SENATE CS FOR CS FOR HOUSE BILL NO. 418(L&C) "An Act extending the termination date of the Real Estate Commission; relating to real estate; relating to home inspectors; relating to real estate licensees; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken stated that this bill, SCS CS HB 418 (L&C), Version 23-LS1548\Q, is sponsored by the House Labor & Commerce Committee and Representative Norm Rokeberg and would extend the Real Estate Commission until June 30, 2008. In addition, he noted that the bill would further clarify the State's Home Inspector law. He specified that a Department of Community and Economic Development fiscal note accompanies the bill. JANET SEITZ, Staff to Representative Norm Rokeberg, the bill's sponsor, informed the Committee that in addition to extending the life of the Real Estate Commission until 2008, this legislation would clarify existing procedures regarding real estate licenses and notice procedures as recommended in the Alaska Division of Legislative Audit, Audit Digest #08-20023-03 [copy on file]. She explained that this bill would also change language to address issues arising from the enactment of the 2003 Home Inspector legislation, HB 9, as recommended by the Regulation Writing Procedure and the Home Inspector industry. RUTH BLACKWELL, Realtor and Representative, Alaska Association of Realtors, informed the Committee that the Alaska Association of Realtors (AAR) supports extending the life of the Real Estate Commission. On another matter, she pointed out that AAR is in favor of a forthcoming amendment that would reduce the real estate surety fund award to a claimant from the $20,000 level specified in the Senate Labor & Commerce (L&C) version of the bill to its current level of $10,000. Co-Chair Wilken asked which amendment would address the surety bond issue. Ms. Seitz responded that it would be addressed in forthcoming Amendment #3. Ms. Blackwell explained that with the exception of the year 2003 when the number of surety claims amounted to fourteen, the average number of claims has been three or five claims a year. She stated that during her most recent tenure as a Board member of the Real Estate Commission, it was noted that few surety claim hearings were heard due to the fact that the Commission has limited access to the lone surety fund hearing officer, who is shared with another entity. She stated that AAR recommends that the Committee continue the $10,000 surety bond level and allow time for a process to be developed to "fix the system so that the public is served." She argued that increasing the surety bond to $20,000 would result in an increase in the number of claims filed which would escalate the problem regarding the scheduling of hearings. Ms. Blackwell informed the Committee that AAR has, in place for its members, a mediation, arbitration, and professional standards hearing system that has conducted 60 hearings within the last year. She voiced optimism that some manner of processing hearings to better serve the public could be developed through a cooperative effort between the Commission, the Department of Community and Economic Development, and the AAR. Co-Chair Wilken stated that when Amendment #3 is discussed, AAR's support of it would be noted. Senator Dyson asked whether AAR supports the licensing of home inspectors. Ms. Blackwell affirmed that it does. Senator Dyson asked the methodology used by AAR to reach this conclusion. Ms. Blackwell explained that AAR conducted a poll of its various boards and that information was provided to the AAR Legislative Committee, which consists of a minimum of one member from each of the other AAR boards. She noted that AAR has monitored, discussed, and provided input regarding the Home Inspector bill for approximately four years. Senator Dyson asked whether 99 percent or 60 percent of realtors support the licensing of Home Inspectors. Ms. Blackwell responded that the answer would depend on the area being polled as, she disclosed, the City and Borough of Juneau and several other communities in the State do not have either licensed or unlicensed home inspectors. She commented that, Juneau, for instance, instead utilizes licensed engineers as, she noted, it is felt that "their license was better than ours." However, she disclosed that access to licensed inspectors would be acceptable as their service would be less expensive than that of a licensed engineer. In summary, she surmised that a minimum of 75 to 80 percent of the Association's members support licensing Home Inspectors. CHARLES SANDBERG, Realtor and Representative, Alaska Association of Realtors, testified via teleconference from Anchorage, and informed the Committee that he, a realtor for 17 years, was formerly the National Director of the National Association of Realtors and is currently a member of the Professional Standards Committee on the national, State, and local Anchorage Board and Association level. He also disclosed that he is an arbitrator on the AAR Hearing Panel. This panel, he shared, is a very effective system that resolves disputes between both consumers and consumers and between consumers and realtor members. He stated that the AAR Hearing Panel is less expensive to operate and is more efficient