Legislature(2003 - 2004)
04/27/2004 09:02 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
CS FOR SENATE BILL NO. 272(L&C) "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." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken noted that this legislation, which is sponsored by the Senate Rules Committee, would require the Division of Banking, Securities and Corporations, Department of Community and Economic Development "to license and supervise Alaska's payday lending establishments." He noted that, "39 states and the District of Columbia specifically regulate this service." The Version 23- LS1516\U committee substitute is before the Committee. RICHARD SCHMITZ, Staff to Senator John Cowdery, the Chair of the Senate Rules Committee, stated that this legislation would regulate "payday lenders" which is a term used to identify business that lend less than $500 on short-term loan basis, typically for less than two weeks. ED SNIFFEN, Assistant Attorney General, Commercial/Fair Business Section, Civil Division (Anchorage), Department of Law, testified via teleconference from an offnet site in Anchorage and noted this bill would regulate the payday lender industry by instituting "fairly significant" licensing requirements including bonding, auditing, and regulatory authority. The issue being most debated in this bill "deals" with "the fundamental principal of how these loans" would originate. Payday lenders have operated in Anchorage "for quite some time" and typically charge $15 in interest per each $100 loan amount. The Version "U" committee substitute would limit payday lending to a maximum of $500 and would allow the loan to be rolled over two times as compared to the $1,000 maximum and four- time rollover proposed in the original version of the bill. Mr. Sniffen explained that a rollover occurs when a loan is not paid when due and is "rolled over" for another two weeks with an additional $15 per $100 charge levied. A provision in this bill would require a payday lender to offer a borrower the option of up to a six-month payment plan at no additional fee or charge at the conclusion of a rollover period were a loan unpaid at that time. He expressed that "significant consumer protection" language is incorporated into the bill to "provide protection that does not currently exist." Mr. Sniffen allowed that such things as a pending lawsuit being advanced by Alaska Legal Services against payday lenders challenges "the legality of these transactions under Alaska Usery Statutes," has caused confusion regarding this legislation. The Banking, Securities and Corporations Division "is not as optimistic" as Alaska Legal Services is about the outcome of that lawsuit. He stated that, "there is no current indication that these transactions are currently illegal," and he reminded that they have been available "for quite some time." Mr. Sniffen commented that while some groups are furthering the adoption of the Model Act, no other state has adopted it or would likely be adopting it in this regard, as "it contains fairly significant restrictions that would essentially put these businesses out of business." Mr. Sniffen pointed out that this legislation, when compared to regulations of the 44 states that currently regulate this industry, would be viewed as "one of the more restrictive" in that it would implement a monetary limit and a minimum two-week lending period. In addition, this legislation is the only one that would require lenders to provide the aforementioned payment plan option to borrowers. Mr. Sniffen also communicated that there is opposition to the lending fee which would be considered "enormous," were it calculated in terms of an annual percentage rate (APR). The $15 fee for a $100 loan combined with the five-dollar origination fee would amount to a 520-APR; a $300 loan would equate to a 433-APR; and a $500 loan would equate to a 416-APR. He noted that these figures would not change were a rollover to occur, as both the fee and the amount of time would be doubled. The largest fee charged on an annual basis, he shared, would therefore equate to a maximum of 520-APR. While some states have implemented a 60-percent interest rate cap, "most states do not" have a specified limit and the fee being charged in Alaska could be considered to be "at the low end." Mr. Sniffen conveyed that the Division's view is that, rather than the $15 fee creating consumer harm, financial management is the issue. Extending the length of the loan from 14-days to 30-days has been discussed as it would "half the interest rate … the lenders might have some problems with that and it would effectively put them out of business." He stated that the industry could speak to that concern. Mr. Sniffen discounted comparisons of the payday lender industry to the credit card industry, as, he contended, they are completely different kinds of loans. In summary, this legislation was carefully developed after weighing the input from the industry, consumer groups, and other interested parties. In conclusion, he stated that the Department supports the legislation. Senator Bunde asked regarding the bill's business license requirements; specifically how the licensing fee would be determined. Mr. Sniffen understood that the licensing fee could total a maximum of $2,000. The Division of Banking, Security and Corporations would determine the amount. Senator Bunde asked that the fee structure be further explained. MARK DAVIS, Director, Division of Banking, Securities & Corporations, Department of Community and Economic Development, testified via teleconference from an offnet site in Anchorage and explained that a biannual, maximum $1,000 per year fee, or a total two-year fee of $2,000, could be levied as depicted in Section 3, Sec. 06.50.080, page five, lines 12 through 16 of the bill. Senator Bunde asked whether these fees would offset the actual costs associated with managing the program. Mr. M. Davis responded that these fees "would capture approximately 80-percent" of the Department's associated licensing expenses. He noted that the Department was concerned that these businesses would not pay a higher fee during