Legislature(2005 - 2006)BELTZ 211

03/16/2006 01:30 PM LABOR & COMMERCE


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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ SB 273 MOTOR VEHICLE SALES TELECONFERENCED
Moved SB 273 Out of Committee
+ SB 300 MOTOR VEHICLE NEGATIVE EQUITY TELECONFERENCED
Heard & Held
Bills Previously Heard/Scheduled
Including But Not Limited to:
+= SB 272 MORTGAGE LENDING TELECONFERENCED
Scheduled But Not Heard
+= SB 307 LANDLORD REMEDIES; LATE FEE TELECONFERENCED
Scheduled But Not Heard
                    ALASKA STATE LEGISLATURE                                                                                  
          SENATE LABOR AND COMMERCE STANDING COMMITTEE                                                                        
                         March 16, 2006                                                                                         
                           1:34 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Con Bunde, Chair                                                                                                        
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Ben Stevens                                                                                                             
Senator Johnny Ellis                                                                                                            
Senator Bettye Davis                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 272                                                                                                             
"An Act  relating to mortgage  lenders and persons who  engage in                                                               
activities  relating to  mortgage lending;  and providing  for an                                                               
effective date."                                                                                                                
     SCHEDULED BUT NOT HEARD                                                                                                    
                                                                                                                                
SENATE BILL NO. 307                                                                                                             
"An Act  relating to a fee  provided for in the  rental agreement                                                               
for late payment  of rent under the  Uniform Residential Landlord                                                               
and Tenant Act."                                                                                                                
     SCHEDULED BUT NOT HEARD                                                                                                    
                                                                                                                                
SENATE BILL NO. 273                                                                                                             
"An Act relating to a  motor vehicle dealer's selling or offering                                                               
to sell  motor vehicles  as new  or current models  or as  new or                                                               
current model motor vehicles having manufacturer's warranties."                                                                 
     MOVED SB 273 OUT OF COMMITTEE                                                                                              
                                                                                                                                
SENATE BILL NO. 300                                                                                                             
"An  Act relating  to the  handling of  negative equity  in motor                                                               
vehicle transactions."                                                                                                          
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 273                                                                                                                  
SHORT TITLE: MOTOR VEHICLE SALES                                                                                                
SPONSOR(s): SENATOR(s) COWDERY                                                                                                  
                                                                                                                                
02/08/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/08/06       (S)       TRA, L&C                                                                                               
02/23/06       (H)       TRA AT 1:30 PM CAPITOL 17                                                                              
02/23/06       (H)       -- Meeting Canceled --                                                                                 
03/02/06       (S)       TRA AT 2:00 PM FAHRENKAMP 203                                                                          
03/02/06       (S)       Moved  SB 273 Out of Committee                                                                         
03/02/06       (S)       MINUTE(TRA)                                                                                            
03/03/06       (S)       TRA RPT 4DP                                                                                            
03/03/06       (S)       DP:   HUGGINS,    THERRIAULT,   COWDERY,                                                               
                         KOOKESH                                                                                                
03/16/06       (S)       L&C AT 1:30 PM BELTZ 211                                                                               
                                                                                                                                
BILL: SB 300                                                                                                                  
SHORT TITLE: MOTOR VEHICLE NEGATIVE EQUITY                                                                                      
SPONSOR(s): SENATOR(s) SEEKINS                                                                                                  
                                                                                                                                
02/14/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/14/06       (S)       TRA, L&C                                                                                               
02/23/06       (H)       TRA AT 1:30 PM CAPITOL 17                                                                              
02/23/06       (H)       -- Meeting Canceled --                                                                                 
03/09/06       (S)       TRA AT 1:30 PM BUTROVICH 205                                                                           
03/09/06       (S)       Moved  SB 300 Out of Committee                                                                         
03/09/06       (S)       MINUTE(TRA)                                                                                            
03/10/06       (S)       TRA RPT  2DP 1NR                                                                                       
03/10/06       (S)       DP: HUGGINS, KOOKESH                                                                                   
03/10/06       (S)       NR: FRENCH                                                                                             
03/16/06       (S)       L&C AT 1:30 PM BELTZ 211                                                                               
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
RYAN MAKINSTER                                                                                                                  
Staff to Senator Cowdery                                                                                                        
State Capital                                                                                                                   
Juneau AK                                                                                                                       
POSITION STATEMENT: Introduced SB 273 for the sponsor.                                                                        
                                                                                                                                
ED SNIFFEN, Assistant Attorney General                                                                                          
Division of Consumer Protection                                                                                                 
Department of Law                                                                                                               
PO Box 110300                                                                                                                   
Juneau, AK  99811-0300                                                                                                          
POSITION STATEMENT: Supported SB 273 and SB 300.                                                                              
                                                                                                                                
