BA Committee Hearing Transcript for 03/08/2005

COMMISSIONER JOHN BURKE: Good afternoon. Today, I am here to testify on two bills, which are House Bill 6829, AN ACT UPDATING AND REVISING THE CONNECTICUT UNIFORM SECURITIES ACT, and then Senate Bill 1219, AN ACT CONCERNING CONSUMER CREDIT, CHECK CASHING AND MONEY TRANSMISSION. I have submitted written testimony on both these bills, so my remarks will be appropriately brief.

In the case of the securities bill, we are updating and revising the Uniform Security Act for Connecticut. The bulk of the bill, I apologize, I think there are 47 pages to it, so I apologize for that.

But unfortunately, our act is extremely long, and in almost all cases we like to mimic, if you will, or copy the Uniform Securities Act from the Feds, with some exceptions.

And, essentially, this is what this bill is doing. It does give us some additional powers working, well, for example, to issue a cease and desist, which we didn't have the authority to do, which we think we need to have.

And then in the event where a non-regulatory agency like NASD takes some action against a broker, we would like to be able to piggyback on that. Currently, we are not able to do that, and we think it's appropriate that we do. So those are the two unique things that we are doing.

As I mentioned, the rest of the bill is really patterned after the Federal Uniform Securities Act, with some exceptions. We'd like to have a little flexibility.

And in some cases, we don't think that in all cases the Feds are always right, and we would like to keep a little control of those in the state, particularly in the area of penalties.

Which we, as you all know, when you pick up the paper, including today's paper, there's a great deal of mis-activity in this business, the securities business.

And we really need to be sure that we have our hands around it and have appropriate remedied it, at least curtailed some of that. And that's really essentially what this will do and what some of the other aspects of the bill will do.

REP. DOYLE: I would like to entertain questions on this bill to keep it simple.

COMM. JOHN BURKE: I'd be happy--

REP. DOYLE: Any questions from Committee Members on this particular proposal? [inaudible] Please continue, Commissioner.

COMM. JOHN BURKE: --the next bill is Senate Bill 1219, which is concerning consumer credit, check cashing, and money transmission. This is an industry that we've regulated for years or we have licensed them I should say for years, and haven't done much regulation, very little origination.

But with the Patriot Act coming out of Washington, much more concern about money laundering. We have revised our programs within the Department and are now kind of, we are touching up some of the regulations with this proposed legislation to give us a firm control as best as we can of this industry.

It is a widespread industry. There are things that we find happening, for example, in the bill you will see a name change. We find that a number of these firms operate with different names and don't bother telling us that.

That's of some concern, so we have instituted a modest amount, I think it's a $100 fee, for naming change, which we then could keep control of and know where they're operating.

In addition to that, what we will do is if they will move, we need to know that. That happens an awful lot too. So we are just trying to keep our hands around the problem, and we hope to be able to more ingemination on this industry.

It is very critical and it's important that we have both the authority and the leverage, for example, we have asked for the ability to issue a cease and desist.

In some cases, we are permitted to fine if there is any action taken that is inappropriate, but we are not able to issue a cease and desist. And we are asking for that authority within this bill.

In general, that's it. That's a summary of the write-up, which you all have copies of.

REP. DOYLE: Any questions for the Commissioner? Representative Stripp.

REP. STRIPP: Thank you, Mr. Chairman. Good afternoon, Commissioner.

COMM. JOHN BURKE: Good afternoon. How are you?

REP. STRIPP: Good, thank you. I have a question about money transfer. If I were in the, let's say, dry cleaning business and I decided I wanted to also transfer money to people, to other people in the area that might not have accounts with banks, and they want to transfer it back home to relatives and so forth.

Is there very much involved in getting a license, in the cost of license?

COMM. JOHN BURKE: Yeah. We have, well, the cost is minimal. I can't give it to you off the top of my head, John, but it's really not expensive. But we do have some requirements. Well, we will check State Police records.

That, we also have a minimum requirement for net worth, so that there is some back up behind that. And those are the kind of things that we check on.

REP. STRIPP: Does that person have to put any sort of sign or indication of the license at their place of business?

COMM. JOHN BURKE: Yes. They must display the license.

REP. STRIPP: They do? Okay. So you would know it's a licensed activity because there would be a sign there saying that.

COMM. JOHN BURKE: Right.

REP. STRIPP: Thank you very much.

COMM. JOHN BURKE: Yeah. There are a number of these that we are aware of, and I can't name them all, unfortunately, because there are a number that are operating without a license. We know that.

We are just trying to get our hands around it. It's a very difficult industry to police and examine, frankly.

REP. STRIPP: I know. That's my suspicion, too. Thank you very much.

REP. DOYLE: Any other Committee Members with questions for the Commissioner?

REP. MOUKAWSHER: You were, in this bill, you were focusing on the check cashing aspect of it. And it talks about consumer credit as well.

There are some sections in here about mortgage lenders, I think, and misrepresenting, you know, matters regarding mortgages. Can you address that? There are some different things in here about mortgage lenders.

COMM. JOHN BURKE: Within the bill itself, in regard to mortgage lenders, we already have legislation in which covers predatory lending, which defines predatory lending, which was passed I think now four years ago. I think it was finally passed and put into effect about that time. And this just cleans it up a little bit. There isn't really anything new on that.

REP. MOUKAWSHER: I was surprised because it seemed like, you know, it was highlighting some areas that talk about, say, fraud on behalf of lender misrepresenting something, and you know, I was surprised to see it, you know, in terms of being new language. So I just was interested in what the change, if any, was.

COMM. JOHN BURKE: I can't address that. There aren't any significant changes as far as we're concerned with the mortgage lenders.

REP. MOUKAWSHER: Sure, thank you.

REP. DOYLE: Thank you, Representative. Any other questions from Committee Members? Senator Finch.

SEN. FINCH: Thank you. Yes, Sir, Commissioner, I just have two questions. The first is what kind of staff do you have at the Department that looks into check cashing?

COMM. JOHN BURKE: It's in our Consumer Credit area, which covers the mortgage lenders. It covers the first mortgage lenders, second mortgage lenders, mortgage originators, mortgage brokers, and now check cashers and money forwarders, total staff of six examiners.

We have a separate licensing group who does the licensing. But the examiners, we have really at this point one full-time examiner working in that field.

SEN. FINCH: One?

COMM. JOHN BURKE: One. One full-time examiner for check cashers and money forwarders.

SEN. FINCH: And does that particular examiner, do they actually get in the car and drive around the north end of Hartford and the west side of Bridgeport, and--

COMM. JOHN BURKE: Yeah. That's interesting. I may have commented on this before. When the Patriot Act was put into effect, which really brought this into focus, we needed to do more on the examination side.

We were responding to consumer complaints, but not proactively with examination, and we would like to do more of that as best we can, as we can find them, frankly.

The difficulty was, and I'm not being a chauvinist about this, but a number of our examiners are female, and they didn't want to go in to some of the neighborhoods where these businesses are housed, without either going in with a team or something else.

We do have one examiner who happens to be about six-foot-two, and big, and strong, and we send him out. He's right now the only one doing on-site examinations at this point. It is a tough business to regulate.

SEN. FINCH: --do you feel that you are on top of this or do you feel like it gets away from you?

COMM. JOHYN BURKE: No. I don't think so. I think we have some wonderful players in this who are legitimate businesses. We hope that the more we do, and they are aware of our existence, the good guys will let us know about the bad players, which really is the best way we're going to be able to find out about it.

And particularly if they are competitors, we will hear about. So I don't think it's a runaway problem at this point.

SEN. FINCH: The second question I have is on Section 36A-657, the debt adjuster license. Forgive my ignorance, but I don't know what that is.

COMM. JOHN BURKE: A debt adjuster is--

SEN. FINCH: Is that like a credit bureau where you go if you have bad credit to get it straightened out?

COMM. JOHN BURKE: --well, you have nonprofit organizations who will work with you to work off your debts. And they are nonprofit and they are licensed by us and examined by us.

SEN. FINCH: Okay. Thank you.

REP. DOYLE: Any other questions from the Committee Members? Representative.

REP. TYMNIAK: Yes, thank you. Commissioner, I was wondering, while we were talking about mortgage lenders, there's a bill in Raised House Bill 6834 that we'll be hearing testimony today, which is establishing a website for your Department to hear, I guess, complaints.

And I was wondering how that would be monitored and what your thoughts were concerning this if it were to become law?

COMM. JOHN BURKE: If it were to become law, we would be disappointed. We do not agree with the bill. We think the manner in which bill was originally crafted was to have a little chat room.

So that if you had a problem with your mortgage broker or mortgage banker or originator, you could put it on the website. And we felt, number one, we don't have the capacity to do that.

DOIT, who is our organization for the state, is not prepared to do that. Secondly, it becomes a great place to start rumors. I mean, if you've got a competitor that you're unhappy with, put something up, you know the typical blogger sort of thing that you read about in the paper all the time.

So we're very uncomfortable with doing that. We said we would be working, we would be happy to work with the real estate people, if they'd like to do something on their own, and put something on our website, which is indicted if you have something you'd like to talk about, that you want posted, send it to the realtors, and we'll give an address on our website. But beyond that, we are very uncomfortable with this.

REP. TYMNIAK: Thank you very much.

REP. DOYLE: Any other questions from Committee Members? Thank you, Commissioner.

COMMISSIONER JOHN BURKE: Okay. Thank you very much.

REP. DOYLE: Next department head or public official is Attorney General Richard Blumenthal. Is he here? He's not here. Okay. If he comes back, we'll let him. At this point, are there any other department heads or elected officials? I don't have anybody else signed up.

At this point, I will go through the public. The first person is Jim Horan, second is Melissa Malone, and then Christine Hwang. Jim Horan.

JIM HORAN: Good afternoon, Senator Finch, Representative Doyle, and
Members of the Committee. I am Jim Horan, Executive Director of the Connecticut Association for Human Services. We are a nonprofit advocacy organization that works to reduce poverty and strengthen families and communities.

I am testifying today in support of Raised Senate Bill 6830, AN ACT PROTECTING CONSUMERS FROM ABUSES IN THE MAKING OF INCOME TAX REFUND ANTICIPATION LOANS.

Refund anticipation loans or RAL's are loans that are made by tax preparers to clients who want to receive their tax refund in one or two days. They used to be advertised as rapid refunds.

Large tax preparers target their advertising for these high-cost, short-term loans to lower-income working families who are eligible for the Federal Earned Income Tax Credit or EITC.

In 2001, one-third of tax filers in Connecticut who received an EITC also received a RAL. That translates to 46,000 households in almost every legislative district in this state, with the concentration in the larger core cities and some small towns.

RAL's get tax-filers their money quicker, but at a pretty steep price. The National Consumer Law Center estimates that the average tax filer receiving an EITC and a RAL paid about $250 for a loan fees, filing fees, and tax preparation.

The bill before you would substantially reduce these fees for consumers while still allowing tax preparers to run their business at a profit.

You have seen television ads for refund anticipation loans but may not have paid much attention. Each year, early in the tax season, H&R Block and other companies advertise how you can get your tax refund quicker.

If you owe the IRS money or you anticipate getting a very small refund, you wouldn't pay much attention. But for low-income people who receive the EITC and know that they are going to get a big tax refund, the prospect of getting that money sooner has great appeal.

This is the target audience for RAL's, people who need their money to pay their rent, to buy food or to pay down credit card bills. Many people don't realize they could get their refund in seven to ten days, if they filed electronically or that they can get their taxes prepared for free at a volunteer income tax assistance site.

Last year, the General Assembly passed Senate Bill 476, AN ACT CONCERNING TAX REFUND LOAN DISCLOSURES. That legislation, which is incorporated in Section Two of the bill before you today, requires tax preparers to inform their clients of tax preparation and electronic filing fees, the interest rate for the loans and the total cost of the loan.

After we offered that bill last year, we and other proponents realized that what we really needed to do was to try to cap the interest rates for these loans. They range from 70% to 700%.

And when we talked to Legislators last year about this, they were shocked to hear that the interest rates could be that high. That's because tax preparers use out-of-state banks and therefore avoid Connecticut's usury laws by doing this.

This year's bill goes to the heart of the problems with these loans by capping the interest rate for such loans at 36%.

That might still sound high, but it's a small fraction of what some tax preparers charge now, and it's in line with the highest interest rates that are allowed under state law for small loans.

Raised House Bill 6830 forbids loan facilitators, which is what the tax preparers are in this case, from engaging in unfair or deceptive practices, from charging fees other than those alone allowed under the act, and from including loan provisions to avoid the provisions of the act. There are also enforcement provisions included.

This is very important to a lot of people in Connecticut. In 2001, the most recent year that we have figures available for, 50% of the people who received the EITC in New Haven used a RAL, and more than 40% in Hartford, Bridgeport, and a lot of other towns and cities around the state. So it affects a lot of people.

Our goal and that of others who support the bill is to try to help lower income people keep more of their tax refund. Ultimately, direct service providers and advocates are working to promote policies that will help the working poor move into the economic mainstream.

Lowering the cost of RAL's and helping working people keep more of their tax refunds will help more families move one step closer to being able to save for education, for a car to get to work, or for a home.

We appreciate the opportunity to testify on the bill and for the Committee for raising the bill. It's a solid step toward protecting consumers from one type of predatory lending, and I hope that you'll support it.

I'd be happy to answer any questions you might have.

REP. DOYLE: Thank you, Jim. Any questions for Jim? Representative Stripp.

REP. STRIPP: Thank you, Mr. Chair. You mentioned out-of-state banks. Are these banks that are not regulated in the State of Connecticut?

JIM HORAN: Right.

REP. STRIPP: They're not foreign banks doing business in the State of Connecticut, but they're not doing business at all?

JIM HORAN: They are generally banks that are regulated by either the Federal Office of Thrift Supervision or the Office of the Controller of the Currency, and therefore they are not regulated under Connecticut law.

REP. STRIPP: They don't have branches in the state?

JIM HORAN: Right. That's correct.

REP. STRIPP: Thank you.

REP. DOYLE: Thank you. Any other questions? Thank you. Sorry. Thank you, Mr. Chair

SEN. FINCH: Thank you very much for coming. And I would like to first off compliment you and your organization and the work that you do in my community with Family Services Woodfield.

Having the volunteer site really is very helpful to people who don't have ready access to sort of the establishment kind of institutions that we all take for granted.

They are sort of the same people that use what the Commissioner was just talking about with check cashing facilities.

But I posed this question last year, and it's sort of like for me to get my arms around this issue, I really need spend a little bit of time explaining to me why, if the interest rate is only over a week or two, if you charge 1,000% for a day, then it wouldn't impact me very much. A couple dollars, maybe, you know here and there.

So, what we were hoping to hear this year were some of the things that were rumored last year when we spoke about it. And that was what possible abuses were. People had long time periods over which they were paying these abusive rates.

Because, as I said to you, I don't see a problem with it if it's a short period of time. The interest rate doesn't have a real dollar impact, which is what the people that I'm worried about are more interested in.

If I said to someone who was poor, you know, for $20 today you can have all your money. And they are living paycheck to paycheck, and they've got baby formula to buy, and they are going to get a $1,000 check minus $20 today or wait for two weeks, and get the whole $1,000, I'd like to give them that option to pay them that $20 because they need the money now. So if you could address that, that's where my reservation comes on this.

JIM HORAN: Three points. One, the interest rate does matter, even in the short term. Because if you lower the interest rate from 700% to 36%, you're going to still be saving consumers who are getting the RAL's some money in the short term.

It might be the difference between paying $100 versus paying $30, but that's still $70 saved per household. And when you multiply that by the almost 100,000 households that received a RAL, that's fairly significant savings for low-income households.

Second point is some people do have horror stories because these are loans, and so it can go on for a much longer period of time. Usually, if everything works as it's intended, it will only be the difference from when you would get the money back from the IRS versus the one or two days when H&R Block or the other tax preparers giving you the money.

So it is a short-term loan. But there are instances where it ends up going on much longer because you received the money in error and then they have to get the money back. And you don't have the money to pay back because you used it to pay for your credit card bill or something like that. And others, who will be testifying after me today from the University of Connecticut Law School Tax Clinic and other places, will give you some of those horror stories of consumers who have been trapped because of these loans, and where the extremely high interest rates went on and on and on.

So it can really have enormous impact on some households, and therefore is important to rectify those very high interest rates.

REP. DOYLE: Any other questions for Mr. Horan? Seeing none, thank you.

JIM HORAN: Thanks very much.

REP. DOYLE: Next up are Melissa Malone, Christine Hwang, and David Weiss. Melissa Malone, please.

MELISSA MALONE: Good afternoon, ladies and gentlemen. My name is Melissa Malone, and I am a third-year student at the University of Connecticut School of Law. And I am here today to underscore two policy reasons why House Bill 6830 should be supported by this Committee.

The first reason is that Section Four of this bill provides that the Attorney General will be able to pursue individuals and companies that continue to engage in unfair and deceptive trade practices.

This is a change from the previous language in the bill, which actually only gave a $500 fine to these companies, which is tantamount to a slap on the wrist.

The second reason that this bill should be supported is that the bill is Connecticut's usury provisions, and the Connecticut Legislature has in the past promoted bills that have sought to protect individuals that are the most vulnerable in our society, the working poor.

For example, I would like to call your attention to Connecticut General Statute 37.40, which actually applies to pawn brokers and limits the amount of interest that can be charged at 12%. This is similar in policy as far as what is being able to be done to the working poor.

So for these two reasons, first this enables the Attorney General to oversee and to assist the Connecticut Legislature in protecting the working poor, and for the second reason that the Connecticut Legislature has already acted on establishing usury percentage rates and has acted in other instances to protect the most vulnerable individuals in Connecticut.

I would request, as a constituent, and on behalf of many of the clients that the University of Connecticut Tax Clinic has represented, that you support this bill.

REP. DOYLE: Any questions from the Committee Members? Senator Finch.

SEN. FINCH: Indulge me, but this issue really is interesting to me, and I would like to know if you've worked with anyone whose story you can relate to us about having suffered substantial harm because of a RAL.

MELISSA MALONE: Well, I will relay one story to you, and then I will actually defer to my colleague who will be speaking after. I actually worked with an individual who received a RAL. You actually have, in your hand, a copy of what she was given as far as for a loan disclosure.

And if you look at the fees and you look at the amounts, you can see that it's very confusing. [inaudible] No. It is actually a separate testimony. Correct.

And basically what happened to her is not only did she not need this refund anticipation loan, she was not told that this was a true loan.

She stated that she did not need the loan, that she could wait until her refund came back. They then proceeded to convince her that she could buy clothes, that she could pay off bills, that it would be not a problem. After this occurred, there were some issues that came to light.

There are other instances in which other individuals that we have worked with have either not disclosed that this was a loan or once they did receive the loan, did have cars, did have creditors come after them, when they were audited by the IRS.

In which case, we had to intervene to assist them, so that they wouldn't have their cars repossessed and that creditors would not continue to call them.

SEN. FINCH: Do you recall what the amount of the loan was for and what fees they paid?

