CS FOR SENATE BILL NO. 39(FIN) "An Act relating to loans in an amount of $25,000 or less; relating to financial institutions; relating to the Nationwide Multistate Licensing System and Registry; relating to pawnbroker licensing exemptions; relating to deferred deposit advances; relating to computing interest; and providing for an effective date." 3:47:03 PM Co-Chair Foster OPENED public testimony. He provided the email address for public testimony. He noted there were eight individuals online to testify. 3:48:12 PM NATALIE LYNCH, INNOVATIVE LENDING PLATFORM ASSOCIATION (ILPA), WASHINGTON, DC (via teleconference), explained that ILPA was a trade organization for online lenders and service companies serving small businesses. She stated that the bill went far beyond the sponsor's intent of regulating payday loans. She believed it would negatively impact small business in Alaska relying on diverse financing options to meet credit needs. She elaborated that Alaska would be the fourth state to adopt such a broad regulation. She remarked that laws in other states were narrowly tailored to small consumer loans. She stated that the law would apply to any loan of $25,000 or less, not just payday loans. She noted that the average payday loan an Alaska borrower took out was $440. She stated that the bill would severely hurt ILPA members' ability to supply working capital to Alaska's small businesses. The bill would also require anyone holding the predominate economic interest in the loans to be registered in Alaska. She stated that transferring loans to nonbank entities was a fundamental aspect of banking that helped reduce risk. She highlighted that it could also lead to higher borrowing cost and less capital available for Alaskan consumers. She added that the bill would endanger the secondary credit market. The organization opposed the bill. 3:50:36 PM CATHY BRENNAN, PARTNER, HUDSON COOK LAW FIRM, BALTIMORE, MD (via teleconference), shared that the firm represented banks and fintechs [financial technology] with regard to consumer financial services laws and regulation. Her focus was on bank partnerships. She addressed the bill's provision that recharacterized the bank's service provider as the true lender on credit transactions. She stated that the Small Loans Act (SLA) provided an optional licensing scheme allowing licensed nonbank lenders to contract for a greater rate of interest than the rate available to unlicensed lenders. She relayed that currently the SLA did not require entities that brokered, serviced, or purchased consumer loans to obtain a license. She stated that unfortunately the bill would impair highly regulated U.S. banks from making legal loans to Alaskans. She relayed that fintech service providers were subject to a high level of scrutiny from banks and regulators. She provided an example. Federal law authorized federal and state banks to export interest rates from their home states to make loans to borrowers across state lines and allowed banks to work with third parties in the loan making process. She stated that the anti-evasion language in the bill ignored the reality that banks managed their balance sheets by routinely selling the loans they originated. She provided an example. She stated that the bill impaired the common practice and would diminish the availability of consumer credit in the state. She highlighted that the bill included commercial lending, which she imagined was likely not the intent of the bill. Representative Hannan asked where the anti-evasion language Ms. Brennan was referring to was located in the bill. Ms. Brennan responded that the bill would add a new subsection to Section 4 [subsection (c)(1)] under AS 6.20.010. She read language from the subsection: "...directly or indirectly holds, acquires, or maintains the 21 predominant economic interest in a loan..." She noted there was additional language regarding evasion. Representative Hannan observed that Ms. Lynch and Ms. Brennan came from a similar segment of industry. She remarked that there were not many reasons in most elected officials' minds not to help protect consumers from predatory lending practices of payday lenders. She remarked that Ms. Lynch asserted the entire bill should be stopped. She wondered if Ms. Brennan had concerns about the payday lending portions of the bill separate from the SLA portions. She asked if Ms. Brennan's concerns were exclusive to Section 4 and the anti-evasion language. Ms. Brennan responded that her process was focused on working with banks attempting to offer credit on a nationwide basis, which was done with the assistance of service providers frequently referred to as fintechs. She was concerned the legislation would impair the ability of banks to exercise their lawful authority under federal law and the law of their home state. She was most concerned about the bank partnership. Secondarily, the bill would limit the ability of commercial entities and businesses in Alaska to get credit through a bank partnership program. She explained that it was common for that type of credit for interest rates to be higher than it would be for consumer credit given the nature of the underwriting and type of loans. She did not know that she would refer to that market as predatory. Additionally, on the consumer side, there were many consumers who were credit impaired, who would not qualify for other types of credit. She understood policymakers needed to make a policy decision on how to protect consumers. She suggested the legislation would not protect consumers, but it would hurt them by making it difficult to get credit. 3:57:12 PM Representative Hannan asked if Ms. Brennan's use of the word "consumer" meant a commercial entity or an individual. Ms. Brennan clarified that a consumer was an individual who obtained credit for a household or personal use. Representative Hannan stated most legislators were interested in providing more protections for consumers using payday loans. She noted that Ms. Brennan had first talked about Section 4 related to commercial lending. She elaborated that Ms. Brennan had also stated the bill would lose credit for consumers. She had initially thought the commercial credit was only available to commercial entities. She thought she understood Ms. Brennan's concerns. Ms. Brennan responded that the SLA was an optional scheme. She explained that that many small loan acts in many states including Alaska, did not specifically apply only to consumer credit; therefore, it was broad enough to apply to consumer and commercial credit made to individuals (sole proprietors or individuals who own a business). She asked if her explanation made sense. Representative Hannan agreed. 3:59:20 PM REVERAND ANDY BARTEL, SELF, ANCHORAGE (via teleconference), shared that he had been a resident and safe leader in Anchorage for the past decade. He testified in favor of SB 39. He detailed that for two years, the Alaska Conference of the United Methodist Church, had unanimously adopted a resolution in support of payday lending reform. He noted that a unanimous vote in the church was about as rare as a unanimous vote in the legislature. He highlighted that church members were republicans, democrats, and independents and the bill did not favor a particular political perspective. The church believed financial institutions served a vital role in society, but they must guard against abuses and deceptive lending practices that took advantage of the neediest for the gain of the richest. He underscored that banking regulations must prevent the collection of usurious interest that kept people in cycles of debt. He stressed that payday lending in Alaska was predatory lending extracting millions of dollars from local impoverished citizens and the local economy. He stated that short term loans by payday lenders were not the only option for some individuals. He listed Credit Union One, Spirit of Alaska Credit Union, Wells Fargo as options for small dollar short-term loan products that came in under the proposed 36 percent cap. Prior to returning to Alaska, he had been a pastor in South Dakota, which also enacted a similar cap to reform payday lending. He highlighted that subsequent studies showed the economy had only benefitted from enacting a 36 percent cap on all lenders. He pointed out that South Dakota had saved $81 million a year in fees. He underscored that the bill would make a real and positive difference for some of the state's most vulnerable Alaskans. He implored the committee to pass the legislation. He thanked the committee. 4:02:43 PM GREG PORTER, ONLINE LENDER'S ALLIANCE, ARLINGTON, VA (via teleconference), shared that the organization had submitted written testimony as well. The alliance focused on policy surrounding credit access and believed that more options yielded better outcomes for consumers. He stated there had been a lot of discussion on payday products, but there was much more in the bill that would impact access to credit for consumers and small businesses. He detailed that nearly one-third of Alaskans were considered credit constrained and Alaskans led the nation in credit card utilization and had the highest card balances in the U.S. He disputed claims that lenders would keep making loans to the same borrowers at lower cost if the bill was enacted. He stated that if someone needed a couple hundred dollars until their next paycheck, a lender could charge $1.50 per week in total fees and interest. He remarked that common sense suggested that small dollar lenders would not be able to adequately price for cost or risk and borrowers would see options dry up. He highlighted there was research from the federal reserve backing up his statement. Mr. Porter reported that Illinois applied the same framework of restrictions as SB 39 and a study showed that credit access declined for thousands of consumers after the restrictions were enacted. He referenced some proponents claims that large legacy banks and credit unions offered small dollar loans. He stated it was technically true, but for a small number of individuals. He stated the offerings did not come close to meeting demand. The bill worked against more banks entering into the small dollar space. He explained that states had the ability to extend loans across state lines and used the assistance of service providers. He stated that the bill worked to stop banks from offering loans if they worked with a service provider. He pointed out that when people lost the ability to access products to support themselves in a downturn, they were more likely to turn to government support. He stated that on a per capita basis, Alaska ranked near the top on public support payments. He believed the bill would increase the need. He urged the committee to oppose the bill. 4:06:14 PM AT EASE 4:06:43 PM RECONVENED 4:06:54 PM MIKE COONS, SELF, WASILLA (via teleconference), opposed the the bill. He stated that the bill was not about poor people only. He thought the bill boiled down to the government getting involved in people's mistakes, while government could not control its spending and borrowing from the Permanent Fund Dividend. He remarked that the mistakes were in many cases due to poor education and impulse buying. He suggested that it did not matter if interest rates were 194 to 521 percent or general lending laws of 39 percent. He stated that people got into debt and stayed in debt. He read from the last paragraph of the sponsor statement. He asked what constituted reasonable interest rates. He wondered if it was 12, 25, or 39 percent. He relayed the Discover credit cards had a rate of 18.24 to 27.24 percent. He stated that people were getting payday loans because banks would not take the risk. He suggested that the legislature should go after credit card companies that allowed multiple credit cards when a person was heavily in debt. He stated the no amount of government help would fix the problem. He underscored that the key was teaching kids responsible financial management. He believed there should be classes taught on the subject. He was in support of separate legislation that taught financial literacy. 4:09:46 PM WENDY GIBSON, CHECK CITY, PROVO, UT (via teleconference), testified in opposition to the bill. She shared that she is an Alaska licensed payday lender located in Provo, Utah. She stated that although SB 39 was a consumer friendly bill to reduce the cost associated with short-term loans, its passage amounted to a wholesale prohibition of licensed short-term lending in Alaska. She highlighted that if the bill passed, the only entities that would offer loans were those with no regard for Alaska law. She believed Alaskans would face fewer choices, higher risk, and greater financial hardship. She stated that customers deserved access to credit that was transparent, safe, and regulated. The company charged a flat fee, did not charge interest, and its loans were capped at $500. The company was also subject to strict money rules in Alaska including offering a repayment plan if customers were unable to pay by the due date. She stated that in the past year, the Consumer Financial Protection Bureau had received only one complaint against an Alaska payday lender. She stated that the statute had worked well for years. She emphasized that the bill was not data driven and did not include input from all stakeholders. She thought the bill would unintentionally harm people it was trying to protect. She asked the committee to vote against the bill. 4:12:16 PM KAY WRIGHT, SELF, NIKISKI (via teleconference), was in opposition to the bill. He stated that short-term loans were a priority for some village residents trying to stretch finances from paycheck to paycheck. He thought the bill should allow short-term loans to continue. He remarked that it was sad when a person could not get a loan from a bank in a remote area. 4:13:26 PM Co-Chair Foster shared that he would keep public testimony open for the time being. He provided the email address for written testimony. [Note: Co-Chair Foster closed public testimony later in the meeting at 4:31 p.m.] 4:14:23 PM SENATOR FORREST DUNBAR, SPONSOR, addressed the idea that there was something unique or different about the anti- evasion provision. There was written testimony from the Center for Responsible Lending in members' bill packets written by Mr. Kushner that included a section addressing the topic. He elaborated that it had to do with the service provider issue Mr. Kushner had spoken about. He highlighted that it was not a novel language; the language was identical or near identical to language adopted in Maine, New Mexico, Washington, Connecticut, and Illinois. He noted the language had not been repealed in any of those locations or overturned by a federal lawsuit. He clarified that the bill did not include a novel expansion and included standard anti-evasion language. Co-Chair Foster set an amendment deadline for Saturday at 5:00 p.m. CSSB 39(FIN) was HEARD and HELD in committee for further consideration. 4:15:44 PM