AN ACT Relating to small business loans; adding a new section to chapter 42.17 RCW; and adding a new chapter to Title 43 RCW.

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

NEW SECTION. Sec. 1. The legislature finds and declares that:

(1) Expansion of small businesses will have a favorable impact on the Washington economy by creating jobs, increasing competition in the marketplace, and expanding tax revenues. Small business expansion is a major source of new employment opportunities for economically distressed communities, for economically disadvantaged individuals, and for individuals of low and moderate income generally; and

(2) There is an unmet need to provide long-term capital to rapidly growing small businesses whose growth exceeds their ability to generate internal earnings to finance that growth; and

(3) Under traditional standards used by banks many well-operated small businesses cannot provide security adequate to qualify for normal bank loans; and

(4) This problem is especially severe in its effects on economically distressed communities and on economically disadvantaged individuals; and

(5) It is desirable to address this problem by creating an efficient, nonbureaucratic form of state assistance to encourage banks to make many such loans which are not now made; and

(6) Assistance and encouragement of small business development to provide, maintain, and expand employment and tax revenues is an important function of the state; and

(7) The modest state expenditure to encourage such loans will be returned to the people of the state of Washington in the form of increased tax revenues based on business expansion and reduction in the number of unemployed persons.

In order to accomplish these goals, the legislature creates the Washington small business loan program. The intent of the legislature is to provide sufficient incentives to financial institutions and credit unions to make small business loans that would otherwise not be made to worthy small businesses. Further, it is the intent of the legislature to provide incentives which will result in greater availability of small business financing to economically distressed communities and to economically disadvantaged individuals to promote the creation of new employment opportunities and the retention of existing employment in the state.

NEW SECTION. Sec. 2. As used in this chapter, the term:

(1) "Lender participant" means such financial institutions and credit unions as are approved by the supervisor to make loans under this chapter.

(2) "Eligible loan" means a loan to a person under the conditions set forth in this chapter.

(3) "Amount of loss" means an amount equal to the unpaid balance of the principal amount, less any amounts realized by perfecting rights under a security agreement, together with such interest as the executive director shall allow, to a maximum of such interest as may be allowed by rule. The amount of loss is subject to the limitations contained in section 11(2)(c) of this act.

(4) "Premium charge" means the percent of the loan which shall be deposited in the small business loan reserve fund by the lender and the borrower on loans made pursuant to this chapter.

(5) "Executive director" means the executive director of the small business loan program.

(6) "Fund" means the small business loan reserve fund.

(7) "State match" means the percent of the loan which shall be deposited in the small business loan reserve fund by the state on loans made pursuant to this chapter.

(8) "Manufacturing" means all activities of a commercial or industrial nature wherein labor or skill is applied, by hand or machinery, to materials so that as a result thereof a new, different, or useful substance or article of tangible personal property is produced for sale or commercial or industrial use and shall include the production or fabrication of specially made or custom made articles. "Manufacturing" also includes computer programming, the production of computer software, and other computer-related services, and the activities performed by research and development laboratories and commercial testing laboratories.

(9) "Traded services" means those commercial and professional services that are developed for sale outside the state.

(10) "Supervisor" means the state supervisor of banking.

(11) "First source hiring agreement" means an agreement requiring a business to interview prospective employees from a list of the unemployed supplied by the employment security department, local private industry councils, local labor unions, or other employment or placement agencies, and hire any qualified candidates on the list before hiring any candidates not on the list. No fees may be charged by the employment or placement agency to the unemployed candidates on the list.

NEW SECTION. Sec. 3. In addition to the powers and duties prescribed under this chapter, the state supervisor of banking may exercise all the powers necessary or convenient for the enforcement of this chapter. The supervisor may adopt such rules as he or she finds necessary or appropriate in carrying out this chapter after consultation with the director of the business assistance center in the department of trade and economic development and representatives of small businesses and lender participants. The supervisor may examine the loans made under this chapter at any participating bank to ascertain compliance with this chapter and any rules adopted under this chapter, and to ascertain whether a bank is exercising reasonable care and diligence in the making and collection of loans made under this chapter. In the administration of this chapter, the supervisor shall consult with the director of the business assistance center.

An exempt position is hereby created within the department of general administration for the executive director of the small business loan program. The executive director shall be appointed by the supervisor of banking and shall serve at the supervisor's pleasure. The supervisor shall delegate to the executive director such duties as the supervisor deems necessary to the administration of the program. The supervisor may employ such other employees as may be needed to carry out the powers and duties imposed under this chapter.

