Legislature(2003 - 2004)
03/14/2003 03:16 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 159-FINANCIAL INSTITUTION EXAMINATIONS/CFAB Number 1580 CHAIR ANDERSON announced that the final order of business would be 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." Number 1542 MARK DAVIS, Director, Division of Banking, Securities & Corporations, Department of Community and Economic Development, presented HB 159 on behalf of the governor. He explained that the bill makes two changes, one to the banking code and the other to Title 44 [State Government]. The first change reduces the frequency of the division's examination of small loan companies from every 12 months to every 18 months. He said this change will bring the schedule for examinations for small loan companies in line with the rest of the banking code and will eliminate the need for an additional bank examiner. He opined that this change will not affect the integrity of the examinations, and it still allows the division to examine a small loan company more frequently, if that is deemed advisable. MR. DAVIS said the second change would discontinue the division's annual examination of the Alaska Commercial Fishing and Agriculture Bank (CFAB). At present CFAB has no state funds and does not accept deposits from the public. He explained that CFAB operates as a cooperative for the benefit of its members and borrowers, and it is required by statute to prepare an annual audit by an independent outside auditor. That audit requires CFAB to include financial statements audited by outside auditors; the audit must discuss the bank's circumstances and any other pertinent information under AS 44.81.200 [Reports and publications]. House Bill 159 does not alter that requirement nor does it change CFAB from being subject to a legislative audit. He said that if HB 159 is passed, the audited report will still be provided to the legislature. In conclusion, he said that division officials believe an annual bank exam is unnecessary because CFAB has repaid its state funding; it does not lend money to the public; and it's subject to both independent and legislative audits. Number 1388 MR. DAVIS replied to a question from Chair Anderson about whether there are enough examiners now to complete all the required exams. He said if the requirement for the CFAB examination is deleted and the small loan exams change to the 18-month frequency, there is sufficient staff to handle the workload in a timely manner. Number 1354 REPRESENTATIVE LYNN asked if the bill affects pawnbrokers and second hand dealers. MR. DAVIS explained that the division will continue to examine small loan companies that lend up to $25,000 and are allowed to charge in excess of usury under specific procedures. Under the FDIC [Federal Deposit Insurance Corporation] and the National Credit Union Administration rules, all bank institutions are examined 18 months or more frequently. He said the division would like the authority to do examinations using that same schedule. That way, he said, the division could concentrate on small loan companies that have had violations or appear to need guidance. REPRESENTATIVE LYNN asked how many companies would be affected by this bill. MR. DAVIS said he did not know how many small loan companies the division reviews but said he would provide that information. Number 1254 REPRESENTATIVE GUTTENBERG asked if CFAB had a position on HB 159. MR. DAVIS responded that he met with the president of CFAB regarding the previous administration's practice of posting the division's report on the Internet. The CFAB officials said the report should be confidential under the banking statutes, and Mr. Davis said he agreed. The bank would still be subject to legislative audit so this same information would be provided [to the legislature]. He didn't learn from CFAB officials whether they benefited from the division's examination. REPRESENTATIVE GUTTENBERG asked about the liability of an outside independent auditor, given the recent audit scandal at Enron Corporation. Number 1098 MR. DAVIS replied that outside auditors owe duty both to the board and to the shareholders. CHAIR ANDERSON reiterated that the auditor KPMG, formerly Pete Marwick, is liable if there are errors in the audit. REPRESENTATIVE GUTTENBERG mentioned that his concern was about financial oversight. MR. DAVIS said an outside auditor could be liable either to the board or to a shareholder because of fiduciary duties that run from a director to a shareholder. He said the directors would have negotiated the contract and scope of engagement for an outside auditor. If there was an error in the audit, the auditor could be held liable in a lawsuit. REPRESENTATIVE GUTTENBERG asked if anything has changed in Alaska since the Enron scandal. MR. DAVIS said he couldn't comment about changes in Alaska but said the accounting industry's Financial Accounting Standards Board is revising audit practices. Number 0950 REPRESENTATIVE DAHLSTROM moved to report HB 159 out of committee with individual recommendations and the accompanying fiscal note. There being no objection, HB 159 was reported from the House Labor and Commerce Standing Committee.