Legislature(2003 - 2004)
04/28/2004 09:06 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 second hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated this bill, sponsored by the Senate Rules Committee, "requires the Division of Banking Securities and Corporations to license and supervise Alaska's payday lending establishments." RICHARD SCHMITZ, Staff to Senator Cowdery, indicated he had nothing to add to his testimony given at the previous hearing. ED SNIFFEN, Assistant Attorney General, Commercial/Fair Business Section, Civil Division, Department of Law, testified via teleconference from Anchorage to respond to testimony presented at the prior hearing. A representative of Alaska Legal Services had testified that Permanent Fund Dividend loan advances were found to be illegal by the Alaska Supreme Court. Mr. Sniffen clarified that the case referenced was the Berger case. Mr. Berger was advancing money to Alaskan residents against future receipt of their Permanent Fund Dividend payment. The State challenged the transactions, and the Supreme Court determined that the transactions were legal under Alaska's usury statute. Following the Berger decision, legislation was passed that made advances based on the Permanent Fund Dividend illegal. The Department of Law does not fully agree with the outcome of the Berger case; however, the ruling established precedent for financial transactions. This case evidences that financial advances would be legal in the State even if they were not regulated. Mr. Sniffen then referenced testimony from the American Association of Retired People (AARP) that recommended a partial payment option be included in the bill. This suggestion was considered, but was determined to be too problematic for multiple reasons. Partial payments would create some procedural difficulties. Advances currently operate under a system where the consumer leaves a post- dated check with the lending institution to be cashed after a two- week period. If partial payments were allowed, the consumer would need to provide the lender with a new check, and the interest rate information would have to be changed. In addition, a partial payment would be allowable under the proposed legislation if a consumer's advance goes into default. Under the payment plan a consumer would be able to make partial payments, and no additional fees would be required. Mr. Sniffen continued that the Department of Law has been communicating with various groups, not exclusively lenders, to consider issues surrounding this legislation. The Department considered the concerns expressed in the earlier Committee hearing of this bill and concluded that this version of the legislation addresses those concerns in a "reasonable manner". Amendment #1: This amendment deletes "$2,000" and inserts "$3,000" in subsection (b) of Sec. 06.50.030. Application., in Section 3 of the committee substitute, which amends AS 06 by adding a new Chapter 50. Deferred Deposit Advances. The amended language in Article 1. Licensing., on page 4 line 4 reads as follows. (b) The applicant shall submit with the application the bond required by AS 06.50.040 and a nonrefundable application fee in an amount that is established by the department by regulation and that does not exceed $3,000. The application fee for the initial license may not be prorated. Senator Bunde announced this amendment would be NOT OFFERED and deferred to Amendment #3. Amendment #2: This amendment deletes "14" and inserts "30" on page 10, line 10, in Article 4. Licensee Practices and Recipient Rescission and Payment., of Chapter 50. Deferred Deposit Advances., created by Section 3 of the committee substitute. The amended language reads as follows. Sec. 06.50.440. Duration of advances. The minimum duration of an advance is 30 days. This amendment also deletes "14" and inserts "30" and deletes "two consecutive times" and inserts "once" on page 10, lines 27 and 28, in Chapter 50, Article 4, created by Section 3. The amended language reads as follows. Sec. 06.50.470. Renewal of advance. (a) The minimum term of a renewal of an advance is 30 days. (b) A licensee may not renew an advance more than once, after which the licensee shall require the advance recipient to repay the advance in full. This amendment also deletes "as an annual percentage rate for 14 days for each $100, and" on page 11, lines 11 and 12, in Chapter 50, Article 4, created by Section 3. The amended language reads as follows. Sec. 06.50.500. Posted fee notice. A licensee shall post a notice in each business location that discloses the fees that the licensee charges for advances. The fees in the notice must be expressed as a dollar amount, and as an annual percentage rate for 30 days for each $100. The notice must also contain any other reasonably necessary information required by the department by regulation. The notice shall be posted so that it is conspicuous to an advance recipient or a potential advance recipient. The lettering in the notice must be legible and at least one inch in height. Senator Hoffman moved for adoption. Co-Chair Wilken objected for an explanation. Senator Hoffman explained this amendment addresses the concern expressed at the earlier Committee hearing of this bill that the 14-day minimum advance should be changed to a 30-day minimum advance. Senator Hoffman explained that this bill would allow a $15 fee per $100 advance to be required for each 14-day renewal with a maximum of two renewals. The 14-day renewal would target military personnel who might only be paid every 30 days. The 14-day renewal period would allow a lender to charge a consumer two $15 fees, in addition to the five-dollar origination fee for a combined fee of $35 for a $100 advance. He considered this amount too high for such a short borrowing period. This amendment would allow two 30-day renewals requiring a $15 fee per $100 advance. Senator Hoffman detailed that if a