Legislature(1995 - 1996)
02/21/1996 09:10 AM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
MINUTES
SENATE FINANCE COMMITTEE
February 21, 1996
9:10 a.m.
TAPES
SFC-96, #28, Side 1 (000-575)
SFC-96, #28, Side 2 (575-158)
CALL TO ORDER
Senator Rick Halford, Co-chairman, convened the meeting at
approximately 9:10 a.m.
PRESENT
In addition to Co-chairman Halford, Senators Donley,
Phillips, and Rieger were present. Co-chairman Frank and
Senator Zharoff arrived soon after the meeting began.
Senator Sharp did not attend.
ALSO ATTENDING: Willis Kirkpatrick, Director, Division of
Banking, Securities, and Corporations, Dept. of Commerce and
Economic Development; John Higgins, General Manager,
Northland Credit Corporation; John Shipe, Executive Vice
President, National Bank of Alaska; Jerry Reinwand
representing Fred Meyer, J.C. Penney, and Sears; Sherman
Ernouf, aide to Senator Kelly; and aides to committee
members and other members of the legislature.
ALSO PARTICIPATING VIA TELECONFERENCE FROM ANCHORAGE: Ron
Kukis, First Interstate Bank of Alaska; and Jerry Weaver,
National Bank of Alaska.
SUMMARY INFORMATION
SB 157 - SMALL LOANS & RETAIL INSTALLMENT SALES
Testimony was presented by Willis Kirkpatrick,
John Higgins, John Shipe, Jerry Reinwand, and
Sherman Ernouf. An amendment by Senator Zharoff
adding an immediate effective date to the bill was
adopted. CSSB 157 (Fin) was REPORTED OUT of
committee with a zero fiscal note from the Dept.
of Commerce and Economic Development.
SB 168 - FINANCIAL INSTITUTIONS
Discussion was had with Willis Kirkpatrick and
Sherman Ernouf. Ron Kukis and Jerry Weaver were
available to respond to questions via
teleconference from Anchorage. SB 168 was
REPORTED OUT of committee with a zero fiscal note
from the Dept. of Commerce and Economic
Development.
SENATE BILL NO. 168
An Act relating to financial institutions.
Co-chairman Halford directed that SB 168 be brought on for
discussion. SHERMAN ERNOUF, aide to Senator Kelly, came
before committee. He advised that the legislation was
introduced at the request of the Division of Banking,
Securities, and Corporations. As background information,
Mr. Ernouf explained that congressional passage of the
Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 overrides state law in a number of areas. It also
allows states to address provisions in the Act and effect
remedies before the 1996 deadline. Alaska anticipated most
of the federal changes in recent recodification of Alaska
banking law. SB 168 contains provisions needed to correct
state law before the congressional act goes into effect.
Changes relate to:
1. Agency activities between Alaska banks and banks
in other states.
2. Examination sharing agreements between state bank
regulators.
3. Deposit concentration limits on mergers and
purchases of Alaska banks by outside banks.
The Alaska Bankers' Association endorses the legislation.
All banks within the state have "passed" on the language and
the intent of the bill.
WILLIS KIRKPATRICK, Director, Division of Banking,
Securities, and Corporations, Dept. of Commerce and Economic
Development, came before committee. He explained that 1994
recodification of state banking law showed that "state
barriers/boundaries were falling down." There was a massive
push by large national and international banks for
congressional action on interstate branching. The large
banks wanted branches across state lines. The congressional
act allows states until 1997 to decide whether or not they
wish to opt in or out of interstate branching. Alaska's
recodification provides for that type of branching. A bank
from another state could buy an existing bank or existing
branch. Alaska opted in before Congress made specific
determinations. However, federal law contains other
optional provisions upon which the state must act by 1997.
One of those provisions relates to agency powers. The
Division of Banking, Securities, and Corporations has
determined that full agency powers would be appropriate in
Alaska. That means that if a large international or
interstate bank locates in Alaska and imports many of its
services and becomes aggressive in the marketplace, the
local community bank may enter an agreement with a bank
outside the state to serve as an agent for the outside bank
and thus compete with the large national or international
bank.
Federal law also allows states to address the question of
concentration (the outside purchase of deposits in Alaska).
A limit of 50% is proposed. Mr. Kirkpatrick cited, as an
example, the fact that National Bank of Alaska has insured
deposits of 24 to 30%.
Federal law also allows states to share agreements and
examinations across state lines. Under that provision, the
Division of Banking, Securities, and Corporations would
cooperate with other states and jurisdictions in sharing
bank examination information.
