Legislature(1995 - 1996)
01/31/1996 03:10 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 319 - SMALL LOANS & RETAIL INSTALLMENT SALES CHAIRMAN KOTT announced the next order of business would be HB 319, "An Act relating to the regulation of small loan and retail installment transactions." GEORGE DOZIER, Committee Aide, House Labor and Commerce Committee, Alaska State Legislature, explained HB 319 was introduced by the House Labor and Commerce Committee and addresses two distinct statutory schemes. The first one is the Small Loan Act which makes up the bulk of the bill. The Alaska Retail Installment Sales Act is also addressed in the bill. Mr. Dozier explained the Small Loan Act pertains to the commercial loans of money, credit, goods or things of action where the amount loaned is $25,000 or less. The Retail Installment Sales Act pertains to credit transactions entered into between retail merchants and retail customers. MR. DOZIER explained HB 319, in its original form, adjusts the application fee of the Small Loan Act from $400 to $1,000. It adjusts upward the annual license fee from $200 for a single license to $2,000 for a multiple office license. It also adjusts upward the amount of liquid assets that are required of licensees, under the Small Loan Act, from $20,000 to $25,000, and requires that where a licensee has multiple offices that that amount be available for each and every office which is listed under the license. Mr. Dozier said it also adjusts upward from $5,000 to $25,000 the amount of bond required for a licensee under the Small Loan Act. MR. DOZIER said the bill also makes it clear that a licensee, unlike the present law, may have one license which pertains to up to ten different places of business. It creates a multiple office license. The Small Loans Act is also modified to the extent that under this bill, licensees don't have to maintain separate books and accounting records where another type of business is operated out of the same office. Mr. Dozier said as he understands the law, the state would have the ultimate discretion as to whether a different type of business can be operated or a different business can be operated out of the licensee's office. When that discretion has been granted in the affirmative, then it is no longer required for the licensee to maintain separate books. However, there must be some system in place so as to permit the state to monitor the records and make sure that the provisions of the (indisc.) statutes are complied with. MR. DOZIER explained Section 8 of the bill, also pertaining to the Small Loan Act, provides that in making repayments under the various loans that are granted that individuals can make irregular payments as opposed to monthly regular payments. That would pertain to seasonal workers, fishermen or people that don't have regular incomes throughout the years. MR. DOZIER said the bill also adjusts and broadens the scope of permissible fees that may be charged under the Small Loans Act. Such fees could include a fee for insurance premiums instead of perfecting security interests. Also for loans over $10,000, the lender can charge reasonable costs and fees for appraisals. That would be appraisals of property that is offered in security or for surveys, title insurance reports and credit reports of the borrower. MR. DOZIER said also under the Small Loan Act, the late payment fee is adjusted upward. Currently, the statutes allow for a late payment (indisc.) fee of 10 percent or $15, whichever is the lesser amount. He said HB 319 would adjust that upward to 10 percent or $25, whichever is the lesser amount. Other fees and costs that are adjusted by the bill are on dishonored checks. The bill specifies a fee may be charged for that. The fee would be set by normal commercial charges that would be imposed. Mr. Dozier said HB 319 would also allow reasonable attorney fees and actual expenses and costs that are incurred in collection of delinquent loans or loans in default, but only when outside attorneys are employed to do this collection. This would not pertain to in house collection activities by corporate counsel. Also, this would only pertain to where the balance is over $5,000. MR. DOZIER said starting in Section 10 of HB 319, the emphasis is shifted to the Retail Installment Sales Act and that particular section would permit the charging of delinquency collection and dishonored check charges, attorney fees charges, court costs and disbursements where the contract or the agreement between the parties so permit. MR. DOZIER referred to Section 11 and said the amount of service charge that is permitted under the Retail Installment Sales Act is adjusted upward to 1.5 percent, per month, for the unpaid balance. MR. DOZIER said that is a sketch of the original bill. There is a draft CS on the table. Much of the CS is the same as the original bill with some exceptions. One exception is the draft CS specifies, under the Small Loans Act, that if a office or a licensee has more than one office, it's a multiple office license, then only one bond is required. Another change is under the original bill, referring to the Small Loan Act, in order to be able to charge for appraisals, surveys, title insurance and reports, charges of