Legislature(2003 - 2004)

04/06/2004 02:04 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
        SB 272-DEFERRED DEPOSIT ADVANCES (PAYDAY LOANS)                                                                     
                                                                                                                                
CHAIR CON BUNDE announced SB 272 to be up for consideration.                                                                    
                                                                                                                                
SENATOR RALPH SEEKINS  moved to adopt CSSB  272(L&C), version /D,                                                               
as the working  document. There were no objections and  it was so                                                               
ordered.                                                                                                                        
                                                                                                                                
MR. RICHARD SCHMITZ,  staff to Senator John Cowdery,  said the CS                                                               
puts the bill in alignment with the House version.                                                                              
                                                                                                                                
MS.  MARIE DARLIN,  Coordinator,  Capital City  Task Force,  AARP                                                               
Alaska, noted  its letter in  the committee packet that  lays out                                                               
their concerns. She  explained that the task force  has worked in                                                               
partnership  with   The  Consumer  Federation  of   America,  the                                                               
Consumer's  Union,  and the  National  Consumer  Law Center  over                                                               
several years and  has developed a model bill, which  was sent to                                                               
the committee.                                                                                                                  
                                                                                                                                
     That is more of what we  would like to see in the bill.                                                                    
     Among  our recommendations  are  that  we [indisc.]  no                                                                    
     less than two weeks for each  $50 owed on the loan. And                                                                    
     a consumer shall be permitted  to make partial payments                                                                    
     in amounts equal  to no less than $5  increments on the                                                                    
     loan at any time without  charge. The maximum amount of                                                                    
     the  deferred deposit  loan shall  not  exceed $300.  I                                                                    
     realize right  now they  have a limit  of $500  and the                                                                    
     bill  wants   to  increase  it  to   $1,000,  which  we                                                                    
     definitely  object to.  We are  sure  the committee  is                                                                    
     concerned with consumer protection,  as we are and that                                                                    
     is our main  concern.... If the term of the  loan is no                                                                    
     less  than two  weeks per  $50, consumers  will have  a                                                                    
     better  chance  of  paying off  the  loan  rather  than                                                                    
     defaulting and  possibly taking court action  or having                                                                    
     to  renew  the  loan  again  at  exorbitant  rates.  We                                                                    
     understand  that the  new version  of the  bill retains                                                                    
     the  maximum  amount  of $500  rather  than  increasing                                                                    
     available loan to $1,000, but  we believe Alaska should                                                                    
     reduce the  available amount from  $500 to  $300. These                                                                    
     are  monies paid  out  of someone's  pocket.  So it  is                                                                    
     interest.  If you  and  I  do not  pay  off our  credit                                                                    
     cards, we  pay interest.  If I take  out a  payday loan                                                                    
     and pay  an exorbitant  fee, much higher  than interest                                                                    
     on a  credit card, it's  still money and  a significant                                                                    
     amount of money and out of my pocket.                                                                                      
                                                                                                                                
     When credit  card companies can make  a handsome profit                                                                    
     on interest  rates of 18%  to 23%, why cannot  a payday                                                                    
     loan outfit make a profit  with an interest rate or fee                                                                    
     that does not go beyond  36%? Our model law also allows                                                                    
     for an administrative fee of  no more than $5 per loan,                                                                    
     no matter  how much the  loan is for. Some  states have                                                                    
     determined that  payday lenders  should not  be allowed                                                                    
     to exist in their state.  AARP does not argue that they                                                                    
     should be banned; we only  argue that the interest rate                                                                    
     should  be no  more than  36% APR.  The available  loan                                                                    
     amount should  not be more  than $300 and  the borrower                                                                    
     should  be allowed  to make  partial repayment.  If the                                                                    
     consumer  has  more  than $300  in  outstanding  payday                                                                    
     loans  from  one  or  more   lenders,  they  should  be                                                                    
     prohibited from  taking out  any additional  loans from                                                                    
     any  payday  lending  organization.  This  is  consumer                                                                    
     interest to us,  but we believe this  is in everybody's                                                                    
     best interest.                                                                                                             
                                                                                                                                
MR.   MARK   DAVIS,   Director,  Banking   and   Securities   and                                                               
Corporations,  Department  of  Community &  Economic  Development                                                               
(DCED),  said  he  is  ready  to take  over  regulation  of  this                                                               
industry  that is  currently  unregulated.  Forty-four states  do                                                               
regulate it. "We're basically in  favor of regulation in terms of                                                               
making sure that some rules are followed."                                                                                      
                                                                                                                                
MR.  DAVIS said  there  is a  fiscal note  for  one more  banking                                                               
examiner. He  supported a  $500 limit;  any greater  amount would                                                               
make it incompatible with the current Small Loan Act.                                                                           
                                                                                                                                
CHAIR BUNDE asked how he could make this issue revenue neutral.                                                                 
                                                                                                                                
MR. DAVIS  replied that industry has  told him that there  are 10                                                               
companies  doing business  in the  state; he  found 30  locations                                                               
between Anchorage  and Fairbanks that  would have to  be checked.                                                               
Basically, another examiner would be  needed to do that. He added                                                               
that  the current  four examiners  work now  to stay  on schedule                                                               
with the state charter banks and credit union.                                                                                  
                                                                                                                                
CHAIR  BUNDE clarified  that he  wasn't suggesting  doing without                                                               
another staff person, but was  looking for revenues with which to                                                               
pay him.                                                                                                                        
                                                                                                                                
MR. DAVIS answered  that he has asked for a  registration fee and                                                               
an  hourly rate  for  the  examiners. "We  would  at least  break                                                               
even."                                                                                                                          
                                                                                                                                
CHAIR BUNDE asked if he would break even under the existing CS.                                                                 
                                                                                                                                
MR. DAVIS replied that he wanted  to charge $75 per examiner hour                                                               
on location to make the bill revenue neutral.                                                                                   
                                                                                                                                
SENATOR FRENCH said the charge on  the loan would be expressed as                                                               
a specific value - $15 per $100.                                                                                                
                                                                                                                                
MR. DAVIS said he was only  trying to make consumers aware of how                                                               
much it cost them to borrow money.                                                                                              
                                                                                                                                
MR.  ED SNIFFEN,  Assistant Attorney  General, Department  of Law                                                               
(DOL), said  he and  Cindy Drinkwater, DOL,  worked with  the Mr.                                                               
Davis and  the payday lenders to  craft the CS. A  section in the                                                               
bill already requires that APRs  be disclosed to consumers in the                                                               
form of  a placard in a  payday lenders shop that  identifies the                                                               
cost per  $100. It  is also  expressed in the  form of  an annual                                                               
percentage rate,  which is  required under  the Truth  in Lending                                                               
Act.  Another  provision  says that  other  federal  requirements                                                               
impose other disclosure obligations on a payday lender, as well.                                                                
                                                                                                                                
Payday lenders are  not currently regulated and this  bill goes a                                                               
long  way   to  removing  the   problems  with  these   kinds  of                                                               
transactions. He  agreed with  Mr. Davis  that reducing  the loan                                                               
amount to  $300 from $500 would  be more trouble than  it's worth                                                               
to be consistent with the Small  Loan Act. He noted that the bill                                                               
has a limit of $15 and a $5  origination fee or 15 percent of the                                                               
amount loaned. "We put a 15  percent limit in there so if someone                                                               
wanted to  borrow $150,  they wouldn't get  charged for  the $200                                                               
cash  advance fee.  It  would  be something  in  between -  maybe                                                               
$22.50."                                                                                                                        
                                                                                                                                
MR.  SNIFFEN  warned that  this  is  still a  fairly  significant                                                               
interest rate.  Some states allow  more, some less; this  bill is                                                               
in the middle of what is allowed in other states.                                                                               
                                                                                                                                
     It's been  our experience  that what gets  consumers in                                                                    
     trouble  with these  kinds of  transactions is  not the                                                                    
     interest rate. It's  not the $15 per  $100 that creates                                                                    
     the  problem.  The  problem  comes  in  poor  financial                                                                    
     management from  the get-go, which brings  consumers to                                                                    
     these types of lenders in  the first place. So, I don't                                                                    
     know that  undue emphasis needs  to be  directed toward                                                                    
     the  interest rate  as a  percentage or  even as  a raw                                                                    
     dollar  figure.... The  problem,  of course,  is a  lot                                                                    
     deeper than that....                                                                                                       
                                                                                                                                
He did not object to allowing partial payments and language                                                                     
could be inserted to that effect, but he wanted to hear from the                                                                
payday lenders on whether or not that would be problematic.                                                                     
                                                                                                                                
CHAIR BUNDE said he was running out of time today and asked him                                                                 
to work with the bill's sponsor to address that question, along                                                                 
with the issue of trying to make this revenue neutral.                                                                          
                                                                                                                                
MS. ANGELA LISTON, Alaska Catholic Conference, supported                                                                        
regulating the payday loan industry.                                                                                            
                                                                                                                                
     The Catholic Church, of course,  has had a long history                                                                    
     of  opposing   exorbitant  interest  rates   and  we're                                                                    
     concerned  that this  type of  lending, which  was once                                                                    
     considered  a social  problem, is  really skyrocketing,                                                                    
     not  just here  in Alaska,  but nationally.  The people                                                                    
     who use  these loans are  the working poor.  If someone                                                                    
     was not  desperate, they wouldn't pay  $15 to borrowers                                                                    
     $100  for two  weeks. These  borrowers are  people that                                                                    
     don't  have  other  options.  In  most  states,  payday                                                                    
     lenders make  their money  on the  renewals or  what is                                                                    
     commonly  called  rollovers. In  California,  borrowers                                                                    
     average 11 loans  a year. In Illinois,  they average 13                                                                    
     loans a year.                                                                                                              
                                                                                                                                
     This trend  doesn't suggest a consumer  service, but it                                                                    
     does  suggest  that  the  industry  moves  people  into                                                                    
     increasing  chronic and  hopeless  debt  and every  two                                                                    
     weeks they're  incurring another $15 fee  for that same                                                                    
     $100  loan.  Happily, in  Alaska,  we  learned from  an                                                                    
     industry representative at a  hearing in the House that                                                                    
     that's  not the  trend  here. In  fact,  out of  26,000                                                                    
     loans,  one  industry  rep  says  that  there's  24,000                                                                    
     customers, which is  an average closer to  one loan per                                                                    
     person.  If  that's  the  case, to  make  this,  a  bad                                                                    
     situation,  better, we  would like  to propose  that we                                                                    
     extend  the term  of the  loan. Right  now, it's  a two                                                                    
     weeks term  and we would  propose that it become  a 30-                                                                    
     day term,  giving people one  extra option  for another                                                                    
     paycheck  to  get  that  loan  paid  off  and  we  also                                                                    
     absolutely support the idea  of partial payment.... For                                                                    
     the industry it  would result in fewer  defaults and it                                                                    
     would have  no impact on  the industry since,  in fact,                                                                    
     they have  24,000 people who  are getting  these loans.                                                                    
     If the industry is making  its money off the rollovers,                                                                    
     then we  do have  problems, again,  because we  have to                                                                    
     admit  that these  constant  rollovers  and these  fees                                                                    
     exploit the working poor.                                                                                                  
                                                                                                                                
MS. JOELLE  HALL, Eagle  River resident, said  she is  a military                                                               
wife and  served in the  Army from 1983  - 1989; her  husband has                                                               
many years  of military  service, as well.  She wanted  to relate                                                               
the  military applications  of this  bill. "These  payday lenders                                                               
tend  to ring  around military  installations and  from my  years                                                               
moving around,  I know  this to  be the case."  Her husband  is a                                                               
Sergeant-Major at  Fort Richardson  and she  thought at  first to                                                               
make these places  off limits if they were  operating without the                                                               
CS.                                                                                                                             
                                                                                                                                
     I   feel  it's   very  important   to  regulate   these                                                                    
     organizations. If  we can't make  this kind  of lending                                                                    
     illegal,  then we  have to  regulate it  as best  as we                                                                    
     can. My hope is that we  can make this bill work better                                                                    
     for  the  military  clients  who   I  know  consume  an                                                                    
     inordinate number of these payday loans.                                                                                   
                                                                                                                                
     The 30-day limit that was  mentioned earlier would be a                                                                    
     great benefit.  Soldiers and airmen have  the option of                                                                    
     getting paid every  15 days, but some of  them only get                                                                    
     paid every 30 days. So,  extending it to a 30-day limit                                                                    
     would greatly  allow those soldiers and  airmen to make                                                                    
     their  payments  on  time.  In  addition,  the  partial                                                                    
     payment question seems  to be one of  just decency. You                                                                    
     should  be able  to pay  a part  of your  principle any                                                                    
     time you take  out a loan. It's the way  we do business                                                                    
     in America with virtually every other kind of lending.                                                                     
                                                                                                                                
     I read in  the minutes that industry  believes they are                                                                    
     providing a  service to poor people  by providing these                                                                    
     loans and I would just  urge this committee to remember                                                                    
     that some of  the people who are  procuring these loans                                                                    
     are  actually  performing  a  real  service  for  their                                                                    
     country and  we should be  thinking about them.  If the                                                                    
     industry is  really interested in providing  a service,                                                                    
     the least they can do is  make these loans a little bit                                                                    
     more compatible for their clients who wear a uniform.                                                                      
                                                                                                                                
CHAIR  BUNDE responded  that he  remembered  being a  GI who  had                                                               
fellow GIs who wanted  to borrow $10 for a $20  pay back. If they                                                               
are  limited  commercially,  their creativity  would  remain  the                                                               
same.                                                                                                                           
                                                                                                                                
MS. HALL responded, "I believe legalized and illegal are                                                                        
different things."                                                                                                              
                                                                                                                                
CHAIR BUNDE thanked her for  her testimony. He wanted the sponsor                                                               
and industry  to address the  amendments. There being  no further                                                               
business to come  before the committee, he  adjourned the meeting                                                               
at 3:28 p.m.                                                                                                                    

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