Senator Randy Phillips asked if consumers would experience
any side effects as a result of proposed law. Mr.
Kirkpatrick responded, "Not that I know of."
Senator Rieger directed attention to page 3, line 7, and
inquired regarding a definition for "financial institution."
Mr. Kirkpatrick explained that "depository institution" is
defined in Title 6, Chapter 1. Financial institutions are
included within that definition. It refers to financial
institutions whose deposits are insured by an agency of the
federal government.
Senator Rieger next referenced page 1, Section 1, and noted
that subsections (a) through (f) speak to state banks acting
as agents for other entities. Subsection (g) appears to
reverse the process and allow state banks to contract with
other entities to render services. The Senator pointed
specifically to language at page 2, line 19, and asked for
an explanation of "by itself through an agent." Mr.
Kirkpatrick said that wording prevents a state bank, acting
as an agent for an outside bank, from conducting activities
prohibited by applicable state or federal laws. Senator
Rieger expressed continuing concern that language might
impact situations where a state bank might be using an agent
rather than serving as an agent.
Co-chairman Halford acknowledged a teleconference connection
to Anchorage and asked if individuals wished to testify.
RON KUKIS, First Interstate Bank of Alaska, advised that he
and Jerry Weaver, National Bank of Alaska, were available to
answer questions.
Co-chairman Frank asked if federal law establishes a limit
on concentration. Willis Kirkpatrick said that under the
Riegle-Neal Act, Congress would set the limit at 37% if the
state does not take alternative action. Most states
presently rely on antitrust provisions. Co-chairman Frank
voiced his understanding that the state would preempt
imposition of 37% by enacting 50%. Mr. Kirkpatrick
concurred.
Senator Rieger MOVED that SB 168 pass from committee with
individual recommendations. No objection having been
raised, SB 168 was REPORTED OUT of committee with a zero
fiscal note from the Dept. of Commerce and Economic
Development. Co-chairmen Halford and Frank and Senators
Rieger and Phillips signed the committee report with a "do
pass" recommendation. Senators Donley and Zharoff signed
"no recommendation."
SENATE BILL NO. 157
An Act relating to the regulation of small loan and
retail installment transactions.
Co-chairman Halford directed that SB 157 be brought on for
discussion. SHERMAN ERNOUF, aide to Senator Kelly, again
came before committee. He referenced CSSB 157 (L&C) and
told members that work on the legislation was done in
conjunction with the Alaska Consumer Financial Services
Association. It attempts to accomplish three goals:
1. Modernize the Alaska Small Loans Act. Present law
was drafted in the late 1950s and is outdated.
2. Expand the availability of credit to Alaska
consumers.
3. Allow Alaska lenders to compete with out-of-state
lenders who import interest-rate structures from
their home states.
WILLIS KIRKPATRICK, Director, Division of Banking,
Securities, and Corporations, again came before committee.
He acknowledged that one of the problems the division
encounters is deterioration or "obsolescence of some of the
laws that we administer." Examiners have been working on
areas that should be modernized. One is the Alaska Small
Loan Act. In the course of drafting improvements, the
division was approached by industry with proposed
amendments. An amendment calling for a single license for
multiple offices would be extremely beneficial to
administration of the act. Other minor changes would
increase fees to cover increased costs since statehood.
Mr. Kirkpatrick referenced a particular provision under the
Installment Retail Sales Act and said that while it is not
"necessarily promoted" by the department, it also is not
objected to. When queried by Senator Phillips, Mr.
Kirkpatrick advised that the department endorses the
proposed bill. When further queried concerning the
Governor's position, Mr. Kirkpatrick said he had briefed
staff on provisions of the bill but had received no specific
instructions from the Governor's Office. He further
commented on the breaking down of banking barriers between
states and the impact of interest-rate provisions on outside
financing.
JOHN HIGGINS, General Manager, Northland Credit Corporation,
(a wholly owned subsidiary of National Bank of Alaska) came
before committee advising that he would also be speaking on
behalf of the newly formed Alaska Consumer Financial
Services Association. He stressed that the end result of
proposed changes within the bill would:
1. Create and retain jobs in Alaska's financial
industry.
2. Provide more financing to rural communities.
3. Provide credit to a broader base of Alaskan
consumers who otherwise might not have access to the
credit they deserve.
Mr. Higgins next spoke to the following highlights included
within the bill:
1. Fee enhancements to the state.
2. Increased bonding requirements.
3. Licensing enhancements which ease licensing
requirements for corporations with more than one
office.
4. Bookkeeping changes.
5. Inclusion of joint loan provisions. Present law
does not allow for two open loans to the same
person or an open loan with a spouse.
