Legislature(2003 - 2004)
04/28/2004 09:06 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 second hearing for this bill in the Senate Finance
Committee.
Co-Chair Wilken stated this bill, sponsored by the Senate Rules
Committee, "requires the Division of Banking Securities and
Corporations to license and supervise Alaska's payday lending
establishments."
RICHARD SCHMITZ, Staff to Senator Cowdery, indicated he had nothing
to add to his testimony given at the previous hearing.
ED SNIFFEN, Assistant Attorney General, Commercial/Fair Business
Section, Civil Division, Department of Law, testified via
teleconference from Anchorage to respond to testimony presented at
the prior hearing. A representative of Alaska Legal Services had
testified that Permanent Fund Dividend loan advances were found to
be illegal by the Alaska Supreme Court. Mr. Sniffen clarified that
the case referenced was the Berger case. Mr. Berger was advancing
money to Alaskan residents against future receipt of their
Permanent Fund Dividend payment. The State challenged the
transactions, and the Supreme Court determined that the
transactions were legal under Alaska's usury statute. Following the
Berger decision, legislation was passed that made advances based on
the Permanent Fund Dividend illegal. The Department of Law does not
fully agree with the outcome of the Berger case; however, the
ruling established precedent for financial transactions. This case
evidences that financial advances would be legal in the State even
if they were not regulated.
Mr. Sniffen then referenced testimony from the American Association
of Retired People (AARP) that recommended a partial payment option
be included in the bill. This suggestion was considered, but was
determined to be too problematic for multiple reasons. Partial
payments would create some procedural difficulties. Advances
currently operate under a system where the consumer leaves a post-
dated check with the lending institution to be cashed after a two-
week period. If partial payments were allowed, the consumer would
need to provide the lender with a new check, and the interest rate
information would have to be changed. In addition, a partial
payment would be allowable under the proposed legislation if a
consumer's advance goes into default. Under the payment plan a
consumer would be able to make partial payments, and no additional
fees would be required.
Mr. Sniffen continued that the Department of Law has been
communicating with various groups, not exclusively lenders, to
consider issues surrounding this legislation. The Department
considered the concerns expressed in the earlier Committee hearing
of this bill and concluded that this version of the legislation
addresses those concerns in a "reasonable manner".
Amendment #1: This amendment deletes "$2,000" and inserts "$3,000"
in subsection (b) of Sec. 06.50.030. Application., in Section 3 of
the committee substitute, which amends AS 06 by adding a new
Chapter 50. Deferred Deposit Advances. The amended language in
Article 1. Licensing., on page 4 line 4 reads as follows.
(b) The applicant shall submit with the application the bond
required by AS 06.50.040 and a nonrefundable application fee
in an amount that is established by the department by
regulation and that does not exceed $3,000. The application
fee for the initial license may not be prorated.
Senator Bunde announced this amendment would be NOT OFFERED and
deferred to Amendment #3.
Amendment #2: This amendment deletes "14" and inserts "30" on page
10, line 10, in Article 4. Licensee Practices and Recipient
Rescission and Payment., of Chapter 50. Deferred Deposit Advances.,
created by Section 3 of the committee substitute. The amended
language reads as follows.
Sec. 06.50.440. Duration of advances. The minimum
duration of an advance is 30 days.
This amendment also deletes "14" and inserts "30" and deletes "two
consecutive times" and inserts "once" on page 10, lines 27 and 28,
in Chapter 50, Article 4, created by Section 3. The amended
language reads as follows.
Sec. 06.50.470. Renewal of advance. (a) The minimum term
of a renewal of an advance is 30 days.
(b) A licensee may not renew an advance more than once,
after which the licensee shall require the advance recipient
to repay the advance in full.
This amendment also deletes "as an annual percentage rate for 14
days for each $100, and" on page 11, lines 11 and 12, in Chapter
50, Article 4, created by Section 3. The amended language reads as
follows.
Sec. 06.50.500. Posted fee notice. A licensee shall post a
notice in each business location that discloses the fees that
the licensee charges for advances. The fees in the notice must
be expressed as a dollar amount, and as an annual percentage
rate for 30 days for each $100. The notice must also contain
any other reasonably necessary information required by the
department by regulation. The notice shall be posted so that
it is conspicuous to an advance recipient or a potential
advance recipient. The lettering in the notice must be legible
and at least one inch in height.
Senator Hoffman moved for adoption.
Co-Chair Wilken objected for an explanation.
Senator Hoffman explained this amendment addresses the concern
expressed at the earlier Committee hearing of this bill that the
14-day minimum advance should be changed to a 30-day minimum
advance.
Senator Hoffman explained that this bill would allow a $15 fee per
$100 advance to be required for each 14-day renewal with a maximum
of two renewals. The 14-day renewal would target military personnel
who might only be paid every 30 days. The 14-day renewal period
would allow a lender to charge a consumer two $15 fees, in addition
to the five-dollar origination fee for a combined fee of $35 for a
$100 advance. He considered this amount too high for such a short
borrowing period. This amendment would allow two 30-day renewals
requiring a $15 fee per $100 advance.
Senator Hoffman detailed that if a consumer accepted a $100 advance
for the required minimum advance period of 14 days, and extended it
twice for a total of 45 days, the individual would pay three $15
renewal fees and one $5 origination fee for a total of $50. This
amendment would allow only one 30-day renewal.
Co-Chair Wilken asked if the maximum length of an advance under
Amendment #2 would be 60 days.
Senator Hoffman affirmed.
Mr. Schmitz stated that the sponsor would oppose Amendment #2. He
deferred to Mr. Sniffen and the representative from Cash Alaska to
address the sponsor's opposition to this amendment.
Mr. Sniffen surmised that the extension of loans from 14 to 30 days
could effectively "drive business away". Some states that regulate
this industry allow more than two extensions, while others allow
only one. He also deferred to the industry to testify to the
effects of this amendment.
DEBORAH FINK, Cash Alaska, testified that if the minimum loan term
were extended to 30 days, the industry would not "survive". She
qualified that because this industry is not currently regulated in
Alaska, financial data does not exist. Using data from states with
regulated industries she informed that lenders are making
approximately ten percent on fees. The overhead of the advance does
not change due to fixed costs; however income would be reduced by
half if the 30-day extension were implemented. The payday industry
could no longer support the payroll advance loan program in Alaska.
She further predicted that Internet-based businesses located out of
state and the "loan by phone industry" would thrive with the
absence of Alaska companies offering these loans.
Senator Olson anticipated that this amendment could decrease
businesses' viability, but disputed that the companies would go out
of business.
Ms. Fink argued that some businesses would fail if required to
extend the loans for a minimum of 30 days. She informed that her
businesses start "in the hole" each year because the amount of fees
collected by her businesses is equal to the amount of checks
written from accounts with non-sufficient funds. The payday loan
business is really a collection agency. The 30-day minimum would
reduce these businesses' income by half. No other state imposes a
30-day minimum, and only four states have instituted a 14-day
minimum. The majority of states do not have a minimum advance term,
and many are issuing five, six and seven-day advances.
Senator B. Stevens asked whether Internet companies offering
payroll advance loans and "loan-by-phone" companies are
unregulated.
Ms. Fink affirmed and explained these businesses operate from
states with no usury regulations. Approximately 60 payroll advance
companies operate on the Internet, and their fees range from $19.88
to $60 per $100 advance, with a one-day minimum. These businesses
especially flourish in the six states that do not allow payroll
advances.
Senator Hoffman asked Ms. Fink to comment on the rollover changes
proposed in Amendment #1.
Ms. Fink replied that the payroll advance companies could comply
with a single rollover, although customers often utilize rollovers.
This provision would eliminate an option for customers.
Co-Chair Wilken commented that currently there are no restrictions
on rollovers.
Ms. Fink affirmed.
Senator Bunde pointed out that consumers could simply have a new
loan issued after utilizing the maximum number of rollovers on
their previous loan. He asked if having a new loan issued is more
expensive than a loan renewal.
Ms. Fink replied that a rollover is less expensive for the customer
due to the five-dollar origination fee for each new loan.
Senator Bunde understood that Ms. Fink's businesses make
approximately $1.50 per $100 loan.
Ms. Fink responded that a $1.50 profit per $100 loan is an
industry-wide average based on the data collected in states that
regulate the payroll loan industry. Ms. Fink added that her
businesses average a profit between $1.50 and $2 per $100 loan.
Senator Bunde inquired if the passage of this legislation would
provide the State with more information about the payroll loan
industry in future years.
Ms. Fink replied that the State would know "everything" about the
payroll loan industry's volume and profits if this bill were
implemented.
Senator Bunde understood the presence of significant opposition to
this service and suggested that instead of offering this amendment,
Senator Hoffman could sponsor other legislation to eliminate the
industry. Senator Bunde emphasized that while the payroll loan
industry is operating in Alaska it should be regulated so that
industry information can be compiled.
Senator Hoffman clarified his concerns relating to the rollover
provision given that the cost of a $500 loan is $80. When the term
of the loan is due, customers are forced to rollover the loan if
they do not have the finances to pay for the original amount of the
loan and the fees incurred. Forced renewals could be avoided if
this legislation offered a partial payment provision. The extension
of the minimum loan term to 30 days would accommodate those
customers who are paid on a monthly basis. Currently, customers
borrowing $500 for a 30-day period consisting of two renewals would
pay $150 in renewal fees and a $5 origination fee for a total of
$155. Amendment #2 would reduce the fees by the amount of a second
rollover, or $75, and would allow the customer up to 60-days to pay
for the loan and fees.
Senator Bunde commented that if the consumer cannot repay the loan
and fees after one renewal, it is unlikely they could repay the
loan after a second renewal.
Senator Hoffman defended Amendment #2 by stating that under the
current version of this bill the consumer would have more
difficulty paying the loan because after the first 14-day period an
additional $75 renewal fee would be incurred.
Senator Bunde agreed that the consumer would likely be unable to
pay the loan and fees after an additional $75 fee were incurred,
resulting in "bad debt".
Senator Hoffman moved to divide the amendment. Amendment #2a
pertains to the extension of the minimum loan term from 14 to 30
days. Amendment #2b pertains to reducing the number of renewals
from two to one.
Senator B. Stevens referred to the chart provided by Cash Alaska
titled "State Law Governing Deferred Deposit Services/Payday
Advance" [copy on file] and commented that the states with liberal
laws and political representatives, such as Wisconsin and Oregon,
have $25,000 and $50,000 payday loan limits with no interest
guidelines and minimal loan terms. In contrast, traditionally
conservative states have more regulations. He emphasized the
"unique" nature of the statewide regulatory patterns on this
industry.
Senator Dyson referenced Senator B. Stevens's comments and surmised
that the political leaders in the states with strict regulations on
this industry have realized, "how stupid their constituencies are,
and how much they need to be protected." He continued that his
constituents do not need protections on this industry because they
have the ability to make rational decisions.
Senator Dyson asked Ms. Fink to clarify if the payroll loan
industry's profits would actually be reduced by one-half if the
minimum advance terms were increased to 30 days. He understood that
the profits would not be reduced by one-half unless all of the
consumers waited to repay their advances until the last day of
their 30-day term. In earlier testimony Ms. Fink had mentioned that
many consumers pay their loans back in seven to nine days, well
before the 14-day loan expires.
Ms. Fink explained that the gross income would be reduced by one-
half and that profits would be negative were the loan terms
extended to 30 days. She referred the Committee to a document
titled "Where do fees for Deferred Deposit Advance Services go"
[copy on file] to view the expenses of a payroll advance business.
She predicted that consumers would not repay their loans as rapidly
if the minimum advance term were increased to 30 days. She asserted
that members of the military do not need a 30-day minimum as
Senator Hoffman suggested because most consumers take out loans
between paydays and repay the loan on their payday.
Ms. Fink continued that lenders try to ensure the repayment of
loans they issue. Consumers who renew loans are likely to become
consumers who do not repay their loans. The industry's preferred
consumers are those who pay their loan as soon as possible. The
industry attempts to avoid consumers who regard the advances as
"loans", and attempts to attract consumers who regard the advance
as "a little something" to assist them until payday. If the 30-day
term is implemented, consumers will no longer view the advance as a
"stopgap measure", but as a loan. She predicted that if the 30-day
term were instituted fewer consumers would repay their loans.
Ms. Fink relayed that while reviewing the transactions her
businesses conducted in 2003, she discovered that many transactions
were on behalf of repeat customers. She estimated that 30-day terms
would reduce the number of loans issued by 30-percent, consequently
reducing her businesses' income by 30 percent. She added that her
profits are approximately five-percent, meaning that a 30 percent
reduction in income would produce a negative balance.
Co-Chair Green stated her assumption that this legislation has
"come together as a package" including rates, fees, percentages,
terms and other factors regulating the payroll advance industry. If
certain changes were made to this bill, other changes would be
required to balance the package. She expressed concern that if this
legislation is not properly balanced it could be detrimental to the
payroll advance industry and result in the industry "going
underground".
Senator Hoffman countered that Cash Alaska, not the legislative
finance committees or the Murkowski Administration submitted this
legislation and the supporting documentation. The industry could
not expect to determine all of the regulations pertaining to it.
Senator Hoffman requested that the Committee consider that none of
those who testified at this bill's previous hearing, except the
industry, were in support of this legislation. The testifiers
requested changes to this bill in response to certain concerns, and
Amendment #2 would implement those changes.
Co-Chair Wilken asked for an explanation of the portion of
Amendment #2b that would delete the following language on page 11
lines 11-12: " as an annual percentage rate for 14 days for each
$100, and".
Senator Hoffman replied that this deletion would be a conforming
change to reflect the establishment of a 30-day minimum loan term.
A roll call was taken on the motion to adopt Amendment #2a.
IN FAVOR: Senator Hoffman and Senator Olson
OPPOSED: Senator Bunde, Senator Dyson, Senator B. Stevens, Co-Chair
Green and Co-Chair Wilken
The motion FAILED (2-5)
Amendment #2a FAILED to be adopted.
A roll call was taken on the motion to adopt Amendment #2b.
IN FAVOR: Senator Hoffman and Senator Olson
OPPOSED: Senator Dyson, Senator B. Stevens, Senator Bunde, Co-Chair
Green and Co-Chair Wilken
The motion FAILED (2-5)
Amendment #2b FAILED to be adopted.
AT EASE 9:44 AM / 9:49 AM
Amendment #3: This amendment deletes "$2,000" and inserts "$3,000"
in subsection (b) of Sec. 06.50.030. Application., and Sec.
06.50.080. Renewal of license., in Section 3 of the committee
substitute, which amends AS 06 by adding a new Chapter 50. Deferred
Deposit Advances. The amended language in Article 1. Licensing., on
page 4 lines 2 - 5 reads as follows.
(b) The applicant shall submit with the application the bond
required by AS 06.50.040 and a nonrefundable application fee
in an amount that is established by the department by
regulation and that does not exceed $3,000. The application
fee for the initial license may not be prorated.
The amended language on page 5, lines 12 - 16 reads as follows.
Sec. 06.50.080. Renewal of license. A license issued
under this chapter shall be renewed on or before the date set
by the department by submitting to the department a completed
renewal application on a form established by the department
and paying a nonrefundable renewal fee established by the
department, which may not exceed $3,000.
Senator Bunde stated that a discrepancy existed in this legislation
regarding the license fee. He noted a new draft fiscal note to
reflect the impact of this amendment.
MARK DAVIS, Director, Division of Banking, Securities and
Corporations, Department of Community and Economic Development,
testified via teleconference from an offnet location that the
increased license fee would produce significant revenue. However,
he understood from correspondence with Senator Bunde that the
intent is that the program be revenue neutral in the first few
years of operation, which the Division determined would require a
$5,000 fee annually. Mr. Davis expressed concern that the proposed
fee would be too high because it might cause industry members to
decide to conduct business illegally in order to avoid the fee.
This amendment would require a biannual fee of $3,000. The Division
would prefer that the licensing fee be as revenue neutral as
possible, and will adopt the highest fee the industry would be
willing to accept.
Senator Bunde remarked that the cost to administer the program, and
not the preferences of the industry, should be considered to
determine the licensing fee. If the Division calculates that the
cost to administer the program is higher than the industry would
voluntarily support with fees, efforts should be taken to reduce
expenses.
Mr. Davis outlined that the Division is attempting to cut
administrative expenses related to the regulations proposed in this
legislation by reducing contractual services such as legal
services. He explained that if this bill were adopted, a bank
examiner position would be statutorily required to oversee and
address potential litigation. The administrative costs would also
include a clerk to handle increased correspondence; however, the
clerk position could possibly be eliminated to further reduce
costs.
Senator Bunde acknowledged the high workload of the Division and
the increased demands this legislation would create. He asserted
that despite this workload, the full-time bank examiner would not
need to be exclusively devoted to the payroll loan businesses; the
examiner could also serve other businesses. The payroll loan
industry should not pay for all of the expenses related to the bank
examiner, but rather the costs should be distributed amongst all
the businesses the examiner would serve.
Co-Chair Wilken explained that the options before the Committee
regarding the application fee are threefold: leave the language as
is, which would require a fee not to exceed $2,000; adopt Amendment
#3, which would require a fee not to exceed $3,000; or raise the
fee to $5,000 to reflect the fee recommended by the Division of
Banking.
Senator Bunde moved for adoption of Amendment #3.
Senator Bunde offered an amendment to the amendment to increase the
licensure fees to $5,000. Because the sponsor of the amendment made
the motion, no further action was necessary and the amendment was
AMENDED.
Co-Chair Green asked whether every industry was responsible for
administrative costs incurred by the State during the first year of
governmental oversight. She stated that a $5,000 application fee
would be too high.
Mr. Davis informed that the Division is solvent because it has an
annual budget of approximately $2.1 million, and should generate
revenues of approximately $14 million. Fees collected from the
banking industry are used to pay most of the Division's costs. The
Division initially supported the establishment of the licensing fee
amounts for payroll advance loan businesses through the regulatory
process. This amendment would allow the Division to impose fees up
to $5,000.
Senator Bunde pointed out that license fees have been increased for
existing industries to provide adequate funding to support the
administrative costs to the State in order that State subsidies can
be eliminated.
SFC 04 # 98, Side B 09:59 AM
Senator Olson asked the bill's sponsor to comment on the proposed
amended amendment.
Mr. Schmitz responded that the sponsor supports the amendment in
its original form. He added that the sponsor does not want to raise
fees to the extent that the industry is eliminated, forcing
Alaskans to use out-of-state payday loan businesses.
Senator Olson referenced Mr. Davis' suggestion that if the license
fees were too high, some operators would "go underground". Senator
Olson asked how many underground payday loan operations are
currently active.
Mr. Davis replied that because the industry is currently
unregulated in Alaska the Division is aware of only those
businesses that advertise. He confirmed that underground operations
exist.
A roll call was taken on the motion to adopt Amendment #3 as
amended.
IN FAVOR: Senator Olson, Senator Bunde and Co-Chair Wilken
OPPOSED: Senator B. Stevens, Senator Dyson, Senator Hoffman and Co-
Chair Green
The motion FAILED (3-4)
The amendment as amended FAILED to be adopted.
Amendment #4: This amendment is identical to the original version
of Amendment #3. It increases the license fees from $2,000 to
$3,000.
Senator Bunde moved for adoption.
Without objection the amendment was ADOPTED.
Co-Chair Green offered a motion to report SB 272 as amended from
Committee with individual recommendations and a forthcoming fiscal
note.
Senator Hoffman noted that this legislation should not be brought
forth by the legislature because it would negatively affect the
court's determination.
There was no objection and CS SB 272 (FIN) MOVED from Committee
with a forthcoming fiscal note dated 4/28/04 for $130,500 from the
Department of Community and Economic Development.
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