Commission should bump law back to Legislature

Editor's note: This week Barbara Holland takes a break from answering homeowners association questions. Instead she explains a bit of law that will affect community managers.

The 2009 Nevada Legislature passed a law that requires each community manager to post a fidelity bond with the Real Estate Division to obtain or renew a community manager certificate. That law requires the Common Interest Commission to set the terms and amounts of the bond in Nevada Administrative Code.

The commission is proposing to require a fidelity bond be posted based on the amount of funds that are controlled by the community manager. The amount of the bond would be from $25,000 to $250,000. The commission has met three times on the bonding issue. Each time the vote was postponed to the next meeting. This issue will again be on the agenda Wednesday.

The problem with the statue as written is that it requires a bond. A fidelity bond is a three-party credit transaction. In this industry, 90 percent of fidelity coverage is written as a crime insurance policy. Bonds represent the other 10 percent. The bonding company views the bond as an unsecured loan to the person or corporation being bonded. Other than large corporations, how many of us qualify for a $250,000 unsecured loan? The cost of a bond is based on the financial stability and credit history of the bond holder. The way the law is written, it is not the management company who needs to procure the bond, but the individual community and provisional managers.

This presents many other issues. A newly formed management company owner may not have the credit history to obtain the bond. Self-managed associations that employ community managers will have to pay for their managers' bonds. Also, the bond would have to be in the name of the association that would cover its employees.

The cost to procure these bonds by the individual community managers would substantially reduce their salaries. In turn, the cost of the bonds would be absorbed by the homeowners as their assessments would possibly increase.

Still, there are more problems with this law. The association may find that its employee manager's spouse had credit problems so no bond is available. Each time a management company hires or fires a manger, that person would have to be added to or removed from the bond. This complicates things further. For instance, the way the law is written the bond would only cover the community manager, but what happens if someone from the accounts receivable department, or any department, stole the money? This example would be covered by an industry standard crime insurance policy, unlike this bond proposal, which would focus responsibility on specifically named people.

The costs for a bond is always more than that of a crime insurance policy. And the fidelity bond will be useless in the event a manager does steal association funds unless the coverage endorsement for property under care, custody and control is included. Crime insurance is based on risk class and past loss ratios, not credit history.

All common interest communities by federal mortgage regulation must have a crime insurance policy or fidelity bond in place. The Federal Housing Administration, Fannie Mae and Freddie Mac have all adopted requirements that mandate an association maintain fidelity coverage. The minimum amount is at least 90 days assessments plus 100 percent of the reserve balances.

My recommendation is that the commission again table the issue. The commission must propose changes to the legislation. Change the bond requirement to an insurance policy or bond. Then that NRS116.3113 be amended as follows: First paragraph change the word both to all. Then add: (c) A crime insurance policy or a fidelity bond that includes coverage of dishonest acts by employees, officers, directors, volunteers and or agents. The policy or bond may not contain a conviction requirement. The amount of the crime policy or bond must at a minimum meet the requirements as stated in federal mortgage regulations for federally insured mortgage programs.

When the law was first proposed, many specific e-mails were sent to the Legislature and to the specific legislative committees that what they were proposing would not address the problem. We attempted to educate the Legislature of what was realistic and viable. Unfortunately, a poor law was passed and for the commission to try to enforce a poor law with regulations that individual managers cannot obtain, makes no sense. We are not too far away from a new legislative year, to table this law and present a better one to the Legislature is the best action that the commission should take.

I would like to thank Mark Coolman for his assistance in helping me prepare this column.

Barbara Holland, CPM, and Supervisory CAM, is president of H&L Realty and Management Co. To ask her a question, e-mail support@hlrealty.com.