6. Allowance for payments other than standard 30-day
payments. This change will accommodate those
with seasonal jobs.
7. Inclusion of NSF fees within the Alaska Small Loan
Act. Current statutes do not so provide, and
good payers end up subsidizing bad
payers.
8. Inclusion of attorneys fees for collection of
loans over $5,000.00.
9. Deregulation of financing in dealerships under the
Alaska Retail Installment Sales Act to compete
with out-of-state lenders that import
their rate structures to Alaska.
Senator Randy Phillips referenced the zero fiscal note from
the Dept. of Commerce and Economic Development and asked why
enhanced fees were not included. Willis Kirkpatrick again
came before committee and said the department would submit
an updated zero note explaining the impact of fee changes.
The department does not anticipate "that much fee
enhancement."
Senator Rieger asked for an explanation of "add-on
interest." Mr. Higgins acknowledged inclusion of clean-up
language on "how interest should be earned." Current
statutes are unclear. Some companies earn under the "rule
of 78ths." Others earn under "interest bearing"
arrangements. Two different forms are used "under the same
type of paper." This should be "more homogeneous"--everyone
should be "doing it the same way." However, the annual
percentage rate is the same under both methods. The methods
differ in how the money is earned internally. Add-on
interest refers to "closed-end contracts." The current rate
is "ten percent, eight percent add-on." That equates to ten
percent up to $1,000 and eight percent thereafter, in an
add-on fashion.
Lengthy discussion of different methods of calculating
interest followed. Mr. Higgins advised that "rule of 78ths"
financing has an inherent prepayment penalty. However, it
is the best type of loan to have if the payer is delinquent
because the interest never changes even if payments are
late. An interest-bearing loan is the worst to have, if you
are late, because interest is calculated on the outstanding
balance. Further comments followed regarding differing
legal interpretations of the "rule of 78ths."
The proposed bill allows interest earning by either of the
above-mentioned methods, but the method must be disclosed to
the consumer. Discussion of disclosure requirements and
understanding of disclosure by the general public followed.
Senator Frank stressed need to clarify existing law to track
with requirements for disclosure of the annual percentage
rate so that consumers know what rate they are paying.
In response to a question from Co-chairman Frank asking why
calculation of interest is not restricted to a single method
such as simple interest, Mr. Higgins explained that under
the Truth in Lending Act the "rule of 78ths" was the
preferred method of computing interest. Those involved in
drafting the proposed bill did not want to preclude that
methodology since it is part of federal law. For high-risk
consumer loan portfolios where payments tend to be late and
delinquency and charge-offs are higher, interest on "rule
78ths" loans cannot increase. Principal is paid down more
quickly since the interest does not change. It is
precomputed each month because it is set at the time the
loan is written. A borrower who is late on an interest
bearing contract "could pay on it forever because . . . your
payments just go to interest" and do not cover the principal
balance.
Further discussion followed regarding computation of
interest under the "rule of 78ths." Mr. Higgins
acknowledged that it computes to 15% interest for the first
month.
Co-chairman Halford asked if the proposed bill provides for
an increase in the amount of information provided to
consumers. He voiced support for deregulation but suggested
that greater public awareness is an appropriate balance.
Mr. Higgins advised that contracts indicate how interest
will be calculated. Requirements for disclosure to the
consumer are incorporated within regulation "Z" and truth in
lending statutes.
Senator Rieger directed attention to page 5, lines 20
through 26, and asked if new language deletes ability to
charge for a credit report on a loan of less than
$10,000.00. Mr. Higgins concurred.
END: SFC-96, #28, Side 1
BEGIN: SFC-96, #28, Side 2
Discussion of title insurance requirements followed. In
response to questions from members, Willis Kirkpatrick came
back before committee. He advised that if collateral is not
perfected, the classification of the loan might be
jeopardized.
In response to a question from Senator Zharoff regarding
Sec. 13 provisions for late-payment fees, Mr. Higgins
explained that language relates to retail revolving credit
rather than the consumer small loan act. The law is silent
on these charges. The proposed bill does not list fees or
charges by dollar amounts because they vary from state to
state. Sec. 13 provides for information on these costs to
be contained in the contract, or agreement, and concurred in
by the parties so that everyone understands what the late
charges will be. Mr. Higgins advised that his corporation
would use "what's already out there as law." That means ten
percent up to $15.00. He then referenced language at page
5, subsection (6) which seeks to increase the limit from
$15.00 to $25.00.
