Capital Access

Establishes a capital access program in the department of
commerce and consumer affairs.

THE SENATE                              S.B. NO.           2419
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT



 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 further finds 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

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

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

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

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

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

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

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

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

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 1 or enterprise in an area designated as an enterprise zone under
 2 chapter 209E.
 3      (d)  On receipt of a certification made under subsection
 4 (c), the department shall deposit in the institution's reserve
 5 account for each capital access loan made by the institution.
 6      (1)  An amount equal to the amount deposited by the
 7           institution for each loan if the institution:
 8           (A)  Has assets of more than $1 billion; or
 9           (B)  Has previously enrolled loans in the program that
10                in the aggregate are more than two million
11                dollars;
12      (2)  An amount equal to one hundred fifty per cent of the
13           total amount deposited under subsection (b) for each
14           loan if the institution is not described by paragraph
15           (1); or
16      (3)  Notwithstanding paragraphs (1) and (2), an amount equal
17           to two hundred per cent of the total amount deposited
18           under subsection (b) for each loan if:
19           (A)  The borrower is located in or financing a project,
20                activity, or enterprise in an area designated as
21                an enterprise zone under chapter 209E; or 
22           (B)  The borrower is a small or medium-size business or
23                a nonprofit organization that operates or proposes

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 1                to operate a child care facility or adult
 2                residential care home.
 3         -8  Limitations on state contribution to reserve
 4 account.  (a)  The amount deposited by the department into a
 5 participating financial institution's reserve account for any
 6 single loan recipient may not exceed $150,000 during a three-year
 7 period.
 8      (b)  The maximum amount the department may deposit into a
 9 reserve account for each capital access loan made under this
10 chapter is the lesser of $35,000 or an amount equal to:
11      (1)  Eight per cent of the loan amount if:
12           (A)  The borrower is located in or financing a project,
13                activity, or enterprise in an area designated as
14                an enterprise zone under chapter 209E;
15           (B)  The borrower is a small or medium-size business or
16                a nonprofit organization that operates or proposes
17                to operate a child care facility or adult
18                residential care home; or
19      (2)  Six per cent of the loan amount for any other borrower.
20         -9  State's rights with respect to reserve account.(a)
21 All of the money in a reserve account established under this
22 chapter is property of the State.
23      (b)  The State is entitled to earn interest on the amount of

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 1 contributions made by the department, borrower, and institution
 2 to a reserve account under this chapter.  The department shall
 3 withdraw monthly or quarterly from a reserve account the amount
 4 of the interest earned by the State.  The department shall
 5 deposit the amount withdrawn under this section into the fund.
 6      (c)  If the amount in a reserve account exceeds an amount
 7 equal to thirty-three per cent of the balance of the financial
 8 institution's outstanding capital access loans, the department
 9 may withdraw the excess amount and deposit the amount in the
10 fund.  A withdrawal of money authorized under this subsection may
11 not reduce an active reserve account to an amount that is less
12 than $200,000.
13      (d)  The department shall withdraw from the institution's
14 reserve account the total amount in the account and any interest
15 earned on the account and deposit the amount in the fund when:
16      (1)  A financial institution is no longer eligible to
17           participate in the program or a participation agreement
18           entered into under this chapter expires without renewal
19           by the department or institution;
20      (2)  The financial institution has no outstanding capital
21           access loans; and
22      (3)  The financial institution has not made a capital access
23           loan within the preceding twenty-four months.

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 1         -10  Annual report.  A participating financial
 2 institution shall submit an annual report to the department.  The
 3 report must:
 4      (1)  Provide information regarding outstanding capital
 5           access loans, capital access loan losses, and any other
 6           information on capital access loans the department
 7           considers appropriate;
 8      (2)  State the total amount of loans for which the
 9           department has made a contribution from the fund under
10           this chapter;
11      (3)  Include a copy of the institution's most recent
12           financial statement; and
13      (4)  Include information regarding the type and size of
14           businesses and nonprofit organizations with capital
15           access loans.
16         -11  Reports; audits.(a)  The department shall submit
17 to the legislature an annual status report on the program's
18 activities.
19      (b)  The financial transactions of the fund are subject to
20 audit by the legislative auditor.
21         -12  State liability prohibited.  The State is not
22 liable to a participating financial institution for payment of
23 the principal, the interest, or any late charges on a capital

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 1 access loan made under this chapter.
 2         -13  Gifts and grants.  The department may accept gifts,
 3 grants, and donations from any source for the purposes of this
 4 chapter."
 5      SECTION 3.  This Act shall take effect upon its approval.
 7                       INTRODUCED BY:  ___________________________