The supervisor shall report to the governor and the ways and means and trade and economic development committees of the house of representatives and the ways and means and economic development and labor committees of the senate by December 1 of each year and shall include in the report the following:

(1) The names of all financial institutions certified to participate in the small business loan program;

(2) The names and locations by county of all borrowers under the program;

(3) The number of employees by county of all borrowers under the program;

(4) The total amount of funds lent under the program by county;

(5) The total amount of funds lent under the program reported separately by categories of uses made by borrowers of the proceeds;

(6) The amount paid out of the fund for loans in default, by lender, and by county;

(7) The financial condition of the fund;

(8) An evaluation of the extent to which the results of the program meet the objectives of the program as defined in section 1 of this act. This evaluation shall include a review of success in meeting criteria listed in section 7(4) of this act;

(9) The expenditure of funds under section 6 of this act; and

(10) Such other information as in the supervisor's judgment may be desirable.

NEW SECTION. Sec. 4. The business assistance center of the department of trade and economic development and the community development finance program of the department of community development shall both be responsible for promoting the small business loan program.

NEW SECTION. Sec. 5. (1) The small business loan reserve fund is hereby established in the custody of the state treasurer. The fund shall consist of appropriations made to the fund and any other public or private money received under this chapter. Moneys in the fund may be used only to operate this program and secure loans made under this chapter. Disbursements from the fund shall be on authorization of the supervisor. The fund is subject to the allotment procedure provided under chapter 43.88 RCW, but no appropriation is required for disbursements.

(2)(a) The state of Washington shall not be subject to or responsible for any claim, debt, obligation, or liability exceeding its appropriations to the small business loan reserve fund and shall be immune from suit for any claim, debt, obligation, or liability in excess of such appropriations.

(b) All loans made under this chapter shall indicate on the face of the loan instrument the limit of the state's obligation as set forth in (a) of this subsection and section 11 (2) (c) of this act.

(3) Funds held in the small business loan reserve fund which are attributable to the lender participant's portion of the premium charge shall be accounted for on a lender-by-lender basis and shall include the matching premium charge paid by the borrowers and the state match paid by the state.

(4) Upon authorization by the supervisor, disbursements from the small business loan reserve fund shall be made to financial institutions by the state treasurer in warrants drawn by the controller pursuant to this chapter.

(5) Funds in the small business loan reserve fund shall be invested in time certificates of deposit with lender participants at such rates as determined by the supervisor in proportion to each lender participant's participation in the small business loan reserve program. Such funds shall be offered on a right of first refusal to lender participants. Should a lender participant refuse to receive such funds for investment, the funds shall then be offered other lender participants in proportion to their participation in the small business loan reserve program and, if not fully invested in the participating bank, shall be invested as determined by rule of the supervisor.

NEW SECTION. Sec. 6. (1) All income from funds invested pursuant to section 5 of this act shall be deposited in the small business loan reserve fund, and shall be used exclusively for the support of the small business loan reserve program.

(2) Whenever the supervisor determines that the income from funds invested pursuant to section 5 of this act exceeds amounts necessary to support the small business loan reserve program pursuant to subsection (1) of this section, the supervisor may order any excess funds transferred into the general fund, but not to exceed the amount appropriated to the small business loan reserve fund.

NEW SECTION. Sec. 7. (1) The supervisor shall certify those financial institutions whose experience, financial capability, and such other criteria as the supervisor may establish under rules adopted under this chapter, qualify them to participate in the small business loan reserve program.

(2) Any financial institution may be disqualified from further participation in the small business loan reserve program on a finding, by the supervisor, as specified by rule, that such institution has violated any provision of this chapter, or any rule adopted under this chapter, or that such institution is insolvent.

(3) A loan made by a lender participant shall be recorded under this section if made to a corporation, partnership, sole proprietorship, cooperative, or other association doing business primarily in Washington, whether nonprofit or organized for profit.

(4) The executive director shall adopt by rule eligibility criteria for loans made under this chapter. Such criteria shall be consistent with the intent of this chapter to assist small businesses with strong potential for growth and job creation and, to that end, such loans shall be primarily devoted to businesses engaging in manufacturing or traded services. Such criteria shall include but shall not be limited to: The potential for benefiting economically distressed communities; the potential for benefiting economically disadvantaged individuals; the potential for benefiting individuals of low and moderate income; the potential for creating new employment opportunities, especially opportunities for stable high wage employment; the potential for retaining existing employment, especially stable high wage employment; the potential for local economic diversification; the impact on the stabilization, modernization, and long-term growth potential of mature industries; and the size and types of businesses which shall be eligible to receive loans which may be based on the standard industrial classification code. Absence of a classification within the standard industrial classification code for a type of business shall not preclude it from being established as an eligible business.

(5) No more than twenty-five percent of the proceeds of any loans made under this chapter may be used by the borrowing business for the payment of existing loans to that business.

