Legislature(2001 - 2002)
03/15/2001 01:30 PM Senate 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
SB 66-FINANCIAL INSTITUTIONS
CHAIRMAN RANDY PHILLIPS called the Senate Labor & Commerce
Committee meeting to order at 1:30 pm and announced SB 66 to be up
for consideration.
MR. TERRY ELDER, Director, Division of Banking, Securities and
Corporations, discussed his proposed amendments, which were in a
letter dated February 26, 2001. There were four in total.
He said the current bill includes business development corporations
(BIDCOs), which are under AS 10.13, and CFAB, which is under AS
44.81,in its definition of state financial institution. These
entities are primarily concerned with privacy. After looking at
CFAB's statutes, they found a privacy provision that is almost
identical to the one in the banking code. So there is no need to
include them in this legislation. Rather than putting BIDCOs into a
definition of a state financial institution, it refers to them
specifically in the privacy provision. Consequently, the first
amendment adds a new (f) to AS 06.01.028, the privacy provision,
which would cover the BIDCOs.
MR. ELDER said the next two amendments are related in that they
change the definition of state financial institution and delete the
reference to AS 10.13 and AS 44.81.
The other amendment is in relation to some concerns of Credit Union
One, a state chartered credit union. One of them was to the privacy
provision and the other one was to change to page 21, lines 15 and
21.
In both of those cases, there's an amount of $5,000,
which for credit unions, it says that it's for
essentially the kinds of loans to directors and members
of the supervisory committees. Right now it says if it's
$5,000 or more, they have to be reviewed and approved by
the board of directors. Credit Union One mentioned that
the federal law has been increased to $20,000. So they
are asking for the same $20,000 limit. And we don't have
a problem with that and we would encourage the committee
to consider Credit Union One's request and change both of
those $5,000 amounts to $20,000.
MR. ELDER recalled that his position on removing the cap on credit
card interest rates is that it would have no impact on the
consumer. The major impact it will have is to allow state-chartered
institutions to consider the credit card business as a viable
business to get into and offer it to their customers. A survey of
state-chartered institutions showed that half of them issue credit
cards and half of them don't. He suspected that the half that do,
do it for reasons other than because it's a good business to be in.
They probably do it because they probably want to be a full service
institution. It's also a vehicle for overdraft protection.
He said in 1996, there was an amendment to the Alaska Retail
Installment Sales Act, AS 45.10.120, saying that caps are whatever
is agreed to between the lender and the borrower. The last proposed
amendment eliminates the caps on the credit cards and makes them
whatever is agreed to between the lender and the borrower.
MR. BART LABON, Sr. Vice President, Mt. McKinley Bank, said the
Alaska Bankers Association and Mt. McKinley Bank support the intent
of the amendment to make AS 06.01.015 conform with the federal
examination requirements so that well capitalized and mortgage
banks take advantage of an extended examination schedule similar to
that that's required on the federal level. The proposed change to
the 18 month cycle would favor institutions that are well
capitalized and that have proven by previous examination to be well
managed and hold a strong capital position.
The coordination of examinations between the state and federal
level would benefit our state banking institutions through a more
efficient use of time. It also wouldn't be as disruptive to bank
business. He said Mt. McKinley Bank had a joint examination last
fall and it went very smoothly. He mentioned, "As always the state
has the option to return earlier to examine a bank if they feel
justified in doing so based upon the results of their most recent
examination." So they support the change from the 12 month cycle to
an 18 month cycle and urge the state to continue to coordinate
their examination efforts with the federal examiners.
MR. MIKE BURNS, President, Key Bank, said he was concerned
specifically with the opt in/out issue. He said:
Our customers have grown to expect financial institutions
to use their personal information responsibly. They also
expect high quality and convenient and affordable
financial services. Balancing these expectations has
yielded exceptional benefits to consumers and I think
also contributed to the longest sustained economic growth
in modern history. The opt in restriction, which are
included in this banking bill would require customers to
send before any sharing of information occurs, threatens
to destroy that balance and significantly reduce the
benefits of shared information use. Financial
institutions rely on integrated information systems to
operate more efficiently, thereby avoiding the cost of
acquiring and maintaining duplicate systems. Requiring
our customers to opt in to information sharing decreases
the speed, lowers the efficiency and raises the cost of
information. This will ultimately be born by the customer
who will end up paying higher prices for lower quality
goods and our services. We are very strongly against this
provision. It is out of step with almost every other
state in the country and we strongly support the Alaska
law conforming the recently passed federal legislation.
