Legislature(2003 - 2004)

05/06/2004 03:40 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 272(FIN)                                                                                               
                                                                                                                                
     An Act  relating to certain  monetary advances  in which                                                                   
     the deposit  or other negotiation  of checks to  pay the                                                                   
     advances is  delayed until  a later date;  and providing                                                                   
     for an effective date.                                                                                                     
                                                                                                                                
RICHARD  SCHMITZ, STAFF  TO SENATOR  JOHN COWDERY,  explained                                                                   
that SB  272 regulates payday  lenders, which  are businesses                                                                   
doing short-term  loans, from  payday to  payday, for  a fee.                                                                   
These  lenders had  been  unregulated. The  bill  sets out  a                                                                   
maximum  loan amount of  $500, limits  roll-overs that  renew                                                                   
the loan to two,  and limits the fees. The  Department of Law                                                                   
crafted and  supports the bill.  By limiting it to  two roll-                                                                   
overs,  the  bill's main  value  is  to prevent  people  from                                                                   
taking out a loan that they forever roll over.                                                                                  
                                                                                                                                
Co-Chair Harris  asked why the  AARP is opposed to  the bill.                                                                   
Mr. Schmitz was unable to answer.                                                                                               
                                                                                                                                
AT EASE:    3:49 P.M.                                                                                                         
RECONVENE:  3:50 P.M.                                                                                                         
                                                                                                                                
CHIP WAGONER,  CATHOLIC CONFERENCE, stated that  the industry                                                                   
feels  the changes  that would  cut the  interest rate  400%,                                                                   
plus  the annual  percentage interest  rate down  to a  lower                                                                   
figure, and  cut the minimum term  from a 14-day to  a 30-day                                                                   
loan  period would  put out  them of  business. The  Catholic                                                                   
Conference hopes that the Committee  will adopt the amendment                                                                   
that would add  reporting requirements on the  amount of fees                                                                   
collected  from   customers,  how  many  payment   plans  are                                                                   
offered, the number  of recipients whose debts  are sent over                                                                   
to  third-party  collection  agencies,  and the  income  from                                                                   
court  actions. This  information  would allow  the State  to                                                                   
evaluate the  industry. He said  that after one or  two years                                                                   
of hard  data, the State  could better balance  the competing                                                                   
factors  of  regulating  the   industry  and  protecting  the                                                                   
consumer.                                                                                                                       
                                                                                                                                
Mr.  Wagoner explained  the  three amendments.  Amendment  #1                                                                   
would  provide   reporting  requirements  to   gain  industry                                                                   
information.  Amendment  #2 would  change  the allowed  roll-                                                                   
overs  from two  to one  to avoid  increasing the  consumer's                                                                   
debt.  Amendment #3  would  make the  bill  close to  revenue                                                                   
neutral  so that  if  the State  regulates  the industry,  it                                                                   
would receive enough licensing  fees to cover the costs.  Mr.                                                                   
Wagoner said that the amendments  would not hurt the industry                                                                   
and would  improve the  bill, which  the Catholic  Conference                                                                   
doesn't entirely support.                                                                                                       
                                                                                                                                
PAT LUBY, ADVOCACY DIRECTOR, AMERICAN  ASSOCIATION OF RETIRED                                                                   
PERSONS (AARP),  explained that the AARP is  participating in                                                                   
a lawsuit  filed  by Alaska  Legal Services  (ALS). The  AARP                                                                   
attorneys agree with ALS that  payday loans should be subject                                                                   
to the Small  Loans Act and these businesses  should not have                                                                   
any loans  outstanding for  more than  36%. The current  rate                                                                   
for a payday loan  is 391% [$15 per $100 loan],  and the AARP                                                                   
feels that  is "usurious"  and that  these lenders  should be                                                                   
subject  to the same  requirements of  all financial  lending                                                                   
institutions.                                                                                                                   
                                                                                                                                
