Monday, June 16, 2003 | 11:06 a.m.
A new law that created a state division overseeing mortgage lenders is attracting praise from investors who lost money in the Harley L. Harmon Mortgage Co. scandal but is drawing scorn from mortgage bankers.
The praise is based on the belief that Assembly Bill 490, which was approved by the Nevada Legislature and became law on Friday, will enable the state to do a better job protecting investors from unscrupulous business people.
The criticism comes from mortgage bankers who say they should never have been included in the law.
Even Assemblyman David Goldwater, D-Las Vegas, author of AB490, said he was displeased with an amendment from the state Senate that lumps certain mortgage bankers -- individuals who make home loans with their own capital -- with mortgage brokers who take money from investors and lend it to developers for construction projects.
Gov. Kenny Guinn also was displeased with the last-minute Senate amendment, so much so that he refused to put his name on the bill, sending it back to the Legislature without his signature. That meant AB490 became law because Nevada does not have a pocket veto.
"The governor didn't want his name on the bill because he objects to the process in which the bill was passed," Guinn spokesman Greg Bortolin said. "What he objected to was the amendment on the floor. The reason he did not veto it is he believes there's more good in the law than bad."
The law will affect an estimated 2,100 individual Nevadans who are mortgage brokers or mortgage bankers, Goldwater said. An estimated 500 to 600 businesses will also be regulated by the new division.
But no taxpayer money will be involved. That's because the new Division of Mortgage Lending, which will be part of the Nevada Department of Business and Industry, will be funded solely by the annual licensing fees paid by brokers and bankers.
"This is great news for consumers and investors because the state's process of regulation would have a greater degree of accountability attached to it," Goldwater said. "This is good news for the good players and bad news for the bad players."
The business and industry department also has gone on record in support of the law.
"We have found that mortgage lending has suddenly become a huge industry," department spokeswoman Amanda Getzoff said. "Because of the number of businesses involved and the trends in the industry it justifies having its own oversight."
Mortgage lenders have been under the purview of the department's Financial Institutions Division, which also regulates state-chartered banks and credit unions. The lenders are required to be licensed and are subjected to periodic audits.
But serious flaws in the state's regulatory process were exposed in 1997 after the division revoked the Harmon company license for mishandling investor funds and misleading them about their investments.
At the time of the state's action, the Las Vegas company named after the former state assemblyman had handled $23.9 million from 694 investors. Much of that money was lost through phony deeds of trust. Harmon in February was found guilty of 34 counts of mail fraud in U.S. District Court.
The state also shouldered blame because it turned out that Harmon's company had produced questionable audit results, such as from sloppy record keeping, for several years before the state acted.
Even after the state began probing Harmon, investors lost millions of dollars, unaware that the company was under investigation. One investor was a Goldwater constituent who lost her life's savings in the Harmon affair.
The constituent's misfortune prompted Goldwater, an investment consultant for pension funds who chairs the Assembly Commerce and Labor Committee, to lead the effort to strengthen the regulation of mortgage lenders. AB490 represents the third consecutive legislative session where lawmakers have approved his bills in response to the Harmon fiasco.
"When we found out about Harley Harmon we didn't have the proper laws and regulations in place," Goldwater said. "Then it became a matter of enforcement. With a new agency we would have much greater accountability.
"I don't know if this bill would have prevented the Harmon debacle but it would have lessened it. Had Harley Harmon done what he did and this bill was in place, we would have caught him in six months rather than in three years."
Sydney Wickliffe, director of the business and industry department, will select a commissioner to head the new division. A new accountant who would also serve as office manager would be hired.
Doug Walther, deputy director of the business and industry department, said the current plan is to transfer four examiners who help audit license holders from elsewhere in the department to the new division and hire one additional examiner. He also said two or three new clerks may be hired.
The Financial Institutions Division will still regulate state banks and credit unions, he said.
One provision in the legislation will also hold advertising spokesmen for mortgage companies liable along with the companies for any damages caused by fraud, embezzlement or misappropriation of property.
The most visible spokesman for a mortgage broker of late has been former National Football League star quarterback Joe Namath, who makes televised pitches on behalf of Vestin Group Inc., a publicly traded Las Vegas holding company that is involved in mortgage lending.
But Goldwater said he did not have Namath in mind when he proposed AB490.
"It wasn't aimed at any particular person," Goldwater said. "It was aimed at anybody who knew or should have known that what they were doing was fraudulent."
In March, Vestin and affiliated companies lost a $5 million judgment to local developer Howard Bulloch for allegedly mishandling loans made to him. The judgment has been stayed, pending court motions.
Vestin officials did not return repeated telephone calls seeking comment on AB490.
The new division could become operational as early as this fall after the legislative Interim Finance Committee determines a budget for its existence. It is estimated that the budget for the new division will be $1.2 million a year but that it will generate $1.8 million in revenue in fiscal 2004 and $2.1 million in revenue in fiscal 2005. The extra revenue not spent by the division will go into its reserve fund, Walther said.
Bulloch, who blamed the Financial Institutions Division and its commissioner, L. Scott Walshaw, for being slow to address the developer's complaints against Vestin -- it took a court order to get the state to probe the company -- said he could see why the Legislature passed AB490.
"It's too bad the state has to pass new laws because the commissioner is not doing his job," Bulloch said. "This is an important issue that needs to be kept in front of the people because we do not need another Harley Harmon."
Southern Nevadans who lost money through Harmon's company said they support AB490 but would still like to see stiffer penalties against unscrupulous mortgage agents.
"Anything is better than it has been," Henderson resident Dan Gray said. "I would endorse this all the way. The new division is only going to be as strong as the new person who heads it."
Fellow Harmon investor Norm Bell of Las Vegas said he supports the new law but also believes mortgage brokers should be required to undergo more rigorous background checks before obtaining their licenses.
"They shouldn't just have a local background check," Bell said. "It should be a national check. We've protected the crooks long enough. Give investors a shot."
AB490 could address Bell's concerns in part because it will expand the number of mortgage agents who will be subject to criminal background checks, Getzoff said.
Harmon and other mortgage lenders that have created problems for Nevada investors typically have promised them returns of 10 to 15 percent in annual interest on their investments. The money is supposed to be borrowed by developers who, for some reason, cannot get conventional loans at lower interest rates.
Investors with these problem companies have been told that they would get first deeds of trust that would serve as collateral against defaulted loans. But in Harmon and in other cases, the deeds of trust either turn out to be phony because the investors' money is used to pay off previous investors -- a form of a pyramid scheme -- or because the money was used for other developments without the investors' knowledge.
Las Vegas resident Irv Bronstein, who also lost money through Harmon, said he thinks the new division will do a better job monitoring the mortgage lending industry because it will concentrate on that area.
"They need to keep on top of these companies by making sure they're operating in the black instead of in the red," Bronstein said. "They should check their books every 90 to 180 days to make sure everything is aboveboard. Keeping it separate from the Financial Institutions Division will make it better."
Fellow Harmon investor Loretta Eichelberger, a former state employee and mother of Assemblyman Tom Collins, D-North Las Vegas, said she had no problem with creation of a new division as long as taxpayer money was not involved.
"I still think the laws need to be tightened up more because I keep reading about people getting ripped off," she said. "There also should be some way to guarantee reimbursement of the investors' money. If I deposit my money in a bank, the FDIC (Federal Deposit Insurance Corp.) will guarantee it. If I invest in a first trust deed, my money should be guaranteed."
The latest company to run into problems with state regulators was Global Express Capital Mortgage of Las Vegas, which was the subject of a takeover by the Financial Institutions Division on Wednesday. The division indicated it found numerous regulatory violations but Global Express countered last week by filing a lawsuit against the state, seeking a restraining order against the division.
Global Express Chief Executive Connie Farris said she supported creation of a new division as long as no favoritism was shown to particular companies.
"It depends on who runs the division," Farris said. "If it is an individual who has no connection with mortgage companies, I would have no problem with that."
Part of the reason the business and industry department supported AB490 is that it includes certain mortgage bankers who currently are not regulated by the state, Getzoff said. These mortgage bankers lend money for home mortgages but are not affiliated with federally regulated banks, which will be exempt from the new division's regulations.
The inclusion of certain mortgage bankers is why the Nevada Mortgage Bankers Association opposed AB490. Association lobbyist Jim Wadhams said mortgage bankers have had nothing to do with the problems created by mortgage brokers such as Harmon.
"This bill was originally designed to regulate the Harley Harmon-type businesses," Wadhams said. "Mortgage bankers loan their own capital."
Ironically, one businessman who could be adversely affected by the creation of a new division is Jeff Guinn, the governor's son. Jeff Guinn owns two local businesses, one that solicits investor money for construction loans and another that makes home mortgage loans.
He said he supported provisions of AB490 that will crack down on advertising spokesmen and give mortgage agents more options to take training courses in their field of specialty. But the inclusion of his home mortgage banking business irks him because he said it could increase his annual business costs by as much as $50,000 a year such as through added auditing expenses.
"AB490 was a decent bill until it included mortgage bankers," Jeff Guinn said.
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