the initial implementation of this legislation. Senator Bunde, noting that there are not an exorbitant number of payday lenders operating in the State, asked whether the Department could enforce the fee or force the business to close. SFC 04 # 96, SIDE B 04:49 PM Mr. M. Davis continued that this legislation would serve to characterize these businesses as financial institutions and as such, once they were licensed, their license must be maintained. As such, the powers of the State's banking codes would be in effect and the State "could prevent them from being in operation." Senator Bunde asked, therefore, the reason that the fees could not recoup the overall expense associated with the program. Mr. M. Davis expressed that were the fee higher than a $2,000 biannual fee, it would serve to discourage the industry from applying for a license. This would prevent the State from getting "a handle on this … completely unregulated industry". Senator Bunde voiced that while he supports this legislation as it would regulate the industry, the State should not subsidize 20- percent of the cost of its licensing program. Senator Bunde suggested that an amendment be developed to address this concern. Other licensing fees, such as those charged to barbers and hair dressers, fully compensate the State for the cost of their licensing programs. Co-Chair Wilken asked that Senator Bunde work with the Division to address this concern. Senator Bunde stated that rather than serving to legalize an illegal industry as some people "have been mislead" to believe, this legislation would establish a licensing program for a legal, but un-regulated industry that has been operating in the State for a significant amount of time. Furthermore, while the bill would regulate the industry, it would not promote it, would not establish a new industry, and does not "do anything to prohibit people from making poor financial judgment." DEBORAH FINK, Representative, Cash Alaska, provided the Committee with a chart titled "Comparison of CSSB272 to Current Law" [copy on file] that compares the provisions of the proposed legislation to current industry practices. Agreeing that misinformation about the industry does exist she affirmed Senator Bunde's remarks that this legislation would serve to regulate the industry rather than to legalize the loans. Approximately twenty payday lenders in the Municipality of Anchorage area operate under the Small Loan Act Exemption, which was established in the State in 1955. This Exemption originally specified that a maximum of $100 could be loaned. The intent of the Act was to exempt these loans "from any kind of interest" or term limit because the Legislature at the time, realized that these loans were expensive to provide due to the fact that they involved "a high risk population." In 1980, as the result of an Attorney General challenge, a Superior Court judge ruled that the original "Legislative intent of exempting those loans from limits and interest was exactly what they meant to do." Shortly after that ruling, the Legislature increased the maximum loan amount to $200, and in 1993, "after a great deal of discussion", the amount was increased to $500. Ms. Fink expressed that, while the industry has been "happily" operating for numerous years without regulation, due to the fact that it is a very popular and busy business, "it is probably time" that regulations be enacted. She characterized the loans as being "real simple and real small" loans that range from $100 to the average of $300. They are designed to be paid off within two weeks. Were this legislation enacted, a $300 loan would cost an individual a total of $350, including the five-dollar origination fee, which would be a one-time fee that would be calculated "as part of the interest". She further clarified that the five-dollar origination fee would not be re-charged were the loan to roller over. This and some other incorrect information are included in a letter from AARP [copy not provided] that was submitted in regards to this bill. Ms. Fink stated that this legislation would serve to regulate a completely un-regulated industry; would align the maximum loan amount of $500 with that currently in effect by the Small Loan Act Exemption; would limit the rollover to two times rather than the current unlimited amount; would establish licensing provisions; would establish a licensing fee; and other provisions. She voiced support for the bill in its current form. Senator Bunde asked Ms. Fink her position regarding increasing the licensing fee to more than $1,000 per year. Ms. Fink stated that in order to provide the service, a license would be required, and due to the fact that this is a "healthy" industry, businesses would pay it. Senator Hoffman asked whether requiring both a maximum number of days for a loan term in addition to the specified minimum loan term would be beneficial. Ms. Fink responded that only the minimum loan term is specified in the bill in response to consumer groups' concerns specific to that aspect. STEVE CLEARY, Executive Director, Alaska Public Interest Research Group (AKPIRG), testified via teleconference from an offnet site, and stated that the organization does not support the bill in its current form, as it would serve "to legalize interest rates that are unfair and predatory to vulnerable consumers." He referenced Mr. Sniffen's remarks relating to problems with individuals' financial management and noted that his organization is working with financial institutions in the State in order to educate and encourage people to establish savings and bank accounts by utilizing such things as their Permanent Fund Dividend checks rather than opting to use payday loans. Usery Statutes have historically been established to protect consumers from being "gouged or loan sharked," and he noted that regulations prevent banks and other financial entities from charging high interest rates. He argued that the interest rates allowed by this legislation "are not commensurate with other" established financial industry rates. The State of Georgia has implemented a maximum 60- percent APR interest rate on its payday loan industry: similar provisions would be preferred "to just letting the industry run wild." Noting Ms. Fink's position that the $15 per $100 loan fee would be at the limit of where her business could successfully operate, he reminded the Committee that this is the fee currently being utilizing. Therefore, the five-dollar origination fee allowed under the proposed legislation, would be additional money. Financial institutions are required to adhere to the Truth in Lending Act in that they must depict their loans using an APR basis. Were one to examine payday lenders application paperwork, the APR listed on them would reflect interest rates in the thousands of percent. Most payday loan consumers need the money and thereby are subject to "outrageous interest rates." Noting that the payday loan industry attests that lower interest rates would put them out of business, he suggested that a compromise be reached that, rather than changing the amount of money to be collected, would increase, by two weeks, the amount of time in which the consumer could repay the loan. He stated that this would provide people, such as those who are only paid monthly, a better chance to repay the loan. Therefore, he asked that a 30-day loan term be considered. Mr. Cleary stated that while the payday loan industry is on record that they could not afford lengthening the payback term they have not provided a reason as to why it would be unaffordable. He recalled Ms. Fink's testimony before the Senate Labor & Commerce Committee in which she stated that most people come in for just one loan. Therefore, he questioned why a 30-day loan period would be unacceptable. Mr. Cleary declared that a loan rollover "is the most dangerous part of this," as were a person to rollover a $300 loan, without paying any portion of it off, six times, they could owe as much in interest as they do in principle." This, he declared, is when consumers "really get gouged by these and really get in a cycle of debt that is bad for our society and is not good for the business" and could tie up Court time. Therefore, in order to provide protection to these "vulnerable consumers," the Committee should consider reducing the allowable number of loan rollovers from two to one. In summary, he asked that these amendments be considered, and were they not, the Committee should not support the bill. PAT LUBY, Advocacy Director, AARP Alaska, testified in Juneau, and stated that AARP participated years prior, in the development of the Model Act legislation. The problem associated with payday lenders is that loans cannot be paid off incrementally; they must be paid off in entirety. While people are allowed to make partial payments on their credit card balances, payday lenders require the entire amount to be paid or the entire balance must be rolled over. The original bill would have established a higher payday loan amount of $1,000 and four rollovers. He agreed with Senator Bunde's and others' comments that "this is an industry that ought to be regulated," as many people are at risk. He allowed that the people who use payday lenders might not be the State's most sophisticated citizens; they are people who need money in a hurry; and who might, two weeks later, continue to be in financial trouble and would be required to roll the loan over. He pointed out that were the two- time rollover language in this legislation adopted there is nothing that would prevent an individual from going to another payday lender and borrowing from them. He noted that the State of Arizona's regulations require a payday lender to determine whether a consumer already has outstanding payday loans by simply calling a company called Telecheck. He stated that credit card companies are profitable while operating at an 18-APR; therefore, he questioned the reason that payday lenders must have a 400-percent profit in order to be successful. Mr. Luby characterized this legislation as an industry bill, and stated that the fact that the industry is requesting regulation should raise a "red flag." Mr. Luby referenced the Division of Banking, Securities and Corporation's fiscal note that projects that the number of payday lenders is expected to substantially increase. As a result, two new staffing positions would be required in order to license and investigate the industry. He argued however, that this legislation would create "a regulatory environment" that would discourage rather than encourage new operators. This would serve to assist the businesses that currently support the regulation of the industry. Were the number of payday lenders to not increase as projected, insufficient funds would be collected to offset the cost of operating the program. Therefore, rather than assisting the consumer, this legislation would serve to enhance the position of the businesses supporting this bill. Mr. Luby stressed that AARP agrees that this is an industry that must be regulated. AARP attorneys are participating in the pending Alaska Legal Services lawsuit, and he voiced optimism that the suit could be won. The Judge hearing that case has already indicated that he would wait to see what the Legislature would do, as were this legislation enacted, no lawsuit would ensue. He asked that action on this bill be delayed until after the Court proceedings conclude. He stated that, at that time, were the Legislature to determine that further regulations should be developed, AARP would be willing to participate in the endeavor to assure that consumers are adequately protected. ANGELA LISTON, Representative, Alaska Catholic Conference, testified via teleconference from an offnet site and supported Senator Bunde's comments that this is an industry that must be regulated. However, she spoke against the level of fees proposed in the legislation "on behalf of the working poor who find themselves desperate for cash" in order to pay for such things as rent, car repairs, and unforeseen medical needs. She strongly supported AKPIRG's suggestion that this legislation be amended to allow a minimum 30-day loan term as it might allow a person to repay a loan without being required to roll the loan over. This might help