Mr. Luby continued,  stating that the interest  rates are too                                                                   
high and payday  lenders should allow people  to make partial                                                                   
repayments.  These borrowers  are not  financially savvy  and                                                                   
many  have  to  roll over  the  loans.  Currently  there  are                                                                   
unlimited  roll-overs. The  industry is  asking the  State to                                                                   
regulate it, and he questioned  why it would.  The AARP fears                                                                   
the  industry will  do  "touch and  go  loans," and  probably                                                                   
allow  unlimited  roll-overs  again.  The  bill  presumes  20                                                                   
payday lenders with 30 more in  the next five years. The AARP                                                                   
opposes  the additional  lenders but without  them, he  noted                                                                   
that the  revenue stream would not  pay for the staff  on the                                                                   
fiscal note. The  AARP supports the amendments.  The cost for                                                                   
licensing ought  to be high enough  that the State  would not                                                                   
be subsidizing these "predatory  lenders." The industry needs                                                                   
to be regulated.                                                                                                                
                                                                                                                                
STEVE  CLEARY,  EXECUTIVE DIRECTOR,  ALASKA  PUBLIC  INTEREST                                                                   
RESEARCH GROUP  (AKpirg), explained that the  AKPirg has been                                                                   
involved in  consumer advocacy  and education since  1974. It                                                                   
is currently starting a program  to help people begin savings                                                                   
accounts so that they would not  have to choose payday loans.                                                                   
He said that the AKPirg believes  that interest rates are too                                                                   
high, and this bill would legalize  rates sometimes in excess                                                                   
of 400%. The organization has  looked for ways to compromise,                                                                   
considering the  General Usury  statute interest rate  cap at                                                                   
10-1/4% and the  Small Loan Act rate cap at 36%.   The AKpirg                                                                   
believes  a  drastic jump  to  400%  is unreasonable  and  it                                                                   
opposes the bill.                                                                                                               
                                                                                                                                
Mr. Cleary  suggested a change  extending the time  period of                                                                   
the loan from  a minimum of 14  days to a minimum  of 30 days                                                                   
to repay the loan without defaulting.   If the loan period is                                                                   
not extended,  he suggested  deleting the language  mandating                                                                   
lenders to disclose  the APR (Annual Percentage  Rate) for 30                                                                   
days, which would  only confuse the consumer.   He noted that                                                                   
Senator Bunde raised the license  fee to $5000 but the change                                                                   
was not  adopted in the Senate,  and he hoped that  the House                                                                   
would rectify this to ensure that  the industry is paying for                                                                   
its own regulation. He summarized  that the AKPirg would like                                                                   
to see  roll-overs reduced to  one, the time  period extended                                                                   
to 30 days, and the license fee increased to $5000.                                                                             
                                                                                                                                
Representative Fate  asked if a need exists for  this type of                                                                   
lending. Mr.  Schmitz asserted  that these  loans are  a good                                                                   
alternative and  are not designed  for people who  want long-                                                                   
term loans.  He said that consumers  like these loans  with a                                                                   
set rate  and fee.  The intent  of the  bill is to  institute                                                                   
some regulations and limit the roll-overs to two.                                                                               
                                                                                                                                
Representative  Fate  asked  if the  amendment  reducing  the                                                                   
roll-overs would  be a regulatory  or a punitive  change. Mr.                                                                   
Schmitz replied  that the one  roll-over is designed  to hurt                                                                   
the  industry and  takes  choice away  from  the consumer.  A                                                                   
consumer can  lower the amount  through a roll-over,  and can                                                                   
set up a payment  plan before the case is sent  to court. Two                                                                   
roll-overs give the consumer an option.                                                                                         
                                                                                                                                
Representative Fate repeated his question.                                                                                      
                                                                                                                                
