MINUTES OF THE

SENATE Committee on Commerce and Labor

 

Seventy-First Session

May 16, 2001

 

 

The Senate Committee on Commerce and Laborwas called to order by Chairman Randolph J. Townsend, at 7:00 a.m., on Wednesday, May 16, 2001, in Room 2135 of the Legislative Building, Carson City, Nevada.  The meeting was video conferenced to the Grant Sawyer Office Building, Room 4401, Las Vegas, 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 Dean A. Rhoads

Senator Mark Amodei

Senator Raymond C. Shaffer

Senator Michael A. (Mike) Schneider

Senator Maggie Carlton

 

GUEST LEGISLATORS PRESENT:

 

Assemblywoman Marcia de Braga, Churchill, White Pine, Eureka (part), and             Lander (part) Counties Assembly District No. 35

Assemblywoman Christian E. Giunchigliani, Clark County Assembly District

            No. 9

Assemblywoman Barbara E. Buckley, Clark County Assembly District No. 8

 

STAFF MEMBERS PRESENT:

 

Scott Young, Committee Policy Analyst

Gayle Nadeau, Committee Secretary

 

OTHERS PRESENT:

 

Gary H. Wolff, Lobbyist, Nevada Highway Patrol Association

Walter R. Tarantino, Lobbyist, Nevada Highway Patrol Association

Bob Gagnier, Lobbyist, State of Nevada Employees’ Association

Martin Bibb, Lobbyist, Retired Employees of Nevada

Danny N. Coyle, Lobbyist, State of Nevada Employees’ Association/American             Federation of State, County and Municipal Employees Retiree

            Chapter 4041

James T. Richardson, Lobbyist, Nevada Faculty Alliance

David Smith, Acting Chairman, Board of the Public Employees’ Benefits Program

Kathy Naumann, Lobbyist, Teamsters Local 14

Renee Diamond, Administrator, Nevada Division of Manufactured Housing,             Department of Business and Industry

C. Joseph Guild III, Lobbyist, Manufactured Home Community Owners

Charles W. Joerg, Lobbyist, Nevada Manufactured Housing Association

Ernest K. Nielsen, Lobbyist, Washoe County Senior Law Project

Karl Braun, Nevada Association of Manufactured Home Owners

James R. Barkley, Nevada Legal Services

Gail Burks, Nevada Fair Housing

Susan Furlong Reil, Concerned Citizen

Mark J. Krueger, Deputy Attorney General, Office of The Attorney General

John P. Sande III, Lobbyist, Nevada Bankers Association

Alfredo Alonso, Lobbyist, Citibank (Nevada) NA

Kenneth T. Scruggs, Lobbyist, Household Financial Group, Limited

Robert Barengo, Lobbyist, Nevada Consumer Finance Association

Keith L. Lee, Lobbyist, Responsible Mortgage Lenders Coalition

Samuel P. McMullen, Lobbyist

 

Chairman Townsend:

I open the hearing on Assembly Bill (A.B.) 123.

 

ASSEMBLY BILL 123:  Revises provisions relating to health insurance provided             by public employees’ benefits program. (BDR 57-603)

 

Assemblywoman Marcia de Braga, Churchill, White Pine, Eureka (part), and Lander (part) Counties Assembly District No. 35:

Assembly Bill 123 is a bill that puts the self-funded insurance plan for the State of Nevada under the insurance commissioner.  It requires the Board of the Public Employees’ Benefits Program to comply with the same rules other health insurers have to comply with under state law.  It requires them to comply with certain sections of the law, and those are the sections which deal with notification coverage, authorization, the appeals process, and the claims process.

The bill also requires the insured under the self-funded program be notified of rate increases and they be given a choice of plans.  The purpose for A.B. 123 is it gives some oversight to the self-funded insurance plan.  At the present time, it is unregulated, unlike others.  I felt very strongly about the issues this bill addresses having dealt with them, personally, but not bringing the bill for personal reasons.  I have had complaints, as I am sure all of you have, too.  I think this bill is just a little extra layer of comfort and oversight for the people who are under this plan.

 

Assemblywoman Christina R. Giunchigliani, Clark County Assembly District

No. 9:

I am here in support of the legislation.  I chaired the subcommittee on this piece of legislation in the Assembly Committee on Commerce and Labor.  Assemblywoman Marcia de Braga articulately explained the piece of legislation.  I think it is much needed; we have a real problem here.  We do not want to get into another $48 million bailout.  I think it is time we explore a privatized look at it, to look at a TPA (Third-Party Administrator) or something else that manages it.  The board, unfortunately, is not trained, and we still do not provide that.  There is somewhat of an arrogance going on right now regarding, in my opinion, how we even deal with trying to fix some of the problems that we are hearing about this session.  I think this piece of legislation is a good step forward and, at least, protects those individuals who are currently covered.

 

Senator Townsend:

In looking at this years ago, I was befuddled by the issue of losing asset value in the portfolio that, basically, pays for the employee’s needs.  Was there ever any consideration of having two separate boards?  One would be a professionally staffed investment board that manages the portfolio to maximize the benefits while it maintains a safety level for the employees.  Then have the board, once they get the receipt of how much money you have to spend, determine benefit levels and who gets covered, et cetera.  In other words, you bifurcated in a manner because now you have one board that is trying to do everything.

 

I believe your point is well taken.  It is very complex, and we have never trained the board.  Many of us sit on various boards.  If they are a paid board, you are usually sent somewhere and trained on what the federal laws are, what the federal regulations are, et cetera.  Has there ever been any discussion on keeping the benefit issues separate from the investment issues?

 

Assemblywoman Giunchigliani:

Not during these hearings.  Last session, though, the committee, I think the Governor put together, explored some of that, which is not a bad idea.  I will take credit, but also blame to some extent, when I started the teacher’s trust.  I am the one who negotiated pulling that out, for example, in Clark County.  Even though we were unpaid, we modeled ourselves as an ERISA Taft-Hartley Act (Employee Retirement Income Security Act of 1974/Taft-Hartley Act).  We hired a special attorney who had drafted some of that legislation at the federal government.  We went to all the training available.  But I have to say, we have grown too large to really manage it, deal with claims and processing, and all the benefit part of it.

 

I see this is what has happened with the state.  If we want lay people to have some say-so over their benefits, I have no problem with that.  But, we are dealing with millions of dollars without the expertise.  I think that part is missing.  I do not know if this is the session to do it, but I think we need to move toward exploring that dialogue.

 

Senator Townsend:

Perhaps, in discussing with leadership, and we can do the same on our side, we could put a working group together of the Assembly and Senate, and some of the technical people to look at it.  I looked at a couple of other states and what you have, if you have the employee benefits committee, and if they are the umbrella committee, they have, in essence, a technical committee that is made up of some key people.  Some are elected, some are not elected, and most of them are technical people.  What they do is hire the portfolio manager; they make sure everything is done in an appropriate investment concept.  That is all they do, the investment side of it.  Then, every year, they allocate “this is what we took in, these were our expenses, here is what you have to deal with.”

 

Then the benefits group, which is the overriding body, figures out if they have additional benefits, if they should cut back here, or if they should cut back there.  It seems to be a cleaner way of dealing with it, and it also takes the political pressure of “we have to do something even if we do not have the money,” which is what put us in the problem we had before.

 

Senator O'Connell:

When we looked at a bill last session we did consider that, and we were discouraged from doing it, unfortunately.  I think we should have done it then.  Assemblywoman Giunchigliani, tell me how much money the state gave them during the last session, and how much we have given them during the interim.

 

Assemblywoman Giunchigliani:

The total, I believe, is $29 million.  I am not sure, though for this session, what dollar amount we have landed on.

 

Senator O'Connell:

Part of the problem is they turned this money over to the treasurer, and they get only 4 percent on it, which is, I think, a major problem.  That should never have been.  I think we really need to look at that again because of the shortage of funds, but they have not had the expertise, if you will.  We tried to set them up in a similar system to PERS (Public Employees’ Retirement System).  The PERS has been very successful, and very well managed, but we can never seem to get ahead of the game because of all of the problems that agency has experienced.

 

Senator Townsend:

I think this start, though, is an important one.  We are very sensitive to the issues of how you manage insurance companies.  This is a very important step to this, which probably needs to be taken anyway.  Putting the bill aside, let us deal with that during the interim with the insurance commission.  It will not take much, because there is a lot of interest in doing that.

 

Assemblywoman de Braga:

Your suggestion is one of the most important pieces of this issue.  Right now, the way it is structured, the diversification of the board is very important, but by the same token, as you said, the expertise is not there.  It needs to be there; the director should be reporting to the board.  Almost the reverse is true because the director is the one, in the past, who has had the expertise and the board has not, so a lot gets lost there.

 

When UICI Administrators first took this over, they inherited a terrible wreck.  By the same token, when they started to catch up, a lot of claims were paid, unnecessarily, or were duplicated.  So, a lot of money got lost in the first debacle, but also in trying to clean it up a lot more was lost.  So, there definitely needs to be the risk-management expertise and the claims and benefits expertise for the program to work like we set it up to work.

