The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 9:00 a.m., on Wednesday, May 26, 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

Ardyss Johns, Committee Secretary

OTHERS PRESENT:

Chairman Townsend opened the hearing referring to Assembly Bill (A.B.) 431.

Chairman Townsend told the committee the Assembly had refused to concur to Amendment No. 1119 and recommended they not recede.

Chairman Townsend referred to A.B. 610 and said the Assembly had refused to concur with Amendment No. 1003.

James L. Wadhams, Lobbyist, Nevada State Board of Architecture, Interior Design and Residential Design, recommended that the committee recede. He said the first reprint satisfied the speaker, Senator Amodei, the Clark County Building Department and Vicki Gonzales, Lobbyist, Mirage Resorts, Inc., as well as the board of architecture.

Chairman Townsend opened the hearing on A.B. 673.

Samuel P. McMullen, Lobbyist, Retail Association of Nevada, told the committee the intent of A.B. 673 was to provide a minimal regulation structure for the regulation of service contracts. He said that over the last few years the National Association of Insurance Commissioners (NAIC) came up with a model bill. One, he stated, that would provide adequate consumer protections and be reasonable to business and to the providers who offer these service contracts. He claimed A.B. 673 was an industry-sponsored bill and make sure providers had the financial security to fulfill the obligation of their contracts. He distributed to the committee a copy of a summary of the second reprint of A.B. 673 (Exhibit C).

Chairman Townsend asked if the individuals referred to in the bill would be covered by the insurance guaranty association.

Alice A. Molasky-Arman, Commissioner, Division of Insurance, Department of Business and Industry, replied they would not. Chairman Townsend wanted to know what then were the consumer protections. Mr. McMullen said the major protection was in respect to financial security as spelled out in section 13 of the bill.

Chairman Townsend asked if there had been a problem in Nevada with service contracts. James Jeppson, Chief Insurance Assistant, Division of Insurance, Department of Business and Industry, replied there had not been a significant problem. He said the insurance division had reviewed contracts currently provided by insurance companies and contracts submitted by companies that want to provide those types of contracts. He stated the division had taken the position, pursuant to a federal law enacted in 1975, that a manufacturer or a retailer of a product may warrant or guarantee any products they sell. In the past when an independent third party entered the picture and wanted to sell a service agreement, he explained, that was not allowed since only an insurer could assume that risk. He declared that the State of Nevada has not interfered with retailers or the manufacturers who offer extended warranties or service agreements.

Senator O’Connell asked how this bill would impact companies like Sears, Penneys, Macys and etc. Mr. McMullen stated that those companies, through the retail association, were actually the sponsors of the bill. He walked the committee through each section of Exhibit C. Mr. McMullen said, for the record:

Senator O’Connell wanted to know how the people who sell these contracts would be made aware of this bill in order to make sure they were conforming to the requirements. Mr. McMullen stated he was working in conjunction with a service contract industry council as well as the retail association. Chairman Townsend stated the problem was that not everyone belonged to Mr. McMullen’s organization. He said there could be small businesses who are not members of the chamber of commerce and who might not be aware of new laws and therefore be caught in some kind of web.

Mr. McMullen suggested that additional dollars could be spent by the retail association for some public advertising to make sure people were alerted. Senator O’Connell said instead of advertising, some kind of direct mail would not only be more cost-effective but might be more visible to the individuals who receive it. Mr. McMullen said he would be happy to work with Senator O’Connell to come up with a way in which the public could be alerted to these new requirements.

Chairman Townsend closed the hearing on A.B. 673 and opened the hearing on A.B. 64.

L. Scott Walshaw, Commissioner, Division of Financial Institutions, Department of Business and Industry, referring to section 73, said it affected only those who handle trust accounts.

Kevin C. Powers, Committee Policy Analyst, Research Division, Legislative Counsel Bureau, suggested including in both subsections 1 and 2 of section 73, a statement that says the mortgage broker shall include in the report, any information relating to the delinquency that is required by the regulations adopted by the commissioner. He said in subsection 2, a similar provision could be added that states the commissioner could determine regulations. Chairman Townsend concurred.

Chairman Townsend referred to section 75 having to do with power of attorney and said that section had been discussed at great length. He stated there were two areas, a power of attorney that lasts for an indefinite amount of time, and one that is restricted to a time period. Within that power of attorney, he continued, there were those things that could be restricted as to being specific. He claimed A.B. 64 was proposing that every single transaction have a different power of attorney. He said testimony had been given that indicated there are many people who either travel or are busy or do not want to get involved in a turnover of a loan. However, he noted, concerns had occurred as a result of some of the problems addressed in trying to regulate the mortgage banking industry.

Chairman Townsend asked Mr. Walshaw:

Mr. Walshaw replied that he could agree with what Chairman Townsend was saying, but added, as far as the legal technical requirements of how a power of attorney is supposed to be written, Mr. Walshaw said he would have to defer to legal counsel.

Chairman Townsend stated he understood the efforts in the bill with regard to what was trying to be accomplished, but said he had a problem with having to renew a power of attorney every time a loan turned over. He wanted to know if there could be a power of attorney that would be specific. He gave as an example, "It is good for 1999. It is limited to commercial investments only and I will accept nothing less than a first position." He claimed it could be rolled over as often as one wished.

Douglas E. Walther, Senior Deputy Attorney General, Office of the Attorney General, said that legally, one could have a power of attorney that contains those types of restrictions or conditions. He claimed though that it might be a policy issue because the more flexible the power of attorney is made to be, the more potential for abuse.

Chairman Townsend asked if a power of attorney document could state that it would expire after a specific period of time and also be limited to a specific type of investment. Third, he wanted to know if it could be defined that someone would only accept a certain amount of position. Mr. Walshaw replied that it could. He explained that appointing a person with specific authority to do things on someone else’s behalf was an agency agreement. He said if someone was authorizing a rollover into a loan that may not exist yet, it is possible to grant that type of authority; but claimed the intent of section 75 was to require a conscious decision to be made at that point in time.

Chairman Townsend said he understood that but claimed his point was to prevent a burden for the investor who might want to make that conscious decision up front. He explained how that investor might want the power of attorney restricted to investments in residential and commercial only or residential and raw land only. He might be a high-risk type of investor, he continued, who wants to go from a second to a third. As long as those three issues are addressed in the power of attorney; the type of investment, the position in the investment and of course the fact that it extinguishes, then the investor is protected.

Mr. Walther stated that what Chairman Townsend suggested could be done legally.

Martin LeVasseur, State President, Nevada Association of Mortgage Brokers, stated that one of the things the committee would have to be careful of was not to create a contract when actually, a power of attorney was what was intended. He said when one begins to talk about term limits, being project specific and priority specific, one begins to get into what is called a "loan contract." He claimed if the flexibility to be able to mix those types of things together was allowed by the commissioner and the attorney general when they reviewed, it would act as disclosure. Chairman Townsend claimed that was the issue the bill was trying to accomplish.

Mr. Walther declared that though this would accomplish the purpose of disclosure, he knew from experience that people would sign the broadest type of authority. He said that if a mortgage was having problems, those people might go into another investment that, if they had been made aware of, they might have decided against. He claimed it was important that people at least know where their money is being rolled. He suggested that if Chairman Townsend’s idea were adopted, that there be some kind of written record created that would show the investor to where their money is being moved.

Chairman Townsend referring to section 108 having to do with advertising, stated that what that section needed to say was that nothing could be advertised that would conflict with any of the laws of the State of Nevada. He claimed it should also indicate that anyone in violation could be prosecuted under NRS chapter 598 for deceptive trade practice. Mr. Walther said he thought that would be sufficient.

Senator Shaffer asked how the penalties proposed in A.B. 64 compared with what was in the existing law. Mr. Walther said the administrative fines had been increased to $10,000 per violation.

Chairman Townsend wanted to know why the fine only went up to $10,000 since the last violation was in the neighborhood of $20 million. Mr. Walther pointed out that the $10,000 was per violation and that in any kind of large fraud case there would be dozens of violations.

Chairman Townsend referred to section 69 and the issue of a positive net worth in handling people’s money. He stated there should be some way to deal with that issue in a manner that would allow smaller companies to participate in this activity. If not, he claimed, this committee would have the option of either doing nothing and leaving the solvency issue with the commissioner, or going with what is in the bill which requires $250,000 net worth.

Mr. LeVasseur said the rule has always been solvency and claimed that the commissioner had always handled it well. Those who did not maintain solvency, he declared, were put out of business and those who did were allowed to stay. He stated those companies that do not handle trust accounts were not nearly as much as a threat as those that do. He maintained he was not in favor of the requirement of net worth. He said if a net worth were imposed, he would suggest that it go to a minimum amount that would be an average of what the states do and would amount to approximately $25,000. Either way, he insisted, net worth would not cure the problem of a huge company.

Chairman Townsend declared that while it would not cure the problem, it would not allow them to profit from it either. He claimed the committee had debated at great length regarding those companies that do not handle trust accounts and had considered the $25,000 level of net worth for that group.

Cindy Stephens, Past President, Sierra Nevada Association of Professional Mortgage Women, stated that if her association were forced to have a net worth, they would request the requirement to be $25,000.

Chairman Townsend stated that at that point they would be given the option of a surety bond, a letter of credit or something of that nature which, while it would not protect anyone, it would show good faith. Regarding those who handle trust accounts, he stated, the net worth of $250,000 or more would not be negotiable. He asked Mr. Walshaw if it was acceptable for those handling trust accounts to have the alternative option referred to in subsection 2 of section 69.

Mr. Walshaw said if the purpose was to require someone to put their own money at risk, then that should be the standard. Purchasing a bond as a substitute for a net worth requirement, he declared, was vastly different than putting one’s own money at risk.

Chairman Townsend recessed the meeting at 11:05 a.m. and stated the committee would reconvene upon adjournment of the Senate Floor Session to readdress the power of attorney issue.

The meeting was reconvened at 3:50 p.m. with Chairman Townsend presenting a proposal regarding sections 72 and 75 that were the results of the discussion in the committee meeting earlier in the day (Exhibit D). He read the proposed amendments to the committee. After reading subsection 3 he wanted to know why October 1, 1999 had been chosen as the implementation date rather than upon passage and approval.

Mr. Powers said that unless passage and approval was specifically stated in a request, the Legislative Counsel Bureau’s Legal Division automatically went with the default date of October 1. In addition, he noted, there had been some concern about transition time for implementing all of the new measures. Chairman Townsend suggested July 1 as the implementation date.

Mr. LeVasseur claimed that some of the powers of attorney currently in force were involved in some fairly large projects and therefore requested that the committee go with the latter date of October 1. Chairman Townsend said that was a fair request.

Chairman Townsend asked if the representatives of the Division of Financial Institutions were comfortable with the new language and their ability to make sure that things were handled in the manner that had been discussed at great length. Mr. Walther declared it would allow the division to track the powers, and how they were used, and create a record of people having disclosure and authorizing what is happening to their money. Mr. Walshaw concurred.

Sherri Negrete, Education Director, Sierra Nevada Association of Professional Mortgage Women, stated she was also in concurrence with the proposed changes.

Mr. Walshaw said that in connection with the implementation of a sliding scale bond requirement for NRS chapter 645A companies, some transitory language was needed to make the requirement coincide with the license renewal date, which would be July 1, 2000.

Mr. Powers stated that the Division of Insurance had made a similar request in that existing licensees want a phase-in period so they would not have to meet the sliding scale bond requirement until July 1, 2000. He presented that proposal to the committee (Exhibit E). He explained that new licensees would have to meet that new sliding scale bond requirement as of October 1, 1999, the effective date of the bill. Chairman Townsend concurred.

Chairman Townsend referring to section 69, paragraph (a), said there were requirements now that those who have trust accounts must file a financial statement with the Division of Financial Institutions. Mr. Walshaw stated that existing statute requires that anyone who maintains trust accounts as those described in section 175 of NRS chapter 645B must file a financial statement annually. He claimed it also requires that those who do not maintain those types of trust accounts, file a financial statement prepared by a certified public accountant.

Referring to paragraph (b) of section 69, Chairman Townsend said:

Ms. Stephens told the committee that was a great idea and a great alternative to the net-worth requirement.

Mr. Walshaw claimed that the release of that information would have to be done in a slightly different fashion than just checking a box. He said the mortgage company would have to formally authorize the division to release that information to the individual.

Mr. Powers stated the committee might want to have a requirement that if the respective investor requests a copy of the financial disclosure statement that the mortgage broker has a duty to submit a written release to the commission within a certain number of days. He added that the mortgage broker would have to pay the cost of the copy and mailing of that information.

Chairman Townsend referred to information furnished by Mr. Walshaw regarding mortgage companies with trust accounts in Nevada (Exhibit F). He said he had asked for this information because he was not sure if any of the committee understood how many companies were involved when discussing those addressed in section 69, subsection 1.

Mr. Walshaw said he had asked the staff certified public accountant to come up with some numbers that the committee could use in their policy deliberations. He read Exhibit F to the committee and explained what was meant by "investor or collection trust accounts." They handle exclusively, loan collections for private money transactions, he declared, or they handle both loan collections and the initial taking of money that is used to fund the loan. Out of 11 companies statewide that fit that description, he noted, only 5 were involved in handling both types of trust accounts. He explained that based on the current financial information, out of the 11, only 3 would not already meet some minimum standard for capitalization as described in the sliding scale shown in Exhibit F. Therefore, he stated, if this bill were implemented immediately, there would be only three companies that could not comply with the amounts show on that sliding scale.

Chairman Townsend wanted to know if the research done in compiling Exhibit F identified how close to compliance those three companies were. Mr. Walshaw replied that two of the three only handled loan collections. One out of the three does both, he added, meaning they handle private investor funding as well as loan collections.

Chairman Townsend told the committee because they had to be on the Senate Floor in just a few minutes, he wanted to address amendments to A.B. 634 and A.B. 680 to which the Assembly had not agreed.

Fred L. Hillerby, Lobbyist, Nevada State Contractors’ Board, said when the amendments to A.B. 634 had been explained to the Assembly the day before, two issues had come to light that were in conflict with A.B. 633 which had already been enrolled. He claimed an amendment was being drafted that would resolve those conflicts. He recommended not receding because it would be resolved in conference.

Robert R. Barengo, Lobbyist, A and H Insurance, recommended not receding from the amendment.

Chairman Townsend recessed the meeting at 4:25 p.m. until adjournment of the Senate Floor Session.

Chairman Townsend reconvened the meeting at 5:35 p.m. with continuing discussion on A.B. 64. He asked Mr. Walther to walk the committee through information furnished by the attorney general’s office regarding the fiscal impact of the bill.

Mr. Walther directed the committee’s attention to a letter he had written to Senator Townsend dated May 19, 1999 (Exhibit G). He said the letter attempted to explain in greater detail what the attorney general’s office perceived the fiscal impact to be to the civil division. He claimed the letter pointed out parts of the bill he believed would have an impact on the civil side of the equation. The licensing of mortgage agents would have the most impact, he said, but added that since the bill had been amended to remove that requirement then that impact has been neutralized. The remaining impacts on the civil side, he noted, related to two specific sections of the bill. He claimed sections 77 and 78 created mandatory duties on the part of the commissioner with respect to the way he investigates and deals with consumer complaints. Section 77, he declared, creates a procedure for filing consumer complaints and specifies how the commission is to deal with those. He asserted the practical effect of implementing that provision would be that there would be an increase in hearings related to consumer complaints. As a result of that increase in those formal types of hearings, he stressed, there would be an increase in requests to the attorney general’s office for representations at those hearings.

Mr. Walthers stated section 78 created a mandatory duty to impose fines, suspend or revoke licenses for the specified types of violations which deal basically with unlicensed activity, trust account violations and record keeping. That section, he continued, takes away what is currently the law, which is discretion on the part of the commission to decide, when he finds a violation, what the appropriate regulatory response should be. He said he felt that mandating that a certain regulatory response take place, would create an incentive for the licensee to not be as candid with the attorney general’s office regarding any violations.

Assemblyman David E. Goldwater, Clark County Assembly District No. 10, told the committee that the fiscal impact had been recognized by the money committee on the Assembly side. He claimed Mr. Walshaw’s division had been authorized a number of new positions. Additionally, in the attorney general’s office, he declared, a position was authorized for the civil side, but the Assembly money committee felt additional help on the criminal side was not needed.

Chairman Townsend asked Assemblyman Goldwater if he had read what had been proposed in regards to the language concerning power of attorney. Assemblyman Goldwater replied that he had, but urged the committee to vote against amending the bill using that proposed power of attorney language. Chairman Townsend said the bill wants to require a power of attorney for every single loan and claimed the proposed language gave more flexibility to the investor as to whether they want to sign one for every loan. He asked why Assemblyman Goldwater had a problem with that concept.

Assemblyman Goldwater claimed the proposed language states that in place of a power of attorney, someone could write a note stating that the note also could serve as a power of attorney. He mentioned that perhaps he had read the wrong amendment. He said the power of attorney that was in the bill said that for each loan, each time an individual’s money was at risk, the power of attorney could be used for whatever ministerial acts had to do with that loan. When moving from one loan to another, he asserted, it would be a completely new decision. He noted that with that decision and that power of attorney, it now becomes the broker’s decision rather than the investor’s decision. He stated he would need time to review the proposed amendment further since many hours of work had been done in coming up with the language in the bill.

Chairman Townsend stated that the parties who were involved with the bill had been asked to take language of subordination out of A.B. 64 and use it to help with the power of attorney issue.

Assemblyman Goldwater, referring to the proposed amendment, asked Mr. Powers when the power of attorney would expire. Mr. Powers replied that there was no expiration and Assemblyman Goldwater said, "That is my problem right there. It never expires. Ever."

Mr. Walther said an automatic expiration date had been discussed but it was felt that what would accomplish a greater protection was an express provision in the power of attorney that states it cannot be used to move money unless prior written authorization is received from the investor. He claimed the primary purpose of this provision on the power of attorney was to require a conscious decision by the investor every time the money is moved to a new place. That primary purpose would not have to be accomplished through a new power of attorney, he asserted, but could be as simple as some kind of written authorization. Since the primary protection is preserved, he declared, the group working on the amendment felt it was not necessary to have it expire at a time certain but instead could expire whenever the parties wished it to expire.

Chairman Townsend told the committee that discussion on A.B. 64 would continue tomorrow morning at 8:30 a.m. The meeting was adjourned at 6:00 p.m.

RESPECTFULLY SUBMITTED:

Ardyss Johns,

Committee Secretary

APPROVED BY:

Senator Randolph J. Townsend, Chairman

DATE: