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
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.                                                                         

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