Out of Touch and Out of PLACE?

The state of California is up to its old tricks again….an established program is up for a revamp!

While the state has set their sights on zero and near zero transport, a legacy program is being bled out to make way for “sustained” investments in the zero emission future. Since the piggy bank is being shaken dry, CARB is looking for ways to have their bacon and eat it too.

The unfortunate reality of the CARB on-road truck and bus rule is that is expensive to comply with, very expensive. CARB is synonymous for throwing good money after bad at HD truck incentives to help offset escalating costs. While these programs do help, especially grant programs, a supplemental program that assists with residual financing has been instrumental in the compliance rate for the truck and bus rule and it is currently under threat of a change for the worse.  

The threatened program is administered through the state treasurer’s office and in some circles is known as the Providing Loan Assistance for California Equipment (PLACE) program. While in reality its true moniker is the California Capital Access Program (CalCAP) on-road truck loan program. It started back in 2009 with a onetime $35m investment from AB118, the bill that basically created the Air Quality Improvement Program (AQIP).

The initial investment was used to create the program and start enrolling qualified trucking fleets that could not obtain financing anywhere else. However, the program was hopelessly underutilized until SB 832 in 2010 and in SB 225 in 2011 when the laws were changed to allow for private finance company participation and for the enrollment of Terminal Rental Adjustment Clause (TRAC) leases, respectively.Hoiwever, no one began seriously partic Since then, the program has received close to $100 Million and has enrolled over 10,000 vehicles into the program with over a dozen active lenders

Back in 2009, when the AQIP was created, legislative direction was given to create a low-interest loan guarantee program to assist small trucking fleets who cannot access financing in order to achieve early compliance with CARB rules.

This was the original intent of the program.

Today, the intent is there but a couple things were massaged a little to take into account the realities small trucking fleets were facing.

First, the early compliance provision definition needed to be revisited because the people who needed the loans most were the exact ones who were out of compliance.

Second, the individual loan guarantee program didn’t have enough oomph to help all the people that needed the helping.

A more robust approach was eventually adopted.

Instead of the loan guarantee approach, CARB agreed on a concept that shared basic DNA with the original CalCAP program for small business; the pooled reserve. Basic difference between a loan guarantee and a pooled reserve is a that a loan guarantee is a guarantee on a single loan, the pooled reserve is exactly what it sounds like, a pool of reserved contribution money that is used across an entire portfolio or pool of loans.

More simply, if a loan with a loan guarantee goes bad, there is a set amount dedicated up front to that particular loan which is then paid back to the lender to help cover losses incurred on the original net investment should a default occur.

The pooled reserve concept is where individual loans are each given a set contribution rate which is then put into a reserve account that the lender can draw from once a loan is terminated in order to cover any losses after liquidation.

The pooled approach is more effective because it spreads out the risk across a larger portfolio, making the money go further. The loan guarantee is on a loan by loan basis, there is no co-mingling. While the loan guarantee concept has merit, shifting from a loan reserve pool to a loan guarantee once a loan reserve pool is established is akin to changing horse mid-stream. 

Nevertheless, for lenders, the larger the reserve pool, the more it can be leveraged against the risky credit profiles that the state of California essentially created the program for. Since the effective reserve percentage (which is calculated by taking the total dollar amount in a particular lenders reserve account and dividing that into the total outstanding balance) was being used to justify loans to these risky credit profiles that lenders would have never lent to without the reserve threshold.

The mere thought of having the reserve account gutted by a recapture program while simultaneously shifting the program to a loan by loan guarantee is chilly to say the least.  

The original mission of the program was to help those who could not secure traditional financing for compliant truck purchases. The majority of credit profiles enrolled in the CalCAP on-road program are those exact people. To put it bluntly, there is a reason they couldn’t get financing.

So, living up to its job, the pooled reserve account justified issuing affordable loans to folks who have little or no positive credit history to lean on. Compounding this issue was the fact that in 2014, the eligible fleet size limit was lowered from 40 or fewer trucks to 10 or fewer trucks. This has been directly responsible for shifting the overall average credit profiles for eligible loans enrolled in the program to higher credit risk tiers.

Complicating the issue further is the fact that over the years, CalCAP has been lowering the contribution rate for participating lenders with larger reserve accounts. It started at a 20% contribution, went down to 14%, then 10%, and it is now currently at 4%. With a 4% contribution rate, effective reserve thresholds of active lenders are dwindling since new loans are being enrolled at a greater rate than the 4% contribution can cover.   

If another economic downturn hit, lenders could be facing losses in the tens of millions of dollars. More immediately, regardless of pending economic downturns, the unfortunate reality of these credit profiles is that more often than average, these loans go bad, that’s why they are risky credit profiles to begin with.

Data from PayNet Inc., one of the leading collectors and distributors of information on commercial loans and leases, forecasts an increase in credit defaults for the Transportation industry in 2017. So right at the time this industry begins to contract taking several small, single truck fleets with it, the floor is simultaneously being pulled out from under the lenders who issued the loans because the floor was there in the first place.

With a sharp increase in defaults, CalCAP claims will skyrocket; resulting in the same millions of dollars in losses unless the reserve account thresholds are maintained at an appropriate level. Lenders are looking ahead towards these higher defaults on the exact loans they justified because of the effective reserve pool that the state created.

CARB would be well served to reconsider their across the board recapture concept and seek additional funds elsewhere or the program in its proposed form will dwindle and wither. Lately, it seems that money for zero and near zero emissions demonstration and grant projects, alternative fuel and the like are coming out of the wood work. In the VW settlement alone California is getting $800m for zero emissions transport projects over the next ten years. $800 Million! Surely CARB can redirect some AQIP allocations to sustain the program in light of the recent treasure trove for the all-electric boogaloo CARB is endeavoring towards.

And, instead of draining already invested money that has been used by banks and finance institutions to help justify loans to some of the most challenged credit profiles in the trucking industry, CARB and CalCAP should keep existing funds intact with guarantee for a reasonable effective threshold that lenders can count on. The program should continue, but not at the expense of the very lenders who have made it successful.

Stay Tuned!