HB 177-COMMERCIAL FISHING LOANS  10:02:38 AM CHAIR SEATON announced that the first order of business would be HOUSE BILL NO. 177, "An Act relating to interest rates on loans from the commercial fishing revolving loan fund and the community quota entity revolving loan fund; and providing for an effective date." CHAIR SEATON identified the adopted working document as committee substitute (CS) for HB 177, labeled Version 28- LS0607\O, Bullard, 3/26/13. 10:03:56 AM REPRESENTATIVE JOHNSON moved to adopt Amendment 1, labeled 28- LS0607\O.2, Bullard, 1/30/14, which read as follows: Page 1, line 13, through page 2, line 1: Delete all material and insert: "(B) [AT A RATE] of more than 10 1/2 percent a year; [OR] (C) that is less than the prime rate, as  defined in AS 44.88.599, minus three percentage  points; or    (D) [AT A RATE] that is less than three  percent a year [THE COST OF FUNDS TO THE STATE];" 10:04:10 AM REPRESENTATIVE FEIGE objected for purposes of discussion. 10:04:15 AM REPRESENTATIVE JOHNSON explained that the amendment establishes limits to the floor of the loan program, and provide security to the fund; a policy procedure. He said that, with adoption of the amendment, he could support HB 177. REPRESENTATIVE BRYCE EDGMON, Alaska State Legislature, stated support for the amendment, and said it is a positive addition to the bill. 10:05:52 AM TIM CLARK, Staff, Representative Bryce Edgmon, Alaska State Legislature, explained that Amendment 1 will be inserted in Section 1 of the bill, and he paraphrased the new language for the amended subsection (2), which read as follows: "(2) may not bear interest at a rate (A) exceeding the prime rate, as defined by AS 44.88.599, plus two percentage points; (B) [AT A RATE] of more than 10 ½ percent a year; [or] (C) that is less than the prime rate, as defined by AS 44.88.599, minus three percentage points; or (D) [AT A RATE] that is less than three percent a year [THE COST OF FUNDS TO THE STATE]; MR. CLARK stressed that under the proposed CS, as amended, for any loan made from the Commercial Fisheries Revolving Loan Fund (CFRLF), all of the above statements must be true. Further, the subsection now provides a "floating" ceiling to the interest rate tied to the prime rate, and a "fixed" ceiling of ten and one-half percent, as well as a "floating" floor tied to the prime rate, and a "fixed" floor of three percent. Without the proposed amendment, he pointed out that HB 177 would allow a loan to be offered for as much as six percent below the prime rate. Directing attention to the committee handout, titled "Amendment to CSHB 177(FSH)", page 3, he paraphrased the language, which read as follows [original punctuation provided]: Without the amendment, if the prime rate were, for example, 8 percent, it would be lawful to make a loan at an interest rate as little as three percent. In other words, the loan could be offered by as much as 6 percent below prime, since the only "floor" is a minimum 3 percent a year. With the amendment, if the Prime Rate were 8 percent, it would only be lawful to make a loan at an interest rate as low as 5 percent. In other words, the loan could only be offered for as much as 3 percent below prime, as defined by (2)(C). Subsection (2): "(2) may not bear interest at a rate (A) exceeding the prime rate, as defined by AS 44.88.599, plus two percentage points; (B) [AT A RATE] of more than 10 ½ percent a year; [or] (C) that is less than the prime rate, as defined by AS 44.88.599, minus three percentage points; or (D) [AT A RATE] that is less than three percent a year [THE COST OF FUNDS TO THE STATE]; MR. CLARK finished with an example of a product quality improvement loan offered at two percent below the prime rate, under HB 177, paraphrasing from the committee handout, page 4, which read as follows [original punctuation provided]: If the Prime Rate were at 8 percent, the interest rate on the loan would be 6 percent a year, well within the Subsection (2) parameters. Under Subsection (2), all these statements are true: (A) 6 percent does not exceed the Prime Rate plus two percent. (B) 6 percent a year is not more than 10 ½ percent a year. (C) 6 percent a year is not less than the Prime Rate minus 3 percent. (D) 6 percent a year is not less than 3 percent a year. However, if the Prime Rate were at 3.25 percent, as it is today, the interest rate on the loan would hit the fixed 3 percent floor in (D), and so the rate would be 3 percent. 10:09:23 AM REPRESENTATIVE FEIGE removed his objection. There being no further objection, Amendment 1 was adopted. 10:09:47 AM CHAIR SEATON closed public testimony on HB 177. 10:11:09 AM REPRESENTATIVE OLSON recalled that the original structure of Commercial Fishing and Agriculture Bank (CFAB) was to provide loan and operational funds to vessel owners who might not otherwise obtain standard market loans. LEA KLINGERT, President and CEO, Commercial Fishing and Agriculture Bank (CFAB), agreed. REPRESENTATIVE OLSON said that his review of the current vision statement appears to be different than what was originally intended, and he paraphrased the statement, which reads as follows [original punctuation provided]: To be the PREMIER LENDER to the commercial fishing, agriculture, timber, tourism and resource based industries of Alaska. To provide prompt, courteous service and financing customized to meet the specific needs of our borrowers. REPRESENTATIVE OLSON expressed his understanding that CFAB served clients who, due to a lack of or a questionable credit history, would not qualify for a standard market loan. Further, he stated his belief that CFAB did not generally serve as a primary underwriter. MS. KLINGERT stated her understanding that CFAB was created due to requests from the fishing and agriculture industries, whose needs were not being met through the commercial banks. She said: It is also my understanding that we were created with the idea that we would replace the state program at some time. We were never the lender of last resort; ... the division was supposed to be the lender of last resort. The way I've always looked at it is that the state department kind of gets it in the crawling, CFAB does the walking, and then you hope that they're running and they go off to the commercial, the larger institutions, at that point. REPRESENTATIVE OLSON emphasized that to be the premier lender would place CFAB in direct competition with private sector banking institutions. MS. KLINGERT explained that CFAB is a private lending institution and does compete with other entities but loan size is a limiting factor. The agency provides a service as a private, tax paying, agency. REPRESENTATIVE OLSON stated support for the bill. 10:15:12 AM REPRESENTATIVE HERRON moved to report CSHB 177, Version 28- LS0607\O, Bullard, 3/26/13, as amended, out of committee with individual recommendations and the accompanying fiscal notes. Without objection, CSHB 177 (FSH) was reported from the House Special Committee on Fisheries.