With only a handful of credit unions enrolled, the state of California is pulling out all the stops to get more signed on to a nearly $100 million business lending program.
The California Capital Access Program is offered through the California Pollution Control Finance Authority within the state’s treasurer’s office. It encourages credit unions and other financial institutions to make loans to small businesses that fall just outside of their conventional underwriting standards.
The way CalCAP, as it is referred to is, works is when a lender's first loan is enrolled, the program establishes a loss-reserve account for that lender. Each time a loan is enrolled under CalCAP, premiums are paid into the portfolio loss-reserve account and the program matches the premiums.
For instance, if the lender and borrower each pay a 2% premium, CalCAP will typically pay 4%. For this one loan a total of 8% is added to the lender's loss-reserve account for its entire CalCAP portfolio. The more loans a lender makes, the more dollars are deposited into the loss-reserve account for its CalCAP portfolio.
Over time, as more loans are enrolled, a lender's loss-reserve account grows, providing 8% to 14% loss coverage on a portfolio of loans that will likely only experience a lower rate of loss, according to the treasurer’s office.
If a lender makes 10 loans totaling $500,000, the lender may have as much as $60,000 in its loss- reserve account using an average premium of 3% each from the lender and borrower, 6% from CalCAP. If one loan of $50,000 defaults, the lender has immediate coverage of 100% of the loss. The lender must return recoveries from the borrower, less expenses, to the portfolio loss-reserve account.
To be eligible to apply for the loans, businesses must meet certain criteria, including having fewer than 500 employees and the business activity resulting from the loan is required to be created and retained in California.
The CalCAP program normally runs on about $14 million, said Joe Deanda, a spokesman for California State Treasurer Bill Lockyer. However, earlier this year, it received federal stimulus funds totaling $84 million and the state provided $6 million in 2010 bringing the total to $90 million.
"With the new money coming in, we’ve taken the lender’s share. CalCAP provides 14%. That money goes into the loan-loss reserve account at the financial institution," Deanda explained. "If there is a default, the lender will get 100% payback through the loan-loss reserve."
Deanda said federal rules only allow the program to receive funds a third of the time over a three-year period. So far, CalCAP has received $30 million and cannot receive the second allotment until the first round is distributed.
As of June 1, there were 60 California financial institutions enrolled in the program. Three of them are credit unions: $24 million Mid-Cities Financial Credit Union in Compton, $180 million Pacific Community Credit Union in Fullerton, and $4.8 million Episcopal Community Federal Credit Union in Los Angeles.
At press time, CalCAP was in discussions with two more credit unions, said Kourtney Michael Bell, executive fellow with Lockyer’s office. Plans are underway to organize a credit union recruitment forum in the greater Los Angeles region, he added.
Deanda said since credit unions have been under represented in the program, CalCAP staff has been meeting with them statewide to educate to educate them on the guidelines.
"We’re finding a lot of the time is just a lack of knowledge on how the program works," Deanda said.
The program’s terms are the maximum loan amount is $5 million and the maximum enrolled amount is $2.5 million. Lenders set all the terms and conditions of the loans and decide which loans to enroll into CalCAP. The maximum lender-borrower contribution for any single borrower in a three-year period is $100,000.
Lenders determine the premium levels to be paid by the borrower and lender within the parameters of the program Loans can be short or long term, have fixed or variable rates, be secured or unsecured, and bear any type of amortization schedule.
A lender can enroll all or a portion of a loan. CalCAP allows a lender to cover loans beyond its conventional risk threshold. Lenders can also restructure loans by extending terms, amending covenants or releasing collateral.
"Mid-Cities Financial was excited to partner with the CalCAP program to gain additional funds to aid small businesses who may not qualify under our current loan guidelines," said Melia Keller, president/CEO in a statement.