Legislature(1993 - 1994)
03/03/1994 08:00 AM House STA
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 408 - AIDEA EXPORT ASSISTANCE PROGRAM LOANS CHAIRMAN VEZEY opened discussion on HB 408. Number 330 REPRESENTATIVE GREEN, sponsor of HB 408, gave a sponsor statement. He said, Chapter 42, SLA 1987, provided for the Alaska Industrial Development Authority to add an Export Financing Guarantee program to its' portfolio, and change the name, at that time, to the Alaska Industrial Development and Export Authority (AIDEA). Six years later, AIDEA has yet to guarantee an export transaction with this program. REPRESENTATIVE GREEN stated HB 408 is an attempt to make the export program work. The problem is that current AIDEA regulations impose a ceiling on the interest commercial lenders may charge when participating in this program. The lesser of the rate charge, under the promissory note, of one percent above the U.S. Treasury Note rate, at 3.5 percent, means commercial banks could charge no more than about 4.5 percent interest on a loan. This restriction effectively kills the program because no commercial lender would lend money at 4.5 percent. REPRESENTATIVE GREEN said, somewhat similar to the export assistance program, AIDEA also has a business assistance program. The interest rate for banks is this program is in the same statute, however, it is substantially higher allowing lenders to charge 2.75 percent above the prime rate. At the current prime rate of six percent, a commercial bank could charge as much as 8.75 percent interest. The Federal Small Business Administration (SBA) program also allows this interest to go to 2.75 percent above the prime rate. REPRESENTATIVE GREEN stated that HB 408 establishes the same interest rate for the export program, as exists for the business assistance program. The export program will become more attractive to commercial lenders. He noted the export assistance program is a loan guarantee, not a state loan. A potential exporter could go to a commercial bank, and if they qualify, get a commercial loan at any time, but if the exporter seems at all risky, the bank could use this program to reduce that risk. AIDEA would assume that risk, because it has a mechanism to reinsure itself which would reduce its exposure. REPRESENTATIVE GREEN stated managers at AIDEA recognize the export program is not working and they have begun to work with banks and the Department of Commerce to fix it. It is his opinion that between these statutory changes and some changes in AIDEA's regulations, banks might be willing to use this program and that would be an important tool for small businesses. REPRESENTATIVE GREEN stated he was serious about fixing the problems and if it could not be done in the regulations, he would try to introduce something to fix it through statute. Number 389 CHAIRMAN VEZEY asked which program under AIDEA is limited to one percent over the six month treasury note. REPRESENTATIVE GREEN replied the export program. He understood the oddity of trying to help a program by increasing its ability to charge more interest. He clarified the problem to be small export potentials, which there are many in Alaska, need to be financed. Number 402 CHAIRMAN VEZEY stated AIDEA is providing the guarantee, not the loan. REPRESENTATIVE GREEN agreed. He gave an example of a man named Jones, who may not have a good enough idea for a very restrictive bank, but it may pass the AIDEA test. AIDEA would guarantee him. If Jones were to then go under, he clarified, AIDEA would not exactly have to pick up the tab, because AIDEA reinsures itself with a .5 percent charge which the applicant pays. If Jones had gotten 8.75 percent, the loan he would have actually been paying would have been at 9 percent, therefore, 25.25 percent would be a reinsurance program that AIDEA would not get stuck with the bill. AIDEA acts as an intermediary. Number 415 CHAIRMAN VEZEY did not believe the legislature had the foresight in 1987 to see the short-term interest rates drop so dramatically below the long-term rates. He was concerned that if the number of loan guarantees was increased the reserves for loan losses would have to be increased, requiring a fiscal note. REPRESENTATIVE GREEN responded the AIDEA program does not put up the money, the bank does. If AIDEA is held as a default, they would look to their reinsurer to pay the difference. CHAIRMAN VEZEY asked if AIDEA buys loan insurance. REPRESENTATIVE GREEN confirmed. REPRESENTATIVE G. DAVIS questioned if the insurance was bought from another state agency. Number 437 REPRESENTATIVE GREEN said no, it was more like a "LLoyd's of London type of thing." Number 438 CHAIRMAN VEZEY thought AIDEA would use their investments to secure loans. REPRESENTATIVE GREEN said no, that way state capital is not tied up. Number 440 CHAIRMAN VEZEY commented that if activity is anticipated to increase, increased insurance premiums for loan insurance should be expected. Number 442 REPRESENTATIVE GREEN said an increase in premiums was possible. He speculated, if there were a specific number of loans at a quarter of a percent, and the insurance carriers felt AIDEA was getting too much exposure, and they wanted to raise to a half a percent, there would be some loans with a quarter override and some that are higher interest override. This would be paid by the borrower. HB 408 would bring both the export program and the small business program to equal terms. CHAIRMAN VEZEY clarified HB 408 would annul the one percent above the treasury note in code, not in statute. 3 AAC 99.650 would be annulled. CHAIRMAN VEZEY moved to the Anchorage teleconference site. Number 467 JOHN DELANO, DEPUTY DIRECTOR OF CREDIT, AIDEA, commented and answered questions on HB 408. He felt the problems which HB 408 addresses could be taken care of through regulations. The interest rate is only established by regulation. AIDEA does not have the legislative history or the corporate memory because those involved in suing the regulations are no longer with the authority. There have been attempts by several staff members of AIDEA to meet with banks, OIT, and other interested parties to make the export program more attractive. AIDEA would not have a problem changing the interest rate through regulation. Number 484 CHAIRMAN VEZEY could not see banks wanting to loan at 4.5 percent, even if they could get money from the Federal Reserve banks for 2.5 percent. He believed the low interest rate had been in effect for at least three years. MR. DELANO replied, "at least." CHAIRMAN VEZEY thought it was a regulatory interest rate and [we] seem a little a slow to react to the market. Number 495 MR. DELANO responded the interest rate discussed would be the interest rate AIDEA would pay off in the event they have to honor the guarantee, in the event of default by the borrower. He clarified the bank can charge any rate they choose. The index in 1987 was probably substantially higher, twice as high as it is currently, when the regulation was made. Number 505 REPRESENTATIVE GREEN inquired, if that were the case wouldn't there still be a restriction or difficulty for a borrower if they went to a bank, and the bank may have reservations that AIDEA is not supporting them for the full amount they want to commit their money to. Number 510 MR. DELANO stated this scenario was very possible. That's why AIDEA has absolutely no objection to increasing the rate to be commensurate with the same rate charged in the business assistance program, prime plus 2.75. He felt this may comfort banks so in the event of default, they may know the amount of interest they would collect on the defaulted amount of money. Number 515 CHAIRMAN VEZEY clarified 3 AAC 99.650 sets the interest rates for the loan guarantee and not the loan. MR. DELANO confirmed that was correct. Number 520 CHAIRMAN VEZEY asked what the response is from the commercial lending institutions to 3 AAC 99.650. MR. DELANO replied the concern of banks was they wanted to know the interest rate AIDEA will pay them in the event the guarantee would have to be honored. They felt the interest rate should be raised. AIDEA did not have objections to this. He stated the underwriting by both the bank and AIDEA is generally conservative enough that AIDEA does not view a lot of risk in the guarantees. The moneys guaranteed are contingent liabilities of the AIDEA and under the business assistance program, for example, AIDEA has only had to pay off one guarantee since the program was instituted. They paid off about 25 percent of the total guaranteed amount. Number 540 REPRESENTATIVE GREEN clarified one loan defaulted under the business assistance program and asked how many loans had been granted. Number 543 MR. DELANO answered there are currently 14 or 15 on the books, however, the total amount of outstanding guarantees is just short of $1 million. The export program had not been utilized because it is similar to the U.S. Small Business Administration, a federal guarantee, which is more liberal and banks have used it since the late 1940s. AIDEA's export program is more attractive than the federal program for financing inventory and accounts receivable because of greater limits, $1 million versus $750,000. Number 553 REPRESENTATIVE GREEN commented there are some 15 loans under that program and zero under the export program, and asked if that was because of the difference in the types of people or businesses that would be involved or because they are more apt to get loans from banks with a higher guarantee from AIDEA. Number 560 MR. DELANO responded he thought the export program was partially not used because AIDEA does not know if the participant volume exists in this area. Several people have come in with interest in this area, but in talking to them, their needs tend to fit the business assistance program. Number 575 REPRESENTATIVE GREEN reiterated AIDEA has no objection to modifying the interest rate in regulation. He then asked if [we] could be assured that if HB 400 was not pursued, it would be done in regulations. Number 580 MR. DELANO said yes, AIDEA could do it. Number 581 REPRESENTATIVE GREEN suggested HB 408 be pulled off the table with that assurance. In an effort to make the change more proactive, rather than negative, he offered that page 1, line 7, the (b) portion of the existing regulations which now read, "the authority may not guarantee a loan unless the authority finds that the guarantee is reasonably necessary," should be modified to read, "that the authority may guarantee a loan if the authority finds that the guarantee is reasonably necessary." The thrust would change to more positive wording. Number 597 REPRESENTATIVE G. DAVIS asked MR. DELANO about the previous loan being considered under the export authority, that was later found to fit better under the business assistance program. He could not imagine an export loan that would not fit under the business assistance program and asked if this was why the export program had not been used. Number 605 MR. DELANO responded long-term contracts and revolving credit can fall under business assistance, and he believed the statutes and regulations were written more with the intent of specific transactions. AIDEA felt continuing relationships are served better under the business assistance program because guarantees can be issued for one year, and they can get renewals for four additional years. Number 626 REPRESENTATIVE GREEN asked if AIDEA can handle the exporters through regulation and still get loan requests through small business, is there a need for the export authority. He asked if there were people working in this category. Number 629 MR. DELANO replied no one is specifically working in the export area, but several AIDEA employees are familiar with the program and are trying to work with it. If there was a request to have a designated employee for the program, one of three officers who does underwriting for the authority would be chosen. He stated the need for the export authority had been deliberated over and because of its lack of use and misunderstanding of intent, AIDEA would like to amend the program to be usable or dispense of it and the financing will be taken care of under business assistance. Number 641 REPRESENTATIVE GREEN asked if AIDEA would take care of the export program in the reasonable future. (REPRESENTATIVE OLBERG left the meeting at 8:42 a.m.) Number 645 MR. DELANO answered AIDEA is prepared to make the regulation changes and it should not take too long. They have no objection to making the changes, however, they are not so sure it will induce the banks to make presentations to them. He suggested AIDEA talk to the banks and find out what will make the export program attractive to them. Depending upon the response of the banks, AIDEA could report back the options of whether the program will be changed or dispensed with. Number 661 REPRESENTATIVE GREEN asked if there was currently a director of AIDEA. Number 662 MR. DELANO answered the executive director is Riley Snell. (REPRESENTATIVE OLBERG returned to the meeting at 8:45 a.m.) Number 663 REPRESENTATIVE GREEN asked if the executive director would then refocus his attentions to other duties and AIDEA would not have personnel involved with the export program that would no longer be needed. Number 664 MR. DELANO responded there would not be unnecessary personnel and their workload would not be impacted unless the program was kept. Number 665 REPRESENTATIVE GREEN suggested HB 408 be held until he could receive further information from AIDEA and he would readdress the committee at a later date. Number 675 CHAIRMAN VEZEY accepted REPRESENTATIVE GREEN's suggestion and held HB 408 in the House State Affairs Committee for further study. CHAIRMAN VEZEY called a recess at 8:48 a.m. TAPE 94-20, SIDE B Number 000
| Document Name | Date/Time | Subjects |
|---|