The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 9:00 a.m., on Thursday, May 20, 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:

Assemblyman David E. Goldwater, Clark County Assembly District No. 10

STAFF MEMBERS PRESENT:

Scott Young, Committee Policy Analyst

John L. Meder, Committee Policy Analyst

Kevin C. Powers, Committee Policy Analyst

Beverly Willis, Committee Secretary

OTHERS PRESENT:

Dean Heller, Secretary of State

Senator Townsend announced today’s meeting would focus on Assembly Bill (A.B.) 64. Senator Townsend stated, "The issue is one of having the construction control companies merely submit an affidavit as to what level is in their trust account on a regular basis, and what level of bonding they have."

Senator Townsend asserted the decision was made that a $20,000 bond would be applicable, pertaining to trust accounts of construction control business with an average of less than $2 million per monthly balance. He declared a sliding scale would also apply.

Assemblyman David E. Goldwater, Clark County Assembly District No. 10, concurred with statements offered by Senator Townsend. He asserted any help or input would be welcome, as this industry has little restriction or regulation. Senator Townsend inquired if an advisory committee to the financial institutions division (Department of Business and Industry) would be beneficial. This proposed committee could be made up of investors, mortgage brokers, mortgage bankers, et al. Assemblyman Goldwater was not overly enthused with the possibility of an advisory board. He asserted there might be problems in obtaining properly qualified persons to assemble an advisory board. Assemblyman Goldwater maintained a great deal of dissention could arise through inner-industry disagreement over how the advisory board was supposed to speak for the industry. It was his contention this was not the best way to accomplish public policy.

Senator Townsend maintained, as there was no standing committee to deal with this type of subject; perhaps, there should be a mechanism without cost that could benefit the legislative process. He claimed even though this might not be an easy task, without benefit of an interim committee, this idea could certainly have merit. Assemblyman Goldwater conceded that, at this point in time, conceivably, an advisory board would definitely have value. Senator Townsend asked for an opinion on any advantage this type of committee might have for the Division of Financial Institutions.

L. Scott Walshaw, Commissioner, Division of Financial Institutions, Department of Business and Industry, noted he would have to agree with Senator Townsend and Assemblyman Goldwater. Mr. Walshaw commented on the process of implementation. He noted using guidelines already in place for other agencies; i.e., a credit union, would be advisable. He concurred with Assemblyman Goldwater there was a possibility of conflict due to the diverse nature of the makeup of any advisory board/committee. Mr. Walshaw declared the members of any board/committee would have to be on a voluntary basis, in order to avoid a fiscal impact. Mr. Walshaw asserted, ". . . If it is done in the manner that is provided for, in statute, with other industries, I would not be opposed."

Russell Best, Lobbyist, Home Financial Mortgage, concurred with Senator Townsend and Assemblyman Goldwater. Mr. Best noted this type of board was in service in other financial areas. He claimed this method seemed to work very well.

Senator Townsend and Assemblyman Goldwater perused methods of appointing this committee/board. Assemblyman Goldwater stated he would have no problem with Mr. Walshaw choosing members for this board. Ways of obtaining members were discussed.

Senator Townsend noted the subject of trust accounts and power of attorney would be addressed at this point. Mr. Walshaw observed these subjects would encompass sections 72 and 73. Special attention was given to the method of notifying an investor when there are problems with collection of any payments.

John Royce, Nevada Association of Mortgage Brokers, asserted this type of action would generate an enormous amount of data to be funneled into the financial institutions division. He declared this would also cause a large reporting task for those in the collection industry. Mr. Walshaw indicated he did not think this situation would create too much of a burden for the financial institutions division.

Assemblyman Goldwater stated, "There is some value to a [mortgage] broker having a trust account. The value of the industry is, it provides less stringent money than you would get from a bank." He noted all transactions would need to be managed in a very professional and upright fashion. Assemblyman Goldwater asserted an advantage was the ability to provide liquid capital easier than from a bank. He stressed the importance of accurate records.