system than the system utilized by the Commission and, in addition, has a 95- percent resolution history. In contrast, he avowed that the Surety Fund claim process is slow and resolves less than 10 percent of the claims that are filed. He stated that none of the fourteen Surety Fund claims that were filed in 2003 were heard, as compared to the AAR process in which 60 claims were filed and processed. Furthermore, he noted that the AAR system usually addresses and resolves disputes in two to four months; whereas, the Commission's hearing system process might require several years. Echoing Ms. Blackwell's comments, he urged that the Surety Fund claim limit be rolled back, via Amendment #3, from $20,000 to $10,000, and allow the appropriate parties to review and determine a more effective manner through which to deal with the issues. Amendment #1: This amendment inserts new bill sections into the bill on page two, following line 20. The new language reads as follows. Sec. 3. AS 08.18.071(a) is amended to read: (a) Except as provided in (d) and (e) of this section, each [EACH] applicant shall, at the time of applying for a certificate of registration, file with the commissioner a surety bond running to a state conditioned upon the applicant's promise to pay all (1) taxes and contributions due the state and political subdivisions; (2) persons furnishing labor or material or renting or supplying equipment to the applicant; and (3) amounts that may be adjudged against the applicant by reason of negligent or improper work or breach of contract in the conduct of the contracting business or home inspection activity, as applicable, or by reason of damage to public facilities occurring in the course of a construction project. Sec. 4. AS 08.18.071 is amended by adding a new subsection to read: (d) A general contractor or specialty contractor who is in compliance with the surety bond or deposit requirements of (a) and (b) of this section is not required to file another surety bond or increase a deposit with the commissioner when the general contractor or specialty contractor applies to be a registered home inspector. However, if the general contractor or specialty contractor subsequently is neither a general contractor nor a specialty contractor and becomes only a registered home inspector, the home inspector shall provide a surety bond or deposit in lieu of the bond in the manner and amount required for registered home inspectors under this section. (e) An applicant for, or holder of, a certificate of registration as a home inspector may, in lieu of filing with the commissioner a surety bond or deposit that meets the requirements of this section, file evidence satisfactory to the commissioner that the applicant is employed by a registered home inspector who is in compliance with the surety bond or deposit requirements of this section. Co-Chair Green moved to adopt Amendment #1. Co-Chair Wilken objected for explanation. Co-Chair Green noted that one issue not resolved by the passage of HB 9, was how to deal with home inspectors who are not employees of a city or borough and who conduct the majority of the home inspections. Co-Chair Green informed the Committee that by restoring some of the original language pertaining to home inspections, the amendments she would be offering today would assist in alleviating the unintended consequences resulting from the passage of HB 9. Co-Chair Green stated that Amendment #1 "would correct" provisions established by HB9 that require each home inspector to be individually licensed, to provide a surety bond, and to have a general liability insurance policy. These requirements, she continued, require an individual to acquire "multiple bonding and insurance requirements" in such situations as when a home inspector business owner employs one or more persons who are also registered home inspectors, or when a general or specialty contractor also wishes to be a registered home inspector. She voiced the understanding that the current requirements result in multiple layers of requirements that are unnecessary in that they would not provide any additional protection. She stated that Amendment #1 would change the provisions so that an owner/home inspector's coverage would not be duplicated. Ms. Seitz informed the Committee that Representative Rokeberg supports Amendment #1, as it would address the "dual bonding" concern. She exampled that currently a specialty contractor who also desires to be licensed home inspector is required to acquire two bonds, and she continued, this dual bonding requirement also applies to a owner/employee situation in which both the employee and the owner are currently be required to have a bond. Senator Dyson asked whether there is a national home inspector association. Co-Chair Green understood that there is; however, she would defer to the industry to provide further information. Senator Dyson specified that he "did not agree" with the State being involved in the licensing of home inspectors and, voicing support for "eliminating that entirely." He asked whether this amendment would eliminate the licensing requirement and replace it with a registration requirement. Ms. Seitz responded that the amendment retains the requirements established by HB 9 that specify that a home inspector be required to register in a manner "similar to a license, but it's not called a license, it's called a registration." Senator Dyson asked whether meeting the standards of the national organization would serve to quality someone as a licensed inspector. Ms. Seitz stated that once the transitional licensing period, that allows someone to be qualified in the profession based upon a certain number of years' experience, has expired a person would be required to pass certain examinations. Senator Dyson asked whether the examinations would be administered by the State or by a professional organization. Ms. Seitz responded that the tests would be administered by professional testing agencies. Co-Chair Green referred to language in Section 2, subsection (a) (1) (A) on page one, line 13 through page two, line two, of the bill that reads as follows. (A) existing home is the examination offered by the American Society of Home Inspectors, [AMERICAN HOME INSPECTORS TRAINING INSTITUTE,] or National Association of Home Inspectors; Co-Chair Green noted that this legislation would require an applicant to provide additional information as denoted in Section 2, subsection (a)(3)(B), located on page two, line nine, that reads as follows. (B) accompanied by documentation that the applicant has completed continuing education requirements established by the department; Co-Chair Green clarified that this amendment does not address the registration requirements as they are addressed elsewhere in the legislation. Co-Chair Green stated that forthcoming Amendment #2 would address other issues that have resulted from the enactment of HB 9. DAVE OWENS, Owner, Owens Inspection Services, testified via teleconference from an offnet site and explained that his business conducts both residential and commercial inspections. He discussed the "stumbling blocks" that he and his business have experienced as a result of HB 9's licensing requirements, in that, in addition to the "problematic" dual bonding requirement, he, who has been accredited in the home inspection business for numerous years, was denied his license because he had not been tested in all applicable categories within a year prior to his licensing application. Mr. Owens also requested that the AS 18.56.300(c) provision, as would be addressed in a forthcoming amendment, remain in Alaska Housing Finance Corporation (AHFC) statutes. Mr. Owens asked the Committee to address the dual bonding issue as well as to determine a method through which the Department of Community and Economic Development could recognize qualifying certifications in lieu of when a test was undertaken. Senator Dyson asked for clarification that while Mr. Owens remarks referenced licensing requirements in his remarks, he was, in fact, speaking to the registering requirements. Mr. Owens concurred that he was speaking in regards to the registration requirements. Senator Dyson commented that although he would not require further discussion at this time, he would be interested, at some time, in further clarification between the difference in registration, certification, and licensing. Co-Chair Wilken removed his objection. There being no further objection, Amendment #1 was ADOPTED. Amendment #2: This amendment deletes "Section 44(e), ch. 134, SLA 2003, is" and replaces it with "Sections 41, 42, 44(e), and 47, ch. 134, SLA 2003, are" in Section 11, page five, line two. Co-Chair Green moved to adopt Amendment #2. Co-Chair Wilken objected for explanation. Co-Chair Green explained that this amendment would reestablish the AS 18.56.300 (c) provision, as earlier mentioned by Mr. Owens, that was repealed by HB 9. She noted that a home inspection is required for either the purchase of home through AHFC or for the implementation of a housing loan for residential housing constructed after June 30, 1992 with AHFC. She noted that AHFC ascertains that this would apply to approximately "thirty to forty percent of the market share of mortgage lending for single family residential dwellings." Furthermore, she noted that subsection (c) limited the liability of a home inspector performing the requirements of subsection (b) to gross negligence and intentional misconduct. Therefore, she stated, removal of subsection (c) served to "expose home inspectors to greater risk of legal actions against them for which a prudent business owner would require professional liability or errors and omissions insurance." Furthermore, she informed that this insurance is unavailable in Alaska, as confirmed by the Division of Insurance. Therefore, she stated, HB 9 required home inspectors to seek an unobtainable product. She stated that the bill's sponsor concurs with this amendment. Co-Chair Wilken removed his objection. There being no further objection, Amendment #2 was ADOPTED. Amendment #3: This amendment deletes "one year" and replaces it with "three years" in Section 2, subsection (3)(A), on page two, line seven of the bill. The amended language would read as follows. (A) within three years after passing the examination required under (1) of this subsection; or In addition, the amendment would delete Section 6, on page three, lines 12 through 