The Committee on Commerce and Labor was called to order at 3:45 p.m., on Wednesday, February 17, 1999. Chairman Barbara Buckley presided in Room 4100 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Guest List. All Exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Ms. Barbara Buckley, Chairman

Mr. Richard Perkins, Vice Chairman

Mr. Morse Arberry, Jr.

Mr. Bob Beers

Ms. Merle Berman

Mr. Joe Dini, Jr.

Mrs. Jan Evans

Ms. Chris Giunchigliani

Mr. David Goldwater

Mr. Lynn Hettrick

Mr. Dennis Nolan

Mr. David Parks

Mrs. Gene Segerblom

COMMITTEE MEMBERS ABSENT:

Mr. David Humke, Excused

GUEST LEGISLATORS PRESENT:

Assemblywoman Cegavske, Assembly District 5

Assemblyman Collins, Assembly District 1

STAFF MEMBERS PRESENT:

Mr. Dean Heller, Secretary of State

Mr. Charles E. Moore, Administrator, Securities Division

Mr. Don Reis, Deputy Secretary of State, Secretary of State’s Office

Mr. Scott Walshaw, Commissioner, Financial Institutions Division

Mr. Chris Villareale, President, The Mortgage Mart

Mr. James Zubriggen, Owner, American Commonwealth Mortgage

Mr. David Ferradino, Owner, Interstate Mortgage

Ms. Connie Farris, President, Global Financial

Mr. Jonathan Andrews, Chief Deputy Attorney General, Attorney General’s Office

Mr. Doug Walther, Senior Deputy Attorney General, Attorney General’s Office

Mr. John Vergiels, Consultant, Nevada Mortgage Brokers Association

Mr. Dan Gray, Private Citizen

Ms. Loretta Eichelberger, Private Citizen

Following roll call, Chairman Buckley asked the committee to take action on the following Bill Draft Request (BDR):

• BDR 52-743 - revises provisions governing solicitation by phone (A.B. 283).

The entire hearing was devoted to the presentation of the Legislative Counsel Bureau’s Bulletin No. 99-16, Legislative Commission’s Subcommittee to Investigate Regulation of Mortgage Investment. Assemblyman David Goldwater, Chairman of the Legislative Commission’s subcommittee, presented the subcommittee report results.

Chairman Buckley noted many individuals were chagrinned by the Harley Harmon Mortgage Company collapse where numerous individuals were financially harmed. She commended Assemblyman Goldwater for reacting to concerns and for coming before the legislative commission requesting the formation of a special subcommittee to examine the problems. Chairman Buckley noted the subcommittee did an excellent job in hearing testimony and thanked Assemblyman Goldwater and members of the subcommittee.

Assemblyman Goldwater, Assembly District 10, introduced Assemblywoman Barbara Cegavske and Assemblyman Tom Collins. He noted they, along with Senators Randolph Townsend, Raymond Shaffer, and Bill O’Donnell, were members of the interim subcommittee as were staff members Vance Hughey and Kevin Powers. Each individual labored extensively to achieve the presented results.

Mr. Goldwater referenced Exhibit C and began his presentation with the failure of the Harley Harmon Mortgage Company. He explained the mortgage investment business was different from the residential mortgage business and pointed out in the business of mortgage investment, a lender was referred to as an investor. A mortgage company acted as an intermediary between a lender and a borrower and the borrower was often a developer who built homes, strip malls, and other such entities. The process was conducted through a financial instrument entitled a deed of trust. The deed of trust secured an investor’s interest by real property. In the case of the Harley Harmon failure, the property was usually Nevada property.

Mr. Goldwater explained loan-to-value ratios and offered as an example a $100,000 piece of property. He said ordinarily a lender would not lend the full $100,000; they would lend half, which would be a 50 percent loan-to-value ratio. In such a case, the lender had a reasonable expectation of receiving all of his/her principal back. Furthermore, there were different priorities of loans. One could be in a first, second, or even a third position. In the Harmon case, there were individuals who thought they were investing in a loan at a 50 percent loan-to-value ratio who were actually investing in a 90 or 100 percent loan-to-value ratio. There were those in the Harmon case who thought they a had a first position who in actuality had a second position, which meant there were creditors ahead of them in the event the property was taken back and put into bankruptcy.

What attracted individuals to trust deed investing was the rate of return. In trust deed investing, an investor could earn a rate of return commensurate with risk. The rate of return was quite a bit higher than in other investments. Mr. Goldwater noted the United States Treasury Bill was considered by some to be the risk free rate of return at about 5 or 6 percent. The stock market returned, on average, between10 to 15 percent, and bonds returned from 7 to 8 percent. He pointed out trust deeds offered a 10 to 15 percent rate of return, which was attractive to many investors. There was a relationship between risk and return making trust deeds much more important.

Rates of return for trust deed investments in the State of Nevada were advertised, whereas there was little advertisement for stock market returns without a significant disclaimer. The advertisements soliciting individuals for trust deed investments were based on risk.

At the conclusion of a deal, the investor could be paid off, which meant the interest was paid, the principal was returned, and the deal was closed. The investor could also refinance, which meant the investor took the loan in an existing property and put it into another property; or if someone went into bankruptcy, the asset in which the loan was secured became the investor’s possession. The investor could do what they wanted with the asset.

Mr. Goldwater explained in the Harmon case, the power of attorney was abused. There were investors who signed powers of attorney for the purpose of reconveyence, rollover, or other administrative items. Individuals from Harmon Mortgage Company abused the power of attorney by performing such actions where consent was not granted.

The natural check of the escrow and title company failed in the Harley Harmon Mortgage case. The title process provided for clear and understandable terms between a buyer and seller and saw that the process of conveying title from one individual to another was clean. Additionally, there was failure on the part of the Financial Institutions Division. Mr. Goldwater pointed out the division, in good faith with the Committee on Mortgage Investments, worked to improve the process. The division conducted an internal self-examination and pointed out weaknesses in their own operations.

Mr. Goldwater explained Harley Harmon was audited. He referenced Attachment A of Exhibit C and noted the section describing the memorandum from Burns Baker of February 21, 1997. Mr. Baker found serious deficiencies in the Harley Harmon Mortgage Company. Mr. Goldwater observed one examiner thought the deficiencies in Harmon Mortgage were so great that he recommended the company be shut down in February of 1997. The interim committee discovered the Financial Institutions Division did not have confidence in their ability to prosecute the case or to defend shutting down the company at such time. He articulated the purpose of A.B. 64, A.B. 72, and possible amendments was to ensure it was very clear what was going on, who had authority, and when to shut down.

Mr. Goldwater mentioned a memorandum from Burns Baker to Scott Walshaw of the Financial Institutions Division (Exhibit C, Attachment B). He noted the memorandum provided background on the examination of the Harley Harmon Mortgage Company, Inc., and he pointed out the investigation persisted for a period of 10 to 14 months. There were serious deficiencies found and concerns raised. Mr. Goldwater related details provided by Mr. Harmon and his cooperation were very poor.

Mr. Goldwater noted Exhibit C, page 5, Report Findings, and offered an explanation of dispersed proceeds disproportionate to investor’s interest. He said if a loan was syndicated and two individuals each had 10 percent in the loan, Harmon Mortgage would pay one individual their 10 percent before the other was paid their 10 percent. Mr. Goldwater explained Harmon’s actions were not correct because all parties should receive their proportionate interest.

Chairman Buckley recessed the hearing on A.B. 64 and opened the hearing on A.B. 72.

Mr. Goldwater explained A.B. 72 resulted from the direction and hard work of Secretary of State Dean Heller who realized there was a problem in the industry and came forward with a meritorious proposal. He noted the Mr. Heller should be commended for his efforts to protect Nevada consumers.

He testified subsection 21 of Nevada Revised Statutes (NRS) 90.530 exempted certain transactions from registration as a security. Mr. Goldwater noted if an individual sold an equity interest in a company to the public, the individual would have to register the equity offering with the secretary of state. If an individual solicited a debt offering from the general public, generally such an offering would also be registered with the secretary of state. He testified subsection 21 of NRS 90.530 exempted certain transactions from registration as a security. A.B. 72 not only repealed subsection 21 of NRS 90.530 but also directed the secretary of state to create other exemptions.

Mr. Goldwater asserted there were transactions that should have a specific exemption from registration as a security. Such transactions included individuals who loaned their own money, transactions with enough qualified investors, or transactions with very few investors. He noted there could be additional exemptions, and he desired to work with anyone who thought their transaction should be exempt. He did not want to put burdensome and unnecessary regulation or registration on companies. It was necessary to create special exemptions, remove the broad language, and provide specific language.

Chairman Buckley noted Mr. Goldwater would provide a brief overview of A.B. 64. She would then conduct the hearing on A.B. 72 and then open the hearing of A.B. 64.

Mr. Goldwater explained A.B. 64 was a product of the interim committee. He referenced section 39 of A.B. 64 and noted the authority of the Attorney General’s Office. Mr. Goldwater introduced Assemblywoman Barbara Cegavske, Assembly District 5, who offered additional explanation on A.B. 72 and A.B. 64 (Exhibit D). Ms. Cegavske pointed out the focus of regulation for mortgage companies was protection of companies versus focus on protection of investors. She explained the attorney general did not have direct enforcement authority and could not impose fines for regulatory violations of NRS 645B. The Division of Financial Institutions had the authority to impose fines for regulatory violations, but subcommittee testimony suggested the division rarely imposed such fines on mortgage companies that violated NRS 645B. After listening to testimony, it became clear to Ms. Cegavske mortgage company laws in the State of Nevada needed to be tightened to ensure appropriate and timely action was taken when a violation occurred.

Chairman Buckley asked the record reflect the general overview of A.B. 72 and A.B. 64 would continue and noted public testimony would begin when Mr. Goldwater concluded his presentation.

Mr. Goldwater directed committee attention to Exhibit C, Attachment D, which was the subcommittee recommendation. He briefly explained Exhibit C, page 8, and noted A.B. 64 required an investigation, increased maximum fine, inserted an administrative penalty for abusing an exemption, distinguished between major and minor violations, made clear the Financial Institutions Division had the ability to suspend a license, noted criminal sanctions for violations such as disproportionate payment, guaranteed a payment of principle or interest, and specified disciplinary action.

Mr. Goldwater commented on Exhibit C, page 9 and 10 relating to the power of attorney, and he noted in A.B. 64, the power of attorney was used for the sole purpose of servicing a single note. In addition, the power of attorney had to be approved by the Financial Institutions Division and it expressly prohibited uses other than intended.

Mr. Goldwater explained disclosure was "the meat" of the bill. He noted disclosure about mortgage investments must occur on a Financial Institutions Division form, investors may not waive such disclosure, and the disclosure must be signed and retained by all parties. The disclosure must also state risks, inform investors of mortgage company interest, and inform of pending investigation. In addition, a monthly report to the Financial Institution Division of all non-performing loans was required as well as the status of non-performing loans to investors. A.B. 64 also required investors receive information if they requested it. He pointed out many investors in the Harmon case made inquiries of the Financial Institution Division, and the division was unable to provide needed information. A.B. 64 made clear investors were entitled to certain information if the information did not harm the institution.

A.B. 64 also required disclosure of the results of an investigation. When a title or escrow company concluded a deal, an insured closing letter allowed an investor knowledge of issuance of title insurance on the property. He stated there were amendments regarding the issue, which he needed to fix. In addition, language in A.B. 64 required disclosure of loan priority, whether an individual was in a first or third position, and if the mortgage company was the subject of an investigation.

Mr. Goldwater referenced Exhibit C page 11, "Advertising Disclosures." He stated mortgage companies advertised on billboards and newspapers and were not required to disclose very much information. He called attention to Exhibit E, the Saturday, February 13, 1999, business section of the Las Vegas Review Journal, and noted the headline "Del Mar Mortgage Seized." He further noted the Sunday, February 14, 1999, Las Vegas Review Journal pointing out a Del Mar Mortgage advertisement stating one could earn 12.25 percent interest.

Exhibit C page 12 called attention to the issue of licensed loan officers and persons who arranged mortgage loans. Mr. Goldwater explained loan officers received every detail of an individual’s financial life. The loan officer could be a convicted felon and the State of Nevada had nothing to say about it. He desired that be changed and loan officers be licensed and regulated, which would have a financial impact on the state and would be funded with a fee. Such action was not a deviation from current state policy.

The intent of increasing the net worth requirement of a mortgage company was not to become burdensome or to over-regulate. At the present time, an individual needed only a $50,000 bond and a license to start a mortgage investment company. He further pointed out an unscrupulous owner would be less likely to defraud investors if they were financially at risk, and an individual would be less likely to commit fraud if they had a vested interest in their business. In addition to the net worth requirement, Mr. Goldwater stated bonding and a letter of credit created a natural free market de facto regulation.

Mr. Goldwater continued to explain licensing and capital requirements (Exhibit C, page 13). He stated the net worth requirement for a mortgage company that handled investor trust funds was increased to $250,000. If a mortgage company did not maintain trust funds, there was a 4 year phase-in beginning at $25,000 progressing to $100,000 of net worth. Net worth requirements were increased to $250,000 for escrow, construction control, and title companies. In addition, full funding of loans was required. He offered an example where a mortgage company promised a loan to a developer for $2,000,000 then raised $1,000,000, which was dispersed to the developer. At such time, the mortgage company was unable to raise the balance, leaving the developer and investors with a half-completed project. It was the intent that all loans were fully funded, and promises of mortgage companies to developers were made in good faith.

A.B. 64 attempted to prevent vertical integration (Exhibit C, page 14). Mr. Goldwater explained a mortgage company should not own a construction control company that checked the mortgage company and ensured money was dispersed properly nor should a mortgage company own an escrow or title company. In addition, spousal ownership of a mortgage company was also examined. Mr. Goldwater pointed out the construction control issue was manipulated in the Harmon case. Investors were relying on the good faith of other parties involved in a transaction who were owned by those in the mortgage company.

It was pointed out by Mr. Goldwater the Financial Institutions Division indicated they did not have adequate staff to do the required job and noted the Assembly Ways and Means Committee was aware of the problem of additional staffing, which they intended to address (Exhibit C, page 15).

Mr. Goldwater said the mortgage investment industry was a valuable industry to the State of Nevada. The industry provided developers with money in a less burdensome manner than bank loans or equity offerings, was a good investment for investors, and offered a good return. He explained deals were going to go bad and all deal risk could not be protected against, but involved parties needed to understand their role in deals. In addition, unsuspecting investors, solicited and enticed by high yields, needed to be protected from unscrupulous people. He noted he would be willing to work with all interested parties to clean up A.B. 64 in order to make it workable.

Chairman Buckley thanked Assemblyman Goldwater, Assemblywoman Cegavske, and Assemblyman Collins for their work on A.B. 72 and A.B. 64. She commended the subcommittee for listening, figuring out what happened, and presenting solutions.

Assemblyman Collins pointed out the legislature was unable to help individuals harmed in past situations such as the Harmon case, but the legislature could act to help individuals who in the future invested in Nevada. Additionally Mr. Collins stated current statutes must be enforced and commended Mr. Goldwater and Ms. Cegavske for their hard work. Chairman Buckley also commended Mr. Goldwater on his outstanding committee presentation.

Mr. Hettrick disclosed he loaned his own money. He then referenced Exhibit C, Attachment D, Page 2, "Administrative Sanctions and Criminal Penalties" that said, "Prohibit a payment preference by a mortgage company of one investor over another when each of those investors has the same beneficial interest in a property." Mr. Hettrick explained he had past involvement with loans where investors preferred to have a payment not paid in an equal amount and wondered if there would be an exemption for such a situation. Mr. Hettrick offered an example of himself and a family member who invested in a company. He may want his family member paid off first, even though they both invested equal amounts. Under A.B. 64, such an act would be prohibited, and as long as the lender was willing to have another paid off first, the action should be legal. Mr. Hettrick acknowledged there should be full disclosure.

Mr. Goldwater pointed out if there was a full disclosure and a contractual agreement, such action as described by Mr. Hettrick would be exempt. He noted in the Harmon case, individuals with a beneficial interest were not paid back while others were. Those who received payment were those Harley Harmon approached for additional money.

Mr. Hettrick noted additional language could read "except as agreed to in writing by the investors." Mr. Goldwater agreed the additional language was acceptable. Mr. Hettrick then referenced Exhibit C, Attachment D, Page 2, part 5b, which said "Report the statutes of each such nonperforming loan, on a monthly basis, to each investor who owns a beneficial interest in the loan." He sought clarification as to whether the statute’s report applied only to the investor who owned an interest in the loan. He did not think it appropriate another investor receive information on a loan in which he/she did not own an interest. Mr. Hettrick pointed out bankruptcies, defaults, and late payments were not uncommon, and he did not want to cause additional problems. Mr. Goldwater noted what Mr. Hettrick sought was acceptable.

Mr. Hettrick again called attention to Exhibit C, Attachment D noting page 7, which required an escrow company or title company provide a lender at the time of closing an insured-closing letter, which guaranteed title insurance had been obtained. Mr. Goldwater pointed out the section was unclear and he had amendments he intended to resolve with those in the industry. He explained in the Harmon case, an escrow company let transactions go without issuing a title policy. Mr. Hettrick suggested language be put into the law that required, upon closing, a mortgage company provide a title policy rather than issue a separate document making it prohibitive to lend and receive money.

It concerned Mr. Hettrick when language was put into the law saying a commissioner "may adopt any other regulations." He preferred language indicating a minimum amount of regulation.

Mr. Hettrick again noted concern about the issue of individuals lending their own money and sought verification as to whether a mortgage company that did not handle trust account funds must demonstrate a minimum net worth according to the listed schedule (Exhibit C, Attachment D, page 12). Mr. Goldwater explained an individual who loaned their own money in a private transaction established a debtor/creditor relationship. His concerns dealt with those who held a mortgage license and did not apply to one who loaned their own money.

