Legislature(2003 - 2004)
04/21/2004 08:43 AM House FIN
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE BILL NO. 389
An Act relating to certain monetary advances in which
the deposit or other negotiation of certain instruments
to pay the advances is delayed until a later date; and
providing for an effective date.
Co-Chair Harris MOVED to ADOPT the work draft #23-LS1341\U,
Bannister, 4/20/04, as the version of the legislation before
the Committee. There being NO OBJECTION, it was adopted.
REPRESENTATIVE TOM ANDERSON, SPONSOR, noted that the bill
would create a framework for regulatory oversight of an
industry that is currently doing business and serving
consumers across the State. HB 389 does not create an
industry; it is simply providing oversight to current
practices to ensure some level of consumer protection. He
commented that if the practice was banned from the State,
consumers would then take advantage of the offers online or
from banks with out-of-state branches that offer the product
and often at higher fees.
Representative Anderson stated that these are not standard
loans, they do not fall into the same category either in
amount or in length. They would best be described as short-
term conveniences.
Representative Anderson commented that his office has worked
with the Department of Law and the Division of Banking and
Securities to come up with HB 389, which adheres to two
important principals:
· Consumer protection - shielding citizens from
unconscionable fees and predatory lending
tactics; and
· Business protection - allowing businesses
that are filling a legitimate need for the
Alaskan consumer to operate without
unreasonable regulatory burdens that would
force them out of business.
Representative Anderson added that HB 389 provides:
· Minimum standards for licensure;
· Maximum loan amount;
· Maximum number of "roll overs";
· Bonding requirements;
· Penalties; and
· Framework for oversight and examination.
ED SNIFFEN, (TESTIFIED VIA TELECONFERENCE), ASSISTANT
ATTORNEY GENERAL, DEPARTMENT OF LAW, ANCHORAGE, offered to
answer questions of the Committee.
ANGELA LISTON, (TESTIFIED VIA TELECONFERENCE), ALASKA
CATHOLIC CONFERENCE, EAGLE RIVER, spoke against the
legislation. She commented that the bill would legalize an
industry that makes a profit on the working poor. It would
charge huge interests rates on that group of people. She
noted that it had been compared to a credit card cash
advance; however, she pointed out that no credit card
charges 490% on its cash advances. She stressed that HB 389
was poor public policy. She requested that if the
legislation is passed, that it be amended to allow a minimum
term of 30-days on any loan with a maximum of $50-$100 fee.
TAPE HFC 04 - 91, Side B
Ms. Liston continued discussing the repercussions of the
interest, which could be addressed by amending the bill to a
30-day term rather than the 14-day term.
STEVE CLARY, (TESTIFIED VIA TELECONFERENCE), EXECUTIVE
DIRECTOR, ALASKA PUBLIC INTEREST RESEARCH GROUP (AKPIRG),
ANCHORAGE, testified that AkPIRG opposes the bill in its
current form. To charge vulnerable consumers in need for
short-term loans over 400% interest is unconceivable. Other
states have been addressing similar legislation placing a
limit on the interest rates that can be charged. He
proposed a compromise in attempting to figure out how to
keep the industry around for those that do need a short-term
loan and a way to protect the consumers.
Mr. Clary discussed that there are two ways to reduce the
annual percentage rates by either reducing the amount of
money charged or increase the time. AkPIRG supports the
idea of extending the amount of the loan time from 14 days
to 30 days, which would divide the interest rate charged to
consumers in half. Another change that would protect the
consumer would be to limit the amount of rollovers.
Mr. Clary was pleased to see the industry will now have to
report to the Division of Banking, however, if that Division
does not have more staff to adequately review these
documents, will result in another cause of concern for the
consumer.
Representative Croft asked the status of the current
lawsuit. Mr. Clary advised that Alaska Legal Services
Corporation has a case before the bar which challenges that
payday loans not be granted an exemption from the Small Loan
Act. That General Usury Act usually caps interests rates at
10.25%; the Small Loan Act caps it at 36%. The Alaska Legal
Services Corporation is representing the consumer who
believes that payday lenders should fall under those caps.
BUD WILSON, (TESTIFIED VIA TELECONFERENCE), CASH ALASKA,
ANCHORAGE, offered to answer questions of the Committee.
