Legislature(2003 - 2004)
04/27/2004 09:02 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
CS FOR SENATE BILL NO. 272(L&C)
"An Act relating to certain monetary advances in which the
deposit or other negotiation of checks to pay the advances is
delayed until a later date; and providing for an effective
date."
This was the first hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken noted that this legislation, which is sponsored by
the Senate Rules Committee, would require the Division of Banking,
Securities and Corporations, Department of Community and Economic
Development "to license and supervise Alaska's payday lending
establishments." He noted that, "39 states and the District of
Columbia specifically regulate this service." The Version 23-
LS1516\U committee substitute is before the Committee.
RICHARD SCHMITZ, Staff to Senator John Cowdery, the Chair of the
Senate Rules Committee, stated that this legislation would regulate
"payday lenders" which is a term used to identify business that
lend less than $500 on short-term loan basis, typically for less
than two weeks.
ED SNIFFEN, Assistant Attorney General, Commercial/Fair Business
Section, Civil Division (Anchorage), Department of Law, testified
via teleconference from an offnet site in Anchorage and noted this
bill would regulate the payday lender industry by instituting
"fairly significant" licensing requirements including bonding,
auditing, and regulatory authority. The issue being most debated in
this bill "deals" with "the fundamental principal of how these
loans" would originate. Payday lenders have operated in Anchorage
"for quite some time" and typically charge $15 in interest per each
$100 loan amount. The Version "U" committee substitute would limit
payday lending to a maximum of $500 and would allow the loan to be
rolled over two times as compared to the $1,000 maximum and four-
time rollover proposed in the original version of the bill.
Mr. Sniffen explained that a rollover occurs when a loan is not
paid when due and is "rolled over" for another two weeks with an
additional $15 per $100 charge levied. A provision in this bill
would require a payday lender to offer a borrower the option of up
to a six-month payment plan at no additional fee or charge at the
conclusion of a rollover period were a loan unpaid at that time. He
expressed that "significant consumer protection" language is
incorporated into the bill to "provide protection that does not
currently exist."
Mr. Sniffen allowed that such things as a pending lawsuit being
advanced by Alaska Legal Services against payday lenders challenges
"the legality of these transactions under Alaska Usery Statutes,"
has caused confusion regarding this legislation. The Banking,
Securities and Corporations Division "is not as optimistic" as
Alaska Legal Services is about the outcome of that lawsuit. He
stated that, "there is no current indication that these
transactions are currently illegal," and he reminded that they have
been available "for quite some time."
Mr. Sniffen commented that while some groups are furthering the
adoption of the Model Act, no other state has adopted it or would
likely be adopting it in this regard, as "it contains fairly
significant restrictions that would essentially put these
businesses out of business."
Mr. Sniffen pointed out that this legislation, when compared to
regulations of the 44 states that currently regulate this industry,
would be viewed as "one of the more restrictive" in that it would
implement a monetary limit and a minimum two-week lending period.
In addition, this legislation is the only one that would require
lenders to provide the aforementioned payment plan option to
borrowers.
Mr. Sniffen also communicated that there is opposition to the
lending fee which would be considered "enormous," were it
calculated in terms of an annual percentage rate (APR). The $15 fee
for a $100 loan combined with the five-dollar origination fee would
amount to a 520-APR; a $300 loan would equate to a 433-APR; and a
$500 loan would equate to a 416-APR. He noted that these figures
would not change were a rollover to occur, as both the fee and the
amount of time would be doubled. The largest fee charged on an
annual basis, he shared, would therefore equate to a maximum of
520-APR. While some states have implemented a 60-percent interest
rate cap, "most states do not" have a specified limit and the fee
being charged in Alaska could be considered to be "at the low end."
Mr. Sniffen conveyed that the Division's view is that, rather than
the $15 fee creating consumer harm, financial management is the
issue. Extending the length of the loan from 14-days to 30-days has
been discussed as it would "half the interest rate … the lenders
might have some problems with that and it would effectively put
them out of business." He stated that the industry could speak to
that concern.
Mr. Sniffen discounted comparisons of the payday lender industry to
the credit card industry, as, he contended, they are completely
different kinds of loans. In summary, this legislation was
carefully developed after weighing the input from the industry,
consumer groups, and other interested parties. In conclusion, he
stated that the Department supports the legislation.
Senator Bunde asked regarding the bill's business license
requirements; specifically how the licensing fee would be
determined.
Mr. Sniffen understood that the licensing fee could total a maximum
of $2,000. The Division of Banking, Security and Corporations would
determine the amount.
Senator Bunde asked that the fee structure be further explained.
MARK DAVIS, Director, Division of Banking, Securities &
Corporations, Department of Community and Economic Development,
testified via teleconference from an offnet site in Anchorage and
explained that a biannual, maximum $1,000 per year fee, or a total
two-year fee of $2,000, could be levied as depicted in Section 3,
Sec. 06.50.080, page five, lines 12 through 16 of the bill.
Senator Bunde asked whether these fees would offset the actual
costs associated with managing the program.
Mr. M. Davis responded that these fees "would capture approximately
80-percent" of the Department's associated licensing expenses. He
noted that the Department was concerned that these businesses would
not pay a higher fee during the initial implementation of this
legislation.
Senator Bunde, noting that there are not an exorbitant number of
payday lenders operating in the State, asked whether the Department
could enforce the fee or force the business to close.
SFC 04 # 96, SIDE B 04:49 PM
Mr. M. Davis continued that this legislation would serve to
characterize these businesses as financial institutions and as
such, once they were licensed, their license must be maintained. As
such, the powers of the State's banking codes would be in effect
and the State "could prevent them from being in operation."
Senator Bunde asked, therefore, the reason that the fees could not
recoup the overall expense associated with the program.
Mr. M. Davis expressed that were the fee higher than a $2,000
biannual fee, it would serve to discourage the industry from
applying for a license. This would prevent the State from getting
"a handle on this … completely unregulated industry".
Senator Bunde voiced that while he supports this legislation as it
would regulate the industry, the State should not subsidize 20-
percent of the cost of its licensing program.
Senator Bunde suggested that an amendment be developed to address
this concern. Other licensing fees, such as those charged to
barbers and hair dressers, fully compensate the State for the cost
of their licensing programs.
Co-Chair Wilken asked that Senator Bunde work with the Division to
address this concern.
Senator Bunde stated that rather than serving to legalize an
illegal industry as some people "have been mislead" to believe,
this legislation would establish a licensing program for a legal,
but un-regulated industry that has been operating in the State for
a significant amount of time. Furthermore, while the bill would
regulate the industry, it would not promote it, would not establish
a new industry, and does not "do anything to prohibit people from
making poor financial judgment."
DEBORAH FINK, Representative, Cash Alaska, provided the Committee
with a chart titled "Comparison of CSSB272 to Current Law" [copy on
file] that compares the provisions of the proposed legislation to
current industry practices. Agreeing that misinformation about the
industry does exist she affirmed Senator Bunde's remarks that this
legislation would serve to regulate the industry rather than to
legalize the loans. Approximately twenty payday lenders in the
Municipality of Anchorage area operate under the Small Loan Act
Exemption, which was established in the State in 1955. This
Exemption originally specified that a maximum of $100 could be
loaned. The intent of the Act was to exempt these loans "from any
kind of interest" or term limit because the Legislature at the
time, realized that these loans were expensive to provide due to
the fact that they involved "a high risk population." In 1980, as
the result of an Attorney General challenge, a Superior Court judge
ruled that the original "Legislative intent of exempting those
loans from limits and interest was exactly what they meant to do."
Shortly after that ruling, the Legislature increased the maximum
loan amount to $200, and in 1993, "after a great deal of
discussion", the amount was increased to $500.
Ms. Fink expressed that, while the industry has been "happily"
operating for numerous years without regulation, due to the fact
that it is a very popular and busy business, "it is probably time"
that regulations be enacted. She characterized the loans as being
"real simple and real small" loans that range from $100 to the
average of $300. They are designed to be paid off within two weeks.