Mr. Hettrick noted the word "demonstrate" needed clarification. He explained when the State Industrial Insurance System (SIIS) was reformed, language was used stating self-insured groups had to demonstrate financial capability. The demonstration of such capability ended up requiring extremely expensive financial statements from certified companies. Mr. Hettrick noted the demonstration of financial capabilities needed to be realistic, which was acceptable to Mr. Goldwater.

Mr. Hettrick noted page 13 of Exhibit C, Attachment D, which said "Amend Chapter 645B of NRS to provide that, for each loan, a mortgage company shall not release any amount of money to a borrower or his designee unless the amount of money released is equal to the total amount of money that is being loaned to the borrower for such loan less any amount of money due to the mortgage company for the payment of any fee or service charge." Mr. Hettrick noted holdbacks were typically seen in such loans and he did not desire the prohibition of holdbacks.

Mr. Goldwater noted the intent was not to prohibit a holdback but to prohibit short-funding. In the industry, there were instances where holdbacks were appropriate, but there were those who short-funded because an obligation was made to a developer without sufficient funding of the loan.

Mr. Hettrick noted he understood and agreed with the intent, but care needed to be taken. He explained a situation wherein an unavoidable short-term delay in receiving funds could result in a temporary short-funding.

Mr. Goldwater stated the situation described by Mr. Hettrick was exactly the type of situation that was of concern. He noted the bill was designed to prevent short-funding that resulted from people expecting funds to be available but for some reason they were not available.

Mr. Hettrick noted a situation where short-term timing or cash flow problems associated with making payments on a large loan could result in "committed" funds not being available to a borrower when the borrower expected them to be available.

Mr. Hettrick referenced Exhibit C, Attachment D, page 14, which dealt with licensure of relatives. He asked for consideration of language clarifying a relative could be licensed from another state.

Chairman Buckley stated she understood there were technical concerns with A.B. 64. She asked Mr. Goldwater if it was his intention to work with interested parties as well as address Mr. Hettrick’s concerns and bring a comprehensive set of amendments back to the committee.

Mr. Goldwater stated such was his intention.

Chairman Buckley noted during a work session additional testimony was not permitted, but if an individual’s amendment was not addressed in the original hearing, she may permit testimony at such time to ensure the position of all interested parties was clear on the record.

Chairman Buckley introduced Secretary of State Dean Heller and noted he helped the interim subcommittee ensure a situation such as occurred in the Harmon case would not reoccur.

The Secretary of State introduced Charles E. Moore, Administrator, Securities Division and Don Reis, Deputy Secretary of State and offered testimony on behalf of A.B. 72 and A.B. 64 (Exhibit F). He commended those on the interim Subcommittee to Investigate Regulation of Mortgage Investments for their extensive labor on the study that brought about the two bills. Secretary of State Heller explained the way to prevent problems such as those encountered in the Harmon case was to allow disclosure to investors. He drew attention to advertisements offering 14 or 15 percent returns on an investment and explained when a potential investor made any other type of investment, they received a prospectus. Regarding the issues surrounding A.B. 72 and A.B. 64, such was not the case. Disclosure of information to investors was not in the statutes.

The Secretary of State referenced Exhibit F, "Questions and Answers," and explained the exhibit offered an explanation as to why he believed NRS 90.530 (21) should be repealed, the effect of repealing NRS 90.530 (21), other available exemptions for small securities offerings, and what the fiscal impact on the secretary of state’s office would be.

Mr. Heller noted under his agency request for additional positions sent to the governor, there was enough positions for his office to accomplish the increased workload. When the governor’s recommendation came out, every new requested securities position was removed. He noted the increased workload would take a minimum of three positions. The purpose of A.B. 72 was the issue of prevention. He said if information could be provided to investors, we could prevent many problems.

Mr. Beers questioned whether requiring registration of certain mortgage company transactions was necessary if the committee adopted provisions requiring disclosure on advertisements, licensure of loan officers, and greater regulatory control to the Financial Institutions Division.

The secretary of state asked why the State of Nevada was the only state with the exemption and asked why the State of Nevada believed the public did not need to be informed about the sort of investments made. What occurred in the Harmon case could not always be prevented, but with oversight, opportunities for prevention were greater. The specifics of the Securities Act allowed for auditing of mortgage companies as occurred with brokerage and insurance companies. He noted it was time to change the way the situation was viewed. The pendulum had swayed toward banks and mortgage companies and it was time to switch the pendulum so as to protect the investors, which was what A.B. 72 did.

