Legislature(2003 - 2004)

04/20/2004 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 called  the Senate  Labor and  Commerce Standing                                                             
Committee meeting  to order  at 2:04  p.m. Present  were Senators                                                               
Bettye Davis,  Ralph Seekins  and Chair  Con Bunde.  Senator Gary                                                               
Stevens  arrived at  2:05 and  Senator Hollis  French arrived  at                                                               
2:10. The  first order of  business to come before  the committee                                                               
was SB 272.                                                                                                                     
                                                                                                                                
SENATOR RALPH SEEKINS  moved to adopt CSSB  272(L&C), version /S.                                                               
There were no objections and it was so ordered.                                                                                 
                                                                                                                                
MR.  RICHARD   SCHMITZ,  staff   to  Senator   Cowdery,  sponsor,                                                               
explained that the  original bill had a $1,000 cap  on the amount                                                               
that could  be loaned, which was  lowered to $500 in  the CS. The                                                               
new version allows  only two rollovers so a person  can't go into                                                               
perpetual debt.  The lender also  has to  post a bond  giving the                                                               
Division  of Banking  closer scrutiny  and offer  the consumer  a                                                               
payment plan  before initiating  a legal action  to collect  on a                                                               
default. Damages a  lender can recover are limited  to $700, down                                                               
from  $1,000 and  he can  only charge  $15 per  $100 loaned.  The                                                               
original bill allowed  for some additional interest.  A couple of                                                               
other minor changes  were made like raising the NSF  fee from $25                                                               
to $30, which is an amount that another bill puts in statute.                                                                   
                                                                                                                                
MR.  ED SNIFFEN,  Department of  Law, clarified  that the  fees a                                                               
lender can charge include the $15  per $100 plus a $5 origination                                                               
fee. A stylistic  change included removing a  problem with third-                                                               
party   collectors.   In   the  original   version,   third-party                                                               
collectors were required  to comply with the  payment plan, which                                                               
was  problematic  because the  Division  of  Banking didn't  have                                                               
jurisdiction  over them.  The CS  requires a  payment plan  to be                                                               
offered  by  the lender  before  taking  any  other action  on  a                                                               
default. He  stood by his  previous testimony on other  issues in                                                               
the bill.                                                                                                                       
                                                                                                                                
CHAIR BUNDE noted that the general  public seems to think this is                                                               
enabling  legislation that  would create  something that  doesn't                                                               
exist  in Alaska  now.  However,  that is  not  correct. This  is                                                               
simply  regulating  a legal  industry  that  currently exists  in                                                               
Alaska.                                                                                                                         
                                                                                                                                
MR. SNIFFEN concurred with that  saying that's why the Department                                                               
of Law supports  it. There is some room for  debate on whether or                                                               
not the current form of this  industry is legal or not in Alaska,                                                               
because of  the Small  Loan Act and  the usury  statute structure                                                               
that  is  a little  confusing,  but  pending legal  action  might                                                               
clarify that.  This legislation goes  a long way in  dealing with                                                               
the problems in the industry, although it's not a perfect fix.                                                                  
                                                                                                                                
MR.  STEVE CLEARY,  Executive  Director,  Alaska Public  Interest                                                               
Research Group (AKPIRG),  said that other states  have a somewhat                                                               
varied track  record with payday loans.  Recently, Georgia capped                                                               
the annual percentage  rate at 60 percent, whereas  this bill has                                                               
the rate at approximately 470 percent.                                                                                          
                                                                                                                                
     So,  we've  been  testifying and  trying  to  show  how                                                                    
     dangerous  these types  of loans  are to  consumers. In                                                                    
     Georgia,  they basically  shut them  down, particularly                                                                    
     around  military bases  because  they  were preying  on                                                                    
     military  families  who couldn't  afford  to  get on  a                                                                    
     cycle of debt.  This bill purports to just  be a short-                                                                    
     term fix for consumers,  but oftentimes what happens is                                                                    
     consumers get on a cycle  of debt that they aren't able                                                                    
     to escape from.                                                                                                            
                                                                                                                                
The compromise  AKPIRG has come  up with is changing  the minimum                                                               
term of  the loans  from 14  days to 30  days, which  would allow                                                               
consumers two pay periods to get  this loaned money back. It also                                                               
would allow  people who are  only paid once  a month a  chance to                                                               
better repay this loan. One  of the payday lenders testified that                                                               
he  gave roughly  26,000  loans  in a  year  to 24,000  different                                                               
customers,  meaning that  most customers  are  only choosing  one                                                               
loan  per  year.  If  the  amount  of  time  allocated  to  these                                                               
customers were doubled, it would  have a negligible affect on the                                                               
profits of payday  lenders. He urged the committee  to change the                                                               
length of the  loan term from 14 to 30  days, which would roughly                                                               
halve the annual percent rate to 200 percent.                                                                                   
                                                                                                                                
MS. DEBORAH FINK, a lender, said she would answer questions.                                                                    
                                                                                                                                
CHAIR BUNDE  asked for  her reaction to  extending the  loan term                                                               
from 14 to 30 days.                                                                                                             
                                                                                                                                
MS. FINK  replied that would  essentially reduce the  income from                                                               
the fees,  which would  make payday  loans a  loosing proposition                                                               
for any of  the people who did  it. "We would have  to double our                                                               
customer base in order to cover that cost...."                                                                                  
                                                                                                                                
