Legislature(2003 - 2004)
04/20/2004 02:04 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.