Legislature(1995 - 1996)
02/21/1996 09:10 AM Senate FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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was drafted in the late 1950s and is outdated.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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