 

Senator Townsend:

Is it my understanding there is an amendment being offered by someone?  Is it a friendly amendment, a non-friendly amendment?  Do we know? Do you want to comment, or not comment?

 

Assemblywoman Giunchigliani:

I have a copy; I think Mr. Wolff wants to present it.  It was not brought before the subcommittee.  I think it is to clarify something that we did last session regarding who can leave the system.  We just do not want to jeopardize this piece of legislation, and I think they would agree.

 

Senator Townsend:

We feel strongly when someone puts his or her name on a bill, we need to process it, one way or the other, the way it is.  Then it is up to the sponsor to decide whether there will be any other amendments.  It should not be up to the committee.  There is nothing worse when you get back to your constituents on some bill and something happened; that is not fair.  I do not think anybody maliciously does it, but it has happened.  So, we have been very sensitive to that.

 

There is no big fiscal note attached to this?  It says, “Yes, yes,” but I do not have a note.

 

Senator Carlton:

It is with the original bill, Mr. Chairman.

 

Assemblywoman de Braga:

It is $7000 for filing additional forms for changes in rates.

 

Gary H. Wolff, Lobbyist, Nevada Highway Patrol Association:

I did submit an amendment (Exhibit C).  I will not take credit for the language in the amendment; Mr. Tarantino and other associates who deal very heavily in insurance law did the language.  The reason this amendment was brought forth has a little bit of history to it.  Last session Senate Bill (S.B.) 544 (of the Seventieth Session) was passed, which was a part of Senator O'Connell’s bill to allow groups of 300 people to opt out.

 

SENATE BILL 544 of the Seventieth Session:  Makes various changes concerning programs for public             employees. (BDR 23-230)

Since then, we have gone before the Legislative Commission on three attempts to try to get regulations passed, and they have been turned down by the commission all three times.  Subsequently, we have had meetings with the Governor’s office, with Keith Munro (the Governor’s general counsel), and this has been a very frustrating situation.  At the last meeting, it was suggested that perhaps we could find a bill the Legislature could clarify the language in that we have had problems in dealing with the commission on.  I believe this has been accomplished.

 

I do want to go on record.  I did, in fact, go to the bill’s sponsor, Assemblywoman de Braga.  I gave her copies of this.  We made an agreement that we in no way want to jeopardize Assembly Bill 123, which we heavily favor, but we believe this is the only bill we have going through the Legislature that we can clarify language, so we can get some regulations written and passed by the commission.  I also want to make clear, there was a rumor out that I said the Governor’s office supported this amendment.  They have neither supported nor denied the amendment, and I want to make that perfectly clear.  These amendments were written by a suggestion from the Governor’s General Counsel, Keith Munro, and Mr. Tarantino did, in fact, do this.  Hopefully, if this does not jeopardize A.B. 123, we would appreciate this amendment being attached.

 

Walter R. Tarantino, Lobbyist, Nevada Highway Patrol Association:

Mr. Wolff gave you a little bit of an overview.  Senate Bill 544 of the Seventieth Session, which was passed in the last legislative session, was presented by the Nevada Highway Patrol Association.  If you recall, at that time, the health benefits’ program was in disrepair.  It required a bailout of approximately $24 million.  Apparently, additional funds through interim finance have been apportioned to that committee.

 

At the time, the thought of the Nevada Highway Patrol Association was if their members could opt out and get better insurance, or adequate insurance for less cost, it would be a benefit to the members.  That was the genesis of the bill draft, S.B. 544 of the Seventieth Session in the last Legislative session.

 

What the Legislature did was enact Nevada Revised Statutes (NRS) 287.0479, which provided three core issues that any combination of employees could leave the plan, not less than 300.  They had to go to a plan that would provide adequate benefits.  Also, the Board of the Public Employees’ Benefits Program had to ascertain the departure of those employees, not less than 300, would not impact the plan by more than 5 percent for the remaining participants in the plan.  That was the core of the statute that was passed; from there, the Legislature empowered the Board of the Public Employee Benefit’s Program to promulgate rules and regulations to enact the statute and the spirit in the intent of the statute.  I think that is where we have had tremendous difficulty.

 

You have heard Mr. Wolff reference the fact that the proposed regulations of the Board of the Public Employees’ Benefits Program have been rejected by the Legislative Commission on three occasions.  The group departing had to take retirees in the same direct proportion as the retirees in the plan.  The statute did not say that.  In the first set of regulations, the departing group had to pay costs, 105 percent bonds.  There were numerous costs these employees would have to pay to help offset that deficit position if the Board of the Public Employees’ Benefits Program determined the plan, and subsequently went into a deficit position again, despite the fact that these people had already left.

 

The second set of regulations said either the employees can pay or the insurance company can pay.  We all know in today’s market, the brokers in the insurance plans are the ones who dictate to us.  You are not going to be able to go to a plan and say, “You are going to have to help pay for these costs.”  That was just as ludicrous as the employees paying.

 

The third set of regulations provided that neither the employee nor the insurance plan would pay for these costs, but the Board of the Public Employees’ Benefits Program could ascertain what those costs were, and they could offset the premiums that otherwise would go to those employees to purchase insurance.  The amount of premiums the people in the plan were receiving could be offset as determined by the Board of the Public Employee Benefit’s Program, including the language with a deficit.  We did not believe those regulations lived up to the spirit and the intent of the original statute.  As Mr. Wolff mentioned, there has been discussions with the Governor’s office.  There have been discussions with the public employees’ benefits program, and we were asked to look at trying to draft some regulations.  The amendment is, basically, what we have drafted as an attempt to determine what the spirit and intent of the Legislature was.  Now, obviously, only you folks can do that.

 

The reason we are presenting this amendment is we have a statute, but we do not have a mechanism for these employees to opt out and buy insurance elsewhere.  The statute passed by this Legislature in 1999 provided that employees could leave in January 2001.  Well, January 2001 has come and gone and no one has been able to leave the program, again, because there are no regulations.  Our fear is this Legislature will adjourn on June 4 of this year, and we still may not have regulations.  The next opportunity we are going to have to speak to the Legislature will be in 2003.

 

So, what we are asking in the form of this amendment is for the Legislature to declare its intent when it passed S.B. 544 of the Seventieth Session in 1999 and present some clear language so everyone, the Board of the Public Employees’ Benefits Program and the employees, can all know what the intent of the Legislature is and govern themselves accordingly.  I have tried to mirror the language in the amendment to the language in NRS 287.0479.

 

Senator O'Connell:

I want to stop you a minute, and give the committee a little more background.  I think, after you hear the proposed regulations you can understand easily why the commission turned them down.  They did not meet the intent, or even the spirit of the law.  We have a more basic problem here, even more than just allowing them to opt out of the state insurance plan.  That is, we are losing so many of our highway patrol officers because not only can they get better pay, but they can also get better benefits through some of the county plans.  So, this is a way, also, of trying to entice them to stay with the state after the state has invested in their training

 

The bill gives us an opportunity to not only see what the state is contracting for, but the actual cost to the state, which are figures that we have not been able to get very easily before because they are much more money than for what the state is buying the contract.  The employees are making up the difference that the state should be making up.  That is one of the major problems.  This amendment is intended, at least from my perspective, to help the state in two ways.  To help the employees feel they are at least valued employees from the standpoint of giving the option to have better benefits, because it is something like, on average, $200 per family.  In meeting with some of the employees in the southern Nevada area who work on the repair of the roads, as an example, they have had to drop coverage on their families because they can only afford to pay for the coverage on themselves.

This is, I think, an extremely important piece of legislation for the state because it is going to help us to be able to keep our employees whom we currently have, and it is going to help them because they will then be able to afford coverage.  This committee works on a regular basis to try and make sure the uninsured are covered, and yet, we are doing this to our own employees because we have the premium so high they cannot afford the coverage themselves.  And, the state is not giving them enough money to be able to cover their spouses, or their children.

 

Unfortunately, the committee, because of the financial situation they found themselves in, did not honor the law requiring them to put together regulations which would allow these folks to opt out of the plan.  Instead, they made it impossible.  As was stated here, the commission has been very upset about this, and we have turned them down three times with the regulations, but they are very perceptive.  It is important for a lot of different reasons, both on the state’s side and the employees’ side.  So, I would certainly be very much in favor of the addition of the amendment to Assemblywoman de Braga’s bill, if she had no problem with it.

 

Senator Carlton:

This does apply to me because my husband is a peace officer for the state.  I am not sure if he would ever get the option to be able to do this, but the one thing we realized as a family last session when I was looking at losing my health coverage through the culinary union, since I would no longer be working, was possibly using the state plan.  It was much easier and cheaper for me to just pay the self-pay through the culinary plan than to try to even get involved in the state plan.  It was very expensive, and we had no idea until then because I had always carried another coverage.  So, I concur whole-heartedly with you, Madame Vice Chairman.

 

Bob Gagnier, Lobbyist, State of Nevada Employees’ Association:

I am speaking against the amendment.  If this were to pass in this form and be implemented, then slowly over a period of time, and maybe not so slowly, the state’s self-funded health plan will become a retiree plan, because it will be so much cheaper for employees to stop subsidizing the retirees and get separate health insurance.  I think the regulations that have been rejected took that into account and tried to get groups, if they are going to leave, to at least continue to subsidize the retirees as all active employees do.

 

There are some reasons for this; 20 percent of the people in this plan are retirees.  This is the only plan that we are aware of anywhere which gives local government employees the right to join the state health plan when they retire from their governmental entity, even though they have never been in the state plan.  They can opt into the state plan, so it is no wonder we continue to have our retirees grow.  And, they have to be protected.  Pretty soon the employees are going to say, “Why should we continue to subsidize the retirees.  We can opt into a plan without retirees, and we will not have to pay that subsidization.”

 

Another failure of this proposed amendment is it provides no guarantee to employees who leave the plan, there is no bonding in it.  So, you could have a group of employees who would leave and the plan, under which they opt out for, can no longer pay benefits.  Who pays?  We have no doubt the state would be held liable and would have to pay.  The state self-funded plan would probably have to pay.

 

Mr. Gagnier:

Those are two of the primary issues that are involved.  The other is the lack of a definition of a group.  What it will mean by not having groups defined is employees can move back and forth between plans.  So, if one plan is better, let us say the state plan has better life insurance and someone has a terminal illness, they will come back into the state plan so they can get that.  There are many problems with that definition.  I also think the committee needs to understand that the benefits provided by the state under this program are not limited to health insurance.

 

However, under this amendment the group that opts out would get the entire amount from the state even though much of that amount is going for things other than health insurance, such as long-term disability.  The only disability plan that state employees have is through this plan.  They are not covered by Social Security, so we do not have Social Security disability coverage, and that provided by retirement is very limited, particularly for new employees.  Additionally, this plan provides business insurance which started a number of years ago when DRI (Desert Research Institute) lost an airplane in the Sierra Nevada mountains and the employees who were killed had no business accident insurance.  So, business accident insurance is now provided through this plan, as is life insurance of $40,000 for every active employee and $20,000 for every retiree.

 

Martin Bibb, Lobbyist, Retired Employees of Nevada:

We appreciate this committee’s experience and background on this issue.  The chairman, himself, was a member of that 1983 study group that looked at creating the self-funded program that we think brings a lot of institutional memory to this process.  And obviously, Senator O'Connell’s involvement as chairman of the commission and vice chairman of this committee also brings an awareness, we think, which is important.

 

We support Assembly Bill 123 as written, and we believe it is good because we think additional oversight is appropriate.  We also think additional legislative oversight, which was addressed somewhat in the earlier remarks, is appropriate.  After all, we are talking about a $25 million to $40 million appropriation and subsequent funding that this Legislature approved in 1999, keeping this self-funded program afloat.

 

We think the amendment, which would permit people out of the plan, is fine.  We do believe there should be some sort of offset for the lost funding relative to actives leaving, if there is cross-subsidization back to retirees.  The original intent of the plan in 1983 was that retired employees not be rated as a separate category in this group insurance pool.  Unfortunately, that has begun to happen.  We think that numbers really are the problem.

 

We know retirees are a cost driver, but we are not the only cost driver.  Medical costs, themselves, are another cost driver.  Also, as I think Senator O'Connell noted, money really is the issue.  What does it take to run the plan?  What are the actual numbers?  What are these subsidizations and cross-subsidizations?  In that process, it is not an easy pill to swallow, but we know there are states where retirees are subsidized exactly the same dollar amount as active employees.  If that were done then, perhaps, some of these cross-subsidizations would be unnecessary.

 

Mr. Bibb:

Until and unless that happens, I think it is different, and we do need to, I believe, take a look at the overall funding for the program.  I believe, also, that there was reference made to the non-state employees in this program.  The statute is pretty clear on that one.  It says they should be rated separately from active state employees and retired state employees in this plan.  They should be actuarially rated accurately and separately, and the administrative costs they bring to this plan should be wrapped up into that rate.  So, they should not be a cost driver, or have a cost impact on the plan.

 

Another note I think is kind of interesting is when you talk about the retiree group.  If you have a very young person, say in his or her 20s, a highway patrolman or perhaps a state NDOT (Nevada Department of Transportation) worker, and that person becomes permanently disabled, he or she then counts as a disability retiree, and therefore, impacts the retiree rate group in this plan.  So, there are a lot of elements, and we recognize it is complex.

 

Danny N. Coyle, Lobbyist, State of Nevada Employees’ Association/American Federation of State, County and Municipal Employees Retiree Chapter 4041:

I would like to speak in opposition to the proposed amendment by the Nevada Highway Patrol Association.  I would also like to join my remarks, entirely, with Robert Gagnier’s and, to some degree, with Mr. Bibb’s.  I still do not think this amendment really addresses the problem we have with the retirees.  There is nothing in there, I can see, that would provide for a prorated share of any group leaving to provide for the retiree issue.  There was a remark made about the local governments being able to offer a better plan, but with a few exceptions, to my knowledge, most local governments do not take care of their retirees.  They throw them to the dogs, which is why a lot of them are opting into the state’s health insurance plan.  I do not think the proposed amendment is germane to the bill that was passed and amended out of the Assembly, but if the sponsor had no objections, I guess that point is moot.

 

James T. Richardson, Lobbyist, Nevada Faculty Alliance:

We would like to go on record in support of A.B. 123.  We consider it something of a best-practices act.  It would inform participants in the plan and those who deal with the plan about changes in the plan and would furnish information to them as they were trying to both serve as vendors and be participants in the plan.

 

With that, I will move on to the issue of the amendment.  It is regrettable that 19 days before the session ends this gets visited upon you.  It is a very complicated issue, as you have said and as Senator O'Connell has so eloquently stated.  This is a very complicated and an important one for the actives and retirees who would remain in the plan if people start pulling out of the plan.

 

 

I have said on the record, Senator O'Connell has heard me say this, the University and Community College System of Nevada, itself, has considered on more than one occasion trying to leave the state health plan.  I speak on this amendment with some mixed feelings about the matter because, at some point, that could be an issue the university and community college system would be addressing.  However, I do have some pretty severe reservations about handling the matter this way.  It is true that some of you have been through, particularly Senator O'Connell, an ordeal of trying to get some regulations approved that would allow groups to leave.  There are reasons why those regulations have not been approved.  The committee has been caught in the middle, so to speak.

 

Some of us have been expressing grave concern that allowing groups to pull out and not take their retirees and to take all our significant portion of the funds the state gives the plan would, in effect, destroy the plan.  And, then you would have something visited on you in a couple of years like you had last session where you had to pump between $50 million and $60 million into the plan just to keep it afloat.  Some of us have said if groups leave the plan, if the plan collapsed, if whatever you do for the teamsters becomes a precedent for any other group wanting to leave and there is a financial problem with a group leaving, there is absolutely no question of moral and legal responsibility, I think.  The state would have to take those people back.

 

Mr. Richardson:

And, how do you do it?  Who pays for it?  So, those regulations that have been rejected three times did include standard kind of bonding provisions, which I have been puzzled throughout this session as to why the teamsters think they are a problem, because the teamsters have some resources.  So, I do not understand why they do not just put up the bond and take their group out and let it go at that.  But, that is another issue.

 

We have asked that those regulations include adequate bonding provisions to protect those of us left in the plan.  That, I think, is a fairly standard practice in situations like this.  We have also been concerned about just how much money would leave the plan for each active or retiree that left.  The teamsters cannot, apparently, take retirees we found out this session.  But, how much money do they get from the state for people who leave is a good question.  Mr. Gagnier has made the point very well that the funds furnished by the state do a lot of things, including furnish other kinds of insurance coverage that is very vital to state employees.  And, that money subsidizes retirees and dependent coverage as is well known.

 

It is a public policy of this state that the state pumps money into the plan using the count of actives as the way to do it.  But, part of that money subsidizes retirees and dependents. So, how does that get worked out?

 

Mr. Richardson:

I would also go back to the definitional problem that Mr. Gagnier raised.  What is a group and how can it leave?  When this discussion first started, most of us thought we were talking about one particular agency wanting to leave the state health plan, which was the highway patrol.  I do not have a problem with that; nobody has a problem, I think, as long as we can adequately protect those who remain in the plan.  However, the ground has shifted a little.  Now we are told that groups leaving want to be able to recruit people in every state agency.  That is an administrative nightmare.  In other words, some of the insurance coverage Mr. Gagnier was discussing would retain those with the state health plan and, yet, get their health insurance from the teamsters or from some other plan.