CHAIRMAN PHILLIPS asked Mr. Burns if he had seen the Bankers
Association recommendation.
MR. BURNS answered that he had and said there are two versions of
the recommendation. One incorporates the federal law just by
reference and the other sets out exactly the same wording as the
federal law. They do not object to either of those, but their
counsel has a technical problem.
MR. JOHN BEARD, counsel to the Bankers Association, said he
assisted them in drafting the proposed amendment before the
committee. It takes the position of simply referring to the
requirements of the new federal statute rather than trying to set
them out. The reason is that the federal statute calls for further
regulation by various federal bodies. The Association's bill would
pick up the requirements of those regulations. Picking up the
federal language would put things out of sinc between the state law
and federal agencies when they start promulgating their
regulations.
SENATOR AUSTERMAN asked if the under the current work draft
everything was confidential unless a customer signs a waiver that
says it's not, but once it's signed, it's not confidential any
more.
MR. BEARD said he thought that was a little broader interpretation.
The information is always confidential. How it is shared with
affiliates for financial services is governed by a lot of
regulations. With opt in a customer would have to take an
affirmative action to allow banks to share that information. The
vast majority of other states have taken the opt out view where you
get all the power of a financial services holding company
MS. JAN SEIBERTS, National Bank of Alaska, said they are owned by a
holding company which is owned by Wells Fargo Bank. "We support the
position of the Alaska Bankers' Association." Their main concern is
that their credit card department and mortgage company are now
subsidiaries and under this legislation it is going to be difficult
to pass information on to the consumers which they might find very
beneficial. "For instance, NBA is the dominant bank in rural Alaska
and they have a harder time than other parts of our state in
getting information about products and services that could be
advantageous to them." They believe the opt out provision is the
proper way to go.
MS. LISA BELL, Senior Vice President and Chief Operating Officer,
Alaska Pacific Bank, said she was representing Alaska Bankers
Association and they generally supported the intent of SB 66, but
have concerns with the privacy provisions. They disagree with the
Division of Banking on some points. They believe the state banking
code as it pertains to privacy should be consistent with federal
laws. There are many federal laws that are already on the books
that pertain to customer privacy. They believe the opt in
restrictions that would be placed on financial institutions by the
proposed legislation would be unduly restrictive.
MS. BELL explained that the Gramm-Leach-Bliley-Act (GLBA) already
provides for annual disclosures of the banks privacy policy to all
of its customers. "In addition to that annual disclosure, you are
also required to disclose your privacy policy and information
sharing policies with every new customer."
GLBA also allows customers to opt out of disclosures to third
parties. This is important because that gives them the right to
prevent sharing of their non-public personal information with non-
affiliated third parties that are not exceptions under the law. "So
they do have a mechanism to prevent information sharing."
Another prohibition GLBA has is it prohibits a financial
institution from disclosing account numbers to any non-affiliated
third party. You can't share a credit card number or an account
number with non-affiliated parties. She explained that federal
regulators were directed to establish more standards which have
recently been issued that are related to the physical security and
storage of customer records.
MS. BELL reported that the Fair Credit Reporting Act (FCRA) already
governs the sharing of non-public personal information among
affiliated parties. It contains many safeguards and has its own
type of opt out provisions within it that gives consumers the
ability to stop the sharing of their credit information among
affiliates. She said other laws like the Electronic Fund Transfer
Act, Right to Financial Privacy Act and Telephone Consumer
Protection Act approach the privacy issue from several different
angles and "cover it quite adequately."
Number 1500
MS. BELL said their proposed amendments for SB 66 replaces the
entire section 3 with new wording. It makes a reference directly
back to the GLBA without trying to bring in the actual language of
that legislation. The first thing she wanted to clarify is that the
financial records are the property of the financial institution and
not the property of the customer. The customer's information
pertains to the financial records. This is an important legal
clarification.
The next change was rewording of the exceptions to a strong ban on
releasing customer or financial information and says, "Information
may not be disclosed by the financial institution to another person
or government except when and only to the extent that the
disclosure is…"
· When it's authorized in writing by the depositor or customer
(already in state statute)
· When it's required by federal or state statute or regulation
or subpoena, search warrant or other similar type of court
order by a court or administrative agency that has that
jurisdiction
· The direct reference to GLBA.
MS. BELL also wanted to clarify the misunderstanding in the current
statute when banks are asked to provide sometimes huge volumes of
customer information to a government agency. It's not always clear
whether the bank will be compensated for the time and materials,
which could be thousands of dollars. This should be changed to say
that banks would be authorized, but not required, to comply with
the subpoena, search warrant, etc. that did not provide for
reimbursement of reasonable costs. She explained that requests for
federal agencies are already covered under other legislation.
MS. BELL explained another amendment to section (c):
Normally we would be required to disclose to a customer
that a government entity has requested personal financial
information. That's an important right the consumer has.
There are times when that is not allowed under the law,
but it's not always clear on the face of the document
they are presented by the courts that they are either
allowed to let the customer know or are banned from
letting the customer know.
If they are not to disclose the information to the customer, that
court order must expressly directly banks not to notify the
customer, otherwise they will.
She suggested clarifying the definition of government in section
(d).
MR. BEARD observed that the proposed notification to customers
when there is a disclosure in (c) sets up a "bright line test"
which says it has to be done within three days rather than the
present proposal which states as soon as possible.
SENATOR AUSTERMAN said he had been told that state laws could be
stricter than federal laws and asked if that was correct.
MS. BELL replied that is correct. The intent is that they not be
conflicting.
MR. BEARD replied that was correct. The state may prohibit
disclosures that are not prohibited by the federal law.
Number 1900
MR. TERRY ELDER, Director, Division of Banking, Securities and
Corporations, said that the amendments Ms. Bell suggested aren't
necessary. This is because the language in current regulations
and statutes is already very broad in allowing them to develop an
exam schedule. He read:
AS 06.05.005 (b)(1) lists the powers of the department
and provides that the department may relieve a bank from
the examination requirements of AS 06.05.015 if the
bank's deposits are insured by the FDIC or another agency
of the United States that insures bank deposits.
This already gives the division the statutory authority to do
something other than annual examinations.
SENATOR TORGERSON asked if they do it, since they have the
ability.
MR. ELDER replied that they generally do examinations in concert
with the federal agencies. He didn't know if they had done one
[alone]. He would probably not support having the federal agency
go in without state presence when dealing with a state chartered
institution. He said:
There are differences in what the FDIC cares about in
terms of protecting its insurance fund versus what we may
care about in looking at other provisions, specifically,
of state law. It's a matter of maintaining your presence
and your knowledge about the institutions. I would think
it would be detrimental to our examiners to literally not
be in a bank for, say, three years. If you read the
proposed amendment and we went to an 18-month cycle and
we decided not to join the FDIC on every other one, that
would mean our examiners would be staying out of the
institution for a period of three years and I do not
think that would be attractive. It certainly is a good
point that we should coordinate and we do that.
He said there is a provision in current regulations at 3 AAC
02.030 that says:
The examinations required under AS 06.01.015 may be
conducted in alternate years as appropriate if the
department determines that an examination of the
financial institution conducted by the FDIC or other
agency that regulates financial institutions during the
intervening years carries out the purposes of AS
06.01.015.
He explained they already have the statutory and regulatory
position in place for that.
SENATOR TORGERSON asked what the difference was if they go to 18-
months since they already have the authority to it any time they
want to. "Just make them happy and go to 18-months. You still have
the same authority you're talking about."
MR. ELDER responded that, "Their language, we think actually is
more rigid than what we currently have." He would have to argue for
the increased flexibility that current statute and regulations
provide. Examination policy currently reads:
It shall be the policy of the department to conduct,
whenever reasonably possible, joint examinations with the
federal deposit insurance corporation of those
institutions subject to this title whose accounts are
insured through that corporation.
Looking at this section through this proposed amendment,
it came to mind that we should include the National
Credit Union Administration (NCUA) in that, because for
credit unions, they have insurance generally through
FDIC, but certainly we cooperate with the NCUA when we go
into a credit union.
He proposed an amendment after "Federal Deposit Insurance
Corporation" insert "or with the National Credit Union
Administration" and replace "that corporation" with "these
agencies". This would clarify what is currently in statute.
MR. LABON responded, "Your better capitalized financial
institutions would not require the 12-month cycle. It would be up
to the department to measure the performance of the bank and to
gage how often they would need to come back."
He said they are, "looking for some relief for the stronger
capitalized, well-managed and strong performing banks so that the
disruption to our normal conduct of business is minimized once
every 18-months on a coordinated basis with federal agencies."
