01/28/2004 03:34 PM House L&C
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ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
January 28, 2004
3:34 p.m.
MEMBERS PRESENT
Representative Tom Anderson, Chair
Representative Carl Gatto, Vice Chair
Representative Nancy Dahlstrom
Representative Bob Lynn
Representative Norman Rokeberg
Representative Harry Crawford
Representative David Guttenberg
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
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."
- HEARD AND HELD
WORKER'S COMPENSATION OVERVIEW & UPDATE
- HEARD [See 4:10 p.m. minutes for this date]
PREVIOUS COMMITTEE ACTION
BILL: HB 389
SHORT TITLE: DEFERRED DEPOSIT ADVANCES (PAYDAY LOANS)
SPONSOR(S): LABOR & COMMERCE
01/20/04 (H) READ THE FIRST TIME - REFERRALS
01/20/04 (H) L&C, FIN
01/23/04 (H) L&C AT 3:15 PM CAPITOL 17
01/23/04 (H) <Bill Hearing Postponed 1/28/04>
01/28/04 (H) L&C AT 3:30 PM SENATE FINANCE 532
WITNESS REGISTER
CLYDE (ED) SNIFFEN, JR., Assistant Attorney General
Commercial/Fair Business Section
Civil Division (Anchorage)
Department of Law
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 389; said he
would be willing to work with the committee.
DEBRA FINK, Owner
Cash Alaska
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 389.
ACTION NARRATIVE
TAPE 04-4, SIDE A
Number 0001
CHAIR TOM ANDERSON called the House Labor and Commerce Standing
Committee meeting to order at 3:34 p.m. Representatives
Anderson, Gatto, Dahlstrom, Rokeberg, Crawford, and Guttenberg
were present at the call to order. Representative Lynn arrived
as the meeting was in progress.
HB 389-DEFERRED DEPOSIT ADVANCES (PAYDAY LOANS)
Number 0100
CHAIR ANDERSON announced that the committee would hear 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." [HB 389 was sponsored by the House
Labor and Commerce Standing Committee.]
CHAIR ANDERSON said this bill recognizes there is consumer
demand for smaller, short-term credit options. This demand is
increasing, with 39 states and the District of Columbia
currently regulating this service; Alaska is currently
unregulated. House Bill 389 adheres to two important aspects of
the deferred deposit [payroll advance] issue. He said the
primary reason for this bill was consumer protection: shielding
citizens from unconscionable fees and predatory lending tactics.
The second reason is business protection. He said it would
allow businesses that are fulfilling a legitimate need for
Alaskan consumers to operate without unreasonable regulation.
Number 0136
CHAIR ANDERSON listed further purposes of HB 389. It is to
define and codify the state's practices with regard to
businesses that pay money [to the consumer] in exchange for a
check. He noted that the state is also attempting to prevent
delays in depositing. He said HB 389 also gives the Department
of Community and Economic Development (DCED) additional
licensing and regulatory authority over people who are making
deferred deposit advances.
CHAIR ANDERSON said HB 389 gives the recipients of deferred
deposit advances the right to rescind the advance without cost
before the end of the following business day, if they choose to.
It prohibits onerous collection practices by both deferred
deposit advances licensees and licensees' third-party
collectors, including the threat of criminal charges. In
addition, it prohibits the collection of collateral other than
the check itself. Finally, it clearly defines the necessary
additional disclosures for persons who make deferred deposit
advances. He said the disclaimer will clarify the process for
the consumer and the lender.
Number 0351
CLYDE (ED) SNIFFEN, JR., Assistant Attorney General,
Commercial/Fair Business Section, Civil Division (Anchorage),
Department of Law, stated that the protection unit is aware of
the problems that consumers have with deferred deposit advances.
He noted problems such as triple-digit interest rates,
exorbitant fees, lenders allowing multiple renewals [rollovers],
taking out loans from one payday lender to pay off loans to
another, and businesses that mask these transactions in the form
of catalog sales. He continued:
We first became aware of the seriousness of these
lenders when a legal assistance attorney for the U.S.
Army in Fairbanks contacted our office. There was a
serviceman there who was being sued by a payday lender
on a $200 loan. As part of the transaction, he was
forced to buy 50 bucks of coupons that could be
redeemed from a catalog that the lender had. He
didn't want these items, of course, but he was
required to purchase them.
At the end of the day, he was sued. He paid a lot of
fees. Part of the transaction included his signing a
waiver on the back of a form, where he basically
waived all of his rights under the Fair Debt
Collection Practices Act. He agreed that creditors
could call him and anyone he knew about the debt, and
he agreed to a 25 percent collection charge from a
collection agency, who happened to be owned by the
same payday lender. There was a [mishmash] of
consumer problems in that transaction that didn't seem
right, for lots of reasons.