DEBORAH FINK, CASH  ALASKA, replied that the  change from two                                                                   
to one  roll-over is punitive  to the customer who  can't pay                                                                   
off  the entire  debt,  and do  a "roll  down."  A roll  down                                                                   
involves paying off  a portion and taking out a  new loan for                                                                   
a lesser amount.  It is not unusual for a customer  to do two                                                                   
roll-overs instead of letting  the check go into default. She                                                                   
said that  from the industry  standpoint, two  roll-overs are                                                                   
far superior to one.                                                                                                            
                                                                                                                                
Representative Croft  asked where the language  states that a                                                                   
consumer  can proportionately  reduce  the  amount owed.  Ms.                                                                   
Fink replied that a customer could  essentially roll over the                                                                   
entire amount if  they don't have the money when  the loan is                                                                   
due.  If the  customer  could  make  a partial  payment,  the                                                                   
customer would roll over the remaining balance.                                                                                 
                                                                                                                                
In response to  a question by Representative  Croft, Ms. Fink                                                                   
explained that the fees are approved  at the time the loan is                                                                   
taken out.                                                                                                                      
                                                                                                                                
Representative Croft  clarified that the  Catholic Conference                                                                   
proposed the three  amendments and he added them  to the bill                                                                   
packets.                                                                                                                        
                                                                                                                                
Representative Fate MOVED to ADOPT  Amendment #1.  Vice-Chair                                                                   
Meyer OBJECTED.                                                                                                                 
                                                                                                                                
Representative Fate explained  that Amendment #1 would add to                                                                   
the existing reporting  requirements to build up  a good data                                                                   
base.                                                                                                                           
                                                                                                                                
Vice-Chair Meyer  asked about  AS 06.50. Representative  Fate                                                                   
stated that it's in the body of the bill.                                                                                       
                                                                                                                                
Representative  Hawker  felt  that  Amendment  #1  is  not  a                                                                   
technical   amendment,  and  unless   the  Committee   passed                                                                   
Amendment #3 with  a substantive change addressing  the issue                                                                   
of balancing  the fiscal  note, he would  not be  inclined to                                                                   
support  Amendment #1.  He proposed  addressing Amendment  #3                                                                   
first and then returning to Amendment #1.                                                                                       
                                                                                                                                
Representative  Fate WITHDREW  his motion  to MOVE  Amendment                                                                   
#1. There being NO OBJECTION, it was so ordered.                                                                                
                                                                                                                                
Representative  Hawker MOVED  Amendment  #3.   Representative                                                                   
Fate OBJECTED for purposes of discussion.                                                                                       
                                                                                                                                
Amendment #3 reads:                                                                                                             
                                                                                                                                
Page 4, line 4                                                                                                                  
Delete [$3,000]                                                                                                                 
Insert  $5,000                                                                                                                
                                                                                                                                
Representative Hawker  explained that Amendment  #3 addresses                                                                   
the  fiscal  note  which,  as  written,  indicates  that  the                                                                   
revenues generated  through the  service charges  would never                                                                   
meet the  costs incurred  by the  legislation.   He asked  if                                                                   
both the Financial Institution  Examiner I and Administrative                                                                   
Clerk  III positions  are needed  and where  to find  partial                                                                   
persons [1-1/2 positions].                                                                                                      
                                                                                                                                
Mr. Schmitz indicated that it  is the sponsor's wish that the                                                                   
nonrefundable  application fee  remain  at $3000.  Increasing                                                                   
the fee to $5000 would remove all but the major lenders.                                                                        
                                                                                                                                
Representative  Hawker  asked what  the  Department would  do                                                                   
with two ¾-time persons.                                                                                                        
                                                                                                                                
MARK DAVIS,  DIRECTOR, DIVISION  OF BANKING, SECURITIES,  AND                                                                   
CORPORATIONS, DEPARTMENT OF COMMUNITY  & ECONOMIC DEVELOPMENT                                                                   
(DCED),  VIA TELECONFERENCE,  stated that  the Department  is                                                                   
unsure what would  be required to regulate the  industry, but                                                                   
thought that  it would take 75%  of one examiner's  time. The                                                                   
DCED is  behind schedule  on examinations  of companies  that                                                                   
lend substantial amounts of money  to pay insurance premiums.                                                                   
The  Department  would  utilize  the  staff  person  to  stay                                                                   
current on the  premium finance companies that  have not been                                                                   
examined in the past.                                                                                                           
                                                                                                                                