to prevent the increasing burden of chronic debt. She urged the Committee to emphasize with the working poor and realize that regulation of this industry would be "a huge step in promoting the common good." Allowing these interest rates to continue "is an exploitation of the working poor." JIM DAVIS, Representative, Alaska Legal Services Corporation, testified via teleconference from an offnet site and expressed that "Alaska Legal Services represents low income Alaskans in various civil matters including consumer law matters." He addressed six issues including the pending lawsuit that Alaska Legal Services has filed in Anchorage on behalf of a client that is based on the premise that a business must operate under the State's Usery Statutes unless explicitly exempted from the Statute. Because payday lenders are not exempt, they are in violation of the Usery Statute law. The Superior Judge hearing this case understands that the industry advanced this legislation in an attempt to halt the lawsuit. Therefore, the Judge ruled that he "would not rule on the legality of the lawsuit until after the Legislature adjourned" due to concern that, were the Court to rule that payday lenders were in violation of the law, the ruling would be moot as it would be argued that the Legislature changed the law in this regard. Therefore, the lawsuit is on hold pending this legislation. In addition, this legislation was not brought forward until after the lawsuit was filed. Mr. J. Davis submitted that this is not good legislation, as it would allow low income Alaskans to carry loans carrying interest rates ranging between 400 and 1000 percent. The claim that this is a consumer protection bill is questionable, as these high interest rates could be argued as otherwise. "It is a very strange world" when a consumer protection bill legalizes high interest rates such as these. This is in effect "loan sharking." He recalled Mr. Sniffen's comments that specified that "because payday lenders are making these loans, its legal." He argued that on many occasions in this State, that has not been the case. He recalled that in the 1980s many lenders provided loans by placing liens on people's permanent fund dividend checks. He stated that this was "a disguised transaction charging ridiculous rates of interest against Alaskans and of which was stopped after the Courts ruled it as being illegal. Mr. J. Davis further alleged that due to "the fact that Mr. Sniffen's department is understaffed," it has not been able to present this business practice to the Court System. This scenario, he continued, only proves that Mr. Sniffen's department is understaffed and not that this practice is legal. Absent the introduction of this legislation, the Superior Court would have already ruled it as being illegal. Mr. J. Davis commented that it has been argued that the monitoring provisions of this legislation would "fix the problem." The pending lawsuit is a testament that the provisions of the bill would not work, as the case involves a woman who took out one $500 payday loan, could not pay it back, and had to roll it over numerous times. As a result, her loan went into default; she was sued by the lender, and subsequently lost her case in Court. He stated that this scenario regularly occurs. Mr. J. Davis cited a North Carolina banking entity as stating that "consumers generally take these loans out to satisfy sudden financial needs, find themselves unable to meet their budgetary needs on their next payday, take additional loans, and get caught up on a never-ending cycle of high fees and interest." He noted that an Illinois study indicated that 77-percent of consumers who took these loans repeatedly fell into the rollover scenario and got deeper in debt. Mr. J. Davis stated that this legislation would not fix these problems and that limiting the number of loans would only encourage a borrower to go to another payday lender. No mechanism is in place through which, either a payday lender or the Division of Banking, Securities and Corporations would be able to determine how many loans a person has taken out. He declared that the question is whether the State would desire to approve loans with high interest rates and allow people to get deeper in debt. Mr. J. Davis pointed out that the bill does not contain any APR disclosure provisions, which are required when someone signs up for a credit card or bank loan. He opined that there are better options out there and that a better bill could be developed were consumer advocacy groups such as AARP involved in the process. Mr. Schmitz spoke, on behalf of the bill's sponsor, in support of legislation. During his research on this subject, he became aware that there is a difference between interest rates and fees. He stated that were one to write an insufficient fund check on their bank account, the bank would typically assess up to a $25 fee. He declared that perhaps an eighteen-dollar fee would be reasonable, as most people who borrow are fairly responsible and are one-time users. This is contrary to testimony that most consumers are in rollover scenarios. He also stated that consumer protection is provided by the rollover limit and payment plan option provided in the bill. Senator Bunde wished that he "could propose an amendment that would prohibit Alaskans from making poor financial decisions." He stated that this bill would not require Alaskans to utilize this service. The service is driven by demand. He concluded that this industry has provided a service for some time, and were it not regulated, he assumed that an underground business might occur. TIM KELLY, Former Senator, Lobbyist for Cash Alaska, informed the Committee that the Alaska Legal Services testimony misstated a point of fact as, he continued, the bill contains three mechanisms though which a consumer could be notified regarding the APR: a sign must be placed in the business window in this regard; there is an ARP disclaimer on the paperwork that the consumer signs; and a federal APR disclosure requirement mandates that this information must be provided to the consumer. Co-Chair Wilken ordered the Bill HELD in Committee.