(6) Upon default by the borrower on any loan made under this chapter, the executive director may require from the lender a showing as to how the proceeds of the loan were disbursed.

NEW SECTION. Sec. 8. Prior to the making of a loan under this chapter, the executive director shall enter into contracts with lender participants and borrowers. In exchange for the state's agreement to place the state match in the small business loan reserve fund, the contracts shall: (1) Obligate the lender participants to adhere to the provisions of this chapter and to make loans, consistent with eligibility criteria established pursuant to this chapter, to small businesses which do not meet standard lender eligibility criteria; and (2) obligate borrowers to enter into first source hiring agreements with the employment security department.

NEW SECTION. Sec. 9. The lender and borrower shall negotiate the premium charge for each loan made pursuant to this chapter. Such charge shall be from three percent to seven percent of the loan. The lender and borrower shall contribute an equal amount to the premium charge. The state match made under this chapter shall be equal in amount to the premium charge. When a loan is participated in by two or more lender participants, the premium charge shall be a single rate, applicable to the entire loan. The lender's portion of the premium charge shall be apportioned among the lenders in proportion to each lender's participation in the loan.

NEW SECTION. Sec. 10. (1)(a) An application to record a loan made under this chapter shall be made by an eligible lender on such form as the executive director may require. The application shall set forth the amount of the loan, its maturity, interest rate, and amortization. In addition, the executive director may require other information relating to job creation.

(b) If, upon application by a lender participant, the executive director finds that the lender has made an eligible loan, the executive director shall cause the loan to be recorded.

(2)(a) The lender shall submit, together with the application under subsection (1) of this section, the following premium charges determined by the lender under section 9 of this act: (i) The percent premium charge payable by the lender; and (ii) the percent premium charge payable by the borrower.

(b) Premium charges collected under this section shall be deposited in the small business loan reserve fund.

(c) Upon recording a loan, the director shall allocate, from appropriated funds, the state match payable by the state in the small business loan reserve fund.

(3) All loans made under this chapter shall be recorded in a register to be maintained by the supervisor. The registration shall set forth the information contained in the application.

(4) At least annually, and more frequently at the direction of the supervisor, a summary of the information contained in the register maintained pursuant to subsection (3) of this section, shall be provided to each lender participant.

NEW SECTION. Sec. 11. (1) Upon default by the borrower on any loan made under this chapter, the lender, if a secured party, shall take reasonable steps, and avail itself of such rights and reasonable remedies as may be provided for in the security agreement and by virtue of chapter 62A.9 RCW except when, in the determination of the supervisor, special circumstances exist which do not warrant taking such action.

(2)(a) Upon default by the borrower on any loan made under this chapter, the lender shall promptly notify the supervisor and the executive director. The executive director shall, if requested, either ninety days after the lender has commenced collection action required by subsection (1) of this section, or after further collection efforts required by the supervisor, pay to the lender the amount of the loss, subject to the limitation contained in (c) of this subsection, sustained by the lender.

(b) In addition to the amount of loss, the lender may claim such amounts as the supervisor has established by rule for collection expenses incurred in the attempted collection of the loan. Such collection expense shall be a charge against that portion of the small business loan reserve fund attributable to the lender who made the loan, and shall be subject to the limitation contained in (c) of this subsection.

(c) Payments made to a lender pursuant to this section shall not exceed the amount retained in the small business loan reserve fund attributable to the lender who made the loan.

(3) Upon payment of a claim for loss pursuant to this section, the lender shall assign the note, all security interests, and any and all other rights held by the lender to the state of Washington. The supervisor is authorized to take such steps as the supervisor determines are reasonable to collect, contract, and pay for collection services, and compromise and settle claims. All amounts collected, minus any unrecovered collection fees, shall be returned to the fund for the account of the lender participant.

(4) Nothing in this section may be construed to excuse the lender from exercising reasonable care and diligence in the making and collection of loans under this chapter.

If the supervisor, after reasonable notice and opportunity for hearing to an eligible lender, finds that it has substantially failed to exercise such care and diligence required under this section, the supervisor shall disqualify that lender for further loans under this chapter until the supervisor is satisfied that its failure has ceased and finds that there is reasonable assurance that the lender will in the future exercise necessary care and diligence.

NEW SECTION. Sec. 12. A new section is added to chapter 42.17 RCW to read as follows:

Notwithstanding the provisions of RCW 42.17.260 through 42.17.340, no application to record a loan or the register of loans under chapter 43.--!sc ,1RCW (sections 1 through 11 of this act) may be made available to the public.

NEW SECTION. Sec. 13. Sections 1 through 11 of this act shall constitute a new chapter in Title 43 RCW.

NEW SECTION. Sec. 14. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.