Representative   Hawker  questioned   the  $35  thousand   in                                                                   
Contractual that  increases to $70  thousand in FY  2010. Mr.                                                                   
Davis replied that it reflects  the anticipated services from                                                                   
the Department  of Law to revoke  licenses, which will  go to                                                                   
hearings.   The   DCED   is  uncertain   how   many   license                                                                   
applications it  will receive, and  he said that  these could                                                                   
be contractual expenses.                                                                                                        
                                                                                                                                
Representative  Hawker pointed  out that  it's not a  receipt                                                                   
supported  service.  Mr.  Davis agreed,  but stated  that the                                                                   
Department would  pay as much  as possible through  receipts,                                                                   
not knowing how the industry would grow.                                                                                        
                                                                                                                                
Representative  Hawker noted  that it  is a technical  rather                                                                   
than a substantive problem.  He  opposed passing out the bill                                                                   
with a deficit fiscal note when it isn't really the case.                                                                       
                                                                                                                                
Representative  Chenault   asked  if  it  would   generate  a                                                                   
significant  number  of  consumer   complaints  if  put  into                                                                   
regulation.  Mr.   Davis  thought  so,  and   said  that  the                                                                   
Department  has jurisdiction in  this matter.   It  would use                                                                   
its current staff for these investigations.                                                                                     
                                                                                                                                
Representative  Chenault  discussed   the  examination  costs                                                                   
estimated on  page 2 of the  fiscal note, expressing  that it                                                                   
did not appear to warrant two  full-time positions. Mr. Davis                                                                   
reiterated that it  is an estimate.  While  the Department is                                                                   
almost current  in the exams,  seven of the eight  small loan                                                                   
companies are licensees of Wells  Fargo Bank, which require a                                                                   
different type of examination.                                                                                                  
                                                                                                                                
Representative  Chenault expressed  concern that the  numbers                                                                   
appear a little high.                                                                                                           
                                                                                                                                
Representative Hawker WITHDREW Amendment #3.                                                                                    
                                                                                                                                
Representative Hawker MOVED a  conceptual Amendment to revise                                                                   
Fiscal Note  #2, DCED, Component  1233 dated 4/28/04  to make                                                                   
it a net zero  for each fiscal year under  Contractual. Vice-                                                                   
Chair Meyer  OBJECTED for purposes  of discussion,  and asked                                                                   
if a specific number is needed.                                                                                                 
                                                                                                                                
Representative Hawker repeated  that his amendment would zero                                                                   
out the  contractual line  to yield a  net zero fiscal  note,                                                                   
from FY 2005 through FY 2010.                                                                                                   
                                                                                                                                
Vice-Chair  Meyer WITHDREW  his  OBJECTION.   The  conceptual                                                                   
Amendment was ADOPTED.                                                                                                          
                                                                                                                                
Representative Fate  MOVED to ADOPT Amendment  #1. Vice-Chair                                                                   
Meyer OBJECTED for purposes of discussion.                                                                                      
                                                                                                                                
Amendment #1 reads:                                                                                                             
                                                                                                                                
Page 7, line 24:                                                                                                                
Insert the following and renumber accordingly:                                                                                  
                                                                                                                                
(11) the total amount of fees received per AS 06.50.460;                                                                        
                                                                                                                                
(12)  the  total amount  of  fees,  costs, and  other  income                                                                   
received per AS 06.50.550;                                                                                                      
                                                                                                                                
(13)  the total number of recipients  offered a payment plan;                                                                   
                                                                                                                                
(14)  the average length of the payment plans;                                                                                  
                                                                                                                                