consumer accepted a $100 advance for the required minimum advance period of 14 days, and extended it twice for a total of 45 days, the individual would pay three $15 renewal fees and one $5 origination fee for a total of $50. This amendment would allow only one 30-day renewal. Co-Chair Wilken asked if the maximum length of an advance under Amendment #2 would be 60 days. Senator Hoffman affirmed. Mr. Schmitz stated that the sponsor would oppose Amendment #2. He deferred to Mr. Sniffen and the representative from Cash Alaska to address the sponsor's opposition to this amendment. Mr. Sniffen surmised that the extension of loans from 14 to 30 days could effectively "drive business away". Some states that regulate this industry allow more than two extensions, while others allow only one. He also deferred to the industry to testify to the effects of this amendment. DEBORAH FINK, Cash Alaska, testified that if the minimum loan term were extended to 30 days, the industry would not "survive". She qualified that because this industry is not currently regulated in Alaska, financial data does not exist. Using data from states with regulated industries she informed that lenders are making approximately ten percent on fees. The overhead of the advance does not change due to fixed costs; however income would be reduced by half if the 30-day extension were implemented. The payday industry could no longer support the payroll advance loan program in Alaska. She further predicted that Internet-based businesses located out of state and the "loan by phone industry" would thrive with the absence of Alaska companies offering these loans. Senator Olson anticipated that this amendment could decrease businesses' viability, but disputed that the companies would go out of business. Ms. Fink argued that some businesses would fail if required to extend the loans for a minimum of 30 days. She informed that her businesses start "in the hole" each year because the amount of fees collected by her businesses is equal to the amount of checks written from accounts with non-sufficient funds. The payday loan business is really a collection agency. The 30-day minimum would reduce these businesses' income by half. No other state imposes a 30-day minimum, and only four states have instituted a 14-day minimum. The majority of states do not have a minimum advance term, and many are issuing five, six and seven-day advances. Senator B. Stevens asked whether Internet companies offering payroll advance loans and "loan-by-phone" companies are unregulated. Ms. Fink affirmed and explained these businesses operate from states with no usury regulations. Approximately 60 payroll advance companies operate on the Internet, and their fees range from $19.88 to $60 per $100 advance, with a one-day minimum. These businesses especially flourish in the six states that do not allow payroll advances. Senator Hoffman asked Ms. Fink to comment on the rollover changes proposed in Amendment #1. Ms. Fink replied that the payroll advance companies could comply with a single rollover, although customers often utilize rollovers. This provision would eliminate an option for customers. Co-Chair Wilken commented that currently there are no restrictions on rollovers. Ms. Fink affirmed. Senator Bunde pointed out that consumers could simply have a new loan issued after utilizing the maximum number of rollovers on their previous loan. He asked if having a new loan issued is more expensive than a loan renewal. Ms. Fink replied that a rollover is less expensive for the customer due to the five-dollar origination fee for each new loan. Senator Bunde understood that Ms. Fink's businesses make approximately $1.50 per $100 loan. Ms. Fink responded that a $1.50 profit per $100 loan is an industry-wide average based on the data collected in states that regulate the payroll loan industry. Ms. Fink added that her businesses average a profit between $1.50 and $2 per $100 loan. Senator Bunde inquired if the passage of this legislation would provide the State with more information about the payroll loan industry in future years. Ms. Fink replied that the State would know "everything" about the payroll loan industry's volume and profits if this bill were implemented. Senator Bunde understood the presence of significant opposition to this service and suggested that instead of offering this amendment, Senator Hoffman could sponsor other legislation to eliminate the industry. Senator Bunde emphasized that while the payroll loan industry is operating in Alaska it should be regulated so that industry information can be compiled. Senator Hoffman clarified his concerns relating to the rollover provision given that the cost of a $500 loan is $80. When the term of the loan is due, customers are forced to rollover the loan if they do not have the finances to pay for the original amount of the loan and the fees incurred. Forced renewals could be avoided if this legislation offered a partial payment provision. The extension of the minimum loan term to 30 days would accommodate those customers who are paid on a monthly basis. Currently, customers borrowing $500 for a 30-day period consisting of two renewals would pay $150 in renewal fees and a $5 origination fee for a total of $155. Amendment #2 would reduce the fees by the amount of a second rollover, or $75, and would allow the customer up to 60-days to pay for the loan and fees. Senator Bunde commented that if the consumer cannot repay the loan and fees after one renewal, it is unlikely they could repay the loan after a second renewal. Senator Hoffman defended Amendment #2 by stating that under the current version of this bill the consumer would have more difficulty paying the loan because after the first 14-day period an additional $75 renewal fee would be incurred. Senator Bunde agreed that the consumer would likely be unable to pay the loan and fees after an additional $75 fee were