that nature, the loan would have to be for in excess of $10,000. The draft CS modifies that to the extent that these charges may be imposed when the loan is less than $10,000 if the loan is secured by real property - real estate. MR. DOZIER explained another change pertains to the interest rate that is permitted under the Retail Installment Sales Act. He said HB 319, in its current form, allows a service charge in the amount of 1.5 percent per month. The change made in the proposed CS would eliminate that ceiling and set interest as agreed by the parties. So essentially, the market would determine the interest rate. MR. DOZIER pointed out that the proposed CS is identical to a corresponding bill in the Senate, CSSB 157(L&C). He said there are two small exceptions. On page 7, line 8 of the proposed CS, Section 13 reads, "If authority to do so is contained in the contract or agreement, the". He explained the Senate version of the bill has a couple of words inserted after "agreement." Those words are, "and agreed to by the parties." Mr. Dozier said it appears this language is redundant in that there is no contract or agreement that can exist, as he sees it, without an agreement of the parties. Consequently, those words were deleted as excessive. The other change is a stylistic change made on page 7, line 18, where the House draft CS reads, "revolving charge agreement, or other retail charge agreement must". The Senate version reads, "shall". MR. DOZIER said that concludes his presentation. There are experts present at the meeting who will be able to provide the details. Number 742 REPRESENTATIVE PORTER moved that the committee adopt CSHB 319(L&C), Version C, dated 1/16/96. There being no objection, it was so ordered. Number 773 JOHN HIGGINS, General Manager, Northland Credit Corporation, came forward to testify on CSHB 319(L&C). He said the bill really came to be where it is today with the consensus of the industry along with working hard with the Administration. Mr. Higgins said he not only is speaking for Northland Credit Corporation, but other industry members that can't be present. MR. HIGGINS explained what the bill does in the consumer finance industry, which consists of himself, Norwest Financial, AFCO Financial, Affordable Loan, Superior Financial. They are the ones that currently hold a license under the Alaska Small Loan Act. What the bill does for the consumer finance industry is it helps to bring up to date, from the 1950s standards, a lot of antiquated statutes which currently exist that revolve around this. Mr. Higgins said the Act was originally written in the 1950s and hasn't been modified much since then. He said there are things that have to do with joint loan provisions where currently, you really can't give a loan out to a spouse or a husband and wife. That would be changed to where you can have one open account with each person if they so desire. The could each have their own loan if they want to. Currently, they have to be under the same loan. There is also fee enhancements that would be brought up the 1990 standards. Mr. Higgins said under the statute, they are looking to do multiple office licenses. Currently, each office has to be individually licensed. Another portion previously mentioned, was the part of the bill about payment restructuring. Currently, a customer can only pay back on a 30 day payment cycle. They have to have a payment in the office every month. He said they want to adjust that so they can accommodate a seasonal worker and have a repayment schedule that might be 90 days or 6 months later. That is not allowed under the current statutes. MR. HIGGINS said what they are looking for is market deregulation to put them on a more competitive playing field with rate importation which comes in to Alaska from outside the state, which effects their market when they try and finance mainly household good type items at retail dealerships. That rate importation puts them on an uneven playing field to the point where they really are at a disadvantage to be licensed and located in Alaska. They can't currently do the same rate structures that business outside the state can. Number 984 CHAIRMAN KOTT asked Mr. Higgins how that particular section of the bill would play out. MR. HIGGINS said currently, the programs that are the most attractive for a consumer are the 90 day, same as cash, and the 12 month interest free programs that are advertised for household goods, furniture, appliances and electronics. Mr. Higgins continued, "I'll use a big screen T.V. as an example. If you go to buy a big screen T.V., whether it is here in the city of Juneau with Alaska Audio Video or you're up at Anchorage buying one at Pyramid Electronics or Magnum Electrics, that $4,000 T.V. that you go in buy, because you wanted to get it on a special program which was 12 months interest free and 12 months no payments, and that's what brought you into this store. Currently, I offer those programs, but currently they do not use our financing and nor are they relatively using the financing of Norwest Financial who also offers those programs in state. What happens is Mitsubishi Bank, excuse me, Monogram Bank -- no it's Mitsubishi - Mitsubishi big screen T.V., what they do is because they can offer a rate structure on the other end that is 21 percent or 21.8 percent, and our rate structure is about 13.9 percent right now -- and this would be the rate that the consumer would pay after their special program is over - after their 12 month interest free program period is over, if they don't pay it off in that period, the rate they would pay me is about 13.9 and the rate they would pay outside the state is 21. Now how that works back to the retailer is the retailer right now, I would have to charge them basically 10 percent to run that same interest free program, for the cost of that money it's basically interest free for that year period. The place outside the state, such as Monogram Bank of Georgia, or that they finance the Mitsubishi card, they charge the retailer nothing at that point. And they charge the retailer nothing because, once again, they make it up on the other end with the consumer at 21 percent. So, basically what happens on a $4,000 purchase, lets say, Monogram Bank of Georgia will cut a check back to the retailer for approximately $4,000. We'll cut a check to the dealer for about $3,600." MR. HIGGINS gave the committee information which were the rate ceilings for the entire U.S. He said what they are looking for is a deregulated or competitive market rate playing field to deal with the people that do rate importation from outside the state. He said they would like to keep the Alaska consumer here if they can. It's good business for Alaska. It gives him the ability to provide more jobs. The paperwork is kept in Alaska and doesn't go to Georgia or Denver. Also, if a consumer ever does have a complaint or comment on their financing, they can come and discuss it with them directly. He pointed out that many retailers use cards that are sponsored outside the state because they don't charge what the instate users have to charge - the instate issuers of credit. CHAIRMAN KOTT asked if it is a fair assessment to say, for instance, Mr. Higgins' credit corporation would not be pushed within one of the retail establishments because of the payback at the end. MR. HIGGINS said he could provide a clear example. He chose Pyramid Electronics and Shimicks Audio and Video in Anchorage. "We used to be a sole financing source for both those places, and including Magnum Electronics, which has a lot of paper that they finance, and we no longer really do hardly any business with those places anymore. As we sit here now, now a year ago I did, and what has changed between then and now is the Sony card has come on board, the Toshiba card has come on board, and the Mitsubishi card has come on board, and they're all cards that are sponsored outside the state. And why have they come on board and why does the retailer use them? Well the retailer uses them because they don't charge what the instate users have to charge, I mean the instate issuers of credit. Being myself, it deals in this market -- Norwest Financial or AFCO primarily. And so with that in mind, that user retailer would probably make the same decision at some point too. It becomes a monetary decision. You'd like to use someone in state, but they can't cut you the same deal that the guy outside the state can. And so that's how it rolls down to today that we are are - as you stated - are we even on the counter? No, we're not on the counter. Our applications are under the counter at this time. The retailer doesn't want you to know about us because if you say, `Oh no, I'd rather go through them, they're offering the same program anyway.' The retailer doesn't want you to have that in you hands because he is going to have to pay more. He will lose money on that particular T.V. that goes out the door. He will not receive $4,000. He'll only get $3,500 because we have to discount that paper." Number 1316 REPRESENTATIVE KUBINA clarified how it works. Mr. Higgins is allowed to charge 18 percent on the first $1,000, but anything over that, he is only allowed to charge 10 1/4 percent. MR. HIGGINS answered in the affirmative. Representative Kubina asked if this is on an installment loan or if it is a credit card. Mr. Higgins said it looks like a credit card program. It's not like a Visa Mastercard or anything, but it's merchant specific. REPRESENTATIVE KUBINA a bank that issues a credit card doesn't have that restriction. MR. HIGGINS said that is right. He noted that is a separate set of laws that governs those interest rates. REPRESENTATIVE KUBINA referred to JC Penney and said their rate could be higher. He asked if this is the law that they're under. MR. HIGGINS said it is not because at this time they're not a member of any national bank and they have offices in Alaska. They have to abide by Alaska statutes under this Act. Representative Kubina said JC Penney is restricted to anything over $1,000, they charge 10 1/4 also. Mr. Higgins said exactly. He referred to information before the committee and said what the committee member's see on the paper is what they charge on their card at this time. REPRESENTATIVE KUBINA said he assumes the reason that was there in the first place would be because this is a good deal for our residents because we're holding the interest rate down. But in fact, it's not really a good deal because all the