Were this legislation enacted, a $300 loan would cost an individual
a total of $350, including the five-dollar origination fee, which
would be a one-time fee that would be calculated "as part of the
interest". She further clarified that the five-dollar origination
fee would not be re-charged were the loan to roller over. This and
some other incorrect information are included in a letter from AARP
[copy not provided] that was submitted in regards to this bill.
Ms. Fink stated that this legislation would serve to regulate a
completely un-regulated industry; would align the maximum loan
amount of $500 with that currently in effect by the Small Loan Act
Exemption; would limit the rollover to two times rather than the
current unlimited amount; would establish licensing provisions;
would establish a licensing fee; and other provisions. She voiced
support for the bill in its current form.
Senator Bunde asked Ms. Fink her position regarding increasing the
licensing fee to more than $1,000 per year.
Ms. Fink stated that in order to provide the service, a license
would be required, and due to the fact that this is a "healthy"
industry, businesses would pay it.
Senator Hoffman asked whether requiring both a maximum number of
days for a loan term in addition to the specified minimum loan term
would be beneficial.
Ms. Fink responded that only the minimum loan term is specified in
the bill in response to consumer groups' concerns specific to that
aspect.
STEVE CLEARY, Executive Director, Alaska Public Interest Research
Group (AKPIRG), testified via teleconference from an offnet site,
and stated that the organization does not support the bill in its
current form, as it would serve "to legalize interest rates that
are unfair and predatory to vulnerable consumers." He referenced
Mr. Sniffen's remarks relating to problems with individuals'
financial management and noted that his organization is working
with financial institutions in the State in order to educate and
encourage people to establish savings and bank accounts by
utilizing such things as their Permanent Fund Dividend checks
rather than opting to use payday loans. Usery Statutes have
historically been established to protect consumers from being
"gouged or loan sharked," and he noted that regulations prevent
banks and other financial entities from charging high interest
rates. He argued that the interest rates allowed by this
legislation "are not commensurate with other" established financial
industry rates. The State of Georgia has implemented a maximum 60-
percent APR interest rate on its payday loan industry: similar
provisions would be preferred "to just letting the industry run
wild." Noting Ms. Fink's position that the $15 per $100 loan fee
would be at the limit of where her business could successfully
operate, he reminded the Committee that this is the fee currently
being utilizing. Therefore, the five-dollar origination fee allowed
under the proposed legislation, would be additional money.
Financial institutions are required to adhere to the Truth in
Lending Act in that they must depict their loans using an APR
basis. Were one to examine payday lenders application paperwork,
the APR listed on them would reflect interest rates in the
thousands of percent. Most payday loan consumers need the money and
thereby are subject to "outrageous interest rates." Noting that the
payday loan industry attests that lower interest rates would put
them out of business, he suggested that a compromise be reached
that, rather than changing the amount of money to be collected,
would increase, by two weeks, the amount of time in which the
consumer could repay the loan. He stated that this would provide
people, such as those who are only paid monthly, a better chance to
repay the loan. Therefore, he asked that a 30-day loan term be
considered.
Mr. Cleary stated that while the payday loan industry is on record
that they could not afford lengthening the payback term they have
not provided a reason as to why it would be unaffordable. He
recalled Ms. Fink's testimony before the Senate Labor & Commerce
Committee in which she stated that most people come in for just one
loan. Therefore, he questioned why a 30-day loan period would be
unacceptable.
Mr. Cleary declared that a loan rollover "is the most dangerous
part of this," as were a person to rollover a $300 loan, without
paying any portion of it off, six times, they could owe as much in
interest as they do in principle." This, he declared, is when
consumers "really get gouged by these and really get in a cycle of
debt that is bad for our society and is not good for the business"
and could tie up Court time. Therefore, in order to provide
protection to these "vulnerable consumers," the Committee should
consider reducing the allowable number of loan rollovers from two
to one. In summary, he asked that these amendments be considered,
and were they not, the Committee should not support the bill.
PAT LUBY, Advocacy Director, AARP Alaska, testified in Juneau, and
stated that AARP participated years prior, in the development of
the Model Act legislation. The problem associated with payday
lenders is that loans cannot be paid off incrementally; they must
be paid off in entirety. While people are allowed to make partial
payments on their credit card balances, payday lenders require the
entire amount to be paid or the entire balance must be rolled over.
The original bill would have established a higher payday loan
amount of $1,000 and four rollovers. He agreed with Senator Bunde's
and others' comments that "this is an industry that ought to be
regulated," as many people are at risk. He allowed that the people
who use payday lenders might not be the State's most sophisticated
citizens; they are people who need money in a hurry; and who might,
two weeks later, continue to be in financial trouble and would be
required to roll the loan over. He pointed out that were the two-
time rollover language in this legislation adopted there is nothing
that would prevent an individual from going to another payday
lender and borrowing from them. He noted that the State of
Arizona's regulations require a payday lender to determine whether
a consumer already has outstanding payday loans by simply calling a
company called Telecheck. He stated that credit card companies are
profitable while operating at an 18-APR; therefore, he questioned
the reason that payday lenders must have a 400-percent profit in
order to be successful.
Mr. Luby characterized this legislation as an industry bill, and
stated that the fact that the industry is requesting regulation
should raise a "red flag."
Mr. Luby referenced the Division of Banking, Securities and
Corporation's fiscal note that projects that the number of payday
lenders is expected to substantially increase. As a result, two new
staffing positions would be required in order to license and
investigate the industry. He argued however, that this legislation
would create "a regulatory environment" that would discourage
rather than encourage new operators. This would serve to assist the
businesses that currently support the regulation of the industry.
Were the number of payday lenders to not increase as projected,
insufficient funds would be collected to offset the cost of
operating the program. Therefore, rather than assisting the
consumer, this legislation would serve to enhance the position of
the businesses supporting this bill.
Mr. Luby stressed that AARP agrees that this is an industry that
must be regulated. AARP attorneys are participating in the pending
Alaska Legal Services lawsuit, and he voiced optimism that the suit
could be won. The Judge hearing that case has already indicated
that he would wait to see what the Legislature would do, as were
this legislation enacted, no lawsuit would ensue. He asked that
action on this bill be delayed until after the Court proceedings
conclude. He stated that, at that time, were the Legislature to
determine that further regulations should be developed, AARP would
be willing to participate in the endeavor to assure that consumers
are adequately protected.
ANGELA LISTON, Representative, Alaska Catholic Conference,
testified via teleconference from an offnet site and supported
Senator Bunde's comments that this is an industry that must be
regulated. However, she spoke against the level of fees proposed in
the legislation "on behalf of the working poor who find themselves
desperate for cash" in order to pay for such things as rent, car
repairs, and unforeseen medical needs. She strongly supported
AKPIRG's suggestion that this legislation be amended to allow a
minimum 30-day loan term as it might allow a person to repay a loan
without being required to roll the loan over. This might help to
prevent the increasing burden of chronic debt. She urged the
Committee to emphasize with the working poor and realize that
regulation of this industry would be "a huge step in promoting the
common good." Allowing these interest rates to continue "is an
exploitation of the working poor."
JIM DAVIS, Representative, Alaska Legal Services Corporation,
testified via teleconference from an offnet site and expressed that
"Alaska Legal Services represents low income Alaskans in various
civil matters including consumer law matters." He addressed six
issues including the pending lawsuit that Alaska Legal Services has
filed in Anchorage on behalf of a client that is based on the
premise that a business must operate under the State's Usery
Statutes unless explicitly exempted from the Statute. Because
payday lenders are not exempt, they are in violation of the Usery
Statute law. The Superior Judge hearing this case understands that
the industry advanced this legislation in an attempt to halt the
lawsuit. Therefore, the Judge ruled that he "would not rule on the
legality of the lawsuit until after the Legislature adjourned" due
to concern that, were the Court to rule that payday lenders were in
violation of the law, the ruling would be moot as it would be
argued that the Legislature changed the law in this regard.
Therefore, the lawsuit is on hold pending this legislation. In
addition, this legislation was not brought forward until after the
lawsuit was filed.
Mr. J. Davis submitted that this is not good legislation, as it
would allow low income Alaskans to carry loans carrying interest
rates ranging between 400 and 1000 percent. The claim that this is
a consumer protection bill is questionable, as these high interest
rates could be argued as otherwise. "It is a very strange world"
when a consumer protection bill legalizes high interest rates such
as these. This is in effect "loan sharking." He recalled Mr.
Sniffen's comments that specified that "because payday lenders are
making these loans, its legal." He argued that on many occasions in
this State, that has not been the case. He recalled that in the
1980s many lenders provided loans by placing liens on people's
permanent fund dividend checks. He stated that this was "a
disguised transaction charging ridiculous rates of interest against
Alaskans and of which was stopped after the Courts ruled it as
being illegal.
Mr. J. Davis further alleged that due to "the fact that Mr.
Sniffen's department is understaffed," it has not been able to
present this business practice to the Court System. This scenario,
he continued, only proves that Mr. Sniffen's department is
understaffed and not that this practice is legal. Absent the
introduction of this legislation, the Superior Court would have
already ruled it as being illegal.
Mr. J. Davis commented that it has been argued that the monitoring
provisions of this legislation would "fix the problem." The pending
lawsuit is a testament that the provisions of the bill would not
work, as the case involves a woman who took out one $500 payday
loan, could not pay it back, and had to roll it over numerous
times. As a result, her loan went into default; she was sued by the
lender, and subsequently lost her case in Court. He stated that
this scenario regularly occurs.
Mr. J. Davis cited a North Carolina banking entity as stating that
"consumers generally take these loans out to satisfy sudden
financial needs, find themselves unable to meet their budgetary
needs on their next payday, take additional loans, and get caught
up on a never-ending cycle of high fees and interest." He noted
that an Illinois study indicated that 77-percent of consumers who
took these loans repeatedly fell into the rollover scenario and got
deeper in debt.
Mr. J. Davis stated that this legislation would not fix these
problems and that limiting the number of loans would only encourage
a borrower to go to another payday lender. No mechanism is in place
through which, either a payday lender or the Division of Banking,
Securities and Corporations would be able to determine how many
loans a person has taken out. He declared that the question is
whether the State would desire to approve loans with high interest
rates and allow people to get deeper in debt.
Mr. J. Davis pointed out that the bill does not contain any APR
disclosure provisions, which are required when someone signs up for
a credit card or bank loan. He opined that there are better options
out there and that a better bill could be developed were consumer
advocacy groups such as AARP involved in the process.
Mr. Schmitz spoke, on behalf of the bill's sponsor, in support of
legislation. During his research on this subject, he became aware
that there is a difference between interest rates and fees. He
stated that were one to write an insufficient fund check on their
bank account, the bank would typically assess up to a $25 fee. He
declared that perhaps an eighteen-dollar fee would be reasonable,
as most people who borrow are fairly responsible and are one-time
users. This is contrary to testimony that most consumers are in
rollover scenarios. He also stated that consumer protection is
provided by the rollover limit and payment plan option provided in
the bill.
Senator Bunde wished that he "could propose an amendment that would
prohibit Alaskans from making poor financial decisions." He stated
that this bill would not require Alaskans to utilize this service.
The service is driven by demand. He concluded that this industry
has provided a service for some time, and were it not regulated, he
assumed that an underground business might occur.
TIM KELLY, Former Senator, Lobbyist for Cash Alaska, informed the
Committee that the Alaska Legal Services testimony misstated a
point of fact as, he continued, the bill contains three mechanisms
though which a consumer could be notified regarding the APR: a sign
must be placed in the business window in this regard; there is an
ARP disclaimer on the paperwork that the consumer signs; and a
federal APR disclosure requirement mandates that this information
must be provided to the consumer.
Co-Chair Wilken ordered the Bill HELD in Committee.
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