(15)  the total number of recipients whose payment                                                                              
obligation was assigned to a third party for collection;                                                                        
                                                                                                                                
(16)  the total number of recipients  that had a court action                                                                   
initiated against them;                                                                                                         
                                                                                                                                
Representative Fate  explained that Amendment #1  adds to the                                                                   
reporting requirements in the bill.                                                                                             
                                                                                                                                
Representative  Hawker  reiterated that  in  the interest  of                                                                   
expediency,  he could  support a substantive  change  but not                                                                   
this  amendment.  He  felt  that  the  existing  language  is                                                                   
adequate on page 7, line 24: "(11)  any other information the                                                                   
Department determines is required to conduct its review."                                                                       
                                                                                                                                
Representative  Croft spoke  to the merits  of the  amendment                                                                   
proposed  by  the  Catholic Conference,  noting  that  it  is                                                                   
uncertain what the bureaucracy  would require to regulate the                                                                   
industry.                                                                                                                       
                                                                                                                                
TAPE HFC 04 - 109, Side B                                                                                                     
                                                                                                                              
Representative  Croft   continued  speaking  in   support  of                                                                   
Amendment  #1 and  felt that there  was time  to improve  the                                                                   
bill in Committee.                                                                                                              
                                                                                                                                
Representative  Hawker spoke  against imposing  the level  of                                                                   
detail on small businesses that  is inherent in Amendment #1.                                                                   
                                                                                                                                
Vice-Chair Meyer  noted that the  amendment is  more specific                                                                   
than the language in the bill.                                                                                                  
                                                                                                                                
Representative  Fate  expressed  support  for the  data  that                                                                   
would be  generated by the last  two parts in  the amendment,                                                                   
(15) and  (16). He reiterated  that reporting  mechanisms are                                                                   
important in establishing a data bank.                                                                                          
                                                                                                                                
Representative  Fate MOVED to  AMEND Amendment #1  to exclude                                                                   
(11) and (12), and to include (13) through (16).                                                                                
                                                                                                                              
Mr.  Davis clarified  that this  amendment addresses  Section                                                                   
06.50.310,  reports to  the Department  by the licensee.  The                                                                   
DCED would gather a lot of this  information during the exam,                                                                   
and he questioned  whether it needed  to be in the  form of a                                                                   
report. In  response to a  question by Vice-Chair  Meyer, Mr.                                                                   
Davis said that lines 13-16 are  unnecessary in Amendment #1.                                                                   
The  Department would  ensure  that licensees  adhere to  the                                                                   
statute.                                                                                                                        
                                                                                                                                
Representative Fate  commented that it is not  a problem when                                                                   
the licensee knows the statute,  but there can be information                                                                   
gaps when the requirements are in regulation.                                                                                   
                                                                                                                                
Representative Fate MOVED to ADOPT  the Amended Amendment #1.                                                                   
Vice-Chair Meyer OBJECTED.                                                                                                      
                                                                                                                                
A roll call vote was taken on the motion.                                                                                       
                                                                                                                                
IN FAVOR:  Croft, Fate, Joule, Moses                                                                                            
OPPOSED:   Chenault, Foster, Hawker, Meyer, Stoltze                                                                             
                                                                                                                                
Representatives Harris and Williams were absent.                                                                                
The MOTION  FAILED (4-5).  The Amended  Amendment #1  was not                                                                   
adopted.                                                                                                                        
                                                                                                                                
Representative  Croft MOVED  to  ADOPT Amendment  #2.   Vice-                                                                   
Chair Meyer OBJECTED for purposes of discussion.                                                                                
                                                                                                                                
Amendment #2 reads:                                                                                                             
                                                                                                                                
Page 10, line 28:                                                                                                               
                                                                                                                                
Delete [TWO CONSECUTIVE TIMES]                                                                                                  
Insert once                                                                                                                   
                                                                                                                                
Representative Croft explained  that the AARP, AKPirg and the                                                                   
Catholic Conference recommended  the amendment, which reduces                                                                   
the number of times  that someone can roll over  the loan. He                                                                   
expressed that the loan ceases  to be a useful financial tool                                                                   
and becomes damaging when it is rolled over multiple times.                                                                     
                                                                                                                                
Mr.  Schmitz reiterated  that the  bill limits  to two  roll-                                                                   
overs, which seems reasonable.  The problem with consumers is                                                                   
with unlimited roll-overs.                                                                                                      
                                                                                                                                
Ms.  Fink  commented  that she  didn't  favor  the  roll-over                                                                   
amendment because  it removes  consumer choice and  penalizes                                                                   
the consumer.                                                                                                                   
                                                                                                                                
Representative  Stoltze  asked what  happens  after the  last                                                                   
roll-over.  Ms.  Fink  explained that  the  customer's  check                                                                   
would be in  default and would go into collections.  A series                                                                   
of notifications would ensue,  offering the customer a payoff                                                                   
plan over six months.   If the customer opted  for the payoff                                                                   
plan, there would be no other  cost except the bad check fee.                                                                   
                                                                                                                                
Vice-Chair Meyer agreed with Representative  Stoltze that two                                                                   
consecutive times  appears to  the advantage of  the consumer                                                                   
rather than the industry.                                                                                                       
                                                                                                                                
Representative Croft  argued that it's not to  the benefit of                                                                   
the  consumer because  repeated roll-overs  put the  consumer                                                                   
into a cycle of debt.                                                                                                           
                                                                                                                                
Mr. Schmitz repeated that it's  not another loan or unlimited                                                                   
roll-overs.                                                                                                                     
                                                                                                                                
A roll call vote  was taken on the motion to  adopt Amendment                                                                   
#2.                                                                                                                             
                                                                                                                                
IN FAVOR:  Croft, Joule, Moses                                                                                                  
Opposed:   Fate, Foster, Hawker, Meyer, Stoltze, Chenault                                                                       
                                                                                                                                
Representatives Williams and Harris were absent.                                                                                
The MOTION FAILED (3-6).  Amendment #2 was not adopted.                                                                         
                                                                                                                                
Representative  Foster   MOVED  to  report  SB   272  out  of                                                                   
Committee   with    individual   recommendations    and   the                                                                   
accompanying  amended   fiscal  note.  Representative   Croft                                                                   
OBJECTED.                                                                                                                       
                                                                                                                                
Representative  Croft  commented  that  to establish  a  400%                                                                   
interest  rate and  call  it a  consumer  protection bill  is                                                                   
improper.    He felt  that  the  bill  does  not do  what  it                                                                   
purports.  He  regretted  that  the  Committee  rejected  the                                                                   
advice  of the Catholic  Conference  and the  AARP.  He  said                                                                   
that  he could  not support  the legislation  in its  present                                                                   
form.                                                                                                                           
                                                                                                                                
Representative Hawker commented  that his constituents hold a                                                                   
misconception  that the bill  would legalize "something  that                                                                   
was previously illegal."                                                                                                        
                                                                                                                                
Representative  Croft noted  that 10  states ban these  loans                                                                   
for good  reason because  the  loans can often  be fit  under                                                                   
traditional lending practice at a much lower interest rate.                                                                     
                                                                                                                                
A roll  call vote was  taken on the  motion to move  the bill                                                                   
from committee.                                                                                                                 
                                                                                                                                
IN FAVOR: Fate, Foster, Hawker, Meyer, Moses, Stoltze,                                                                          
          Chenault, Harris                                                                                                      
OPPOSED:  Croft                                                                                                                 
Representatives Joule and Williams were absent.                                                                                 
                                                                                                                                
The MOTION PASSED (8-1).                                                                                                        
                                                                                                                                
CSSB 272(FIN)  was REPORTED out of Committee  with individual                                                                   
recommendations and an amended fiscal impact note.                                                                              

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