Mr. Beers asked if it was possible to achieve desired goals by regulating companies that put the packages together rather than registering individual mortgage packages that funded specific development projects. He thought funding of mortgage packages was a frequent event lasting a year or 2.

Mr. Heller pointed out investments were not always short-term. Some were long-term investments where the money continued to be rolled over from transaction to transaction. He reiterated A.B. 72 was to protect investors and consumers.

Scott Walshaw, Commissioner, Financial Institutions Division noted his office had no objections to A.B. 72 as they understood it. A number of years prior his office was involved in an attempt to regulate practices of what the division considered unlicensed mortgage company activities involving the offering of securities, but as securities, they were outside the division’s purview. There were a number of failures in mortgage companies as a result of activities conducted. In reaction to the failures, the legislature created a mechanism to license the companies. At that time, there was not a Uniform Securities Act in the State of Nevada, nor was there a staff of enforcement agents at the Securities Division of the Secretary of State’s office, which led to the creation of the statute giving jurisdiction to the Financial Institutions Division. The intent was to license such activity and provide for an enforcement mechanism. He noted if Harley Harmon Mortgage Company transactions had been registered as securities, disclosure would have given investors pause for consideration before investing.

Chris Villareale, President, The Mortgage Mart asserted it was unnecessary to remove the exemption A.B. 72 and requested it be removed. He noted lack of enforcement of existing laws in the Harmon case was instrumental in creating current problems. Mr. Villareale thought to register such investments as securities was an unbelievable request. In California, the Real Estate Division, not the Securities Division, regulated investments because the transactions dealt with real estate. The transactions were not securities transactions. He asked how necessitating the filing and review of such transactions by the Securities Division would affect other real estate investments such as the sale of a property on a deed of trust carried back by multiple owners. Mr. Villareale noted many mortgage brokers thought existing laws were sufficient and the problem was enforcement of the laws. He desired to be included in future discussions on the issue.

Chairman Buckley asked Mr. Goldwater to meet with all interested parties and report back to the committee within 2 weeks. She noted it was her understanding the exemption did not exist in any other state but Nevada. She asked Mr. Villareale if he had contradictory information to her statement.

Mr. Villareale replied in the State of California, mortgage brokers were licensed and regulated by the California Real Estate Division; they were not regulated by the Securities Division.

Chairman Buckley noted who regulated mortgage brokers was a different matter and noted Vance Hughey, Committee Policy Analyst would provide necessary clarification during the final work session.

James Zurbriggen, Owner, American Commonwealth Mortgage, Las Vegas stated he had been a member of the Senior Management Team of the American Bank and Commerce in Las Vegas and had over 24 years of banking experience. He noted his opposition to A.B. 72 and pointed out the bill was written because of loss of investor money in the Harmon case. He sympathized with those who lost money, but to blame the mortgage industry as a whole was wrong. The losses occurred because of fraud and mismanagement and the State of Nevada had sufficient laws to regulate the industry, but they chose to move slowly. Even though the Financial Institutions Division knew about Harmon Mortgage’s problems, the company was still allowed to continue operation. He pointed out the laws were adequate to seize Del Mar Mortgage and place it under the protection of a conservator and noted the Financial Institutions Division could move and act to protect investors quickly if they desired.

A.B. 72 recommended mortgage companies no longer had a waiver to sell investor’s deeds of trust and must treat them as a security to protect the consumer from loss. He questioned how the consumer would be protected from loss pointing out current security laws that had not been successful in protecting the consumer. Mr. Zurbriggen stated a consumer could open an internet on-line account and trade securities. He asked how they were protected from loss on their investment. He continued to ask if a consumer chose to buy a stock and it went down or if a company failed, would the State of Nevada protect them. There was risk in all investments, which was why returns were higher than the 2 percent offered by bank savings accounts. As an ex-banker, Mr. Zurbriggen knew real estate carried a risk and losses did occur, but losses occurred in any investment. In conclusion, the State of Nevada had laws to protect the consumer from fraud and mismanagement. He asked the state to use the laws and to remember risk in investments would always occur no matter how many laws were written.

David Ferradino, owner of Interstate Mortgage stated he had been in business since 1984. He asserted passage of A.B. 72 would close the doors of every mortgage company in the State of Nevada thus creating devastating economic impact. There was no place in the country where developers and homebuilders were not dependent on the capital provided by the mortgage lending industry.

Connie Farris, President, Global Financial explained she had been in the mortgage business for over 34 years and was opposed to A.B. 72. She noted the Harley Harmon case was a grave concern to every mortgage broker and company. Ms. Farris agreed with those who noted there were regulations and disclosures in statute that only needed enforcement. The drastic change in regulation would close mortgage broker’s doors and have a tremendous impact on the economy. She explained she disclosed to her investors and advertised with State of Nevada approved advertisement. Within the business, foreclosures occurred, but first trust deeds were real estate and needed to stay within current statutes or be placed within the Real Estate Division not the Securities Division.

Chairman Buckley asked Ms. Farris why she thought A.B. 72 would close her business and why complying with security laws complied with in every other state in the union would close a business that operated legitimately.

Ms. Farris pointed out there were very few states that did first trust deeds on actual real estate properties in the same fashion as the State of Nevada. New construction was one reason new money was raised. She explained that some of the builders were unable to obtain complete financing from a bank, which did not mean they were unreliable builders. Mr. Farris noted there was no physical way a trust deed could be received from a title company and sent out in one day. Compliance with delivery of a first trust deed to her investors within a day of the deed being recorded was a major problem.

Chairman Buckley pointed out the provision discussed by Ms. Farris was not in A.B. 72, but A.B. 64 and noted the section would be amended because the action was impractical. She again asked why compliance with security laws would put individuals who followed the rules out of business.

Ms. Farris considered the time element for applying and complying with the regulation a factor. When a builder approached her for a loan, she would normally be able to turn around a request in a few days to a week. She was told it would take 4 or 5 months to have a transaction approved through the Securities Division. Those in the industry would not be able to adhere to such a time limit. Ms. Farris explained she had 34 years in the mortgage business but no experience with the Securities Division. She was very concerned 1 violation would cause a $10,000 fine and close her down.

Chairman Buckley explained the $10,000 fine was in A.B. 64 not A.B. 72.

Mr. Goldwater noted Ms. Farris’s comment on a securities transaction taking 4 or 5 months and asked who told her such a transaction would take that amount of time. He noted he had contrary information to hers from the Secretary of State’s Office.

Ms. Farris explained mortgage brokers were involved in numerous meetings and met with the Financial Institutions Division 4 or 5 months previous. Her information came from such meetings.

Charles Moore of the Secretary of State’s Office explained exempt companies were still subject to the state’s securities laws. The exemption was an exemption from the securities registration requirements. His office currently had jurisdiction over such activity even with the exemption in place. Mr. Moore explained that type of registration was considered a shelf registration where a company registered a certain dollar amount of securities sold over a 1 year time period with annual renewals of such registration statement. He pointed out his office was not considering reviewing every trust deed investment but rather requiring a disclosure document which was provided to all investors with respect to trust deed investments that disclosed risk factors particular to the investments. He believed regulations proposed for the Financial Institutions Division addressed the issues of disclosure items with respect to each individual property or trust deed funded. Such was not the business his office attempted to regulate. From a securities registration standpoint of putting together a prospectus covering debt securities, trust deed investments, and disclosing information necessary for an investor to make an informed investment decision with respect to such products, the registration statement filed in his office was typically reviewed and approved and comments generated within 5 business days from the time the statement was received.

Mr. Hettrick inquired as to a prospectus on a note secured by a deed of trust. He pointed out interest on notes could be different at different times and asked how a prospectus would be issued in such a situation. Mr. Hettrick noted they were dealing with a single one-time disclosure that stated deeds of trust were not a guarantee an investor would receive their money back, the return could vary, and the result might be negative. Individuals who brokered such an arrangement were not the ones who backed up the deed of trust; they were the brokers in-between. He questioned the wisdom of a financial disclosure about an entity who brokered a deal but was not the financially responsible party. Mr. Hettrick said the investor would not be protected. He noted Ms. Ferris’ point that Nevada was a trust deed state where issues were handled differently from states who used security. He explained a deed of trust was a security with a fixed amount of money that would be returned with a fixed term. The terms were laid out in the note, which was the disclosure. He asked what else there was to disclose.

Mr. Moore referenced the Del Mar Mortgage Company, who advertised in every newspaper every week, noting fluctuating interest rates. Their advertisement was not for any specific trust deed investment. It was aimed at trust deed investments in general. A company, such as Del Mar Mortgage, could produce a prospectus informing investors of the risk factors for investing in trust deeds, the background of the company, the experience of managers, executive officers and directors, financial information, and if the company was operating profitably or losing money.

Mr. Hettrick asked what the information had to do with the trust deed. The mortgage company operating profitably had nothing to do with the repayment of the trust deed. It did not matter if the mortgage company was profitable or not.

Mr. Goldwater explained the types of transactions to which Mr. Hettrick referred needed to be exempted, but there were transactions that needed to be registered with the Secretary of State’s Office. Broad solicitations to a great number of individuals who only had a small fractional interest were the types of transactions that needed to be taken into consideration, not those who were in a two or five party transaction. It was his intent to remove the broad exemption and create the narrow exemption. He pointed out the wording of most of the transactions with which Ms. Farris and Mr. Ferradino dealt would be different, but the transaction would continue in exemption. If a company, in a broad solicitation to the public, touted a certain rate of return, such transactions should be registered.

Mr. Hettrick offered an example of a company who wanted to raise $1,000,000, each investor had 5 percent, and the company decided where the money was invested. He noted such a situation dealt with securities. He was talking about a company or individual who advertised the sale of trust deeds or advertised for the arrangement of financing of trust deeds and noted such was considered a broker and the situation was not a securities issue.

Mr. Goldwater stated the situation described by Mr. Hettrick would be exempt.

Chairman Buckley noted A.B. 72 would be held for approximately 2 weeks. She asked interested parties get in touch with Mr. Goldwater to review the bill and stated there would be another hearing. In addition, there would be amendments and refinement to A.B. 72. Chairman Buckley pointed out there was no desire to rush the issue and harm legitimate businesses, but there was concern that issues be kept up-to-date and consumer protection be ensured.

Ms. Berman disclosed she had financial dealings with Harley Harmon, but because nothing in the bill was retroactive, she was advised by the Legislative Counsel Bureau Legal Division she could fully participate in consideration of the issue.

There being no further discussion on A.B. 72, Chairman Buckley closed the hearing and opened the hearing on A.B. 64.

Jonathan Andrews, Chief Deputy Attorney General, introduced Doug Walther, Senior Deputy Attorney General, Attorney General’s Office, and indicated on behalf of the Attorney General’s office, they were supportive of the work of the subcommittee and the goals of A.B. 64. His office was prepared to assume whatever responsibility the legislature decided to give them regarding the issue. He noted his office would need the necessary resources to do the job and pointed out a fiscal note was prepared outlining duties. He stated his office would work with Mr. Goldwater to modify the note as the bill was amended.

Mr. Walshaw, Commissioner, Financial Institutions Division, stated the division supported changes in the Mortgage Company Act. He noted his office had a pending BDR dealing with an overhaul of the act, and asked the subcommittee on A.B.72 and A.B. 64 to consider the BDR in its deliberations.

Chairman Buckley said Assemblyman Goldwater would chair the subcommittee on A.B. 72 and A.B. 64 and noted the need for additional testimony and discussion of the issues. Assemblywoman Berman would also participate in the subcommittee.

John Vergiels, represented the Nevada Mortgage Brokers Association and introduced Marty LeVasseur, Chairman, Nevada Mortgage Brokers Association. Mr. LeVasseau commended Mr. Goldwater on his presentation and stated the Nevada Mortgage Brokers Association desired reform in the industry and noted that as written, they were in favor of certain aspects of A.B. 64 and were diametrically opposed to other aspects of the bill. He noted interest in participating in the subcommittee.

Dan Gray of Henderson Nevada said he was a victim of fraud by Harley Harmon Mortgage Company and took an active role in pursuing the regulation of mortgage companies. He offered support for A.B. 64 (Exhibit G).

Chairman Buckley noted Mr. Gray was instrumental in helping other victims be informed and vindicated by the subcommittee’s work.

Mr. Gray said he appreciated all who participated in the interim committee and those on the Committee on Commerce and Labor were greatly appreciated.

Loretta Eichelberger stated she might never recover her investment in the Harley Harmon Mortgage Company and noted if A.B. 64 passed, future investors would be better served and protected (Exhibit H).

David Ferradino, Interstate Mortgage, explained he supported the bulk of A.B. 64 and noted there were seven items that needed revision. Mr. Ferradino was grateful to Mr. Goldwater for spending the necessary time with him and interested parties.

Chairman Buckley explained Mr. Goldwater planned to meet with Mr. Ferradino’s representative prior to the subcommittee hearing to see if technical changes could be made.

Dale E. Puhl, President Southwest Escrow Company offered written testimony in opposition to the increase in the required bond (Exhibit I).

There being no further testimony on A.B. 64, Chairman Buckley closed the hearing and adjourned the meeting at 6:00 p.m.

RESPECTFULLY SUBMITTED:

Jane Baughman,

Committee Secretary

APPROVED BY:

Assemblywoman Barbara Buckley, Chairman

DATE: