The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 9:15 a.m., on Tuesday, May 18, 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

STAFF MEMBERS PRESENT:

Scott Young, Committee Policy Analyst

John Meder, Committee Policy Analyst

Kevin C. Powers, Senior Deputy Legislative Counsel

Crystal Suess, Committee Secretary

OTHERS PRESENT:

Chairman Townsend stated, in his opinion, there were a number of key provisions to A.B. 64 that are important. He remarked one is the power of attorney. Chairman Townsend asked Scott Walshaw if amongst regulators such as he, power of attorney was a key provision in resolving some of the issues brought forward by the interim committee.

L. Scott Walshaw, Commissioner, Division of Financial Institutions, Department of Business and Industry, replied that was correct, as he had stated in his last testimony. Chairman Townsend inquired whether the trust account issue was handled well by A.B. 64, or if it should be dealt with in another manner. Mr. Walshaw replied his division’s proposal has consistently been to eliminate the handling of other people’s money by a licensed mortgage company, and cause it to be handled by an independent third party. He continued the current statute requires those companies that handle other people’s money to be subject to certain requirements, among which is an annual independent certified public accountant (CPA) audit. Mr. Walshaw advised that was the way it was handled in 1985 as a way to protect the public. He stated that does not necessarily work if the CPA firm does not do its job properly. Chairman Townsend referred to section 108, subsection 1, paragraph (a) of the bill, regarding advertisement, and expressed his opinion that the public would be better off with a disclosure page containing this language that the investor must sign before investing his money. He remarked that would have more of an impact than a notice in the newspaper containing the disclosure.

Doug Walther, Senior Deputy Attorney General, Commerce Section, Civil Division, Office of the Attorney General, concurred with Chairman Townsend’s remarks, and pointed out there is another section in the bill that requires the commissioner to adopt a generic disclosure statement through regulations. Mr. Walshaw indicated subsection 3 of section 108 addresses advertisements. Chairman Townsend inquired whether a regulation could be drafted, based on section 108, subsection 1, paragraph (a), requiring a disclosure statement be included in each investment document a mortgage broker uses to carry on the business of investment. Mr. Walshaw pointed out it was his understanding the bill requires licensees to use the format of the statement in section 108, subsection 1, paragraph (a) in their disclosure. He indicated there could be a regulation such as is already in the bill with a requirement to adopt other statements of disclosure through regulation in addition to this language. Mr. Walshaw inquired whether Chairman Townsend was talking about including the above-referenced statement in a disclosure that is given outside of an advertisement. Chairman Townsend replied affirmatively, and remarked when a person gets ready to sign the papers to make an investment, in his opinion, there should be a cover form that discloses the information included in the referenced statement. Mr. Walshaw stated that could be made a requirement. He further stated it would not have to be put into regulation; this section could be modified to make it a requirement not only to be in the advertisements but also to be disclosed at the time an investor signs the investment documents.

Mr. Walther indicated he found the section Chairman Townsend mentioned earlier. He said it is in section 105 on page 59 of the bill, the new language of subsection 1, which states, "A mortgage broker or mortgage agent shall not accept money . . . unless . . . " they sign and date a disclosure form, and it specifies what needs to be in the disclosure form. Mr. Walshaw pointed out the difference between what is currently in statute and what this attempts is in subsection 3 of section 105, where it says the mortgage agent may not agree to alter or waive the provisions of this section by contract. He remarked currently there is a provision in statute that allows the investor to waive receipt of certain documentation.

Chairman Townsend requested they next address the fee section. Mr. Walshaw inquired whether Chairman Townsend was referring to the fees as they relate to licensure of loan agents. Chairman Townsend answered affirmatively, adding, he just meant the new fees in the bill. Mr. Walshaw indicated, technically, there is only one new fee in the bill, and it relates to the licensure of mortgage agents. He said the reason he mentioned that is because the new chapter being created for mortgage companies is comprised of a group of licensees being moved from another chapter into the new chapter. Mr. Walshaw explained the fees being charged under the old chapter would be paid under the new chapter, and the change is not creating a new body of licensees. However, he stated the chapter regarding mortgage loan agents would be a new licensing chapter and would create new fees. Mr. Walshaw advised there would be an application fee, an initial licensing fee, and an ongoing renewal of that licensing fee built into that chapter.

Chairman Townsend recalled a generic statute that covers everyone in the industry. It is his understanding the bill drafters are now trying to sever the kinds of companies involved in chapter 645 of the Nevada Revised Statutes (NRS) and create a new "mortgage company." Mr. Walshaw clarified the new mortgage company chapter was intended to apply to those companies that were essentially lending their own money. Chairman Townsend confirmed that was correct. Mr. Walshaw advised they also talked last session about creating a third category for commercial loan brokers. He said he has language from the State of Arizona used to that effect that Nevada could use as the basis for an amendment. Mr. Walshaw commented once again, they were talking about taking existing licensees and re-categorizing them, so they would not be creating new fees, but reapportioning the fees they are paying now into a new chapter.

Chairman Townsend addressed Robert Barengo, saying in attempting to segregate those who are lending their own money, such as Household Finance, for example, a "mortgage company" category was being created under sections 8 through 39 of A.B. 64.

Robert R. Barengo, Lobbyist, Nevada Consumer Finance Association, remarked sections 8 through 39 restate the old law, chapter 645B of NRS. Responding to a question by Chairman Townsend, Mr. Barengo stated since sections 8 through 39 are a restatement of existing law, there should be no problems in interpreting those chapters. Mr. Barengo mentioned the only substantive change is that the existing law does not contain fines as high as $10,000, such as that found in section 32 of A.B. 64. He advised the Assembly Committee on Commerce and Labor revised the fine upward to make it more effective. Chairman Townsend noted if a mistake is made of $1,000 or more, it is a Category D felony. He mentioned that portion of the bill is difficult to read because of all the new language. Mr. Barengo pointed out the existing language is in section 115 on page 65 of the bill, under subsection 1, paragraph (c). Chairman Townsend stated there are really no changes in sections 8 through 39, other than moving finance companies who lend their own money to a new section and separating them from people who take investor money and loan it out. Mr. Barengo said that was correct, and mentioned that for many years his industry has wanted to separate investment bankers, investment brokers, mortgage bankers, mortgage brokers, and mortgage agents, because their functions are different. He advised that Mr. Walshaw reminded him there is another section in NRS 675.230 that would need to accommodate this provision if the committee passes this bill. Mr. Barengo remarked NRS 675.230 is the "Shared Premises" statute that states mortgage companies can share premises, with chapter 675 of NRS-licensed companies, under certain regulations promulgated by the commissioner.

Kevin C. Powers, Senior Deputy Legislative Counsel, Legal Division, Legislative Counsel Bureau, pointed out the amendment to section 125, subsection 2, paragraph (b), subparagraph (2) of A.B. 64 accommodates the change in the chapter so that the prohibition on operation of dual businesses at one location would not apply to a mortgage company licensed under the new chapter.

Chairman Townsend next addressed section 40 of A.B. 64, chapter 627 of NRS, regarding surety bonds for construction control. He read subsection 2, which discusses the obligations to which a bank, savings and loan association, thrift or credit union must be held to secure the same obligation as would the surety bond. Chairman Townsend said he presumed that would mean a surety bond is one of the things that may be used to secure the obligation. Mr. Powers concurred, and pointed out the addition of this section is to make the provisions of chapter 627 of NRS, dealing with construction controls, identical to the provisions that deal with escrow agencies and then the new provisions dealing with surety bonds, title agents, and title insurers. He referred to section 43 of the bill, saying it is the existing section from the escrow agency chapter, and it is identical to the language in section 40. Mr. Powers remarked the overall intent was to make the surety bond requirements language identical for construction controls, escrow agencies, title agents, and title insurers.

Alfredo Alonso, Lobbyist, Kaufman and Broad Home Corporation, distributed a handout titled "Proposed Amendment to Assembly Bill No. 64" (Exhibit C), and stated section 44 of A.B. 64 deals with the escrow provisions. He stated the amendment exempts Kaufman and Broad Home Corporation and other companies from licensing per section 10, subsection 10 of the bill.

Chairman Townsend referred to section 41, subsection 2, of the bill and inquired why Mr. Walshaw deleted "a penal sum equal to 1 ¼ times the amount of capital in the business but in no event less than $20,000," and replaced it with a $250,000 surety bond. Mr. Walshaw replied the direction from the interim subcommittee was to make the $250,000 corporate surety bond for construction control, any escrow agencies, as well as title agents and title insurers, the same across the board.

