SENATE LABOR AND COMMERCE COMMITTEE February 25, 1993 1:35 p.m. MEMBERS PRESENT Senator Tim Kelly, Chairman Senator Steve Rieger, Vice-Chairman Senator Drue Pearce Senator Georgianna Lincoln Senator Judy Salo OTHERS PRESENT Senator Robin Taylor COMMITTEE CALENDAR SENATE BILL NO. 76 "An Act preventing persons with felony convictions from being involved in charitable gaming activities as a permittee, licensee, or employee in a managerial or supervisory capacity; and relating to `political uses' and `political organizations' as those terms are used in the charitable gaming statutes." SCHEDULED BUT NOT HEARD THIS DAY. SENATE BILL NO. 105 "An Act relating to motor vehicle dealers and to agents for motor vehicle buyers; and providing for an effective date." BANKING CODE REVISION PREVIOUS SENATE COMMITTEE ACTION SB 76 - See Labor & Commerce minutes dated 2/11/93, 2/25/93, and 3/4/93. SB 105 - See Labor and Commerce minutes dated 2/25/93. See Judiciary minutes dated 3/10/93. BANKING CODE REVISION - previously heard on 2/23/93. WITNESS REGISTER Joe Ambrose Senator Robin Taylor State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Testified on SB 105. Steven Allwine Alaska Auto Dealers 8725 Mallard Street Juneau, Alaska 99801 POSITION STATEMENT: Supported SB 105. Willis Kirkpatrick, Director Division of Banking, Securities, & Corporations Dept. of Commerce & Economic Development P.O. Box 1100807 Juneau, Alaska 99811-0807 POSITION STATEMENT: Banking Code Revision. Marc Langdon, CEO NorthRim Bank 9620 Spring Hill Drive Anchorage, Alaska 99508 POSITION STATEMENT: Banking Code Revision. Jeff Bush, Attorney 175 S. Franklin Street, #318 Juneau, Alaska 99801 POSITION STATEMENT: Banking Code Revision. William Moran, President First Bank Box 7920 Ketchikan, Alaska 99901 POSITION STATEMENT: Banking Code Revision. Craig Ingrim Mt. McKinley Bank Box 73880 Fairbanks, Alaska 99707 POSITION STATEMENT: Banking Code Revision. Charles McKee 7800 DeBarr Rd. E. #63 Anchorage, Alaska 99504 POSITION STATEMENT: Banking Code Revision. ACTION NARRATIVE TAPE 93-15, SIDE A Number 001 CHAIRMAN TIM KELLY called the Labor and Commerce Committee meeting to order at 1:35 p.m. SENATOR KELLY introduced SB 105 (MOTOR VEHICLE DEALERS & BUYERS' AGENTS) and invited the prime sponsor, SENATOR ROBIN TAYLOR, to testify. SENATOR TAYLOR gave some background information on SB 105 dealing with an automobile broker, who was working in Alaska, going out of business without notice. He explained it left at least 30 people in Southern Southeast Alaska either without the car they thought they had purchased, or without legal title to a vehicle which had been delivered to them. He further explained that many were out dollars, and others were stuck in a nightmare that began with a dream of owning their first new car. SENATOR TAYLOR said the legislation was an attempt to see that problem would never be repeated by the establishment of a new definition in state law for a buyer's agent. It would regulate the activities of such an agent and define the difference between a buyer's agent and a licensed dealer. SENATOR TAYLOR said the bill would offer real protection by requiring any fees collected by the agent be held in escrow until the vehicle was delivered. The buyer's agent would be required to maintain a fleet record on each sale, including evidence of delivery. SENATOR TAYLOR reviewed the criminal penalties, asked for support for SB 105, and gave an example from Ketchikan to support his testimony. SENATOR KELLY asked how many car brokers there were in Alaska, and there was some discussion with SENATOR TAYLOR over possible numbers. Number 061 In a series of questions and answers, SENATOR RIEGER discussed with SENATOR TAYLOR the role of the agent and the delivery of the car. SENATOR KELLY clarified the legislation did not apply to a licensed dealer or a salesman for a dealer. JOE AMBROSE, aide to SENATOR TAYLOR, expanded the information on warranties and the role of the buyer's agent. SENATOR RIEGER gave an example to ask when a person becomes a dealer in Alaska. SENATOR KELLY invited STEVE ALLWINE, representing automobile dealers throughout the state of Alaska, to testify. Number 124 MR. ALLWINE voiced support from all of the dealers in Alaska on behalf of SB 105, and he commended SENATOR TAYLOR'S for his introduction of the legislation. He added insight into some additional problems such as buyers who received different vehicles from those requested, buyers sold vehicles that were not new, warranties that were different from expected, lack of safety notifications, and manufacturers' recalls. He explained some of the problems did not surface until several years later, leaving consumers and local dealers with the dilemma. He quoted automobile manufacturers as being dissatisfied with the manner in which the brokers handled their automobiles. Number 161 SENATOR RIEGER asked questions about warranties of MR. ALLWINE in connection with Section 1, and how it would work in practice in Alaska. MR. ALLWINE thought it would work because of the words, "reasonable distances." He gave examples of warranty failures, and how they were handled in the rural areas in Alaska. They discussed automatic warranties among Chrysler vehicles, including the purchase of vehicles from Anchorage to Southeast Alaska. SENATOR KELLY clarified his testimony dealt with new cars rather than used, and MR. ALLWINE agreed. SENATOR PEARCE moved to pass SENATE BILL NO. 105 from committee with individual recommendations. Without objections, so ordered. (The committee recessed until 2:00) SENATOR KELLY returned the proposed legislation, BANKING CODE REVISION, to committee and invited WILLIS KIRKPATRICK to continue his testimony on the recodification of the banking code. SENATOR KELLY noted the committee was on teleconference to Ketchikan, Anchorage, and Fairbanks. SENATOR KELLY said there were concerns expressed about the proposed legislation at the last meeting, and he thought MR. KIRKPATRICK and MR. BUSH had addressed most of them. He asked for a review of those concerns before opening the discussion to the teleconference and those present. MR. KIRKPATRICK chose to begin with a response to MARC LANGDON, CEO of the NorthRim Bank in Anchorage, who sent down a private rough draft summarizing his previous comments from the 2/23/93 meeting. The following is excerpts from the report and a response from MR. KIRKPATRICK. Number 251 MR. KIRKPATRICK quoted a problem area from MR. LANGDON in Section 7 of AS 06.01, paragraph (d), "a director, officer, or employee of a financial institution who receives a deposit knowing that the institution is insolvent and without the department's prior approval, is guilty of a Class C felon." MR. KIRKPATRICK explained that during the period of failing banks, his division didn't want them to close immediately, because they were trying to find prospective borrowers. He said the attorneys for the failing banks were concerned about an existing law making it a felony to receive deposits while the bank was insolvent. He cited the addition of "without the department's prior approval," to allay the fears by the bank of criminal fraud action, and he explained the control and protection of the depositors. MR. KIRKPATRICK assured MR. LANGDON that neither he nor his employees, in the situation as described, were going to be adjudged felons. In reference to (e) (f) and (g) in the same section of MR. LANGDON'S draft, MR. KIRKPATRICK explained it dealt with the state having the authority to assess penalties for violation of the Alaska Banking Code. He described MR. LANGDON'S concerns because of a new fiduciary from Congress which gives extremely stiff penalties by the federal government to anyone who is violating federal law. (MR. BUSH suggested it could be a million dollars a day potential penalty.) MR. KIRKPATRICK assured MR. LANGDON the legislation would operate very much like a public utility penalty, and the bank would not be assessed without an opportunity to respond. Number 312 MR. KIRKPATRICK, in reference to Section 17, wished there had been more discussion with the banks on the notice for closing on holidays. There was a discussion with SENATOR KELLY and MR. BUSH about it being rather a non-problem. In reference to Section 28, MR. KIRKPATRICK quoted (h), "The department may adopt regulations classifying loans based upon the type of securities or collateral and restricting or limiting a bank's authority to make loans to certain classes." He didn't think MR. LANGDON realized the origin of this statute in relation to problem loans such as real estate development loans and the difficulty in covering every type of loan. He quoted MR. LANGDON'S rejoinders of, "This provision seems to indicate that the State knows more about the economic conditions of each bank's market than do the banks," as being correct, and he used the Alaska Mutual Bank to make his point about questionable loans. Number 376 SENATOR KELLY suggested the division could limit the authority of a bank to make loans, and MR. KIRKPATRICK replied they could by regulation, but some banks were difficult to convince of the danger. SENATOR LINCOLN questioned her understanding of "by statute," and read some passages which would limit the bank's authority to make loans to certain classes. MR. KIRKPATRICK agreed with her as to MR. LANGDON'S concerns, and he described his discussion with MR. LANGDON involving the authority to address some problems not otherwise covered in statute. Number 411 MR. BUSH explained current existing law in relation to lending, with some restrictive statutory limits, which will be removed in the revision of the banking code. He said as long as the lending situation in the state is going well, there won't be the restrictions. MR. BUSH explained the authority of the division will remain in case they see a problem developing. SENATOR KELLY discussed the authority under regulation, rather than statute, depending on the extent of the need, and he expressed some discomfort with that kind of authority since he favors the statute approach. SENATOR LINCOLN suggested placing a period right after "collateral" on page 15, line 6, and delete the remainder of the sentence, "... and restricting or limiting a bank's authority to make loans to certain classes." She discussed her opinion. SENATOR KELLY thought it might work. Number 452 SENATOR SALO questioned limiting authority on certain classes of loans, and she gave an example of poor economic times where a bank is surviving by being into the condo market heavily. She asked if this would be an area where the loans would be restricted. MR. KIRKPATRICK thought it was an excellent example, and he used the Peninsula Savings and Loan in the condo market in Anchorage to outline the division's process in dealing with failing investments and restricting additional condo loans. The bank protested there was nothing in the law limiting the loans, and MR. BUSH explained how this could be handled by redrafting the provisions. SENATOR SALO suggested crafting in a different manner by requiring a level of diversification in loans, but she was not in favor of eliminating this section, since she thought the division should be able to steer banks away from risky markets. MR. BUSH thought her answer would achieve the same goal, but he had a problem with defining it in statute. There ensued a discussion with SENATOR KELLY and MR. BUSH on where the judgement would lie. Number 520 In reference to Section 32, MR. KIRKPATRICK quoted (a), "a director, officer, or employees of a state bank many not knowingly, willfully and persistently overdraw the director's, officer's, or employee's account or permit a customer to do so," and said he spent considerable time with MR. LANGDON on this area. MR. KIRKPATRICK explained he was concerned about the huge overdrawn household accounts by choice customers that the banks don't want to lose. He expressed concern with accounts that were overdrawn "knowingly, willfully and very persistently" and the abuse in using the overdrawn account as a credit source. SENATOR KELLY asked about existing law, and MR. BUSH explained Section 32 was still in existing law with some technical changes. There was some discussion on commercial accounts with SENATOR KELLY as being a non-problem. MR. KIRKPATRICK reviewed Section 38, AS 06.05.235, which "relates to provisions that would require bank holdings companies to obtain a permit and possibly post a bond before they could acquire a bank in the state," which MR. LANGDON declared would be an impediment to business. MR. KIRKPATRICK used Rainier Bank in discussing the purchase of failing banks, which eventually gave Bank of America about 75% of the banking assets of the State of Washington. It took a threat of anti-trust legislation to make the Bank of America more responsive to the problem. TAPE 93-15, SIDE B Number 001 MR. KIRKPATRICK explained it was this concern over interstate branching which inspired one of the provisions in the new code. The provision would require that existing branches be purchased rather than new ones formed by Outside banks. Otherwise, it would not be possible to prevent a large Outside bank from gobbling up all of the banking interests in Alaska. SENATOR LINCOLN wondered why MR. KIRKPATRICK changed the "equal to" to "not more than" on page 18, line 31, and she was concerned the wording could be construed as "less than." MR. BUSH explained why a bond of that specific amount was needed, but in some cases the bond could be less. In all of the banking history of Alaska since 1970, a bond was not needed in this case. MR. KIRKPATRICK explained how the legislation was an attempt to say the holding company does have a responsibility to the subsidiary. SENATOR KELLY began the teleconference by inviting WILLIAM MORAN, President of First Bank in Ketchikan, to testify. MR. MORAN said he attended the first meeting on the proposed legislation and has been involved in the process with the state Division of Banking from the beginning. He supports the legislation as currently written, and he explained the part First Bank has played in being on both sides of the charter issue in changing from being a national bank to a state chartered bank. MR. MORAN thought the recodification of the banking code would allow enough flexibility to keep it current without returning to the legislature every time there needed to be a minor change. He reviewed the changes in subsidiaries, which he considered kindred financial services, and the lending statutes which he thought were difficult to decipher. MR. MORAN explained why he preferred the broad powers described by the Division of Banking on loan guidelines and employee loans. He praised the expansion and flexibility of the proposal by the state in the revised code as similar to those adopted by the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency. MR. MORAN concluded with praising the ability of the Division of Banking to be more flexible on allowable investments in Federal Home Loan Bank legislation passed at the national level, which would allow commercial banks to join the home loan bank system. He thought the current recodification is an enlightened approach to address a number of problems with the existing statutes and would bring the code up to parity with the national banking system. Number 124 SENATOR RIEGER clarified that MR. MORAN was a state chartered bank, and he wanted to know the advantages. MR. MORAN listed the reasons they liked being an Alaskan bank including going to Juneau to talk to someone who knows what is going on v. dealing on the national level with the latest fad in bank regulations. He praised the working relationship with the state. SENATOR KELLY turned to Fairbanks to hear from CRAIG INGRIM, President of the Mt. McKinley Bank. MR. INGRIM agreed with the proposed legislation and felt it would benefit all of the state banks. SENATOR RIEGER asked if he had FDIC insurance, and MR. INGRIM said they did. SENATOR KELLY next went to Anchorage to hear from CHARLES MCKEE. Number 171 MR. MCKEE said he would fax his information to SENATOR KELLY as to why he was against the proposed legislation. SENATOR KELLY gave him directions for sending it from the LIO. MR. MCKEE expressed concerns about Section 6 dealing with injunctions, notices and hearings because he wanted to bring back a gold and silver based currency, utilizing the Legal Tender Issue Act. He said it was all within the Cartwright paper work being faxed to SENATOR KELLY. MR. MCKEE concurred with MR. LANGDON since he was in sympathy with people faced with felony charges, and he described trying to bring criminal trespass charges against those who hindered his project. Number 209 MR. KIRKPATRICK, asked to continue with Section 51, AS 06.05.235, on page 25, line 24 (c), quoted "if a bank fails to maintain its total capital accounts and loan loss reserves in an amount equal to the assets classified as substandard by the FDIC or the state ... the department shall consider the failure as endangering the safety of the depositors and may direct the bank's directors to increase the capital accounts in an amount sufficient to cover substandard assets." MR. KIRKPATRICK said it was existing law and has been a reliable tool in the closure of financial institutions. He explained MR. LANGDON'S view as being Alaska's First Federal Reserve Bank, and as a member, is examined by the Federal Reserve System every six months. MR. LANGDON quoted the federal examiners as seeing in his bank loans, substandard loans, which was giving him problems in Southern California. He feels he might get forced into raising more capital. MR. KIRKPATRICK said he had discussed with MR. LANGDON the importance of the existing law in relation to possible deteriorating loans and possible failure by the bank. He pointed out the key words in the legislation that could endanger the depositors and explained the ramifications of substandard assets, but MR. LANGDON did not think some of the loans were substandard. SENATOR SALO asked for the significance for deleting "adjusted." MR. BUSH explained the definitions had been standardized throughout the bill as listed on page 47. Number 280 MR. KIRKPATRICK discussed with SENATOR KELLY some added information to MR. LANGDON'S concerns about Section 51. MR. KIRKPATRICK next went to Section 71, AS 06.05.437, on page 36, beginning on line 22, which would allow the department to order the board to remove an officer who has been "negligent, dishonest, reckless or incompetent." MR. LANGDON objected to what he considered the department's right to micro-manage the bank, rather than regulate. SENATOR KELLY asked whether he had a discussion with MR. LANGDON, and MR. KIRKPATRICK indicated it had been a lengthy one. SENATOR KELLY asked for a copy of the privileged information from MR. LANGDON. MR. KIRKPATRICK reviewed the last section presented by MR. LANGDON which asked that international banks be subject to the same rules and restrictions that cover domestic banks. He was concerned the international bank could collect deposits from customers in the state, but not reciprocate with proportional lending. MR. BUSH thought the legislation would do what MR. LANGDON wanted, which was for domestic banks to have the same authority as international banks. He promised that all banks, domestic and international, would play by the same rules. SENATOR KELLY asked about other concerns, and MR. KIRKPATRICK discussed a letter from JIM CRAWFORD, the CEO of City Commerce Corporation, which he has labeled a non-bank. MR. KIRKPATRICK was perplex about a Fosby Ruling mentioned by MR. CRAWFORD, and he thought it might be related to trading accounts, but he had not been able to contact MR. CRAWFORD about his concerns. SENATOR KELLY asked how the figure of $10,000, a new limit for loans to an employee, director or officer, was determined, and MR. KIRKPATRICK reviewed some past history. They concluded it was an adjustment for inflation. Number 370 SENATOR KELLY explained he had been asked in the bill to increase the pawn shop cap from $200 to $500, and MR. KIRKPATRICK indicated he had no objections to its inclusion in the bill. MR. BUSH referred to a letter from MR. CRAWFORD with his second concern related to Section 49, which he thought included the prohibition of a non-bank bank. This was discussed at the last hearing on this proposed legislation, as well. MR. BUSH said the section was borrowed from Montana and was not designed to deal with MR. CRAWFORD'S operation. MR. BUSH said MR. KIRKPATRICK was going to be in touch with the Association of State Regulators to determine language that would not touch MR. CRAWFORD'S business or other similar businesses. For now, MR. BUSH suggested pulling Section 49 from the bill. Number 410 MR. BUSH quoted MR. CRAWFORD as discussing the definition of "banking business" at some length, and they agreed it needed to be changed because the banking business has changed over the years. He offered a proposed amendment to change the definition which he hoped would be acceptable to MR. CRAWFORD. MR. BUSH addressed MR. CRAWFORD'S final request of placing a time limit on the disqualification of a director based on the director having filed for bankruptcy. He said there was agreement that bankruptcy would not disqualify a director, and he referred to Section 69 in which it is a factor the department may consider relevant in removing a director. SENATOR KELLY asked about the letter from GARY STERTON, President/CEO of the ALPS Federal Credit Union in Sitka, and MR. BUSH said he first objected to Section 9, AS 06.05.005 (b) (7) (G) and (H) on page 8. He thought MR. STERTON may have misinterpreted "may" for something the department "shall" do, or would require. He said there was no change from existing law, which he explained as a tool for examiners. MR. BUSH said they had discussed some of the other concerns of MR. STERTON, but he didn't think there was anything else that needs discussion. MR. BUSH said he had responded in writing, with a copy to SENATOR KELLY for distribution. SENATOR RIEGER expressed some concerns which he preferred to keep for the final version. SENATOR KELLY set up an appointment with MR. KIRKPATRICK, MR. BUSH, and JOSH FINK for the next morning to review the final version of the bill. MR. KIRKPATRICK gave a final review from people interested in the legislation. SENATOR KELLY said he planned to finalize the bill for one more hearing - a major overview in committee. There being no further business to come before the committee, the meeting was adjourned at 3:25 p.m.