrolling a loan in the program, a participating
 
15 financial institution may specify an amount to be covered under
 
16 the program that is less than the total amount of the loan.
 
17      §   -7  Reserve account.(a)  On approval by the department
 
18 and after entering into a participation agreement with the
 
19 department, a participating financial institution making a
 
20 capital access loan shall establish a reserve account.  The
 
21 reserve account shall be used by the institution only to cover
 
22 any losses arising from a default of a capital access loan made
 
23 by the institution under this chapter or as otherwise provided by
 
24 this chapter.
 

 
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 1      (b)  When a participating financial institution makes a loan
 
 2 enrolled in the program, the institution shall require the
 
 3 borrower to pay to the institution a fee in an amount that is not
 
 4 less than two per cent but not more than three per cent of the
 
 5 principal amount of the loan, which the financial institution
 
 6 shall deposit in the reserve account.  The institution shall also
 
 7 deposit in the reserve account an amount equal to the amount of
 
 8 the fee received by the institution from the borrower under this
 
 9 subsection.  The institution may recover from the borrower all or
 
10 part of the amount the institution is required to pay under this
 
11 subsection in any manner agreed to by the institution and
 
12 borrower.
 
13      (c)  For each capital access loan made by a financial
 
14 institution, the institution shall certify to the department,
 
15 within the period prescribed by the department, that the
 
16 institution has made a capital access loan, the amount the
 
17 institution has deposited in the reserve account, including the
 
18 amount of fees received from the borrower, and, if applicable,
 
19 that the borrower is located in or financing a project, activity,
 
20 or enterprise in an area designated as an enterprise zone under
 
21 chapter 209E.
 
22      (d)  On receipt of a certification made under subsection
 
23 (c), the department shall deposit in the institution's reserve
 
24 account for each capital access loan made by the institution:
 

 
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 1      (1)  An amount equal to the amount deposited by the
 
 2           institution for each loan if the institution:
 
 3           (A)  Has assets of more than $1,000,000,000; or
 
 4           (B)  Has previously enrolled loans in the program that
 
 5                in the aggregate are more than $2,000,000;
 
 6      (2)  An amount equal to one hundred fifty per cent of the
 
 7           total amount deposited under subsection (b) for each
 
 8           loan if the institution is not described by paragraph
 
 9           (1); or
 
10      (3)  Notwithstanding paragraphs (1) and (2), an amount equal
 
11           to two hundred per cent of the total amount deposited
 
12           under subsection (b) for each loan if:
 
13           (A)  The borrower is located in or financing a project,
 
14                activity, or enterprise in an area designated as
 
15                an enterprise zone under chapter 209E; or 
 
16           (B)  The borrower is a small or medium-size business or
 
17                a nonprofit organization that operates or proposes
 
18                to operate a child care facility or adult
 
19                residential care home.
 
20      §   -8  Limitations on state contribution to reserve
 
21 account.  (a)  The amount deposited by the department into a
 
22 participating financial institution's reserve account for any
 
23 single loan recipient may not exceed $150,000 during a three-year
 
24 period.
 

 
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 1      (b)  The maximum amount the department may deposit into a
 
 2 reserve account for each capital access loan made under this
 
 3 chapter is the lesser of $35,000 or an amount equal to:
 
 4      (1)  Eight per cent of the loan amount if:
 
 5           (A)  The borrower is located in or financing a project,
 
 6                activity, or enterprise in an area designated as
 
 7                an enterprise zone under chapter 209E;
 
 8           (B)  The borrower is a small or medium-size business or
 
 9                a nonprofit organization that operates or proposes
 
10                to operate a child care facility or adult
 
11                residential care home; or
 
12      (2)  Six per cent of the loan amount for any other borrower.
 
13      §   -9  State's rights with respect to reserve account.(a)
 
14 All of the money in a reserve account established under this
 
15 chapter is property of the State.
 
16      (b)  The State is entitled to earn interest on the amount of
 
17 contributions made by the department, borrower, and institution
 
18 to a reserve account under this chapter.  The department shall
 
19 withdraw monthly or quarterly from a reserve account the amount
 
20 of the interest earned by the State.  The department shall
 
21 deposit the amount withdrawn under this section into the fund.
 
22      (c)  If the amount in a reserve account exceeds an amount
 
23 equal to thirty-three per cent of the balance of the financial
 

 
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 1 institution's outstanding capital access loans, the department
 
 2 may withdraw the excess amount and deposit the amount in the
 
 3 fund.  A withdrawal of money authorized under this subsection may
 
 4 not reduce an active reserve account to an amount that is less
 
 5 than $200,000.
 
 6      (d)  The department shall withdraw from the institution's
 
 7 reserve account the total amount in the account and any interest
 
 8 earned on the account and deposit the amount in the fund when:
 
 9      (1)  A financial institution is no longer eligible to
 
10           participate in the program or a participation agreement
 
11           entered into under this chapter expires without renewal
 
12           by the department or institution;
 
13      (2)  The financial institution has no outstanding capital
 
14           access loans; and
 
15      (3)  The financial institution has not made a capital access
 
16           loan within the preceding twenty-four months.
 
17      §   -10  Annual report.  A participating financial
 
18 institution shall submit an annual report to the department.  The
 
19 report shall:
 
20      (1)  Provide information regarding outstanding capital
 
21           access loans, capital access loan losses, and any other
 
22           information on capital access loans the department
 
23           considers appropriate;
 

 
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 1      (2)  State the total amount of loans for which the
 
 2           department has made a contribution from the fund under
 
 3           this chapter;
 
 4      (3)  Include a copy of the institution's most recent
 
 5           financial statement; and
 
 6      (4)  Include information regarding the type and size of
 
 7           businesses and nonprofit organizations with capital
 
 8           access loans.
 
 9      §   -11  Reports; audits.(a)  The department shall submit
 
10 to the legislature an annual status report on the program's
 
11 activities.
 
12      (b)  The financial transactions of the fund shall be subject
 
13 to audit by the legislative auditor.
 
14      §   -12  State liability prohibited.  The State shall not be
 
15 liable to a participating financial institution for payment of
 
16 the principal, the interest, or any late charges on a capital
 
17 access loan made under this chapter.
 
18      §   -13  Gifts and grants.  The department may accept gifts,
 
19 grants, and donations from any source for the purposes of this
 
20 chapter."
 
21      SECTION 3.  This Act shall take effect upon its approval.