Capital Access

Establishes a capital access program in the department of
business, economic development, and tourism.  (SB2419 HD1) 

THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 2000                                H.D. 1
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 new emerging technology
 4 companies, that are not typically reached by other small business
 5 lending programs.  Furthermore, capital access programs in some
 6 states are used significantly for start-up businesses and for
 7 working capital, both of which are often cited as needs
 8 unsatisfied by the private market without public support.
 9 Lastly, lending through capital access programs retains and
10 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 business, economic development, and tourism.
14      SECTION 2.  The Hawaii Revised Statutes is amended by adding
15 a new chapter to title 13 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.

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 1      "Department" means the department of business, economic
 2 development, and tourism.
 3      "Financial institution" includes a bank, trust company,
 4 banking association, savings and loan association, mortgage
 5 company, investment bank, credit union, or nontraditional
 6 financial institution.
 7      "Fund" means the Hawaii capital loan revolving fund
 8 established in section 210-3.
 9      "Loan" includes a line of credit.
10      "Medium-sized business" means a corporation, partnership,
11 sole proprietorship, or other legal entity that:
12      (1)  Is domiciled in this State;
13      (2)  Is formed to make a profit; and
14      (3)  Employs one hundred or more but fewer than five hundred
15           full-time employees.
16      "Nonprofit organization" means a private, nonprofit, tax-
17 exempt corporation, association, or organization listed in
18 section 501(c)(3), Internal Revenue Code of 1986, as amended,
19 that is domiciled in this State.
20      "Participating financial institution" means a financial
21 institution participating in the program.
22      "Program" means the capital access program.

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 1      "Reserve account" means an account established in a
 2 participating financial institution on approval of the department
 3 in which money is deposited to serve as a source of additional
 4 revenue to reimburse the financial institution for losses on
 5 loans enrolled in the program.
 6      "Small business" means a corporation, partnership, sole
 7 proprietorship, or other legal entity that:
 8      (1)  Is domiciled 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  Powers of department in administering the capital
13 access program.  In administering the program, the department
14 shall have all the powers necessary to carry out the purposes of
15 this chapter, including the power to:
16      (1)  Make, execute, and deliver contracts, conveyances, and
17           other instruments necessary to the exercise of its
18           powers;
19      (2)  Invest money at the department's discretion in
20           obligations determined proper by the department, and
21           select and use depositories for its money;
22      (3)  Employ personnel and counsel and pay the persons from
23           money in the fund legally available for that purpose;
24           and

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 1      (4)  Impose and collect fees and charges in connection with
 2           any transaction and provide for reasonable penalties
 3           for delinquent payment of fees or charges.
 4         -3  Capital access program.(a)  The department shall
 5 establish a capital access program to assist a participating
 6 financial institution in making loans to businesses and nonprofit
 7 organizations that face barriers in accessing capital.
 8      (b)  The department shall use money in the fund to make a
 9 deposit in a participating financial institution's reserve
10 account in an amount specified by this chapter to be a source of
11 money the institution may receive as reimbursement for losses
12 attributable to loans in the program.
13      (c)  The department shall determine the eligibility of a
14 financial institution to participate in the program and may set a
15 limit on the number of eligible financial institutions that may
16 participate in the program.
17      (d)  To participate in the program, an eligible financial
18 institution shall enter into a participation agreement with the
19 department that sets out the terms and conditions under which the
20 department will make contributions to the institution's reserve
21 account and specifies the criteria for a loan to qualify as a
22 capital access loan.
23      (e)  To qualify as a capital access loan, a loan shall:

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 1      (1)  Be made to a small or medium-sized business or to a
 2           nonprofit organization;
 3      (2)  Be used by the business or nonprofit organization for
 4           any project, activity, or enterprise in Hawaii that
 5           fosters economic development; and
 6      (3)  Meet any other criteria provided by this chapter.
 7         -4  Rulemaking authority.(a)  The department shall
 8 adopt rules relating to the implementation of the program and any
 9 other rules necessary to accomplish the purposes of this chapter.
10 The rules may:
11      (1)  Provide for criteria under which a certain line of
12           credit issued by an eligible financial institution to a
13           small or medium-sized business or nonprofit
14           organization qualifies to participate in the program;
15           and
16      (2)  Authorize a consortium of financial institutions to
17           participate in the program subject to common
18           underwriting guidelines.
19      (b)  To qualify for participation in the program, a line of
20 credit shall:
21      (1)  Be an account at a financial institution under which
22           the financial institution agrees to lend money to a
23           person from time to time to finance one or more

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 1           projects, activities, or enterprises that are
 2           authorized by this chapter; and
 3      (2)  Contain the same restrictions, to the extent possible,
 4           that are placed on a capital access loan that is not a
 5           line of credit.
 6         -5  Provisions relating to capital access loan.(a)
 7 Except as otherwise provided by this chapter, the department may
 8 not determine the recipient, amount, or interest rate of a
 9 capital access loan or the fees or other requirements related to
10 the loan.
11      (b)  A loan is not eligible to be enrolled under this
12 chapter if the loan is for:
13      (1)  Construction or purchase of residential housing;
14      (2)  Simple real estate investments, excluding the
15           development or improvement of commercial real estate
16           occupied by the borrower's business or organization;
17      (3)  Refinancing of existing loans not originally enrolled
18           under this chapter; or
19      (4)  Inside bank transactions, as defined by the department.
20      (c)  The borrower of a capital access loan shall apply the
21 loan to working capital or to the purchase, construction, or
22 lease of capital assets, including buildings and equipment used
23 by the business or nonprofit organization.  Working capital uses

