HOUSE BILL NO. 389 An Act relating to certain monetary advances in which the deposit or other negotiation of certain instruments to pay the advances is delayed until a later date; and providing for an effective date. Co-Chair Harris MOVED to ADOPT the work draft #23-LS1341\U, Bannister, 4/20/04, as the version of the legislation before the Committee. There being NO OBJECTION, it was adopted. REPRESENTATIVE TOM ANDERSON, SPONSOR, noted that the bill would create a framework for regulatory oversight of an industry that is currently doing business and serving consumers across the State. HB 389 does not create an industry; it is simply providing oversight to current practices to ensure some level of consumer protection. He commented that if the practice was banned from the State, consumers would then take advantage of the offers online or from banks with out-of-state branches that offer the product and often at higher fees. Representative Anderson stated that these are not standard loans, they do not fall into the same category either in amount or in length. They would best be described as short- term conveniences. Representative Anderson commented that his office has worked with the Department of Law and the Division of Banking and Securities to come up with HB 389, which adheres to two important principals: · Consumer protection - shielding citizens from unconscionable fees and predatory lending tactics; and · Business protection - allowing businesses that are filling a legitimate need for the Alaskan consumer to operate without unreasonable regulatory burdens that would force them out of business. Representative Anderson added that HB 389 provides: · Minimum standards for licensure; · Maximum loan amount; · Maximum number of "roll overs"; · Bonding requirements; · Penalties; and · Framework for oversight and examination. ED SNIFFEN, (TESTIFIED VIA TELECONFERENCE), ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, ANCHORAGE, offered to answer questions of the Committee. ANGELA LISTON, (TESTIFIED VIA TELECONFERENCE), ALASKA CATHOLIC CONFERENCE, EAGLE RIVER, spoke against the legislation. She commented that the bill would legalize an industry that makes a profit on the working poor. It would charge huge interests rates on that group of people. She noted that it had been compared to a credit card cash advance; however, she pointed out that no credit card charges 490% on its cash advances. She stressed that HB 389 was poor public policy. She requested that if the legislation is passed, that it be amended to allow a minimum term of 30-days on any loan with a maximum of $50-$100 fee. TAPE HFC 04 - 91, Side B  Ms. Liston continued discussing the repercussions of the interest, which could be addressed by amending the bill to a 30-day term rather than the 14-day term. STEVE CLARY, (TESTIFIED VIA TELECONFERENCE), EXECUTIVE DIRECTOR, ALASKA PUBLIC INTEREST RESEARCH GROUP (AKPIRG), ANCHORAGE, testified that AkPIRG opposes the bill in its current form. To charge vulnerable consumers in need for short-term loans over 400% interest is unconceivable. Other states have been addressing similar legislation placing a limit on the interest rates that can be charged. He proposed a compromise in attempting to figure out how to keep the industry around for those that do need a short-term loan and a way to protect the consumers. Mr. Clary discussed that there are two ways to reduce the annual percentage rates by either reducing the amount of money charged or increase the time. AkPIRG supports the idea of extending the amount of the loan time from 14 days to 30 days, which would divide the interest rate charged to consumers in half. Another change that would protect the consumer would be to limit the amount of rollovers. Mr. Clary was pleased to see the industry will now have to report to the Division of Banking, however, if that Division does not have more staff to adequately review these documents, will result in another cause of concern for the consumer. Representative Croft asked the status of the current lawsuit. Mr. Clary advised that Alaska Legal Services Corporation has a case before the bar which challenges that payday loans not be granted an exemption from the Small Loan Act. That General Usury Act usually caps interests rates at 10.25%; the Small Loan Act caps it at 36%. The Alaska Legal Services Corporation is representing the consumer who believes that payday lenders should fall under those caps. BUD WILSON, (TESTIFIED VIA TELECONFERENCE), CASH ALASKA, ANCHORAGE, offered to answer questions of the Committee. JIM DAVIS, (TESTIFIED VIA TELECONFERENCE), ALAKSA LEGAL SERVICES, ATTORNEY, ANCHORAGE, addressed issues of concern in the bill. He noted that there is a pending lawsuit before the court against a payday lender chain known as Alaska First Cash. He pointed out that those businesses are already regulated through the Alaska Small Loans Act and that they have been violating that act for some years. The case will be decided by the Superior Court in June. Mr. Davis claimed that the legislation has been brought forward because the lawsuit points out that these business are violating that Act. HB 389 is a means to create legality for some business that are already illegal in Alaska. He pointed out that the legislation would allow people that have needs to get loans at a 400% interest. The question is not whether people have needs but rather that there should be some sort of regulation on the interest. Loan sharking is illegal and the bill would make it legal. Mr. Davis maintained that the legislation is not in the consumer's interest and that it would not meet the rollover and cap intent. Mr. Davis pointed out that there is concern whether or not the Division of Banking could monitor the data. If honest data is reported to the Division, the only way that it would be meaningful is if there was enough staff in that Division. The number of lenders would not be reported. There will be societal problems resulting from the small suits with no legal representation. Mr. Davis emphasized that payday lenders are asking for authorization for a lending rate used by crime families. The legislation has been brought forward only to end a lawsuit currently before the courts. Representative Croft questioned if other lawsuits have held that they were exempted from the usury exception. Mr. Davis replied not to his knowledge. Alaska is unique because of the Small Loan Act. Representative Croft asked what would be the appropriate regulation of the industry. Mr. Davis responded that consumer groups should be considered when making that determination. He understood that the legislation only addresses what would work for the payday lenders. The consumer groups have had no opportunity for input. DEBORAH FINK, CASH ALASKA, ANCHORAGE, testified in support of the legislation. She noted that there currently is a lawsuit and that presently, 44 states are regulated in a more liberal manner than proposed in the legislation. She stressed that HB 389 is one of the stronger consumer protection bills dealing with the industry in the United States. The lawsuit was based on the premise that past legislative groups in 1955 before statehood, and in 1981 & 1993 were "too dumb to figure out" when they increased the small loan exemption that meant there would not be any interest requirements or limits on those people. She maintained that the legislatures involved clearly understood that small loans would not be available if the market was not allowed to regulate the amounts, because no one would provide the service. Under the consumer rate proposed, the lenders would be able to charge less than 50 cents per $100 loan without the proposed provisions. The legislative bodies meant to exempt the loans from any regulated interest rate. The exemption was raised to keep up with inflation. She maintained that consumers love these loans. Those that argue against the loans don't use them. The industry is happy to do the loans at $15 per $100 for a couple week period of time. Ms. Fink maintained that some of the numbers mentioned in previous testimony were incorrect. She referred to the recommendation that there be a compromise and extend the terms to 30 days. Ms. Fink pointed out that would be cutting their income in half. Money does not grow on trees. At the present configuration, there is only a 10% profit margin. It would be impossible to continue lending under that type of term except for the Internet dealers. Internet is operating in all states, legally, with no regulations. That industry will grow if there is no legislation in Alaska that permits the industry to provide service for the public to utilize. Ms. Fink advised that the bill puts forth a lot of consumer protections. She stated that only six people have complained. It is a service that only the people that utilize it understand. It is not a traditional bank situation. Annual percentage rates are based on making payments over twelve months and what happens in the industry are two-week loans. She claimed that these are not desperate people getting the loans. Payday loans cost less than a bouncing a check which can amount to $43-$48 per one bad check. She reiterated that these are not dumb people. They are usually young people in the collection phase of their lives. Statistics show that 56% of these borrowers have some sort of college education. Ms. Fink emphasized that the service is important and that it must stay available. PATRICK LUBY, LEGISLATIVE DIRECTOR, ALASKA ASSOCIATION OF RETIRED PERSONS (AARP), JUNEAU, testified on behalf of the 76,000 AARP members in Alaska, in strong opposition to HB 389 regarding deferred deposit advances, also known as payday loans, sponsored by the House Labor and Commerce Committee. Under the plain language of Alaska's general usury statute and small loans act, the maximum interest rate of 36% under the usury statute should apply to payday lending. HB 389 would eliminate the cap on interest rates for those loans and allow usurious lending. There are reasons why the federal government, the Consumer Federation of America, Consumer's Union, the National Consumer Law Center and AARP consider payday loan operators as predatory lenders. Payday loans usually affect the most vulnerable segment of the population - those that cannot secure credit or a small loan from traditional financial institutions, often because the loan amount is small or they do not have the necessary collateral. Those who live from paycheck to paycheck must resort to "fringe" banking services such as payday loans if an emergency arises. Mr. Luby continued, cash-strapped consumers rarely have the ability to repay the entire loan when their payday arrives because that would leave them with little to nothing to live on until the next paycheck. Lenders then encourage consumers to rollover or refinance one payday loan with another. The result is that the consumer pays another round of charges and obtains no additional cash in return. If the consumer cannot repay the loan in two weeks, however, the loan is rolled over into a new payday loan, and the annual percentage rate jumps to a staggering 917%. Mr. Luby pointed out that the legislation would legalize payday loans, thereby, authorizing interest rates that exceed State usury limits more than ten times. At minimum, HB 389 would allow loans of up to $500 be made at a 15% interest rate, which translates to an annual percentage rate (APR) of 391%. It would also allow payday lenders to charge an origination fee, with no limit set. Although the origination fee is not considered interest in the bill, in fact, it would have the identical effect, as the consumer must repay the fee to renew the loan. In addition, the legislation allows what are known as "touch and go" loans, where borrowers can take out a new loan immediately after paying off an old loan, resulting in borrowers entering a never-ending cycle of using two lenders to continually pay off each other, while plunging the borrower into ever-deeper debt. Mr. Luby stated that as indicated, to renew the loan, consumers would have to repay the origination fee as well as the $15 per $100 loan charges. Research in several states, such as Illinois, Indiana, and Wisconsin, show that consumers typically take out 10-12 payday loans a year. The consumer repays the interest over and over again to extend the loan term, as they do not have the money to repay the principal. The limit on renewals in the bill would not end the practice in any way. There is no limit on the number of loans that could be taken out by the consumer, just a limit on the dollar amount from one lender or its affiliates. Consumers often have multiple loans outstanding from multiple lenders, using one loan to pay off another. AARP, in collaboration with the Consumer Federation of America, Consumer's Union, and the National Consumer Law Center, has been working on predatory lending issues for several years. As part of the effort on predatory lending, the organizations have developed a model bill recognizing that consumers, particularly those who are "unbanked," may have a need for small loans but they should not pay usurious rates to receive them. Further, the repayment terms of the loan must be reasonable so consumers are not trapped in debt. The model bill calls for a repayment period of two weeks for every amount borrowed, which allows consumers to pay back their loans without having to go deeper into debt. AARP also advocates a 36% annual interest rate cap, which is consistent with Alaska's existing Small Loan Act. The model also prohibits lenders from extending loans to consumers who already have $300 outstanding in payday loans, either from the same lender or any other lender. Payday loans are heavily marketed in low-income areas and near military bases as "fast, easy, credit" with no credit checks, a practice considered predatory. AARP has found payday lenders who market to older persons who have high medical costs or high prescription costs by encouraging retirees to treat their Social Security check like a paycheck. Mr. Luby pointed out that many of the AARP members are veterans. It is particularly onerous that payday lenders target young military families who, because of deployment overseas, may find themselves cash-strapped. Consumers who are considered high-risk borrowers often have a difficult time getting credit on reasonable terms, but they deserve protection from deceptive and unfair lending practices. Mr. Luby strongly urged that the bill not be moved from Committee. HB 389 was HELD in Committee for further consideration.