MR. SNIFFEN said the largest payday lenders in Anchorage
typically charge $15 for every $100 borrowed, or 15 percent; on
a $500 loan that amounts to $75. He calculated that for two
weeks that is 365 percent interest. He doesn't think these
rates are hidden from consumers, but they are written in small
print on the backs of contracts, if disclosed at all. He noted
that it is an expensive way to borrow short-term money. He also
listed $25 service fees if the check bounces. Mentioning an
Anchorage consumer who borrowed $500 in July 2003 and had a
[suit] for $1,283 brought against her seven months later, he
said payday lenders file hundreds of small claims actions each
year against defaulting borrowers; this is easy to do because
Alaska has a permanent fund dividend that is easy to attach.
Number 0747
MR. SNIFFEN continued:
There are borrowers in Anchorage who get behind, and
one of the biggest evils of this whole process is this
rollover opportunity, where you are begging from Peter
to pay Paul, so to speak. We know of a lender who
borrowed $400 and couldn't pay it back. She went to
another payday lender, borrowed another $400; it cost
her $460 to do that. The next day she borrowed
another $400 for $60 to pay off the prior loan and two
days later went to another payday lender. Over a
short period of time, it is very easy for consumers to
rack up enormous debt. ...
Some of the features that we need to pay attention to
are making sure there are caps on interest rates and
fees, that there are minimum terms for loans, that we
prohibit the amount of rollovers that can happen, that
there are full disclosures to consumers about the fees
and interest rates, and that lenders use contracts
that have been approved by the state. We might want
to consider bonding requirements for lenders if we're
going to license them in some way. Maybe [we might
want to consider] allowing consumers to make partial
payments, giving private rights of actions to
consumers, and a right to recover damages against
lenders for violations of this Act, and, finally,
maybe limiting the lenders' remedy for nonsufficient
check fees to a reasonable amount.
Number 1005
MR. SNIFFEN continued:
One of the problems with the current structure is when
you use a check as an instrument to secure a loan and
the check bounces. Under our banking laws, you can
recover three times the amount of the check, up to a
certain amount. So, it's kind of a backdoor way of
getting damages from consumers - by allowing lenders
to use the check mechanism. If there were other ways
to make the loans where consumers weren't subject to
these kinds of penalties ... if their check bounces,
they could be liable for three times the face value of
the check.
Number 1030
CHAIR ANDERSON asked Mr. Sniffen if, to some degree, he supports
HB 389, and if he'd be willing to work with the committee.
MR. SNIFFEN affirmed that, agreeing there certainly is a need
for some kind of legislation that addresses this scenario,
because there is a loophole where the usury statute has a
$25,000 cutoff on interest rates. He explained:
If you borrow money above $25,000, you are not subject
to the usury law; if it's under $25,000, you are
subject to usury. However, Alaska's Small Loan Act is
sort of an exemption to the usury law. So, if you're
making small loans through the Small Loan Act, I think
you can charge interest rates up to about 36 percent.
Unfortunately, there's an exemption to the Small Loan
Act for these payday lenders who are lending amounts
of $500 or less. There's sort of a never-never-land
out there for these payday lenders that we haven't
been able to fit into a regulatory scheme anywhere.
Absolutely, something should be done to address that
situation.
Number 1200
DEBRA FINK, Owner, Cash Alaska, Anchorage, agreed with much of
what Mr. Sniffen said. She added that Alaska needs some
regulation in these areas of concern. She gave the opinion that
the consumer loves deferred deposit advances. She had brought a
survey of customers to share with the House Labor and Commerce
Standing Committee and also referred to a cost-comparison sheet
she had distributed to the committee.
MS. FINK characterized her customers as caring not about how
much it costs to borrow the money short-term, but about the
benefit of being able to borrow short term, given the
alternatives. She testified that a deferred deposit, according
to the chart, would cost $15. She noted:
If the same consumer were behind on a payment to a
utility company, and behind on a late fee to a credit
card company, they would have to pay $79: $50 to re-
hook their utility and $29 to the credit card company,
as a late fee. These are all averages that [we've]
got in the state of Alaska. Then, if they bounced two
checks, even worse.
The average charge by any bank here in Alaska is $22
to the customer for a bad check, and the vendor
charges $25. So, if you write a check that bounces,
that's a $47 fee. You write two of them and you are
out $94. Anybody looking at this would say, "Gee,
should I go in the hole $94, $79, or should I take out
a deferred deposit advance for $15 and save myself a
bunch of money." Those are the kinds of decisions our
customers are making. They are looking at their
alternatives.
This industry grew out of nobody being there to
provide any money for a group of people that work.
