The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 7:30 a.m., on Tuesday, March 16, 1999, in Room 2135 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.

COMMITTEE MEMBERS PRESENT:

Senator Randolph J. Townsend, Chairman

Senator Ann O’Connell, Vice Chairman

Senator Mark Amodei

Senator Dean A. Rhoads

Senator Raymond C. Shaffer

Senator Michael A. (Mike) Schneider

Senator Maggie Carlton

GUEST LEGISLATORS PRESENT:

Senator William R. O’Donnell, Clark County Senatorial District No. 5

Senator Jon C. Porter, Sr., Clark County Senatorial District No. 1

STAFF MEMBERS PRESENT:

Scott Young, Committee Policy Analyst

John L. Meder, Committee Policy Analyst

Crystal M. Lesbo, Committee Policy Analyst

Ardyss Johns, Committee Secretary

OTHERS PRESENT:

Chairman Townsend opened the hearing with the introduction of Senate Bill (S.B.) 335.

Senator William R. O’Donnell, Clark County Senatorial District No. 5, told the committee yield spread premium was a tool used in the industry to make money for mortgage brokers. The way the mortgage banking industry works, he explained, is to make loans that they underwrite. The mortgage broker, he continued, solicits his services to many different mortgage bankers. He referred the committee to a packet (Exhibit C) which included a pricing sheet, daily rate sheets dated November 17, 1998, a court case of Culpepper versus Inland Mortgage and a newsletter from the Internet entitled Bank Rate Moniter. He explained that "par rate" means the lowest rate at which the lender will make loans without charging the borrower "discount points." He pointed out the par rate of 7.250 percent on the pricing sheet and noted that at a 50-day lock, there would be zero points. In other words, he asserted, the lender would kick nothing back to the mortgage broker. However, he stressed, if the broker brings the mortgage banker a loan with interest at an "above par rate," then the broker is paid a "yield spread premium" by the banker. That is how mortgage brokers make their money, he testified.

Senator O’Donnell claimed yield spread premiums have come under attack by the Real Estate Settlement Procedures Act of 1974 (RESPA). He said it was discerned whether or not a mortgage lender’s payment of a yield spread premium to a mortgage broker violates the antikickback provision in RESPA. He stated the district court granted a summary judgement to a defendant, Inland Mortgage, and held that the payment that was made was not prohibited by RESPA. Circuit Court Judge Hull, he continued, from the U.S. Eleventh Circuit Court of Appeals, disagreed with that decision. He claimed the pertinent facts are undisputed and referring to Exhibit C, gave as an example, an actual case; that of Patricia and John Culpepper. They obtained a federally insured home mortgage loan, he explained, from Inland Mortgage Corporation (Inland). He said the Culpeppers did not directly deal with Inland, but dealt with Premiere Mortgage Company (Premiere), a mortgage broker. He said Inland, like other mortgage bankers, sends Premiere daily rate sheets that show the type of loans Inland will make to qualified buyers. He referred to the daily rate sheet in Exhibit C and pointed out the small print at the very bottom of the page and read it to the committee, "For use by mortgage professionals only and should not be distributed to borrowers."

Senator O’Donnell told the committee that on December 7, 1995, Premiere received a rate sheet from Inland and informed the Culpeppers that a 30-year loan was available at a 7.5-percent interest rate. The Culpeppers accepted the rate, he said, and Premiere registered the loan with Inland. Unbeknownst to the Culpeppers, he continued, the rate sheet showed 7.5 was higher than Inland’s par rate on a 30-year fixed note and carried a yield spread premium of 1.675 percent. In other words, he stated, 1.675 times the loan amount was how much the premium was and amounted to $1263.61. Premiere quoted the 7.5 rate, he asserted, notwithstanding the fact that Inland would make the same loan at 7.25 in which case the yield spread premium to Premiere would only be .125 of the loan amount, or $97.20.

Senator O’Donnell summarized that essentially what is happening in the mortgage brokering business, is mortgage brokers continue to quote higher than normal interest rates. When they do that, he noted, the higher the interest rate, the more money they make on the back end and they do not tell the borrower this until the time of signing. And even then, the borrower is not actually told, but it shows up on a U.S. Department of Housing and Urban Development form as a number just before escrow closes. By this time, he has moved out of his house and is waiting to move into his new home. The borrower finds that the mortgage rated quoted, was higher than the par rate and now he is going to pay the mortgage broker $1200, $2000, $3000 or $4000 more than he would if he had been quoted the par rate. He said escrow companies are not required to explain the yield spread premium to a borrower.

Senator O’Donnell said there is a big dispute whether or not yield spread premiums should be prohibited or regulated, but added, that is something for the courts to decide. However, he suggested, in the mortgage brokering business, it is very important to disclose at the time the quote is made to a prospective borrower, what the yield spread premium is going to be. He told the committee anyone looking to finance their home should first ask the mortgage broker, ‘How much is your loan origination fee?’ If they say 1 percent, he continued, that means they are making 1 percent on the entire money you are borrowing. He claimed the very next question the borrower should ask is, ‘How much money are you making on the back end with this rate?’ At that point, he stated, they will become very nervous and will not want to answer. But if they tell you one-half of a percent, or one percent, or one and a half percent, he explained, that means they are making money on you because they have quoted you a higher than normal par rate.

Senator O’Donnell clarified that a mortgage banker, because he is doing the underwriting, can quote whatever rate they want and you can at least shop for the mortgage banker with the best rate. But when you go through a mortgage broker, he maintained, you could be quoted a higher than normal rate only so the mortgage broker can make more and more money. He told the committee about a "bait and switch" tactic wherein a mortgage company quotes a 7-percent rate and approximately 4 or 5 days before escrow is to close, a credit problem suddenly appears. He said now the borrower is told he will not be able to use Company A’s program but can get into Company B at a higher interest rate. He declared the interest rate really is not any higher and the credit problem, which normally would have been caught in the first 5 days after applying for the loan, might or might not even exist. Now the borrower’s house is sold and he has already bought the new one and is ready to move, Senator O’Donnell explained, so he sees no other choice than to go with the higher interest rate. Therefore, he reiterated, how much money mortgage brokers are making on the back end needs to be disclosed. He said the mortgage brokers who especially need to be scrutinized, are the ones who quote one-half percent loan origination fee or no loan origination fee. Those are the ones, he noted, who are making all of their money on the back end.

Senator O’Donnell said S.B. 335 was a consumer protection bill and not very popular and claimed there were people all over the country watching this committee hearing. He declared millions and millions of dollars were lost every year by consumers due to mortgage companies quoting a higher than normal rate.

Martin LeVasseur, State President, Nevada Association of Mortgage Brokers, told the committee he had been in this business for 15 years and the yield spread premium represented a lot more than just a source of compensation for mortgage brokers. He stated it was his premise that the bill was unnecessary because based upon the Appropriation Bill signed into law by President Clinton, yield spread premiums per se, are not illegal. He told the committee he uses yield spread premiums as compensation because sometimes there is not enough money in a loan or not enough loan-to-value ratio. He claimed the customer always pays in a real estate deal and added that the mortgage broker could be compensated either through a higher interest rate and less closing costs, or a lower interest rate and more out-of-pocket costs to the customer. But that interest rate, he continued, is a process of open negotiation which the customer is free to change all the way up to close of escrow.

Mr. LeVasseur pointed out that if a customer is about to close escrow and finds out that he is paying half of a point or a point more than he could have gotten had he shopped better, he might want out of the deal. But he cannot get out of it, Mr. LeVasseur continued, because he is responsible for that close of escrow. He stressed that if the customer thinks he can go to someone else and get the loan done faster, that is fine, but he added, neither yield spread premiums nor the mortgage broker are the culprit. He claimed mortgage brokers deliver over 50 percent of all of the mortgages in the United States and are as responsible as anyone in the business for driving rates down. Mortgage brokers, he asserted, are competitive and that competition has driven rates to be smaller and smaller margins. He reiterated yield spread premiums are not illegal per se.