MELISSA MALONE: Yes. For the client that I am actually speaking of, the amount is listed on page two of the written testimony. And if you look at the amount of the refund, it was for $1,715 even, but if you look to itemized amount financed.

SEN. FINCH: Hold on. Let me catch up with you. I have, a lot of your testimony looks terrific, but it doesn't have anybody's name at the top. So I am having a hard time. I think I've got it. Okay, we're there now. Can you point to--

MELISSA MALONE: Now, if you look on the first section, it actually has the amount--

SEN. FINCH: Indirectly to me, $1,590.76.

MELISSA MALONE: Correct. That's in the second section. And then if you look at all of these fees, we actually went through to figure out what they were actually related to and we had a hard time figuring out.

If you look at the percentage rate, it's at 87.066%, for this particular loan. For an individual who clearly stated to the preparer, also whose first language was English, that she did not need this loan.

She did not need the money. And they did not disclose to her that it was a loan, simply stated that you're getting your money back today.

SEN. FINCH: So the rate was 87%. There were, sounds like the fees were relatively modest though, the finance charge of $45, and $70.29 to be paid to H&R Block on top of that through the prep fee, and $29 administration fee. So it looks like it was about $125, somewhere in there.

MELISSA MALONE: Correct. You're correct, Senator Finch, but what I'd like to underscore is that individuals who are receiving the refund anticipation loans, not only are they able to have this same refund for free through the free-filer system that is provided at H&R Block, but this individual did not actually want this money today.

And yet, she was coerced into signing an agreement. She was never, never disclosed, it was never disclosed to her that this was an actual loan. It was instead presented that this was her refund.

So the fact that it was a loan, and the fact that it's only say $100, $100 for someone who's making $19,000 a year is considerable amount of money for them.

It could be the difference between groceries for a week and going hungry or getting groceries for their children or having them go hungry. So while the fees may be minimal to us, sitting in this room, the fees to the individuals that are impacted by this are real.

SEN. FINCH: Well, I really respect the work you do, and I'm trying to understand this issue. Maybe I'm a little slow. It's my second year trying to figure it out. But it still seems to me that some of it seems like a tempest in a teapot.

It seems to me that if I'm a poor person, and I want my money now, and I have to pay $100 or $125, so long as, if that interest rate works out to be whatever, 87.06%, I made that mental calculus.

I could be pretty bright and pretty poor. I may think that in this case, it is deplorable, let me just say that this woman was gorged, and whoever coerced her should be ashamed of themselves for doing that. And maybe they are culpable of some wrongdoing.

But in terms of our policy here, what I'm trying to figure out is how do we make the best law to make sure that poor people don't get ripped off.

Because the other side that I see from the city's standpoint and the poor neighborhoods is these companies are opening up offices in poor neighborhoods where everyone else is leaving. Now, the cynic says they are doing that because that's their market.

Well, at least they are providing a service, and poor people can make the calculus, I would think, in their own mind, about whether or not this is fair or not. What would you say to that?

MELISSA MALONE: Well, my response would be two-fold. First, this is not a matter of being overly paternalistic with this segment of the population.

In this particular instance, if you actually look at the loan agreement that is here, and we have actually looked at it with Director Diana Leyden, who will also testify, you will see that not only is this convoluted and impossible to understand, in addition to that, these companies could offer, for example, to file the tax return electronically and this person could get it in ten days.

Now, there may be a minority of individuals who need the money that day, but the fact that 36% is the usury rate in Connecticut, it prompts me to ask the questions why are RAL's exempt from that? Why are they allowed to charge in excess of 85% when it's already been deemed that the usury rate is 36%?

So I am in no means stating or advocating reducing the rate to 5% to 10% or even 12%, which is what pawn brokers are regulated at. It's merely at 36%, which is still a very, very high interest rate.

So I guess my response is two-fold to that. And I would urge you to actually look at the reasoning behind the usury provisions that have already been passed by the Legislature. And, in addition, looking at the ideas of pawn brokers who also prey on the same people who get refund anticipation loans. Their rate is 12%.

Why is the rate for all these other tax preparers at 85%? What's the difference? The difference is really, it's minimal, granted one's related to tax, and I'm not trying to minimize that difference. But the true policy difference is minimal.

SEN. FINCH: Let me ask you a follow-up. Now, I've been a supporter of this, the Senate has been a little skeptical, but assuming we pass this and then these businesses shut down. Well, I shouldn't say, they wouldn't shut down, but the loans would in theory no longer be profitable, no longer offered?

Do you think that is a good outcome of these? Because I'm sure that the industry people might say, if you passed these caps we're no longer going to offer them.

And then in theory you could argue that some, your hypothetical is inexcusable, but in theory you could be prohibiting the practice of this. So I guess the question is, do you think that's a permissible risk to this if we pass it? That we end up, you know, terminating all risks?

MELISSA MALONE: Actually, I don't think that's a risk. DRS is now working to give refunds within three days. Also, the fact that these companies won't be able to charge, say 90% and can charge 36%, they are still going to be making money. The amount of money may be decreased, but they are still going to be able to make money.

They are not going to be moving out of these neighborhoods and in addition to that, they many times, many of the companies that are giving the refund anticipation loans, have other services that they could provide and they are still are profitable on.

So it's not a matter of taking these businesses out of the community and not leaving individuals with any options. They still will have options and they still will be able to get their refund. It's a matter of whether or not the rate should be equivalent to what the usury rate is in Connecticut.

REP. DOYLE: Any other questions? Representative McCrory.

REP. MCCRORY: Thank you, Chair. It is not a question more so as a comment. I want to first commend you and your colleagues for bringing this to the forefront.

It always strikes me around this time of the year when these companies do come in and prey on a population of people that do not have the options that others do.

We know when they're coming and we know when they're going to leave. They're probably closing their doors out in another month and a half. I think we should move forward with capping these, for all the reasons you said.

In regards to them not providing services if we do cap them, they'll be back, and we'll be back here again trying to prevent them from doing something else that is unscrupulous.

So I want to commend you and the people you're working with at the UCONN Law School for bringing this to our forefront. And thank you very much.

MELISSA MALONE: Thank you very much.

REP. DOYLE: Representative Moukawsher.

REP. MOUKAWSHER: Thank you, Mr. Chairman. I, you know, I also think that this is an important issue. But what I am concerned about is that we could, say, change in this bill the percentage rate, but as I see it, the total fee for the preparation of the return and for the, I guess, the rapid refund is $175.

If we change the percentage rate, would these companies find another way? I mean, they're basically figuring that for them, it's worth it to do this business, if they make about $175 or $125, depending on what the refund is. So would they just change their fee schedule and are we saving people money by changing the way they do it?

MELISSA MALONE: Well, I would two responses to that. First I think in one way it's difficult to legislate for every single conceivable possibility.

So the fact that they may be able to somehow in the future, if the 36% was passed into law, not be able to make up that profit, I think that may be an unknown and we may have to address it when whatever system they take up to make up for the lost profit is brought to the forefront.

But I don't really think that there is going to be a danger insofar as still charging, say, $175 for a preparation, and not giving a loan.

Many of the individuals who use these tax preparer could easily get their taxes prepared for free and could file online for free. Because if you actually look at the IRS website, if you fall under certain guidelines, you can file your taxes for free.

And not only can you file your taxes for free, but many of these organizations are part of a consortium in which they are supposed to provide the ability of tax payers to go into H&R Block, to go into their buildings and have their taxes prepared for free and filed electronically.

So I don't really think it's a concern, insofar as changing what money that they are receiving right now in profits and then somehow re-characterizing it on their balance sheet.

I think that it's hard to say that somebody filling out a 1040-EZ should have to pay $170 or even $100 to get that form filled out.

REP. MOUKAWSHER: Well, you reference that someone easily could file their return for free. In that instance they'd preparing it themselves.

MELISSA MALONE: The actual software that is available at many of these locations at H&R Block's is actually would walk you through as far as preparing your return, Similar to TurboTax, which a lot of people use. But you would be filing electronically.

But the question of whether or not they would be able to re-characterize the profit they are receiving in another form on their balance sheet, to say charge $175 to prepare a return, I mean, I can't really answer for them.

Perhaps they can answer as far as an explanation for their fees, Whether or not they could do that.

REP. MOUKAWSHER: It seems like we're concentrating on the percentage, I mean, the annual percentage rate, you know of 87% or whatever the percentages are is on its face it's exorbitant.

That may be even an understatement, but its part of the calculations being made by the company. It'll be worth it to us to advance money to people to do their return at this rate of pay, like $175 in this case.

And it's apparently worth it to the person that is having the return prepared to pay that, to get the money right away.

MELISSA MALONE: Well, I guess I would take issue with your second point, whether or not it is worth it for the individual.

REP. MOUKAWSHER: Well, I am just saying that they made that determination apparently. They paid it.

MELISSA MALONE: Just because they paid it, I would have to take issue with that. Because there is not necessarily full disclosure of all the fees that are involved with this, so just because they've actually paid the fee, I wouldn't say that they have actually, you know, implicitly agreed with everything.

Further, I would say that many time many of the individuals who do get these loans, in our incidents I was speaking of, the individual received a high school degree from Hartford, and English was her first language.

Many of the individuals that we've assisted, English is not their first language, and it is not presented as a loan. It's presented as getting your money today, which is different.

REP. MOUKAWSHER: Correct. But that's what they're looking for, to get their money immediately.

MELISSA MALONE: They are looking to get their money immediately, but they are not under the impression that it's a loan. Further, many times what ends up happening is after--

REP. MOUKAWSHER: Does it make a difference whether it's a loan or not?

MELISSA MALONE: It makes a huge difference in an individual's life when they have the IRS not only coming after them, they go to their tax preparer, and the tax preparer is not fair. So once they--

REP. MOUKAWSHER: No, no, I am not talking about that. I am talking about does it make a difference to them whether it's a loan or whether they just pay the fee directly. I mean, we're talking about $175 that a person pays to get their refund immediately.

And however that's calculated, whether it's by a percentage rate or not, I mean, is that the issue? Or is the issue that these people are paying too much?

Because you just mentioned a person of, say, a background where English is their second language, and you're saying, well, they could go on the IRS site and do their return, but perhaps they can't do that.

So, I mean, some of these people, it seems to me are going to go to a tax preparer. So the question is, is it an appropriate amount of money to pay someone to get their refund immediately, and to have their return done, which they apparently feel they can't do? So that's what I'm asking.

MELISSA MALONE: Well, I don't really have a full answer to that, and I could research it for you and submit to you a memorandum of sorts, which could perhaps fully answer it. But I would like to, I guess, underscore the fact that the interest rate is what is, at 36% is Connecticut's usury rate.

And what this bill would do is would at least provide some consistency which currently we don't have. Because if you can charge 80% to get, for example, a RAL, but the usury rate is 36%, it's a matter of having internal consistency within the statutes. It's essentially the same thing.

REP. MOUKAWSHER: Well, in this case, the $1715, the financed amount or the financed charge, the dollar amount it was $45. Now, that computes to 83% at the annual percentage rate.

Do they just raise the amount that they, you know, it just seems to me that we're focusing on the percentage and that's fine, but isn't it the raw dollar amounts that someone is paying that should be the issue?

We're talking about people getting taken advantage of, but would they be paying the same fee if we changed the law and limited the percentage rate? Are they still going to be willing, in the marketplace, to pay that to get their money right away?

MELISSA MALONE: Again I think this goes back to whether or not industry would do a re-characterization and say we're not going to charge the 90%, but instead we're going to charge $200 to prepare this return. That, essentially, I think is what you're asking, whether or not they would do that.

I think that, you know, I can't answer for industry, but I think that this is at least a step in the right direction to assist working families that fall prey to these types of loans.

Now, whether or not, say five years from now, that issue is before this Committee, that may be a great time to actually address it. But the bill, as proposed, would go at least one step further than where we are now and that is the best solution that we currently have.

REP. MOULKAWSHER: And I'm not going to belabor, but the falling prey to this… different formula for that fee. That's all that I'm asking. I mean, is that the question, are they paying too much overall $175? Or is it just the percentage is offensive?

MELISSA MALONE: Well, in my opinion, its not so much that the percentage rate is offensive, it's that it's inconsistent with other usury percentage rates that have already been established.

So whether or not it's offensive to an individual, if anything for internal consistency within the statute, it should be at least consistent with the 36% that has already been accepted.

REP. MOULKAWSHER: Okay, thanks very much.

MELISSA MALONE: Thank you.

SEN. FINCH: Melissa, I want to thank you very much. The only thing missing here was maybe John Hausman, you know, with the going back and forth. But I do really want to thank you. I hope that it was as challenging for you as it was for us.

MELISSA MALONE: It was. Thank you very much.

SEN. FINCH: We appreciate your help.

REP. DOYLE: Any other questions? Thank you. Melissa, wait up one second. Melissa, one more question. Representative Harkins, sorry.

MELISSA MALONE: Sorry, Representative Harkins.

REP. HARKINS: Thank you, Mr. Chairman. It'll be brief. When filling out the paperwork, does it say anywhere on the papers that it is a loan application?

MELISSA MALONE: It does. If you actually look, and unfortunately, on the second page, on the very top, it does state that. It's halfway cut off, but that is my copying error.

REP. HARKINS: Okay, so how do they not know it's not a loan when it says loan on the documents that they are signing.

MELISSA MALONE: What actually occurs and what actually heard in the instance that I was speaking of, is that the individual was given the return, so given her 1040, told to sign, and then told about getting the money back. She said, no she didn't need the money back, that she didn't need it.

They said, well, you know you could get it back, you could go buy clothes, you could buy this thing, you just need to sign here.

And, you know, trusting individuals who are presented as tax preparers and having been in my own experience of having people come to you and ask tax questions, people are very intimidated by filling out their taxes.

So if someone presents themselves as a professional, as an official, you know, unfortunately many times they do sign things and they don't take the time to actually read the fine print.

But even if you actually read the fine print, which we have done, it is thoroughly confusing, even though it says loan on it. So a lot of times, you know, I would say the individual signs it, not knowing, but I would say a majority of times, they sign it thinking that the individual has their best interest in mind.

REP. HARKINS: Thank you, Mr. Chairman.

REP. DOYLE: Thank you, again, Ms. Malone. I am going to ask Christine Hwang to take a break. Will she permit the Attorney General to go before you?

CHRISTINE HWANG: Sure.

REP. DOYLE: Thank you. I'm sure he'll thank you also. Attorney General.

ATTY. GEN. RICHARD BLUMENTHAL: You have a right to remain silent.

REP. DOYLE: Thank you, Attorney General.

ATTY. GEN. RICHARD BLUMENTHAL: That will probably come back to help you in the future. Get her name down please.

Thank you, Mr. Chairman, and thank you to the individuals whom I am delaying by appearing out of turn, and I will be brief as a result.

I am here to testify on two measures, my office has personal or very hands-on experiences with both sets of problems. One relates to predatory lending, the other to the bill that has just been ably and articulately advocated to you.

So let me begin with the predatory lending measure, Senate Bill 1217. This measure essentially incorporates the terms and conditions that we have imposed on Household Finance, through the settlement that we reached with them, a multi-state, national settlement requiring full disclosure, limits on prepayments penalties, better enforcement, essentially compliance with standards of conduct that the industry as a whole, I think, generally observes.

Household Finance was not following those standards. States across the country took action against Household Finance and imposed these kinds of requirements as part of court action.

And so we are here today simply to ask for what should be the industry norm, and what should be the law in the State of Connecticut, prohibiting certain prepayment penalties that are means of really strangling the first-time homeowner, the low- and moderate-income homebuyer, who wants to refinance and is unable to do so and often forced out of his or her home because they are unable to pay the interest but also unable to refinance because of the penalty that is imposed on them for doing so.

And so, this bill imposes limits, they are spelled out in my testimony. It also prohibits prepayment penalties when the individual is refinancing a mortgage with the same lender or an affiliate of that lender.

It also requires that when there is refinancing of existing mortgages, that there be some benefit. Some benefit to the homeowner, or the borrower as a result of the refinancing.

It imposes, the best way to think about it, I think, is that it imposes the limits that now apply when there are high-cost loans, high-cost being defined in the statute.

A lot of the predatory lenders have circumvented those statutory standards by reducing interest rates, raising fees and prepayment penalties, compensating for the reduction in interest rates, but avoiding the requirements of fair dealing under the law.

And so, basically we would apply these standards regardless of the interest rate, and also significantly provide better means to enforcement.

I am very, very gratified by the cooperation, by the partnership that we have received from the Department of Banking and the Commissioner of Banking, who has proceedings underway right now dealing with the subject. The State Attorney's General also have a major case underway, which probably we will be announcing shortly, similar to Household Finance.

This problem cuts at the core of economic justice. It, as I have said so many times I am sure that you are tired of hearing it, that it turns the American dream into a nightmare. Truly it does. We've seen it in our enforcement actions.

For example, I have just come from Waterbury, where we have a major enforcement action. And so I urge the Committee to adopt this bill.

In the second measure, and you have heard already a very able explanation of it, quick refunds as you know them, as many people know them, is a huge business.

There are 12 million of them every year, and they generate $1 billion in fees, $1 billion that could be in the pockets of low- and moderate-income people.

Those fees are the charges. They're the interest rates, if you will, on those loans. They are loans and the interest rates can be effectively 400% to 900%.

People are confused, sometimes enticed, into adopting these kinds of loans and what this bill would do is simply protect people from effective interest rates above 36% and provide for better disclosure.

Obviously we can't protect people always from themselves. If they have it on a form that's a loan, there may be a lot of fine print or big print that they disregard, but the limits that are set on the interest rate here are tremendously important, and also making this practice an unfair trade practice in terms of enforcement, will be very important.

Thank you.

REP. DOYLE: Thank you, Mr. Attorney General. Any questions for the Attorney General? Committee Members? Senator Finch.

SEN. FINCH: Thank you, Mr. Attorney General. Have there been abuses that have come to your office, either with the predatory lending situations that you referred to in your act, or with the RAL's?

ATTY. GEN. RICHARD BLUMENTHAL: With both, absolutely. We have an action underway, for example, in Waterbury, regarding predatory lending. We have others in other parts of the state. We've reached settlements. We have begun actions in the Hartford area. Predatory lending is a very significant problem, and even more difficult is gaining cooperation, because people are afraid of retaliation.

Very often, they are at the margins, they are in their house because the, essentially, the bank or whoever has made the loan, is tolerating them to be there and they are afraid of retaliation.

And the same, we have also many complaints, particularly around this time of year, about the refund anticipation loans.

SEN. FINCH: Could you tell us a little bit about the abuse in Waterbury? Was this a high-risk type of a loan? Was it a no-income, no-asset loan? Was it a loan that was higher risk because the borrower was poor? What kind of a loan was it?

ATTY. GEN. RICHARD BLUMENTHAL: Well most of the victims were non-English speaking or English was their second language. They were first-time homebuyers.

They were told by brokers that they didn't need an appraisal, and so they bought homes after both title searches and inspections were done by people hired by the broker. And, essentially, they bought homes that had tremendous structural problems and needed a lot of work, which they couldn't afford.

And so when they tried to make the housing habitable, which it turned out not to be after a short period of time, months, six or eight months, they couldn't afford their mortgages. And the lender foreclosed.

And so we came into the picture, by the way, as a result of many of the community groups involved in the Naugatuck Waterbury area. There are very active housing advocates in that area, who were very cooperative and helpful and we have an ongoing investigation.

SEN. FINCH: In terms of the benefit, how do we define, it's kind of nebulous the way it is right now, isn't it? How do we define what a benefit is to the borrower?

I guess in other states, that was a problem, where they had a hard time defining a benefit. I mean, some of this is up to the consumer, whether they benefit or not, isn't it? In the predatory

ATTY. GEN. RICHARD BLUMENTHAL: Whether the consumers benefit? Well, you know, what this bill would do is define the limits on what essentially conditions can be attached to those benefits.

Putting aside what the benefits are, a first-time homebuyer may not understand the way prepayment penalties can work. You know, to take some folks back to a time that may be difficult to remember, the first purchase of a home is often a mystifying and confusing experience, with appraisers, inspectors, title insurance, sometimes lawyers and sometimes not. And if the lender advises you don't need a lawyer, you don't need to spend money.

SEN. FINCH: We're all lawyers. The Co-Chairman insists that a lawyer be involved. It's good for you.

ATTY. GEN. RICHARD BLUMENTHAL: The benefit sometimes can be exaggerated and the pitfalls can be disguised. And this bill doesn't break enormous new ground.

It simply extends those protections that now apply to high-interest loans, as they are defined in the statute, extends those protections to other home loans, so that they are covered across the board.

And I don't think that the reputable members of the industry, and I imagine you may hear from them this afternoon, would object, because they play by these kinds of rules right now.

SEN. FINCH: I guess one of the things that always us when we want to reach out and expand the coverage to new companies that are out there doing business, is number one will it effect them as to possibly reduce a source of capital that consumers are accessing now, because obviously they're accessing it, or there wouldn't be abuses. Whether there are enough abuses for the Committee to rein it in, we have to figure out.

But also, we always wrangle with, we're preempted in so many ways by the Feds, and the one thing we're trying to do as a Committee has been to try to make Connecticut a relatively friendly state, or at least not a less-friendly state of regulations, than the Feds are.

Because we would want to have maybe a little less to say over a broadening amount of banks, rather than less and less to say over a smaller amount of banks.

Are you at all concerned that this might scare away some of those lenders from Connecticut and not only reduce the capital that some consumers would have access to, but also maybe hurt us in terms of these companies and the jobs that they produce?

ATTY. GEN. RICHARD BLUMENTHAL: No, I'm not. I don't think predatory lending is a major source of jobs in the state. I don't think that it attracts industry here.

I don't think that it's sanctioned or approved by the reputable members of the industry. And so far as preemption is concerned, if the law now on the books is not preempted, this measure certainly wouldn't be.

Again, it simply closes a loophole that the predatory lenders have succeeded in using to circumvent the standards that we already have in the law.

SEN. FINCH: Thank you.

SEN. DOYLE: Any other questions, Committee Members, of the Attorney General? Seeing none, thank you very much, Attorney General. Sorry, sorry. Almost again, Representative.

REP. HARKINS: It's tough being down here on the end.

SEN. DOYLE: Peripheral vision you know.

REP. HARKINS: I'm going to take you up on that. Thank you, Mr. Attorney General for your testimony today.

Just a follow-up to Senator Finch about the availability of mortgage monies in the state, would it deter any lenders from providing mortgages?

That was my initial concern too, was with the taking out that prepayment penalty clause from those that refinance with their own lender. Have you spoke to industry about this at all? Have you spoke to anyone from the mortgage bankers about the impacts of this bill?

ATTY. GEN. RICHARD BLUMENTHAL: Well, we've spoken to the industry about the law that's on the books and the loophole that exists. I think, from our perspective, the industry can and should be supportive of this effort to close that loophole, because it simply extends standards that now should be applied across the board.

REP. HARKINS: Did they, in fact, tell you that they were in favor of this?

ATTY. GEN. RICHARD BLUMENTHAL: I don't want to speak for anyone but myself here today.

REP. HARKINS: I was just wondering maybe if your office had discussion with people in the industry and got their reaction from this.

ATTY. GEN. RICHARD BLUMENTHAL: We always discuss our legislative proposals with members of the industry who want to have that kind of dialogue, but I'm not going to represent who will support or oppose this measure.

REP. HARKINS: Okay. I understand.

ATTY. GEN. RICHARD BLUMENTHAL: I would certainly want the Committee to hear first hand.

REP. HARKINS: And I have one other question regarding the refunds, the RAL's. You had said that the high interest rates had generated $1 billion in revenue?

ATTY. GEN. RICHARD BLUMENTHAL: In fees, yeah.

REP. HARKINS: Is that total fees?

ATTY. GEN. RICHARD BLUMENTHAL: For the country.

REP. HARKINS: For the country? Where did you get that information from?

ATTY. GEN. RICHARD BLUMENTHAL: I'm not sure that I have it in my notes. I can provide that source for you.

REP. HARKINS: Was that annually or was that over the time since they--

ATTY. GEN. RICHARD BLUMENTHAL: That's annually.

REP. HARKINS: --I have no further questions. Thank you, Mr. Chairman.

REP. DOYLE: Thank you. Any other questions from Committee Members? Seeing none, thank you, Mr. Attorney General.

ATTY. GEN. RICHARD BLUMENTHAL: Thank you.

REP. DOYLE: We'll go back to the public. I appreciate the patience. Next person is Christine Hwang, and David Weiss, and Laura Gilmore.

CHRISTINE HWANG: Good afternoon, ladies and gentlemen. My name is Christine Hwang. I am also a student at the University of Connecticut School of Law and I along with my colleague, Melissa Malone, are here to provide you with specific examples of why we should support Raised Bill Number 04148.

And the difficulty that we have found in the testimonies that we have provided to you is that oftentimes, the taxpayers that we have come to represent, they have not been well-informed.

As my colleague has read from the testimony of Mrs. C, the one with the attached loan agreement, her understanding of what this loan was, as explained to her by the tax preparer, was that this was merely a fee that she was willing to pay the $100 because she thought was the amount that she was going to pay.

She did not realize that if there were any difficulties with her tax return, if the IRS did not return her tax right away, that this tax would accrue, and this would be money that she would eventually have to return back to the IRS, or return back to the creditors.

And this is why, in the other testimony submitted here, but June Gold, who is another student at the University of Connecticut, she explains that for three years there was a problem, there was interest accruing on the tax return that was being prepared.

If you look at page two, the IRS actually examined her return and disallowed her income tax, earned income credit. And this, in fact, was money that was withheld by the government, and then by this the interest rate, which is over 80%, started accruing on her tax return.

And this is why there is such a concern with the large interest percentage, because not only was the IRS auditing her, and going after her amount, but also the creditors at H&R Block were going after her as well.

And so if you look at the third paragraph down, Mrs. D. still owed the total amount of the refund anticipation loan, plus interest.

And this was an amount that included the $200 for tax preparation, because as a form of marketing, what happens is she was told that she didn't have to pay anything right away. That all of her tax preparation fee was included along with the refund anticipation loan, and this amount was accruing since 1999. And it still has not yet been paid off, to the full amount.

And also I would like to specifically point out that in subsection seven of the proposed bill, on page six, that one concern that we have had was that the creditors also take a security interest on property of the borrower, other than just the tax refund amount itself.

So in the testimony of Mrs. R. the creditors actually took a credit interest in her car, as well. So these are examples, real life examples, of why we have this concern of representing the consumers that are affected by this refund anticipation loan.

REP. DOYLE: Thank you. Question?

REP. MOUKAWSHER: You mentioned that, in this case, there was a security interest taken in the person's car. How did that, was there another loan separate that was made? I don't understand that, could you explain that?

CHRISTINE HWANG: I'm sorry. Can you repeat that question again?

REP. MOUKAWSHER: Well, in the written testimony you just mentioned that in the case of Mrs. R., not only did she, you know, have a loan to get a rapid refund, but the creditor being, I guess, H&R Block, took a security interest in her car. Now, how did that happen? What was the mechanism for that?

DIANA LEYDEN: Would the Committee like to answer? This is Diana Leyden. I'm--

CHRISTINE HWANG: This is our director.

DIANA LEYDEN: I'm not sure specifically what happened in her case, but I think what happened, I'm not sure if it was, remember H&R Block was the tax preparer, there's usually a bank behind this that is actually doing the loan.

So as security for the loan, for the refund, they may have asked for security interest in the car. I believe that's probably what happened in this case.

REP. MOUKAWSHER: Did you see any documents that had, you know, that she provided you that showed a security interest in the car.

DIANA LEYDEN: We didn't, but we have worked with an attorney down in Fairfield, because in fact the creditors were showing up at her door, trying to repossess her car.

REP. MOUKAWSHER: Okay. Thanks.

REP. DOYLE: Any other questions? [inaudible] Thank you. Thank you very much. Sorry, Senator Finch. Senator Finch has a question.

SEN. FINCH: I wanted to know if you knew anyone who ever lost their home from an RAL, or they take it mostly on the car liens? Mostly in the car or do they lien the home?

DIANA LEYDEN: They don't take a security interest in the home. The security interest, I mean, the way these RAL's work, to give you sort of a simple example, is the taxpayer goes in, gets a return prepared, and then they are borrowing this money on the assumption that the refund is going to come back.

In the case with a security interest, many times RAL's are given not only by tax preparers, and national tax preparers, as I'm sure you'll hear from Bob Weinberter from H&R Block, have an interest in preparing returns accurately.

But refund anticipation loans are also given by rent-a-centers, car dealers. These people have no knowledge base in which to do a tax return. So they will entice someone to rent furniture or to buy a car, and that's usually where the security interest then comes in, because if the refund is held up which there is a 1% in 46 chance that taxpayers claim the earned income credit are audited by the IRS--

SEN. FINCH: [inaudible]

DIANA LEYDEN: A 1 in 46 chance that people with EIC's are audited. That's a high percentage of those refunds that aren't going to come back, and yet the person is going to be on the hook for paying back the loan.

SEN. FINCH: One of the things that I'm curious to know is, did you ever find a person that you were working on that lied to the preparer, and then didn't get the refund because the citizen had been in error?

DIANA LEYDEN: When you say lie, let me again give you an example--

SEN. FINCH: Misrepresented the facts.

DIANA LEYDEN: --well, I can say that in the cases that we have had in the clinic, we have never had a situation where we have an indication that the person has lied. But let me give you sort of a flavor of what happens.

Woman comes in to a tax preparer with two kids, one on the hip and one crawling on the floor, sits down to the tax preparer and the tax preparer says, oh I assume you have two kids, and I assume you're the head of the household and I assume earned income credit.

And if this is, if jargon such as head-of-household, dependency exemption is used, that person may not have a clear understanding of what it is that the preparer is asking. So actually, the child on the floor is a relative, it's not that child.

So the earned income credit goes in with two children and then the IRS starts looking at it, and so I'm not sure that it's a misstatement by either the taxpayer or the preparer. But these are very difficult cases to truly understand and prepare a return for.

SEN. FINCH: One quick follow-up to that. Would the person who's lending the money then say, these are high-risk situations, I've got to get paid for my risk?

DIANA LEYDEN: Well, interestingly, the IRS is looking at this also. The IRS puts something called a debt indicator on, which is some indication that some people may have federal loans, and have other liabilities that a tax refund can go to.

When that debt indicator is on, and, Bob, you can correct me if I'm wrong on this, I believe what happens is the number of refund anticipation loans go up considerably, because they have more information about whether or not this person has an outstanding liability.

For one year, the IRS took that off, and the percentage and the number of RAL's decreased tremendously, because these people didn't have a true understanding of what the obligations of these taxpayers were. So I don't know if that's responsive to your question, but.

SEN. FINCH: Sort of. Thanks.

REP. DOYLE: Thank you. Any other questions from Committee Members? Thank you very much.

DIANA LEYDEN: Thank you.

REP. DOYLE: Next up is David Weiss, and then Laura Gilmore, then Bob Weinberter. Sorry if we mispronounce. David Weiss.

DAVID WEISS: Chairman Finch, Chairman Doyle, Members of the Banks Committee, my name is Dave Weiss. I am here on behalf of the Connecticut Banker's association to testify on a number of bills.

The first one is House Bill 6831, AN ACT PREVENTING BANK FRAUD AND IDENTITY THEFT. It has two objectives to it. As the name implies, one to help prevent and detect identity theft and the second is to help victims of identity theft.

Let's start with the first part, preventing and detecting bank fraud. Crimes against banks have been growing at an alarming rate in the past couple of years.

We have seen a stunning number of bank robberies, check fraud, check trading schemes, just to name a few. In response to these crimes, financial institutions across the country, in cooperation with law enforcement authorities, have established secure information network sharing programs.

These networks allow, for example, a bank in, say, for example, Bridgeport to share information on an attempted check kiting. So that a bank in Danbury or in Indianapolis or in San Francisco can possibly spot a similar attempt at check kiting.

Law enforcement being involved in these networks are also able to benefit from this by seeing patterns and leads that help them catch the bad guys.

It also allows them to tie together different remote cases of bank fraud and put them together into bigger, stronger cases against the bad guys.

The federal privacy laws, and I'm emphasizing the federal privacy laws, provide an important exception to allow financial institutions to share information in these networks in order to detect and to prevent fraud.

Unfortunately, however, Connecticut's financial privacy law, which was originally enacted in the 1970s, does not contain a similar exception. The first provision of this bill would create an exception similar to that found in federal law.

It would allow the use of these networks to prevent and detect fraud, by essentially ensuring that there's a specific exception within our financial records statute.

The second provision of this bill would help victims of identity theft. Recent amendments to the Federal Fair Credit Reporting Act have provided important weapons to combat identity theft.

One such weapon would allow potential victims of identity theft to obtain transactional records from financial institutions, where all or part of the fraudulent activity may have taken place. For example, if a consumer discovers that an account may have been opened in their name, at XYZ bank, without that victim's knowledge and using that victim's stolen identity, the victim may go under federal law now and ask for records relating to that account, so that they can help to set the record straight and prevent further usage of that erroneous account.

Unfortunately, as presently drafted, Connecticut's financial privacy laws may prevent a bank from disclosing that information to the victim.

Although Connecticut's privacy laws permit disclosure of financial records to customers, the definition of a customer may not encompass a victim.

Customer is currently defined as someone who uses the services of a bank. Remember, the victim of identity theft didn't open the account. The thief opened the account. This amendment will clarify that banks may disclose financial records to the victims of ID theft pursuant to the new Fair Credit Reporting Act provisions.

As a result, we ask you to support Raised House Bill 6831.

The next bill I am going to testify on is Senate Bill 1221, AN ACT CONCERNING HOLIDAY CLOSING SCHEDULES FOR BANKS AND CREDIT UNIONS AND ALLOWING THE ACCEPTANCE OF PROPRIETARY AUTOMATED TELLER MACHINE DEPOSITS. Again, with this bill there are two main objectives.

One provision would make it more feasible for a state-chartered bank to accept customer deposits at an off-site ATM.

In this case, we are only focusing on off-site ATM's, such as those that you find at malls or grocery stores or remote ATM's on street corners. We're not talking about ATM's that are located in bank branches.

Those ATM's that are located in branches can accept customer deposits. However, when it comes to a remote or an off-site ATM, Connecticut has a rather antiquated statutory provision, that was passed a long time ago, that states that if a bank wants to accept its own customer deposits at that off-site ATM, it must also accept deposits of other banks.

So picture this. At the end of the day, your security personnel are collecting and re-stocking the ATM. And they're opening up the deposit bin, where there are envelopes from all of the deposits from a given day.

And if you were to go to a remote ATM and in that deposit bin, you were to find not only your customers' deposits, but the deposit envelopes from the banks all over the place, you would have a security and transportation nightmare.

As a result of that feature, and this antiquated Connecticut requirement, most banks, virtually all banks that I'm aware of, have refrained from accepting deposits from anybody at these off-site ATM's because it's just impractical and impossible to administer.

What this bill would do, is it would repeal that antiquated and impractical provision, and allow a bank to accept customer deposits at their own off-site ATM without having to accept deposits of other banks.

In the end, we think that this provision will provide additional conveniences for Connecticut residents. And just as an aside, we also note that federally chartered banks are not subject to this state requirement.

Their ATM's are only subject to federal banking law, and therefore this particular amendment will help to provide some competitive parity for state-chartered banks, your state-chartered banks.

The second provision of this bill deals with branch office hours for Connecticut-chartered banks. Current Connecticut law generally allows banks at their option to close on designated state holidays.

However, for certain branches, for some of our banks, customer traffic on the day before or the day after a holiday can be virtually non-existent.

For example, some branches may be located in a commercial corridor or at or near a manufacturing facility. When the manufacturer shuts down the day before a holiday, the branch gets virtually no traffic. It makes no sense to force banks to keep the branch open under those circumstances.

On those days banks should be free to be able to make decisions based on market demand for the office. And I might note that federally chartered banks have broad flexibility, when setting up branch hours. State-chartered banks should enjoy similar flexibility.

Please, also note that this legislation includes requirements for the banks to give customers of that branch advance notice of the closure. So we think this is good for consumers, and we think this is good for the banking industry.

For all of the foregoing reasons, we urge you to adopt Raised Senate Bill 1221.

The next bill I would like to mention or to speak on, is House Bill 6834, AN ACT ESTABLISHING A FORUM FOR CONSUMER COMMENTS RELATIVE TO MORTGAGE LENDERS.

We, like the Commissioner of Banking, urge you not to adopt this proposal. As our Commissioner so eloquently stated, we think that this legislation would essentially create an un-moderated chat room or web log for consumers to comment on mortgage lenders, including banks.

It would be on the Banking Department's official website. As we all know, consumers can sometimes say untruthful and irresponsible things on Internet discussion boards. The inclusion of a discussion board on the Department's official website might lend a degree of unwarranted credibility to the comments that are being made by the consumers.

We are particularly concerned about statements that might suggest a run on the bank, or other unwarranted solvency or reputation concerns. The Banking Department currently has in place a responsible and professional mechanism to deal with consumer complaints, both legitimate and non-legitimate.

A consumer chat room forum is not the proper way to deal with consumer complaints. We strongly urge you not to adopt this legislation.

The final bill I want to mention today is a bill that our Attorney General commented on earlier. It's Senate Bill 1217, AN ACT CONCERNING PREDATORY LENDING. We at the Connecticut Banker's Association oppose this legislation.

As the Attorney General mentioned, the bill apparently is targeted at a small number of unscrupulous lenders, and to our knowledge, none of those involve banks.

But, unfortunately this is a classic case of throwing the baby out with the bath water. The bill has some unfortunate and unintended consequences for responsible Connecticut lenders, the same Connecticut lenders that have created one of the most robust and competitive mortgage marketplaces that we have ever seen in our lifetime.

For example, it contains severe limitations and prohibitions on prepayment penalties. This will inevitably restrain a lender's flexibility to respond to legitimate consumer demands in the marketplace.

Let me just give you an example. As you probably have seen in newspapers, in the myriad of mailings that you get each day at your home probably, on TV, and the like, the Connecticut banking industry and others in the industry have responded with products, such as no-cost or low-cost closing on loans, where people who don't have a lot of money to pay for closing costs are able to obtain a loan without having to pay some or all of those costs.

Remember though, that even though the bank may not be charging that consumer for some or all of those closing costs, those closing costs still exist for the lender.

The lender, at least in the case of banks under Connecticut law, has to have an appraisal or other suitable evaluation, often times needs title insurance, has to pay recording costs, credit reports, flood certification, and in many cases lawyers fees. All of this can add up to thousands and thousands of dollars in a residential mortgage transaction.

So how, if the bank's not going to charge the consumer for these things, how is the bank going to get reimbursed for those costs, plus make money on its own cost of funds? The answer is through interest payments over time. But it has to be over time.

You're not going to make it back in a year. You need to put mechanisms into these loans to make sure that you're going to get reimbursed for those costs, and the way to do that is to include prepayment penalties.

If the consumer repays during the initial period of the loan, what in effect happens with most responsible lenders, is the prepayment penalties are simply gear to help, on a percentage basis, to help pay the closing costs that the lender otherwise incurred.

It's a great product. This is a great example of a product for someone who has limited cash flow for closing and who plans to stay in the home for a long period of time.

This legislation would inevitably hurt consumers by making it impossible for responsible lenders to offer a broad range of financing choices.

The legislation also has a benefits test to it, which is very troubling to us. It involves very subjective analysis, as Senator Finch alluded to earlier.

It requires banks and other lends to ask the question, does the consumer have a good reason for borrowing this money from us? Consumers apply for loans for many, many different reasons. We really shouldn't be put in the position of judging whether or not those are good reasons.

We shouldn't be put in the position of having to say to a consumer, I'm sorry, we can't make this loan because you don't have a good reason to borrow from us.

In the end, this type of test is an invitation to litigation and foreclosure actions, where lawyers and disgruntled consumers are flailing about for reasons to raise the fences.

And one of the fences that will inevitably come out of this is you should have never made this loan to me. There was no benefit to this. So it's a very dangerous provision to include.

The predatory lending legislation also includes some additional disclosure requirements. I would submit to you that right now we are on information overload when it comes to disclosure requirements.

I suspect that many of you have in front of you, with respect to the taxpayer refund loans truth in lending disclosures, that we have already heard testimony are confusing and nobody understands.

And I don't know that in fact you do, but I will tell you right now that in a truth in lending disclosure statement, under federal and state law, there is only a certain number of things that you can include in the so-called Fed Box.

It's supposed to be clear and conspicuous, and prepayment penalties are one of the things that are supposed to be in there. If you think that consumers read these things, they really don't. There's overload.

We need to make sure that there' are a limited number of disclosures that are available for consumers to read and focus on and try to understand. We can't overwhelm them with additional disclosures, as this legislation suggests.

Moreover, this legislation would provide misleading disclosures. It would tell the consumer, that they can rescind this agreement, and they're given this disclosure at the time of application.

There is no agreement at the time of application. They've applied for a loan. They haven't even been approved yet. So it is a misleading disclosure. It tells them to contact HUD and seek counseling. These provisions would apply to plain vanilla loans that are made by responsible lenders.

In most cases, in 99% of the cases, consumers don't need to go to HUD, to seek counseling in these types of loans. So please don't provide yet another disclosure to the overwhelming pile of disclosures that these consumers see.

I would also point out that, with all due respect to our Attorney General, who suggested that this legislation might apply to federally chartered institutions, as it's drafted, it only, only applies to state-chartered banks and state-licensed lenders.

By its very drafting, it does not attempt to reach federally chartered institutions. Having said that, if it were to be amended, if the proposal were to be amended to try to pick up on federally chartered banks, it would be preempted.

So as a practical matter, the end result is that this legislation, although it's well-intentioned to target a small number of unscrupulous lenders, really would hurt responsible lenders, and in the end, consumers who enjoy the competitive nature of responsible lenders.

And, in general, because it would not reach federally chartered banks, the only institutions that would be harmed by this legislation, and their customers, would be your state-chartered banks.

For all of those reasons, we urge you to oppose the predatory lending bill.

REP. DOYLE: Thank you, Mr. Weiss. Any questions for Mr. Weiss? Representative Moukawsher.

REP. MOUKAWSHER: Thank you, Mr. Chairman. I am particularly interest in House Bill 6831, the section that would prohibit or not prohibit disclosure of information-to-information networks.

As I read it, you know, it seems awfully vague to me, because it says that this would not prohibit any disclosure of information to an information network, and that's not defined. I don't know what or who's out there that is an information network.

That may be accessed by financial institutions, other commercial enterprises, I have no idea what that could encompass, I imagine it would be credit card. It could be anything. That concerns me. And law enforcement authorities for the purpose of detecting and protecting against actual or potential fraud, and it goes on, or other liabilities.

So I don't know what door we're opening up and to whom with this. I mean, it's really quite vague. I mean, there's a reason, there are a lot of exceptions here for allowing disclosure of financial information, but there is a reason that it is not disclosed.

It also doesn't seem to limit the use of the information. I mean, there's an information network that's going to be accessed, but it doesn't, you know, limit the parties who have access to this, as to how they use that information. So I am a little concerned about that.

DAVID WEISS: Let me respond to that. There are other laws, both state and federal, that limit the use and re-disclosure of this type of information.

Under the Graham, Leach, Bliley financial privacy provisions, which are federal provisions, but which you, about three years ago, at the urging of the Commissioner, adopted as a matter of state law.

Under section 13 of the regulations, there are very specific provisions that prohibit any type of financial institution that is the recipient of non-public personal information, which this might include, from re-disclosing or reusing that information for purposes that are inconsistent with the original delivery of the information.

The types of networks that are emerging, so there are legal constraints that aren't repeated in this particular law, they're elsewhere.

The types of networks that are emerging are typically networks that are sponsored by the banking industry. And there are reams, I mean, reams, of federal and state regulation and supervisory guidance that mandate that banks and other financial institutions choose the parties that they are dealing with, including these types of networks, carefully [Gap in testimony. Changing from Tape 1B to Tape 2A]

--a very important issue for the banking industry, not only privacy, but information security. So the banks are required by law to do due diligence on the networks that they are entering into.

Not only as to privacy, and what will happen to the information that they're sharing and what they're going to do with the information that they receive, but also on information security. Is that information free from hacking and other security risks?

REP. MOUKAWSHER: Well, you mentioned that there is a limitation on the use of the information in section 13 in I guess an act that we passed before, that limits the reuse or use of it by financial institutions, but this also includes commercial enterprises and law enforcement. I don't know what commercial enterprises are.

DAVID WEISS: Commercial enterprises are directed broadly enough to include other types of financial institutions that may be participating, the non-banks.

REP. MOUKAWSHER: I mean, that's a very broad category.

DAVID WEISS: Information is shared with law, but you're right it is a broad category, and maybe it could be narrowed to include only financial institutions.

I'd have to check on that to see whether there is or any of the major networks that are being proposed here, that would allow information sharing with non-financial institutions and if so, what are the nature of the those non-financial institutions.

The law enforcement agents have access to non-public personal information of financial institutions in a variety of different ways, through the Patriot Act, through subpoenas, and the like, so one would hope that we can trust our law enforcement agencies to use this information responsibly.

REP. MOUKAWSHER: Well, I always would prefer to not hope but know. And I'm concerned about this, because frankly, I mean, you say that there are information-sharing networks that you have to use due diligence to be careful with what, but it's really very vague.

Any company could start what they call an information network. I mean, it just seems very wide open to me. So I'm a little concerned about that too. That's all I have to say.

REP. DOYLE: Thank you. Any other questions? Seeing none, thank you very much, Mr. Weiss. I would just point out to the public that, apparently, the Capitol will be closed in about 20 minutes.

This Committee is going to go forward. We'll finish our public hearing, but in the light of the weather, I would hope that the people could maybe expedite or summarize their testimony, and questions, of course, by the Committee are unlimited, but it would help everyone if we could maybe try to expedite it because of the weather.

At this point, I would maybe suggest Laura Gilmore and Bob from H&R Block come up together maybe and try to do a joint presentation, so we can just keep the weather in mind. Awesome.

BOB WEINBERTER: Thank you for inviting us, and we'll try and abbreviate our presentation. Laura Gilmore is with me.

She's worked for H&R Block for 19 years, and as a district manager, responsible for about half of Connecticut. She can respond to any questions you might have about how the refund loan process actually happens, and what kinds of compliance and disclosure safeguards we have in our program at H&R Block.

Block is now in its 50^th year, and so we were in business for over 30 years before refund loans were invented, and we're not dependent upon them. We have 124 offices in Connecticut. We're about 1,600 people prepare tax returns for 207,000 Connecticut taxpayers.

BOB WEINBERTER: So, 124 offices, 1,600 associates, 207,000 tax returns, about 80% of our clients do not take refund anticipation loans. But the first point I want to make, out of three, is that for those who do, it serves a very real need.

It solves a problem for some consumers who can't afford to wait three to eight weeks for an IRS refund if they don't have a bank account to accept direct deposit.

And for those who can accept direct deposit, it may save as much as two weeks, which can be very important at the beginning of February, because what's arriving in the mailbox at the same time, you're starting to get overdue notices on holiday purchases, at the same time, you get the W2. And that creates a gap, which for many people creates a real financial strain.

So for them, this can be a solution, albeit an expensive solution, and it can solve a real problem.

The second point I want to make is that RAL's are already regulated rather heavily. There are, by my count anyway, eight federal laws, including the Internal Revenue Code and IRS rules that regulate either the lending, the loan or the facilitator of refund anticipation loans.

And Connecticut passed a law last year, which has now been in effect for four months, through this tax season, we have not heard of any major enforcement issues, respecting the bill.

And finally, while the bank sets the interest rates and complies with the federal banking laws, we have taken very seriously our obligation to make sure that taxpayers are well-informed about what it is they're getting, what the terms and conditions are.

And in developing our disclosures, we turned to the former head of the Federal Trade Commission's Bureau of Consumer Protection for advice, and we've also taken counsel with consumer groups, including Acorn and others, in trying to develop what we hope are best-practices disclosures.

And they're attached to the written testimony I have presented. But I just wanted to call some of them to your attention very quickly.

We followed what is, I think, a good practice, which is called layered disclosures. I think the prior witness made reference to the fact that the long detailed application form and the truth in lending disclosures can be confusing, or at least are in small print.

And recognizing that, we have all of our tax return preparers, have a document called Facts About RAL's, which is two pages long, it calls attention to certain key features in the RAL process.

Then it has a chart, which gives all of the fees and interest rates, it gives a timeline, so people can compare the time for the refund loan versus the time for the IRS refund delivery. And finally, it gives a sample transaction, so people have an understanding as to how that might work.

Just in reference to some of the earlier testimony, the first points made are, it's a loan. And let me emphasize that, because the actual loan application has in the background on the top of page one, the word loan in capital letters, two inches high and seven-and-a-half inches across.

And that document uses the term loan or RAL, which is a defined term as a loan, over 100 times. So there is certainly, I would say, every effort we can possibly make to make sure people understand that it's a loan.

And the second point is, you must repay the full amount of the loan, even if the IRS does not send all of your refund.

And I think we've tried to be very ethical, responsible, and careful in the way we make these disclosures. And our return preparers are trained to present the free, no additional cost IRS refund options first, before they present any bank product alternatives, which would cost additional.

In addition to that, these disclosures are fairly general, but we also have disclosures that are very specific to the individual taxpayer.

On the computer screen, which pivots between the taxpayer and the tax professional, we have a side-by-side comparison, which enables them to see, for their own refund, what the cost of various options would be.

Again, this promotes a discussion between the tax return preparer and the taxpayer, so that they can understand what the cost of each alternative is.

Finally, we have a screen shot that essentially outlines how all the fees are presented, so that no one is under any misimpression as to the cost of anything.

And the other point I would make is that at the very end of the tax interview, when the tax return is given to the taxpayer, it comes with a set of advice, called the Block Advantage in our case, and it consists of a variety of tips.

The very first tip that someone gets if they have taken a RAL is a notice that you can keep more of your refund if you avoid this product next year. And we want to work with our taxpayers wherever possible, to ensure that they can engage in fully responsible financial behavior, which through planning may enable them to save money by avoiding a loan.

But the reality is that for many people, they feel that they need this product, and that's really why we offer it.

I'd be happy to respond to any of your questions, but I think those are the main points we wanted to make.

REP. DOYLE: Thank you. Any questions from the Committee? Representative Moukawsher.

REP. MOUKAWSHER: Thank you. You heard, I think you probably heard the testimony earlier, and may have seen the written testimony of a Mrs. R., who apparently among other things, had a security interest in her auto.

And I was trying to figure out how that, she was an H&R Block customer according to her testimony.

BOB WEINBERTER: I apologize because I came from the airport in the snowstorm, so I caught the very last piece of that testimony. If I could get the details, I'd be happy to do some research and try to respond to it.

REP. MOUKAWSHER: Let me just ask you in general. If you have a refund, you're making a loan, and do you securitize these loans with--

BOB WEINBERTER: The bank, I think the bank will have to respond to that. I believe the security is in the tax refund. And I think one of the things you heard in the testimony that I listened to, is an example of where the IRS basically did not pay the full amount of the refund.

And they do, for revenue protection reasons and a high percentage of audits, about 1.7% of EITC returns are audited, which is two, three, four times what high-income taxpayers experiences at audit rates.

So these are not slam-dunk automatic, you know, well-securitized loans. There is some risk. And that risk is one of the reasons, I believe, the bank really has to testify to this, but one of the reasons the product may be more expensive than some other forms.

REP. MOUKAWSHER: In your offices at H&R Block, you have the paperwork filled out for these loans.

BOB WEINBERTER: Yes.

REP. MOUKAWSHER: And if you took, if there was something securing that loan, there would be a security agreement that would also be filled out in your office, wouldn't it.

BOB WEINBERTER: Yes.

REP. MOUKAWSHER: Do you do that?

BOB WEINBERTER: I don't actually facilitate loans. They keep me far away from that process. But Laura may be able to respond. But the bank, it's the bank--

REP. MOUKAWSHER: I don't want the bank. I want you to respond.

BOB WEINBERTER: No. I understand, but we're filling out the bank's forms. So they can testify as to what is actually in them.

REP. MOUKAWSHER: You fill the forms out in your office, do you not?

BOB WEINBERTER: Yes, we do.

REP. MOUKAWSHER: So, I mean, do you have security agreements for these loans, yes or no? You don't know that?

BOB WEINBERTER: I don't.

REP. MOUKAWSHER: Do you?

LAURA GILMORE: It's a five-page document. It's not separate. I don't know if it's in the bank's document.

BOB WEINBERTER: I would be happy to check and respond to you on that.

REP. DOYLE: Representative McCrory.

REP. MCCRORY: First question, do you offer any other services or loans of excess of 75% as H&R Block, under the umbrella H&R Block?

BOB WEINBERTER: No, well, one of our subsidiaries is in the mortgage business, but I don't believe we offer loans that have interest rates that are this high.

REP. MCCRORY: So this is the only loan to have this amount?

BOB WEINBERTER: Yeah. Let me just if I can, the interest rate is stated in annual terms. It's for an 11-day loan. So the reality is that no one is paying the annual rate for the 11-day loan. You would have to take 33 loans of the same length in order to get to the annual rate.

REP. MCCRORY: Right, unless you have a problem like, you know, it gets audited. The reason I say that, in a city like Morris and Hartford the IRS is auditing all the random people in this capacity.

And that's going to affect a lot of, I think I heard earlier that one out of every 41 individuals who does this kind of filing is going to be audited. That's going to impact a lot of people in a community like mine.

So you say there are only 11 days, but it seems to me that this year it's going to be more than 11 days for a lot of people.

My other question is, how many of the areas where you have set up these shops, and I know that they're set up for a small amount of time, four or five months, are they mostly concentrated in the urban areas?

BOB WEINBERTER: There was a study done of that, and I think the study found that H&R Block was basically evenly distributed across the US population. We have about 11,000 offices.

REP. MCCRORY: Is there any numbers that detail the percentage of these loans and where they are coming from, you know, the RAL's are they largely in--

BOB WEINBERTER: I think RAL's are primarily used by people who are in financial stressed situations, but many people I think, I asked this question once, I think we had one client who had an income of over $500,000 who had taken a RAL, but that's certainly atypical.

But it applies to more than just low-income taxpayers, but I think there certainly is more financial stress that is a motivator there.

REP. MCCRORY: Thank you.

REP. DOYLE: Representative Harkins.

REP. HARKINS: Thank you, Mr. Chairman. Does H&R Block receive any revenue for filling out these forms from the lenders?

BOB WEINBERTER: We don't, we have purchased an interest in the loans, but our tax return preparers on the front line don't receive any bonus or commission or additional compensation for facilitating a refund loan.

REP. HARKINS: So you don't have any incentive programs for the people going over the person's tax forms?

BOB WEINBERTER: Not tied to refund anticipation loans.

REP. HARKINS: But H&R Block does enjoy some benefit from having these applicants processed.

BOB WEINBERTER: Yes.

REP. HARKINS: Any idea how much money you receive?

BOB WEINBERTER: I'd have to double check, but we receive approximately 49% of the profits.

REP. HARKINS: Do you sign exclusively with just one lender or do you represent other lenders?

BOB WEINBERTER: No. We have a ten-year agreement with, it's now HSBC, and that expires in 2006.

REP. HARKINS: Okay. Thank you. Thank you, Mr. Chairman.

REP. DOYLE: Representative Barry.

REP. BARRY: Thanks very much for your testimony. I just had a couple of quick questions. I was looking through your, the attachments here, and you referenced a number of federal laws and IRS rules that extensively regulate RAL lenders.

And the one in particular, the FDCPA, the Fair Debt and Collection Practices Act, I was just taking a look at, you had put three bullets down which is a real, obviously you glossed this one through, and there is a lot more to that act obviously than you put down. Mentioning about how you're prohibited from providing false and misleading information and you can't harass and abuse debtors and things like that.

You also mentioned that RAL lenders collect debts on behalf of other RAL lenders. Do you guys do that?

BOB WEINBERTER: Well, the bank does. Yes. It's called cross-collection. It's one of the things that is highlighted as number three in the Facts About RAL's.

And I think the bank can probably speak best to that when they testify. I think it's to deal with the issue of a client who may go to a different provider the next year. And it happens, as I understand it, in about one of every 2,100 loans.

REP. BARRY: One of every 2,100 loans? Okay. And with respect to the disclosure of, under the FDCPA you get a disclose to the consumer within five days that a debt is being collected. How do you do that at H&R Block?

BOB WEINBERTER: We don't, let me emphasize a very important point. H&R Block does not make refund anticipation loans. We facilitate them on behalf of a banking partner. And that is pursuant to IRS rules.

IRS rules do not allow someone who is an electronic filer and a tax return preparer to also be a refund lender. So there has to be a bank involved, and they're the ones that engage in the collection, the documentation, and so forth.

REP. BARRY: So you're not, you would not be considered to be defined as a debt collector or a loan service--

BOB WEINBERTER: No. I mean, there may be a situation, which goes beyond the refund loan, where we have a client who does not pay a fee that we need to collect, in which case we might be subjected certainly to that. But for the refund loans, the bank is really doing that.

REP. BARRY: It's outside of the RAL.

REP. DOYLE: Thank you. Representative Stripp.

REP. STRIPP: Thank you, Mr. Chairman. I'm a little confused as to how the process works. Let's say Mrs. Jones comes in, and you fill out the forms for her, file her income tax, she decides she wants the RAL.

When the IRS sends that check, who do they make it out to, and who do they address it to, who do they send it to?

LAURA GILMORE: When she does the loan, if she opts for that, then--

REP. DOYLE: Please, identify yourself just for the record.

LAURA GILMORE: I'm sorry, Laura Gilmore, with H&R Block. We would print the check through authorization from the check. We would issue the check.

REP. STRIPP: Wait a minute, that's the check going to her. She has the money. She goes away. Now, what happens to the check from the IRS? It goes from the IRS to the bank?

LAURA GILMORE: It goes to the bank, and she's authorized--

REP. STRIPP: Made out to the bank, in the bank's name?

LAURA GILMORE: --it's done through computers.

BOB WEINBERTER: It liquidates the loan, and it's pursuant to the instruction of the taxpayer who filed it.

REP. STRIPP: So it's pretty good security then? It's not a conjunction you're going to get the money back.

BOB WEINBERTER: Yeah. It's good security, if the IRS pays the refund.

REP. STRIPP: Unless they decide, for some reason, not to give the full refund. Thank you.

REP. DOYLE: Representative Mazurek.

REP. MAZUREK: Thank you, Mr. Chairman. Just a couple of quick questions, I know we all want to get out of here with the weather.

I'm a little confused concerning your testimony compared to the Attorney General's testimony where he talks in terms of government. The refund checks from the government are usually received within one to two weeks of filing. Your publication says that you save three to eight weeks by using a RAL.

So are you saying that it's three to eight weeks, plus a normal amount of time for the filing? Are you saying that the average refund takes longer, considerably longer, than the Attorney General reported?

BOB WEINBERTER: About 48% of H&R Block clients who use a refund anticipation loan do not have a checking account.

So you can get your money from the government, the fastest way is basically eight-and-a-half to fifteen days, which you can get if you electronically file and have a direct deposit into your account.

But if you don't have an account, that's not an available option. And for those people, they get it, get their check by mail. And that takes basically 15 to 22 days. So that's a longer proposition.

If you don't electronically file, it can take five to eight weeks. So if you just looked at the one time frame, which applies to the fastest way, that is direct deposit into your account, it can be somewhat misleading, because many of the people who are using refund loans, that's not a realistic option for them. They do not have a bank account.

REP. MAZUREK: I guess I didn't realize that it took the government that long to turn these checks around, up to eight weeks. I guess I don't pay any attention to when my taxes come back.

BOB WEINBERTER: Now, the government is working on that and I think really, one of the problems here, is the government deliberately over-withholds from our wages, so that creates a large refund, averaging over $2,100, and then it doesn't really turn the checks around very quickly.

I think Massachusetts has a two-day turnaround. There was testimony earlier about a three- or four-day turnaround coming in Connecticut.

The IRS is working on those computers, and over the next few years, some refunds will starts to turnaround in just as few as five days. And as that process builds, I think the need for refund loans will shrink. So I think that's something we look forward to.

REP. MAZUREK: Yeah. I think everyone would. Let me just ask you one other question concerning the whole application process.

How much time do your agents, accountants, typically spend with the customer explaining the RAL application loan process and the implications of it? If I asked you to say, you know, average number of minutes that we spend explaining this in the course of doing our tax refund for them, what's that average?

LAURA GILMORE: My guess, I guess it would be my guess, I don't know if I have a stat.

REP. MAZUREK: You don't have to guess, you know, an average. You know, you have highs and lows.

LAURA GILMORE: Right, right. But I mean, I guess depending on how knowledgeable, if the person has done it every year, or if they are first time doing it, but still we get to that screen that Bob showed and we start showing them all the options.

So that's part of the explanation process right there. I don't know, maybe ten to fifteen minutes of the interview, I'm guessing, but to explain the whole process and what their options are and which way they want to go.

REP. MAZUREK: Okay. I'm just curious. I was looking through somebody else that submitted some paperwork. And it looked like the application to me was household, it says on it. And it looks like it's four pages, legal sized, small print. I mean, it's quite lengthy. And I said, my God, how does anyone understand that in ten minutes

And then I looked at your presentation, and I guess your loan application is 11 pages long. Is that true? It says page 1 of 11 on there, that's why I'm asking.

LAURA GILMORE: Probably with the customer's copies in there.

REP. MAZUREK: That seems like quite a bit of information you need to get across in ten minutes.

BOB WEINBERTER: I think ten minutes would refer to the presentation of options and the highlighting of the Facts About RAL's. It certainly would take longer than that if someone wants to read the full application. There is no question about that.

REP. MAZUREK: If someone wanted to read the full application, that would be, the agent, whoever it was, would just sit there and wait for them to get through the 11 pages, I would assume?

LAURA GILMORE: Yes, yes.

REP. MAZUREK: Yeah, okay. All right. Thank you.

REP. DOYLE: Any other questions? Representative Moukawsher.

REP. MOUKAWSHER: You know, I looked at the forms again that were submitted by Mrs. R., and on the loan agreement and disclosure statement, under number two, it says security interest.

If I receive a RAL, I grant ICB a security interest in the property described in the Truth in Lending disclosure statement, as collateral for my obligations to repay the RAL and perform my other obligations under the terms of application in this agreement. Who's ICB?

BOB WEINBERTER: ICB was the bank that was used to make the loans in 2004, I believe, or maybe 2003. There was a transition among--

REP. MOUKAWSHER: So another bank is, Household I suppose is--

BOB WEINBERTER: --well, Household was bought by Hong Kong Shanghai Banking Corporation, HSBC, so they're the ones right now.

REP. MOUKAWSHER: --and in the process of filling out this paperwork, someone fills out a disclosure statement, and they would, I suppose list a car or some other personal property on that disclosure statement.

LAURA GILMORE: I don't know. We don't ask them any information about a vehicle.

REP. MOUKAWSHER: Well, it says, I grant a security interest in the property described in the TILA disclosure statement as collateral for my obligations. So, I mean, apparently there is a Truth In Lending disclosure statement.

So are you aware of the fact that these loans are being collateralized, that they're secured?

BOB WEINBERTER: I would be happy to look into that particular situation and respond to it, but, you know, absent the details, I'm not able to.

REP. MOUKAWSHER: See this is what kind of bothers me, I mean, you're here talking about a process, and we happen to have certain documents that were provided us by someone who used the service.

I assume that you would be aware of the documentation that people are filling out. It sounds like you're not aware of your own documentation.

BOB WEINBERTER: I'm not aware of all of the details. My impression had been that the collateral was exclusively the refund. But the bank is in the room, and I think they can testify more fully to that and give you a more accurate--

REP. MOUKAWSHER: From your testimony I would assume that it is credible, possible, that someone would be filling out these forms and giving a security interest in their car, for instance, or for to collateralize this loan.

BOB WEINBERTER: --I don't believe security interests or cars are involved. But I think the bank is going to have to respond, because I don't know the answer and I don't want to give you any misimpressions.

REP. DOYLE: Senator Finch.

SEN. FINCH: In your information you pass out to the consumer, just so I have this right, you're saying this to the consumer, the typical refund is $2,500, and your preparation fee is $150 and for roughly an additional $100 you give them their money right then and there.

BOB WEINBERTER: That's basically correct, they would get it the next day, the next business day or actually the next day since we're in business through that season everyday.

This is probably high for our average tax prep fee, but as an example, I think it works fine. Yes, that's correct.

Basically, for the equation that most low-income taxpayers would face in a situation like this is getting $3,000 less fees tomorrow, versus, if you don't have a bank account, waiting roughly three weeks. And that would cost $100--

SEN. FINCH: And roughly half the people fit into those criteria because they don't have a bank account, at least in H&R Block

BOB WEINBERTER: --they don't have a checking account, right.

SEN. FINCH: Thank you.

REP. DOYLE: Any other questions from Committee Members? Seeing none, thank you very much. Next up is Art Corey then Raphael Podolsky and Bob Rothford. Art Corey, please.

ART COREY: Good afternoon Chairman Finch, Chairman Doyle, Members of the Committee. My name is Art Corey. I am the president and CEO of the Connecticut Credit Union Association. I'm here to testify on a couple of bills, and I will be brief.

The first is House Bill 6832 AN ACT CONCERNING THE FIELD OF MEMBERSHIP OF A CONNECTICUT CREDIT UNION.

As you may know, credit unions are nonprofit, cooperative financial institutions that are owned by their members, and essentially there are two kinds of credit unions, those that serve a single employer, single company, employees of the company, or a group of companies.

And on the other hand, those that serve a well-defined community, a community that is established by or approved by the Commissioner of Banking.

On occasion, a credit union that serves a single company or a group of companies will have a need to expand its field of membership.

The main reason for that happening is the single company or the group of companies that the credit union serves may experience financial problems, might downsize their employee population.

The company may move out of state, which would leave the credit union in a difficult situation with a lack of potential members, or as you might call them customers.

So when that happens, a credit union that serves a single company or group of companies will oftentimes or sometimes convert its field of membership away from just that single company to a community, so that it has access to more potential members.

Under current Connecticut law, when a state-chartered credit union does that, and as I said before, the Commissioner of Banking would approve the community, and it has to be a well-defined, geographic community that the credit union would serve.

The credit union could only serve individuals who live, work, or worship within that very well-defined geographic community. It would be rare, but it would be possible, that a credit union that converted to a community charter, may have served a company that now resides or is located outside of its current community, the community that the Commissioner grants. I said that would be rare.

The Commissioner's position now, we've discussed this with, would be to grant the community that would encompass all of the companies that the credit union currently serves, but on occasion, it might be possible that company might lie outside that community, which would mean that the credit union could no longer serve that company.

This bill would make an exception to the rule, and it would allow the credit union to continue to serve that single company or groups of company that lie outside of the community. It would not be an exclusive right to serve that company.

Other financial institutions, including credit unions, could market to the employees of that company or companies and be able to serve them with financial services.

This would allow the credit union to maintain the bond that it has with that company, allows the company to continue to ride the credit union as a benefit to its employees. Oftentimes these are long-standing relationships and will benefit Connecticut consumers.

As an aside, there is legislation pending in Congress, the U.S. Congress, that will allow federal credit unions to do this as well. So we expect that to pass at some point in the 109^th Congress, which would provide federal credit unions a competitive advantage over state-chartered credit unions.

We have both in our field of membership, and we as a matter of policy like to see both of them on the same plane, or level playing field. So this is legislation that we feel it will be necessary to maintain the value of the state charter.

I don't know if you would like me to take questions on that legislation now or until I--

REP. DOYLE: Any questions on that piece? Thank you. Go ahead.

ART COREY: The second piece is House Bill 6833, AN ACT CONCERNING CHECK CASHING AND WIRE TRANSFERS BY CREDIT UNIONS. And again, this goes to the field of membership issue that I just described.

Currently, credit unions can only serve their members, and a member can only become a member if they're within this credit union's field of membership.

We have had a number of our credit unions, particularly community credit unions and those that serve or have branches in low-income communities, have been approached by individuals in those communities looking for check cashing and wire transfer services.

The credit union's response is that they would sign the person up for membership and they would be able to provide those services. Interestingly, the credit unions have found that these individuals, to a great extent, do not want to become members of the credit union, because they have a distrust of the financial services industry.

This law would provide an exception to the membership rule, this legislation would provide an exception, and would allow a state-chartered community credit union, or other credit union, to provide those services on a limited basis, just the check cashing and wire transfer services to those folks who do not want to become a full member.

It will allow the credit unions in those communities to fulfill their traditional social mission, which is to provide services to individuals of modest means.

It will also, as I mentioned, offer a low-cost service to those individuals seeking these services, as I said credit unions are nonprofit, they are owned by their members, and so by definition they do not charge fees that are excessive.

So it provides a low-cost alternative to folks in these communities as well as shore up the membership of these credit unions. It will also give the credit union the opportunity to establish a relationship with these individuals, get them comfortable with a mainstream financial institution, and hopefully encourage them to find the value in a credit union, which is of course encouraging savings and low-cost credit.

So I ask that you support both of these pieces of legislation for the reasons stated.

REP. DOYLE: Any questions? Thank you.

ART COREY: Thank you.

REP. DOYLE: Okay. Raphael Podolsky.

RAPHAEL PODOLSKY: Thank you, Mr. Chairman. I'm Raphael Podolsky with the Legal Assistance Resource Center of Connecticut. It's part of the Legal Aid and Legal Services programs who represent low-income clients in Legal Aid and Legal Services programs in Connecticut.

I want to speak to you briefly about four bills. I've filed written testimony and I'll just try to highlight with each one of those, particularly two of them.

First one I want to talk about is Senate Bill 1218, which deals credit card access to home equity lines of credit. Some of you will recall this is a bill that came out of this Committee two years ago.

It passed the Senate. It was defeated on the floor of the House. I think the reasons why it was defeated on the floor of the House are still good reasons, and I would hope that you would choose not to do the bill this year.

We have a statute that deals with how you can access a home equity line of credit, that's an open-end credit. The statute, which was adopted, originally in 1988, was adopted at that time explicitly on the condition that it not be accessible by credit card.

And the theory was it makes it way too easy to put your house up as security for something that would normally be an unsecured loan.

The reality is that people are much less likely to carry a checkbook with them than to carry their credit card these days. If you make it easy to turn what would usually unsecured loans into secured loans, you're going to find people going to the gas station and buying gas with their home equity credit card.

You'll see it with groceries, and you'll see it in a casino. Go to the ATM, get some money out, and it's now your home has become collateral, so that when you get in financial trouble, your homes become at risk for something that normally would have been an unsecured credit card.

It also undercuts the homestead exemption, because the homestead exemption will not apply to secured credit.

And it really invites a misuse by this by the very predatory lending industry you have been trying to regulate effectively over the last few years. It's simply not a good way to do it, and so I would ask you to reject Senate Bill 1218.

The second bill I want to mention is, oh, sorry—

REP. DOYLE: Let's just see to those questions one bill at a time.

RAPHAEL PODOLSKY: --oh, I'm sorry.

REP. DOYLE: Representative Barry.

REP. BARRY: By the way, thanks for the testimony. I know that you have such a great institutional memory of what's happened with bill and with most other bills in this body. I was just trying to find some kind of value in the bill.

And I know that someone said earlier today that consumers apply for loans for a whole number of different reasons. And I know that, just as a lawyer, when people come to me for some advice and study of business, there are those people who can't get traditional commercial loans. Say they want to start up a business, they want to start up an accounting firm, and they need $100,000.

They go to the local bank and that bank's not going to give them any money, because they don't have any, they've been in house somewhere, they don't have any business experience.

So what they do is they take a HELOC, they get a Home Equity Line of Credit. And I guess what I just wanted to bring to your attention, there are people out there that I can only imagine that when you're starting a business, and something happens, and you end up doing your equity line of credit, and you send back a bunch of money to the bank, because you don't want to pay the interest on that, but you know it's there.

It's sitting there, and then you have your operating expenses. And all of a sudden, you get hit, and your copier goes down. And you've got to go buy a copier. And then you got to take money out of that HELOC, and you take money from the bank, but it takes awhile to do that.

And I've heard that concern expressed to me, that, boy, you know, I'm worried about sending money back to the bank. I'd rather put it in a money market for the time being, rather than send it back to the bank, because in the event that I really needed that money for the business, I may not be able to get it in 7 days or 14 days or 21 days, to pay my employees or to pay for some piece of equipment.

And I understand that you make some compelling arguments, obviously, on behalf of rejecting the bill. I just wanted to bring that to your attention and see if you see any value in that with respect to the small businessperson out there.

RAPHAEL PODOLSKY: I think I'm not understanding your question in relation to this bill. As I understand the law, this applies only to consumer revolving loans, that are secured by home equity credit, so that a business loan would not be effected one way or the other.

My understanding is there's a separate rule for commercial revolving loan, so what you're describing is a business loan, and I don't think is effected by this.

REP. BARRY: What I'm saying to you is that these are people, just assume that I start my own law practice. I don't qualify for a commercial loan, so I've got to go talk to my walk and say, hey, do you mind if we get an appraisal done on our house and take out an equity line of credit?

RAPHAEL PODOLSKY: There's still a commercial loan. I'm looking at the statute, if you look at Senate Bill 1218, the part of existing statute, at line 90.

Consumer revolving loan means a loan to one or more individuals, the proceeds of which are intended primarily for personal, family, or household purposes. So even if you put your house up for your business, it's still a commercial loan. And it doesn't become a consumer loan because you're pledging your house. It's the purpose for which you're borrowing.

And so the statute, at least as I understand the statute, the protection that we're talking about that's built into the statute is when you're borrowing for personal, family, or household purposes. It's not for business purpose.

But even saying that, I guess I'm not quite sure the common way of accessing such a loan is with a check, which has the effect of making you kind of stop and think a little bit each time you do it.

So even on the commercial side that you're talking about, it's not like you would have to wait 7 or 14 days, you would write a check.

If you have an open end line of commercial credit, secured by your house, you could access it with a check. The issue on this, Senate Bill 1218, is should you be able access it with a credit card.

Because credit cards are all going to look kind of the same, what it means is, you know you carry four credit cards in your wallet. When do you decide that you've maxed out on one credit card, and so you use this other credit card? But this other credit card means if you had a default on your payment, you lose your house.

The law tries to say that when you're going to pledge your house for a consumer purpose, we want to push you to use a certain amount of deliberation in doing it.

I mean, nothing stops somebody from writing all of the checks they want, but the reality is the use of a credit card is very, very simple.

I don't know if that's responsive to your question, but I'm not understanding how your question applies to this bill.

REP. BARRY: I certainly don't think that you're evading the question at all, but I don't think it's responsive, but I can always talk to you outside of the hearing.

Because this has happened on many occasions, when people do, that's how people start businesses. They get home equity lines of credit all the time. They're not commercial loans.

REP. DOYLE: They don't qualify for commercial loans, that's the--

RAPHAEL PODOLSKY: What I'm saying is they would, that it doesn't fit the definition. The statute says if you have a consumer-revolving loan, there are certain rules that apply.

One of the rules is that you can't access the home equity with a credit card. But your description is not a description that fits the definition of a consumer revolving loan, so this protection would not apply in that circumstance, as best as I can tell because it doesn't fit the definition.

Maybe we can continue the conversation afterwards.

REP. BARRY: Yeah. We can always continue some other time. Thanks a lot.

REP. DOYLE: Any other questions on this bill for Raphael. Thank you, next bill, Raphael.

RAPHAEL PODOLSKY: Next bill is Senate Bill 1220, that deals with check cashing services. Our particular concerns are just with two parts of the bill. Section Four of the bill and Section Five A.

Section four of the bill increases the maximum check from $2,500 to $15,000. It also takes the limit off a number of any check that is not from an individual, so that's really uncapped. It could be even more than $15,000.

Our real concern with that section is how the increasing of the dollar amount interrelates with the cost, the fee, the maximum allowable fee for cashing check.

By regulation, the maximum fee is 2%. The statute essentially allows the Banking Commissioner to set a maximum.

My understanding is there is no anticipation that the Banking Commissioner's regulations would change. So what that means is right now, for $2,500 check, which is the current maximum, 2% is $50.

So you have to pay $50 to get the check cashed. At $10,000, 2% is $200. Now, you're talking about a law that allows a check cashing service to charge you $200 to cash the check. Our concern is that as these numbers go up and up and up, the check-cashing fee also goes out.

So that I would be much more comfortable with Section Four of the bill if you were putting some sort of statutory cap on how much, at some point this ought to max out, at a much lower than would be allowed by this.

The second concern we have is with section 5A, which puts a floor of $1 per check…

How much of a difference this really makes to a check cashing company, I have no idea how many checks under $50 they're cashing. But I'm assuming that as the checks get smaller, by in large you're dealing with people that have less and less in the way of resources. So that I would at least ask you to think about whether there is any need to do that.

Those are my comments on that bill. Should I keep going?

REP. DOYLE: Any questions? Keep going.

RAPHAEL PODOLSKY: The third bill is one you've heard a lot of testimony on, which is House Bill 6830, which is tax refund anticipation loans. We support the bill. I just want to make a couple of comments that are in relation to things that I've heard, some of the questions that were asked.

Senator Finch, at an earlier point in the hearing, kind of suggested that there really is not that much money involved. You're talking fairly small amounts of money, so yeah the interest rate is high, but you're really not borrowing the money for a year.

I would just say that actually the witness from H&R Block even referred to this as, I believe his phrase was an expensive solution

UNIDENTIFIED SPEAKER: He's not a witness.

RAPHAEL PODOLSKY: I'm sorry?

UNIDENTIFIED SPEAKER: Go on.

RAPHAEL PODOLSKY: The person who was speaking from H&R Block, and he also acknowledged that a lot of people were financially stressed when they used this kind of an arrangement.

Sitting in the audience, I was thinking about the fact that there are certain other contexts in which people get really upset about pennies. For example, one of the reasons sales tax is sometimes viewed as acceptable and sometimes as unacceptable because you don't pay very much at any one purchase, and yet over time it starts to add up.

Or even the whole issue of what interest rates people pay, in general on credit cards or on anything, that on small purchases, it doesn't seem like much, but it adds up after awhile.

I really think that it becomes more than just pennies. I believe that the 36% limit that's in the bill comes from looking at the Connecticut statutes and looking for what is the closest comparable rate, and that's the small loan rate.

In fact, what are being made are small loans. And if you look at the Small Loan Act in Connecticut, you will see that approximately the highest interest rate you can have for a short-term, small loan is between 33% and 36%, because of the way it's expressed.

It's actually a little hard to figure out exactly what it is because the Small Loan Act changes the rates based on the loan is for and how much it is. But I believe 36% is roughly the maximum. So this is not a number that has been pulled out of thin air, it's a number that matches approximately what would be done if they licensed themselves as a small loan company.

It is certainly true, this bill is focused on the facilitator, not on the bank but on the facilitator, which is the area that we're authorized to regulate.

In regard to the timing, I think the comparison of three to eight weeks, I think is not an apples and apples comparison. First of all, the eight weeks seems awfully long based on, I think, most people's experience.

But the issue isn't how much, how long would it take you to get the check if you filed it yourself. The assumption here is H&R Block is doing the filing for you.

The question is, what's the marginal extra time it takes if you take it up front as a refund anticipation loan versus as if you let them file it for you. And then the payment comes in due course, either in direct deposit or by check.

And that's the comparison you should make, and when you're making that comparison by direct deposit you're talking in the ballpark of a week or so.

If you're talking a check payment, I'm not sure of what that is, but working from their own numbers, you're talking two or three weeks. So the fee that you're paying, if it's $100 or $110 or $140, whatever that fee is, is for a loan of somewhere between maybe let's say a week in half the case and two to three weeks in the other half of the cases.

It's not fair to say, well, what if you did your own tax return and filed it by mail, because that's not the comparison that's in front of us.

I would urge you to go with that bill. And I would also say, apart from the interest rate cap that's in there, there are other important things in that bill as well.

I would hope that you would also want to see those things included, including the unfair trade practice, the Banking Commissioner regulation, things of that sort. They're also in that bill.

REP. DOYLE: Any questions from Committee on that bill? Raphael, I have a question for you on that. Do you think there is an actual, and I generally support the concept, but my question is do you see any value in these loans.

In your eyes, would you like to have them prohibited or do you see value to the consumer?

RAPHAEL PODOLSKY: I think that there can be value in some cases. I agree with the comment that this is a very expensive solution.

And it's the reason that we have interest rate caps, recognizing that people who are financially stressed may be willing to pay more than a reasonable amount in order to get something.

There certainly can be circumstances in which someone would like to get the money more quickly. But I think the reality is people psychologically think it's going to take longer to get the tax refund from IRS than it really takes.

And that may be true even if you tell them, even if you say it's going to be a week to ten days, well, you know, it's the government, it's not going to be a week to ten days.

And so, the time period for them feels like it is going to be a much longer time period. It's a very secure loan, from the point of view of the bank, that is the lender, because unless the tax return is wrong, which could come either from the tax preparer or from information provided by the taxpayer, unless it's wrong, this is a guaranteed payment.

And usually, we talk about interest rates as being, you know, you'd go higher because you're dealing with a very risky loan. And in the scheme of things, as loans go, the person may be fairly poor. They may be getting an Earned Income Tax Credit, their income may be $15,000 or $17,000 or $18,000 a year.

It might suggest it's risky to lend to a person like that, but there's very low risk because the tax preparer has reviewed the tax returns, and it's highly likely to be accurate.

And you're relying on the government to make the payment that it's going to make. So it's a very low-risk loan and yet it's a very, very high fee, relative to the low risk.

But I'm not saying that there aren't people out there who felt they can't wait ten days to get their money.

REP. DOYLE: In the perfect world, if you had control, would you prohibit these?

RAPHAEL PODOLSKY: No, I think I probably would go with a capped interest rate. Would I be upset if they were prohibited? No. Would I feel that we had to prohibit them?

No. If the interest rate was reasonable, I would not say we had to prohibit. I don't know what others think or would advocate. That would be my personal opinion.

REP. DOYLE: Yes. Any other questions? Representative Moukawsher.

REP. MOUKAWSHER: Thank you. Just briefly, you mentioned in your written remarks that one of the features of the bill is that it prohibits taking a security interest in anything other than the proceeds of the loan. Have you had any experience with someone having a security interest?

RAPHAEL PODOLSKY: No, no, I haven't. And it was interesting to me to listen to the testimony and listen to your questions. I mean, to the extent that a place like H&R Block or the bank that does this for H&R Block, does not take a security interest in anything other than the actual tax refund, then there's no harm done by having this in here.

As one of the other speakers said, sometimes there are other entities. First of all, not everybody's H&R Block, but the second thing is there may be other kinds of entities other than tax preparers that do refund anticipation loans, where they want to hook this onto something else, where they have access.

So I think I am not aware of the situations personally, but I think it's a reasonable prohibition. It seems to me that you wouldn't want these to attach to anything other than the refund itself because the refund itself is going to go through the tax preparer.

REP. MOUKAWSHER: I think that the idea is where in an instance where the refund is rejected or it's not paid, I guess that's where the security interest comes from.

I didn't gather this originally, but I think the concern is if you have a really high-interest loan, and the refund doesn't come to you. And you have a security interest on the car and now you're running it, even if we lower it to 36%, it would be a very high interest rate on the loan, which would in all likelihood probably require the car to be repossessed.

RAPHAEL PODOLSKY: I mean, another thing that happens, just as with Senate Bill 1218, you've now converted something where you had an exemption under the exemption laws, I think it's $1,500 value in a car is exempt from execution.

You've now given that up if the car has become collateral for the loan. You effectively lose that portion of the exemption. And I'm sure the consumer doesn't realize that.

I mean, none of us would realize that unless you were pretty familiar with the statute, and so it's not a knowing kind of giving up of the homestead, not the homestead, but the car exemption.

REP. MOUKAWSHER: Thanks very much.

REP. DOYLE: Any other questions on that bill. One more bill?

RAPHAEL PODOLSKY: Last bill, very briefly, Senate Bill 1217, which is the predatory lending bill. Again, you've heard a fair amount of testimony on it. I would just say that I'm in favor of the bill.

If there are any questions I can answer, I'd be happy to, but for the reasons that have been cited by other speakers, I would support that bill.

REP. DOYLE: Thank you, Raphael. Any other questions for Raphael on this topic or any topic? He can handle the questions. Representative McMahon.

REP. MCMAHON: Raphael, since you're testifying, does that mean that this over? Don't you usually come last?

RAPHAEL PODOLSKY: I think there are people waiting who would like to speak.

REP. DOYLE: Okay. Thank you, Raphael.

RAPHAEL PODOLSKY: Thank you very much.

REP. DOYLE: Next up are Bob Rothford, James Demers and Doug Hall. Bob Rothford, please.

BOB ROTHFORD: Good afternoon, Chairman Finch and good afternoon, Chairman Doyle, and Members of the Committee. My name is Bob Rochford. I am the general counsel for Connecticut State Check Cashing.

I am also deputy general counsel for the Financial Service Centers of America, which is the trade association representing over 6,000 of the 9,000 full-time check cashing locations in the United States.

I'm here to testify in support of Senate Bill 1220, the Check Casher Modernization Act. I have submitted a written testimony to the Committee, so I'm going to try to keep my remarks as brief as they can be.

The reason that we are supporting Senate Bill 1220 is there have been two significant developments since 1993 when Connecticut adopted its current check cashing statute, which was largely borrowed from New York's existing statute.

The first development is that in these dozen years, there have been huge increases in the cost of operating the business. There have been major increases in the cost of commercial banking facilities, with substantial per check item fees that have to be paid.

In addition to that, of course, there is also a cost of obtaining the inventory. You can't get cash for nothing. You have to pay a fee in order to obtain cash.

There have also been increases in everything you can imagine, rent, labor expenses, insurance, across the board. Those increases in expenses have put pressure on the 2% fee cap that Connecticut has in place.

We are here trying to support this bill in order to maintain the 2% fee cap. We are not looking for an increase in the fees.

The second major development has been a reduction in check volume. The number of checks in the United States has declined substantially, by over 5 billion, from 2000 to the most recent year studied by the Federal Reserve System, 2003. And the Federal Reserve projects that that decline will continue.

What this has meant is a reduction in the volume of checks available to be cashed by check cashers. And of course, there are many different factors for this, electronic payment, direct deposit, the emergence of payroll cards, including from very significant employers, such as Sears have caused a reduction in the amount of checks available.

In order to maintain the volume, what we have suggested doing in this statute, proposed statute, is to utilize the distance requirements that have been utilized successfully in New York State and in New Jersey, to maintain a reasonable amount of volume available to each check cashing location, with the effect that it will avoid putting upward pressure on the authorized check cashing fee of 2%.

And I would just mention to you, that Connecticut has one of the lowest check cashing fees in the entire United States. Also, we have asked that the maximum check that could be cashed by an individual should be raised from $2,500 to $15,000.

Most states in this country have no maximum on the amount of the check that can be cashed. The $2,500 limit was borrowed by Connecticut from New York, back in 1993. Since that time, New York, in the mid '90s, raised its maximum from $2,500 to $6,000. And in this past year, New York increased its maximum from $6,000 to $15,000.

Keep in mind here that there are risks associated with these larger checks. But one of the benefits that is derivable is that the additional revenue available from being able to cash the larger checks will create a cash flow that will help to support the maintenance of the existing 2% check cashing fee

And, of course, the vast majority of checks cashed under that fee are paychecks. So the consumer will benefit. Also, there will be more services available for the consumer and there won't be a contraction that would otherwise occur in the industry.

Unless there are questions, I intend only to address two items that were raised by the Connecticut Legal Services folks. The first is the $1 minimum check-cashing fee.

Connecticut does not have a minimum check-cashing fee currently. New York has a minimum check-cashing fee of $1. Rhode Island has a minimum check-cashing fee of $5.

The reality is that checks under $50 won't be cashed absent a minimum fee. Nobody's going to cash a $25 check for a $.50 fee.

The costs of labor, of processing the transaction, recording, engaging in the appropriate record-keeping activities, and paying the bank, both for the cash that is laid out and the per item fee that has to be paid are such that there simply won't be any checks under $50 cashed.

There are such checks, for example, there are some people who work part time, who maybe during the summer receive a check of under $50. There are some folks who receive birthday gifts in checks of, say, $25.

Those folks will not have a place to cash their checks, unless they go to a store and maybe buy something. Because banks won't cash checks for non-depositors at all, and even where the check is drawn on the bank itself where you go to cash the check, if you are a non-depositor, you will typically be charged a fee of $3 to $5 for cashing that check. So we're trying to keep the service available with the minimum $1 fee.

And finally, I would just like to mention that when we're talking about business checks and checks that are on the larger denomination side, there is also a risk associated with those checks.

You do not pay the same amount to the bank for your cash inventory for $50 as you do, for let us say $8,000. You also take more substantial risks. I've heard it said, and this has to be based on a lack of awareness of how the check cashing industry actually operates.

I've heard it said that certified checks are perfectly safe. Well, that is certainly not true. There are certified checks that are forged. There are certified checks that are stolen. There are certified checks that white-collar criminals cause to be improperly issued. They come under the imposter in article 3 of the UCC.

I could tell you, I represented a client who cashed a certified check, and he ended up paying $45,000 in legal fees and lost $100,000.

We do believe, however, that following New York's lead, and also adhering to the general approach throughout the United States will help to create an additional revenue stream that will benefit the most common users of check cashing services, namely, those who need to cash their paychecks.

And unless there are any questions from the Committee, I have nothing else to say.

REP. DOYLE: Okay, any other questions from the Committee? Seeing none, thank you very much.

BOB ROTHFORD: Thank you.

REP. DOYLE: James Demers, Doug Hall, and Diana Leyden. James Demers, please.

JAMES DEMERS: Thank you, Mr. Chairman. For the record, my name is James Demers, I'm here today on behalf of the New England Financial Services Association, which is a six-state trade group, comprised of consumer finance companies, mortgage lenders, and credit card companies doing business here in Connecticut.

I'd like to speak very briefly on two bills if I may. Senate Bill 1218 we want to urge your support of.

As you've heard earlier, this bill would give parity between federally chartered financial institutions and Connecticut-chartered or licensed institutions by removing the current prohibition on issuing real estate secured credit cards.

Under the current law, lenders who are regulated by the Connecticut Banking Department are unable to issue this type of revolving credit, while federally chartered credit card banks are able to offer this credit here in this state.

The current restriction, we believe, serves no benefit to consumers, but instead forces Connecticut residents, who wish this type of credit option, to go out of state to obtain it.

For most Connecticut residents, this type of credit line has significant benefit to traditional unsecured credit because it offers lower interest rates because of the security placed on the card. And it also allows for the tax deduction of interest charges that do not apply to other types of revolving credit.

Further the convenience of use of this credit option greatly enhances the consumer's ability to take advantage of this type of loan to meet their immediate needs.

In addition to the consumer benefits, we believe state-chartered and licensed institutions are able to offer person-to-person lending and service that leads to responsible lending practices.

That combined with direct regulatory oversight by the Connecticut Bank Department of the instate lenders who would offer this product, helps ensure that the consumers have adequate protection and oversight that might not exist with some federally chartered institutions.

Finally, like most consumer products, when the residents of this state have the ability to obtain such a service here, without have to go out of state, it helps Connecticut's economy, and it also helps the financial service sector jobs.

So we believe home equity lending is a very cost-effective way for many borrowers to meet their credit needs and we hope you will support this measure.

The second bill that I would like to speak very briefly about is Senate Bill 1217. And I'd like to echo the concerns of the Connecticut Bankers' Association.

This is the bill that would expand some of the provisions of the high-cost mortgage law here in Connecticut to conventional mortgage loans. The law that you have on the books has been one of the most effective laws in the country. As a matter of fact, it was used as the model in the states of Maine and New Hampshire, when they crafted their predatory lending laws.

And we have concern that expanding the predatory lending provisions to conventional mortgages may impact the availability of credit. But I can assure you it definitely will impact the cost of mortgage lending here in Connecticut.

When a mortgage lender prices out interest rates on mortgage loans, prepayment penalties are a factor that they take into consideration. And if you are to amend your law and reduce the prepayment penalty that can be applied to these types of loans, it will have an impact in pricing of conventional loans here.

And I can tell you that the outcome will be that people who don't pay off their loans early will end up having to subsidize those who do pay off their loans.

The second piece that raises concern is the benefit standard provision in the bill. This is a provision similar to what the State of New Jersey repealed last year because of the concerns and potential litigation that stems from that kind of provision.

And I think Representative Barry made a very good point when he was talking about another bill, but talked about an individual wanting to use their mortgage equity for business purposes.

I can tell you that there is no lender that wants to have to do an assessment of whether or not those types of circumstances make sense before they grant a mortgage loan to an individual.

And the fear of litigation alone under those types of standards will do nothing but drive up the cost of credit here in the State of Connecticut. We would hope that you would vote down Senate Bill 1217 and support Senate Bill 1218.

REP. DOYLE: Thank you. Any questions? Senator Finch.

SEN. FINCH: I'd like to thank you very much, since I happen to agree with everything you said about Senate Bill 1218. As you know, we did pass that in the past. Unfortunately, the Senate passed it on consent, but the House doesn't understand yet. And my colleague would have loved to have had a consent calendar that day if he could have got it on there.

But, I guess the thing that kind of blows my mind with this, is that one bank down the street, you can have a credit card or a debit card attached to your home equity loan, and the next bank up the street, you can't.

Now, the consumer doesn't understand one is federally chartered. One is state-chartered. They just know that if they walk in door A, they get a full range of services, if you walk in door B, well, you can't have the whole piece of plastic that links to it, because you're really not responsible enough with your own money. It's pretty bizarre when you think about it.

But yet, people had said that this was going to lead to terrible abuses. Now, you deal with both state- and federal-chartered.

JAMES DEMERS: Yes, Sir.

SEN. FINCH: Have you noticed that there is this terrible abuse of home equity loan debit cards or credit cards? Where people are loosing their homes and the homestead exemption is not enough? Have you noticed that there is a—

JAMES DEMERS: I can tell you that the example that you gave, residents of this state are obtaining this type of credit. Unfortunately, it's not through state institutions.

They're going to out-of-state institutions or federally chartered institutions to get it. And I would say that first, you haven't heard one complaint that someone sat down and said that they had a problem and they are using an out-of-state bank credit card here.

And we don't see that there's an extensive problem. The fact is, there is greater consumer benefit to be able to use the equity in your home, so that you can get the lower rate, and that you can get the interest rate deduction.

And based upon the law that you have here today, if an individual doesn't want to go out and shop and go to a federally chartered bank, then they are going to pay more to get a different type of credit line or mortgage loan that they might be able to get if they have the service available.

SEN. FINCH: You know, the thing I liked about Representative Barry's point was the whole idea that we missed the first time that we debated this bill, and that it is great for small business.

It's a ready-source of capital without a lot of sophisticated underwriting. It's a very secure loan, and people go into it eyes wide open. Except that if you go into door B, the state-chartered bank, you can't have an electronic access to your funds. You can only write checks. Which may be fine, it just doesn't make any sense.

But I really appreciate your support of this. I hope we can move this forward again. It's frustrating to see what happened in the house because I think people didn't really think about it.

You know, sometimes it takes a while, try just sticking with it because it takes a while for us to synthesize down the essence of the bill. And the way I explained it is really the essence of the bill. One bank can do it electronically, one can't, or credit union.

And I know that since the credit unions are still here they bravely put this bill forward the first time, and sort of hand their heads handed to them.

But we are optimistic in the future, now that they have new allies. And I don't know what the Committee's sentiment is yes, but I'm going to shut up now because the snow is getting deeper.

And I'm going to go on, if there are no other questions, to the next speaker. I just would comment, it's Doug Hall, Connecticut Voices for Children.

This is the most substantive hearing we've had all session, and maybe in the last two years, and it has to be truncated by snow. But bare with us, we'll get through and hear everybody. Doug, thank you.

DOUG HALL: Chairman Finch, and remaining Member of the Committee, I want to thank you for hearing from me today. My name is Douglas Hall. I'm the Associate Research Director at Connecticut Voices for Children. I'm here today testifying on behalf of ACCY, which is our sister lobbying organization.

As I'm sure Members of the Committee are aware, the 2004 General Assembly passed legislation mandating that over the next ten years we reduce child poverty in this state by 50%. I'm arguing today in support of Raised House Bill 6830.

I see that as one piece of the puzzle of helping families and their children out of poverty in Connecticut.

You have my testimony. You also have attached to it a two-page fact sheet on the Earned Income Tax Credit, which addresses both the federal Earned Income Tax Credit in Connecticut as well as the role that could be played by a state EITC in Connecticut.

And you also have a full-page map of the rates of refund anticipation loans that are being used throughout the State of Connecticut.

The EITC is the number one anti-poverty program in this country. It does more than both TANF and food stamps together to raise families out of poverty.

In 2002, 4.9 million people were lifted out of poverty, including 2.7 million children. Unfortunately, we know that this could do much more, the things that are eroding the potential impact of the Earned Income Tax Credit.

And one of those forces is these refund anticipation loans. We know that nationally, between $1.4 and $2 billion nationally are being lost to families who should be using this money to raise themselves to a higher standard of living, raising their children out of poverty. Instead, it's going to those organizations that are offering this service of refund anticipation loans.

In Connecticut, we know that approximately a third of all EITC recipients are relying on refund anticipation loans.

Again, these are 45,000 families that could be using that money to better serve their families. As the map shows, there's a significant concentration of refund anticipation loans in what we know to be the high-poverty areas of the state. Significantly, the larger cities, as well as eastern Connecticut.

In fact, if you look at the two maps, one of which shows EITC recipients, which is sort of a proxy for working poor, and the percent of people relying on RAL's, with the exception of Northwest Connecticut, the two maps are more or less identical.

In closing, I'd like to urge this Committee to pass this bill out. This is a bill that can, as I said, play a large role in helping families out of poverty in Connecticut. Thank you.

REP. DOYLE: Thank you. Any questions from Committee Members? Seeing none, thank you. Oh sorry, sorry, Representative McMahon

REP. MCMAHON: As vice chair of the Subcommittee on Children, we have chosen this as one of our ways. We're looking, we have to raise 4,000 children this year. Because there's about 80,000 children in poverty and we have to reduce it by 40,000, so we're using that.

One of the obstacles we're run up against is advertising at poor. Do you have any ideas, does your agency have ideas of how we can get the poor to—

DOUG HALL: Well, we certainly had discussions with several Representatives about this, and it seems to me that part of what has to happen is there needs to be sort of a cultural shift. We need to collectively acknowledge and buy into this notion of reducing child poverty. The fact that 10% of the children in the richest state in the richest country in the world are poor, that's unacceptable. And yet we seem to have accepted that as okay somehow.

Instead, we should have every state agency that has outreach to the public should have the information available to them to help people collect the federal Earned Income Tax Credit, and certainly adding a state EITC to that mix as well would be a huge step forward.

REP. MCMAHON: Great, thank you.

DOUG HALL: Thank you.

REP. DOYLE: Thank you. Any other questions? Thank you very much. Next up is Diana Leyden, Tim Calnen, and Claudia, I can't see the last name, Drumond maybe. Diana Leyden, right now. Hello.

DIANA LEYDEN: Yes, good afternoon, Representative Doyle and, Senator Finch. Nice to see you again. This is Diana Leyden. I'm the director of the University of Connecticut School of Law Tax Clinic, and I will try to keep my remarks brief.

But I think it's important, I've heard some really very probing questions and good questions today from the Committee. I'm hoping that any of the testimony that I give you is just helpful for you to understand.

I thought it might be appropriate, because there were some questions, I'm sorry that Representative Moukawsher isn't here, that might help you understand the realities of the RAL's.

Here's the example that I would give you that would be the closest analogy. A person comes up to a bank and says, gee I'm applying for Social Security Disability and I think I'm going to get it. I think I'm going to get $3,000 this year as soon as they make me eligible. Will you give me a loan? And they give him a loan. And guess what? He doesn't qualify for Social Security Disability.

Now, you might call that a fee, to borrow his $3,000, but it really is a loan. And that's what's so different about the earned income credit.

The other kinds of refunds, that we think of, those of us with middle-class backgrounds, are really, they're banked money. They are the withheld excess withholding, and it's a sure bet.

The other point I guess I'd like to make is that the RAL's that we're talking about

UNIDENTIFIED SPEAKER: [inaudible]

DIANA LEYDEN: Should I repeat my analogy? Two points. No. I thought that they were very good questions, and I wanted to try to help you understand it.

The analogy I made for refund anticipation loans that are given to people with the earned income credit, or seem to be eligible for the earned income credit. Let's say a gentleman goes into a bank and says I've applied for Social Security Disability, and I expect to get $3,000 this year.

And they say, fine, here's $3,000. Here's your money, and by the way, we're going to charge you an interest rate of 80%.

Well, that person, there's a likelihood that he may not get the Social Security Disability. It's a pretty complex process.

And that's really what the refund anticipation loans that are secured by the earned income tax is really like, it's not like the excess withholding which is a sure bet.

As to the security interests, you have heard from a national tax preparer, but the RAL's are really much more intrusive in low-income communities, and are done by them—

REP. DOYLE: Sorry, can I interrupt you. I'm just, I'm not sure of that parallel that you made, but I would think, getting Social Security Disability is much more difficult than getting a RAL.

DIANA LEYDEN: The earned income credit. You would think so, but as I said, 1 in 46 people who claimed the earned income credit are audited. Why?

You need to prove by third party affidavits and other third parties that your child lived with you for more than six months. That's a lot of information to get, and so it's not a sure bet.

The IRS estimates, out of the $40 billion that is paid in the earned income credit, $10 billion is incorrectly claimed. So it's almost as unsure as Social Security Disability.

REP. DOYLE: So are you arguing that these are riskier endeavors that these people are putting forward and they need to be, they deserve to be compensated for their risk.

DIANA LEYDEN: You mean the lenders?

REP. DOYLE: The loaners, the loaners.

DIANA LEYDEN: You could say that, but that's true of all predatory lending. Of course that's the case with predatory lending.

REP. DOYLE: But that's not predatory lending.

DIANA LEYDEN: But it is if, in fact, there's such a high risk that they're not going to get the IRS refund. They are actually paying a much higher percentage interest rate than someone who has excess withholding and has a certified--

REP. DOYLE: But I am correct, right, when I say that this is not legally predatory lending?

DIANA LEYDEN: If you want to say the legal definition of predatory lending, I guess you're correct. But in practice, it's as if it were predatory lending, because it really is aimed at the EIC population.

Most middle-class people who have excess withholding have a bank account. And I really do dispute, when we do the volunteer income tax assistance sites, I believe the turnaround on refunds, at least in the early part of the season, is about two weeks.

I've never seen it as long as eight weeks to get a refund, even as a check, not electronically deposited.

REP. DOYLE: I'm sorry to interrupt you.

DIANA LEYDEN: They other point I wanted to make was that the security interest, because as I was saying, it's unbelievable.

There's an ad for a car dealer that says, come in, get your tax return prepared, we'll double your refund, and so that goes toward paying your car. And so that's where the security interest is.

The person doesn't walk off with money in their pocket. They walk off with a car. And of course they want they want that security in the car in case that IRS refund doesn't come in.

And so you've got a lot of other lenders here, other than the typical national preparers that are doing RAL's, and why it's so important.

The third point I wanted to make, is I think, Representative Doyle, you had asked a previous speaker whether or not he would go as far as to prohibit RAL's on EIC.

And there is, in Congress, federal Congress, legislation that has been introduced that would prohibit RAL's being securitized by the earned income credit.

The IRS is very, you know, concerned about this and when they did this free file initiative, they actually prohibited any of the persons taking part in it against marketing refund anticipation loans as part of this program.

With respect to the EIC, I just wanted to make a quick point, and that is, I've been involved in this area for six or eight years now, and I think a very important part to education and getting people aware of the EIC is our school systems.

And they just have not done enough with their EIC certification that's taking place in Hartford. There have been more hurdles places in our path in getting taxpayers to get documentation from the school than was really necessary.

I know when my kids go to school, they get all the information about free school lunches. I don't think they ever get any information about the earned income credit.

Thank you.

REP. DOYLE: How many complaints does your clinic handle on RAL's?

DIANA LEYDEN: Of about the 64 cases that we have now, I would say 5% to 10% are people who have earned income credit, who have been denied, who have had RAL's.

REP. DOYLE: So it's safe to say it's a small number.

DIANA LEYDEN: Well, those are the people who come to us, you know, who ask for our help.

REP. DOYLE: So you're handling two or three cases right now, roughly?

DIANA LEYDEN: About that, yes.

REP. MOUKAWSHER: Thank you. When you were talking about other venders using RAL's, how would a car dealer do that? I mean, how does someone come in?

DIANA LEYDEN: They hire an accountant to come into their shop during a busy Saturday morning and they tell person after they look at the car, hey, why don't you go ahead? And they advertise this, why don't you go have your tax return prepared? And when you're done, you'll know how much you get for your refund. Same with furniture dealers, used car dealers.

REP. MOUKAWSHER: In that case, we were looking at paperwork before from H&R Block that had an 85% interest rate. What interest rate is someone, they're paying the rate that they would pay on the car?

DIANA LEYDEN: No. It's the same thing. Because, again, the car dealer is thinking that this is a short-term loan, not even realizing, perhaps, that if it's someone who has a $4,000 refund for the EIC that there's a likelihood that they're not going to get this check from the IRS in two to three weeks.

REP. MOUKAWSHER: All right. Because I've been pursuing this security interest issue, and looking at the paperwork, someone could provide a security interest in their vehicle.

Irrespective of trying to buy one, it seems like, have you run across that, where someone went to a tax preparer and pledged collateral for?

DIANA LEDYEN: The only one was the case we had, and it was with H&R Block. I have never seen that, ever, in any other cases that we've had, involving H&R Block or a tax preparer.

Among our low-income taxpayer communities throughout the nation, however, I have heard, especially in the South for some reason, it's very common for used car dealers and things like that to advertise this.

REP. MOUKAWSHER: Okay. I'm not talking about car dealers. I'm talking about tax preparers.

DIANA LEYDEN: Tax preparers, I've not heard any more than the once instance that I'm aware of.

REP. MOUKAWSHER: Which is Mrs. R.?

DIANA LEYDEN: Mrs. R.

REP. MOUKAWSHER: Okay. Thanks.

DIANA LEYDEN: Thank you.

REP. DOYLE: Thank you, now can I ask a question? It seems like for these RAL's, generally we're focusing on H&R Block and the tax preparers, and then briefly you touched upon car loans and issues like that.

I personally would think there was a big distinction between the two. The tax preparers are much more, you know, familiar with the situation.

I think there could be more, and I want you to correct me if you think I'm wrong, that there could be more abuses from third party, like car dealers, making loans dependent on this, and I see a big distinction between those two. Do you think I'm realistic in your experience?

DIANA LEYDEN: I think that the national taxpayers, and I've got to say H&R Block in particular, because again, we have worked with H&R Block, they've come to the table.

I've got to say that they have made a lot of effort to educate their preparers so that they really vet the issues with the taxpayer to understand whether or not they qualify. I think that's the exception.

I think that there are still a lot of other preparers, Jackson Hewitt, JK Harris, you could name a lot of them, that do not do that amount of education for the preparers and it's still a risk.

I think you're right though. The shop that has a CPA come in on a used car lot is certainly not prepared to do tax return preps, but unlike our check cashers, which I think Representative Stripp had indicated that check cashers are licensed. We do not license tax return preparers.

There is no licensure. There are no standards of practice. The IRS is looking at this, and whether or not it'll ever go forward I'm not sure. So right now, there are no standards to apply.

REP. DOYLE: Can you do me one more favor, could you detail, you said the accountant comes in, I just don't see how it works.

I'm a car dealer selling a car, and I know nothing about a person's tax situation. They bring in an accountant to kind of review it, how does that work?

DIANA LEYDEN: Well, they would have some kind of bank. There would be some kind of a lending situation, just like the H&R Block, so that the CPA is working with a lender that the car dealer is, it could be a financing company where they use for other financing products for their cars. There has to be some type of lender behind it, I guess.

REP. DOYLE: Thank you. Any other questions? Thank you very much for coming in and in the snow and everything. I appreciate all of your effort. Next up is Tim Calnen, then Claudia Drumond, Leysen Cardini. Claudia, what is it? Tim Calnen.

TIM CALNEN: Good afternoon, my name is Tim Calnen. I'm Vice President of Government Affairs for the Connecticut Association of Realtors. We are the group that is proposing House Bill 6834, or requesting that it be proposed, AN ACT ESTABLISHING A FORUM FOR CONSUMER COMMENTS RELATIVE TO MORTGAGE LENDERS.

The bill has five parts, and I recognize that Commissioner Burke and others are concerned, particularly about items one and five.

That having been said, I would ask the Committee to look at the three sections of the bill, which helps protect consumers in a post-Wachovia world, in which the federal government has preempted vast sections of consumer protection laws in states like Connecticut, and said that consumers have nowhere else to go but the Office of the Comptroller of the Currency, which is within the US Department of the Treasury, if they have a complaint.

And what we're concerned about as the realtor community is the rush by some banks now to go get federal charters, rather than have state charters in order to benefit from these, if you will, exemptions from state consumer protection laws.

The way we tried to provide greater control and protection would be through the State Banking Department.

And we thought the best way to do it in the time of scarce resources would be a small change to the website that they have, that would allow consumers to log-in the experiences, both good or bad they had with a particular mortgage lender or financial institution, so that other consumers would have the benefit of that experience in deciding whether or not to apply for a loan.

The fact that it may lead to gossip, I think that's something that can be handled. For example, the Department of Consumer Protection already has a website system for letting the public know what complaints have been against licensed real estate brokers and sales people, that they can go to.

And there's a caveat at the bottom that says this is not necessarily adjudicated yet, contact the Department of Consumer Protection to find out the final result.

We are finding that, particularly, for example, if there is a failure to provide mortgage releases, more and more common in this state. And that it's costing Connecticut consumers to get these. Even though the state law requires banks to make these mortgage releases in a timely fashion, they have not been doing so.

So we've got examples of, for example, the Connecticut Attorney's Title Insurance Company charging $35 to help consumers get something that they're supposed to get anyway, without paying the $35, these mortgage releases.

With the increased preemption by the federal government, due to the Office of Comptroller of the Currency, we feel that the Legislature and state regulators need to protect the consumers, because there is going to be a [Gap in testimony – Changing from Tape 2B to 3A]

--who will say they are exempt from state consumer protection laws. And I think I will conclude with that.

I urge you recognize that the bill has five parts, if one and four are particularly troublesome, that doesn't mean that two through three are bad. And we think that the state needs to act to protect consumers in this area.

I'd be happy to take any questions.

REP. DOYLE: Thank you. Any questions? Thank you. Next up are Claudia Darmrod, Leysen Cardina, and Steve Burdo. Claudia, please.

CLAUDIA ORMROD: Ormrod.

REP. DOYLE: Ormrod. Sorry about that, sorry for the mispronunciation.

CLAUDIA ORMROD: That's okay. Everybody tries to make more out of it. It's not that hard. My name is Claudia Ormrod.

I'm here on behalf of HSBC Taxpayer Financial Services. We are an affiliate of HSBC Bank USA, NA, a federally chartered national bank, which offers refund anticipation loans through our business partners such as H&R Block, also referred to as RAL facilitators or electronic return originators.

In the interest of time, I'd like to direct the Chair's attention, as well as the Committee's attention, to this folder that should be part of your packages there, that has a lot of information regarding out refund anticipation loan program. We also offer other bank products in association with the tax return event.

There aren't loans. They're called refund anticipation checks and refund processing transfers, so there are a number of different types of products that are also available at the time to choose from.

And one of our themes is clear choice and clear disclosure. And we certainly try to deliver on that promise to our customers as well as our commitment with our business partners.

I've submitted written testimony as well. I'm not going to go through it, unless you'd like me to hit the high points of our concerns with House Bill 6830.

REP. DOYLE: Sure, it's up to you. We can read it, but it's up to you. I will not restrict you saying anything.

CLAUDIA ORMROD: Well, I don't think I'll read it because it's seven pages long. But our major concerns with House Bill 6830 are the refund anticipation loan interest rate definition, which would conflict with the federal annual percentage rate calculation, under truth in lending and regulation Z. And that's the one that I guess is 80% on all of these handouts that I'm hearing about.

I have no frame of reference as to what you're looking at, because other than, it sounds like it is a former Imperial Capital Bank loan agreement, which we did service, Taxpayer Financial Services, serviced those loans last year. So I could address the situation, as well as Mr. Weinberter offered to address this Mrs. R.'s situation.

But I can unequivocally state that we do not take a security interest in automobiles at any time in conjunction with a refund anticipation loan.

So I guess I should go back to the bill, I apologize. I digress. Our concerns are the refund anticipation loan interest rate, which would conflict with federal truth in lending, the 36% interest rate cap.

As a national bank, federal law allows us to export our interest rates from our home state, which is Delaware. And so we apply Delaware law to the contracts of our refund anticipation loans.

And therefore, as a federally chartered national bank, we would not be subject to that 36% interest rate cap, and it would probably only apply to state-chartered financial institutions or lenders, which then would put them at a competitive disadvantage to their federal counterparts.

There are two other issues with House Bill 6830, and that is there is a provision that would disallow the ability to use an arbitration provision in our loan agreements.

We believe that the Federal Arbitration Act plays a big role in reducing litigation and the cost to consumers, over-litigation and we would like to be able to continue to use arbitration agreements.

In our particular agreement, the consumer can opt out within the first 30 days after signing the loan agreement, to say, I don't want arbitration to apply, and I want to be able to continue to be able to pursue my legal rights elsewhere.

The fourth thing is the cross-collection prohibition, which I think we briefly touched on during the hearing. And that is really like an offset.

And the IRS and the Department of Treasury are probably the biggest users of offsets against income tax refunds. They offset a number of different, it's actually a whole list of things, against a person's federal tax refund.

If they are delinquent with state taxes, delinquent federal taxes, back child support, delinquent student loans, things like that are offset against a person's tax refund.

And cross-collection from the HSBC perspective affects only .45% of our customers across the country. And to put that in a little bit more perspective, it's about 29,000 customers out of about 5 million.

So those are our major concerns. I would be happy to come back at a later time and delve more deeply into this.

REP. DOYLE: Sure. Any other questions? I have a couple of quick questions. If you are federally chartered, does this bill, would this bill impact you at all?

CLAUDIA ORMROD: With respect to rate and the provisions on, I imagine the arbitration and cross-collection would affect us, because they would be imposed upon the facilitator, who's our business partner, such as H&R Block.

So, yes. It would affect us.

REP. DOYLE: But not the interest though, right?

CLAUDIA ORMROD: No.

REP. DOYLE: And just, I remember when H&R Block's Bob Weinberter was testifying, a Committee Member asked him a question, and you were going to try to answer it. Do you remember that?

CLAUDIA ORMROD: That was the auto lien situation, I believe, but I'll be happy--

REP. DOYLE: Yeah, well, that's it. It must be--

UNIDENTIFIED SPEAKER: [inaudible – microphone not on]

CLAUDIA ORMROD: --you might have missed it. I said I can unequivocally state that we do not take automobiles as security for refund anticipation loans.

REP. DOYLE: And the documentation that we were provided for Mrs. R., which I guess went back to 2004, does have a provision about security.

CLAUDIA ORMROD: And I imagine it refers back to the truth in lending disclosure statement, which you evidently weren't provided.

So you couldn't read the provision that talks about we take a security interest in the proceeds of the refund, and the refund account itself, which by the way needs to be established for everyone who gets a refund anticipation loan.

So I'm not real sure even how this whole car dealer thing works. Because you can't really participate and offer refund anticipation loans without electronically filing, having a refund, deposit account or some type of deposit account to receive that electronic refund back from the IRS. So I really can't help with explaining that situation.

REP. DOYLE: The security provision there, I mean, it referred to the truth in lending disclosure, it potentially could have other property as security.

CLAUDIA ORMROD: Certainly not. Not taken by the bank.

REP. DOYLE: All right. Maybe the security paragraph could say, this is secured by the refund that we are anticipating.

CLAUDIA ORMROD: That's exactly what it does say, and I've read it, and I apologize, if had known that there would be all of these questions concerning our loan agreement, I would have been happy to have brought both the truth in lending disclosure statement and the loan agreement with me. And I can supply it to the Committee.

REP. DOYLE: Okay, yeah, if you could do that.

CLAUDIA ORMROD: Absolutely.

REP. DOYLE: Okay. Thank you. Yes, Representative McMahon.

REP. MCMAHON: I know it's getting late, but if you don't secure a home and say you don't know your budget for the refund and someone does know how to secure a refund loan. [inaudible – microphone not on] What do you put collect for security?

CLAUDIA ORMROD: When we review the application, because the consumer actually fills out an application and applies for the refund anticipation loan, we will do a credit check and also we would get a debt indicator, which I think we talked about earlier in the hearing. I think it was Ms. Leyden might have mentioned that.

The debt indicator actually is sent back to the lending bank to say, yes, this customer has an offset amount. Yes, this customer owes back taxes. Yes, this customer owes back child support, whatever that amount might be, and therefore notifies the lending bank that this may be a problem.

And the lending back then, depending upon the amount, and if it's a small amount they may lend up to that amount or if it's a lesser amount, then they may just say, we're going to have to deny this loan.

Because the bank certainly does not extend a loan they know will not be repaid.

REP. DOYLE: Thank you. Any other questions? Thank you very much. Layson Cardina, Steve Burdo, and it looks like--

STEVE BURDO: Mr. Cordonn isn't here. If it pleases the Committee, Lavern Mitchell and Shawna Daniels are with me as well. We're representing Acorn. If we could come up together to expedite the process?

REP. DOYLE: Yeah, that would be great.

STEVE BURDO: Thank you.

REP. DOYLE: So this would be, Leyson, Steve, Larden, and Shawna. The next, all four of those are going up, basically. Okay. Thank you.

STEVE BURDO: For the record, I'm Steve Burdo, Head Organizer of Connecticut Acorn. I've been hearing a lot today from a lot of other organizations and advocacy groups and other such.

We've actually brought a RAL victim with us, also a member of the community. They're both members of Acorn.

I would just like to start briefly by saying a few things, and we will be brief.

REP. DOYLE: Take your time.

STEVE BURDO: The usury rate in Connecticut is 36%. Anything over that interest rate is usurious. With that being said, RAL's are a product specifically designed to effect low, working class families.

So what we want to know, is why wouldn't these standards be imposed across—the-board, rather than just, you know, in terms of getting a regular interest rate. We want to know why RAL's differ.

Another question I have, the gentlemen over there, the Representative, asked a question to the H&R Block people about how their offices were distributed, were they urban, suburban. And they said, I mean, the answer that was given was 11,000 offices in the nation and they're distributed pretty equally.

I think now, you know, the question was along the lines, but I think we'd be looking for something a little more specific, along in Connecticut how were they divided up.

You know, Connecticut is primarily suburban. However there are very big urban populations, such as Bridgeport, New Haven. I mean, I'd love to know how many H&R Blocks there are in Westport or New Canaan or Avon, for that matter.

Now, I'd like to turn it over to Shawna Daniels, who is a RAL victim.

SHAWNA DANIELS: I did my taxes at Jackson Hewitt. When I went in and sat down and spoke with the manager, she was the woman who did my taxes, this year. I had explained to her that I had never filed for my taxes before, that I don't know how it works.

She tried to explain it to me, in the best way to put it. She didn't exactly tell me everything. Basically she told me about a fee which was for the bank, the Santa Barbara Bank Trust, which was a $25 fee.

That was the only fee she had mentioned. And I asked her, was that all the fees were? She said, yes.

And so she finished processing my taxes. Then I went to go pick up my tax check on the 18^th, which also had came with a big packet like this. And as I was going over it, I see all of these other fees that she never mentioned to tell me about. She only told me about the $25 bank fee.

In here there are other fees for tax preparation and electronic filing fees for $142. I didn't know about that. She failed to tell me that. Then there are also the documentation fees for $50. So in total of all of the fees, it was $217.

And I do have a six-month-old baby that I take care of. And Pampers, baby milk, and all of the things that a baby would need, I was expecting to get all of the refund money back.

And it just didn't happen, and she wasn't being totally honest with me. Plus, she's the manager of Jackson Hewitt. I just think that was unfair.

I was treated wrong. I asked her all of these questions, and she just wasn't being honest. And I do have a baby to take care of. And I'm not working now. You know, it's just not fair.

REP. DOYLE: Any questions? I have a question for you. When you first went in there, did you know you were getting a loan or what did you think?

You were getting back the refund or did you think it was a loan. What did you think? What did they tell you when you were in there the first time, before you came back the next day to get the check, did you know what you were getting, I guess is my question?

SHAWNA DANIELS: When I first went in there, she gave me two choices. One was a RAL. One was the ACR. She had explained those two. And they would take out $75 if I chose the RAL, because if I owed like the state or the government money, they would take that out.

And then there was the other option there would be a $25 fee, where they would just go ahead and process but I will have to wait two weeks for the check.

So I decided to stay with that, because I knew I didn't owe any money to anybody. So I had to wait the two weeks for the check, everything went through.

But she had failed to mention that my check was originally about $2,000, but what I got back was about $1,000 and some change. So she just didn't tell me everything.

REP. DOYLE: What was the differential? You said an extra $220 in charges, and you're saying you got a differential of $1,000. What about that other $800?

SHAWNA DANIELS: No, it was—

STEVE BURDO: I think what she was referring to in the charges were fees. I haven't looked at this paperwork, but I can only assume that those others were just taken off. The RAL was the interest.

REP. DOYLE: But I thought, I mean, you can help too, help me. I thought she said my refund was supposed to be, I thought I was getting a check for $2,000, and I got a check for $1,000. That's a $1,000 differential. I don't see what the other $800.

STEVE BURDO: Exactly. I don't either.

SHAWNA DANIELS: [inaudible]

REP. DOYLE: I don't want to put you in a spot. You can get back to me.

STEVE BURDO: Yeah. We will get back to you with this.

REP. DOYLE: Because we're trying to look at examples of how it works. And if $1,000, I mean, the IRS could have grabbed for another year or something.

That's it, that's legit to be honest. But I want to know for sure that she wasn't abused further than 220. It's what I'm concerned.

STEVE BURDO: Absolutely. We'll get back to you on that.

REP. DOYLE: Thank you, thank you. I don't want to--

STEVE BURDO: But, no, Lavern Mitchell would like to talk to you about the community's view on this issue.

LAVERN MITCHELL: First time, so bare with me. Lavern Varice Mitchell [inaudible], but, yes, as he was saying for the community, greater Hartford, where they have these tax preparation in these communities knowing that lower-income families don't have the money to wait for it.

So they urge, and they're not explaining it to them that they can wait, what the really processing fee service and filing the tax return.

Where a fee, H&R Block, I guess approximately ten minutes, and working with the client, it's more than ten or fifteen minutes. Some don't even take time, their plans or their program to explain in details about the tax filing, what they're filing for and what they're going to charge.

And I think that if these organizations are setting up, their business plan, to sell to customers they should have peoples taking time to explain to an individual that comes in that door what the filing everything should be upfront.

Because then when you do it, they don't have it. And then cutting corners, from another incident, one of the Representatives was talking with the, what was that, H&R--

STEVE BURDO: Yeah. He was talking with the H&R Block people.

SHAWNA MITCHELL: --he didn't pay attention to his own return or have to wait for that income tax. Look, honey, I don't need the money. Then so they won't borrow to him, but they would borrow to someone that was looking for this money to do things as a family, have family like me, single mother divorce. I have joint custody, but still it's rough.

STEVE BURDO: I think what Lavern's trying to illustrate is the fact that, I mean, looking around the Committee, we don't trust that there are too many on this Committee living paycheck-to-paycheck.

I mean, I may be wrong. However with Acorn, with our communities we work in, the people we are working with do live paycheck-to-paycheck.

Even me, as a head organizer of the organization, a nonprofit organization, making a meager salary, and I am living paycheck-to-paycheck as well.

With that being said, this is a product, like I said, that is geared, I believe it was you, Representative, that asked the question is there a value in these loans? And there is, actually, because people do need the money.

I mean, I don't know if anyone on this panel has ever know what it's like to get an eviction notice so you have to have that rent in two days or you're out of here.

You have, like Shawna, she has a baby that she needs to take care of. I mean, if there's no food on that table, there has to be food on that table.

And that's why there is value in these loans. However, when you're put in these situations, like so many of our constituency is, so many, you're being railed into getting this product.

So that's why these interest rates, the bill that was passed last year attacked the disclosure, which was excellent, excellent, because people need to know what they're getting into.

However, this would, like I said, people are being railed into paying a ridiculous interest rate and ridiculous fees for money that they need.

I mean, that's why when I talk about the usury rate being 36%, believe me, it should be lower as far as RAL's, I feel, and our whole constituency feels, but we feel that, you know, capping the rate at 36% would be a great start.

REP. DOYLE: Can I ask a question of Lavern? Lavern, did you yourself ever go through an experience of a RAL? Did you have a bad experience?

LAVERN MITCHELL: No, well, with my taxes I claim zero, so I know where it is that I'm going to be.

And another thing before we get into the tax, the man that was talking about the small business, oh, he left, when it was just something he touched on. This small business tax, home equity loans, when people who don't have the equity, do they work with something with them on that?

REP. DOYLE: Well, that question was just tied to another bill. Just saying whether or not, say, you have a house and you have a home equity line. And what some people, one of the bills is seeking a person to be able to access that home equity line via credit card.

And the bottom line is, other proponents say it's a terrible bill, and they don't want anybody to have a right to it. So it's unrelated to this.

LAVERN MITCHELL: Yes, and then there's still the thing for the home ownership, with different organizations that were involved with the Urban League, organization for working for coming from rent to ownership, and in just finished a small business class.

And it was just things to show the help, which in the community, I'm willing to do too, is work with other organizations that are involved for this rent to hopefully to own one day and own my own business one day [inaudible].

REP. DOYLE: Can I ask just a quick question for you and Shawna both? What cities do you guys live in? What cities are you talking about here?

LAVERN MITCHELL: I'm in Norwalk.

SHAWNA DANIELS: I'm in Hartford.

STEVE BURDO: I think we may have clarified the issue you had with Shawna. She said that when she went there, on this form, and I could circulate it if you would like, on the form here, it states that expected amount of federal refund before fees $2,038. And then, estimated amount of proceeds of your ACL was $1,821.

She was told that, and I hope that I'm correct about this, you were told that her refund was on, she wasn't told about $2,038. She was told $1,821.

REP. DOYLE: She would get a check of $1,831?

STEVE BURDO: Exactly. There wasn't $1,000 that was missing. It was exactly the amount of fees that we had added up before.

REP. DOYLE: Okay. Thank you. Representative Moukawsher.

REP. MOUKAWSHER: Is it Shawna? Sorry. You didn't get a refund loan. You said that you had a choice, and you chose the two-week option. And they call that an ARC, I guess

SHAWNA DANIELS: Yes.

STEVE BURDO: ARC, RAC, I believe that RAC's and ARC's are regulated by the same laws that RAL's are. It just stands for a RAC, as we know it, is refund anticipation check.

REP. MOUKAWSHER: All right. And they didn't charge you interest or anything on there, so your fees consisted of preparation fee. I mean, do they charge any interest or anything on your form?

SHAWNA DANIELS: No.

REP. MOUKAWSHER: So you paid $220 to get it in two weeks.

SHAWNA DANIELS: Yes, $217.

REP. MOUKAWSHER: Okay. Thanks.

REP. DOYLE: Could you clarify what the $217 is? Is part of that the preparation fee for doing the tax return, or is that just pure? No, you can get it for me later too.

SHAWNA DANIELS: It was tax preparation for $142, and the Jackson Hewitt ACR application for $50, and then the bank withheld fee for $25. But she only mentioned the bank fee.

REP. DOYLE: But $142 was the tax preparation fee?

SHAWNA DANIELS: Yes.

REP. DOYLE: Okay. All right. Any other questions? Are you guys all set?

STEVE BURDO: Yeah.

REP. DOYLE: Thank you very much for coming out here.

STEVE BURDO: Thank you very much.

REP. DOYLE: Thank you. The next speaker is Patrick McCabe and then Jon Green. Moved on, you're up Pat.

PATRICK MCCABE: I don't know anything about arcs, but we may need one to get home tonight. My name is Patrick McCabe. I appreciate the opportunity to testify before you. I don't do this very often so bare with me.

I am here to testify today on behalf of the Securities Industry Association. The gentlemen who signed the letter that you received could not be here, and so they've asked me to offer this testimony on their behalf.

This relates to House Bill 6829, the Uniform Securities Act of Connecticut. The SIA certainly appreciates the opportunity to testify here today on this bill.

The SIA is a strong proponent of the Model Uniform Securities Act of 2002, the model act. And they have some serious concerns with the bill that has been offered here today as it relates to certain provisions of that bill, and it relates to the model act.

The act, not the Connecticut act, but the model act, was a result of an extensive and participatory drafting conference led by the National Conference of Commissioners on Uniform State Laws.

It was a very deliberative process. It took more than four and one-half years to come to conclusion and agreement. The groups that participated are the North American Securities Administrator's Association, American Bar Association, and the SIA.

While we admit the act is not perfect, it is the result of five years of negotiation, and it is working.

It was carefully crafted. It has a delicate balance as most of these things do. And I believe there are some significant benefits to the uniformity of it throughout the various states.

While the SIA, and I will stress this, has tremendous respect for Ralph Lindsey and his securities division, as well as the department. We work very closely with them, and believe me, I have enormous respect and expertise in that department.

There is concern about a couple of provisions. First, is House Bill 6829 differs substantial from the model act in the current Connecticut law provides for liability for one who materially assists.

House Bill 6829 replaces that language with language that is not part of the uniform code, uniform act, and that is the aiding and abetting language. And I believe that is in at least eight different places in the Connecticut Act.

When they negotiated the model act, that standard was specifically rejected by the drafters. Furthermore, the application of aiding and abetting language has been successfully challenged at the federal level.

In addition, the Connecticut bill is proposing enhanced enforcement provisions, including uniform language, which is part of the act of directly or indirectly controlling a person.

That language, we feel, is enough, and that is model act language, and you don't really need to go beyond that with the aiding and abetting language.

The SIA believes that the legislation provides appropriate vehicle for the Department to make the so-called Connecticut Uniform Securities Act fully uniform.

The model act provides numerous registration exemptions from brokers' dealers, none of which anyone can detect and bridge registration is likewise not included in Connecticut's act.

Finally, the model act provided for a cap on penalties, only leaving to the state's discretion to determine what the cap should be. In Connecticut, there is no cap.

And that lack of cap is particularly problematic given that the civil penalties given here in Connecticut are up to 100,000 per violation.

So there are three areas where they disagree with Department on this act, the Connecticut act and think it ought to be modeled more towards the model act.

I would be happy to provide an opportunity for any Members of the Committee to meet with representatives of SIA, if you have specific questions. And, again, their apologies that they cannot be here today.

REP. DOYLE: Thank you, Mr. McCabe. Any questions from Committee Members? Seeing none, thank you. Okay last person I have signed up is John Green, from Working Families.

Is Mr. Green here? He's not here. Anybody else at this point? I have no one else signed up to speak. Anyone else interested in speaking at this point or forever hold your peace?

UNIDENTIFIED SPEAKER: I just want to say that I'm so happy to see the motion of [inaudible].

REP. DOYLE: I think we have to present that to Representative Tymniak and see how she thinks about it. She's probably home by now. And look who's here. Wow, the Ranking Member has arrived.

SEN. DELUCA: [inaudible] Am I here in time for adjournment?

REP. DOYLE: Yes, Sir. Anyone else? Could Senator DeLuca motion to adjourn?

SEN. DELUCA: Adjourn?

REP. DOYLE: Yes.

SEN. DELUCA: I make a motion to adjourn

UNIDENTIFIED SPEAKER: Second.

REP. DOYLE: All in favor.

[Whereupon, the hearing was adjourned.]