Legislature(2023 - 2024)ADAMS 519
04/30/2024 10:00 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB122 | |
| HB169 | |
| HB234 | |
| HB55 | |
| HB145 | |
| Adjourn | |
| HB55 |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 187 | TELECONFERENCED | |
| + | HB 234 | TELECONFERENCED | |
| + | HB 55 | TELECONFERENCED | |
| += | HB 145 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 169 | TELECONFERENCED | |
| += | HB 122 | TELECONFERENCED | |
HOUSE BILL NO. 145
"An Act relating to loans in an amount of $25,000 or
less; relating to deferred deposit advances; and
providing for an effective date."
5:14:38 PM
Co-Chair Foster noted that public testimony had been left
open at a previous hearing on the bill. He moved to public
testimony.
5:15:32 PM
PATRICK BRENNER, PRESIDENT, SOUTHWEST POLICY INSTITUTE, LAS
CRUCES, NEW MEXICO (via teleconference), relayed that in
2023, New Mexico adopted a rate cap law intended to
eliminate predatory lending. Despite the intentions, the
results had been disappointing. He stated that the
anticipated market adjustment did not materialize and
traditional banks and credit unions had not filled the
void. He had tested the accessibility of emergency credit
under the current conditions by applying for small dollar
loans from major banks and credit unions in New Mexico.
Despite applying at institutions like Wells Fargo, U.S.
Bank, and Bank of America, as well as 16 credit unions, he
had faced rejections from all of the banks and only
conditional approval from two credit unions after
substantial time and effort. He stated that the application
process was excessively complex involving numerous
requirements, the opening of new accounts, considerable
financial commitments, and extensive paperwork. He relayed
that he had spent about 20 hours over 2 months attempting
to secure one emergency loan. He stated it was a task that
would be nearly impossible for most consumers, especially
during financial emergencies. He added that the effort
significantly harmed his credit score, which dropped over
100 points due to multiple hard credit enquiries by
institutions, which had subsequently increased his
borrowing costs. He urged the committee to recognize the
practical shortcomings of the bill. He stated that in New
Mexico, the expectation that banks and credit unions would
replace alternative lenders had not occurred. He reiterated
other impacts he believed the bill would have. He asked the
committee to consider the real world impacts and need for
balanced regulations that assure accessible credit for all,
particularly those in precarious financial situations.
5:17:55 PM
SCOTT PEARSON, SELF, LOS ANGELES, CALIFORNIA (via
teleconference), shared that he is a financial services
lawyer located in Los Angeles. He hoped to help the
committee understand the regulatory environment in the
particular space. He referenced the term rent-a-bank, which
had become popular in the press. He stated that the term
did not accurately reflect the level of protection for
consumers that existed in programs where a non-bank company
partnered with a bank in order to expand credit
availability for average consumers. He explained that banks
were typically heavily regulated and exercised considerable
oversight over the lending programs. He added that
regulators also exercised oversight over the programs. He
elaborated on the oversight process. He remarked that banks
audited service providers to banks and those partners
frequently needed to obtain various state licenses to
engage in loan servicing. He disputed the idea that banks
let lenders put their names on loan documents and then
merely walked away.
Mr. Pearson relayed that the company he worked for
represented numerous start-ups that wanted to extend credit
to people who had difficulty getting credit. He noted that
the costs of entering the market were substantial.
Typically, companies had to obtain state licenses, which
was burdensome and expensive. They also needed to build a
system to deal with periodic examinations from regulators.
He explained that banks had considerable expertise in
lending and complying with all of the laws that apply to
lending. He detailed that the lending companies frequently
wanted to partner with banks in order to get into the
market more quickly. He stated that the bill would create
significant barriers to entry and its ultimate impact would
be to constrain credit.
Representative Stapp referenced the mention of the
regulatory burden and difficulty of getting state licenses.
He asked how difficult it was for one of the clients to get
a license in the State of Alaska.
Mr. Pearson replied that he could not answer the question
directly. He relayed that a for a nationwide licensing
program normally the cost was well into six figures, and it
took about a year to get all of the licenses.
Representative Stapp believed Mr. Pearson had stated the
cost was well into six figures. He thought Alaska's
licensing fee was pretty marginal, but if the average was
in the six figures it should be considered by the
committee.
Mr. Pearson clarified that he was not referring to the cost
of the fee charged by the licensing agency. He was
referencing, in addition to those fees, the expenses paid
to firms and consultants to help navigate the process. He
remarked that Alaska's process may be leaner than other
states. He explained that in terms of setting up a
nationwide lending program, the cost was in the low six
figures to mid six figures to get the program off the
ground. One of the benefits of bank partnerships was the
ability to get into the market faster and at a lower
expense.
Representative Stapp asked what the registration fee was in
California.
Mr. Pearson responded that he did not know the fee off the
top of his head. There was a team of people who handled
licensing work. He worked with clients on the overall
costs. He was happy to follow up with the information in
writing.
Representative Stapp would appreciate the information.
Co-Chair Foster provided the email address.
5:25:35 PM
ANDREW DUKE, CEO, ONLINE LENDERS ALLIANCE, ARLINGTON,
VIRGINIA (via teleconference), relayed that the Online
Lenders Alliance was a diverse group of lenders, service
providers, and vendors that used technology to increase
credit options for consumers. He referenced another
individual named Brendan Bolen who had been planning to
testify but was unavailable at present. He detailed that
the individual was an author of a key study on the impact
of a similar bill in Illinois on consumer credit. He
believed the information was available to the committee and
thought it was valuable for consideration on the bill. He
thought some of the comments and narratives around the bill
seemed to be a distorted picture of what happened with
consumers options and credit access when "these types" of
restrictions were imposed, especially when the primary
metric was an annual percentage rate (APR), which could
fluctuate greatly with the size and duration of a loan.
Mr. Duke relayed that relevant data pertaining to the bill
was in the organization's updated letter including data
from the Consumer Financial Protection Bureau showing that
like all Americans, Alaskans faced financial issues and
challenges, but small dollar lending hardly registered
among their concerns. He highlighted that in 2021 Illinois
enacted similar legislation. His trade association
conducted a survey of loan borrowers impacted by the law.
Of the 700 respondents, 56 percent reported they were
unable to access credit after the restrictions took effect.
When asked what happened when individuals were unable to
borrow money, the top answer was that they paid bills late,
which generated overdraft fees. Some reported that
utilities had been cut off. He reported that about 80
percent said they would go back to their previous lender if
possible. As a result of the legislation passed in
Illinois, many lenders had left the state and there was a
sharp decline in the number of lending licenses. The
alliance advocated for creating more credit options for
consumers.
Representative Galvin asked what the average APR charge
was.
Mr. Duke replied that using APR was as a measure of cost on
a small dollar short-term loan was misleading as the metric
was highly impacted by the duration. Ultimately banks were
in charge of their lending programs and his members were
acting as service providers to the bank. The banks were
often offering a consumer loan that was likely a
noncollateralized risk price installment. He relayed that
with a shorter duration risk price the APR calculation
would exceed 36 percent.
Representative Galvin referenced Mr. Duke's statement that
the APR calculation exceeded 36 percent. She asked about
the average APR to the consumer in Alaska based on any
clients Mr. Duke worked with in Alaska.
Mr. Duke offered to follow up with the information.
5:31:17 PM
Representative Ortiz was trying to get at the same answer
that Representative Galvin was seeking. He asked why the
particular type of lending service could not make money at
36 percent.
Mr. Duke replied that much of the reason was that the
duration of a loan had a tremendous impact on the APR
calculation. He began to discuss how to calculate APR.
Representative Ortiz understood how APR worked. He stated
that generally in the commercial lending field banks chose
to loan money at a much lower rate than 36 percent. He
reasoned that evidently they made money doing it, otherwise
they would not do it. He asked why that could not happen
with the type of lending service Mr. Duke worked with.
Mr. Duke believed banks typically served the prime customer
base. He believed a lot of the short-term loan products
were extended to the subprime customer base and the risk
profile was higher. He relayed that a risk priced loan
carried a higher rate, especially if it was
noncollateralized.
Representative Stapp considered that the loans under
discussion were high risk and directed at individuals
without much collateral. He asked Mr. Duke what the
appropriate percentage would be. He asked if it was not in
the 30s whether it should be 200 or 300 percent.
Mr. Duke replied that with technology through alterative
data, the underwriting model was becoming increasingly
sophisticated and it was possible to better predict the
outcome of a loan and to drive down the cost of a loan to
consumers. The fee schedule for the deferred deposit model
was straightforward and in statute. Under the bank model,
banks were in charge of the process and it was ultimately
up to them to determine the proper rate. He stated that for
small-dollar short-term loans, especially under one year,
the APR would look much more outsized than a longer term
loan extending for something like two years. He stated that
with a 36 percent APR it meant the loan size needed to be
about $2,500 in order to break even. The rates would be
higher to properly price in risk if the loan was under
$2,500.
Representative Stapp understood collateralization and cost.
He clarified his question and noted that Mr. Duke had
talked about the underwriting model. He stated that if the
number was not in the 30 percent range he had asked if the
number was 300 percent. He wondered if the number was
supposed to be higher than that at 1,500 or 2,000 percent
given the short duration of the loan. He wanted a ballpark
number. He asked if it was 3,000 percent or less.
Mr. Duke did not believe anyone would say that. He stated
that even when considering the extreme calculation of an
overdraft product it calculated out to something like 1,700
percent. He stated that there were scenarios where short-
term small-dollar loans could get to three digits.
5:37:06 PM
Co-Chair Johnson stated the research she had received by
someone very familiar with the industry showed loan rates
over 500 percent for these loans. She asked if it was a
number Mr. Duke was familiar with.
Mr. Duke asked for clarification on what she meant by these
loans. He asked if she was talking about Alaska
specifically.
Co-Chair Johnson replied that she was talking about Alaska.
She was referencing payday loans taken out by 15,000
Alaskans in 2023.
Mr. Duke responded that the fee schedule was in statute. He
speculated that the scenario likely factored in some sort
of renewal that took place more than once. He clarified
that he did not know, but it was what it sounded like to
him if Co-Chair Johnson was talking about the deferred
deposit product.
5:38:40 PM
ANDREW KUSHNER, SENIOR POLICY COUNSEL, CENTER FOR
RESPONSIBLE LENDING, OAKLAND, CALIFORNIA (via
teleconference), shared that the organization was a
nonprofit, nonpartisan policy and research organization
dedicated to building family wealth through curbing abusive
financial practices. The organization was affiliated with
the Self Help Credit Union, a nationwide community
development financial institution providing access to safe
and affordable financial services to low income communities
and borrowers. The organization supported efforts like HB
145 to cap interest rates at around 36 percent or less in
states across the country. He stated that payday and other
predatory lenders claimed to provide consumers with quick
and easy cash for occasional needs, but in reality, they
snared many consumers in a debt trap, which only
exacerbated financial hardship. He relayed that payday
lenders in Alaska routinely charged APRs of up to 424
percent, made no real assessment of a borrower's ability to
repay the loan, and took money directly from borrowers'
bank accounts.
Mr. Kushner relayed that the industry's business model
depended on trapping consumers in a cycle of debt so that
lenders could charge further fees. He stated that
unaffordable credit was a feature, not a bug, of the
predatory lender business model. He addressed a couple of
the public testimony arguments by industry in opposition to
the bill. First, the committee had been told that APR was
an inappropriate metric for short-term loans. There was a
reason why federal law required payday and other short-term
lenders to disclose APR. He stated that the lenders hated
the disclosure law. He explained that the law enabled
borrowers to compare the relative cost of credit across
financial products, empowering them to make informed
choices. With respect to short-term loans, research showed
that many of the loans were refinanced and extended for
months or years. He elaborated that the Consumer Financial
Protection Bureau (CFPB) found that 75 percent of payday
loans went to borrowers who took out 10 or more of the
loans annually. He highlighted that by design, payday loans
created a cycle of long-term debt for borrowers and a high
cost of loans over the duration of the cycle.
Mr. Kushner remarked on the proposal to cap rates at 36
percent, which industry claimed would constrain access to
credit. He stated that 36 percent was a widely recognized
dividing line between responsible and irresponsible credit.
He explained that loans and interest rates above that
threshold did far more harm than good. He stressed that a
loan borrower could not afford put the individual further
behind. He stated there were many lenders whose business
model depended on making irresponsible loans
indiscriminately; however, there were other lenders
including credit unions that were more focused on community
development that could make responsible loans to borrowers
in financial need.
Mr. Kushner remarked that the 36 percent interest rate cap
that was before the committee currently applied to all
active duty military and dependents under the Military
Lending Act. Currently, 20 states and the District of
Columbia capped interest rates on consumer loans at an
affordable level of 36 percent or less. He noted that the
states ranged from politically progressive to conservative.
He highlighted that in 2023, a group of military and
veterans groups submitted a letter to the CFPB praising the
Military Lending Act and urging the bureau to strengthen
its protections. He stated that borrowers were protected
from predatory interest rates and health credit markets
still existed where borrowers could get access to safe,
responsible credit. He stated that the most effective way
for Alaska to simplify its lending law and address the
predatory debt trap was to follow the lead with the
military and the 21 other jurisdictions to cap the interest
rate at a responsible level. He thanked the committee for
its time.
Co-Chair Foster CLOSED public testimony.
5:43:37 PM
Co-Chair Foster asked the sponsor to provide a brief recap
the bill if desired.
REPRESENTATIVE STANLEY WRIGHT, SPONSOR, thanked the
committee for hearing the bill. He explained that the bill
would cap APR interest rates on small loans at a more than
reasonable 36 percent. The percentage would be profitable
for current systems and competitive with the innovative
financial technology products emerging daily. The
percentage level would also allow Alaska to keep the $29
million generated by the industry in-state. He was ready to
hear the amendment.
Co-Chair Foster thanked the sponsor.
Co-Chair Foster noted that one amendment had been received.
Representative Coulombe MOVED to ADOPT Amendment 1,
33-LS0508\U.3 (Dunmire 3/22/24) (copy on file):
Page 4, line 30:
Delete "AS 06.20.260(a)(1) - (5)"
Insert "AS 06.20.260(a)(1) and (3) - (5)"
Page 5, following line 11:
Insert a new bill section to read:
* Sec. 12. AS 06.20.330(b) is amended to read:
(b) This chapter does not apply to a financial
institution chartered under 12 U.S.C. 38 (National
Bank Act) or 12 U.S.C. 1751 - 1795k (Federal Credit
Union Act) [INDIVIDUAL LOANS BY
(1) PAWNBROKERS WHERE SEPARATE AND INDIVIDUAL LOANS
DO NOT EXCEED $750; IN THIS PARAGRAPH, "PAWNBROKER"
MEANS A PERSON WHO IS REGULATED UNDER AS 08.76.100 -
08.76.590;
OR
(2) LOAN SHOPS WHERE SEPARATE AND INDIVIDUAL LOANS DO
NOT EXCEED $500]."
Renumber the following bill sections accordingly.
Page 5, line 31:
Delete ", 06.20.330"
Page 6, line 7:
Delete "2024"
Insert "2025"
Co-Chair Foster OBJECTED for discussion.
Representative Coulombe explained the amendment was brought
to her by the sponsor. She asked for the sponsor to speak
to it.
RACHAEL GUNN, STAFF, REPRESENTATIVE STANLEY WRIGHT, relayed
that they had worked closely with industry when crafting
the bill to ensure federally and state chartered banks were
happy in addition to financial institutions and the fintech
market. She noted the fintech market was robust and
included numerous products. She explained that they had
come up with amending the bill by deleting AS
06.20.260(a)(1) - (5) and reinserting AS 06.20.260(a)(1)
and (3) - (5) separately. She detailed that the bill worked
hard to calculate the true cost of a loan. She highlighted
the importance of cost transparency. She noted that the
exemption to the true cost of the loan would include some
fees such as credit insurance, premiums paid out for
insurance, and taxable costs and expenses during the debt
collection process (Alaska had a 7 percent interest on
collections). She noted that in Alaska loans were
guaranteed because the state had the unique ability garnish
the Permanent Fund Dividend (PFD). The other exemption was
for a loan of $10,000 or less, which did not apply to
payday loans, secured by an interest in real estate, any
cost in fees for appraisals, surveys, and title insurance
were not included in the APR figure. She explained they
were going for full transparency and the number had been
arrived at with the approval of industry across the board
including fintech, banks, and credit unions. She added that
military members also had access to the loans through USAA
and other programs.
5:47:27 PM
Co-Chair Johnson asked about something one of the
testifiers had said, which she found a bit concerning. She
detailed that one of the testifiers shared that they had
applied for a lot of credit, which had negatively impacted
their credit score. She asked if the sponsor's office had
thoughts on the mechanism of applying for credit. She
believed the bill would put a mechanism in place that was
already somewhat in place in Alaska that would make the
process more streamlined.
Ms. Gunn answered that because the committee had heard an
anecdotal experience from an out of state testifier, she
offered her own personal anecdotal experience. She had
grown up in a foster care situation and had not emerged at
the age of 18 with good financial sense. She had tanked her
own credit score through irresponsible financial habits.
She put herself through college with zero student loans and
when she entered the working world, she had worked to
rebuild her credit score. She shared that it had been the
previous year when she began her current job and used some
of the fintech products including a payday loan that fell
under the 36 percent [APR] and a couple of credit builder
payday loan advances. She shared it had been amazing and
cost $6.99, $9.99, or $30.00 per month for people to help
her dispute charges on her credit report while offering
small loans she could repay on time to rebuild her credit.
She was very happy that at the age of 36 the products were
available. She noted nothing like that had been available
to her 15 years back.
5:50:14 PM
Co-Chair Foster WITHDREW the OBJECTION.
There being NO further OBJECTION, Amendment 1 was ADOPTED.
Representative Coulombe noted that most people who had
called into public testimony had called in from out of
state. She asked why.
Ms. Gunn answered that no opposition to the bill had been
encountered until the past week or so. She shared that in
her research trying to get to the bottom of the rebuttals
it appeared there was significant financial interest in the
$29 million that leaves the state. The funds were a result
of credit borrowed by the state's most vulnerable
population. Her personal credit was on the up and up and
the worst credit card she personally had carried an
interest rate of 26.99 percent APR. She believed the 36
percent APR in the bill seemed ethical.
Representative Coulombe thought it seemed like the people
benefitting were from out of state. She asked if the people
calling in were directly benefitting from the payday
industry.
Ms. Gunn answered that it sounded like the early testifiers
had some clients involved in the industry and the online
lenders association was heavily vested in the industry. She
relayed that 67 percent of payday loans taken out in Alaska
were done online, none of which had licenses in Alaska. She
detailed that mom and pop loan shops did not exist in the
state. The bill would not put any homegrown Alaskan
businesses or pawn brokers out of businesses. She stated
that if a person wanted to sell a gold ring and get a very
bad loan rate, but it took more foresight than taking
advantage of people in desperate circumstances.
5:53:32 PM
Representative Stapp referenced public testimony by Mr.
Duke who stated the appropriate APR number might be around
1,700 percent. He remarked there was a big difference
between the 30s and 1,700. He asked for comment.
Ms. Gunn answered that the average loan in Alaska was 421
percent, but the payday loans were in the 500 percent
range. She detailed that if a person took out a payday loan
for $400 because their transmission was going out and the
transmission repair cost $900, it was unlikely they would
be able to make rent or afford groceries that week and very
unlikely they would be able to pay the $400 back within two
weeks. She considered the higher APR loans and used the
purchase of a house as an example. She detailed that 421
percent interest on a $250,000 loan would mean paying tens
of millions yearly for the house over the lifetime of a 30-
year loan. She recognized the bill was not addressing long-
term loans. She explained that if a person paid a $400 loan
back on time at an interest rate of 420 percent, they would
pay up to $1,200. She believed a loan with a 1,700 percent
APR would be unaffordable for anyone.
Co-Chair Johnson stated that the average loan was $440 and
the average payback was $1,890, which was significant in a
short period of time. She referenced the $29 million and
did not believe any of the lenders were based in Alaska.
She noted that the money was all leaving the state. She
stated there were institutions in Alaska that would provide
the service, but the market had not really been there for
them. She elaborated that the bill would encourage the
market to happen at a much more reasonable rate as well as
keeping the $29 million in Alaska for in-state businesses.
5:57:13 PM
Representative Cronk thanked the bill sponsor for bringing
the bill forward. He believed in making money but not at
the extent or at the expense of people trying to make ends
meet. He appreciated the examples provided and believed
there needed to be a limit on how much [could be charged].
Co-Chair Johnson MOVED to REPORT CSHB 145(FIN) out of
committee with individual recommendations and the
accompanying fiscal note.
There being NO OBJECTION, it was so ordered.
CSHB 145(FIN) was REPORTED out of committee with nine "do
pass" recommendations and with one new fiscal impact note
from the Department of Commerce, Community and Economic
Development.
Representative Wright thanked the committee. He thoroughly
appreciated all of the meaningful input.
Co-Chair Foster discussed the schedule for the next
meeting.