people from outside can charge our residents more anyways and then they can give the businesses more of a deal to get them to use their card at the disadvantage to a local business. MR. HIGGINS said that is accurate. He referred to Sears and said they are in Alaska and are operating in the same retail environment as JC Penney. Sears doesn't have to abide by these rates because about 90 to 120 days ago, they purchased a national bank and they now issue their card through the national bank. They can now use the deregulated rate structures. It depends on where the card is issued. He noted Nordstrom bought a national bank in Oregon last year and they now issue their card through that bank. Number 1551 REPRESENTATIVE ROKEBERG asked if there is a limit or ceiling on bank credit cards like VISA or Mastercharge in the state. MR. HIGGINS said there is a limit and it depends on if you're a national or a state chartered bank. The set of statutes you would be under depends on how you issue your card. He noted he isn't familiar as to what the cut offs are on those. MR. HIGGINS said he would like to say something else about rate caps. He referred to the list he gave the committee and said Wisconsin is currently passing themselves into the top of the section which would be a deregulated or a competitive market rate. Even though they're at 18 percent on all money lent, they've found out that is not even effective in their state because, once again, they still have rate importation which steels so much of their business. MR. HIGGINS said he has some studies if the committee would like a copy of them, that had to do with the deregulation of retail revolving credit and what it does. The University of Wisconsin, for Wisconsin state, did the most recent studies last year. When you do deregulate, you cause more competition. The rates do come down. Number 1848 CHAIRMAN KOTT said as a business in a lending capacity, such as Mr. Higgin's, it would certainly be beneficial from Mr. Higgins perspective. MR. HIGGINS said the bottom line is, "Do you want people churning paper in Georgia for Alaskan consumers or do you want them churning the paper here if they're going to be borrowing money?" Mr. Higgins said his vote is to have them here. There would be some job growth. CHAIRMAN KOTT noted the committee members had letter in support of the bill from AFCO Financial and JC Penney. Number 1999 WILLIS F. KIRKPATRICK, Director, Division of Banking, Securities and Corporations, Department of Commerce and Economic Development, said he will limit his comments to the provisions addressing the Small Loan Act. He said he wants to go on record of really appreciating the assistance, the help and the understanding that the industry did in working on this piece of legislation. Mr. Kirkpatrick said his staff has been in contact with the industry and the debates have been minimal. Most of the amendments are beneficial to the consumer, it brings the act up to date and provides for a little more sense in operation. The provision, for example, allows them to commingle accounts on computers which makes sense. Why keep hand posted or separate records just for the small loan portion of the business if they can segregate those out by sorting their computer data and provide it to the department's examiners. Mr. Kirkpatrick said he feels it is a very good piece of legislation and he doesn't find any fault with it. MR. KIRKPATRICK referred to the Retail Installment Sales Act and said he doesn't have any comments, but is available for questions. CHAIRMAN KOTT referred to the increase in fees for applications for a licensor and asked if that is agreeable to him as far as the amount that is needed to cover associated costs. MR. KIRKPATRICK said most of their applications for financial institutions, such as bank branches or different types of service facilities that they apply for, falls right in line with that. In this type of a provision, this gives $1,000 for the department and partial payment for the application. If it's a complicated application, under AS 06.01, if there are additional costs the state can recover those additional costs. He said they have found that this is in line with other types of investigations of similar types. CHAIRMAN KOTT said he assumes that is the reason for the zero fiscal note. MR. KIRKPATRICK said that is correct. CHAIRMAN KOTT asked how many applications the division processes. MR. KIRKPATRICK informed the committee that in the early 1970s, there were two major companies in Alaska, Beneficial and Household. Both of them had offices throughout the state. In the mid 1980s, it dropped down to maybe three Household offices. That has now begun to increase. He said it provides a credit service for constituents who cannot otherwise obtain credit from traditional financial institutions. Mr. Kirkpatrick said we have actually encouraged them to come to the outlying areas of the state. Over the last two years, the department has been very active in those applications but they do not have an application currently on file. CHAIRMAN KOTT referred to the requirement to have $25,000 in liquid assets and asked if that is comparable with other states. MR. KIRKPATRICK said it is probably the lowest in the nation. He explained what they look at in addressing that is if they don't have $25,000 to lend out the first most expensive loan, they should probably look at some other endeavor. That has never been a question. Those who do apply usually have substantial money or cash available to lend out. Number 2380 REPRESENTATIVE ROKEBERG asked Mr. Kirkpatrick to clarify the question on the bank card ceiling. MR. KIRKPATRICK explained there is a credit card statute that is more or less defined as a bank card in AS 06.05, the Alaska Banking Code. He said he believes it is 17 percent. Representative Rokeberg asked if other outside banks are allowed to do business in the state and charge higher rates. Mr. Kirkpatrick said that is correct. Representative Rokeberg referred to the retail installment section and asked if that includes the lack of a ceiling cap in Section 11. Mr. Kirkpatrick said that is correct. [End of tape...] TAPE 95-5, SIDE A Number 001 MR. KIRKPATRICK said as an employee of the Executive Branch has no opinion as the consumer impact on this. REPRESENTATIVE KUBINA said, "Could you sit there as a private citizen and, because of your expertise, just give us a little bit of a feeling that you have privately, and we realize this has nothing to do with being an official." MR. KIRKPATRICK said what he is about to tell the committee is what he has advised them that has been his position or comments in the past as a private citizen. He explained in the early 1980s, we used to have a federal regulation called "Regulation Q." Regulation Q said financial institutions and insurer depository financial institutions could not charge more than 5 1/4 percentage interest on savings. Savings and loan got a 1/4 percent of a preferential and they could charge 5 1/2 percent. What happened is that in the 1980s, that part of the balance sheet was deregulated. He said he has always felt that if you're going to deregulate one side of the balance sheet, why not deregulate the other side of the balance sheet. In other words, why say that you can go out and be competitive in one side in relations to interest paid, but are under usury limitations on the other side of the balance sheet on (indisc.) you can charge for loans. Things have changed a great deal. Since Regulation Q went away, we saw that South Dakota and Delaware made their states interest rate exporters. They gave great benefits to financial institutions to set up financial institution credit card exporting businesses in those states just to do what the committee is talking about. They've done that with great success. Mr. Kirkpatrick said he thinks there was a recent court challenge against a bank in South Dakota, but he believes it failed on the basis of you can't impede commerce across state lines. He said one of the things were seeing is that he has a close friend who wanted to buy a $4,000 computer. He bought a $4,000 computer on his Visa Seattle First credit card, he received his Alaska Airlines points. He then received some mail saying he could have a loan for six months at 5 percent, so he applied for that, paid off his Seattle First loan. Then before the six months was up, City Corp said he could have one for 6 1/2 percent until March. Mr. Kirkpatrick said those are leaders. If you take a look at the rate after that period of time, the first one was 18 percent and the one his good friend currently has will soon be 21 percent, but by then he'll have his computer paid off. MR. KIRKPATRICK said people are wise as to what the interest rates are and they can take advantage of them. It is competitive now. One of the things we seem to do is under the pseudo effect of protecting the public, the public is not being protected if we're to do that because they're buying their products that are available to them at "easy payments," or "no payment until..." The local people who are trying to finance the Alaska people are discriminated against. It is a market place. Mr. Kirkpatrick said he has known John Bly in the state of Washington, Cecil in Oregon, Gaven Gee in Idaho, who are all his counterparts. He said all three of those states have no interest rate limitation. Mr. Kirkpatrick said he has urged them to introduce legislation to repeal that and they thought he was crazy. Everything else is in the market, why shouldn't that be. Mr. Kirkpatrick said we do understand that there are consumer groups that feel they need to be protected and heard. CHAIRMAN KOTT thanked Mr. Kirkpatrick for his testimony. Number 477 JERRY REINWAND, Lobbyist, Sears, JC Penney, Safeway and Fred Meyer, said he supports the bill. He noted there should be some information in the committee members packet that JC Penney has provided. He said the legislation is overdue and is something his companies support. Mr. Reinwand urged the committee to move the bill. REPRESENTATIVE KUBINA asked if any of the consumer groups were negative toward the bill. CHAIRMAN KOTT said he hasn't seen anything negative towards the bill. Number 557 REPRESENTATIVE PORTER made a motion to move CSHB 319(L&C) out of committee with individual recommendations and a zero fiscal note. Hearing no objection, CSHB 319(L&C) was moved out of the House Labor and Commerce Committee.
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