Legislature(2003 - 2004)

03/27/2003 01:37 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 159                                                                                                            
                                                                                                                                
     "An  Act relating  to the frequency  of examinations  of                                                                   
     certain persons  licensed to  engage in the  business of                                                                   
     making  loans  of money,  credit,  goods,  or things  in                                                                   
     action;   repealing   the   requirement  for   a   state                                                                   
     examination  and  evaluation  of the  Alaska  Commercial                                                                   
     Fishing  and  Agriculture  Bank; and  providing  for  an                                                                   
     effective date."                                                                                                           
                                                                                                                                
MARK  DAVIS, DIRECTOR,  DIVISION OF  BANKING AND  SECURITIES,                                                                   
DEPARTMENT OF REVENUE, testified  in support of the bill.  He                                                                   
spoke to  the two  statutory changes  contained in  the bill.                                                                   
The first  change alters  the Banking Code,  Title Six.   The                                                                   
second change pertains to the State Code, Title 44.                                                                             
                                                                                                                                
Mr.  Davis  explained  that  the  change  to  the  Bank  Code                                                                   
lengthens the exam time for small  loan companies from twelve                                                                   
to  eighteen  months.    He noted  that  this  was  the  only                                                                   
provision  of  the  Banking  Code  that  required  an  annual                                                                   
examination.  He  emphasized that, even with  the change, the                                                                   
Division would perform more frequent  examinations if needed.                                                                   
                                                                                                                                
Mr. Davis  explained the change  to Title 44  eliminating the                                                                   
provision  for  a  qualitative  examination  for  the  Alaska                                                                   
Commercial Fishing  and Agricultural  Bank (CFAB).   He noted                                                                   
that since CFAB  is a cooperative, it is required  by statute                                                                   
to  prepare  an   annual  audit  that  is  provided   to  the                                                                   
legislature.  He also stated that  when Title 44 was enacted,                                                                   
CFAB operated  using state  funds, which  it was required  to                                                                   
repay.  He pointed  out that CFAB currently  operates with no                                                                   
state funds.  He also noted that  the deleted provision would                                                                   
still make CFAB subject to a full  legislative audit, as well                                                                   
as the annual audit by outside auditors.                                                                                        
                                                                                                                                
Mr. Davis further noted that the  fees charged by the banking                                                                   
section  of  the Division  do  not  cover  the costs  of  the                                                                   
examination.   Mr. Davis  pointed out that  the fees  leave a                                                                   
deficit  of  $350 thousand.  He  noted  that by  statute  the                                                                   
banking  fees  could  not  discriminate   between  state  and                                                                   
federal  institutions,  and  must  be charged  equally.    He                                                                   
maintained  that  a shortfall  would  exist  as long  as  the                                                                   
legislature required fee equanimity.                                                                                            
                                                                                                                                
Mr.  Davis  clarified  the  difference  between  the  audited                                                                   
report and the banking exam. He  noted that the outside audit                                                                   
report would inform the legislature  on the loan portfolio by                                                                   
major  category,  specifying  loan  performance  and  payment                                                                   
history.                                                                                                                        
                                                                                                                                
Mr.  Davis summarized  that the  Division  was requesting  an                                                                   
exemption  from examination under  Title 44.    He  expressed                                                                   
his belief that with the statutory  audits required, adequate                                                                   
fiscal provisions were already in place.                                                                                        
                                                                                                                                
Mr. Davis  also noted  that the  Division had no  enforcement                                                                   
powers with regard to the examination,  since it was included                                                                   
under Title 44.  He explained  that if a problem arose in the                                                                   
examination, the Division could not address it.                                                                                 
                                                                                                                                
Representative Croft  asked how much  of the fiscal  note was                                                                   
attributed to each section of  the bill.  Mr. Davis responded                                                                   
that  the  CFAB  examination  required  ten  days,  and  that                                                                   
savings  were  realized by  freeing  up  the bank  for  other                                                                   
business during that time.                                                                                                      
                                                                                                                                
Representative  Croft   questioned  whether  the   change  to                                                                   
eighteen months  represented the greatest cost  savings.  Mr.                                                                   
Davis   noted  that   the  savings   came  essentially   from                                                                   
eliminating  one  position.    He  speculated  that  the  new                                                                   
schedule enabled an efficiency of service.                                                                                      
                                                                                                                                
In response to a question by Representative  Croft, Mr. Davis                                                                   
stated that  examination fees  were charged  to CFAB  of $2.6                                                                   
thousand.  He also noted that  the additional ten days in the                                                                   
current cycle created  a loss of $6 thousand, as  well as the                                                                   
loss of  potential  paid service  to a state  bank or  credit                                                                   
union.   He  stressed that  as  a cooperative,  CFAB did  not                                                                   
receive  money   from  the  public,  and  focused   on  other                                                                   
cooperatives.                                                                                                                   
                                                                                                                                
Representative   Hawker   asked    for   a   distinction   in                                                                   
organization  between  CFAB and  commercial  banks or  credit                                                                   
unions,  and   whether  that  difference  was   part  of  the                                                                   
justification for the requested exemption.                                                                                      
                                                                                                                                
Mr. Davis  noted that  CFAB was  created by the  legislature,                                                                   
set up  as a  cooperative in  AS 44.81.014,  and required  to                                                                   
follow  a set  structure.   He referred  to 44.81.200,  which                                                                   
requires the bank  to provide an audited  financial statement                                                                   
to the  legislature each year,  including discussion  of bank                                                                   
circumstances,  operating, and   "any other information  that                                                                   
the Board  believes to  be of interest  to the Governor,  the                                                                   
legislature and to the public".   He summarized that the bank                                                                   
was required to self regulate.                                                                                                  
                                                                                                                                
Mr.  Davis noted  that in  1985, problems  occurred with  the                                                                   
bank  and examiners  were asked  to  complete a  report.   He                                                                   
suggested  that the  statute set  forth for  this purpose  in                                                                   
1987 should have  contained a sunset provision.   He proposed                                                                   
that the structure of the bank,  along with special reporting                                                                   
requirements, made the bill appropriate.                                                                                        
                                                                                                                                
Representative Croft MOVED to Adopt Amendment #1:                                                                               
                                                                                                                                
     Page 1, Line 13, DELETE:                                                                                                   
                                                                                                                                
     "*Sec.2. AS 44.81.270(d) is repealed."                                                                                     
                                                                                                                                
     "This amendment  keeps the  requirement for  the [Alaska                                                                   
     Commercial Fishing and Agricultural  Bank]     CFAB   to                                                                   
     submit to  annual bank examinations.   The  argument for                                                                   
     not  holding CFAB  to this  standard  is the  perception                                                                   
     that the  requirement is overly redundant,  that CFAB is                                                                   
     subject  to  independent  audit  or  legislative  audit,                                                                   
     should one be requested.                                                                                                   
                                                                                                                                
     CFAB  puts  forth that  the  requirement  is not  overly                                                                   
     redundant;  that  the independent  audit  only looks  at                                                                   
     their financial  situation, and the bank  examiners make                                                                   
     sure CFAB is adhering to  statute.  CFAB argues the bank                                                                   
     examinations  help  them  with their  accountability  to                                                                   
     their board  (two members of which are  appointed by the                                                                   
     Governor)  and  their  members  and CFAB  pays  for  the                                                                   
     examination.                                                                                                               
                                                                                                                                
     Although  the  Legislature   could  request  Legislative                                                                   
     Budget on  a regular basis.   This last one  occurred in                                                                   
     1995."                                                                                                                     
                                                                                                                                
Representative Croft observed  that Section 1 of the bill was                                                                   
an appropriate  cost savings.   He maintained that  Section 2                                                                   
pertained to the  CFAB examination, and referred  to a letter                                                                   
from CFAB,  which expressed  a desire for  this service.   He                                                                   
suggested  that  the  entity should  continue  to  receive  a                                                                   
service that they  valued.  He pointed out  that by retaining                                                                   
Section 1, the majority of the savings was still available.                                                                     
                                                                                                                                
Co-Chair  Williams  asked  if  CFAB could  pay  for  its  own                                                                   
outside  examiner.    Mr.  Davis  reiterated  that  CFAB  was                                                                   
required  by  statute  to  have   an  outside  auditor.    He                                                                   
suggested that  CFAB could expand  the scope of the  audit to                                                                   
include their  loan portfolios.   He  suggested that  such an                                                                   
audit could help evaluate the  potential of these portfolios.                                                                   
He noted  that bank examiners  did not traditionally  perform                                                                   
such an  evaluation.  He stated  that he did not  support the                                                                   
Amendment.                                                                                                                      
                                                                                                                                
Representative  Stoltze  asked   if  a  sunset  might  be  an                                                                   
alternative  to  deleting  the  requirement.    He  suggested                                                                   
giving two  years for the requirement  to lapse if  a problem                                                                   
arose that necessitated an examination.                                                                                         
                                                                                                                                
Mr. Davis  emphasized  the legislative  audit as a  mechanism                                                                   
for effectively addressing any potential problems.                                                                              
                                                                                                                                
In  response  to  questions by  Co-Chair  Harris,  Mr.  Davis                                                                   
clarified  that  the CFAB  examination  period  would not  be                                                                   
extended  to eighteen  months, but that  the cycle  pertained                                                                   
only to  small loan companies.   He stated that for  CFAB the                                                                   
bill addressed  their annual  examination requirement,  which                                                                   
is separate from the annual legislative audit.                                                                                  
                                                                                                                                
Representative  Hawker recalled a  circumstance in  the early                                                                   
1980's during  the time when CFAB  was subject to  an outside                                                                   
audit  only,  and  asked  if  the  outside  audit  identified                                                                   
circumstances  that  resulted  in  the  addition  of  a  bank                                                                   
examination by the legislature.                                                                                                 
                                                                                                                                
Mr. Davis  stated that  the Division was  invited in  1985 to                                                                   
report on  the viability of the  bank.  He observed  that the                                                                   
outside auditors identified problems.   He explained that the                                                                   
Division  turned  to  bank  examiners  to  help  address  the                                                                   
potential crisis for the State and for the other investors.                                                                     
                                                                                                                                
Representative  Hawker  recalled   that  the  examiners  were                                                                   
viewed as  an effective  tool of the  state, even  though the                                                                   
examiners  did  not traditionally  involve  themselves  in  a                                                                   
cooperative with  a limited loan  portfolio such as  CFAB. He                                                                   
observed that the examination  was voluntary and limited.  He                                                                   
echoed  previous   concern  that  the  legislation   was  not                                                                   
sunsetted,  and  expressed  confusion  as  to  why  the  bank                                                                   
desired additional regulation.                                                                                                  
                                                                                                                                
Representative Croft  contended that CFAB was  requesting the                                                                   
oversight.  He  suggested that it was unwise to  wait until a                                                                   
serious  problem arose  to engage  an outside  examiner.   He                                                                   
pointed out that CFAB desired  the service and was willing to                                                                   
pay for a portion of it.                                                                                                        
                                                                                                                                
Co-Chair Williams  concurred with the Sponsor  that Section 2                                                                   
was a viable cost savings.                                                                                                      
                                                                                                                                
A roll call vote  was taken on the motion to  ADOPT Amendment                                                                   
#1.                                                                                                                             
                                                                                                                                
IN FAVOR: Joule, Croft, Harris                                                                                                  
OPPOSED:  Meyer, Stoltze, Whitaker,  Foster, Hawker, Williams                                                                   
                                                                                                                                
The MOTION FAILED (3-6).                                                                                                        
                                                                                                                                
Representative Foster MOVED to  report HB159 out of Committee                                                                   
with individual  recommendations and the  accompanying fiscal                                                                   
note.                                                                                                                           
                                                                                                                                
HB  159  was REPORTED  out  of  Committee  with a  "do  pass"                                                                   
recommendation  and  a  new  fiscal   impact  note  from  the                                                                   
Department of Community and Economic Development.                                                                               
                                                                                                                                

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