MR. JIM  DAVIS, Alaska Legal  Services, said this is,  in effect,                                                               
enabling legislation.                                                                                                           
                                                                                                                                
     It will make  legal what is, in  effect, illegal, which                                                                    
     is  to   charge  400  to  1,000   percent  interest  on                                                                    
     consumers  and  it's  motivated  for  no  other  reason                                                                    
     except  to terminate  the lawsuit  pending in  front of                                                                    
     the Superior  Court here in  Anchorage, which  will, if                                                                    
     left  undisturbed,  lead  to   a  ruling  and,  in  all                                                                    
     probability, that  says these  kinds of  businesses are                                                                    
     violating existing Alaska law....                                                                                          
                                                                                                                                
He  pointed out  that  SB 272  would make  legal  an interest  in                                                               
excess  of  what the  Gambino  crime  family charged  on  similar                                                               
loans. Other purported  protections in the bill  will not protect                                                               
consumers in  fact - monitoring  by the Division of  Banking, for                                                               
one.                                                                                                                            
                                                                                                                                
     Without   additional   staff,    there   will   be   no                                                                    
     monitoring.... And  apparently there are  no additional                                                                    
     staff people that  are going to be  added because there                                                                    
     is  no fiscal  note to  this bill.  So, you'll  have no                                                                    
     effective monitoring by the Division  of Banking or any                                                                    
     other division of the state.  You'll have reams of data                                                                    
     under this bill provided to  the Division of Banking or                                                                    
     to  another  division of  the  state,  but without  new                                                                    
     staff to look at these reams  of data, it'll just be in                                                                    
     a box sitting in a warehouse someplace....                                                                                 
                                                                                                                                
CHAIR  BUNDE responded  that  there is  a  $226,000 fiscal  note,                                                               
which he asked Mr. Lutz to address.                                                                                             
                                                                                                                                
SENATOR FRENCH arrived at 2:10 p.m.                                                                                             
                                                                                                                                
MR.  TERRY  LUTZ,  Financial Institution  Examiner,  Division  of                                                               
Banking, Securities  and Corporations, Department of  Community &                                                               
Economic Development  (DCED), said he  had a  lot to do  with the                                                               
revenue  side  of   the  fiscal  note  and   explained  that  the                                                               
expenditure side was done by  Director Mark Davis who anticipated                                                               
several hearings  initially, which  accounts for  the contractual                                                               
amount of $103,000.  Division of Personal Services has  to add an                                                               
examiner  and   a  clerk.  The   travel  is  pretty   much  self-                                                               
explanatory.                                                                                                                    
                                                                                                                                
MR.  CHIP  WAGONER, Alaska  Catholic  Conference,  said the  main                                                               
issue of  whether loans  should be  for two weeks  or 30  days is                                                               
what affect  that would have  on the consumers, which  he thought                                                               
was pretty easy  to figure out, and what affect  it would have on                                                               
the industry,  which wasn't easy  to figure out. Before  the bill                                                               
leaves  this   committee,  he  thought  it   incumbent  upon  the                                                               
committee to get  written facts and figures from  the industry as                                                               
to what  affect it would  really have. Without  that information,                                                               
he didn't see how the issue could be evaluated.                                                                                 
                                                                                                                                
SENATOR  BETTYE DAVIS  said she  wasn't  aware that  it might  be                                                               
illegal to conduct this kind of  business in Alaska and wanted to                                                               
know if  the court  would make  a decision  soon. "If  that's the                                                               
case, why  would we want  to bother  about regulating this  if it                                                               
turns out to be illegal?"                                                                                                       
                                                                                                                                
MR.  MARK DAVIS,  Director, Division  of Banking,  Securities and                                                               
Corporations, responded:                                                                                                        
                                                                                                                                
     These  loans  have been  made  for  some time  under  a                                                                    
     perceived  exemption  to  the  Small  Loan  Act,  which                                                                    
     exempts, some  people argue, loans  up to  $500. That's                                                                    
     in litigation.  However, the Act also  has an exemption                                                                    
     for  certain   types  of   other  activities   such  as                                                                    
     pawnbrokers.  What we're  suggesting is  the regulation                                                                    
     of this  industry, which, I  think, will tend  to exist                                                                    
     in one form  or another, no matter what  the outcome of                                                                    
     the  litigation.... In  44 states,  the state's  answer                                                                    
     has been to regulate them.                                                                                                 
                                                                                                                                
SENATOR SEEKINS  said he didn't  think the Legislature  wanted to                                                               
eliminate  the  industry and  he  looked  at this  as  regulation                                                               
rather  than   enabling  legislation.  He  moved   to  pass  CSSB                                                               
272(L&C),   version   /S,    from   committee   with   individual                                                               
recommendations and attached fiscal note.                                                                                       
                                                                                                                                
SENATOR FRENCH objected because he  thought they would be passing                                                               
enabling legislation that the state  is better off without and he                                                               
wanted to  allow the lawsuit  to work  its way through  the court                                                               
system.                                                                                                                         
                                                                                                                                
CHAIR  BUNDE asked  for the  roll. Senators  Gary Stevens,  Ralph                                                               
Seekins and Chair Con Bunde  voted yea; Senators Bettye Davis and                                                               
Hollis French voted nay; and CSSB 272(L&C) moved from committee.                                                                

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