They're responsible citizens. They make $25,000 to
$50,000 a year. A third of them have homes. They
have college education, many of them. But they are
kind of what we call the "under-banked." They haven't
saved any money; they're at that stage in their lives,
kind of in their mid-thirtyish time where you have to
have big TVs, and you have to have nice stereo
systems, and you got a nice big truck, and a big car
payment, and they aren't saving yet.
They're not saving at all. Mostly, they're not even
thinking about their next bill. When they get to
their late thirties or early forties, they start
saving. Our customers tend to be on the youngish side
because it's kind of a lifestyle transition. There's
no place they can get money. If you don't have a
savings account, and your car breaks down, poof,
you're out of luck! There's no lender in town that's
going to give you anything.
Many of our customers have credit cards; they're maxed
out. What do they do? Well, they come to one of
these deferred deposit advance providers and they get
relatively cheap money, given the alternatives. It's
a great service. That's why they filled these surveys
out: they love the service. Are there a few
nightmare stories that Ed [Sniffen] can tell you
about? You bet. There are credit-card-nightmare
stories and there are "losing homes, losing cars"
horror stories. There's always horror stories, but
the bulk of our customers love the service, and I
personally think they ought to be able to choose it.
Number 1642
MS. FINK continued:
That being said, it should be regulated. It's a
growing industry. There are 40 states in the United
States right now that are offering the service,
essentially in the same form that is in [HB] 389.
It's a good piece of legislation. The Council of
State Governments and ALEC [American Legislative
Exchange Council] have both come out with suggested
legislation that, pretty much, matches what we have
here. So, we are not reinventing the wheel: this is
something that's been going on a lot in the last 10
years.
It is posited that there are 15,000 to 20,000
storefronts across the country, up from zero in the
late 1980s. How does it work, for those of you who
don't know? Somebody, who has a job and is working,
comes in to one of the deferred deposit storefronts;
we'll say Cash Alaska. They come in with a check.
The average PRA is in the $300 range. Incidentally, I
will sometimes refer to it as "PRA" - that's what we
call them in our stores, that's payroll advances.
They are called deferred deposit advances, payroll
advances, payday loans, and cash advances. Everybody
calls them different things.
Number 1727
MS. FINK continued:
In our case, somebody will come in. They'll write a
check for $115 and we'll give them $100 cash. We
check, make sure they're working, make sure they have
a checking account, and we will give them up to 25
percent of what their take-home pay is going to be for
the term of the loan, which is 15 days. So, there's
every reason to believe they would be able to repay
it. The deposit date is actually fixed at 15 days
out. On the sixteenth day we deposit their check in
our account and they are debited for that amount of
money.
Sometimes, they come in and say, "Well, I don't want
you to deposit the check. But, here's the $115 in
cash. Give me my check back." We do that, too.
Sometimes they come in and say, on the fifteenth day,
"I really don't want you to take the money out of my
account yet. Can I roll it over?" So, they are
saying, "Given my alternatives, I am better off paying
$15 and rolling this over for two weeks, and giving
you $115, than writing some bad checks."
Number 1813
MS. FINK continued:
Under this bill they would be able to do that four
times. Right now, of course, we're unregulated so
anybody can do anything they want. Four times is the
limit recommended by the Council of State Governments.
Most people we don't see again, we just deposit their
checks. That's how it works. For a 15-day term loan,
these are small loans; [it costs] a couple hundred
bucks. This is a really great benefit to the
consumer. And I think they should have the choice of
opting for this, if they want to. So do 40 other
states. So, we've got our own bill now. I really
hope you'll give it some consideration. It's a good
piece of legislation.
Number 2011
REPRESENTATIVE LYNN asked why a loan couldn't just be rolled
over into a longer-term loan.
MS. FINK replied that they are not licensed to do that kind of a
loan. She said most of her customers are not interested in
longer-term loans. She added, "They don't want to get into
debt; they don't want to have a bad credit rating."
Number 2112
REPRESENTATIVE CRAWFORD asked Ms. Fink to clarify her statement
about payment programs.
MS. FINK said they are not set up to do long-term loans. She is
able to do roll downs. She explained:
What sometimes will happen, say, somebody has a $200
deferred deposit advance for which there's a check for
$230. Thirty dollars would be our fee. What they'll
do is say, "Well, I don't have that amount. I have
$130." And so, we'll roll the debt down, we'll roll
down to a PRA [deferred deposit advance] that's only
$100. So it's a way for them to pay it off, without
anything else happening. When checks bounce, we do
payment plans on those. Most of the time, on those
payment plans, it's $25 to $50 a payday, without any
interest at all. But, again, most of the customers
don't want to do that.
Number 2230
CHAIR ANDERSON announced that HB 389 would be held over.
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
3:59 p.m. [For minutes on the Worker's Compensation Overview &
Update, heard jointly with the Senate Labor and Commerce
Standing Committee, see the 4:10 p.m. minutes for this date.]
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