Pat Coward, Lobbyist, Nevada Land Title Association, stated when he testified in the Assembly Committee on Commerce and Labor, one of the things mentioned was the land title has underwriters that provide extensive protection. He asserted his association did go along with the $250,000 because there are other options for providing that coverage. Chairman Townsend clarified this is only for the construction control people. Mr. Coward pointed out it applies to the independent escrow agencies as well as construction control. Mr. Powers affirmed that was correct. He said this provision is identical to the escrow agency provision that provides for a substitute form of security and the title agents and title insurers provision that also includes a substitute form of security provision in identical language. Chairman Townsend asked if his understanding of the bill was correct in that some companies operate a multiple of those kinds of businesses, and they would have to have a $250,000 surety bond or a substitute for each of those businesses. Mr. Powers answered affirmatively and explained the reason for that is that construction control deposits their surety bond with the State Contractors’ Board, the escrow agencies deposit their surety bond with the commissioner of financial institutions, and the title agents and title insurers deposit their surety bond with the commissioner of insurance. Mr. Powers clarified that the surety bond requirement is increasing for construction control from $20,000 to $250,000; for escrow agencies from $50,000 to $250,000; and for title agents and title insurers from no surety bond requirement to $250,000. He said sections 125 to 130, inclusive, add these surety bond provisions to chapter 692A of NRS for title agents and title insurers.

Mr. Coward mentioned the title companies affected are mostly the large companies; for example, Stewart Title, that have access to title plans and employ underwriters. Mr. Walshaw pointed out that a gigantic increase in bond requirements for some of the smaller companies that merely do loan servicing and no escrow work would constitute a huge hardship. Chairman Townsend asked why they would increase that bond if many of the title companies do not do something for which they would need that kind of bond. Mr. Walshaw replied, in his opinion, the interim committee did not hear testimony from the small companies and took the position to be consistent and change the surety bond requirement to $250,000 across the board. Chairman Townsend asked if Mr. Walshaw had a sense of the need for mortgage companies to be raised from a $50,000 to a $250,000 surety bond. Mr. Walshaw answered, since 1991 when the Division of Financial Institutions took over from the Real Estate Division and started doing examinations and audits of escrow companies, they have had few problems with those operations. He remarked there has been an occasional situation arise in which his division has had to take corrective action, but they have not encountered the catastrophic situation that existed in 1991. Chairman Townsend asked, with regard to surety bonds in the open market, how the fivefold increase from $50,000 to $250,000 would affect the cost for consumers.

Alice A. Molasky-Arman, Commissioner, Division of Insurance, Department of Business and Industry, answered it would be proportionate, and is generally the same, 5 percent to 10 percent, of the face amount. Chairman Townsend clarified that it is strictly a percentage with no available discounts. Ms. Molasky-Arman replied that is normally the case. Mr. Walshaw suggested using a sliding scale provision based on volume of activity such as occurs in chapter 649 of NRS, the Collection Agency Act. He commented there is language in the chapter that shows a spread of trust account activity that is reviewed at least semiannually to determine the appropriate amount of the bond. Mr. Walshaw recommended doing something similar in chapter 645A of NRS to give provision to those companies with volume enough to warrant the higher bond and putting a sliding scale into effect from $50,000 to $250,000, depending on the volume of activity. Chairman Townsend inquired whether Mr. Coward had a copy of the proposed amendment that Dale Puhl sent to Assemblyman David Goldwater via electronic mail (e-mail). Mr. Coward replied he did not have a copy of the amendment, but stated he remembered that Mr. Puhl was of the opinion a phase-in bond would be appropriate.

Chairman Townsend noted NRS 649.105 talks about average monthly balances; less than $100,000 would require a $25,000 bond, $100,000 to $150,000 would require a $30,000 bond, $150,000 to $200,000 would require a $40,000 bond, and $200,000 or more would require a $50,000 bond. He said this is not a phase-in, but an actual sliding scale. Chairman Townsend recommended leaving the bond requirement at $50,000 as the base, and move it up in increments of $50,000 based on volume. Senator Schneider provided a copy of the e-mail from Mr. Puhl to Assemblyman Goldwater (Exhibit D). Chairman Townsend asked the committee members if they had a preference to phase in the surety bond or create sliding scale categories. The committee agreed to the sliding scale bond approach.

Addressing section 44 of A.B. 64, Chairman Townsend recalled the committee had agreed to keep the offices separate. He remarked the definitions of "mortgage agent" and "mortgage broker" are in sections 56 and 57. Chairman Townsend inquired whether these definitions were from a different section or if they were new definitions. Mr. Powers answered the mortgage agent definition is new because it is creating a new licensing scheme for the mortgage agents who previously were not licensed. He commented the definition of mortgage broker is a reenactment of the existing definition, in chapter 645B of NRS, of mortgage company with modification relative to the new chapter. Chairman Townsend clarified the agent is a new category; everyone in the business would be required to become an agent, obtain a license, and pay a fee. Mr. Powers affirmed that was correct.

Responding to a question by Chairman Townsend, Mr. Walshaw stated section 56 says mortgage agent means "any natural person who is an employee or independent contractor of a mortgage broker." He said as they have defined mortgage broker within the context of A.B. 64, that will be those people licensed under the new chapter 645B of NRS. Mr. Walshaw continued there are approximately 1,500 licensed entities that would be subject to the new licensing requirement. He indicated that would go up or down each year depending upon the number of licensed companies and the number of agents that they would employ. Mr. Walshaw further stated his division projected a gross, based on existing statistics for increases in the licensing of mortgage brokers under chapter 645B of NRS, of about 200 agents per fiscal year. Chairman Townsend indicated he had a question with regard to the impact of the figures quoted by Mr. Walshaw. He queried how much the licensees would be charged. Mr. Walshaw commented the current statutory structure shows a $500 initial application fee, and a $250 annual licensing fee. He advised his division based its projection on running a law enforcement and credit check only on each license applicant. Mr. Walshaw continued once licensed, the only necessary oversight would be keeping track of by whom licensees are employed, and annual license renewal. He remarked he was talking about a two-part event: 1) an investigation done out of the division’s investigative account, covered by the application fee that initially goes into that account; and 2) annual renewal of the license. Mr. Walshaw surmised they would need two new office employees, at a cost of an additional $60,000 per each year of the biennium to pay for the two positions. He maintained the current $250 licensing fee would be sufficient to cover that cost. Chairman Townsend asked why it is necessary to license 1,500 people. Additionally, he queried what the difference is between a mortgage agent and a loan officer employed by a bank, who is not licensed. Mr. Walshaw remarked he was unable to answer that question.

Chairman Townsend asked Mr. Powers the reason for requiring mortgage agents to be licensed. Mr. Powers clarified the licensing fee amounts. He said there is a $500 license application fee, a $250 fee to be issued a license if the application is approved, and a $150 annual fee to renew the license, as the bill stands now. To answer Chairman Townsend’s question, Mr. Powers remarked the interim subcommittee frequently discussed the licensure of real estate brokers and real estate salespersons and considered mortgage agents and brokers to be in the same category as the real estate brokers and salespersons. He said real estate brokers and salespersons are licensed under chapter 645 of NRS, and the interim subcommittee wanted a similar licensing scheme for mortgage agents. Mr. Walshaw mentioned the amount of the fees could be adjusted downward. Another point made by Mr. Walshaw regarding the fiscal impact was the attorney general’s office would be affected fiscally by the implementation of this new chapter by an increase in the amount of potential administrative hearings and challenges if a license was not issued to somebody for some reason. He turned over the discussion to Mr. Walther.

Mr. Walther remarked all of these new potential licensees would have statutory rights to appeal license denial decisions all the way up to the Nevada Supreme Court, if they so chose. They would also be subject to standards of care for which the division could take action against their license. He noted that would be formal action in contested cases requiring attorney general representation. Mr. Walther surmised regulating the new licensees would cause a spike in the workload of the civil division of the attorney general’s office. Chairman Townsend asked Mr. Walshaw, in looking back over time, how much impact licensing everybody in the industry would have with regard to consumers. Mr. Walshaw replied it has been the position of his office to require each licensed company to have at least one qualified employee to undergo a background investigation at the present time. The second and most important function his office has attempted is to hold licensees accountable for the actions of its employees and contractors. Mr. Walshaw told of litigating a case in which a licensee entered into a contractual relationship with someone and allowed that individual to use its name and license, and the person committed fraud. The company’s defense in that case was that the person did something the company did not authorize. Mr. Walshaw told of litigating that case to the point where the company was forced to pay restitution. However, he said the division still does not have the ability to go after that individual outside of the parameters of the mortgage company act other than to refer it to a law enforcement agency for possible prosecution.

Russell Best, Lobbyist, Home Financial Mortgage, stated if the committee decided to license the brokers and their salesmen, it would need to license everybody in the industry, including mortgage bankers. He explained if the law does not require everyone to be licensed, mortgage salespeople would work for the companies that do not require licensing. Mr. Best distributed a handout titled "Home Financial Mortgage" (Exhibit E), which contained a list of reasons not to pass A.B. 64. He noted the last four pages of the handout list what other states charge for licensing of mortgage brokers. Chairman Townsend asked if other jurisdictions require mortgage agents to be licensed.

Marty LeVasseur, State President, Nevada Association of Mortgage Brokers, testified generally the mortgage brokers in the membership states, 38 states affiliated with the national associations, have a 50/50 break in those having licensed mortgage brokers and those who do not. He advised that states that have licensing requirements in large metropolitan areas, California being an exception, use a real estate license to enable licensees to solicit business and quote interest rates. Mr. LeVasseur remarked there are a number of variations to the law. He asserted it is important to make the requirement across the board to level the playing field. In other words, if there is going to be a license to solicit, it should be required of everyone in the industry, not just mortgage brokers. Mr. LeVasseur noted agency issues are also a consideration. He stated if the responsibility of the agent is going to be attached to the mortgage brokers, then the mortgage brokers should have control over the mortgage agents. Chairman Townsend inquired if the committee decides to go forward with a licensing provision, and changes the licensing fees to a figure that more accurately reflects actual costs, that would be acceptable to Mr. LeVasseur’s association. Mr. LeVasseur replied if the provision contained fees that more accurately reflected actual costs, the association would be willing to stand behind statutes of professionalism.

Chairman Townsend mentioned another way to approach this issue is a proposed $55 registration fee paid to the secretary of state to register under a securities rule. He stated that would mean they would still be under state control, but at a much lower cost. The Chairman asked Mr. Powers if he had discussed the $55 registration fee and weighed it against the traditional licensing provision. Mr. Powers answered the way the committee viewed A.B. 72, the secretary of state’s bill, and A.B. 64 was as two separate, stand-alone provisions, and did not consider them in conjunction with the licensing that would occur under each bill.

Mr. LeVasseur asserted to be registered under the secretary of state as a solicitor of securities is not something his industry is prepared to accept presently. Chairman Townsend clarified that what Mr. LeVasseur was looking for was something more reasonable in terms of fees to become licensed. Chairman Townsend announced the committee would resume discussion of A.B. 64 the next day (May 19, 1999) at 9 a.m.

Chairman Townsend remarked the committee would next take action on amendments to assembly and senate bills.

The first bill addressed by Chairman Townsend was A.B. 477. He said the Assembly Committee on Commerce and Labor would not accept the committee’s amendment regarding reducing the $5 figure to $2.

Chairman Townsend stated the committee would either need to recede and withdraw its amendment or go to conference.

Chairman Townsend next addressed Senate Bill (S.B.) 131. He said the committee had been requested to concur with Amendment No. 868 to S.B. 131.

Stan R. Olsen, Lobbyist, Lieutenant, Las Vegas Metropolitan Police Department, stated he was completely satisfied with the amendment to S.B. 131.

Larry D. McBee, Lobbyist, Nevada Bell, testified Nevada Bell is also satisfied with the amended bill.

Alfredo Alonso, Lobbyist, National Pager Coalition, remarked his coalition is in concurrence with the amendment to S.B. 131.

The next bill addressed by Chairman Townsend was S.B. 464.

Chairman Townsend explained originally section 2 of the bill stated, "The administrator may charge an additional fee of $25 . . . ." He remarked the Assembly Committee on Commerce and Labor amended the bill by adding "not more than" before the $25.

Scott Young, Committee Policy Analyst, Research Division, Legislative Counsel Bureau, advised that the amendments were just technical amendments.

*****

There being no further business to come before the committee, Chairman Townsend adjourned the meeting at 10:55 a.m.

RESPECTFULLY SUBMITTED:

Jo Greenslate,

Committee Secretary

APPROVED BY:

Senator Randolph J. Townsend, Chairman

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