JIM DAVIS, (TESTIFIED VIA TELECONFERENCE), ALAKSA LEGAL
SERVICES, ATTORNEY, ANCHORAGE, addressed issues of concern
in the bill. He noted that there is a pending lawsuit
before the court against a payday lender chain known as
Alaska First Cash. He pointed out that those businesses are
already regulated through the Alaska Small Loans Act and
that they have been violating that act for some years. The
case will be decided by the Superior Court in June.
Mr. Davis claimed that the legislation has been brought
forward because the lawsuit points out that these business
are violating that Act. HB 389 is a means to create
legality for some business that are already illegal in
Alaska. He pointed out that the legislation would allow
people that have needs to get loans at a 400% interest. The
question is not whether people have needs but rather that
there should be some sort of regulation on the interest.
Loan sharking is illegal and the bill would make it legal.
Mr. Davis maintained that the legislation is not in the
consumer's interest and that it would not meet the rollover
and cap intent.
Mr. Davis pointed out that there is concern whether or not
the Division of Banking could monitor the data. If honest
data is reported to the Division, the only way that it would
be meaningful is if there was enough staff in that Division.
The number of lenders would not be reported. There will be
societal problems resulting from the small suits with no
legal representation. Mr. Davis emphasized that payday
lenders are asking for authorization for a lending rate used
by crime families. The legislation has been brought forward
only to end a lawsuit currently before the courts.
Representative Croft questioned if other lawsuits have held
that they were exempted from the usury exception. Mr. Davis
replied not to his knowledge. Alaska is unique because of
the Small Loan Act.
Representative Croft asked what would be the appropriate
regulation of the industry. Mr. Davis responded that
consumer groups should be considered when making that
determination. He understood that the legislation only
addresses what would work for the payday lenders. The
consumer groups have had no opportunity for input.
DEBORAH FINK, CASH ALASKA, ANCHORAGE, testified in support
of the legislation. She noted that there currently is a
lawsuit and that presently, 44 states are regulated in a
more liberal manner than proposed in the legislation. She
stressed that HB 389 is one of the stronger consumer
protection bills dealing with the industry in the United
States. The lawsuit was based on the premise that past
legislative groups in 1955 before statehood, and in 1981 &
1993 were "too dumb to figure out" when they increased the
small loan exemption that meant there would not be any
interest requirements or limits on those people. She
maintained that the legislatures involved clearly understood
that small loans would not be available if the market was
not allowed to regulate the amounts, because no one would
provide the service. Under the consumer rate proposed, the
lenders would be able to charge less than 50 cents per $100
loan without the proposed provisions. The legislative
bodies meant to exempt the loans from any regulated interest
rate. The exemption was raised to keep up with inflation.
She maintained that consumers love these loans. Those that
argue against the loans don't use them. The industry is
happy to do the loans at $15 per $100 for a couple week
period of time.
Ms. Fink maintained that some of the numbers mentioned in
previous testimony were incorrect. She referred to the
recommendation that there be a compromise and extend the
terms to 30 days. Ms. Fink pointed out that would be
cutting their income in half. Money does not grow on trees.
At the present configuration, there is only a 10% profit
margin. It would be impossible to continue lending under
that type of term except for the Internet dealers. Internet
is operating in all states, legally, with no regulations.
That industry will grow if there is no legislation in Alaska
that permits the industry to provide service for the public
to utilize.
Ms. Fink advised that the bill puts forth a lot of consumer
protections. She stated that only six people have
complained. It is a service that only the people that
utilize it understand. It is not a traditional bank
situation. Annual percentage rates are based on making
payments over twelve months and what happens in the industry
are two-week loans. She claimed that these are not
desperate people getting the loans. Payday loans cost less
than a bouncing a check which can amount to $43-$48 per one
bad check. She reiterated that these are not dumb people.
They are usually young people in the collection phase of
their lives. Statistics show that 56% of these borrowers
have some sort of college education. Ms. Fink emphasized
that the service is important and that it must stay
available.
PATRICK LUBY, LEGISLATIVE DIRECTOR, ALASKA ASSOCIATION OF
RETIRED PERSONS (AARP), JUNEAU, testified on behalf of the
76,000 AARP members in Alaska, in strong opposition to HB
389 regarding deferred deposit advances, also known as
payday loans, sponsored by the House Labor and Commerce
Committee. Under the plain language of Alaska's general
usury statute and small loans act, the maximum interest rate
of 36% under the usury statute should apply to payday
lending. HB 389 would eliminate the cap on interest rates
for those loans and allow usurious lending.
There are reasons why the federal government, the Consumer
Federation of America, Consumer's Union, the National
Consumer Law Center and AARP consider payday loan operators
as predatory lenders. Payday loans usually affect the most
vulnerable segment of the population - those that cannot
secure credit or a small loan from traditional financial
institutions, often because the loan amount is small or they
do not have the necessary collateral. Those who live from
paycheck to paycheck must resort to "fringe" banking
services such as payday loans if an emergency arises.
Mr. Luby continued, cash-strapped consumers rarely have the
ability to repay the entire loan when their payday arrives
because that would leave them with little to nothing to live
on until the next paycheck. Lenders then encourage
consumers to rollover or refinance one payday loan with
another. The result is that the consumer pays another round
of charges and obtains no additional cash in return. If the
consumer cannot repay the loan in two weeks, however, the
loan is rolled over into a new payday loan, and the annual
percentage rate jumps to a staggering 917%.
Mr. Luby pointed out that the legislation would legalize
payday loans, thereby, authorizing interest rates that
exceed State usury limits more than ten times. At minimum,
HB 389 would allow loans of up to $500 be made at a 15%
interest rate, which translates to an annual percentage rate
(APR) of 391%. It would also allow payday lenders to charge
an origination fee, with no limit set. Although the
origination fee is not considered interest in the bill, in
fact, it would have the identical effect, as the consumer
must repay the fee to renew the loan.
In addition, the legislation allows what are known as "touch
and go" loans, where borrowers can take out a new loan
immediately after paying off an old loan, resulting in
borrowers entering a never-ending cycle of using two lenders
to continually pay off each other, while plunging the
borrower into ever-deeper debt.
Mr. Luby stated that as indicated, to renew the loan,
consumers would have to repay the origination fee as well as
the $15 per $100 loan charges. Research in several states,
such as Illinois, Indiana, and Wisconsin, show that
consumers typically take out 10-12 payday loans a year. The
consumer repays the interest over and over again to extend
the loan term, as they do not have the money to repay the
principal. The limit on renewals in the bill would not end
the practice in any way. There is no limit on the number of
loans that could be taken out by the consumer, just a limit
on the dollar amount from one lender or its affiliates.
Consumers often have multiple loans outstanding from
multiple lenders, using one loan to pay off another.
AARP, in collaboration with the Consumer Federation of
America, Consumer's Union, and the National Consumer Law
Center, has been working on predatory lending issues for
several years. As part of the effort on predatory lending,
the organizations have developed a model bill recognizing
that consumers, particularly those who are "unbanked," may
have a need for small loans but they should not pay usurious
rates to receive them. Further, the repayment terms of the
loan must be reasonable so consumers are not trapped in
debt. The model bill calls for a repayment period of two
weeks for every amount borrowed, which allows consumers to
pay back their loans without having to go deeper into debt.
AARP also advocates a 36% annual interest rate cap, which is
consistent with Alaska's existing Small Loan Act. The model
also prohibits lenders from extending loans to consumers who
already have $300 outstanding in payday loans, either from
the same lender or any other lender. Payday loans are
heavily marketed in low-income areas and near military bases
as "fast, easy, credit" with no credit checks, a practice
considered predatory. AARP has found payday lenders who
market to older persons who have high medical costs or high
prescription costs by encouraging retirees to treat their
Social Security check like a paycheck.
Mr. Luby pointed out that many of the AARP members are
veterans. It is particularly onerous that payday lenders
target young military families who, because of deployment
overseas, may find themselves cash-strapped. Consumers who
are considered high-risk borrowers often have a difficult
time getting credit on reasonable terms, but they deserve
protection from deceptive and unfair lending practices. Mr.
Luby strongly urged that the bill not be moved from
Committee.
HB 389 was HELD in Committee for further consideration.
| Document Name | Date/Time | Subjects |
|---|