Co-chairman Frank asked if small loan institutions in Alaska
would be disadvantaged if limited to simple interest
calculations only, since they would be competing against
institutions able to use either simple interest or "rule of
78ths" financing. Mr. Higgins agreed that disadvantage
could occur if outside institutions import their own
individual method of calculating interest to Alaska. He
stressed that the goal is not to require that the industry
use only one methodology but to clarify that more than one
method may be used and that disclosure to the consumer is
proper.
In response to questions from members, Willis Kirkpatrick
again came before committee. He acknowledged confusion and
complaints from those who pay off "rule of 78ths" contracts
early. At the time a loan is made, the borrow usually has a
specific goal in mind. The particulars of the financing
arrangement are often not paramount. Co-chairman Halford
asked if something could be added to notice requirements to
better inform consumers. Mr. Kirkpatrick voiced his belief
that present disclosure forms are adequate in presentation
of the true rate.
Senator Rieger advised of his understanding that unless
there is a specific waiver, a consumer credit loan has
reasonably equal payment for the life of the loan. "Rule of
78ths" and "simple interest" are merely different schedules
for computing how much of each monthly payment is applied to
interest and principal. Mr. Kirkpatrick concurred.
In the course of further discussion, Mr. Higgins stressed
that application of "rule of 78ths" financing relates only
to retail contracts. It does not apply to the small loan
act. He then recited a listing of institutions and the type
of schedules they use.
JOHN SHIPE, Executive Vice President, National Bank of
Alaska, next came before committee. As background
information, he explained that the "rule of 78ths" was
developed prior to "the days of sophisticated computing
systems." It assumes fixed payments on a fixed bases (such
as every thirty days). "Simple interest" financing computes
interest based on the principal and the number of days since
the last payment. If two hypothetical loans were made for
the same amount and at the same interest rate but calculated
under "simple interest" and the "rule of 78ths" with timely
payments on the due dates carried to maturity, the amount of
interest paid on both loans would be identical. The manner
in which the interest is recognized internally would be
different. Both methods are well established and utilized
and fall within regulation "Z" disclosure requirements.
Discussion involving examples of both types of interest
calculations followed. Mr. Shipe advised that the "rule of
78ths" is the predominant structure used by corporations
that import financing to Alaska.
Co-chairman Halford inquired concerning the types of retail
agreements used by chain stores in Alaska. JERRY REINWAND,
representing J. C. Penney; Sears; Safeway; and Fred Meyer,
came before committee. He explained that the bill
represents an attempt to keep retail business in Alaska.
Co-chairman Halford voiced his understanding that a sale
through a chain store in Alaska is not necessarily governed
by Alaska law. There is nothing to prevent a retail
business from making arrangements with an outside bank and
consequently complying with the laws of that state. Mr.
Kirkpatrick again came before committee and advised of
existing provisions that allow transport of credit rates
across state lines. The first provides that the focal point
(center of gravity) of the transaction is where it is
approved and disbursed. More recent case law speaks to the
constitutional question that prohibits states from
interfering with interstate commerce that allows funds and
the cost of funds to flow across state lines.
Co-chairman Halford queried members regarding disposition of
the bill. Senator Zharoff referenced enhanced ability of
Alaskan businesses to compete under the proposed bill and
asked why it did not have an effective date. Mr. Higgins
acknowledged that the issue was not considered when the
legislation was developed. He concurred that an immediate
effective date should be included. Mr. Kirkpatrick
commented that the crisis created by immediate effectiveness
would be manageable.
Senator Zharoff MOVED to amend CSSB 157 (L&C) to include an
immediate effective date. No objection having been raised,
the amendment was ADOPTED for incorporation within a Senate
Finance Committee Substitute for the bill. Senator Zharoff
then MOVED for passage of the bill.
Co-chairman Halford questioned the zero fiscal note in light
of bill provisions (Secs. 1 and 2) which increase fees. Mr.
Kirkpatrick said there would be a slight positive fiscal
impact if there was a lot of activity because of the bill.
However, the division does not anticipate much activity.
Further, the division will be doing multiple licensing for
some entities. That is likely to reduce revenues. The end
result is a balance between increased fees and revenue
reductions. He said he would provide a new zero fiscal note
with an appropriate explanation.
No objection to passage of CSSB 157 (Fin) having been
raised, CSSB 157 (Fin) was REPORTED OUT of committee with a
zero fiscal note from the Dept. of Commerce and Economic
Development. Senators Rieger and Zharoff signed the
committee report with a "do pass" recommendation. Co-
chairmen Halford and Frank and Senators Donley and Phillips
signed "no recommendation."
ADJOURNMENT
The meeting was adjourned at approximately 10:30 a.m.
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