Mr. LeVasseur stated the tone in which "mortgage broker" had been bandied around in this hearing was not acceptable. He said he is a professional and takes what he does very seriously. He stressed S.B. 335 is not necessary and if the mortgage bankers had to report their yield spread premiums, it would create an accounting and audit nightmare in Nevada.

Russell Best, Lobbyist, Home Financial Mortgage, said yield spread premiums are tools with which mortgage bankers help their clients. He gave as an example people who have mobile homes on foundations. He explained because of liability, the banks do not want to deal with that type of loan and that is where the mortgage banker comes in. He stated that if he had a customer with $5000 for a down payment on a house, he would not be able to get a loan if he had to pay $3000 in costs to the mortgage broker. He told the committee different people have different needs. Some, he said, would rather pay points and get a lower interest rate while others, would rather use that money for other needs. He asserted that what the mortgage banker does is to go out at zero points and tells the customer his interest rates are going to be higher and the mortgage broker will make up the difference. The mortgage broker builds it into the program so the client, who often does not have a lot of money, is still able to buy the house. He claimed he obtains loans for his client from whomever offers the best rate for the best price. He maintained that banks have been trying for years to take away everyone’s money, as well as their rights. He presented a newsletter dated January 1, 1999 entitled SCAN THIS NEWS (Exhibit D). He said he disliked S.B. 335 and told the committee if they were to approve something like this, it should also apply to the banks and bankers.

Senator O’Donnell claimed the Latino community is most affected by the yield spread premium and the quoting of higher interest rates because for one thing, they have difficulty with English and their culture is such that they hold a lot of their assets in cash. Generally, he said, those in the Latino community do not believe in our banking system and do not use a lot of credit. That, he continued, along with the language barrier, makes them susceptible to being disadvantaged, such as quoting higher than normal interest rates. He quoted Mr. Best as saying, ‘We state the percentage of the cost to the borrower right on our sheet.’ Senator O’Donnell told the committee that was all the bill was requiring and therefore would not affect Mr. Best since he was already in compliance. The real reason Mr. Best and Mr. LeVasseur were at this hearing, he surmised, was because they did not want to be told they have to disclose any information to the consumer. He concluded by emphasizing the bill does not prohibit yield spread premium, but only informs the consumer that this is how much money it will cost them because they were quoted a higher than normal rate.

Senator Rhoads referred to Mr. LeVasseur’s comment in which he stated that S.B. 335 was unnecessary because the federal government already required disclosure of yield spread premiums. He asked if that were the case, what harm would be done by processing this bill.

Mr. LeVasseur said a mortgage broker shops for the best interest rates and in doing so, goes from banker to broker and back again. He claimed the interest rate today might not be the interest rate tomorrow and could even be different a few hours from now. He told the committee that the market for mortgages follows a bond market called a "Mortgage Backed Security" and is bid on like an auction process similar to stock and bonds. He declared it is a debt security as opposed to an equity and because that market moves so rapidly, it is impossible to track. He stated if he disclosed the yield spread premium up front, and did not get the application in for the loan on the same day, he would have to disclose it again the next day. He stressed that mortgage brokers disclose at the close of escrow.

Senator O’Donnell pointed out that every mortgage company in the state has a bank of fax machines and receives faxes from their mortgage bankers every day. Sometimes twice and sometimes four times a day, he added. He asserted the mortgage brokers know exactly what the interest rates are, what their kickbacks will be and what they are doing to the consumer. As far as disclosing at the close of escrow, he stated, "That is my point. They tell you at the time you are ready to move in. When it is too late to go get another loan, they will tell you what they are going to get from you out of your back pocket."

Senator O’Connell disclosed to the committee that her son was in the mortgage business.

Chairman Townsend stated this issue would be further heard in subcommittee and closed the hearing S.B. 335. He opened the hearing on S.B. 374.

Gary E. Milliken, Lobbyist, Nevada Contractors Network, referring to page 2 of the bill, lines 10 and 11, stated that what was shown as deleted actually should be left in place. He said the third-party administrator and the association’s administrator should be separate positions as they are currently. Under repealed sections, he noted, "solicitor" has a new definition which would be presented to the committee. He claimed Nevada Revised Statutes (NRS) 616B.371 should not be repealed, and NRS 616B.374, NRS 616B.377, NRS 616B.380 and 616B.383, which were added 4 years ago and applicable at the time, are no longer needed and should be repealed.

Eloise Koenig, Self-Insurance Coordinator, Workers’ Compensation Section, Division of Insurance, Department of Business and Industry, thanked Mr. Milliken for working with the Division of Insurance on S.B 374 and stated she concurred with his testimony. She presented the committee with a proposed amendment (Exhibit E) which, she said, was a simple definition of who may solicit or recruit members for an association.

James L. Wadhams, Lobbyist, Nevada Independent Insurance Agents, told the committee his organization represents several hundred individuals who anticipate soliciting insureds beginning July 1, 1999. He said they had championed this legislation since 1983 or before, and looked forward to the opportunity of soliciting every employer in Nevada. He claimed the Nevada Independent Insurance Agents had difficulty with the notion that associations that are literally insurance companies, although not licensed as such, stray outside of their boundaries. They are soliciting in the open marketplace, he declared, and are literally competing against people who are licensed in this business, have had continued education, have been trained and are experienced in soliciting insurance. To allow an unlicensed competitor into this marketplace, he stressed, clearly makes for an uneven playing field. He remarked if the intent of this legislation was to require the self-insured groups to stay to themselves, perhaps his organization could eliminate their objection. However, he continued, if the self-insured groups are going to be competing in the open marketplace against the independent insurance agents, who are licensed, there are serious reservations.

Fred L. Hillberby, Lobbyist, Professional Insurance Agents of California and Nevada, concurred and stated Mr. Wadhams had articulated the same concerns that the Professional Insurance Agents of California and Nevada had with this provision of S.B. 374.

Mr. Milliken claimed if Mr. Wadhams was referring to the amendment proposed by Ms. Koenig, it does not change anything from the homogenous groups appealed to now but only clarifies who can solicit them.

Mary F. Lau, Lobbyist, Executive Director, Retail Association of Nevada, stated that when the legislature passed the permissive language for self-insured groups and homogeneous settings, "solicitor" was in that language. There was also a requirement for licensing of solicitors, she said, and how they would perform. She claimed what Mr. Koenig’s amendment did was to keep, more or less, the status quo as far as who could sell and who could not sell. She asserted it did not change in any way the homogeneous quality of the groups, which the Retail Association of Nevada strongly supports. She added she also supports leaving in the third-party administrator not being able to be a part of the association’s administration because it is necessary for the good of the groups.

Chairman Townsend told Mr. Wadhams to get together with Mr. Milliken regarding his concerns and to bring something back to the committee. He closed the hearing on S.B. 374 and opened the hearing on S.B. 375.

Terry Riedy, Partner, Vannah, Costello, Canepa, Riedy and Rubino, told the committee he had been practicing law in Las Vegas for the last 10 years and a large part of his practice was representing industry groups such as the Michelin Tire Corporation, Ford Motor Corporation and other businesses, both large and small. He said he had been contacted by several of those entities because of their concern about moving businesses into Nevada. He claimed the corporate climate in Nevada is very attractive to both national and international businesses due to its corporate laws and tax structure.

Mr. Riedy stated S.B. 375 dealt with protections for intellectual property which, he said, he would attempt to define for the committee. He noted many people are familiar with patents and trademarks. Patents, he pointed out, are items that are filed with the U.S. Patent Office who protects those secrets so the people who generate those innovations can receive a fair profit from them. He explained that copyrights do the same thing for written material. Another element of intellectual property, he continued, is called trade secrets. He told the committee that perhaps one of the best examples they might understand regarding trade secrets was the formula for Coca Cola. If it were published as a patent, he explained, sooner or later someone would make it. He added it could not be published as a copyright because that is not what copyrights do. The formula for Coca Cola, he declared, falls squarely in that realm of intellectual property called trade secrets.

Mr. Riedy said almost every business he could think of, both large and small, had intellectual property they wanted to protect and gave as an example, the gaming industry who wants to protect its list of high rollers. He stated he had worked with companies having proprietary systems for extracting minerals from mines that both clean the environment and make a profit. They do not want to share those processes and manufacturing technologies with other companies, he stressed, because it was their idea and they wanted to take the benefit of those properties. He said there are certain processes that companies do not want to patent because they want to keep them a secret.

Mr. Riedy told the committee S.B. 375 was not only about high technology but also about the entrepreneur at the lowest level. An example, he said, would be someone who graduates from the University of Nevada system and develops a nice piece of computer programming or code. He stated it could be someone, like himself, who wants to protect that program or code from dissemination to a large corporation. Or, he added, it could be large corporations who want to protect processes they want to build in the state of Nevada. This bill, he stressed, is about protecting what is, in this information age, one of America’s most valuable assets, which is intellectual property. He maintained that things you can put your hands on, such as your automobile or your house and property, are worthy of protections and those protections need to be extended to intellectual property as well. He declared this very innovative law is not about a problem that exists and needs correcting, but is an opportunity for Nevada to improve its climate for attracting both small and large investments. If we are interested in moving multimillion dollar businesses here, he told the committee, we want to make sure Nevada has strong laws that will protect those businesses’ investments. He claimed this bill was on the cutting edge of both favoring an atmosphere for economic development and attracting business.

Mr. Riedy called attention to an article in the Nevada Appeal wherein it was noted that Nevada was trying to convert their test site near Las Vegas from the cold war mentality into an opportunity to attract high technology business. He stated Lockheed Corporation was considering entering into contracts to build space shuttles in Nevada and had inquired about protections here. He noted that S.B. 375 creates criminal penalties for those people who steal or misappropriate trade secret information. It also provides guidance for our district court judges, he asserted, when litigants in cases ask them to disclose information about trade secrets in individual cases. He said that from a criminal prospective, this law is no different than most laws that are fashioned to protect property from being stolen. He testified that the real aspect behind the civil aspect of this law is there are things litigants can do in cases to gain information about trade secrets that neither foreign governments, multinational corporations nor even our own government can access. An individual litigant often requests this information, he noted, as part of a lawsuit, so there are also civil provisions in this law to provide guidelines. Not to change the discretion of local district court judges, he asserted, but to provide guidelines for them when making their decision about whether to release information. A guideline, he added, to make sure they understand that the policy in the State of Nevada is to consider how important these intellectual properties are before deciding to release that information to someone in an adversarial context such as a civil litigation.

Mr. Riedy introduced Michael D. Rounds, Attorney, and partner in the law firm of Skinner, Sutton and Watson, and who was here today on behalf of the Nevada Trial Lawyers’ Association, who had some concerns about S. B. 375. Mr. Riedy said the thrust of the law had little to do with the civil litigation end; but added, there were certain provisions in it, as written, that might have a chilling effect on an individual’s right to gain information needed for their specific case. He claimed he had discussed the issues with Mr. Rounds and after working out some differences, had come up with some proposed amendments.

Mr. Riedy outlined the first two sections of the bill pointing out that section 1 established the criminal penalties for those persons who would misappropriate or steal trade secrets. He noted it was very similar to other criminal laws regarding the theft or misappropriation of other forms of property. Section 2, he remarked, defines those types of conducts which would be prohibited by the criminal law. He said that under the definition of "misappropriation" on line 22 of page 2, he and Mr. Rounds had agreed on the need to strike "by a person" because, he explained, it was simply redundant. He stated they had also agreed upon the need to strike that provision in subsection 5, on page 3, regarding a definition of "real time discovery." Real time discovery, he claimed, is a concept where someone could plug in to a corporate database to obtain information. He suggested that entire provision be stricken because, he explained, it is somewhat worrisome for corporations to open their databases to people.

Michael D. Rounds, Partner, Skinner, Sutton and Watson; and Nevada Trial Lawyers’ Association, pointed out, in certain circumstances, the court would have discretion to order a party onto someone’s corporate property to review their corporate database. Therefore, he added, it was felt that the "real time discovery" provision was redundant and perhaps a little overbroad and he concurred with Mr. Riedy in deleting subsection 5.

Mr. Riedy stated in subsection 6 of section 2, extending the definition of "trade secret," moves Nevada in the direction of the information age by including such items which are now found in the common vernacular such as "programming code." He said Mr. Rounds had also agreed, in that same subsection, subsection (2), paragraph (b) which originally sought to extend the definition of a trade secret to such things as a fact, item, or procedure should be stricken in its entirety. He claimed since the law already provided for that, it was somewhat redundant at this point. Mr. Riedy referred to section 5, subsection 1 and suggested removing "under this chapter." He explained that originally that section of the law applied solely to trade secret litigation and to criminal prosecutions. But now, he added, it provides the same guidance to our district courts in any civil action that involves the disclosure of proprietary trade secret information. He told the committee that he and Mr. Rounds had reached a compromise in changing the language in section 5, subsection 1, paragraph (d) to read, "determining the need for any information related to the trade secret before permitting the discovery." He said this too would provide guidance to local district court judges so they might make a more intelligent decision about how this information is to be disseminated. It was also agreed that paragraphs (e) and (f) should be eliminated as well as all of subsection 2 under section 5.

Senator Amodei asked what coordination efforts Mr. Riedy had gone through with the district attorney’s association or judges association on S.B. 375. Senator Amodei stated:

Mr. Riedy stated there had been no coordination at this point with either association, but concurred with Senator Amodei that it was something that needed to be done.

Mr. Rounds mentioned with respect to the criminal portion, in many states in the United States, trade secret misappropriation has been a crime for quite some time. At least 10 years in California, he added. He said that based upon his own experience, the district attorney’s office was rarely interested in those cases and usually sent them over to civil courts for dispute resolution. However, he concluded, there have been cases where the district attorney decides to prosecute, perhaps in a conspiracy or espionage case, and therefore it is a good idea for Nevada to have a criminal statute consistent with other states.

Senator Amodei pointed out this was an opportunity to get the district attorney’s office involved. Then, he claimed, when a trade secret misappropriation happens to a client, he/she can at least point to the fact that the district attorney’s office bought into it and therefore have a legitimate expectation of them actually prosecuting someone criminally. Mr. Riedy concurred.

Senator Rhoads referred to the "text of repealed section" NRS 600A.020 and asked what effect repealing that section would have on the bill. When Mr. Riedy could not answer that question, Senator O’Connell suggested John L. Meder, Senior Policy Analyst, Research Division, Legislative Counsel Bureau, look into the reason it was repealed.

Senator Shaffer asked how one would recognize the fact that someone had a trade secret and wanted to know if it would be registered somewhere.

Mr. Riedy said he had been litigating intellectual property disputes for a living for more than 10 years and gave an example. He stated when someone writes a computer program, they have something called source code, which dictates the function of what appears on the screen. Nine times out of ten, he explained, that person is going to keep that under lock and key because they do not want people to know how they are performing the functions appearing on their screen. He declared they do have the option, in that circumstance, of registering the source code as a copyright as well. But the key to a trade secret, he continued, is that it have economic value as set forth in the statute, and that steps are taken to protect it. He claimed the essence of it is that it be kept secret and that it not be published to third parties because the value comes from it being secret.

Chairman Townsend said after having the amendment drafted the committee could decide what they wanted to do with the bill. He then closed the hearing on S.B. 375 and opened the work session on S B. 32 and S.B. 286.

SENATE BILL 32: Revises provisions concerning contractors. (BDR 54-22)

Chairman Townsend told the committee that both bills identified constructional defect issues and said the goal of the committee was to identify the problem no matter what the bills are. He stated the bills would be set aside and the committee would walk through the process of how things are built, how they are inspected, who is building them, etc. He claimed there were growing problems, particularly in southern Nevada, with consumers becoming more and more dissatisfied with homes they have purchased. He declared builders pay a fee for inspections and there is a perception by the public that those inspections bring something to the process. We are hearing from consumers though, he continued, that this is not the case, so we are trying to find out just who is responsible for what in that inspection process. He said he hoped to get some insight at today’s hearing from the representatives of the various city and county building departments from around the state.

Ron L. Lynn, Lobbyist, Assistant Director, Inspections Division, Clark County Building Department, told the committee he was also president of the Nevada Organization of Building Officials and the chairman of the Nevada Earthquake Safety Council. He said a lot of the problems in the construction field were a result of subsurface environment. He noted the problems related to subsurface environment nationwide, is the second greatest economic impact to the United States, second only to insect damage. He claimed over $5 billion last year in corrective action shows it is not an isolated problem. The problem with subsurface environment, he added, is that you do not know what it is, even after taking extensive tests and boreholes. He explained there are special requirements in southern Nevada, but added, until the soil is exposed and has weathered for some period of time and has been subjected to the environmental conditions of use, you cannot know what those soils are going to do.

Chairman Townsend asked what percentage of the construction defect problems in Clark County was soils related as opposed to construction related. Mr. Lynn explained there were a whole series of construction defects that were not covered in the code such as a window not quite opening, the cabinet doors not working or not being finished, etc. Those aside, he continued, if you are only looking at structural, over half of construction defects were dealing with subsurface environments. He said the testimony given at this committee’s March 5, 1999, hearing on S.B. 286, except for that of Alyson McCarthy, all was related to subsurface environment. He claimed the cracks in the home at Windsor Park were directly related to soils as were the corroding underground pipes. Those things can take a long time to determine, he asserted, because of underground water flows caused by individuals irrigating their lawns and flowerbeds next to their homes. Those water flows did not exist from a geological point of view when the house was built, he stressed, but exist now because man has put them there. He said it is an extremely complex area and requires a lot more study. He added that the state of the art has increased dramatically in the investigation of subsurface environments.

Chairman Townsend pointed out that some portions of this process are literal acts of God. He inquired:

Mr. Lynn replied, it was very minimal.

Senator Shaffer asked if the consumer were made aware they were purchasing a home in an area were soils problems existed, would that in some way, relieve the contractor of responsibility. Mr. Lynn said it would certainly help consumers be better informed, but did not know if it would relieve the contractor’s responsibility. He presented a soils map (Exhibit F) which he said was available to the public and showed the areas in Clark County not having significant geological problems. The map also showed some special tested areas, he continued, which would be required by ordinance to have additional tests and investigation borings and consideration.

Chairman Townsend asked how the individual consumer could best be educated in what to ask or look for when seeking to buy a home. Mr. Lynn suggested making people aware that the soils report was a public record and therefore available to the public. Even though some of them are a little difficult to read, he said, there was a committee in southern Nevada currently attempting to standardize the format on soils reports. He stated disclosure would be another way to let individuals know. Currently there is disclosure, he noted, if there is a fault running across your property or you are in a fissure zone. But, he added, there could be additional disclosure along with certain conditions of use. Mr. Lynn pointed out:

Chairman Townsend stated the average homeowner would probably assume when he or she buys a home, new or used, and there are flowers growing in the front yard, that it is designed to accommodate those flowers. He asked if that would be an improper assumption in most homes in Clark County. Mr. Lynn answered, while that might not be an improper assumption in a home newly constructed, the secondary market is completely compromised with no controls. However, he continued, a lot of model homes might give people the perception they can put decorative elements around and within their homes.

Chairman Townsend asked if there was anything the building departments do in a subdivision inspection to find out whether a model home is giving an improper perception to the buyer about what is happening in that development. Mr. Lynn replied that after the model home is completed in substantial compliance with the code and the submitted plans, the inspector leaves. It is at that point, he explained, that the developer decorates.

Senator Shaffer said there was a problem with the word "substantial," in that trial lawyers had found it was a word they could tear apart. He asked if Mr. Lynn had any suggestions on how using the word "substantial" could be addressed, since it winds up being determined by a judge as to whether it is substantial or not. He claimed that word caused a lot of problems and asked if there was an additional section in the uniform building code where "substantial" could be clarified so it would not be so vague.

Mr. Lynn claimed the code was a living document that evolves, and added, it was meant to be interpreted by reasonable people within the context of actual physical construction. Homes are not manufactured products, he declared, but site-built constructed elements and they are not those zero tolerance concepts. He explained that the uniform building code adopted by virtually all jurisdictions in the state of Nevada, with some local amendments and modifications, allows for alternate methods, materials and designs. The crux of the Uniform Building Code, he pointed out, is that it is a performance-based code, and the conceptual basis of the code is that it will provide the element of safety. He stressed there are a lot of ways of getting to that safety. For example, Mr. Lynn explained:

Mr. Lynn stated it was clearly the intent of the code not to be a warranty type of document. He said the building departments are not out there giving a warranty, but they are looking at specific peg points. They are called out for inspections, he explained, at points established within the code, to do an oversight function. He stressed inspectors are not quality control and rather than tell contractors how to build, educate them. He said there are training courses with the southern Nevada home builders and over 200 superintendents have attended. He added there are training courses with the Associated General Contractors, put on by the building department to train people on how to construct in compliance with the code. In effect, he concluded, it is a teamwork process that includes the design professionals, contractors, material suppliers and building departments.

Senator O’Connell asked Mr. Lynn what had happened in the case of the Mandalay Bay (Resort and Casino). Mr. Lynn explained that Las Vegas sits on eluvial sandy deposits with no bedrock. He said because of this, most structures are built on what is called spread footings to distribute the loads; not unlike a boat on water. He stated what happened in this case was that it affected a deeper zone which was not investigated. He explained that in residential construction, subsurface problems occur within 35 to 40 feet and it is not common engineering practice to go down any deeper than that to investigate. For a large structure like the Mandalay Bay Resort and Casino, he continued, the borings might have been 60 to 100 feet when, in fact, the problems occurred 200 to 300 feet down, so it was not a predicted element. Mr. Lynn further explained:

Senator Townsend asked since there was obviously some potential for additional large development in that area, what responsibility, if any, did the building department have in alerting the potential developer. Mr. Lynn replied that he definitely felt the building department had a responsibility in that respect, and stated that was the reason for the map. He said when something new is discovered, it goes on the map so people are aware; and added, the map is more than just a good idea, it is codified. It is an adopted ordinance, he noted, so individuals have to look at that map when they are proposing construction and do the appropriate studies. He asserted it is now known that a 100- to 200-foot boring is not enough.

Chairman Townsend stated the committee’s focus was currently on the individual homeowner. He wanted to know how the various building departments broke out their manpower with regard to large commercial, small commercial, industrial and residential. He said he was sure that not all developers were the same as far as quality was concerned, but suggested that perhaps the building departments should shift their focus to spending more time with those developers.

Paul Wilkins, Director, Development Services Center, City of Las Vegas, told the committee, the 47 inspectors employed by the Las Vegas Building Department averaged 33 to 35 inspections daily, or approximately 300,000 per year. He claimed all of the inspectors were certified in more than one category either as architectural, plumbing, mechanical or electrical inspection and are categorized or split up in different areas of the city. He said there were also culmination inspectors who were trained over the past years to do inspections in all four categories and therefore, able to complete all inspections on a single-family dwelling in one trip. Since approximately 80 percent of the inspections in the City of Las Vegas are on single-family dwellings, he added, it saves taxpayers money for one inspector to be able to do everything at one time.

Mr. Wilkins said he gets numerous calls from builders who think the inspectors are too strict. He claimed he meets with those home builders and general contractors on a regular basis to explain that the building department is only following code. He said he might occasionally get a call from a consumer who has bought a house and wants to report a problem. Those individuals are told to call the contractor, he asserted, and nine times out of ten, the contractor will fix the problem if it is a code problem. He explained that the code is a minimum standard. He said the contractor can certainly build higher than minimum standard and in a lot of cases they do, but the inspectors enforce only the minimum standard of the code. He said the public has a misconception that because the building department is the government and has signed off on the structure, the house is perfect. Then, when they find it is not perfect, he continued, they think the building department is who they should call first.

Mr. Wilkins told the committee, the 1997 edition of the Uniform Building Code adopted by the City of Las Vegas is a minimum standard. He explained when his department is notified to do an inspection on a single-family dwelling, there are certain things they look for to comply with minimum standards. He said there is a rule of thumb that for every foot of opening, you can put an inch in the header size. For example, he defined, if you have an opening of four feet, the standard rule was you would use a four by four header. That, he said, is a performance code. He stated when an inspector goes out on a project, he will look at one header there to make sure it is right. There might be 12 or 14 in that house, he remarked, but because of time constraints and the workload, one header, or possibly two, will be inspected. A lot of times, he explained, the inspector knows the contractor and knows that he does quality work so he does not have to go into the detailed inspection that he would with another contractor. On the other hand, he continued, if the contractor is new, or one with whom the department has seen problems in the past, the inspector would do a more thorough inspection. Mr. Wilkins said there is not an absolutely perfect building in the United States because you can always find a code problem that can be fixed. He claimed every time there is a problem and it is brought to his department’s attention, the home builder is called and the problem is fixed.

Mr. Wilkins testified there could never be acceptable compromise of the life safety and fire integrity of any structure. He said the purpose of the building departments in their role as overseer was to, at called-for points, look at those critical connection elements.

Chairman Townsend asked if it was fair to say that the building inspector’s role was to assure the home buyer that they were buying a product that was in compliance with public safety issues. Mr. Wilkins replied it was, and added that in none of the previous testimony provided, was it ever indicated that there was catastrophic failure.

Chairman Townsend reiterated the role of the building departments was to make sure that the structure is inhabitable from a safety point of view. He said while he did not want to put words in Mr. Wilkins mouth, he did want to get a sense so that the customer and the taxpayer knew what the building department’s role was and did not have a higher level of expectation. Mr. Wilkins concurred and defined his role, as overseer, was to look for structural stability to make sure it does not fall down, and to make sure the electrical system is in proper order and complies with the code so it does not burn down. If there is a natural gas line, he continued, make sure the lines are safe and secure and do not leak. He stressed those were the most important inspections, and to take it a step further, he added, the building department was not concerned if the tile was cracking around the sink.

Senator O’Connell asked Mr. Wilkins how many complaints were received per year out of the 300,000 inspections, he mentioned earlier, that were done by his inspectors. Mr. Wilkins replied that he received an average of two or three phone calls per month from a consumer complaining about inspections. He added, his inspectors rejected approximately 15 to 20 percent; but explained, most of those were because the work was not ready for inspection. He said a lot of times the builder will have a schedule of when they need to call for an inspection and a superintendent might call for that inspection before it is actually ready to be inspected.

Senator O’Connell asked Mr. Lynn if he agreed with those figures mentioned by Mr. Wilkins. Mr. Lynn replied that the county’s figures were probably slightly different because of different volume issues. He claimed his department gets very few complaints; and added, its turndown rate is approximately 22 percent with some of those being due to the work not ready for inspection.

John B. Hester, Acting Assistant City Manager, Community Development Department, City of Reno, said he was in concurrence with what he had heard from his southern Nevada counterparts. He stated the best analogy he could think of to explain his role was that it was kind of like the underwriter’s laboratory where they might look at the design and the components and they might spot-check certain things and then apply their seal. If you buy a toaster, he said, and it fails or does not work, you call Sunbeam, and not the underwriter’s laboratory. He claimed his department does not warrant the project but only checks the key points. He stated out of 3300 building permits issued last year for single-family dwellings, his department had only two serious complaints.

Michael R. Mitchell, C.B.O., Building Official, Community Development Department, City of Reno, told the committee building codes had been around since approximately 1927 and claimed they were generally a history book. He explained most requirements came about because something happened. We do not always know what is going to happen, he remarked, but we do react to what has happened, and code changes are made on an annual basis. He said his department has a very high interest in training people and works hard to make sure that people understand code.

Chairman Townsend drew a scenario in which there was a small development of 20 units and asked when, during that process, an inspector would be required. Mr. Wilkins answered that the Uniform Building Code identifies 5 major inspections that have to be performed, and said there were probably between 12 and 17 inspections the building department does in single-family dwellings. He explained that the permit holder, who is usually the builder, is responsible for calling for the inspections as each stage of building is complete. The inspector, he continued, would generally do the inspection within 1 or 2 days, and each inspection takes on the average, 15 minutes. He noted, at the end of the project, there would be a final inspection and a certificate of occupancy (C of O) would be issued. The C of O, he stressed, indicates that the structural integrity of that building is substantially complete and that safety issues, including smoke detectors, electrical, mechanical and gas are in substantial compliance. He said in other words, they meet the requirements of the code.

Chairman Townsend asked if just one inspector was sent out at each stage. Mr. Wilkins explained that on a single-family dwelling, the combination inspector is utilized. On larger projects, he stated, specialty inspectors, such as electrical, plumbing or mechanical inspectors do the individual inspections for each of those areas.

Robert D. Weber, P.E., Lobbyist, Director, Clark County Building Department, told the committee his department followed essentially the same procedure addressed by Mr. Wilkins. He stated another issue he wanted to add to this discussion was that of owner/builder who, he said, frequently had a higher turndown rate because of their lower level of knowledge coming into a project. He claimed the follow-up with those individuals was a much larger challenge as far as getting a building that was in substantial compliance.

Chairman Townsend wanted to know if the various building departments had any responsibility to contact the contractors’ board when they encountered a contractor or company who’s work was consistently found to be substandard. Mr. Weber answered that if his department noticed a quality issue that seemed to be below the minimum level acceptable, they might contact the contractors’ board because that is who deals with a workmanship issue. His inspectors, he explained, are looking at whether or not code requirements are met and whether or not it is built according to approved plans.

Mr. Wilkins said there have been occasions when, in his opinion, a contractor had abused the system. He claimed his department works hand in hand with the contractors’ board in taking any necessary action against those contractors. He said if harsh measures are called for, then harsh measures will be taken, but reiterated that the majority of contractors are reputable and do a great job.

Senator O’Connell asked Dave Anderson if in the course of his job, he looked strictly at workmanship or if he also looked for code deficiency. Dave Anderson, Owner, Amerispec Home Inspection Service, said that typically, the houses he inspects are older, and each jurisdiction not only interprets building codes differently, but changes those codes from time to time. As a consequence, he explained, there was no way of knowing to what code the building was built when he inspects it 5, 7 or however many years later. He said he looks for workmanship and for health and safety issues. As an example, he commented, recently it had been discovered that flexible brass hoses used to connect water heaters and furnaces about 20 years ago, were starting to fail and houses were blowing up all over the country. He stated those were the types of things he looked into, which of course the building departments would not have had any idea about at the time they were installed.

Chairman Townsend asked if it is stated on the C of O that the only thing it is certifying is fire, and life-safety issues. Mr. Lynn replied that his department does not issue a C of O for residential construction but that they are looking at changing that process. He noted, however, the C of O would state the location, the use of the building, that it meets substantial compliance and that is safe for occupancy and use.

Chairman Townsend asked if it would be possible to consider some kind of disclosure that the ultimate user will get, that explains that the building inspectors are certified to inspect only for fire and life-safety issues. Mr. Lynn thought this was an excellent idea and said that as the president of the Nevada Organization of Building Officials, he would incorporate that into a series of placards and languages to be used statewide. He stated a lot of what this organization was doing was bringing education into the state and trying to get consistency between the north, the south and the rural areas.

Chairman Townsend reiterated that to clear up most of the misunderstanding, it needed to be quite clear to the consumer that the C of O only says the building is safe for occupancy and use. It does not say that every tile is non-cracked, he asserted, and it does not say the shower may or may not leak in a year. He stressed it only says, ‘Fire and life-safety issues have been signed off by this building department.’ Addressing Mr. Lynn, Senator Townsend stated:

Senator O’Connell asked what the building officials would look for if they were buying a home.

Mr. Lynn replied his main concern was the site because, he said, anything can be repaired if it is on good soils with good drainage and not on a floodplain. He stated he buys only used homes in order to see how the building has weathered but assured the committee this was a personal bias.

Mr. Wilkins concurred, and offered suggestions of what to do when it is time to do the walkthrough of your home. He said you should first turn on the heating and air conditioning unit as well as every light in the house to make sure those all work. He suggested bringing an appliance with you to plug into every fixture in order to detect any potential electrical problems. Make sure the electrical panel is property marked, he added, so if a problem does occur, you will know where and how to shut it off. He noted all faucets in the house should be turned on; and added, he would also take a hose and spray the roof to check for leaks.

Senator O’Connell suggested a checklist of critical areas that should be scrutinized by the buyer when they are completing the purchase of the home. This would put some accountability on the buyer, she said, by showing that he has looked at these things and acknowledged he was satisfied.

Mr. Lynn said he would recommend individuals employ a professional presale inspector to go into the home prior to buying it. He stated they are certified and have various tools and techniques to check a vast array of things the purchaser might never even consider.

Chairman Townsend acknowledged that from his own experience he found that presale inspectors provide a valuable service well worth the investment. He claimed it was a fairly inexpensive service and was like an insurance policy.

Mr. Hester pointed out that presale inspectors do not warranty the home and that they also have a disclaimer; but stated, he too would hire one if he were buying a house.

Chairman Townsend said it was important for the representatives of the various building departments to come up with something to present to the consumer, whether the home is under construction or is finished, letting them know that the inspection performed is not a warranty. The consumer needs to know, he continued, that this is not what the cities and counties do, so he or she can make a determination to possibly hire their own inspector. He stated the intent is to prevent the problem in the first place and if for some reason, it cannot be prevented, figure out how quickly it can be fixed.

Phil Herrington, Building Official, City of Carson City, said he was a past chairman of the International Conference of Building Officials and had approximately 30 years of experience in the construction business. He stated the reason a certificate of occupancy is issued to a permit holder is because the building department is permit-oriented. He told the committee he thought they were headed in the right direction as far as making sure the consumer is aware that the C of O is not a warranty. He suggested the possibility of requiring building inspectors to be certified, whether they are in a metropolitan area or in a rural area, so that everyone would be on the same playing field as far as their educational levels.

Daniel C. Musgrove, Lobbyist, City of Las Vegas, said S.B. 286 brought forth a vehicle that would allow the homeowner to get his home fixed without having to go into litigation. He claimed it cost the taxpayers a tremendous amount of money to provide the man-hours and the inspections to bring information to the table so the litigants could litigate.

Chairman Townsend told Mr. Musgrove that he was, "in the middle of the book" and said the beginning of the book was to not let it happen in the first place.

Mr. Musgrove stated he was trying to get back to the point of the role of the municipalities. He noted their role had been defined in the hearing today, and maintained the committee now understood that role for the first time.

Chairman Townsend stressed the problem was with the public’s perception of the municipalities role in allowing buildings to be built poorly. He claimed whether that was true or not, was not part of the debate. The point, he declared, is that we now had a better understanding of what the municipalities perceived their roles were, which had only to do with fire and life-safety issues.

Chairman Townsend then turned his attention to M. A. "Frank" Gross, Concerned Citizen, a Reno homeowner, who had testified in a previous committee meeting, and stated Mr. Gross had not been complaining about cosmetic issues. Mr. Gross, he noted, had talked about 13 crucial issues in which his home did not meet code. He said there were fire and life-safety issues that were not even close to substantial compliance. Mr. Gross added that after some repairs had been done to his home by McKim Homes, who was the builder, Mr. Mitchell told him that because the house already had a C of O, his department was finished and would not reinspect. Mr. Gross said he believed the reason they would not reinspect was because it would put them right in the middle of any litigation arising from this situation. He mentioned Mr. Mitchell’s response to the 13 visible, observable code violations in Mr. Gross’ home was, "Well, we can’t [cannot] check everything." Mr. Gross presented a copy of a letter from Lee Hustead addressed to McKim Homes dated 01/26/99, and showing the subject: "Home items not to code and/or workmanship standards" (Exhibit G). He also presented a letter from McKim Homes addressed to the Reno City Building Department, Mike Mitchell, dated February 4, 1999, and showing the subject: "Lee Hustead Residence" (Exhibit H).

Chairman Townsend asked Mr. Mitchell to address the code violation issue. Mr. Mitchell said once the repairs were made, the department would not go back and reinspect the repair. The repairs are done by a licensed professional contractor, he asserted, who has a professional responsibility to make those repairs in compliance with codes under state law. He added, there is civil action that can be taken if the contractor does not perform.

Chairman Townsend wanted to know how a house with 13 code violations could be signed off, and wondered if he had asked the question incorrectly. He asked, "Do we not inspect for code? Do we only inspect things for fire and life-safety issues, independent of the code?"

Mr. Mitchell acknowledged there were a lot of things in the building code requiring compliance that were not inspected. He claimed some 18 to 20 inspections were performed periodically, pursuant to a schedule of inspections, through the life of the construction of the structure. There are some things the code requires, he continued, that cannot be seen, such as roof covering. He explained that the inspectors do not know how the nailing patterns are for the roof covering on the shingles because it is covered up as it goes along. The installers, he declared, with the integrity of their professionalism, follow the guidelines of the code. He said, " So to answer your question, there are things that might not be in code compliance that we would not inspect for, because we don’t [do not] go there. That we don’t [do not] have that responsibility under the code to look for."

Chairman Townsend wanted to know what the point of having code was if it never had to be met. Mr. Mitchell said the code must be met by the people performing the activity, and claimed it was, therefore, the responsibility of the contractor. He noted if the contractor does not meet that responsibility, then the contractors’ board will assist in getting him to go back and make the necessary corrections, using the violation of the code as part of their clout.

Kim W. Gregory, Chairman, State Contractors’ Board, stated that was basically how the board’s complaint process started, with a building department or a homeowner filing a complaint against a contractor. He claimed if the board convicts a contractor of code violations, they can then order corrective action; but pointed out, this would be after the fact. He concluded the building would already have been built at this point.

Mr. Hester agreed not every single thing along the way was checked. He said, for example if someone were to slip when the subfloor was going in, and break a pipe, the inspector might not notice it because the plumbing was already signed off.

Mr. Gregory said it was not uncommon for something like that to happen; but added, if the contractor fails to correct it once it has been brought to his attention, then he is in violation of state law.

Chairman Townsend asked what percentage of the complaints received by the contractors’ board dealt with residential construction and what percent of those were against the general contractor as opposed to a subcontractor, such as a plumber. Mr. Gregory replied about 97 percent of all complaints had to do with residential; and out of that, approximately 60 to 70 percent was toward the general contractor, and dealt with cosmetic issues. He said the contractors’ board deals with two kinds of complaints. He claimed there was the kind of complaint where, if it is a developer, maybe his customer service is not up to speed and they are slow or they are nonrespondent. He noted the board had one recently in which a very prominent contractor nearly lost his license over not re-staining a banister. The sort of issue, he pointed out, that was completely nonbuilding related. He asserted the other kind of complaint, which he said, he sees a lot of, is the kind in which the root of the problem is financial. Mr. Gregory claimed that approximately 80 percent of the problems seen by the board are related to a business failure or financial failure of some kind. He explained how a contractor would refuse to take care of some insignificant problem because he had gone broke. He claimed the most important thing to every contractor is his license because if he loses his license, he is out of business. When the board deals with a contractor who cares about his license, he declared, any problems can generally be solved. He said it was the ones where there is major financial trouble, a contractor in the grips of bankruptcy, that have no solution.

Chairman Townsend suggested if 80 percent of the problems encountered by the board are financially related, it gives the committee a pretty good indication that there are too many people that should not be in that business because they financially cannot afford it.

Mr. Gregory stated the major home builders are large national companies and in most cases, complaints received by the board are taken care of; but added, it is impossible to make everyone happy. He claimed one of the problems was people who expected a $60,000 home to be the same quality as a $600,000 home, and said this was an issue with which the board had to deal. Every contractor, he asserted, has to meet two qualifications in order to become licensed. Number one, he has to be qualified, he explained; and number two, he has to have the financial resources. Mr. Gregory testified that once the contractor is licensed, he is out there in the business world and the board hopes never to hear from him again because that is a good contractor. He told the committee if they were under the impression that the board repetitively saw the same group of people with complaints against them, then the committee would be wrong. He said the board keeps a score card and it is called upon every time a contractor appears before the board. With the advent of the computer, he added, an even more accurate history can be kept, and has been kept for the last 10 years.

Mr. Gregory stated the board does not hesitate in suspending a summary suspension or revocation if that is what is required; but their first duty, he stressed, is to try and fix the problem. He reiterated that by the time the contractors’ board receives a complaint, the problem has already occurred, and added, the board was not in crime prevention. He said the only crime prevention was what could be achieved through public awareness programs.

Chairman Townsend claimed 6000 small businesses fail every year in the United States due to bankruptcy, and 99 percent of those were because of inadequate capitalization. He told the committee the financial issue was of deep concern to him and said, "It would behoove all of us if we knew where we are currently with regard to those requirements financially and perhaps how to raise that bar."

Mr. Gregory, in giving some background in that regard, said that 15 years ago an unlimited license probably required capitalization of $100,000. He noted, currently an unlimited license requires working capital typically in excess of $2 million net worth which, he added, the board tried to pattern after the bonding world.

Mr. Gross requested he be allowed to comment on a statement made earlier by Mr. Wilkins in which he indicated that some builders complain about the inspectors being too strict. Mr. Gross said:

Chairman Townsend wanted to know if it was not the responsibility of the planning people to check for code, but was instead the responsibility of the builder; what the contractors’ board’s responsibility was when a code violation was brought to their attention by a homeowner. Mr. Gregory replied they would be cited for a hearing if found guilty. He said the board could then order corrective action, impose a fine, suspend their license or revoke their license. Corrective action, he noted, is always the choice if at all possible, and stressed the board, unlike the building department, will invariably go back out to look at any code-related item.

Chairman Townsend asked how Mr. Gross would be able to prove to a potential buyer that repairs done on his home were up to code. Mr. Gregory said that in southern Nevada, the contractors’ board ordered a code repair after which the entity came in and certified the repair was completed.

Chairman Townsend said to the best of his recollection, all Mr. Gross was asking was that he be able to put his home up for sale and say that all of the code violations discovered in his home had now been repaired and certified to have met code. Mr. Gross stated it actually went a step further, and pointed out that the same builder was building 54 more homes just below him and his neighbors. He claimed several of those new homes have some of the same code violations noted earlier. Once the building department has had several complaints against a particular contractor, he declared, surely they should be looking at that contractor in a whole new light. He asserted that contractor should at least lose the privilege of being able to build things without the inspector looking at every little nuance.

Chairman Townsend asked if this builder was currently before the contractors’ board. Mr. Gregory answered it had just recently opened up as a complaint.

Mr. Gross insisted the complaints for this builder went back as early as April 1997, and wanted to know why so many people were the builder’s advocate in these matters. He said the builder of his home did finally send a letter out to those first 32 homes telling the residents they had no vapor barriers, no combustion air and no bollards in front of their gas appliances. In that letter, he maintained, the builder proceeded to blame the city for not catching those Items on the plan check.

Chairman Townsend pointed out that the same builder who has already had complaints against him regarding the first 32 homes he built in the development in which Mr. Gross lives, is now building 54 more homes. "What do you tell that developer," he asked of the building departments, "when you allow him to pull those additional building permits?" Mr. Hester stated, that particular builder was being watched very closely; and added, that according to the senior inspector and building official, was meeting all of the code requirements up to this point.

Chairman Townsend said it was absolutely crucial for the Legislature to work with the various building departments and the contractors’ board in raising the standards for the builders. He claimed that rather than trying to put contractors out of work, the intent was to let them know they were being allowed into a very privileged industry in the fastest growing state in the country, and that they had to meet a certain standard. Obviously, he stated, there were some people who were not meeting that standard. Chairman Townsend pointed out:

Douglas Lee, O.D., Concerned Citizen, described to the committee the problems he had not only with the contractor he hired to build his home in Boulder City, but also with the contractors’ board when he tried to resolve the issues he had encountered. After hearing the testimony of the various building officials, he noted, they painted a very different picture than the one he saw in Boulder City. A building permit was not pulled for his own home, he claimed, until 13 months after ground was broken, and it was 5 months after ground was broken when plans were submitted. He stated city officials had no idea what was even going to be built there. He submitted a copy of some testimony by Paul Donahue of the Boulder City Building Department (Exhibit I). The biggest problem in dealing with the contractors’ board, he said, is the time it takes to go through the process. He explained that a year after the construction started on the house, which had a 7-month contract, he had to fire the contractor. He stated that when he filed a complaint in April 1998, with the contractors’ board, he was told he would be given 30 days in which to resolve the problems with the contractor after which the contractors’ board would become involved. After the 30 days, he continued, the board held an administrative hearing and then told him the contractor would be brought before the board for a hearing in June. He claimed he was then told it would be July, and then it was moved to August; then September and so on, for approximately the next 6 months.

Dr. Lee said the contractor owed him money at the time he was fired, so Dr. Lee sued him for $45,000. The next week, he claimed, the contractor filed a $46,000 lien on Dr. Lee's house, and because of the lien, Dr. Lee could not get his house financed. He stated the bonding company required him to put $70,000 in cash in the bank in order to get a bond to bond around the lien. He commented, "We just spent all the money we had plus all the money we lost, plus some money to finish the house, and then to add another $70,000 to that was a pretty difficult deal." He said the contractor was building seven houses at $300,000 to $400,000 each and had a $10,000 bond.

Dr. Lee said there was finally a hearing in which the contractor was found guilty of 24 counts and fined $25,000, none of which Dr. Lee received. He stressed when the contractors’ board makes a finding, it means nothing from the homeowner’s perspective since the homeowner receives no type of retribution whatsoever. He claimed the contractors’ board does not even receive any of that money, which instead goes into the state’s General Fund.

Dr. Lee mentioned that the contractors’ board is concerned with due process; and added, while they probably should be, they go overboard and the entire process just takes too long. He maintained the state does not give the board enough power to have the ability to go in and solve a situation. He gave the committee some suggestions based on information provided by a friend of his, who happened to be an attorney specializing in construction law in Phoenix, Arizona. He said Arizona has an office of 12 Administrative Law Judges (ALJs) who hear construction complaints and whose rulings are binding. If they rule for the homeowner, he asserted, the contractor will then have his license suspended until he pays damages to the homeowner. He further stated that in Arizona when a complaint is filed, the contractor is given just 2 weeks in which to resolve the problem after which a hearing is scheduled within 60 days. He stressed, whether it is ruled by an ALJ or by the contractors’ board that if the homeowner has been damaged in any way, they should be able to get the homeowner some retribution. The Nevada board has no ability to do that, he concluded, the way the system is currently set up.

Senator Shaffer told Dr. Lee that he had a lot of responsibility when he entered into his endeavor and should, first of all, have made sure he had a competent contractor. He wanted to know how the contractor got $45,000 ahead of Dr. Lee, pointing out that someone had to give him that money or release it in some way. Dr. Lee replied that through voucher control, the money was released when work was not yet done, and added that this was the subject of pending litigation.

Senator Shaffer said this was a very unusual case because normally the buyer would use good common sense when entering into a $300,000 venture. He remarked, "We can create laws and protections, but…." Dr. Lee interrupted, "Well, that’s [that is] what you need to do, is create the laws and protection, but you haven’t [have not] done that."

Robert Schmitt, Concerned Citizen, stated he was prepared to give the committee some background but since time was running short, he said he would just offer some suggestions. At the top of his list of recommendations, he noted, was the need for a contractor to be required to carry, at a minimum, a $25,000 performance bond. He said it should also be tied to the contract amount. Up to 50 percent of the contract amount, he declared. He told the committee there were contractors’ boards in other states that seemed to work well, and that maybe those should be looked at as something we could build on and enhance, instead of looking internally. The third suggestion, he continued, would be to clearly define the role of the contractors’ board. He claimed what the consumer’s expectations are, versus what the contractors’ board really represents, need to be clarified. He wanted to know if there was a charter to represent the contractors or was it to inform and protect the consumer.

Chairman Townsend maintained it was to protect the consumer and added that it always had been. He stressed that it should never be anything else and said if the contractors’ board was not up to it, then the Governor should replace anyone on the board who did not understand that. He insisted that has always been the public policy and told Mr. Schmitt he had made an excellent point.

Mr. Schmitt continued with his next suggestion to reevaluate the screening process for general contractors. He said establishing a threshold for net worth would be an alternative to a performance bond and added that general contractors should bear the risk for performance. This would tighten the control, he asserted, between general contractors and their subcontractors. He pointed out a typical arrangement between the unscrupulous general contractor and some unscrupulous subcontractors was to, "Lien the house. Hit the homeowner and you get double payment that way." Next, he explained, because the courts are so overloaded with these types of cases, consider expanding the contractors’ board’s charter to include arbitration.

Mr. Schmitt’s final recommendation was to enhance or modify existing documents published by the contractors’ board to educate the consumer. He said the existing publications are a good start, but they imply that most of the consumer’s worries would be remedied by using a licensed contractor, which, he added, is far from true. He read from a pamphlet that stated, ‘The licensed contractor is subject to laws designated to protect you and your project. Remember, unlicensed contracting is a crime.’ He declared that law was not enforced. He claimed the agencies that had testified early had indicated that as soon as something goes into litigation or breaks the law, they are out of the process. He stressed, "So it might be against the law, but who is enforcing the fact that it is against the law?" He noted the pamphlet also talks about contracts but claimed his legal contract was not worth the paper on which it is written. He said that even though he had adhered to it, the general contractor had not.

Mr. Schmitt stated the homeowners in his development, in Henderson, who had ‘paid direct by check to the contractor only,’ as the pamphlet directed, lost hundreds of thousands of dollars. He claimed the contractor used those funds to finance other projects; and added, voucher control had been no protection. He concluded there were two other serious omissions from the board’s publication in trying to educate the public. The bond process, he pointed out, and how much coverage the general contractor is required to carry. He asserted the pamphlet does not address those issues at all. He referred to Senator Shaffer’s comment regarding the owner being ultimately responsible and stated, "You only go through this process once and I’m [I am] talking abut the pitfalls that you run into in terms of being misled and what your expectations are of the various agencies." Mr. Schmitt concluded his testimony by stating:

Margi A. Grein, Lobbyist, Executive officer, State Contractors’ Board, said she wanted to add to Mr. Schmitt’s case the fact that his family had been allowed by the building department to move into one bedroom of their four-bedroom home before the house was even completed.

Chairman Townsend wanted to know how that could be allowed to happen, and asked if it was because substantial compliance to fire and health safety had been met. Ms. Grein said while she did not know the reasoning that had been behind it, it was absolutely atrocious.

Mr. Schmitt said the first thing that comes to people’s minds when he tells them of his experience is, ‘My God, why didn’t [did you not] you get a lawyer?’ He stated he did talk with five or six lawyers and the common comments from them were: ‘It is going to be 2 to 3 years before you are even heard in the district court’, and ‘you are going to incur between $15,000 and $40,000 in litigation costs, and that is not to say there will be any remedy at the end for damages you have incurred.’ He claimed he had been damaged approximately $80,000 financially and he and his wife decided to represent themselves in going after their contractor’s bond. He said the bond was only $20,000 and most people did not bother, knowing full well that litigation costs would eat up the value of what the bond was in itself. It took about 6 months to go through the process, he declared, and at the end $5,000 was taken off of the $20,000 for administration fees leaving $15,000 to split among three people.

Chairman Townsend asked Ms. Grein what the board intended to propose to try to "beef up" what Dr. Lee and Mr. Schmitt had articulated. Ms. Grein said she had hoped the bill would be out by now and explained she had approximately eight pages of recommendations she was hoping the Legislature would approve. Recommendations, she asserted, that would expedite the process and add stiffer penalties. She claimed the contractors’ board was patterning itself after Arizona’s whom she had visited last May. She said it would be an Assembly bill and it was legislation requested by the board, as a board.

Senator Shaffer asked Ms. Grein if it was the option of the person hiring a contractor to request a performance bond. Mrs. Grein said it was and stated that thanks to Senator Porter in 1997, all general building contractors now have to provide a "notice to owner" that tells them about payment of performance bonds and what their rights are.

Senator Schneider asked Senator Porter what had happened with the building department in Boulder City.

Senator Jon C Porter Sr., Clark County Senatorial District No. 1, said he was very disappointed how Boulder City had handled this particular case. He stated it was under investigation along with others throughout southern Nevada. It is not unusual, he claimed, for local government to come up with a lot of reasons why certain things happened. He noted he would be happy to report back to the committee when he had a final finding from the community of Boulder City.

Senator Porter told the committee they had heard from two families who tried to follow the rules and processes; who had had trust in the system, in the local government and trust in their contractors. He said those two families have experienced some serious financial and emotional pain and not unlike those folks that have a $100,000 house or a $1,000,000 house, the problems are similar. He concluded, "I think it was mentioned this morning that we, as consumers, have responsibilities, but more so as regulators to find those gaps and plug those holes as soon as we can.

A letter from Phil Coggins, Acting Director, Building Safety, City of North Las Vegas, dated March 15, 1999, describing how the inspection process works and the responsibilities of local governments to ensure residences are constructed to building code standards when a Certificate of Occupancy is issued (Exhibit J), was presented to the committee. No testimony was given regarding this exhibit.

A letter from the Office of the Attorney General dated January 19,1999, addressed to Margi Grein, Executive Officer, State Contractors’ Board and referenced "OPINION NO. 99-02" (Exhibit K), was presented to the committee. No testimony was given.

Exhibit L consisted of; (1). A letter from Robert G. Leonard, P.E., Consulting Engineer to Mr. Joe Carter dated February 2, 1999, Re: Promontory Residential Development, Sparks, NV. (2). A letter from Joseph T. Lyons, II, consultant, Roofing & Waterproofing to Mr. Joe Carter dated February 18, 1999, Re: Building Inspections Promontory Development, Sparks. (3). A fax from JN Consulting Company, Inc. to Maddox and Associates dated December 18, 1998, Re: Short Form Preliminary Report for PROMONTORY. (4). A letter from Joe Carter to his neighbors dated March 17, 1999, asking for feedback regarding construction defects contained in their Beazer Homes. No testimony was given.

There being no further business, the meeting was adjourned at 12:05 p.m.

RESPECTFULLY SUBMITTED:

Ardyss Johns,

Committee Secretary

APPROVED BY:

Senator Randolph J. Townsend, Chairman

DATE: