Legislature(1993 - 1994)
04/23/1993 01:00 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 149 REVISION OF BANKING CODE Number 528 CHAIRMAN PORTER announced that the committee would now take up SB 149, which it had already heard and passed out of committee, but which had been returned to the Judiciary Committee for the consideration of one or two amendments. He called the committee members' attention to a proposed amendment (version K.1) dated April 22, 1993, contained in their bill packets. He said that the amendment would insert a new subsection on page 24 following line 27. He read the proposed amendment for the benefit of those on the teleconference network. The effect of the amendment would be to prohibit state banks from purchasing, establishing, or operating a subsidiary that engaged in the business of insurance or real estate brokerage. He said that the committee would also be considering another proposed amendment, which would "grandfather" in state banks with subsidiaries already in the insurance or real estate brokerage business. Number 563 WILLIS KIRKPATRICK, DIRECTOR OF THE DIVISION OF BANKING, SECURITIES, AND CORPORATIONS IN THE DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT (DCED), indicated his support for the first amendment. He said that when SB 149 was before the House Labor and Commerce Committee, he had stated that federal law would prohibit banks from engaging in insurance activities unless states specifically allowed it. He indicated that he had misspoken. He noted that all of Alaska's banks except for one were owned by bank holding companies, which were subject to federal regulation. He said that these federal regulations prohibited banks from engaging in insurance activities. MR. KIRKPATRICK mentioned a Delaware court case in which the federal government's prohibition against a bank subsidiary engaging in the insurance business had been upheld. He commented that the matter was now before the U.S. Supreme Court. He said that the one Alaska bank which was not part of a bank holding company was a "fed member bank," and thus was also prohibited by the federal government from engaging in insurance activities. MR. KIRKPATRICK noted that there was a bank, owned by a bank holding company, in an Alaskan community of less than 9,000 people, which, through a series of events, that bank had a presently unauthorized title insurance company. He stated that the title insurance company was acquired at a time when it was closing down, which would have been a burden on the community. The bank formed its own bank holding company to purchase the title insurance agency, he added. However, the federal government regulators asserted that the bank holding company could not own a private insurance company. MR. KIRKPATRICK stated that in the five or six years that the bank had run the title insurance company, he had not received a single complaint. He noted that the title insurance company did business on a couple of islands where the community's other title company did not. He expressed support for "grandfathering" this bank's title insurance subsidiary. He urged the committee to amend the bill so as to specifically allow for this one situation. REP. JAMES asked if the bank to which Mr. Kirkpatrick was referring was the only one in Alaska which had a title insurance subsidiary. MR. KIRKPATRICK said that Rep. James was correct. It was the only state-chartered financial institution which had a title insurance subsidiary. Number 652 REP. JAMES asked if the title insurance company made a profit. Number 655 MR. KIRKPATRICK responded that he could not address the profitability of the subsidiary, but said that he was able to attest that the title company was not a financial drain on the bank. Number 662 REP. DAVIDSON asked Mr. Kirkpatrick to clarify his response. Number 665 MR. KIRKPATRICK reiterated his previous comment. Number 669 REP. DAVIDSON asked what was wrong with a bank having a title insurance subsidiary. Number 671 MR. KIRKPATRICK replied that there was concern that one industry might require a type of service from another industry which the first industry controlled. For example, if a bank made a mortgage loan, title insurance would be required before the loan could be sold. He said that it was possible that a bank would refuse someone a loan unless that person agreed to purchase the requisite title insurance from the bank. He stated that regulations needed to be set up to protect customers from this type of situation. He commented that this was not a problem with the bank in question. Number 694 REP. NORDLUND stated that he had not been present when SB 149 was last before the committee. He asked Mr. Kirkpatrick to explain the intent of the amendment. Number 703 CHAIRMAN PORTER stated that the amendment before the committee would preclude insurance and real estate brokerage businesses from being owned by banks. He said that the theory behind this prohibition was that banks would have the appearance of a conflict of interest and the ability to unfairly compete with non-banks which owned those types of businesses. CHAIRMAN PORTER noted that title insurance companies had to send copies of policies to banks issuing loans. If the bank held a title insurance company of its own, then the banks would receive valuable information from their competitors and could take advantage of the situation, he said. Number 727 REP. NORDLUND commented that, on its face, the amendment appeared to discourage competition. But, he said, the Chairman's explanation indicated that it would actually encourage competition. He asked Mr. Kirkpatrick to give his position on the amendment. Number 731 MR. KIRKPATRICK indicated his support for the amendment. Number 739 REP. DAVIDSON asked if Mr. Kirkpatrick could address the issue of the undue concentration of commerce. Number 748 CHAIRMAN PORTER stated that he would accept testimony from the teleconference sites first. Number 751 JACK BARRY testified via teleconference from Ketchikan that he had no problem with Mr. Kirkpatrick's suggested amendment. He indicated his support for separating the banking industry from the insurance industry. Number 762 ARNE IVERSEN, testifying via teleconference from Ketchikan, echoed the comments of Mr. Barry. Number 765 JAMES BARRY, testifying via teleconference from Ketchikan, said that he agreed that the insurance industry and the banking industry should be kept separate. Number 769 CHAIRMAN PORTER asked those testifying from Ketchikan if they had a position on Mr. Kirkpatrick's suggested amendment, which would "grandfather" in the Ketchikan bank which held a title insurance subsidiary. Number 780 JACK DAVIES, testifying via teleconference from Ketchikan, said that he wholeheartedly supported both amendments. Number 787 JIM SARVELA, VICE-PRESIDENT AND CHIEF FINANCIAL OFFICER OF FIRST BANK IN KETCHIKAN, testified via teleconference from Ketchikan and deferred to Bill Moran, president of the bank. Number 789 BILL MORAN, PRESIDENT OF FIRST BANK IN KETCHIKAN, testifying via teleconference from Ketchikan, indicated his support for the amendment and said that he would answer questions about his bank's activities, as well as those of the title insurance company. Number 802 REP. JAMES asked Mr. Moran if there was only one bank in Ketchikan. Number 805 MR. MORAN replied that there were many banks in Ketchikan. Number 808 REP. JAMES asked if the bank had made any effort to sell the title insurance company. Number 811 MR. MORAN responded that the bank had not done so. Number 812 REP. JAMES asked if First Bank ever intended to sell the title insurance company. Number 813 MR. MORAN replied that the bank did not, at present, intend to sell the title insurance company. Number 814 REP. JAMES asked Mr. Moran if the title insurance company was a profitable business. Number 818 MR. MORAN commented that, while the title insurance company was basically profitable, it was not a big contributor to the bank's overall profit picture. He noted that the company's returns were highly volatile, depending on the amount of real estate activity. He said that the bank had been in the title insurance business for nine years, and that the company had been profitable every year. MR. MORAN explained how First Bank had gotten into the title insurance business in the first place. He said that his bank had offices in many small communities in Southeast Alaska. He noted that First Bank used to have a continuing problem with obtaining title insurance for property on Prince of Wales Island, as well as in Petersburg and Wrangell. TAPE 93-71, SIDE B Number 000 MR. MORAN commented that First Bank had presented the idea of acquiring the title insurance company to the Federal Deposit Insurance Corporation (FDIC) and the Division of Banking, Securities and Corporations as a kindred service, closely associated with the extension of credit. He said that the title insurance company was acquired in response to a specific need and for the convenience of the bank's customers. MR. MORAN said that First Bank was sensitive to the concern that the bank might tie loan and title service together. He said that such a practice was illegal. He noted that the title insurance agency was kept separate from the bank. REP. JAMES asked if, at the time that First Bank acquired the title insurance company, there was no other title insurance company operating in Ketchikan. MR. MORAN replied that there was another title insurance agency in Ketchikan at that time, but it did not service Wrangell, Petersburg, or communities on Prince of Wales Island to the necessary extent. REP. JAMES asked if the other title insurance agency now served those areas to a greater extent. MR. MORAN said that he believed that the other title insurance agency served Wrangell; and he was not sure if the agency served Petersburg. He stated that he was almost certain that the agency wrote policies on Prince of Wales Island. Number 101 REP. JAMES asked Mr. Moran what First Bank would do if SB 149 were not amended so as to "grandfather" in its ownership of the title insurance company. Number 106 MR. MORAN commented that First Bank was a state-chartered bank. In the early 1980s, he said, the bank switched from a national charter to a state charter in order to take advantage of certain benefits relating to lending limits and the investment of reserves. Since that time, he added, there had been many changes made to the national banking laws, and the original benefits of a state charter had disappeared to a large extent. MR. MORAN indicated his understanding that one reason behind the state's current recodification was a need to bring the state banks back to parity with the national banks. REP. JAMES repeated her question regarding what First Bank would do if its situation was not "grandfathered" in. MR. MORAN replied that he was not sure what the bank would do. He said that, regarding the entire recodification, the legislature should consider that it was neither difficult nor expensive for a bank to change its charter from state to national, or vice versa. Number 175 GREG ERKINS, testifying via teleconference from Anchorage, spoke on behalf of the ALASKA ASSOCIATION OF REALTORS. He said that he supported the amendment to limit banks' ownership of insurance or real estate businesses, but did not support "grandfathering" in First Bank, as he said that the bank engaged in illegal practices. He noted that a real estate agent in Cordova used a title insurance company in Anchorage, as none existed in Cordova. That did not present much of a problem at all, he said. Number 249 GARY ROTH, PRESIDENT OF DENALI STATE BANK, testified via teleconference from Fairbanks. He urged the committee to pass SB 149, and said that he supported both the amendment prohibiting banks from entering the insurance or real estate brokerage business and the amendment "grandfathering" in First Bank's ownership of its title insurance company. Number 265 GINA MCBRIDE testified via teleconference from Anchorage. She said that she supported the amendment which prohibited banks from engaging in insurance or real estate brokerage activities. She said that the "grandfather" clause was a bad idea. She questioned whether the amendment would affect more banks than just the one bank in Ketchikan. She noted that safeguards that were supposed to prevent industry tie- ins had often not worked in the past. Number 304 CHAIRMAN PORTER clarified that there were two amendments before the committee. Both would prohibit banks from engaging in the real estate brokerage or insurance industries. The second one, however, also included a "grandfather" clause for First Bank. He said that it might be best to address the second amendment first, as if it was adopted, and there would be no need to address the other amendment. Number 310 REP. GREEN offered the second amendment. CHAIRMAN PORTER objected for the purposes of discussion. Number 312 REP. DAVIDSON spoke in favor of the amendment. He noted that, as an island-dweller, he was aware of the problems of doing business in an isolated location. Number 327 REP. PHILLIPS asked the Chairman to address the alleged illegality of First Bank's operation. Number 331 CHAIRMAN PORTER responded that, in his assessment, First Bank's situation was at worst illegal and at best not formally or properly authorized. He said that he did not support the amendment for two reasons: (1) the legislature might be "grandfathering" in an illegal activity; and (2) the amendment might affect more banks than just First Bank in Ketchikan. Number 346 REP. PHILLIPS asked for some background on how First Bank could conduct a potentially illegal operation for nine years, given that banks were periodically reviewed. Number 356 MR. KIRKPATRICK responded that the Alaska Banking Code, as currently written, was not terribly clear. Over the years, he said, examiners had questioned whether First Bank's investment was permissible. He noted that there was some subjectivity involved in the determination of whether title insurance and banks were of a "kindred kind." He added that there was no statute which said that a title insurance business was an illegal business for a bank. Therefore, he said, there were questions about whether or not First Bank's title insurance company was illegal. Senate Bill 149 included a more precise subsidiary provision, he said. He also commented that there was no current Attorney General's opinion on the issue. Number 398 REP. GREEN asked Mr. Kirkpatrick if he knew of any other banks which would be affected by the proposed "grandfather" provision. Number 402 MR. KIRKPATRICK testified that there were no other state- chartered banks, savings and loans, or credit unions that had subsidiaries that were title insurance companies. Number 407 REP. JAMES commented that, since there was another title insurance company operating in Ketchikan, she would probably not support the "grandfather" provision. She said that she understood what it was like to do business on islands and in small communities in Alaska, and was willing to make provisions for the peculiarities of doing so. She expressed her opinion that title insurance companies should not be in the lending business, nor should banks be in the title insurance business. She added that since there was already a title insurance agency in Ketchikan that could be providing the same service that the bank's title insurance company did, she felt that the bank's subsidiary was a conflict of interest. Number 427 REP. DAVIDSON noted that when only one title insurance company was located in an isolated community, the rates were not subject to competition and were often very high. Number 431 REP. JAMES replied that title insurance rates in the state were uniform and set by law. Number 436 REP. PHILLIPS noted that the amendment would only allow for existing situations to continue; it would not allow for other banks to get into the insurance or real estate brokerage business in the future. Number 445 CHAIRMAN PORTER agreed that the amendment would "grandfather" in one existing situation, but would preclude other banks from getting into the insurance or real estate brokerage business. REP. NORDLUND asked what current law said about banks getting into the insurance or real estate brokerage business. CHAIRMAN PORTER commented that, if SB 149 passed, a bank could not enter the insurance business. Under current state law, he added, a bank was not precluded from doing so. However, federal regulations prohibited such activity without specific statutory authority from the state or many "hoops" at the federal level. Number 464 REP. NORDLUND questioned why, if the Division of Banking, Securities, and Corporations supported the proposed amendment, it was not included in SB 149 in the first place. Number 468 MR. KIRKPATRICK stated that the original SB 149 would have allowed banks to enter the insurance or real estate brokerage business. The amendment would remove that authority. He said that his division had seen no specific harm resulting from First Bank's operation; the amendment would clear up a question regarding the legality of First Bank's practices. Number 479 REP. NORDLUND asked if SB 149's sponsor supported the amendment. Number 483 JOSH FINK, LEGISLATIVE AIDE TO SEN. TIM KELLY, PRIME SPONSOR OF SB 149, indicated that the sponsor had no position on the amendment. Number 493 REP. DAVIDSON asked Mr. Kirkpatrick to address where statewide uniform title insurance rates could be found in the Alaska Statutes. Number 498 MR. KIRKPATRICK replied that he did not regulate insurance companies and could not answer Rep. Davidson's question. REP. DAVIDSON asked if there was a state law regarding uniform title insurance rates. MR. KIRKPATRICK responded that he did not know the answer to Rep. Davidson's question. REP. DAVIDSON asked, if title insurance rates were uniform, why the "grandfather" provision created a competition problem. Number 515 CHAIRMAN PORTER stated that the issue was that there was perceived coercion by the bank for its customers to buy the bank's title insurance. REP. PHILLIPS expressed her opinion that it was not right to pass legislation which pertained specifically to one entity. She asked if there were any statutes which prohibited the legislature from doing that. REP. DAVIDSON expressed his opinion that the committee's recent action on SB 178 indicated that the legislature did pass bills which affected only one entity. Number 540 CHAIRMAN PORTER stated that SB 178 would apply to any lawsuit filed by anyone. Number 547 GAYLE HORETSKI, COMMITTEE COUNSEL TO THE HOUSE JUDICIARY COMMITTEE, noted that a provision in the state constitution prohibited special interest legislation, or legislation affecting one party. She said that there clearly had been many bills passed by the legislature over the years which only affected one entity, however. Number 558 REP. DAVIDSON asked what the perceived problem was in "grandfathering" in the First Bank operation in Ketchikan. Number 561 CHAIRMAN PORTER responded that if the committee's philosophy was that tie-ins between the banking industry and the insurance industry were not a good idea due to perceived and real conflicts of interest, then the harm was that (1) there was another title insurance company in Ketchikan that could provide the necessary services to the public; and (2) if another title insurance company wanted to enter and compete in the Ketchikan market, it would face the only city in Alaska where a bank was allowed to own a title company. Number 569 REP. DAVIDSON asked if the other title insurance company in Ketchikan had complained about the bank-owned title insurance company. Number 572 MR. KIRKPATRICK replied that the other title insurance company had not submitted a complaint about the bank-owned title insurance company. Number 577 REP. GREEN asked if it would constitute a "taking" if the legislature were to pass SB 149 without the amendment under consideration, given that First Bank might not have broken any laws. Number 582 CHAIRMAN PORTER stated that it was not clear whether First Bank had broken any laws by acquiring the title insurance company. He said that he could not answer Rep. Green's question. Number 586 REP. JAMES noted that when title insurance companies insured titles, they listed all of the "clouds" and all of the conditions of record pertaining to a piece of property. Some title insurance companies, in competition with other title insurance companies, would insure "around" certain conditions, while other companies would not. REP. JAMES expressed her opinion that there was a definite conflict of interest between title insurance companies and mortgagors. Because First Bank's title insurance company was not the only one in Ketchikan, she said, she would not support the proposed "grandfather" provision. Number 612 REP. PHILLIPS commented that she would abide by the constitution's prohibition against special acts, when a general act could be made applicable. Number 621 REP. NORDLUND noted that if Rep. James' intention was to enhance competition, then her actions ran counter to that intention. CHAIRMAN PORTER indicated that the committee had a motion to adopt what would now be designated as Amendment 1, which included the "grandfather" provision. Objection had been heard. REP. PHILLIPS made a motion to divide the question. CHAIRMAN PORTER stated that if Amendment 1 passed, then the committee was done with the issue. If the amendment did not pass, then the committee would turn to Amendment 2, which included part of Amendment 1. REP. PHILLIPS withdrew her motion. A roll call vote was taken on Amendment 1. Reps. Nordlund, Davidson, Green and Kott voted "yea." Reps. Phillips, James, and Porter voted "nay." And so, Amendment 1 was adopted. CHAIRMAN PORTER announced that, because Amendment 1 had passed, there was no need to consider Amendment 2. REP. PHILLIPS made a motion to move SB 149, as amended, out of committee with individual recommendations. There being no objection, it was so ordered. CHAIRMAN PORTER announced that the teleconference had come to an end. He said that the committee would now take up SB 76.