MR. ELDER responded that they, in fact, try to do that. There have
been times where they haven't gone in every 12-months. "It's in our
interests as well that we don't go in and do examinations that
really don't add value. We don't have a disagreement with what they
are saying. We simply say that it would be better to be left to the
flexibility currently offered by statute."
Number 2300
MR. BURNS added, "These issues relating to direct examination do
not affect either one of our banks. We're both national banks."
MR. ELDER turned to the privacy issue and said they have some "real
problems that are in the proposed replacement."
The big issue here is opt in versus opt out. Current banking code
in AS 06.05 has an opt in/out option.
TAPE 01-11, SIDE B
"For bankers to say this is something new is not correct," MR.
ELDER stated. He proposed putting the privacy provision into AS
06.01, which makes it apply also to credit unions, premium finance
companies and small loan companies also. For them it would be new;
but for banks it would not be new. After Gramm-Leach-Bliley passed,
an article appeared on a website called "Privacy Paradise: Vermont
and Alaska keep financial information under wraps." It says:
Protecting consumer privacy has been business as usual up
in Alaska for decades. Customer records are confidential,
under the Alaska Banking Code. Records will not be shared
with anyone without a customer's written OK.
"That has been the law in Alaska as long as I can
remember," says David Lawer, president of the Alaska
Bankers Association and general counsel at First National
Bank of Alaska. He has lived in Alaska since 1971.
The only exceptions to the state code are for court
orders and subpoenas.
Lawer views the law as "a shield" more than anything
else. It's helped keep private customer records away from
"the ubiquitous angry spouse" and lawyers trying to
shortcut the subpoena process.
"It's worked more to our benefit than our detriment,"
Lawer says.
What about a bank's bottom line? Has it hurt bank
marketing efforts in any way? Not a problem, according to
Lawer.
I can't honestly identify how it's been harmful to
banks," he says.
There have been times when telemarketing companies have
called Alaskan banks requesting customer lists in the
hopes of selling-who-knows-what.
"There have been incidents," Lawer says. "But it's not
been prevalent by any means. I expect that it's been
ignored."
Alaska banks are just as reticent when it comes to
sharing customer information with other financial
institutions.
"We don't share information with any other lending
institutions unless we have the approval of the
customer," says Sharon Engle, vice president and consumer
banking center manager for the National bank of Alaska,
which has been bought by Wells Fargo.
"We get a lot of requests for sharing of information, but
if it's not signed by the customer it's not something we
participate in."
There has been a little bit of discussion over whether or
not the state code applies to all banks doing business in
Alaska or just those regulated by the state Department of
Banking. But that debate, if you can all it that, hasn't
gotten very far. Nobody's ever thought to challenge the
law.
"To my knowledge everybody has voluntarily complied,"
Lawer says.
Privacy has been respected and expected up in Alaska for
as long as anyone can remember.
"That's part of Alaska," Engle says. "Alaskans are very
independent, extremely friendly. But also privacy is very
important…it's a small place."
Small is not a word most people would associate with a
state one-fifth the size of the continental United
States. But Engle says there is a definite small town,
everybody-knows-everybody feeling. With a population of
600,000 or so, it can't be helped.
This state. People come up here to get lost. Privacy is
just extremely important. It's just been very watched.
With a small population, it's something that you have to
do."
Refreshing, isn't it?
MR. ELDER finished reading the article and commented, "Yes, it is."
He said in his opinion, the reason for the opt out provision in the
federal bill is for the practical reason that most people just
don't fill out a little form and send it in to opt out. "Most
people don't opt in either and that's the problem." He can
understand the industry's viewpoint that they want to share
information with other firms, especially with affiliates.
An opt-in provision that requires people to sign something and
actually send it in is difficult for them. "But that's been the law
up here for quite some time and we see no reason to change it."
MR. ELDER said he had received the privacy policies of a couple
large national banks. Most people probably don't read it, but he
does because of his position. But they certainly don't read it when
it goes on and on using tiny print. He had examples with him that
had some of the information on the back of the form. He also noted
that both of the forms allowed people to opt out of information
sharing among affiliates. "The Gramm-Leach-Bliley, if you just
accept what the Alaska Bankers Association is proposing, that
doesn't allow you to opt out of sharing of information with
affiliates. It only allows you to opt out of sharing information
with non-affiliates."
His two examples went one step further and at least allowed
customers to opt out of sharing information with affiliates.