22, which proposes changes to the claim level associated with the Surety Fund. Co-Chair Green moved to adopt Amendment #3. She stated that the first portion of the amendment would address Mr. Owens' concern regarding testing and registration time limitation requirements by increasing the one-year time window to a three-year window. Co-Chair Green noted that the second portion of the amendment has been suggested by various individuals and would serve to delete the Senate Labor & Commerce bill's language pertaining to the Surety Fund. Co-Chair Wilken objected for clarification. Co-Chair Wilken requested that Amendment #3 be divided into Amendment 3A and 3B. There being no objection, Amendment #3 was divided. Amendment #3A: This amendment deletes "one year" and replaces it with "three years" in Section 2, subsection (3)(A), on page two, line seven of the bill. The amended language would read as follows. (A) within three years after passing the examination required under (1) of this subsection; or Co-Chair Green moved to adopt Amendment #3A. REPRESENTATIVE NORM ROKEBERG, the bill's sponsor, concurred with the proposed language. Co-Chair Wilken removed his objection. There being no further objection, Amendment 3A was ADOPTED. Amendment #3B: This amendment deletes Section 6 which is located on page three, lines 12 through 22 of the bill. The language being deleted reads as follows. Sec. 6. AS 08.88.470 is amended to read: Sec. 08.88.470. Findings and payment. At the conclusion of the commission's consideration of a claim made under AS 08.88.460, it shall make written findings and conclusions on the evidence. If the commission finds that the claimant has suffered a loss in a real estate transaction as a result of fraud, misrepresentation, deceit, or the conversion of trust funds or the conversion of community association accounts under the control of a community association manager on the part of a real estate licensee, the commission may award a claimant reimbursement from the real estate surety fund for the claimant's loss up to $20,000 [$10,000]. Not more than $20,000 [$10,000] may be paid for each transaction regardless of the number of persons injured or the number of parcels of real estate involved in the transaction. Co-Chair Green moved to adopt Amendment #3B. Co-Chair Wilken objected. Co-Chair Green stated that the Senate Labor & Commerce committee adopted this language, and that there has been support for continuing the $10,000 surety fund level. Senator Bunde, Chair of the Senate & Labor Committee, asked whether the removal of the entire section would serve to eliminate the Surety Fund in its entirety. Ms. Seitz responded that removal of this section would serve to retain the current language of the section; specifically, she stated, its removal would assure the continuance of the $10,000 Surety Fund claim level. Representative Rokeberg commented that he supports this amendment, as it would address the concerns raised by AAR. He echoed the comments regarding the limited availability of the hearing officer, and characterized the situation as not being "very workable." He stated that currently the Surety Fund could be utilized to reimburse injured parties for cases involving misrepresentation, fraud, or deceit. He stated that were the limit to increase to $20,000, the cases would be "more appropriately addressed by the judiciary system" due to the high cost involved. He also noted that claims at that level should be adjudicated in the Court System rather than via the hearing office system. Furthermore, he opined, increasing the level to $20,000 might result in an increase in the number of claims. He noted that separate legislation is being considered that would increase the current damages amount allowable in Small Claims Courts. Representative Rokeberg stated that the Surety Fund was originally developed to "simplify the process to the consumer, but he opined, the system is currently "more complicated and more expensive," and that, in the case of a "frivolous claims," the licensee is "required to expend a large amount of money for legal fees in order to defend himself and achieve a dismissal." He concluded that increasing the amount of the Surety Fund would be wrong in that, in reality, the entire "system needs to be reformed" rather than "making it more attractive to go the wrong way." He acknowledged the AAR hearing process that allowed 60 cases to be addressed and rectified in a short amount of time. Senator Bunde stated that he respectfully disagreed and objected to the amendment. He provided Members with a handout on Surety Bonds titled "A Selection of Other States with State Administered Real Estate Recovery Funds" [copy on file], that compares Alaska to other states. He noted that Alaska with a $10,000 Surety Bond requirement is one of approximately four states with the lowest level. Furthermore, he declared that the majority of other states have an established level of $20,000 or more, which, he attested, has not "destroyed" their real estate industry. Senator Bunde declared that the Committee should pay more attention to the recommendations of the Legislative Budget & Audit division. He pointed out that as specified in the aforementioned Legislative Audit report in Recommendation #1, on page 11, the $10,000 claim limit was established in 1974 statute. Furthermore, he noted that the Surety Fund statute language was amended in 1998 to specify that licensees would not be required to pay a Surety Fund fee greater than $125 to support the Fund. He also noted that Statute requires a minimum Surety Fund balance of $250,000 and a maximum fund balance of $500,000, and that the Commission determines a fee level to support these amounts. In addition, he noted that during the auditing period, the Fund balance maintained a level close to $500,000. He stated that the current $30 fee is sufficient to support the statute requirements. He declared that increasing the claim level to $20,000 would have minimal impact on the licensee, and that consideration should be equally given to the impact on the consumer, as he continued, while the last five successful Surety Fund claim payments were at the $10,000 level, all of those alleged losses exceeded that amount. Therefore, he supported the Audit's recommendation to increase the level from $10,000 to $20,000. He reiterated his objection to the amendment. Representative Rokeberg informed the Committee that while the primary purpose of the Surety Fund is to support awards to consumers, it's secondary use is to provide funds for educational purposes such as those associated with a restructuring of a licensing law. He stated that the Fund balance is healthy due to the manner in which the fund's fees are managed. Senator Olson asked whether the amendment would result in costing the consumer more or might serve to make the claim process more complicated. Representative Rokeberg replied that the amendment would result in neither of these concerns, as it specially pertains to the ceiling on the level of a Surety Fund award that might be determined. Representative Rokeberg declared that the Surety Fund would also be available to support any claim awarded by the Superior Court that fits the Fund's established criteria. He stated that the fund is there to protect the consumer against such things as "a fly-by- night builder." He reminded the Committee that testimony has been provided attesting to the fact that a higher award level might attract people as it might be viewed as "a pot of money." Senator Bunde respectfully disagreed. He contended that passage of this amendment would cost the consumer, as he noted that the legal cost associated with pursuing a claim via the Superior System would be expensive, and that increasing the limit to $20,000 would allow the claims to be addressed via the hearing process. Furthermore, he noted that $10,000 is a small percentage of the cost of a home in today's market. Senator Olson asked whether the sponsor agrees with Senator Bunde's comments. Representative Rokeberg stated that while he does not agree with Senator Bunde's comments, he would agree that the level has not been adjusted for some time. PAT DAVIDSON, Director, Legislative Budget & Audit, spoke to Recommendation #1 which recommends increasing the claim limit from $10,000 to $20,000. She stated that this recommendation was based on a review of claims submitted through the hearing process during the four-year audit period. All of those claims, she stated, exceeded $10,000 and all but one was less than $20,000. She stated that the recommendation is also based on the fact that the limit had not been raised since its inception in 1974. These facts, combined with the health of the Surety Fund and the fee limit of $125, which assure that no excessive costs would be borne by a licensee, support increasing the claim limit increased to $20,000. Ms. Davidson shared that, in addition to the $10,000 individual transaction limit, the Audit's recommends that the overall maximum limit be increased from $50,000 to $100,000 due to the fact that a licensee could be involved in multiple transactions. However, she noted that, unlike the supporting history regarding the individual claim levels, there was no history regarding the overall maximum limit. Representative Rokeberg suggested that in order to address the inflation factor concern and the Audit's concerns, the individual claim limit could be adjusted to $15,000. Amendment to Amendment #3B: This amendment retains Section 6 and reduces the maximum amount of a Surety Fund claim from $20,000 to $15,000, as specified on page three, lines 20 and 21 of that section. Co-Chair Green moved to adopt Amendment #3B, as amended. There being no objection, Amendment #3B, as amended, was ADOPTED. Representative Rokeberg noted that this legislation and its amendments were necessitated in order to address regulatory making process requirements. He stated that while he did not agree with many of those interpretations, they required addressing. Co-Chair Green thanked the sponsor for his assistance in developing this legislation as it has addressed numerous constituent concerns Co-Chair Green moved to report the bill, as amended, from Committee with individual recommendations and accompanying fiscal notes. There being no objection, SCS CS HB 418(FIN) was REPORTED from Committee with zero fiscal note #2, dated March 25, 2004, from the Department of Community and Economic Development.