incurred, resulting in "bad debt". Senator Hoffman moved to divide the amendment. Amendment #2a pertains to the extension of the minimum loan term from 14 to 30 days. Amendment #2b pertains to reducing the number of renewals from two to one. Senator B. Stevens referred to the chart provided by Cash Alaska titled "State Law Governing Deferred Deposit Services/Payday Advance" [copy on file] and commented that the states with liberal laws and political representatives, such as Wisconsin and Oregon, have $25,000 and $50,000 payday loan limits with no interest guidelines and minimal loan terms. In contrast, traditionally conservative states have more regulations. He emphasized the "unique" nature of the statewide regulatory patterns on this industry. Senator Dyson referenced Senator B. Stevens's comments and surmised that the political leaders in the states with strict regulations on this industry have realized, "how stupid their constituencies are, and how much they need to be protected." He continued that his constituents do not need protections on this industry because they have the ability to make rational decisions. Senator Dyson asked Ms. Fink to clarify if the payroll loan industry's profits would actually be reduced by one-half if the minimum advance terms were increased to 30 days. He understood that the profits would not be reduced by one-half unless all of the consumers waited to repay their advances until the last day of their 30-day term. In earlier testimony Ms. Fink had mentioned that many consumers pay their loans back in seven to nine days, well before the 14-day loan expires. Ms. Fink explained that the gross income would be reduced by one- half and that profits would be negative were the loan terms extended to 30 days. She referred the Committee to a document titled "Where do fees for Deferred Deposit Advance Services go" [copy on file] to view the expenses of a payroll advance business. She predicted that consumers would not repay their loans as rapidly if the minimum advance term were increased to 30 days. She asserted that members of the military do not need a 30-day minimum as Senator Hoffman suggested because most consumers take out loans between paydays and repay the loan on their payday. Ms. Fink continued that lenders try to ensure the repayment of loans they issue. Consumers who renew loans are likely to become consumers who do not repay their loans. The industry's preferred consumers are those who pay their loan as soon as possible. The industry attempts to avoid consumers who regard the advances as "loans", and attempts to attract consumers who regard the advance as "a little something" to assist them until payday. If the 30-day term is implemented, consumers will no longer view the advance as a "stopgap measure", but as a loan. She predicted that if the 30-day term were instituted fewer consumers would repay their loans. Ms. Fink relayed that while reviewing the transactions her businesses conducted in 2003, she discovered that many transactions were on behalf of repeat customers. She estimated that 30-day terms would reduce the number of loans issued by 30-percent, consequently reducing her businesses' income by 30 percent. She added that her profits are approximately five-percent, meaning that a 30 percent reduction in income would produce a negative balance. Co-Chair Green stated her assumption that this legislation has "come together as a package" including rates, fees, percentages, terms and other factors regulating the payroll advance industry. If certain changes were made to this bill, other changes would be required to balance the package. She expressed concern that if this legislation is not properly balanced it could be detrimental to the payroll advance industry and result in the industry "going underground". Senator Hoffman countered that Cash Alaska, not the legislative finance committees or the Murkowski Administration submitted this legislation and the supporting documentation. The industry could not expect to determine all of the regulations pertaining to it. Senator Hoffman requested that the Committee consider that none of those who testified at this bill's previous hearing, except the industry, were in support of this legislation. The testifiers requested changes to this bill in response to certain concerns, and Amendment #2 would implement those changes. Co-Chair Wilken asked for an explanation of the portion of Amendment #2b that would delete the following language on page 11 lines 11-12: " as an annual percentage rate for 14 days for each $100, and". Senator Hoffman replied that this deletion would be a conforming change to reflect the establishment of a 30-day minimum loan term. A roll call was taken on the motion to adopt Amendment #2a. IN FAVOR: Senator Hoffman and Senator Olson OPPOSED: Senator Bunde, Senator Dyson, Senator B. Stevens, Co-Chair Green and Co-Chair Wilken The motion FAILED (2-5) Amendment #2a FAILED to be adopted. A roll call was taken on the motion to adopt Amendment #2b. IN FAVOR: Senator Hoffman and Senator Olson OPPOSED: Senator Dyson, Senator B. Stevens, Senator Bunde, Co-Chair Green and Co-Chair Wilken The motion FAILED (2-5) Amendment #2b FAILED to be adopted. AT EASE 9:44 AM / 9:49 AM Amendment #3: This amendment deletes "$2,000" and inserts "$3,000" in subsection (b) of Sec. 06.50.030. Application., and Sec. 06.50.080. Renewal of license., in Section 3 of the committee substitute, which amends AS 06 by adding a new Chapter 50. Deferred Deposit Advances. The amended language in Article 1. Licensing., on page 4 lines 2 - 5 reads as follows. (b) The applicant shall submit with the application the bond required by AS 06.50.040 and a nonrefundable application fee in an amount that is established by the department by regulation and that does not exceed $3,000. The application fee for the initial license may not be prorated. The amended language on page 5, lines 12 - 