 

There really should be a fiscal note attached to this bill to cover that, and I do not know how you would estimate it, but all the people I have talked to just shake their heads and say they do not know how they could do it under the current personnel system with the computer software we have.  I am not sure how to respond.  I also would have to say that I think there is a problem in writing regulations into statute.  You have a procedure set up; it has not worked very well as Senator O'Connell has stated.  That does not mean it could not work.  It does not mean, for instance, letters of intent could not be sent to the board saying we want regulations written following certain guidelines.

 

If you do something like that, however, as a way to resolve this problem, I would certainly urge you keep in consideration the bonding requirements I talked about.  The notions of how the state’s contribution to the plan would be distributed and how much would actually go with the person leaving the plan, I think the letter of intent should reflect that retirees be taken out in proportion.  Although, I will admit, quickly, before anybody shoots me in the back, the statute passed 2 years ago does not absolutely require that, so that might just be something on my wish list.

 

Mr. Richardson:

The issue is very complicated, and I am not sure 19 days before the session ends, asking this committee to amend another bill with something that is not particularly germane with regulations written by the group who would benefit from those regulations is a bit problematic in terms of the policy perspective.  I say that with all due respect.  I do not think this amendment does the job, and I am not sure putting it on this bill will do anything but kill this bill as it tries to work its way through the Legislature in these closing days.

 

I would pledge, on the record, if there is any interest in this, and I did not see this amendment until just yesterday, but I would pledge to talk to people who want to try to work on a decent regulation and to try to get the board to approve a set of regulations that, perhaps, are less onerous than the ones that have been rejected.  We need some movement on this issue.

 

Senator O'Connell:

Mr. Chairman, Mr. Richardson has certainly identified all of the pieces to this very complex problem.  I think we have something going on here that, shame on us as a state, has not really been recognized and dealt with, and that is our employees, and not just with the highway patrol, but all state employees.

 

The state for some reason, and when it did this taking on of county employees, as well as state employees, into this system and not having been paid, but only come into the system at the time when they are more vulnerable as far as the use of the system goes.  We have to address this problem.  It is at the critical stage, now.  I do not care if we are 19 days away from the close of the session or not, it is something we thought we were taking care of by giving them the option to opt out.  Unfortunately, that did not materialize.  So, I just do not think we can close our eyes to the situation any longer.  We have employees to protect, and that is our responsibility.

 

We should have addressed it when the state found themselves in a crisis to begin with instead of bandaging the problem.  We put the problem off and now the problem has only gotten bigger, as all problems tend to do when you do not address them right away.  I think the committee has a challenge, but I do not think it is something we can turn our back on.  I think it is every bit as important as the power problem.

 

Senator Townsend:

Is anybody here knowledgeable on who is in this plan?

 

David Smith, Acting Chairman, Board of the Public Employees’ Benefits Program:

I am not quite sure of all the public, non-state groups; I know Clark County Health District is one.

 

Senator Townsend:

You mean Clark County Health District, but not Clark County employees?

 

Mr. Smith:

No.  In fact, we have been receiving calls this week from the Clark County teachers’ trust fund.  From what I understand, they are no longer going to cover the retirees, and the retirees are calling to see if they can join our plan.  I do not know if the procedures allow for the retirees to be covered under the plan since they did not join immediately following their retirement.  It is something we are looking into now.

 

Senator Townsend:

Is it fair to say, I have to be careful on how I choose my words, when this plan originally was put together and opportunities for other groups were made available that, somehow, the state plan became a catchall for a number of organizations that were not part of the state plan?  This became an opportunity for other groups, which, for whatever reason, did not like the plan that was offered to them?

 

Mr. Smith:

In dealing with the public employees in the entire state and the different counties, some counties are small enough that their employees would not be able to negotiate good benefits for the areas they are in because of the small pool.  Allowing those entities to join our plan and get the benefit of the strength and the numbers in our plan works well for them.  Rating them separately was the fail-safe that the Legislature put in place so if that group happened to be far more expensive then their rate would be based on their experience, and it would not impact the members of the state body.

 

 

 

Senator Townsend:

Has that proved to be adequate, or do you think there is a certain bleeding over by the independent rating of groups?

 

Mr. Smith:

Every day the experience in our plan will change, based on the claims that come in and the health of the participants.  Each year, the actuary will take those groups and determine their experience and then apply the future rate based on that, so I think it is all going to even out in the end when we are looking at these non-state participants in the plan.  One year they may be more expensive, then the next year they can actually save the plan money because we base the rate on the experience for the previous year.

 

As far as the retirees go, that is a different issue and always creates a potential for greater liability because, in the last year of somebody’s life, they are going to incur the greatest amount of medical costs.  Thank goodness we have Medicare to cover a portion of that groups’ medical expenses.

 

Senator O'Connell:

Mr. Smith, how many people do you currently have in the plan?

 

Mr. Smith:

Including dependents, retirees and other non-state employees, we have approximately 56,000 lives covered.

 

Senator O'Connell:

I wonder if you could provide the committee with the current rates?  I know Mr. Bibb talked about the retirees receiving quite a large jump.  I wonder if you could give us the numbers as far as what the state is paying for each of those groups?  And, what the cost is in each of those groups to the employee?

 

Mr. Smith:

I will ask the staff to provide that to you today.

 

Senator O'Connell:

I think that would be helpful to us.  I do not know how we straighten out this problem.  It is a terrible problem, but we have to look at whether we are going to take care of children, now, or in jails, later.  We have a situation where we cannot turn our back on our retirees, and we cannot turn our back on the young families who need this coverage.  And, we have to think about the employees who we are losing just due to this “dumb” benefit package.

 

I know you and the board are doing the very best that you can do, and I think when we open the hearing on this, and Senator Townsend mentioned that you need more help, we have got to get you that help.  I do not know how we are going to do that, but we are going to do it.

 

Mr. Smith:

I appreciate your comments, and I would just like to say for the record:

 

All of the members of the board, in my experience in working with them for the last 19 or 20 months, are committed to seeing this plan work for all the employees, including the retirees.  We do not have a profit to make for the plan.  We want to make sure everybody is covered.  We also want to make sure that the plan does not end up in the position it was 2 years ago.  On the board, we have various members representative of not only state employees, but also people from the university system, the public sector, and two members from the private sector who have extensive experience in managing benefits.  There are multiple issues that we have been dealing with over the last 18 months and, I think, it takes time to turn this ship.  I think we are on the right course and I think we are going to get there, and hopefully, sooner rather than later.

 

Senator O'Connell

Mr. Chairman, I wonder if we can look to some of the experts who are here on different issues right now and see it they could take a look at the figures and try and analyze them for us?  And, also, give us some of the benefit of their experience in identifying the direction for the committee to get started in dealing with this issue.

 

Senator Townsend:

You bet.

 

Senator O'Connell:

Let us see what we can do to maybe help you, Mr. Smith.  And, I know that you and the board are doing everything.  The point that you have other jobs and other interests when you just go to a meeting once a month, or whenever you hold your meetings, you do not always have the background you need to look at this.

 

Senator Carlton:

This is a little off the track, but I heard that state employees are not allowed to use the Nevada Checkup program, which is a very good program that could supplement some of the costs of benefits for some of the state employees.  Not necessarily right now, but if anyone here can give me any particular reason why, legally, our state employees cannot access this program for their children, I would like an answer to that, if possible.

 

Kathy Naumann, Lobbyist, Teamsters Local 14:

I have heard all this gloom and doom, and I wanted to offer one piece of information that I think is a little bit of bright light.  Teamsters Local 14 is in negotiation with Nye County Employees’ Association. The association is interested in getting a good value for their health insurance dollars.  We expect this affiliation to happen, and for all those employees, and forever more the retirees, to move into the Teamsters health and welfare plan.  I think we are part of the solution, and eventually, you will see through natural choice, this starts to take care of itself if we tend it carefully and try to do the best we can with the problems we see.

 

Senator Townsend:

I close the hearing on A.B. 123 and open the hearing on A.B. 619.

 

ASSEMBLY BILL 619:  Revises certain provisions relating to mobile home parks.             (BDR 10-1090)

 

Renee Diamond, Administrator, Nevada Division of Manufactured Housing, Department of Business and Industry:

In 1998, it was my pleasure to host meetings between the Nevada Manufactured Homeowners’ Association, the Nevada Mobile Home Community Owners’ Association, and some interested legislators, which resulted in the groundbreaking consensus legislation on issues of concern to all parties.  During the year 2000, the committee was reassembled.  We held six meetings in Las Vegas at the division’s office and one in Reno.

 

 

The byproduct of these meetings goes beyond the legislation, as new dialogue was established between community owners and residents who lease space.  Many issues are now resolved by telephone and meetings between the groups.  Board members of each group have addressed each other’s boards and membership, and attended each other’s meetings.

 

There is one error in A.B. 619 in the last section on page 11, section 17, which, I believe, Mr. Guild will speak about.  Currently, as it is printed in the first reprint, there are some errors on lines 11 through 14.  It addresses licensed real estate brokers; the intent of the committee was never to have park owners be registered as dealers, but only to act as dealers concerning lien homes that they receive through the lien process.

 

C. Joseph Guild III, Lobbyist, Manufactured Home Community Owners:

We are here to support A.B. 619, which as Ms. Diamond said, is the result of a cooperative consensus-building arrangement.  (Mr. Guild highlighted the major provisions of the bill for the committee.)

 

Charles W. Joerg, Lobbyist, Nevada Manufactured Housing Association:

With the amendment Mr. Guild just stated, we support the bill.  We are primarily interested in section 17, which affects dealers.  As long as they are appropriately licensed and regulated by the division, we have no problem with it.

 

Ernest K. Nielsen, Lobbyist, Washoe County Senior Law Project:

We support this bill and the amendment Mr. Guild has put forward.  I might add, Nevada Legal Services will be submitting another amendment to this bill.  We also support that amendment.

 

Karl Braun, Nevada Association of Manufactured Home Owners:

This is a consensus bill that we drafted working with the community’s owners.  Our association is in favor of the bill and all amendments presented, so far.

 

James R. Barkley, Nevada Legal Services:

Nevada Legal Services is a statewide law firm that provides free legal assistance to low-income Nevadans.  I worked for Nevada Legal Services for about 6 years.  A substantial portion of my practice involves representing tenants in mobile home parks.  I have litigated numerous cases involving chapter 118B of NRS.  Almost all of these cases have involved an interpretation or application of chapter 118B of NRS.  Assemblywoman Buckley asked our office whether chapter 118B of NRS should be clarified in reference to the termination provisions, NRS 118B.190, and 118B.200, which I have attached to my proposed amendment (Exhibit D).

 

An area of recurring confusion deals with the interplay of these two statutory sections.  We think the original intent was for these two sections to be used in conjunction with each other in a two-step process.  Unfortunately, many park owners, attorneys, and even courts use these sections interchangeably, or inconsistently.  We are hoping our amendment would clarify the distinct function of each section.

 

Nevada Revised Statute 118B.190 sets forth the notice period required for various grounds of termination and NRS 118B.200 sets forth the substantive grounds a landlord may use to terminate a mobile home park tenancy.  The problem that arises is some of the grounds set forth in NRS 118B.200 contain an additional written notice requirement that is often confused with the written notice requirement of NRS 118B.190.  The substantive grounds under NRS 118B.200 that contain the additional written notice requirement are generally grounds that can be corrected, or remedied by the tenant.  Notices via NRS 118B.200 are more along the lines of compliance notices as opposed to termination notices.  We are respectfully requesting the Legislature eliminate the existing ambiguity and adopt the proposed amendment.

 

Senator O'Connell:

Does everyone now have copies of the amendment (Exhibit D), and do you have any problem with it?

 

Mr. Guild:

I do have copies, and I have a great problem with it.  The bill you have before you, A.B. 619, as Ms. Diamond said, is a result of eight interim meetings between the tenants and the landlord group.  This is the very first time I have ever heard this amendment.  I talked to Assemblywoman Buckley about an hour ago and reminded her that this hearing on this bill, which she has been very interested in, was this morning.  She and I spent about 2 hours when the bill was in the Assembly creating the amendments, which resulted in this first reprint, and we never talked about this issue.  I think it is untimely for this bill.

 

 

I talked to Mr. Barkley in the interim.  I have had cases against him, and I have never heard from him that his group was going to propose this kind of legislation, either on its own or in amendment form to anything else.  I am opposed to it for those reasons.  Also, I disagree with his characterization of the notices and the burden it supposedly places on tenants.  If I calculate correctly, his proposed amendment would add a considerable amount of time to a situation where a tenant has failed to pay rent.

 

Senator O'Connell:

Then you are lucky if the judge makes them pay.  They usually just make them move at that length of time, but you have lost the rent for the 2 months in the meantime.

 

Mr. Guild:

I am not opposed to discussing this during the interim.  It sounds like a topic that, perhaps, could be the subject of discussions.  We have already been talking to the tenants’ group and Ms. Diamond, and we are going to continue our consensus-building discussions during the interim.  This is a proper thing to discuss in the interim, but at this late date, I think it is very untimely.

 

Senator Townsend:

Was this presented in the Assembly?

 

Mr. Barkley:

No.

 

Senator Townsend:

It just did not come onto your screen that there was a bill?

 

Mr. Barkley:

No, this was something that was recently decided upon by some legal services providers.  If I may respond to Mr. Guild, I am not trying to sneak in the back door with this amendment.  For whatever reason, Nevada Legal Services was not invited to participate in the consensus process.  I might ask the amendment be considered on its own merits, regardless of what might have happened in terms of pre-amendment negotiations.

 

 

 

Senator Townsend:

We just want to make sure our colleagues, since it is their bill, had an opportunity to review this amendment.

 

Mr. Barkley:

We received a letter from Assemblywoman Buckley asking if it would be necessary to clarify the termination process.  We have felt over the years that there does need to be clarification.  It is not a terribly complicated issue, and that is why I do not think the time element is that critical.

 

Senator Townsend:

It is critical only to the guy who has a mortgage on the property.

 

Mr. Barkley:

I disagree, somewhat, with Mr. Guild’s math and tallying of time.  The way it works now is you get a 10-day notice to pay rent.  If you do not pay rent within those 10 days, your defenses are out the window, assuming you do not have any other defenses other than the nonpayment.  The following 10-day notice is a 10-day notice to vacate.  If you do not vacate, then the park owner can go forward with a complaint, which can be shortened to 5 days by statute.  It also provides that a writ of restitution may be issued.  If an attorney was to pay close attention to the law, I know in Washoe County, they could probably get a writ hearing within a week, or so.  The 60 days is more like 30 days.

 

The park owner has an additional remedy.  They can file a lien for late payment of rent, which I think, is probably a more effective remedy, anyway.  It is not going to be a matter of 60 days out and then just being out of the money.  Because it is a mobile home, it is not like a residential tenancy where you can just have somebody out the door.  The law recognizes that a mobile home park is an investment by the tenant as they have a vested interest in that home, and it should not be a quick 10 days and you are out.

 

Mr. Joerg:

I am not going to speak to the substance of the amendment; I think Mr. Guild has adequately done that.  I just want to mention the process.  The agreement has always been for the last 3 or 4 years, since this consensus-building process was started, that nothing would come forward in the consensus bill that did not have a consensus.  I would object to it, simply, as a matter of process without addressing the issue, itself.

Mr. Nielsen:

Might I suggest a potential solution?  If you would send this to your legal counsel to see whether this, in fact, would be simply a clarification or whether it would be an actual change in law, perhaps that might be a way to clarify the situation.

 

Senator Townsend:

I think the issue is a very simple one, and Mr. Joerg articulated it very well.  If this is what was agreed upon then we will pass that, and we will take this issue up as a separate issue.  I think that is only fair.  In all fairness, it is odd you would come to this committee as opposed to going to the Assembly committee for this clarification.  The majority leader in the other side is an attorney with substantial expertise in this arena, and one of which we respect.  To bring it over here, it does not meet the appropriateness test, and, I am being kind.

 

Mr. Guild, does the amendment you have replace the language in section 17 with the proposed language that you gave to us (Exhibit E)?

 

Mr. Guild:

Yes, if what you just held up is an e-mail from Jan Needham (Jan K. Needham, Principal Deputy Legislative Counsel) to Scott Young (Committee Policy Analyst)?

 

Senator Townsend:

Yes.

 

Senator O'Connell moved tO amend and do pass A.B. 619 with the amendment proposed by Mr. Guild.

 

Senator Schneider seconded the motion.

 

The motion carried unanimously.

 

*****

 

Senator Townsend:

I open the hearing on A.B. 447.

 

 

ASSEMBLY BILL 447:  Prohibits unfair lending practices for home loans. (BDR 52-440)

 

Senator O'Connell:

I need to declare for the record on A.B. 447 that I have a son who is a mortgage banker.

 

Senator Townsend:

And, please note for the record that the bank on which I am a board member and a shareholder also owns a mortgage company.  But, the bill deals with all mortgage companies equally.

 

Assemblywoman Barbara E. Buckley, Clark County Assembly District No. 8:

Predatory lending is the dark side of the lending business.  Probably the best description of predatory lending I came across I got from Citibank’s Website (Exhibit F).  The only thing worse than giving a person a really bad loan so you can steal his or her house is also trapping someone in a really bad loan.

 

Let me just spend a minute and talk about some of these practices.  They involve, one, equity skimming.  Basically, you have someone who either owns their house outright, or has a very low balance on their mortgage.  You go to them, it could be door to door, a cold-call sale, and you say, “Hey, you have equity.  Do you not want to combine your car loan with this loan?  We can do better for you.”

 

Many times they are senior citizens; they are on fixed incomes.  What they do, for example, and I saw this in the past year and a half, my work is an inspiration for a lot of the things that I do at the Legislature, when I had an 80-year-old woman come in.  She was on Social Security and a small pension; her mortgage payment was $800 a month, and she was told she could get a lower payment.  She refinanced; she paid $20,000 in fees, costs and points for the loan and ended up with an interest rate higher than what she was paying.

 

She could not make the payments, and she came into my office because she was being foreclosed on.  I looked at the papers.  I looked at her numbers.  I looked at her income, and this deal did not pencil.  The only reason it was loaned to her was to steal her home, plain and simple.  The good guys, the big banks, they do not do this.  They use traditional underwriting criteria; she never would have qualified.  Her income was not enough to support the higher mortgage.  It was equity skimming.  It is becoming more and more prevalent, and Assembly Bill 447 seeks to address it.

 

Assemblywoman Buckley:

The other issue that predatory lending involves is flipping, which is multiple flips of the loan.  One minute you are at a 7¼ percent rate, and the next minute you are refinanced.  Sometimes it can be the same broker, same lender.  Sometimes it is a broker arranging different lenders.  And, they are constantly refinancing the home.

 

I saw another case where some people paid a huge prepayment penalty on their loan.  When I was looking at all the numbers trying to figure out how they were losing their home, they had financed the same home five times within 7 years.  The daughter of the gentleman I spoke to came in when she found out he did it unbeknownst to her.  Again, it never should have been done, but it was a way to build up the points and the fees such that they could take the home away.

 

The other issue is of credit insurance.  Financing credit insurance is pretty much a bad deal, from a numbers point of view.  You can pay X amount for credit insurance when you finance it over 30 years with your home mortgage, it is a very high fee.  Assembly Bill 447 in its first reprint attempted to deal with some of these practices.  We amended it due to the industry’s complaints that we not pull the good guys into our snare.  Since the first reprint, I had further meetings with the industry, and we have agreed on a few further amendments to try and not bring in the good guys.  (Assemblywoman Buckley then went through section 11 of the bill and then her amendments [Exhibit G] to A.B. 447.)

 

Gail Burks, Nevada Fair Housing:

I would like to address the bill in terms of how it will help the credit market versus hurt the credit market.  As Assemblywoman Buckley has said, predatory lending is different from sub-prime lending.  In the sub-prime lending market what we have are people who have what we call “B” credit.  They have some 30-day late payments.  The “C” credit has some 60- or 90-day late payments.  With “D” credit, we really have someone who has filed bankruptcy, and is a credit risk.  Lenders make that determination because they have to sell it on the secondary market.

 

Across the country almost more than 15 states have addressed the issue of predatory lending.  The city of Chicago addressed the issue based on hearings that were held by the Federal Reserve and HUD U.S. (Department of Housing and Urban Development).  There is no intent to stop sub-prime lending.  We need it, people run into problems and they have to reestablish.  In 1999, the study found a big jump in sub-prime lending, but also at the same time a jump in predatory lending.  We had more than $160 billion, which is 12.5 percent of the mortgage market in sub-prime loans, but we also had $170 billion in predatory loans.

 

According to the hearings, age groups 55 and up are affected 35 percent of the time; age groups 45 to 54 are affected 31 percent of the time.  This bill gets at those groups and the practices that occur most often.  The study also found that most of the people affected are approached by brokers in situations where they are not regulated.  For example, there are only six states in the country that require competency tests for brokers.  Anyone could put up a shingle, open up a shop as a broker, and get all kinds of information on a consumer.  They can lure them into some of the things we are talking about today.  There was a lot of neighborhood targeting revealed, as well as concealment in fees and costs.  The provisions of the bill get at all of those things.

 

One of the effects of not regulating predatory lending is we drive out the good lenders, and the cost of credit for all of us goes up.  With that “Freddie Mac” (Federal Home Loan Mortgage Corporation), who is huge purchaser on the secondary market, as well as “Fannie Mae” (Federal National Mortgage Association), have both agreed not to buy predatory loans.  They still purchase sub-prime, but they do not purchase predatory loans.

 

On January 17, to give an idea of what the problem is like in Nevada, Freddie Mac rolled out a program called “Don’t Borrow Trouble,” in conjunction with some of the lenders in the community, as well as our organization.  On the first day of the program we had more than 20 calls from people who were victims of predatory loans.  The program gives them money to prevent foreclosure, but it also tries to stop them from making decisions that would not be in their best interest.  Even with this educational program it is not possible to get at all of the bad things that are happening to people.

 

We support the bill; we support the amendments.  Like Assemblywoman Buckley, we wish some of the changes had not been made, but we think it is a good start to getting at what we need to get at in the community.  I would also like to say on the commission, if it is established, we would request when it is put together, we not just have industry people on the commission, and if someone has a complaint of predatory lending or if their status has been revoked by HUD as an FHA (Federal Housing Administration) they be prevented from serving on that commission.

 

Senator Townsend:

Assemblywoman Buckley, section 15 is almost identical to the language that was in A.B. 135, which is the insurance fraud bill.  Senator James and a number of members of the Senate were very concerned about that, and they have subsequently amended it on the floor.  Is that something I need to go to Senator James and deal with him on?  He and Senator Raggio, for whatever reasons, had deep concerns about special subpoena privileges as opposed to the normal subpoena privileges the attorney general has available to her.

 

Assemblywoman Buckley:

It is certainly agreeable with me if you want to save the floor time and just make this portion of the bill consistent with the other Senate changes.  We have the right to do subpoena in this building; we do not exercise it.  I do not think it would be abused, but I do not have any heartburn with just making it consistent with the rest.  The best hope for the consumer on this is the individual defense, and stopping that person from losing their home.  That is what I really want to accomplish, not some big judgments or subpoenas.

 

Mr. Nielsen:

We vigorously support this bill.  A couple years ago, an elderly woman walked into our office.  She was alarmed because her mortgage payments had just increased, unexpectedly.  Her husband had died a few years before and her income was reduced, so when this out-of-state mortgage company contacted her, out of the blue offering her refinancing and lower payments, she jumped at the chance.  Her husband had taken care of most of the business.  She was not a sophisticated borrower, so she entered this contract.  It did have reduced payments at first, but the contract had a schedule of increased interest as time went on.  By the time 6 months occurred her interest had increased, and her payments were nearly at the level of the payments she was paying before.  By the time she got to our office the payments were actually more than her original mortgage payments.

 

Before the refinancing, she had about $20,000 in equity in this home.  After the refinancing, her equity was less than $5000.  By the time we filed our lawsuit, the mortgage company was out of business, the principals were scattered, ultimately they are in jail, and the mortgage paper had been sold several times.  So, our remedy was really restricted.  We did settle with the existing mortgage company, but she really lost all of the benefit that she had prior to the mortgage.

 

Senator Townsend:

I know you have a great deal of outreach; you go to senior centers and provide seminars on what to look for and how to protect yourself.  How are we doing with that?  Are there, currently, by the way this is independent from the value of the bill, I am just saying it is always important the consumer has an idea that perhaps they ought to make a call before they sign anything, how are we doing in that arena relative to the issues brought forward here?

 

Assemblywoman Buckley:

I think we are losing the war.  I do not know if we will ever be able to win it, and I do not mean to be too pessimistic.  The legal services that I work for and throughout the state generally do not do that kind of front-end education, because if we did then we would have no resources to help the person losing their home.

 

The Washoe County Senior Law Project does more of that, and Gail Burks’ program and this new initiative that was funded, “Don’t Borrow Trouble,” is doing a great job of it.  I think it is the first effort in the state, ever, to try to stop it from happening in the first place.  Also, one of Mr. John Vergiels’ clients, Leo Davenport, recently touched base with Gail Burks as a result of this bill to talk more about education, from the brokers’ side, because they are good spotters of some of these predatory practices.

 

I am very pleased at those efforts and think those will yield something; but the hardest part is mostly they prey on the elderly who get confused.  Families are already trying to say, “Hey, I do not want to take over your financial business, do not think I am exerting too much control, but call me.”  The elderly get embarrassed; they do not want to bother their children.  I do not know how we ever overcome that with education.

 

Senator Townsend:

It does not mean this does not have guides, but given the growing number of senior population in our state, we should never stop public education on these issues.  If you save 10 people a year from a problem then public education is worth it.

 

Susan Furlong Reil, Concerned Citizen:

Although I am an employee at the Legislative Counsel Bureau, my testimony is provided as a private citizen.  I am not here to support or oppose A.B. 447.  I received permission from Mr. Lorne J. Malkiewich (Director, Legislative Counsel Bureau) and Mr. Robert E. Erickson (Director, Research Division, Legislative Counsel Bureau) to share with you my mother’s experience in refinancing her home last year.  My mother passed away in January of this year, so she is not able to share that with you.  I am appearing here today at the request of the attorney general.

 

I would like to give you a little background information, so you will understand how my mom came to refinance her loan.  In January 1999, she was diagnosed with cancer.  She was 63 years old at the time.  My father had passed away in 1994.  He was a retired state employee, so she had insurance coverage through the state self-funded plan, but still her portion was substantial, as anyone who has been through that knows how expensive cancer treatments are.  Rather than pay the doctors 1 month at a time, she put it on her credit cards.  A couple of years later, she went through her treatment and she was doing well.

