HOUSE BILL NO. 145 "An Act relating to loans in an amount of $25,000 or less; relating to deferred deposit advances; and providing for an effective date." 9:09:05 AM Co-Chair Foster invited the sponsor and his staff to the table. REPRESENTATIVE STANLEY WRIGHT, SPONSOR, introduced the bill with prepared remarks. Payday loans with astronomical interest rates of up to 521.4 percent, rates that turn a lifeline into a chain, were not legal in Alaska until 2004. Despite dire warnings from consumer protection groups back then, exemptions for payday lenders were made. Twenty years down the road, we have seen the worst consequences from this oversight come to fruition, harming the most vulnerable members of our population. Payday loans, marketed as an instant solution to a short-term emergency, are structured as a debt trap by design. HB 145 removes the exemptions that have allowed such predatory practices to flourish unchecked. This legislation will align the interest rates and fees of payday loans with those charged by traditional banks, restoring fairness and equity to our lending laws. Today, we have a chance to right that wrong and ensure that no Alaskan has to suffer under the burden of predatory interest rates ever again. 9:10:58 AM RACHAEL GUNN, STAFF, REPRESENTATIVE STANLEY WRIGHT, discussed the legislation with prepared remarks: The stark reality is that more than half of Alaskans live paycheck to paycheck. For many, the margin between managing daily expenses and a financial catastrophe is razor thin. Ms. Gunn shared that her background was in tourism, sales, mining, and fishing. She detailed that her first paid sick day was working for the legislature the previous session. She continued with prepared remarks: And when life inevitably happens, as it does every year thousands of residents in our community, folks turn to payday loans. Interest rates for these payday loans average 421 percent. This is because the rate is not set by the friendly competition of the market, but by an exemption for these payday lenders crafted in Alaska statute in 2004. At that time, consumer protections groups warned us of the consequences of this exemption. It's a rate so astronomical that it's hard to fathom - but if you paid that interest rate on a $300,000 house, you'd be paying $1.6 million yearly for the 30-year term of the loan. You don't need a credit history to access a payday loan, you just show up with a paystub and your bank account details. The average payday loan taken out in Alaska is $440. If the average person taking out a payday loan doesn't have the money saved to cover the expense in the first place, it is unlikely they will have the money to pay the loan back in two weeks they might not even be able to cover the exorbitant interest that is due in that time. The average time it takes the average Alaskan to pay off this loan is five months, and these folks access payday loans five times a year. Payday loans target folks locked out of the regular consumer borrowing markets - perhaps due to poor credit history or no credit history at all - they can borrow the money they need to avoid the immediate crisis and default at incredibly high rates. Payday loans cost Alaskans $29 million a year. 68 percent of these payday loans are taken out online, and the majority of brick and mortar payday loan shops, which are concentrated in economically depressed parts of our cities, are not incorporated in our state. 20 states have capped interest rates for these kinds of loans at 36 percent. Active duty military members and their dependents are federally protected from predatory rates. Once the member separates, they no longer enjoy that protection. One Texas study shows that while less than one in ten people in the general population took out a payday loan to cover expenses, that rate jumped to half of the veteran population. 9:13:34 AM Ms. Gunn relayed that one of the big players that devised the loophole for interest rates in 2004 no longer operated in Alaska, but the company left a legacy in CourtView and small claims court of 18,809 cases. She stated that Alaska's Permanent Fund Dividend (PFD) was a lifeline for its most vulnerable populations and when the state was able to garnish the PFD to pay the predatory lenders, it was removing the most basic lifeline that people relied on. She concluded her prepared remarks: HB 145 removes the exemptions for these payday lenders under the small loans act, and it flattens the interest rates for these types of loans at 36 percent. It creates an anti-evasion provision so that predatory online lenders can't use rent-a-bank schemes posing as financial institutions in states with lax banking regulations to utilize loopholes to target Alaskans. 9:14:44 AM Representative Wright added that many individuals were being affected across the state and it was hurting the state's economy. He explained that the funds collected [by the payday lenders] did not remain in Alaska. He remarked that nine times out of ten the money was going to another unnamed state. The situation hurt the most vulnerable Alaskans and the state's economy. Co-Chair Foster noted that the bill was currently in its first hearing and there would be no public testimony or fiscal note review during the present meeting. Representative Ortiz thanked the sponsor for bringing the bill forward. He stated the $29 million per year cost to Alaskans from payday loans was an astounding statistic. He asked how the number had been calculated. Ms. Gunn replied that there was a good amount of data available. She deferred the question to Jen Griffis with the Alaska Children's Trust. JEN GRIFFIS, VICE PRESIDENT OF POLICY AND ADVOCACY, ALASKA CHILDREN'S TRUST (via teleconference), asked for a restatement of the question. Representative Ortiz restated his above question. 9:17:46 AM Ms. Griffis replied that she would provide an answer in writing. Co-Chair Foster listed additional testifiers available for questions. Representative Coulombe thanked the sponsor for bringing the bill forward. She asked if the legislation put a cap on the interest rate. Representative Wright replied that the cap was 36 percent. Representative Coulombe asked why veterans were more vulnerable than others to the situation. She observed veterans' numbers were double that of others. Ms. Gunn responded that many individuals joining the military were young and once their service was complete they were starting over without much oversight or family guidance. She stated that younger individuals, older individuals on a fixed income, and recently separated military members were all seeking out the loans. She stated that the loans were targeted to the most vulnerable, low income members of the population. Representative Coulombe asked if there was a sense that the companies located themselves outside of military installations. She asked if there was evidence the companies were targeting military members. Representative Wright replied affirmatively. There were companies located outside the base in his district. He stated it was astonishing to know the companies preyed on certain groups. He stated it was where the clientele was. 9:20:56 AM Co-Chair Johnson remarked that there was a place for many types of things in the market. She asked if the bill would reduce the amount of money available for people to borrow. She recalled when she was young and unable to pay for things out of pocket and the need for quick access to funds. She stated that she would have been much more likely to use something like payday loans than something she knew she could pay off. She understood what the bill sponsor was saying about the cycle of lending, but she also recognized that people could make their own decisions. Ms. Gunn responded that 68 percent of all payday loans were being taken out online. She relayed there were credit unions offering small loans products with reasonable terms, providing more access to small loans than ever. Much of what was seen with the [payday loan] locations were the convenience and education in the areas. She added that 20 states had capped the interest rate at 36 percent for payday lenders. She stated that the small loan market was alive and well in those states. Co-Chair Johnson asked if any businesses would be put out of business as a result of the bill. Ms. Gunn answered that the sponsor did not anticipate any businesses incorporated in Alaska would be put out of business as a result of the bill. She could not answer whether any out of state incorporated businesses would continue to do business. She explained that for the payday lenders currently operating in Alaska, payday loans accounted for 10 to 15 percent of their business. The lenders were primarily pawn shops with other products. The sponsor did not anticipate that reducing the "astronomical interest rates" down to 36 percent would put any of the businesses out of business. Co-Chair Johnson asked if it was an interest rate or an advance fee. Ms. Gunn responded that the exemption for payday lenders was brought about from SB 272 in 2004. She stated there had been warnings from AARP, AKPRIG [Alaska Public Interest Research Group], and Catholic charities about what the exemption could cause in Alaska. She stated that the average interest rate was 421 percent up to a maximum exceeding 500 percent. She stated that the businesses were charging the maximum allowed under the statutory exemption. She stated it was not an interest rate set by the market. 9:24:17 AM Co-Chair Johnson asked if it was actually an interest rate. She thought it seemed like a cash advance fee as opposed to an interest rate. Ms. Gunn referenced others available to answer questions. She referenced a provision related to the Small Loans Reform Act in the legislation and explained that setting the interest rate at 36 percent was for transparency. Currently, the interest rate was compounding and customers were charged for the interest on the loan and the principal and balance. She stated it is an interest rate. She deferred additional details to the Division of Banking and Securities. Co-Chair Johnson relayed that she could ask further questions offline. Representative Tomaszewski referenced the statement that payday loans could be done online. He asked if the bill would prevent online companies out of state [from providing the loans in Alaska]. He asked how it would be regulated in order to prevent individuals from using the same service online that was currently offered in brick and mortar stores. 9:26:43 AM Ms. Gunn answered there was an anti-evasion provision in the bill that would create a safe harbor. She explained that lenders charging an Alaskan an interest rate above 36 percent had to play by Alaska's rules. There was no regulation if a business was charging under 36 percent. Representative Stapp looked at the analysis in the packet and noted that currently there were licensing fees for 19 Deferred Deposit Advance (DDA) lenders. He asked if the out of state lenders paid the licensing fees. Ms. Gunn deferred the question to the Division of Banking and Securities. Representative Stapp stated that the [licensing] fee was currently $3,000. He suggested that the state licensing fee could be increased to $100,000, which would likely make businesses change their behavioral practices. He asked to hear from the department. 9:28:23 AM TRACY RENO, FINANCIAL EXAMINER, DIVISION OF BANKING AND SECURITIES, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT (via teleconference), answered that everyone currently paid a licensing fee. She stated that because the bill removed the exemption for payday lenders or deferred deposit advances, they would try to mesh the loan into the Small Loan Company Act, which would require amendments to make it work. She explained that companies would pay the annual renewal fees though the online nationwide multistate licensing system as all small loan companies currently did. She noted there were 12 current licensed locations with 7 approved companies all out of state. Three of the companies had branches in Alaska and there was one website and one mobile app. The fees paid were annual renewals and would be done just like the small loan companies if the bill went through and removed the Deferred Deposit Advance Act. Representative Stapp asked for verification there was a separate licensing fee. He stated his understanding that if the bill moved forward the companies would be rolled under the existing license fee. He considered that there were 19 businesses engaged in the activity under a separate license fee. He asked if increasing the renewal fee from $3,000 to $100,000 per year would net revenue for the state and change behavior. Ms. Reno answered that the maximum loan amount was $500 or less with a 14-day advance maximum. She assumed that the fee would put the businesses out of business. She stated that the businesses could not make enough money on a $500 loan to stay in business with a $100,000 annual fee. Representative Stapp asked for verification that the [payday lender] businesses would have a different license if the bill passed. Ms. Reno responded affirmatively. 9:31:12 AM Representative Hannan pointed out that the fiscal notes indicated that some businesses may choose to move to the new type of licensure. She asked if there would still be a remaining licensure the businesses could operate under. She referenced the language in the fiscal note specifying that some DDA licenses may choose to apply for licensure under the Alaska Small Loans Act, which was where the cap of 36 percent was located. She remarked it was the loophole the bill was trying to close, but the language in the fiscal note seemed to indicate businesses would still have the ability to operate under their current licensure. Ms. Reno responded that it was her understanding that the bill would completely repeal the Deferred Deposit Advance Act (the payday lending act); that current license type would go away completely. The businesses would be able to apply for a small loan company license, which would allow them to lend $25,000 or less under usury. She explained that if a business chose to go over usury (around 10.5 percent depending on the day), it would be required to get a small loan company license. She stated it depended on the type of business a company was doing. She elaborated that if a business chose to apply for a small loan company act license in Alaska with restrictions on the interest rate, the rate would decrease from around 400 percent (depending on the specific program) to 36 percent. Representative Hannan asked what the legal structure would be to prevent someone from going online and using a non- licensed Alaska predatory loan company. Ms. Reno answered that the department was normally alerted when someone had a complaint. She explained that occasionally when someone had a problem the division was able to investigate and do searches online when it had the capacity. Additionally, the division was alerted by other states. She relayed it was typically word of mouth until someone brought an issue to the division's attention. Representative Hannan asked for verification that the division had investigatory staff to look into and shut down predatory lending by non-licensed providers in Alaska if the legislation became law. Ms. Reno agreed. She deferred the question to the director for additional detail. 9:34:41 AM ROB SCHMIDT, DIRECTOR, DIVISION OF BANKING AND SECURITIES, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT (via teleconference), answered that unlicensed activity in any of the division's program areas was a fact of life and the division routinely took action against people engaging in unlicensed activity. He assured committee members that if the bill passed and the division discovered someone was providing loans at an annualized interest rate over 500 percent, the department would pursue and enforce the matter. Representative Hannan stated she was supportive of the bill, and she wanted to ensure the legislature was closing any online loopholes. Co-Chair Foster thanked the sponsor for the presentation. HB 145 was HEARD and HELD in committee for further consideration.