Legislature(2003 - 2004)

03/14/2003 03:16 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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                                                               
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.                                                                                    

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