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 1 include the cost of exporting, accounts receivable, payroll,
 2 inventory, and other financing needs of the business or
 3 organization.
 4      (d)  A capital access loan may be sold on the secondary
 5 market under conditions as may be determined by the department.
 6      (e)  When enrolling a loan in the program, a participating
 7 financial institution may specify an amount to be covered under
 8 the program that is less than the total amount of the loan.
 9         -6  Reserve account.(a)  On approval by the department
10 and after entering into a participation agreement with the
11 department, a participating financial institution making a
12 capital access loan shall establish a reserve account.  The
13 reserve account shall be used by the institution only to cover
14 any losses arising from a default of a capital access loan made
15 by the institution under this chapter or as otherwise provided by
16 this chapter.
17      (b)  When a participating financial institution makes a loan
18 enrolled in the program, the institution shall require the
19 borrower to pay to the institution a fee in an amount that is not
20 less than two per cent but not more than three per cent of the
21 principal amount of the loan, which the financial institution
22 shall deposit in the reserve account.  The institution shall also
23 deposit in the reserve account an amount equal to the amount of

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 1 the fee received by the institution from the borrower under this
 2 subsection.  The institution may recover from the borrower all or
 3 part of the amount the institution is required to pay under this
 4 subsection in any manner agreed to by the institution and
 5 borrower.
 6      (c)  For each capital access loan made by a financial
 7 institution, the institution shall certify to the department,
 8 within the period prescribed by the department, that the
 9 institution has made a capital access loan, the amount the
10 institution has deposited in the reserve account, including the
11 amount of fees received from the borrower, and, if applicable,
12 that the borrower is an eligible enterprise zone business located
13 in an area designated as an enterprise zone under chapter 209E.
14      (d)  On receipt of a certification made under subsection
15 (c), the department shall deposit in the institution's reserve
16 account for each capital access loan made by the institution:
17      (1)  An amount equal to the amount deposited by the
18           institution for each loan if the institution:
19           (A)  Has assets of more than $1,000,000,000; or
20           (B)  Has previously enrolled loans in the program that
21                in the aggregate are more than $2,000,000;
22      (2)  An amount equal to one hundred fifty per cent of the
23           total amount deposited under subsection (b) for each

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 1           loan if the institution is not described by paragraph
 2           (1); or
 3      (3)  Notwithstanding paragraphs (1) and (2), an amount equal
 4           to two hundred per cent of the total amount deposited
 5           under subsection (b) for each loan if:
 6           (A)  The borrower is an eligible enterprise zone
 7                business located in an area designated as an
 8                enterprise zone under chapter 209E; or 
 9           (B)  The borrower is a small or medium-size business or
10                a nonprofit organization that operates or proposes
11                to operate a child care facility or adult
12                residential care home.
13         -7  Limitations on state contribution to reserve
14 account.  (a)  The amount deposited by the department into a
15 participating financial institution's reserve account for any
16 single loan recipient may not exceed $100,000 during a three-year
17 period.
18      (b)  The maximum amount the department may deposit into a
19 reserve account for each capital access loan made under this
20 chapter is the lesser of $35,000 or an amount equal to:
21      (1)  Eight per cent of the loan amount if:
22           (A)  The borrower is an eligible enterprise zone
23                business located in an area designated as an
24                enterprise zone under chapter 209E; or

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 1           (B)  The borrower is a small or medium-size business or
 2                a nonprofit organization that operates or proposes
 3                to operate a child care facility or adult
 4                residential care home;
 5           or
 6      (2)  Six per cent of the loan amount for any other borrower.
 7         -8  State's rights with respect to reserve account.(a)
 8 All of the money in a reserve account established under this
 9 chapter is property of the State.
10      (b)  The State is entitled to earn interest on the amount of
11 contributions made by the department, borrower, and institution
12 to a reserve account under this chapter.  The department shall
13 withdraw monthly or quarterly from a reserve account the amount
14 of the interest earned by the State.  The department shall
15 deposit the amount withdrawn under this section into the fund.
16      (c)  If the amount in a reserve account exceeds an amount
17 equal to thirty-three per cent of the balance of the financial
18 institution's outstanding capital access loans, the department
19 may withdraw the excess amount and deposit the amount in the
20 fund.  A withdrawal of money authorized under this subsection may
21 not reduce an active reserve account to an amount that is less
22 than $200,000.

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 1      (d)  The department shall withdraw from the institution's
 2 reserve account the total amount in the account and any interest
 3 earned on the account and deposit the amount in the fund when:
 4      (1)  A financial institution is no longer eligible to
 5           participate in the program or a participation agreement
 6           entered into under this chapter expires without renewal
 7           by the department or institution; and
 8      (2)  The financial institution has no outstanding capital
 9           access loans.
10         -9 Annual report.  A participating financial
11 institution shall submit an annual report to the department.  The
12 report shall:
13      (1)  Provide information regarding outstanding capital
14           access loans, capital access loan losses, and any other
15           information on capital access loans the department
16           considers appropriate;
17      (2)  State the total amount of loans for which the
18           department has made a contribution from the fund under
19           this chapter;
20      (3)  Include a copy of the institution's most recent
21           financial statement; and
22      (4)  Include information regarding the type and size of
23           businesses and nonprofit organizations with capital
24           access loans.

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 1         -10  Reports; audits.(a)  The department shall submit
 2 to the legislature an annual status report on the program's
 3 activities.
 4      (b)  The financial transactions of the fund are subject to
 5 audit by the auditor.
 6         -11  State liability prohibited.  The State is not
 7 liable to a participating financial institution for payment of
 8 the principal, the interest, or any late charges on a capital
 9 access loan made under this chapter.
10         -12  Gifts and grants.  The department may accept gifts,
11 grants, and donations from any source for the purposes of this
12 chapter."
13      SECTION 3.  This Act shall take effect upon its approval.