 

Last April, she went to her oncologist and he said he did not see any signs that the cancer had recurred.  She was feeling good, and she thought everything was going well.  On April 10, she received a telephone call from a mortgage broker asking if she would like to refinance her house.  At the time, she had an equity line of credit through her bank.  The interest rate was 10.75 percent.  At the time, we did not know Mom was sick, and what she had was a brain tumor, which really impacted her ability to appreciate financial decisions, in particular.

 

The mortgage broker offered her a rate of 10.74 percent.  She thought she would be saving a lot of money just with the difference.  With her line of credit, she had life insurance she had obtained prior to being diagnosed with cancer.  She did not want to give up this life insurance because she did have a history of cancer.  The representative, according to her notes, and I have them here, told her she could get credit life insurance with the loan and her health history did not matter.  On April 17, she went to her oncologist and he said she was fine.  On April 25, she signed the loan application.  Four days later, on April 29, I got a call from her hair dresser saying my mom had been in that day and had I talked to her, because she thought something was wrong.

 

I went to dinner with her that night, and it was pretty obvious that, yes, something was wrong.  She had not had a stroke, but she was having trouble talking.  On Monday, the loan was funded, payments went out, and I was in the process of making appointments for her to find out what is wrong.  The day she found out she had a malignant brain tumor she got a notice from the finance company that her insurance had been declined.  She was really upset about that; she felt she had given away something, especially after she found out the cancer had metastasized.  She was upset about it and asked me what to do.  I advised her to talk to her attorney and go to the Division of Insurance, and see if there was anything she could do.  Everyone pretty much told her the same thing, and that was it is your word against that of the representative.

 

She had the tumor removed, and we thought she was going to have a little more time.  It grew back.  She continued to be very upset, and it just ate away at her over the course of the summer.  Finally, my sister said, “Well, give me the loan file, and I will take it to an attorney in the Bay Area who is a friend of mine.”  And, by the way, her family did not know she had refinanced.  She, too, did not want to bother her children; she was independent, and she was embarrassed to say there were certain things she did not understand.

 

Once the attorney looked at her loan file, this is what we discovered.  On a mortgage loan of $130, 853 she had paid a loan origination fee of 5 percent, or $6500, a loan discount fee of 5 percent, same amount, $6500.  This was to lock in the rate at 10.74 percent, and that was a year ago.  This translates to an APR (annual percentage rate) of 12.205 percent for this transaction, and a credit insurance premium of $6300.  She paid more than $20,000 in fees for this loan, and that was included in the loan, so the mortgage company did get that upfront.  They did apply the insurance premium back toward the principal of the loan.

 

Mark J. Krueger, Deputy Attorney General, Office of The Attorney General:

I am here in support of A.B. 447.

 

 

 

 

Senator O'Connell:

Assemblywoman Buckley, in section 12, you mentioned some other states were doing similar things addressing this issue.  I wondered if the misdemeanor was a strong enough penalty?  Could you tell me how you landed on that?

 

Assemblywoman Buckley:

That is the exact statutory scheme under chapter 598 of NRS should you choose to increase that, or keep it the same, whatever is the committee’s pleasure.  Other states are using a wide variety of penalties, and again, my goal is to make sure the consumer has a private right of action to stop it.

 

Senator O'Connell:

My concern was, in reading this, if somebody finds themselves in this position, can they then go through the courts?  I mean, if they are financially strapped already, is that not going to put them in an awkward position and, perhaps, intimidate them even more if they have to face the courts?

 

Assemblywoman Buckley:

In the ideal world for anyone who does not have the means where there are these predatory practices, we would have the Attorney General’s office step forward to provide the relief.  And, in terms of resources, right now, that is not going to happen.  So, my goal is, with those cases I saw in the past 2 years, I found lawyers willing to take them for free because they are so outraged.  In the long run, at least, we have a remedy for these people so the other family can rally around, and through pro bono and senior law projects, we have someone who can help.

 

Senator Townsend:

Senator O’Connell came across a similar issue where a lady, a senior, who lost not only her husband, but lost her son in an accident and, for various reasons, on a fine in a homeowners’ association took this lady’s home.  I do not know whether the judge, eventually, was able to stop it, but some of this foreclosure stuff has gone beyond the extreme.  And, I presume, a judge has to look at the law as opposed to the absurdity of the position in front of the judge relative to the law.

 

Senator O'Connell:

That, to me, was the importance of having the homeowners’ associations included in the homestead situation, so they had some protection.

Assemblywoman Buckley:

Unfortunately, it is difficult sometimes in statute to just say, “Thou shalt do no wrong.”  Because, then you are snaring in the people who may be doing something right.  While the ideal world is not to have someone vindicate themselves by going to court when it is expensive.  At least, right now, it is providing them some relief.  Otherwise, they have nothing.

 

I think this bill is a good step forward.  What we have attempted to do in this statute is to be more balanced.  I hear North Carolina went so far that they are stopping the mortgage industry, and you do not want to do that.

 

John P. Sande III, Lobbyist, Nevada Bankers Association:

We have met with Assemblywoman Buckley on several occasions to try to work out some amendments.  The one thing I wanted to clarify, as far as her amendments 1, 2, and 3 (Exhibit G), we are very pleased with, and 4 and 5 I think I understand what they are meant to do, but we want to make sure the language is correct.  As I understand it now, of course the attorney general’s office can go after somebody and that is one possibility, but there is also “a private right of action with treble damages, attorney fees and costs” proposed by the borrower.  Also, it says “a borrower has a defense to any foreclosure action where a lender engages in any unfair lending practice prescribed in this chapter.”

 

When we talked to Assemblywoman Buckley, we indicated that if you just had an outright ban to foreclosure you would cause problems in the secondary market where it would be very difficult to sell these notes to third parties because of the fact that they might not be able to foreclose.  So, I think, what we are trying to address here is saying, “to the extent of the private right of action, which is treble damages, attorney fees and costs,” that would be a defense to any foreclosure action.  But, I also think we should clarify it.  I talked with Wells Fargo, and they said that as long as you had a judicial foreclosure sale, which I imagine this would occur, the court not only would be able to award the damages, but the court might also want to reinstate the loan, so it is not in default anymore.

 

For example, having the judicial power to say, “Wait a second, you engaged in an unfair trade practice by doing this and so, not only am I going to award treble damages, but I am going to reinstate the loan at this lower level, because you cannot charge for this, this, or this, anymore.”  I think we want to make it clear the court would have that ability, so I think we should work on the language to indicate if you have a private right of action for the damages, attorney fees, and costs, and that will also be an offset to any foreclosure sale, but also the court can consider, equitably, which they would do in a judicial foreclosure to protect the borrower and maybe reinstate the loan even though there might, technically, have been a default.

 

Alfredo Alonso, Lobbyist, Citibank (Nevada) NA:

We echo many of Mr. Sande’s remarks.  I will take this back to our client and have them look at it.  Obviously, we want to continue working with the committee and Assemblywoman Buckley.  The goal here is to get at the bad guys without hurting our folks and including the sub-prime market, which is very important.  There is a very delicate balance we want to obtain.

 

Kenneth T. Scruggs, Lobbyist, Household Financial Group, Limited:

We are sub-prime lenders.  Assembly Bill 447 is the tip of a very large iceberg we are dealing with around the country, the whole predatory lending issue.  We support the bill, and we really appreciate the opportunity to work with Assemblywoman Buckley on it, but I need to say a couple of things about sub‑prime lending that sometimes gets lost in the argument.

 

We start off by saying we are not trying to hurt the sub-prime lenders, but then we look at practices that are unique or necessary to the sub-prime business and characterize those as predatory without looking beyond as to why we do the things we do.  I think it is fair to say sub-prime borrowers differ from prime borrowers in a number of ways, and you have to look at those differences in making your loans in marketing your product or you will have severe problems, as we have seen, when a number of banks have tried to get in to the sub-prime industry.  For one thing, as we have said before, sub-prime borrowers have weaker credit, generally, than do prime borrowers.  Another aspect of sub-prime borrowers is they are much more active users of credit than are prime borrowers.  And, they generally have less verifiable income sources than do “A” customers, if you will.

 

Mr. Scruggs:

All of these things tend to mean if you are going to be a sub-prime lender, you have to take these things into consideration.  One example is a prepayment penalty.  Because we know our customers are very active users of credit and are likely to move from lender to lender more often than does a prime borrower, we need to build that into the price of our product.  On the other hand, it is extremely important to our customers that we keep payments as low as possible.  We make loans for an extended period of time, say 15 years, knowing it is likely they are going to pay off earlier, but we price the product as if they are going to pay it to the end.  If they pay it off more quickly, then they need to make up that cost.  The other option is for us to increase payments to everybody and spread out that cost more freely.  When people pay off early, there is a cost to the lender that needs to be recovered somehow.  So, we use prepayment penalties, and we think they are necessary.

 

If you take them away, do not forget, a prepayment penalty is a penalty.  Our customers who tend to pay off frequently will pay off a lot more frequently if there is not some disincentive for them to do that, and that will also mean we will have to increase costs.  We have come up with a prepayment penalty as an offset to increasing monthly payments to customers.  It has worked all right.  Our industry has a model bill we have presented around the country.  It calls for a 5-year limit on prepayment penalties, which we think is a reasonable approach.  But, we do support what is in this bill.

 

Senator Townsend:

What is a 5-year limit on a prepayment penalty?

 

Mr. Scruggs:

If it is paid off in the first 5 years, you can assess a prepayment penalty, beyond that date you cannot.  What that does is provide a disincentive to pay off quicker, but it also allows you to recover your costs if somebody does prepay.

 

The one issue in the bill that has become the “poster issue” on predatory lending is credit insurance.  I want to defend that for just a minute.  We think prepaid, single premium credit insurance is a good product.  I have talked to Assemblywoman Buckley about this and we disagree.  But ask yourselves, “Is it a good product or a bad product, per se?”  If a customer has plenty of insurance and does not need to be covered, then we do not sell them an insurance product.  On the other hand, if you do not have adequate insurance coverage and you are borrowing money against your house, it seems to us to be a very prudent thing for you to want to cover that mortgage in the event you die or are disabled.  As far as the costs go, we do not rate our policies, we charge the same rate to everybody who borrows it.

Another issue is, “Should you be able to finance that premium?”  And that is really where it comes in, because if you add together the premium plus the finance charge and call that all premium, then it does look to be a very expensive product.  But, the fact is, our customers do not generally have enough disposable income to just pay cash for the product.  If we offer a monthly product, there is a chance they will go into default because they will miss a payment, or two, and the insurance will lapse.  By doing a single premium they pay for the insurance throughout the whole term of the loan.  We think it is a good product.

 

Besides the credit insurance issue, we support the bill.

 

Robert Barengo, Lobbyist, Nevada Consumer Finance Association:

You have heard what Mr. Scruggs has said, and he has accurately represented the position of the association except on a couple of points, which he left to me.  I had passed out to you the bill we supported in other areas (Exhibit H).  One of the reasons I had it passed out was in Assemblywoman Buckley’s bill, it now applies to any home loan.  Everybody will have to go through the machinations the loan will require.  This will be a penalty paid by the good guys for the bad guys.  What I would like to see is to have a definition of what a covered loan would be and that definition is what is found in the first paragraph of the handout.

 

Basically, this definition and the regulations adopted under the Home Ownership and Equity Protection Act of 1994 talk about a range of interest.  Most states talk about this as high-cost loans.  When they go into these folks and they look at them and they are going to charge them something that is out of the normal market because of their risky paper that we are all talking about they are going to be doing, then this is a high-cost loan and then these provisions would have to apply.  This act goes through very quickly and sets up what the parameters would be.  New York, which has an excellent Web site for high-cost loans, has pages and pages to determine what a high-cost loan is.

 

What I am suggesting would not be that onerous; this looks at the T-Bill (U.S. Treasury Bill) rate and if you are a certain percentage point over the T-Bill rate then it is a high-cost loan and you have to comply with these things.  If the sub‑prime borrower is the marketplace we are looking at they already have the risky credit; therefore, they are the ones who would be getting into these practices, and this would cover them.  Everybody else would be out of it.  That is a suggestion I would ask be made.

 

Senator Townsend:

This public policy proposal, was that given to Assemblywoman Buckley?

 

Mr. Barengo:

Yes.  We did discuss it, and Assemblywoman Buckley wants to apply it to everyone.

 

Senator Townsend:

I do not have a problem with the differences; I just want to make sure there was an understanding.  Just for the sake of this discussion to better understand the issue, is there some kind of national standard on what a sub-prime loan is?  Is it X number of percent over a T-Bill?  Or, is it adjusted to prime lending rate?  Is it adjusted to federal fund rate?

 

Mr. Barengo:

I think everybody who deals in this area may have differing methodologies of how they deal with that.  The definition I am suggesting looks at the interest rates charged.

 

Senator Townsend:

Assemblywoman Buckley has made a good-faith effort to try not to affect the good guys.  You are offering another avenue to that approach, and we are just trying to understand it.  The most amazing thing to me, and I believe it is one of the underlying issues that not only Senator O'Connell has dealt with, but also Assemblywoman Buckley has dealt with, and that is the people who need the help the most are least prepared to wander into this complex world.

 

What we are seeing in some of these instances, and I think the point Assemblywoman Buckley is making, is many times it is a senior citizen who is not necessarily sophisticated who is currently in the market, already in a home.  Then somebody comes along and says, “I have a deal for you.”  That is where the problem begins.  It is either that or the first-time borrower, because they have not spent the time educating themselves.

 

 

 

Senator O'Connell:

I would like to know if you have enough first-hand experience, or information from people making these loans, if these people ever think about paying off the loan.  Do you not think most people, especially with homes, are buying it with the philosophy they will never pay off the loan, anyway?  They figure they would be selling the home before they would be paying off the loan, so they are really not aware of the extra costs, especially the sub-prime borrowers?

 

Mr. Barengo:

I mentioned at the hearing on the Assembly side, there is product called “125 percent” program.  It is a small amount, maybe $35,000/$40,000, a 125 percent of the value of your home.  You have no equity in your home, and they are borrowing this.  Why are people doing this?  They do this because it is cheaper than going out and borrowing from other kinds of facilities.  They understand what the marketplace is offering them.

 

Keith L. Lee, Lobbyist, Responsible Mortgage Lenders Coalition:

We have very cursorily reviewed all of the amendments that have been proposed previously and today.  All I wanted to do today, Mr. Chairman, is indicate that we would like a place at the table, and we will enter into good‑faith negotiations with all the parties concerned to try to work out some of these problems.  I think, as all the speakers have indicated today, predatory lending is a practice that no legitimate mortgage company, or lender, wants to be involved with and, certainly, does not condone and works very hard not to allow to happen in its respective companies.  Predatory lending hurts them, and it hurts the sub-prime borrower, as well.  Pricing in the credit market is very sophisticated.  Somewhere in this whole process the price of the product is going to be recovered, and that is what prepayment, for instance, allows to be done when there is this continuous shopping of credit.

 

Samuel P. McMullen, Lobbyist, Representing Assurant Group:

The Assurant Group, basically, specializes in credit life transactions, disability, and employment interruption insurance.  My focus on the bill will be section 11, subsection 4, which relates to the credit insurance industry issues.  Generally, the language is fine.  I am going to ask for one amendment, which I have distributed to you (Exhibit I).

 

I wanted to make a couple foundational points about credit insurance.  Number one, it is cancelable.  It is a product that a lot of people like, and use.  In the sub-prime lending market, it is a product that may be the only way for people to actually insure their mortgage from either loss of their job, disability, or death.  The issue really becomes whether they can pay for it up front, or if they can finance it into the loan.  The bill in its original literation had outlawed credit insurance across the board, unless you did it on a monthly payment basis.  Mr. Scruggs already talked about the issues with respect to monthly payment.

 

What, again, I think this does, is allow people to buy the product, finance it through the mortgage, which is, frankly, some of the cheapest rates possible, and go from there.  As you heard today, relating to the one case, if in fact the full value of the insurance product is not used, then the remaining unused premium is refunded.  But, you need to understand this is not like a regular life insurance policy.  It has a different kind of life, particularly because of the way mortgages work.  First and foremost, it generally has an active risk period for about 5 to 10 years.  It, of course, covers the life of the loan, but it at least covers that period of risk.

 

Mr. McMullen:

As Mr. Scruggs also mentioned, it is not really rated by your health or anything that goes to a physical examination.  You can actually get life insurance without a health examination.  You usually have to answer about four major questions such as if you have cancer, AIDS, et cetera.  Usually, if you answer yes to any of those you will not be able to qualify, or if they find out later you answered them improperly, then they will revoke the insurance.  Beyond that, the insurance is totally cancelable.  There is some issue about rates.  Of course, this is a different insurance product than just standard life insurance, or the term portion of life insurance.  It has a different risk factor.  But, most importantly, it is sold in much smaller units.

 

Our issue was to try and look at this bill as to how we could help Assemblywoman Buckley do this in a way that did not outlaw the product, at least in its normal form, and also disclose to people exactly what it meant.  (Mr. McMullen read through the various elements of his proposed amendments [Exhibit I] to A.B. 447.)

 

Senator Townsend:

It would be my recommendation that Senator Shaffer chairs the subcommittee on this bill, along with Senator Schneider and myself.

 

There being no further business, the meeting is adjourned at 10:16 a.m.

 

 

RESPECTFULLY SUBMITTED:

 

 

 

Gayle Nadeau,

Committee Secretary

 

 

APPROVED BY:

 

 

 

                       

Senator Randolph J. Townsend, Chairman

 

 

DATE: