ALASKA STATE LEGISLATURE SENATE LABOR & COMMERCE COMMITTEE  March 15, 2001 1:30 p.m. MEMBERS PRESENT Senator Randy Phillips, Chair Senator Alan Austerman Senator Loren Leman Senator John Torgerson Senator Bettye Davis MEMBERS ABSENT  All Members Present   COMMITTEE CALENDAR  SENATE BILL NO. 66 "An Act relating to the authorizations for state financial institutions; relating to confidential financial records of depositors and customers of certain financial institutions; relating to the Alaska Banking Code, Mutual Savings Bank Act, Alaska Small Loans Act, and Alaska Credit Union Act; and providing for an effective date."   HEARD AND HELD   PREVIOUS COMMITTEE ACTION  SB 66 - See Labor and Commerce minutes dated 2/20/01, WITNESS REGISTER  Mr. Terry Elder, Director Division of Banking, Securities and Corporations Department of Community and Economic Development P.O. Box 110807 Juneau AK 99811 POSITION STATEMENT: Commented on SB 66. Mr. Bart LeBon, Sr. Vice President Mt. McKinley Bank 909 Park Dr. Fairbanks, AK 99709 POSITION STATEMENT: Supported SB 66. Mr. Mike Burns, President Key Bank 101 Benson Blvd. Anchorage AK 99510 POSITION STATEMENT: Supported SB 66. Mr. John Beard 425 G Street, #630 Anchorage AK 99501 POSITION STATEMENT: Supported SB 66. Ms. Jan Seiberts National Bank Of Alaska 301 W. Northern Lights Blvd. Anchorage AK 99503 POSITION STATEMENT: Commented on SB 66. Ms. Lisa Bell, Sr. Vice President Chief Operations Officer Alaska Pacific Bank Alaska Bankers Association 2094 Jordan Ave. Juneau AK 99801 POSITION STATEMENT: Supported SB 66. ACTION NARRATIVE TAPE 01-11, SIDE A  Number 001 SB 66-FINANCIAL INSTITUTIONS    CHAIRMAN RANDY PHILLIPS called the Senate Labor & Commerce Committee meeting to order at 1:30 pm and announced SB 66 to be up for consideration. MR. TERRY ELDER, Director, Division of Banking, Securities and Corporations, discussed his proposed amendments, which were in a letter dated February 26, 2001. There were four in total. He said the current bill includes business development corporations (BIDCOs), which are under AS 10.13, and CFAB, which is under AS 44.81,in its definition of state financial institution. These entities are primarily concerned with privacy. After looking at CFAB's statutes, they found a privacy provision that is almost identical to the one in the banking code. So there is no need to include them in this legislation. Rather than putting BIDCOs into a definition of a state financial institution, it refers to them specifically in the privacy provision. Consequently, the first amendment adds a new (f) to AS 06.01.028, the privacy provision, which would cover the BIDCOs. MR. ELDER said the next two amendments are related in that they change the definition of state financial institution and delete the reference to AS 10.13 and AS 44.81. The other amendment is in relation to some concerns of Credit Union One, a state chartered credit union. One of them was to the privacy provision and the other one was to change to page 21, lines 15 and 21. In both of those cases, there's an amount of $5,000, which for credit unions, it says that it's for essentially the kinds of loans to directors and members of the supervisory committees. Right now it says if it's $5,000 or more, they have to be reviewed and approved by the board of directors. Credit Union One mentioned that the federal law has been increased to $20,000. So they are asking for the same $20,000 limit. And we don't have a problem with that and we would encourage the committee to consider Credit Union One's request and change both of those $5,000 amounts to $20,000. MR. ELDER recalled that his position on removing the cap on credit card interest rates is that it would have no impact on the consumer. The major impact it will have is to allow state-chartered institutions to consider the credit card business as a viable business to get into and offer it to their customers. A survey of state-chartered institutions showed that half of them issue credit cards and half of them don't. He suspected that the half that do, do it for reasons other than because it's a good business to be in. They probably do it because they probably want to be a full service institution. It's also a vehicle for overdraft protection. He said in 1996, there was an amendment to the Alaska Retail Installment Sales Act, AS 45.10.120, saying that caps are whatever is agreed to between the lender and the borrower. The last proposed amendment eliminates the caps on the credit cards and makes them whatever is agreed to between the lender and the borrower. MR. BART LABON, Sr. Vice President, Mt. McKinley Bank, said the Alaska Bankers Association and Mt. McKinley Bank support the intent of the amendment to make AS 06.01.015 conform with the federal examination requirements so that well capitalized and mortgage banks take advantage of an extended examination schedule similar to that that's required on the federal level. The proposed change to the 18 month cycle would favor institutions that are well capitalized and that have proven by previous examination to be well managed and hold a strong capital position. The coordination of examinations between the state and federal level would benefit our state banking institutions through a more efficient use of time. It also wouldn't be as disruptive to bank business. He said Mt. McKinley Bank had a joint examination last fall and it went very smoothly. He mentioned, "As always the state has the option to return earlier to examine a bank if they feel justified in doing so based upon the results of their most recent examination." So they support the change from the 12 month cycle to an 18 month cycle and urge the state to continue to coordinate their examination efforts with the federal examiners. MR. MIKE BURNS, President, Key Bank, said he was concerned specifically with the opt in/out issue. He said: Our customers have grown to expect financial institutions to use their personal information responsibly. They also expect high quality and convenient and affordable financial services. Balancing these expectations has yielded exceptional benefits to consumers and I think also contributed to the longest sustained economic growth in modern history. The opt in restriction, which are included in this banking bill would require customers to send before any sharing of information occurs, threatens to destroy that balance and significantly reduce the benefits of shared information use. Financial institutions rely on integrated information systems to operate more efficiently, thereby avoiding the cost of acquiring and maintaining duplicate systems. Requiring our customers to opt in to information sharing decreases the speed, lowers the efficiency and raises the cost of information. This will ultimately be born by the customer who will end up paying higher prices for lower quality goods and our services. We are very strongly against this provision. It is out of step with almost every other state in the country and we strongly support the Alaska law conforming the recently passed federal legislation. CHAIRMAN PHILLIPS asked Mr. Burns if he had seen the Bankers Association recommendation. MR. BURNS answered that he had and said there are two versions of the recommendation. One incorporates the federal law just by reference and the other sets out exactly the same wording as the federal law. They do not object to either of those, but their counsel has a technical problem. MR. JOHN BEARD, counsel to the Bankers Association, said he assisted them in drafting the proposed amendment before the committee. It takes the position of simply referring to the requirements of the new federal statute rather than trying to set them out. The reason is that the federal statute calls for further regulation by various federal bodies. The Association's bill would pick up the requirements of those regulations. Picking up the federal language would put things out of sinc between the state law and federal agencies when they start promulgating their regulations. SENATOR AUSTERMAN asked if the under the current work draft everything was confidential unless a customer signs a waiver that says it's not, but once it's signed, it's not confidential any more. MR. BEARD said he thought that was a little broader interpretation. The information is always confidential. How it is shared with affiliates for financial services is governed by a lot of regulations. With opt in a customer would have to take an affirmative action to allow banks to share that information. The vast majority of other states have taken the opt out view where you get all the power of a financial services holding company MS. JAN SEIBERTS, National Bank of Alaska, said they are owned by a holding company which is owned by Wells Fargo Bank. "We support the position of the Alaska Bankers' Association." Their main concern is that their credit card department and mortgage company are now subsidiaries and under this legislation it is going to be difficult to pass information on to the consumers which they might find very beneficial. "For instance, NBA is the dominant bank in rural Alaska and they have a harder time than other parts of our state in getting information about products and services that could be advantageous to them." They believe the opt out provision is the proper way to go. MS. LISA BELL, Senior Vice President and Chief Operating Officer, Alaska Pacific Bank, said she was representing Alaska Bankers Association and they generally supported the intent of SB 66, but have concerns with the privacy provisions. They disagree with the Division of Banking on some points. They believe the state banking code as it pertains to privacy should be consistent with federal laws. There are many federal laws that are already on the books that pertain to customer privacy. They believe the opt in restrictions that would be placed on financial institutions by the proposed legislation would be unduly restrictive. MS. BELL explained that the Gramm-Leach-Bliley-Act (GLBA) already provides for annual disclosures of the banks privacy policy to all of its customers. "In addition to that annual disclosure, you are also required to disclose your privacy policy and information sharing policies with every new customer." GLBA also allows customers to opt out of disclosures to third parties. This is important because that gives them the right to prevent sharing of their non-public personal information with non- affiliated third parties that are not exceptions under the law. "So they do have a mechanism to prevent information sharing." Another prohibition GLBA has is it prohibits a financial institution from disclosing account numbers to any non-affiliated third party. You can't share a credit card number or an account number with non-affiliated parties. She explained that federal regulators were directed to establish more standards which have recently been issued that are related to the physical security and storage of customer records. MS. BELL reported that the Fair Credit Reporting Act (FCRA) already governs the sharing of non-public personal information among affiliated parties. It contains many safeguards and has its own type of opt out provisions within it that gives consumers the ability to stop the sharing of their credit information among affiliates. She said other laws like the Electronic Fund Transfer Act, Right to Financial Privacy Act and Telephone Consumer Protection Act approach the privacy issue from several different angles and "cover it quite adequately." Number 1500 MS. BELL said their proposed amendments for SB 66 replaces the entire section 3 with new wording. It makes a reference directly back to the GLBA without trying to bring in the actual language of that legislation. The first thing she wanted to clarify is that the financial records are the property of the financial institution and not the property of the customer. The customer's information pertains to the financial records. This is an important legal clarification. The next change was rewording of the exceptions to a strong ban on releasing customer or financial information and says, "Information may not be disclosed by the financial institution to another person or government except when and only to the extent that the disclosure is…" · When it's authorized in writing by the depositor or customer (already in state statute) · When it's required by federal or state statute or regulation or subpoena, search warrant or other similar type of court order by a court or administrative agency that has that jurisdiction · The direct reference to GLBA. MS. BELL also wanted to clarify the misunderstanding in the current statute when banks are asked to provide sometimes huge volumes of customer information to a government agency. It's not always clear whether the bank will be compensated for the time and materials, which could be thousands of dollars. This should be changed to say that banks would be authorized, but not required, to comply with the subpoena, search warrant, etc. that did not provide for reimbursement of reasonable costs. She explained that requests for federal agencies are already covered under other legislation. MS. BELL explained another amendment to section (c): Normally we would be required to disclose to a customer that a government entity has requested personal financial information. That's an important right the consumer has. There are times when that is not allowed under the law, but it's not always clear on the face of the document they are presented by the courts that they are either allowed to let the customer know or are banned from letting the customer know. If they are not to disclose the information to the customer, that court order must expressly directly banks not to notify the customer, otherwise they will. She suggested clarifying the definition of government in section (d). MR. BEARD observed that the proposed notification to customers when there is a disclosure in (c) sets up a "bright line test" which says it has to be done within three days rather than the present proposal which states as soon as possible. SENATOR AUSTERMAN said he had been told that state laws could be stricter than federal laws and asked if that was correct. MS. BELL replied that is correct. The intent is that they not be conflicting. MR. BEARD replied that was correct. The state may prohibit disclosures that are not prohibited by the federal law. Number 1900 MR. TERRY ELDER, Director, Division of Banking, Securities and Corporations, said that the amendments Ms. Bell suggested aren't necessary. This is because the language in current regulations and statutes is already very broad in allowing them to develop an exam schedule. He read: AS 06.05.005 (b)(1) lists the powers of the department and provides that the department may relieve a bank from the examination requirements of AS 06.05.015 if the bank's deposits are insured by the FDIC or another agency of the United States that insures bank deposits. This already gives the division the statutory authority to do something other than annual examinations. SENATOR TORGERSON asked if they do it, since they have the ability. MR. ELDER replied that they generally do examinations in concert with the federal agencies. He didn't know if they had done one [alone]. He would probably not support having the federal agency go in without state presence when dealing with a state chartered institution. He said: There are differences in what the FDIC cares about in terms of protecting its insurance fund versus what we may care about in looking at other provisions, specifically, of state law. It's a matter of maintaining your presence and your knowledge about the institutions. I would think it would be detrimental to our examiners to literally not be in a bank for, say, three years. If you read the proposed amendment and we went to an 18-month cycle and we decided not to join the FDIC on every other one, that would mean our examiners would be staying out of the institution for a period of three years and I do not think that would be attractive. It certainly is a good point that we should coordinate and we do that. He said there is a provision in current regulations at 3 AAC 02.030 that says: The examinations required under AS 06.01.015 may be conducted in alternate years as appropriate if the department determines that an examination of the financial institution conducted by the FDIC or other agency that regulates financial institutions during the intervening years carries out the purposes of AS 06.01.015. He explained they already have the statutory and regulatory position in place for that. SENATOR TORGERSON asked what the difference was if they go to 18- months since they already have the authority to it any time they want to. "Just make them happy and go to 18-months. You still have the same authority you're talking about." MR. ELDER responded that, "Their language, we think actually is more rigid than what we currently have." He would have to argue for the increased flexibility that current statute and regulations provide. Examination policy currently reads: It shall be the policy of the department to conduct, whenever reasonably possible, joint examinations with the federal deposit insurance corporation of those institutions subject to this title whose accounts are insured through that corporation. Looking at this section through this proposed amendment, it came to mind that we should include the National Credit Union Administration (NCUA) in that, because for credit unions, they have insurance generally through FDIC, but certainly we cooperate with the NCUA when we go into a credit union. He proposed an amendment after "Federal Deposit Insurance Corporation" insert "or with the National Credit Union Administration" and replace "that corporation" with "these agencies". This would clarify what is currently in statute. MR. LABON responded, "Your better capitalized financial institutions would not require the 12-month cycle. It would be up to the department to measure the performance of the bank and to gage how often they would need to come back." He said they are, "looking for some relief for the stronger capitalized, well-managed and strong performing banks so that the disruption to our normal conduct of business is minimized once every 18-months on a coordinated basis with federal agencies." MR. ELDER responded that they, in fact, try to do that. There have been times where they haven't gone in every 12-months. "It's in our interests as well that we don't go in and do examinations that really don't add value. We don't have a disagreement with what they are saying. We simply say that it would be better to be left to the flexibility currently offered by statute." Number 2300 MR. BURNS added, "These issues relating to direct examination do not affect either one of our banks. We're both national banks." MR. ELDER turned to the privacy issue and said they have some "real problems that are in the proposed replacement." The big issue here is opt in versus opt out. Current banking code in AS 06.05 has an opt in/out option.   TAPE 01-11, SIDE B "For bankers to say this is something new is not correct," MR. ELDER stated. He proposed putting the privacy provision into AS 06.01, which makes it apply also to credit unions, premium finance companies and small loan companies also. For them it would be new; but for banks it would not be new. After Gramm-Leach-Bliley passed, an article appeared on a website called "Privacy Paradise: Vermont and Alaska keep financial information under wraps." It says: Protecting consumer privacy has been business as usual up in Alaska for decades. Customer records are confidential, under the Alaska Banking Code. Records will not be shared with anyone without a customer's written OK. "That has been the law in Alaska as long as I can remember," says David Lawer, president of the Alaska Bankers Association and general counsel at First National Bank of Alaska. He has lived in Alaska since 1971. The only exceptions to the state code are for court orders and subpoenas. Lawer views the law as "a shield" more than anything else. It's helped keep private customer records away from "the ubiquitous angry spouse" and lawyers trying to shortcut the subpoena process. "It's worked more to our benefit than our detriment," Lawer says. What about a bank's bottom line? Has it hurt bank marketing efforts in any way? Not a problem, according to Lawer. I can't honestly identify how it's been harmful to banks," he says. There have been times when telemarketing companies have called Alaskan banks requesting customer lists in the hopes of selling-who-knows-what. "There have been incidents," Lawer says. "But it's not been prevalent by any means. I expect that it's been ignored." Alaska banks are just as reticent when it comes to sharing customer information with other financial institutions. "We don't share information with any other lending institutions unless we have the approval of the customer," says Sharon Engle, vice president and consumer banking center manager for the National bank of Alaska, which has been bought by Wells Fargo. "We get a lot of requests for sharing of information, but if it's not signed by the customer it's not something we participate in." There has been a little bit of discussion over whether or not the state code applies to all banks doing business in Alaska or just those regulated by the state Department of Banking. But that debate, if you can all it that, hasn't gotten very far. Nobody's ever thought to challenge the law. "To my knowledge everybody has voluntarily complied," Lawer says. Privacy has been respected and expected up in Alaska for as long as anyone can remember. "That's part of Alaska," Engle says. "Alaskans are very independent, extremely friendly. But also privacy is very important…it's a small place." Small is not a word most people would associate with a state one-fifth the size of the continental United States. But Engle says there is a definite small town, everybody-knows-everybody feeling. With a population of 600,000 or so, it can't be helped. This state. People come up here to get lost. Privacy is just extremely important. It's just been very watched. With a small population, it's something that you have to do." Refreshing, isn't it? MR. ELDER finished reading the article and commented, "Yes, it is." He said in his opinion, the reason for the opt out provision in the federal bill is for the practical reason that most people just don't fill out a little form and send it in to opt out. "Most people don't opt in either and that's the problem." He can understand the industry's viewpoint that they want to share information with other firms, especially with affiliates. An opt-in provision that requires people to sign something and actually send it in is difficult for them. "But that's been the law up here for quite some time and we see no reason to change it." MR. ELDER said he had received the privacy policies of a couple large national banks. Most people probably don't read it, but he does because of his position. But they certainly don't read it when it goes on and on using tiny print. He had examples with him that had some of the information on the back of the form. He also noted that both of the forms allowed people to opt out of information sharing among affiliates. "The Gramm-Leach-Bliley, if you just accept what the Alaska Bankers Association is proposing, that doesn't allow you to opt out of sharing of information with affiliates. It only allows you to opt out of sharing information with non-affiliates." His two examples went one step further and at least allowed customers to opt out of sharing information with affiliates. The sharing with affiliates issue becomes more important because the whole point of GLBA was to break down the previous restrictions on the kinds of companies that a bank can affiliate with, in particular, now with insurance companies and with securities firms. Ms. Bell mentioned there are restrictions on you can't provide account numbers to non-affiliated third parties and it's important to listen to those little details, because it doesn't say anything about not sharing them with affiliated third parties, which means, of course, under the new regulatory scheme, to include insurance companies and securities firms. Our viewpoint, especially with the extra provisions regarding privacy, that's in our constitution. Also, with the decades long history of privacy protection that's been in the banking code, Alaskans can decide whether or not they want to get marketing materials from securities firms and insurance companies. They can decide that for themselves. They don't need when they go into a bank and don't happen to respond properly with a little form for which they don't give you an envelope; they don't all of a sudden need to get marketing information and other kinds of information from insurance companies and securities firms. MR. ELDER said he was not suggesting the information would be used in a bad way, but he emphasized that they are talking about sharing confidential information. "We are not talking about keeping your customers from being aware of what products are out there and things like that. I don't think it would be a problem if the bank puts on its web site or provides information that we do have firms that provide these kinds of services. You can contact them at such and such or you can, in fact, opt in and we will provide the information to them directly." MR. BURNS responded that he thought Mr. Elder was being inflexible when there are only two states even considering the opt-in provision. "It's unbelievable… This Gramm legislation has changed the world and we need to be part of that." MR. SEIBERTS commented that one of the reasons for the Gramm legislation was that it was called the "Financial Modernization Act." Some financial institutions didn't have the research from the financial communities that commercial banks and credit unions did. He said: The banking commissioner is focusing on banks because he's the banking director, but there's other types of financial institutions that aren't addressed here at all. We firmly believe that the opt in position will make it more difficult to provide information to enable people to get car loans and home loans. The commercial customers are probably not going to be affected much, but the people that have the hardest time getting credit are going to be the most negatively impacted by this. MR. LABON said the comments by Mr. Burns and Mr. Seiberts reflect the feelings in Fairbanks, as well. Number 1700 MS. BELL clarified that there are a number of financial institutions that operate in the state under federal charters that have not been subject to the state banking code privacy provisions until this point. "It is new to many of us." She added that the reason GLBA does not contain provisions governing information sharing among affiliates is because it is already governed under existing legislation like the Fair Credit Reporting Act. She suggested continuing the dialogue and include an analysis of that legislation so they can understand what protections are already there. MR. ELDER commented, "If national banks think it doesn't apply to them, it's probably because of the quote in the article saying that it's never been challenged, including by them. So I guess it would be up to someone to challenge that and find out in a court. Our position is that we think it does affect them, but on the other hand, we also don't regulate national banks." MR. ELDER said it was very noticeable when the suggested amendment from the Bankers Association makes sure they cover reimbursements for themselves for costs of subpoenas and things like that, which he personally agrees with, but drops off the liability to their depositors and customers by violating confidentiality of their records. He thought that was a stark contrast and isn't particularly an attractive position to put forward. MR. ELDER said he had talked with the Bankers Association about the confidentiality that's made with disclosure of information that's made subject to a subpoena and a search warrant. It says currently on page 3, lines 5 - 9 in the CS that requires confidentiality. Discussion with the Bankers Association was that the use of the word "confidentiality" is a little bit vague and it would be better to say what you're talking about and that is not notifying the depositor or customer. He had prepared a change for that sentence that would be in line with what the Bankers Association is requesting. MR. ELDER proposed another amendment on page 3, lines 10 - 13. There is a drafting difficulty in the Bankers Association proposal in that they combined some of the subpoenas and disclosures, as well as the statutory disclosures. He thought it was better to keep them separate and make it clear that they are talking about court orders and administrative agency orders, as far as reimbursement is concerned. He made it clear that whenever the disclosure is compelled by (a)(1), court orders as well as administrative, the document shall provide for the reimbursement of the financial institution for the reasonable cost incurred in complying with the order. CHAIRMAN PHILLIPS asked if there was further testimony and there was none. He announced he would hold the bill for further work and adjourned the meeting at 2:43 p.m.