Senator Townsend commented on the type of report needed to alert the investor and officials of any problems connected with trust accounts. He indicated the type of form to be used would need to be as uncomplicated as possible. Senator Townsend and Mr. Royce perused the sort of information needed; i.e., number of loans servicing, number of loans more than 30 days delinquent, number of loans in foreclosure, etc. Mr. Royce indicated, with too high a percentage of delinquent loans, authorities should be informed of any improper action. He stated, perhaps at this time, a disclosure should be made to investors that a certain percentage of a particular broker’s loan is in default.

Assemblyman Goldwater concurred with these remarks. He claimed a complete set of records is vital. He maintained this is necessary in order to track the actions of all individuals involved.

Senator Townsend posed questions on what records are needed to accomplish the following; to keep track of loans in default, and to see a trend. Mr. Walshaw declared these are needed to alert management to identify problems as they happen. Mr. Walshaw asserted any company who handles money belonging to another must be held accountable. He declared these companies should maintain detailed information, which would enable a review of this information. Mr. Walshaw claimed an alternative would be for a summary of information on a periodic basis. Assemblyman Goldwater determined that it would be appropriate for Mr. Walshaw to establish criteria for these reports. He declared there could be a problem determining how much information should be put into statute.

Senator Townsend, explaining to Mr. Royce, noted the committee was trying to meet the goal of this proposed legislation to make sure all information is available. He declared this would make sure all necessary information is available; i.e., to know that there are delinquent accounts, and if there is any trend.

Senator Townsend, Mr. Walshaw, Assemblyman Goldwater and Mr. Royce delved further into the type of form and what information would be needed to manage/follow the proper criteria needed to monitor this type of trust account/loan. Assemblyman Goldwater maintained in order to protect an investor, it would be best to err on the side of caution.

Senator Townsend reviewed section 75, dealing with how the power of attorney may, or may not, be used by a mortgage broker or mortgage agent. Assemblyman Goldwater asserted this section was designed to avoid the abuse of the power of attorney by balancing the need for a mortgage broker to act on behalf of his clients expeditiously. He explained these are paper-intensive transactions, sometimes syndicated with 50 to 100 people in a particular loan, and with signatures needed for each person, unless there is a power of attorney. Once again, he emphasized caution. Assemblyman Goldwater asserted it was necessary to make these regulations as useable as possible for the industry, as well as protecting the investor.

Mr. Walshaw introduced Doug Walther, Senior Deputy Attorney General, Office of the Attorney General, who noted in other legislation, there was language to convey the idea that powers of attorney should not be used to allow mortgage brokers to make judgement calls on what to do with an investor’s money. The power of attorney was to be used in the case of a regular chore that would need to be completed on behalf of an investor. Mr. Walter stated, ". . . to convey notion that powers of attorney are limited to doing these mechanical things to ease the paperwork and not to grant discretion to a broker to make material decisions about either the investment itself, or the level of risk the investor wants to take."

Assemblyman Goldwater explained a power of attorney is just the same as having a person on hand. Mr. Royce asserted relationships that many investors have with their broker is based on trust and absolute discretion and the client will sign a power of attorney, for that reason. Senator Townsend claimed there should not be a blanket power of attorney unless there is a legal document attached that says a person knows what they are giving away in terms of rights. Assemblyman Goldwater cited several instances of problems that could be associated with a power of attorney that is too broad in scope.

Mr. Royce pointed out that all powers of attorney are revocable. He asserted an appropriate disclosure should be forthcoming, before any power of attorney agreement would be made. He maintained the disclosures being used at this time, are somewhat inadequate. Mr. Royce declared the disclosure issue might need to be studied, in the hope a more appropriate disclosure would be developed, that would keep inappropriate investments from being made.

Senator Townsend stressed the importance of disclosure documents before any investment agreements are entered into. He asserted the public needs to understand, when considering these kinds of investment, that they are not insured institutions; there are no guarantees and these are investments with risk.

Mr. Royce stated an investor should always understand in what he/she is investing and understand all the risks involved. He asserted there should be a meeting of concerned officials in order to decide on improvements to disclosure documents that are presently in use. He also suggested providing educational documentation to be read by the investor.

Returning to a discussion on the power of attorney, Assemblyman Goldwater cited an example of possible use. Senator Townsend alluded to the specific use of a power of attorney. Mr. Walther pointed out, "By its terms, it is limited to a single transaction."

Assemblyman Goldwater touched on the subject of "risk." He noted there were all kinds of risk, noting with this particular area under discussion, there was "deal risk." He claimed there is nothing to be done to protect investors from deal risk; either the deal is good, or the deal is bad. Assemblyman Goldwater noted another type of risk was "institutional risk," asserting protection could be offered for this type of risk. Assemblyman Goldwater stated, " We can make sure, which is why we have the financial institutions division. We can make sure when a Nevada investor invests in a Nevada institution, they go in with every assurance that that institution is sound." Assemblyman Goldwater declared Nevada statutes grant the ability for citizens to have a power of attorney. He asserted these constituents and these citizens deserve protection from abuse in a risk transaction against exploitation of a power of attorney.

Dean Heller, Secretary of State, posed questions on institutional risk, namely how to protect citizens if there is no licensing or registration of the "security." He cited an example, noting his office offered information on background and disclosure information pertaining to an agent as well as the product, or investment. Mr. Heller reiterated, "How do you protect against an institutional risk if you do not license and you do not register the product? The product being the investment; the transaction."

Assemblyman Goldwater and Mr. Heller deliberated on what constituted the elements of protection, and how far investors can be protected. Mr. Heller noted there was legislation in place offering full disclosure. Mr. Heller maintained this legislation is not able to protect against a good or bad investment, however; does provide disclosure in making sure the consumer has all the information needed in order to make a decision.

Senator Townsend assessed Mr. Heller’s observations, offering comments on the possibility of registering, or licensing through the secretary of state’s office as a security measure. Senator Townsend then reflected on the likelihood, the potential investor could obtain help with this type of problem through the secretary of state’s office.

Mr. Heller noted his office receives calls pertaining to problems connected with mortgage brokers, however, his office has no information, or jurisdiction to help with these problems. He claimed this type of transaction, a real estate trust, was in fact, a security and reiterated his concern over the lack of ability to protect the consumer.

Senator Townsend asked Mr. Walshaw whether or not he would call a mortgage a security. Mr. Walshaw stated, "In my opinion, I think certain types of transactions, that are being done by certain licensees, under the mortgage company act, could very well be construed as a securities offering." He indicated the question would be where does one draw the line. Mr. Walshaw, citing an example, asserted if a licensed mortgage broker needed funds from several individuals in order to put together a very large construction loan, he would consider this a security. He went on, noting, "It is a fractionalized deed of trust." Mr. Walshaw observed his thought would be where does the "deal" become a security and where does it become a loan?

Senator Townsend, Assemblyman Goldwater and Mr. Heller discussed the removal, as an exemption, of subsection 21 of section 119, page 71, line 37 and line 38.

Senator Schneider and Assemblyman Goldwater discussed the advantages and disadvantages of a sliding scale of net worth, as it pertains to a bond.

Senator Townsend indicated the committee would be giving A.B. 64 further study, with the intention of producing legislation. He claimed an amendment would be forthcoming, as well. Speaking to issues referred to in this legislation, Senator Townsend noted there is an element of risk; however, no one should be defrauded. He maintained there should be protections to cover all aspects of data covered in A.B. 64. He emphasized the need for education to facilitate the knowledge needed for consumers to make intelligent choices.

Assemblyman Goldwater summarized by noting there will be other times when a "deal" goes bad. He indicated proper regulation would enable other deals, when/if they "go bad," to be such, that the industry remains clean and intact.

As there was no further business, the meeting was adjourned at 10:50 a.m.

RESPECTFULLY SUBMITTED:

Beverly Willis,

Committee Secretary

APPROVED BY:

Senator Randolph J. Townsend, Chairman

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