JOHN COOK, Legislative Director                                                                                                 
Alaska Auto Dealers' Association                                                                                                
Aurora Motors                                                                                                                   
Fairbanks AK                                                                                                                    
POSITION STATEMENT: Supported SB 273.                                                                                         
                                                                                                                                
BRIAN HOVE                                                                                                                      
Staff to Senator Seekins                                                                                                        
State Capitol                                                                                                                   
Juneau AK                                                                                                                       
POSITION STATEMENT: Introduced SB 300 for the sponsor.                                                                        
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
                                                                                                                                
CHAIR CON  BUNDE called  the Senate  Labor and  Commerce Standing                                                             
Committee meeting to order at 1:34:57  PM. Present at the call to                                                             
order were Senators  Bettye Davis, Johnny Ellis,  Ben Stevens and                                                               
Chair Con Bunde. The chair announced  that SB 272 and SB 307 were                                                               
postponed.                                                                                                                      
                                                                                                                                
1:36:13 PM                                                                                                                    
SENATOR SEEKINS arrived.                                                                                                        
                                                                                                                                
                   SB 273-MOTOR VEHICLE SALES                                                                               
                                                                                                                                
                                                                                                                                
CHAIR BUNDE announced SB 273 to be up for consideration.                                                                        
                                                                                                                                
RYAN  MAKINSTER, staff  to Senator  Cowdery, sponsor  of SB  273,                                                               
explained that  SB 273 addresses  unintended consequences  from a                                                               
bill that was  passed last year that prohibited new  and used car                                                               
dealers from selling  new cars, but it went farther  than that by                                                               
prohibiting both  groups from selling current-model  used cars. A                                                               
current-model  used car  could  also fall  in  the current  model                                                               
year. Subsequently  if the law  was followed,  a new or  used car                                                               
dealer would  have to hold  a returned  car that has  the current                                                               
model  year on  their lot  until it  wasn't a  current model  any                                                               
more. This does disservice to  the dealers because they will have                                                               
to  hold a  car that  is  losing value  and a  disservice to  the                                                               
consumer, because he doesn't get as  broad a choice to pick from.                                                               
Secondarily, if he is a  serviceman and gets shipped overseas and                                                               
has to  return a  leased car,  it would be  difficult to  turn it                                                               
into a dealer knowing  that the dealer has to hold  it on his lot                                                               
until it is not a current model.                                                                                                
                                                                                                                                
He  said this  law is  basically being  overlooked and  this bill                                                               
changes languages  so that current-model  vehicles could  be sold                                                               
by  used and  new  car  dealers. He  said  the  Used Car  Dealers                                                               
Association supported it.                                                                                                       
                                                                                                                                
1:40:23 PM                                                                                                                    
ED SNIFFEN,  Consumer Protection,  Department of Law  (DOL), said                                                               
he has a large responsibility  for regulating the care dealers in                                                               
Alaska. He has  been working on this issue for  several years and                                                               
the industry supports it. "It's something  we need to do to allow                                                               
us to enforce our laws -  so we can sell these current-model used                                                               
vehicles to consumers."                                                                                                         
                                                                                                                                
CHAIR BUNDE  asked if  he was  comfortable with  the bill  from a                                                               
consumer's point of view.                                                                                                       
                                                                                                                                
MR. SNIFFEN replied yes.                                                                                                        
                                                                                                                                
JOHN COOK,  Used Car  Dealers Association,  supported SB  273 and                                                               
the previous testimony. He thanked  everyone who worked on it for                                                               
over a year.                                                                                                                    
                                                                                                                                
1:44:32 PM                                                                                                                    
SENATOR RALPH SEEKINS  said this addresses part  of his concerns,                                                               
but it  does not address  dealers who commit black  market fraud.                                                               
However, he stated he supported the bill.                                                                                       
                                                                                                                                
CHAIR BUNDE closed the public hearing.                                                                                          
                                                                                                                                
SENATOR  ELLIS  moved   to  pass  SB  273   from  committee  with                                                               
individual   recommendations  and   accompanying  fiscal   notes.                                                               
Senators  Davis,  Ben Stevens,  Seekins,  Ellis  and Chair  Bunde                                                               
voted yea; and SB 273 moved from committee.                                                                                     
                                                                                                                                
              SB 300-MOTOR VEHICLE NEGATIVE EQUITY                                                                          
                                                                                                                                
CHAIR BUNDE announced SB 300 to be up for consideration.                                                                        
                                                                                                                                
BRIAN HOVE, staff to Senator Seekins,  sponsor of SB 300, said it                                                               
updates  the  definition  of "principal  balance"  found  in  the                                                               
Alaska  retail  installment  sales contract  to  accommodate  the                                                               
proper  disclosure  of  negative  equity.  It  clarifies  how  an                                                               
incident   of  negative   equity  is   handled  within   a  lease                                                               
arrangement and a contract.                                                                                                     
                                                                                                                                
He  explained  that  previously,  lending  institutions  required                                                               
borrowers  to participate  financially in  purchase transactions.                                                               
Down  payments of  25 percent  were quite  common and  term loans                                                               
were held  for 36 months. But  these guidelines have gone  by the                                                               
wayside.  Consumers  have  demanded   lower  payment  loans  with                                                               
greater value.  Now no and  low down payment options  are offered                                                               
and the  payment period has  been lengthened. This  phenomenon is                                                               
particularly evident in retail auto  sales where qualified buyers                                                               
often opt  for 100  percent financing  over the  longest possible                                                               
term.                                                                                                                           
                                                                                                                                
     The  mathematical effect  of this  strategy is  simple.                                                                    
     The point in  time at which the  vehicle's market value                                                                    
     exceeds the outstanding balance  on the underlying loan                                                                    
     occurs much  later than it otherwise  would. Until this                                                                    
     point  is  reached,  the  owner's  equity  position  is                                                                    
     commonly  known as  upside down  or negative.  In other                                                                    
     words, the value  of the vehicle is  not yet sufficient                                                                    
     to  completely repay  the  outstanding  balance on  the                                                                    
     loan.                                                                                                                      
                                                                                                                                
     As  a result,  when  the  owner wants  to  trade for  a                                                                    
     different vehicle,  the dealer  has to figure  out some                                                                    
     way to accommodate the loan  payoff in the trade-in. At                                                                    
     one  time it  was  common practice  in  some states  to                                                                    
     simply inflate  the price  of the  car to  be purchased                                                                    
     enough  to permit  an allowance  for the  trade-in that                                                                    
     would  cover  the  amount  owed.  The  negative  equity                                                                    
     disappears. This method solved  the equity problem, but                                                                    
     failed   to   adequately   describe   the   transaction                                                                    
     mathematically. So,  over time this practice  fell into                                                                    
     disfavor and today it is  more common that new vehicles                                                                    
     are  sold at  non-negotiable prices  - such  as factory                                                                    
     incentive programs.                                                                                                        
                                                                                                                                
     Furthermore,   the  Federal   Reserve  Board   provided                                                                    
     guidance  on  this  issue  through  revisions  made  to                                                                    
     Regulations M and  Z. These regs control  the manner in                                                                    
     which  lease and  credit transactions  respectively are                                                                    
     disclosed.  Regulation  M  was  revised  to  provide  a                                                                    
     dedicated  disclosure line  on the  lease agreement  in                                                                    
     cases where  a prior loan  or lease balance  - negative                                                                    
     equity - is rolled into the new lease transaction.                                                                         
                                                                                                                                
     Revisions  made  to reg  Z  altered  the definition  of                                                                    
     "down  payment"  thereby  solving the  negative  equity                                                                    
     issue as it pertains to a loan transaction.                                                                                
                                                                                                                                
MR. HOVE said  that the vast majority of banks  and credit unions                                                               
are federally regulated. He continued to explain:                                                                               
                                                                                                                                
     Therefore  they follow  federal disclosure  laws. State                                                                    
     laws  do  not  come   into  play.  However,  acceptance                                                                    
     companies, like GMAC, Ford Motor  Credit and others are                                                                    
     required  to follow  both state  and federal  laws. The                                                                    
     dual  adherence requirement  has effectively  created a                                                                    
     disparity  in  the  manner  in  which  loan  and  lease                                                                    
     transactions are disclosed  in cases involving negative                                                                    
     equity  here in  Alaska. So,  the bottom  line is  that                                                                    
     while federal law has been  revised to accommodate this                                                                    
     situation, our state law has  not. SB 300 resolves this                                                                    
     disparity  by  updating  the definition  of  "principal                                                                    
     balance"  as  it  pertains to  the  state's  disclosure                                                                    
     requirements  for  retail   sales  contracts  found  in                                                                    
     Chapter  10,  Title  45.   Furthermore  the  bill  adds                                                                    
     corresponding language to Chapter  25 pertaining to the                                                                    
     handling  of  negative  equity with  respect  to  lease                                                                    
     agreements.   These  modifications   bring  state   and                                                                    
     federal law back into alignment.                                                                                           
                                                                                                                                
                                                                                                                                
CHAIR  BUNDE  asked   if  this  language  is   based  on  federal                                                               
regulations.                                                                                                                    
                                                                                                                                
MR. HOVE  replied that  the banks,  credit unions  and acceptance                                                               
companies are the typical financial  options - for purchasing new                                                               
vehicles, for instance.  Banks and credit unions  are required to                                                               
follow  federal  law. Acceptance  companies  like  GMAC and  Fort                                                               
Motor Credit and  other are required to follow  not only federal,                                                               
but also  state, law. The  feds have accommodated  this situation                                                               
through Regulations M and Z for  the banks and credit unions. The                                                               
acceptance companies have not been  accommodated. This is what SB
300 does.                                                                                                                       
                                                                                                                                
SENATOR SEEKINS expanded that the state's  law has a grey area as                                                               
to whether  or not  disclosures that  are required  under federal                                                               
law  meet  our  own  statutes.  SB  300  brings  state  law  into                                                               
alignment with federal law for acceptance companies.                                                                            
                                                                                                                                
1:52:36 PM                                                                                                                    
CHAIR BUNDE asked how the process would work.                                                                                   
                                                                                                                                
SENATOR SEEKINS explained  with an example of a  person who wants                                                               
to trade in his  car and owes more than it's  worth - a situation                                                               
that is called upside down. It's not an uncommon occurrence.                                                                    
                                                                                                                                
CHAIR BUNDE asked how he would start his new loan.                                                                              
                                                                                                                                
SENATOR SEEKINS  explained that it  is included on  the financing                                                               
on the  new vehicle.  The credit  decision is  made based  on the                                                               
customer's ability to pay, not  necessarily the purchase price of                                                               
the car  they are  buying. If this  is done, it  has to  be fully                                                               
disclosed in the deal.                                                                                                          
                                                                                                                                
CHAIR  BUNDE asked  if a  vehicle  was, in  fact, being  financed                                                               
twice.                                                                                                                          
                                                                                                                                
SENATOR SEEKINS replied, "In effect - part of it, yes they do."                                                                 
                                                                                                                                
CHAIR BUNDE asked if the full  costs have to be disclosed as with                                                               
consumer loans.                                                                                                                 
                                                                                                                                
SENATOR SEEKINS replied, "Yes, absolutely."                                                                                     
                                                                                                                                
1:58:26 PM                                                                                                                    
SENATOR  SEEKINS  said that  finance  companies  really frown  on                                                               
inflating the  purchase price of  a vehicle (MSRP) to  cover what                                                               
is still owing on the trade-in.                                                                                                 
                                                                                                                                
1:58:54 PM                                                                                                                    
ED  SNIFFEN, Assistant  Attorney  General,  Division of  Consumer                                                               
Protection,  Department of  Law (DOL),  said he  views this  as a                                                               
consumer  protection issue  in terms  of a  consumer knowing  how                                                               
much money  it is costing  him to  borrow money to  finance these                                                               
transactions.                                                                                                                   
                                                                                                                                
Currently, he  explained, two  things happen.  One is  the dealer                                                               
loans money  to pay off  the car and that  transaction separately                                                               
requires all  kinds of  disclosures under  the Regulation  V, the                                                               
federal Truth  In Lending  Act. If  a dealer  wants to  sell that                                                               
customer another vehicle and loan him  money to do that, he makes                                                               
him a  second loan.  The disclosures  for that  may be  under the                                                               
state's Retail  Installment Sales  Act, the Consumer  Leasing Act                                                               
or  the Truth  In Lending  Act,  depending on  how the  financing                                                               
happened. This bill allows the  dealerships to follow the federal                                                               
model, which  says you can take  the first loan and  wrap it into                                                               
the loan for the new vehicle  and do one disclosure that explains                                                               
the  finance  charge,  cost  of credit,  etc.  This  language  is                                                               
consistent with  federal law; it  won't have any  adverse impacts                                                               
on consumers.                                                                                                                   
                                                                                                                                
CHAIR BUNDE  quipped that there  is no  regulation to put  on the                                                               
forms saying that a fool and their money are soon parted.                                                                       
                                                                                                                                
2:01:45 PM                                                                                                                    
SENATOR  SEEKINS said  someone  suggested  a modification  saying                                                               
that  AS 45.10.030  needs a  clarification to  make its  language                                                               
consistent  with   this  bill.  That  statute   says  the  retail                                                               
installment contract  must contain the  names of the  seller, the                                                               
buyer, etc. etc.  It also must contain the following  items - and                                                               
it  was  suggested  to  add any  other  charges  including:  "the                                                               
amount, if  any, that the  seller agrees  to pay to  discharge an                                                               
outstanding obligation of the buyer  on an existing motor vehicle                                                               
agreement loan  installment or  sales contract  or lease."   That                                                               
would be compatible with the intent of SB 300.                                                                                  
                                                                                                                                
CHAIR  BUNDE said  he would  hold bill  for the  amendment to  be                                                               
added  to  a  CS.  He  thought  that  would  be  easier  for  the                                                               
committee.                                                                                                                      
                                                                                                                                
SENATOR SEEKINS agreed.                                                                                                         
                                                                                                                                
There being no further business  to come before the committee, he                                                               
adjourned the meeting at 2:06:01 PM.                                                                                          
                                                                                                                                
                                                                                                                                

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