16 reads as follows. Sec. 06.50.080. Renewal of license. A license issued under this chapter shall be renewed on or before the date set by the department by submitting to the department a completed renewal application on a form established by the department and paying a nonrefundable renewal fee established by the department, which may not exceed $3,000. Senator Bunde stated that a discrepancy existed in this legislation regarding the license fee. He noted a new draft fiscal note to reflect the impact of this amendment. MARK DAVIS, Director, Division of Banking, Securities and Corporations, Department of Community and Economic Development, testified via teleconference from an offnet location that the increased license fee would produce significant revenue. However, he understood from correspondence with Senator Bunde that the intent is that the program be revenue neutral in the first few years of operation, which the Division determined would require a $5,000 fee annually. Mr. Davis expressed concern that the proposed fee would be too high because it might cause industry members to decide to conduct business illegally in order to avoid the fee. This amendment would require a biannual fee of $3,000. The Division would prefer that the licensing fee be as revenue neutral as possible, and will adopt the highest fee the industry would be willing to accept. Senator Bunde remarked that the cost to administer the program, and not the preferences of the industry, should be considered to determine the licensing fee. If the Division calculates that the cost to administer the program is higher than the industry would voluntarily support with fees, efforts should be taken to reduce expenses. Mr. Davis outlined that the Division is attempting to cut administrative expenses related to the regulations proposed in this legislation by reducing contractual services such as legal services. He explained that if this bill were adopted, a bank examiner position would be statutorily required to oversee and address potential litigation. The administrative costs would also include a clerk to handle increased correspondence; however, the clerk position could possibly be eliminated to further reduce costs. Senator Bunde acknowledged the high workload of the Division and the increased demands this legislation would create. He asserted that despite this workload, the full-time bank examiner would not need to be exclusively devoted to the payroll loan businesses; the examiner could also serve other businesses. The payroll loan industry should not pay for all of the expenses related to the bank examiner, but rather the costs should be distributed amongst all the businesses the examiner would serve. Co-Chair Wilken explained that the options before the Committee regarding the application fee are threefold: leave the language as is, which would require a fee not to exceed $2,000; adopt Amendment #3, which would require a fee not to exceed $3,000; or raise the fee to $5,000 to reflect the fee recommended by the Division of Banking. Senator Bunde moved for adoption of Amendment #3. Senator Bunde offered an amendment to the amendment to increase the licensure fees to $5,000. Because the sponsor of the amendment made the motion, no further action was necessary and the amendment was AMENDED. Co-Chair Green asked whether every industry was responsible for administrative costs incurred by the State during the first year of governmental oversight. She stated that a $5,000 application fee would be too high. Mr. Davis informed that the Division is solvent because it has an annual budget of approximately $2.1 million, and should generate revenues of approximately $14 million. Fees collected from the banking industry are used to pay most of the Division's costs. The Division initially supported the establishment of the licensing fee amounts for payroll advance loan businesses through the regulatory process. This amendment would allow the Division to impose fees up to $5,000. Senator Bunde pointed out that license fees have been increased for existing industries to provide adequate funding to support the administrative costs to the State in order that State subsidies can be eliminated. SFC 04 # 98, Side B 09:59 AM Senator Olson asked the bill's sponsor to comment on the proposed amended amendment. Mr. Schmitz responded that the sponsor supports the amendment in its original form. He added that the sponsor does not want to raise fees to the extent that the industry is eliminated, forcing Alaskans to use out-of-state payday loan businesses. Senator Olson referenced Mr. Davis' suggestion that if the license fees were too high, some operators would "go underground". Senator Olson asked how many underground payday loan operations are currently active. Mr. Davis replied that because the industry is currently unregulated in Alaska the Division is aware of only those businesses that advertise. He confirmed that underground operations exist. A roll call was taken on the motion to adopt Amendment #3 as amended. IN FAVOR: Senator Olson, Senator Bunde and Co-Chair Wilken OPPOSED: Senator B. Stevens, Senator Dyson, Senator Hoffman and Co- Chair Green The motion FAILED (3-4) The amendment as amended FAILED to be adopted. Amendment #4: This amendment is identical to the original version of Amendment #3. It increases the license fees from $2,000 to $3,000. Senator Bunde moved for adoption. Without objection the amendment was ADOPTED. Co-Chair Green offered a motion to report SB 272 as amended from Committee with individual recommendations and a forthcoming fiscal note. Senator Hoffman noted that this legislation should not be brought forth by the legislature because it would negatively affect the court's determination. There was no objection and CS SB 272 (FIN) MOVED from Committee with a forthcoming fiscal note dated 4/28/04 for $130,500 from the Department of Community and Economic Development.