The sharing with affiliates issue becomes more important
because the whole point of GLBA was to break down the
previous restrictions on the kinds of companies that a
bank can affiliate with, in particular, now with
insurance companies and with securities firms. Ms. Bell
mentioned there are restrictions on you can't provide
account numbers to non-affiliated third parties and it's
important to listen to those little details, because it
doesn't say anything about not sharing them with
affiliated third parties, which means, of course, under
the new regulatory scheme, to include insurance companies
and securities firms. Our viewpoint, especially with the
extra provisions regarding privacy, that's in our
constitution. Also, with the decades long history of
privacy protection that's been in the banking code,
Alaskans can decide whether or not they want to get
marketing materials from securities firms and insurance
companies. They can decide that for themselves. They
don't need when they go into a bank and don't happen to
respond properly with a little form for which they don't
give you an envelope; they don't all of a sudden need to
get marketing information and other kinds of information
from insurance companies and securities firms.
MR. ELDER said he was not suggesting the information would be used
in a bad way, but he emphasized that they are talking about sharing
confidential information. "We are not talking about keeping your
customers from being aware of what products are out there and
things like that. I don't think it would be a problem if the bank
puts on its web site or provides information that we do have firms
that provide these kinds of services. You can contact them at such
and such or you can, in fact, opt in and we will provide the
information to them directly."
MR. BURNS responded that he thought Mr. Elder was being inflexible
when there are only two states even considering the opt-in
provision. "It's unbelievable… This Gramm legislation has changed
the world and we need to be part of that."
MR. SEIBERTS commented that one of the reasons for the Gramm
legislation was that it was called the "Financial Modernization
Act." Some financial institutions didn't have the research from the
financial communities that commercial banks and credit unions did.
He said:
The banking commissioner is focusing on banks because
he's the banking director, but there's other types of
financial institutions that aren't addressed here at all.
We firmly believe that the opt in position will make it
more difficult to provide information to enable people to
get car loans and home loans. The commercial customers
are probably not going to be affected much, but the
people that have the hardest time getting credit are
going to be the most negatively impacted by this.
MR. LABON said the comments by Mr. Burns and Mr. Seiberts reflect
the feelings in Fairbanks, as well.
Number 1700
MS. BELL clarified that there are a number of financial
institutions that operate in the state under federal charters that
have not been subject to the state banking code privacy provisions
until this point. "It is new to many of us."
She added that the reason GLBA does not contain provisions
governing information sharing among affiliates is because it is
already governed under existing legislation like the Fair Credit
Reporting Act. She suggested continuing the dialogue and include an
analysis of that legislation so they can understand what
protections are already there.
MR. ELDER commented, "If national banks think it doesn't apply to
them, it's probably because of the quote in the article saying that
it's never been challenged, including by them. So I guess it would
be up to someone to challenge that and find out in a court. Our
position is that we think it does affect them, but on the other
hand, we also don't regulate national banks."
MR. ELDER said it was very noticeable when the suggested amendment
from the Bankers Association makes sure they cover reimbursements
for themselves for costs of subpoenas and things like that, which
he personally agrees with, but drops off the liability to their
depositors and customers by violating confidentiality of their
records. He thought that was a stark contrast and isn't
particularly an attractive position to put forward.
MR. ELDER said he had talked with the Bankers Association about the
confidentiality that's made with disclosure of information that's
made subject to a subpoena and a search warrant. It says currently
on page 3, lines 5 - 9 in the CS that requires confidentiality.
Discussion with the Bankers Association was that the use of the
word "confidentiality" is a little bit vague and it would be better
to say what you're talking about and that is not notifying the
depositor or customer. He had prepared a change for that sentence
that would be in line with what the Bankers Association is
requesting.
MR. ELDER proposed another amendment on page 3, lines 10 - 13.
There is a drafting difficulty in the Bankers Association proposal
in that they combined some of the subpoenas and disclosures, as
well as the statutory disclosures. He thought it was better to keep
them separate and make it clear that they are talking about court
orders and administrative agency orders, as far as reimbursement is
concerned. He made it clear that whenever the disclosure is
compelled by (a)(1), court orders as well as administrative, the
document shall provide for the reimbursement of the financial
institution for the reasonable cost incurred in complying with the
order.
CHAIRMAN PHILLIPS asked if there was further testimony and there
was none. He announced he would hold the bill for further work and
adjourned the meeting at 2:43 p.m.
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