BILL ANALYSIS
AB 33
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Date of Hearing: April 13, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
AB 33 (Nava) - As Amended: March 24, 2009
SUBJECT : Department of Financial Services.
SUMMARY : Creates the California Department of Financial
Services (DFS). Specifically, this bill :
1)Abolishes the Department of Corporations (DOC), Department of
Real Estate (DRE), Department of Financial Institutions (DFI)
and Office of Real Estate Appraisers (OREA).
2)Transfers the powers, duties, purposes, jurisdiction,
responsibilities, and functions of the Commissioners of DOC,
DRE, DFI and OREA (agencies) to the Commissioner of DFS.
3)Provides that DFS secedes to all rights and property of the
agencies, and is subject to their debts and liabilities.
4)States that any action or proceeding by or against the
agencies which may be prosecuted to judgment, shall bind DFS
and may be proceeded against or substituted in place of the
agencies.
5)Specifies that the following funds and accounts shall be under
the jurisdiction of the Commissioner of DFS:
a) The Real Estate Fund;
b) The Education and Research Account, of the Real Estate
Fund;
c) The Recovery Account, of the Real Estate Fund created;
d) The Real Estate Appraisers Regulation Fund;
e) The Administration Account, of the Real Estate
Appraisers Regulation Fund;
f) The Recovery Account, of the Real Estate Appraisers
Regulation Fund;
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g) The Financial Institutions Fund;
h) The Credit Union Fund;
i) The Guaranty Corporation Fund;
j) The State Corporations Fund; and,
aa) Any other fund or account subject to the jurisdiction of
the former agencies.
6)Specifies that any references in the Constitution or any
statute or regulation to the agencies or commissioner's of
those agencies shall mean the commissioner of DFS or DFS.
7)Provides that any orders entered into with, and orders and
regulations issued by the agencies shall continue in effect as
if the agreements were entered into with, and the orders and
regulations were issued by DFS.
8)Makes other conforming changes necessary to create DFS.
9)Makes the following Legislative findings and declarations:
a) The regulation and oversight of financial services in
California are divided among three four regulators, the
DFI, DRE, OREA, and the DOC;
b) California is one of only a few states that separates
the regulation of financial services among different
licensing agencies;
c) This division of oversight is most apparent in the
regulation of home mortgage lending that is split among
several licensing schemes, including the California Finance
Lenders Law, the California Residential Mortgage Lending
Act, the Real Estate Law, and laws governing the operation
of state and federally chartered banks or credit unions;
d) This partition of regulation dilutes consumer protection
and creates confusion and unnecessary administrative
difficulties for financial services entities; and,
e) The current regulatory system creates licensing
arbitrage, with entities seeking out licenses from various
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regulators in order to obtain an advantage.
EXISTING LAW :
1)Provides for the regulation of the following licensees by DOC:
a) Broker-dealers and the agents or registered
representatives of broker-dealers';
b) Investment advisers and investment adviser
representatives or associated persons;
c) Capital access companies;
d) The Franchise Investment Law;
e) Check sellers, bill payers, and proraters;
f) Escrow agents;
g) The Finance Lenders Law;
h) Deferred deposit originators;
i) Securities depositories;
j) Business and industrial development corporations; and,
aa) The California Residential Mortgage Lending Act.
2)Provides for the regulation of the following by DFI:
a) Banks and trust companies;
b) Foreign Banks;
c) Money transmitters;
d) Issuers of travelers checks;
e) Bank holding companies;
f) Credit unions;
g) Industrial loan companies; and,
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h) Sellers of payment instruments.
3) Empowers DRE to enforce and regulate the following:
a) Real estate agents and mortgage brokers;
b) Prepaid Rental Listing Services
c) The Subdivided Lands Law; and,
d) The Vacation Ownership and Time-Share Act of 2004.
4)Provides OREA with the authority to regulate the Real Estate
Appraisers' Licensing and Certification Law;
FISCAL EFFECT : Unknown
COMMENTS :
Background :
The difficulties and crisis associated with the subprime
meltdown have highlighted to varying degrees the issues of
regulation and enforcement of financial entities. California is
the one of the largest and most diversified economies in the
world with a gross state product (GSP) of over $1.8 trillion in
2007. For comparison, global gross domestic product (GDP) was
$53.3 trillion, with the U.S. ($13.8 trillion) having the
highest GDP of any individual nation, followed by Japan ($4.3),
Germany ($3.3 trillion), China ($3.2 trillion), United Kingdom
($2.7 trillion), France ($2.5 trillion), Italy ($2.1 trillion),
Spain ($1.4 trillion), Canada ($1.4 trillion), and Brazil ($1.3
trillion). Based on these figures from the International
Monetary Fund, if California were an independent nation it would
rank as the eighth largest economy in the world. As the largest
state in the US, California is home to 12.1% of the nation's
population and 11.6% of all jobs.
In spite of these numbers, and California's rank among nations,
the state regulates financial services entities across four
regulatory agencies. At a time when even the Federal regulators
are considering major regulatory reforms of the financial
services industry, California must take the lead in establishing
common sense regulations that are good for consumers and good
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for licensees.
The United State Department of Treasury has also started a
review process to examine the myriad of regulatory bodies in a
report issued March 2008, The Department of the Treasury
Blueprint for Modernized Financial Regulator Structure. This
report was primarily concerned with the regulatory framework of
federal agencies, however the following passage from that report
could just as well describe California's environment:
?the inability of any regulator to take coordinated action
throughout the financial system makes
it more difficult to address problems related to financial
market stability. Second, in the
face of increasing convergence of financial services providers
and their products,
jurisdictional disputes arise between and among the functional
regulators, often
hindering the introduction of new products, slowing innovation,
and
compelling migration of
financial services and products to more adaptive foreign
markets.
Finally, a functional system also results in duplication of
certain common activities
across regulators. While some degree of specialization might be
important for the
regulation of financial institutions, many aspects of financial
regulation and consumer
protection regulation have common themes. For example, although
key measures of
financial health have different terminology in banking and
insurance-capital and
surplus respectively-they both serve a similar function of
ensuring the financial strength and
ability of financial institutions to meet their obligations.
Similarly, while there are
specific differences across institutions, the goal of most
consumer protection regulation is to
ensure consumers receive adequate information regarding the
terms of financial
transactions and industry complies with appropriate sales
practices
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The intent of this bill is to create a one-stop-shop regulator
for financial service entities in California. In creating the
DFS, the intention is to ensure that the expertise that
currently exists at the current agencies is retained by the new
agency. It is not the intent of this bill to expand or limit
the activities that licensees can carry out under their existing
licensing laws. Further, attention has been given to the
special funding nature of the agencies and their migration into
DFS. The agencies are currently funded through licensing fees
and/or special assessments charged to the entities they
regulate. These fees are placed in specific funds utilized for
the enforcement of that particular licensing law. For example,
state chartered banks pay assessments that go into a fund that
is used solely for the administration of the banking law, and to
ensure the safety and soundness of those institutions.
Similarly, residential mortgage lenders under DOC, pay fees and
assessments that are used to administer their licensing program.
This arrangement would continue to take place under DFS, with
each licensee paying into the fund that is used solely for their
specific regulation and licensing. This is not a case where
banks or credit unions would be paying for the regulation of
residential mortgage lenders, or vice versa.
The essential example of the unnecessary split of regulation is
mortgage lending activity. Currently, state chartered banks and
credits unions, regulated by DFI, offer residential mortgage
loans. Residential mortgage lenders and finance lenders,
regulated by DOC, also engage in mortgage lending. DRE licensed
real estate brokers also broker mortgage loans, which may even
be funded by the banks, credit unions, residential mortgage
lenders or finance lenders. Couple this with overlapping
federal regulations and jurisdictions and one arrives at the
conclusion that systems to deliver and regulate mortgage loans
is inherently baffling and convoluted.
The idea of combining regulatory agencies has occurred before.
In 2005, the Governors California Performance Review published
several reports and documents recommending structural changes to
California's agencies, boards and commissions. In particular,
the report Form Follows Function: A Framework to Improve the
Performance and Productivity of California State Government
recommended that DOC and DFI would fall under an Undersecretary
of Financial Services Division of a proposed Commerce and
Consumer Protection Department. DRE and OREA were also included
under this department, but would have remained a distinct entity
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separate from the Financial Services Division.
DOC:
Since 2001, the DOC has compelled finance lenders and mortgage
bankers to make over $62.5 Million in refunds to consumers. DOC
has authority over finance lenders and brokers who, in 2007,
made or assisted in the making of about $202.4 billion in
consumer and commercial finance loans. DOC also regulates
mortgage bankers who made $103 billion in home loans to
Californians in 2007, and who serviced $611 billion in home
loans during that year.
Since 2001, DOC has brought approximately 5,063 enforcement
actions against people or companies perpetrating frauds, making
misrepresentations, and pursuing predatory practices.
As of January 1, 2009, DOC regulates over 323,150 entities,
including:
3,473 broker-dealers,
265,355 agents or registered representatives,
3,023 investment advisers,
45,926 investment adviser representatives or associated
persons,
831 independent escrow agents,
3,744 consumer and commercial finance lenders and 6,281
locations,
390 residential mortgage lenders or mortgage bankers,
and
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414 deferred deposit originators at 2,386 locations
DFI :
DFI licenses and regulates commercial banks, credit unions,
industrial banks, premium finance companies, trust companies,
agencies, branches and representative offices of foreign banks,
savings and loans associations, money transmitters, issuers of
payment instruments and traveler's checks, and business and
industrial development corporations.
The department was formed by consolidating the divisions of
Credit Unions and Industrial Loan Companies from the DOC and the
Department of Savings and Loan and the State Banking Department,
some of which date back to the mid 19th century.
Starting in 1857, banking enterprises in California were granted
charters under the General Corporation Laws. Savings banks were
authorized under the provisions of an act passed in 1862.
The year 1878 marks the advent of actual banking supervision in
California. In that year, an act was passed creating a three
person Board of Bank Commissioners and placing under its
jurisdiction "every savings bank and banking company
incorporated under the laws of this state, or any other state or
country and doing business in this state".
Over time, it became apparent that the Board's regulatory powers
and inadequate bank chartering and examination practices were
insufficient to properly protect depositors. In 1909, the Bank
Act was passed, creating the State Banking Department with the
Superintendent of Banks appointed by the Governor to a term of
four years. This was changed in 1911 to provide that the
Superintendent hold office "at the pleasure of the Governor".
The Bank Act was completely revised in 1949 and was codified in
1951 as Division I of the Financial Code. The Banking Law was
again extensively revised in 1979 to bring it in line with
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General Corporate Law and Generally Accepted Accounting
Principles.
As of November 2008, DFI oversees the operation of approximately
700 financial institutions, including about 187 state banks and
208 state credit unions, with combined assets totaling more than
$290 billion. It ensures public confidence in financial
institutions by protecting the interests of depositors,
borrowers, shareholders and consumers through enforcement of
applicable state and federal laws.
DRE :
The revenue necessary to operate the DRE is derived from fees
charged for real estate licenses, subdivision public reports,
and various other permits issued by the Department. Employees
operating from District Offices in five cities (Sacramento,
Fresno, Los Angeles, Oakland, and San Diego) carry out the
Department's responsibilities as mandated by the Real Estate Law
and the Subdivided Lands Law.
The core functions of the DRE are to administer license
examinations, issue real estate licenses, regulate real estate
licensees, and qualify subdivision offerings. The Department
is a special fund agency that derives virtually all its revenues
from examination, license and subdivision fees.
DRE is divided into various divisions that are managed by
program chiefs (Assistant Commissioners). These divisions are as
follows: Licensing, Enforcement, Legal, Audits, Subdivisions,
Legislation and Public Information, and Administrative Services,
which consists of Information Systems, Fiscal and Human
Resources.
As of November, 2008, DRE has 152,704 brokers
(corps/officers/individuals) and 383,116 salespersons for a
total of 535,822 licensees
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
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Opposition
California Association of Realtors
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081