BILL ANALYSIS                                                                                                                                                                                                    






                        SENATE COMMITTEE ON BANKING, FINANCE,
                                    AND INSURANCE
                           Senator Ronald Calderon, Chair


          AB 33 (Nava)                  Hearing Date:  June 17, 2009  

          As Amended June 11, 2009
          Fiscal:             Yes
          Urgency:       No
          

           SUMMARY    Would reorganize the Departments of Financial  
          Institutions and Corporations as divisions, under a  
          newly-created Department of Financial Services, effective July  
          1, 2011; consolidate the Office of Real Estate Appraisals into  
          the Department of Real Estate, effective July 1, 2011; create an  
          Office of Financial Consumer Advocacy within the Department of  
          Financial Services; shift certain mortgage lending, brokering,  
          servicing functions, and business opportunity activities out  
          from under the Real Estate Law and to a new law administered by  
          the new Division of Corporations, effective July 1, 2012; and  
          would require the preparation and submission of two  
          comprehensive reports containing recommendations regarding how  
          the consolidations described above should be implemented, as  
          specified.
           
          DIGEST
            
          Existing law
            
           1.  Provides for the Department of Financial Institutions (DFI),  
              headed by a Commissioner of Financial Institutions, to  
              administer state laws regulating the activities of  
              state-chartered depository institutions, money transmitters,  
              issuers of travelers checks, and issuers of payment instruments;

           2.  Provides for the Department of Corporations (DOC), headed by a  
              Commissioner of Corporations, to administer state laws  
              regulating the activities of certain mortgage brokers, lenders,  
              and servicers; payday lenders; escrow agents; proraters;  
              securities broker-dealers and investment advisers; and others;

           3.  Provides for the Department of Real Estate (DRE), headed by a  
              Commissioner of Real Estate, to administer the Real Estate Law,  
              which authorizes real estate brokers, and real estate  




                                                   AB 33 (Nava), Page 2




              salespersons acting under the supervision of real estate  
              brokers, to engage in one or more of the following activities:   
              representing buyers and sellers in residential and/or commercial  
              real estate transactions; performing property management;  
              engaging in mortgage brokering, lending, and/or servicing;  
              performing escrow functions, in the course of or incidental to a  
              real estate transaction, as specified; and representing a buyer,  
              seller, or borrower in the purchase, sale or financing of a  
              business opportunity, as specified;

           4.  Provides for the Office of Real Estate Appraisers (OREA),  
              headed by a Director, to administer state law regulating the  
              activities of appraisers;

           5.  Authorizes the Commissioners of DFI, DOC, DRE, and the Director  
              of OREA to establish license and examination fees and impose  
              other charges on their licensees, as specified, to fully offset  
              the costs of administering the laws under these departments'  
              jurisdictions;  

           6.  Requires the Governor to appoint the Commissioners of Financial  
              Institutions, Corporations, and Real Estate, and the Director of  
              OREA, and requires these appointees to be confirmed by the  
              Senate;

           7.  Provides for the Business, Transportation & Housing Agency  
              (BT&H), headed by a Secretary, who is appointed by the Governor  
              and required to be confirmed by the Senate, to oversee the  
              activities of DFI, DOC, DRE, and OREA.
            
          This bill

             1.  Would transfer OREA to DRE, effective July 1, 2011, deem  
              the Real Estate Appraisers' Licensing and Certification Law  
              part of the Real Estate Law, and would provide that, after  
              July 1, 2011, the Director of OREA shall serve at the  
              pleasure of the Governor and administer the Real Estate  
              Appraisers' Licensing and Certification Law, in consultation  
              with the Governor and the Commissioner of Real Estate.   
              Would make no other substantive changes to the Director's or  
              to OREA's authority or responsibilities; 

            2.  Would create a Department of Financial Services (DFS),  
              effective July 1, 2011, which would be run by a Commissioner  
              appointed by the Governor and subject to Senate  
              confirmation, and would also do the following, effective  




                                                   AB 33 (Nava), Page 3




              July 1, 2011:

               a.     Would consolidate DOC and DFI into DFS as divisions  
                 run by directors, rather than as departments run by  
                 commissioners; 

               b.     Would retain the former Commissioners of  
                 Corporations and Financial Institutions as the directors  
                 of their respective divisions on and after July 1, 2011,  
                 but would provide that both individuals would hold office  
                 at the pleasure of the DFS commissioner;

               c.     Would provide that, if the Commissioner of Financial  
                 Services finds that any provision of federal law  
                 applicable to financial services providers doing business  
                 in California is substantively different from the  
                 provisions of the Financial Code applicable to state  
                 licensees, the Commissioner may, by regulation, apply  
                 that provision of federal law to the state licensees  
                 without having to comply with the provisions of the  
                 Government Code that typically govern public notice and  
                 review of proposed regulations, as specified;

               d.     Would create an Office of Financial Consumer  
                 Advocacy within DFS, headed by a director, who would be  
                 appointed by the Commissioner of Financial Services and  
                 serve at the Commissioner's pleasure;

               e.     Would authorize the Commissioner of Financial  
                 Services to appoint a chief deputy, and to employ other  
                 deputies and other employees, including attorneys, as the  
                 Commissioner sees fit to discharge his or her duties, and  
                 to establish offices, in addition to offices previously  
                 maintained by DFI and DOC, in any other location in the  
                 state the Commissioner deems appropriate;

            3.  Would require the Commissioner of Financial Services, in  
              consultation with the Director of the Division of  
              Corporations and the Real Estate Commissioner, to adopt  
              regulations, on or before January 1, 2012, creating a new  
              license or licenses and setting related fees, to allow the  
              Division of Corporations to assume responsibility for the  
              provisions of the Real Estate Law that allow real estate  
              licensees to provide lending, servicing, mortgage brokerage  
              services, and business opportunity activities, and would  
              prohibit real estate licensees engaged in those activities  




                                                   AB 33 (Nava), Page 4




              from continuing to engage in them, after the effective date  
              of those regulations; 

            4.  Would require the Division of Corporations to license and  
              regulate mortgage brokers, effective July 1, 2012, including  
              those real estate licenses who make, arrange, and/or service  
              loans and/or engage in business opportunity activities, and  
              would provide that all of these individuals shall be deemed  
              to be fiduciaries in their relationship with, and have  
              attendant fiduciary duties toward, their principals;

            5.  Would require the Secretary of BT&H, in consultation with  
              the Commissioner of Financial Institutions, Commissioner of  
              Corporations, and Commissioner of Real Estate, to submit a  
              report to the Legislature on or before January 1, 2011, that  
              contains recommendations regarding myriad aspects of the  
              consolidation, including recommendations regarding:

               a.     All appropriate areas for consolidation of the  
                 operations, licensing frameworks, regulations, and other  
                 aspects of DFI, DOC, and the portions of the DRE license  
                 that would be shifted from DRE to DOC under this bill;

               b.     Any new or different authorities needed to address  
                 any gaps in, or shortcomings of, the regulation of  
                 financial services in California;

               c.     The possible consolidation of the regulation of any  
                 other financial services that are currently outside the  
                 jurisdiction of BT&H;

               d.     Consolidation of the regulation of home mortgage  
                 lending in California;

               e.     Firewalls between the Department of Financial  
                 Services and its divisions and the Office of Financial  
                 Consumer Advocacy or employees;

               f.     Effective and efficient implementation of the  
                 federal Secure and Fair Enforcement for Mortgage  
                 Licensing Act of 2008 within the Department of Financial  
                 Services;

               g.     Additional changes that should be made in light of  
                 any developments at the federal level regarding the  
                 regulation of financial services;




                                                   AB 33 (Nava), Page 5





               h.     Ways to better serve and protect financial consumers  
                 in California, including, but not limited to, public  
                 outreach and public protections;

               i.     The advisability of establishing recovery accounts  
                 to protect financial services consumers in California;

               j.     Staffing changes that are advisable;

               aa.                   Information technology changes that  
                 are advisable;

               bb.                   The optimal number, size, and  
                 locations of offices for DFS and its divisions and the  
                 Office of Financial Consumer Advocacy;

               cc.                   The structure of fees and other  
                 revenue sources, as well as reserve accounts;

               dd.                   The estimated cost impacts of all  
                 recommendations and details regarding how those estimated  
                 impacts are expected to manifest;

               ee.                   Any other recommendations the  
                 Secretary of BT&H believes would be helpful;

               ff.                   Any necessary statutory changes  
                 required to achieve the recommendations in the report;

           8.  Would require the Real Estate Commissioner and the Director  
              of the Office of Real Estate Appraisers to submit a joint  
              report to the Secretary of BT&H, on or before January 1,  
              2011, that addresses numerous aspects regarding  
              consolidating the operations, licensing, frameworks, and  
              other aspects of DRE and OREA, as specified;

           9.  Would make related, conforming changes.

           COMMENTS

          1.  Purpose of the bill   As described by BT&H, the bill's  
              sponsor:  To consolidate the regulation of financial  
              services and real estate into two departments; direct the  
              regulators to report various recommendations for future  
              improvement of the regulatory structure; and create a  




                                                   AB 33 (Nava), Page 6




              financial consumer advocate to advise regulators regarding  
              increasing public protection, address bureaucratic access  
              issues, and conduct public outreach.    

           2.  Summary of Analysis Recommendations   In order to focus this  
              Committee's discussion of AB 33, a summary of the  
              recommendations discussed in this analysis is provided here.  
               

           Consolidating OREA and DRE:   OREA should be consolidated under  
              the authority of DRE, and the independence of OREA's  
              licensing and disciplinary actions should be retained.   
              Language preserving the independence of OREA's licensing and  
              disciplinary functions should be codified, concurrent with,  
              or before the consolidation, and should be vetted with the  
              Appraisal Subcommittee (ASC) to ensure that it will not  
              result in California's "disapproval" by the ASC.  The report  
              required to be submitted by the Commissioner of DRE and the  
              Director of OREA to the Secretary of BT&H on January 1, 2011  
              should be developed with input from the public and affected  
              members of the appraisal and real estate industry, and  
              submitted to the Legislature.  Further justification in  
              support of this recommendation is included on page 12 of  
              this analysis.

           Consolidating DFI and DOC into a single department:   This  
              proposal should not be implemented, until further  
              justification is provided in support of the idea.  This  
              proposal may have merit, but there is insufficient  
              information available with which to evaluate the proposal at  
              the present time.

           Creating a new DFS to oversee the activities of the consolidated  
              DFI and DOC:   This proposal should not be implemented, until  
              more detail is provided in support of the idea, and until  
              the mechanism to fund the new DFS is identified.  This idea  
              may have merit, if the Conference Committee's vote to  
              eliminate BT&H is ultimately adopted.  However, if BT&H  
              remains as an entity overseeing DFI and DOC, it is unclear  
              why the state would need three layers of bureaucracy  
              overseeing financial services (division-level, DFS, and  
              BT&H). 

           Narrowing the authorized activities in which real estate  
              licensees may engage by removing mortgage brokering,  
              lending, and servicing, and business opportunity activities,  




                                                   AB 33 (Nava), Page 7




              from that license, and moving these activities, when  
              performed by persons who do not have finance lender law or  
              residential mortgage lending act licenses or a bank or  
              credit union charter, to a new law, administered by DOC.   
              Give DOC the authority to draft this new law through  
              regulation:   This proposal should not be implemented, until  
              detailed language is provided to the Legislature regarding  
              the scope of the law, authorized activities that may be  
              undertaken by licensees, licensing requirements, a list of  
              prohibited activities, and the law's enforcement provisions,  
              and until the Legislature is provided with detail regarding  
              how commercial lending/brokering/servicing activities will  
              be regulated.  This reorganization may have merit,  
              particularly in light of new SAFE Act requirements, which  
              apply identical rules to all residential mortgage loan  
              originators employed by non-depository institutions.   
              However, the risks of giving carte blanche to the  
              Commissioner of Financial Services to craft a new law  
              through regulation, without any assurance that it will  
              provide an equal or greater level of consumer protection  
              than the existing Real Estate Law, and without knowing how  
              licensees and licensing requirements will be affected by the  
              transition, are too great to approve the proposal without  
              more specifics.  

           Require the Secretary of BT&H to work with DFI, DOC, and DRE and  
              submit a report to the Legislature that contains a variety  
              of recommendations regarding department consolidations and  
              law revisions:   This report should be developed by the  
              departments, with input from the public and the financial  
              services industry.  It should be used by the Administration  
              and the Legislature to craft legislation that implements  
              only those consolidation proposals that make sense, once  
              they have been thoroughly reviewed during and after the  
              report preparation process.  DFI and DOC should not be  
              consolidated under DFS, and the scope of the real estate  
              license should not be narrowed, nor should a new law  
              regulating those activities formerly regulated under the  
              real estate law be drafted, until the findings of the report  
              are issued and evaluated.  

           Create an Office of Financial Consumer Advocacy within the  
              Department of Financial Services, whose director is  
              appointed by the Commissioner of DFS, and who serves at the  
              pleasure of the Commissioner:   The Director of Financial  
              Consumer Advocacy should be an independent position, with a  




                                                   AB 33 (Nava), Page 8




              fixed term, to ensure that the advocate is not beholden to,  
              nor unduly influenced by, the Commissioner of Financial  
              Services.  Thought should be given to requiring the position  
              to be appointed by the Governor and subject to Senate  
              confirmation.  The responsibilities of the Office of  
              Financial Consumer Advocacy should be broadened beyond those  
              envisioned in the bill, to include not only laws regulated  
              by DOC and DFI, but also laws overseen by DRE and OREA.  The  
              duties of the Financial Consumer Advocate should be more  
              clearly spelled out in the law authorizing the Office's  
              formation.  The funding source(s) for the Office of  
              Financial Consumer Advocacy should be identified.  
           
           3.  Discussion   As currently drafted, AB 33 presents the  
              Legislature with BT&H's preferred answer (consolidation of  
              DFI and DOC under a new DFS, consolidation of OREA within  
              DRE and retention of DRE outside the new DFS, and creation  
              of a new consumer advocate), and then directs the four  
              affected departments to develop recommendations regarding  
              the best way(s) in which to implement that answer.  The bill  
              does not pose the question, "Should we do this?" but rather  
              says, "We're doing it" and then asks, "How do we do it in  
              the best way possible?"  

          AB 33 is the latest in a long list of proposals that have been  
              introduced over the years to reorganize California's  
              financial and real estate regulators, shift the oversight of  
              certain laws from one regulator to another, and restructure  
              our financial and real estate laws for better administrative  
              efficiency, increased consumer protection, and/or reduced  
              regulatory burden.  Some of the prior proposals succeeded;  
              others did not.  AB 33 is unique, not in its content, but in  
              its breadth, combined with the timing of its introduction.  

          California is currently struggling under the weight of an  
              economic downturn brought on by problem mortgages, and  
              subsequently fueled by a nationwide liquidity crisis, rising  
              unemployment, and a plunging stock market, among other  
              contributing factors.  Many Californians who used to make  
              their living off real estate have had to seek new lines of  
              work; others are struggling to survive, and barely hanging  
              on to their livelihoods.  

          In addition, California's mortgage lending licensees and their  
              regulators are about to undertake the massive task of  
              complying with the federal Secure and Fair Enforcement for  




                                                   AB 33 (Nava), Page 9




              Mortgage Licensing Act (the SAFE Act).  It is estimated that  
              approximately 40,000 individuals currently employed by DOC  
              licensees will need to obtain SAFE Act-compliant mortgage  
              loan originator licenses by July 31, 2010, and that  
              approximately 43,000 DRE licensees will need to obtain SAFE  
              Act-compliant mortgage loan originator license endorsements  
              by December 31, 2010.   California's DOC and DRE have  
              already begun planning for the SAFE Act transition, and will  
              ramp up their activities, once state SAFE Act legislation is  
              enacted later this year.  Both of these departments will be  
              devoting significant amounts of resources toward ensuring  
              SAFE Act compliance.  

          As drafted, AB 33 would require all four departments to work  
              together to prepare two comprehensive reports during 2010,  
              which will fill in the details of the consolidations.  They  
              will be required to prepare these reports, at the same time  
              they are working to implement the SAFE Act and address other  
              important changes that are developing at the federal level  
              (including a proposed overhaul of the federal financial  
              regulatory system, whose changes will surely trickle down  
              and affect states).  The changes proposed in this bill will  
              be imposed on an industry already struggling under the  
              weight of a bad economy, and on licensees who will be  
              struggling to navigate the new maze of SAFE Act changes.  

          The reports will be completed in time to hand them over to a new  
              Administration, which will inherit a reorganized regulatory  
              framework, and will be faced with the task of making it  
              work.  Those who develop the reports will not be around to  
              implement them. 

          The cost of the proposal, and its financial impact on licensees,  
              is also unclear.  The sponsor has indicated that it is  
              developing detailed cost estimates, which will be provided  
              to the Legislature when they are completed.  However, the  
              sponsor acknowledges that the bill is not intended as a  
              cost-savings measure.  While long-term savings may flow from  
              the increased efficiencies that are set in motion by the  
              bill, the bill is likely to generate short-term costs of  
              uncertain magnitude.  Because all four departments are  
              special fund departments whose operating budgets are  
              fully-supported by licensees, the burden of those costs will  
              inevitably fall on licensees.  The cost of a financial  
              services or real estate license could increase, during a  
              time period when many licensees are struggling to stay in  




                                                   AB 33 (Nava), Page 10




              business.

           4.  Input from interested parties   Because of the short length  
              of time between the latest amendments to AB 33 and the date  
              of this Committee's hearing, interested parties were unable  
              to submit letters of support or opposition by the Committee  
              deadline.  However, several organizations expressed informal  
              concerns during an interested parties meeting convened on  
              Wednesday, June 10th, by the author and sponsor, and a  
              handful of organizations provided this committee with  
              letters of concern, clarifying their comments at the  
              meeting.  This section does not purport to represent the  
              views of all interested parties, but is offered in an  
              attempt to provide Members and the public with a sense for  
              the initial reactions of interested parties to the proposed  
              changes.  

          Nearly all of those who have reviewed its language have the same  
              initial reaction:  The changes proposed in this bill may  
              have merit, and may ultimately prove to be a dramatic  
              improvement over the status quo, but the details necessary  
              to make such an evaluation are missing, and will not be  
              available until after the Legislature has set the  
                                                                             consolidation in motion.  To many, the bill is backwards;  
              the recommendations should precede the reorganization, not  
              vice versa.  Those affected by the SAFE Act have also  
              expressed concern that the timing of the changes proposed in  
              the bill is likely to complicate SAFE Act implementation,  
              and could potentially draw key DOC and DRE staff away from  
              SAFE Act duties, in order to flesh out consolidation  
              recommendations.

          In general, depository institutions, including banks and credit  
              unions, would like to see the existing regulatory structure  
              preserved, to the greatest extent possible.  These  
              institutions are concerned that their focus on safety and  
              soundness, and the close working relationship they currently  
              have with the Commissioner of Financial Institutions, could  
              be eroded under the proposed reorganization.  They believe  
              that the assessments they pay should continue to be siloed  
              (bank assessments used to support bank regulatory  
              activities, credit union assessments used to support credit  
              union regulatory activities), and are seeking assurances  
              that their assessments will not be commingled with  
              assessments paid by other members of the financial services  
              community.  They are also concerned about the possibility  




                                                   AB 33 (Nava), Page 11




              that their institutions could be examined by individuals  
              unused to, and untrained to, examine depositories.   
              Optimally, they would like to see a requirement that the  
              Commissioner of DFS and the Director of the Division of  
              Financial Institutions have experience, either as a former  
              regulator of depository institutions or as a former  
              employee, director, or board member of a depository  
              financial institution.  They would also like to see language  
              added, ensuring that there is a process for soliciting  
              public input on the appointment of the director of the  
              Division of Financial Institutions.   Finally, they  
              encourage the Legislature to consider the importance of  
              state-chartered depositories to California, and observe that  
              if the proposed changes make a state charter less desirable,  
              California could lose a significant number of state  
              licensees to a federal charter.  To date, no depository  
              institution, nor any association representing depository  
              institutions, has taken a formal position on the bill.  They  
              remain watchful and concerned, but are not opposed.

          A group of former California state banking commissioners,  
              including Howard Gould, James Gilleran, Conrad Hewitt,  
              Walter Mix, and Stan Cardenas, submitted a joint letter of  
              opposition, based on what they view as the poor timing of  
              this proposal.  In their view, this is not the time to  
              divert the attention and resources of DFI from its primary  
              mission of ensuring the safety and soundness of its  
              institutions, to developing recommendations relating to the  
              consolidation.  The former Commissioners urge the  
              Legislature to hold off on its reorganization effort, until  
              national and state economic conditions improve and  
              state-chartered banks regain sound footing.  They also  
              believe that the state should hold off on enacting any state  
              banking department reorganization, and on developing any  
              recommendations relating to such reorganization, until after  
              pending federal regulatory changes impacting the banking  
              industry have been implemented.  

          Those who are currently regulated by DRE, but who would be  
              regulated by DOC under the proposed reorganization, have  
              expressed two types of concerns.  First, there is some  
              question about how the commercial lending activities  
              currently authorized under a DRE license would be treated  
              under the reorganization.  There has been preliminary  
              discussion about regulating residential mortgage brokering,  
              lending, and servicing activities under a new mortgage loan  




                                                   AB 33 (Nava), Page 12




              originator licensing law that would be administered by DOC.   
              That new law would cover persons who are currently engaging  
              in residential lending/brokering/servicing activities under  
              their DRE license.  However, it is currently unclear how a  
              person who engages in commercial lending, brokering, and/or  
              servicing under his or her DRE license would be regulated,  
              once these activities are no longer authorized to be  
              conducted under the Real Estate Law.  DRE's mortgage-related  
              licensees, both residential and commercial, are also  
              concerned about the costs and regulatory burden associated  
              with the reorganization.  Like the depositories, these  
              organizations are watchfully interested in AB 33; they are  
              not opposed.

          Consumer groups are similarly watchful.  They would like  
              assurances that existing law consumer protections will be  
              preserved under the new organizational structure, and  
              believe that a commitment to maintaining strong consumer  
              protections should be the guiding principle of the  
              consolidation.  They are encouraged by the proposal to  
              establish a new Office of Financial Consumer Advocacy, but  
              believe there is insufficient detail available about the  
              Office, its duties, or authority, to evaluate its likely  
              effectiveness.  Consumer groups believe that the Director of  
              the Office of Financial Consumer Advocacy should be an  
              independent position, empowered to recommend changes that  
              would improve consumer protection, without fear of removal  
              for expressing views that challenge the status quo.  At  
              least one consumer group would like to see the Office given  
              rulemaking authority to define unfair and deceptive  
              practices, a mandate to police and enforce existing consumer  
              protections, and the staffing resources and access to data  
              necessary to determine the risk and performance of products  
              (including mortgage products) in the marketplace.  

           5.  Author's Amendments   The author plans to offer the following  
              amendments in Committee, to address technical concerns  
              raised by Committee staff prior to the hearing, and to begin  
              addressing some of the more substantive issues and questions  
              that have been raised about the bill's language since that  
              language was shared with interested parties.   Specific  
              language to implement the non-technical amendments was not  
              available for review, when this Committee analysis was  
              prepared, but may be available for review in time for the  
              hearing.





                                                   AB 33 (Nava), Page 13




                   a.        Non-technical amendments:
                   
                        i.             Provide for public input during  
                         development of the two reports by posting draft  
                         recommendations on the BT&H web site and  
                         soliciting public input on those recommendations  
                         before preparing the final reports;

                        ii.            Create the Office of Financial  
                         Consumer Advocacy as an independent entity, and  
                         move it out from under DFS.  More fully describe  
                         the duties of the Consumer Advocate;

                        iii.           Clarify that the bill is not  
                         intended to expand or diminish the fiduciary duty  
                         that any licensee currently has toward his or her  
                         client(s);

                        iv.            Clarify that the bill is not  
                         intended to expand or diminish existing  
                         authorities of the existing departments or  
                         commissioners;

                        v.             Clarify that existing funds for  
                         licensing operations will continue by expanding  
                         the list already contained on page 14, lines 34  
                         through 40 and page 15, lines 1 through 3.

                   b.        Technical amendments:

                         i.             Page 11, lines 7 and 8, strike  
                         "Institutions" and insert: "Services";
                         
                         ii.            Page 11, line 16, after  
                         "regulations," insert:  "which shall be on or  
                         after July 1, 2012,"
                         
                         iii.           Page 11, line 17, strike "licenses"  
                         and insert: "licenses or licenses and license  
                         endorsements";
                         
                         iv.            Page 11, line 14, page 11, lines 20  
                         and 21, and other sections of the bill that  
                         describe mortgage lending, mortgage brokerage  
                         services, and business opportunity activities by  
                         reference to Section 10131(d) and 10131(e) of the  




                                                   AB 33 (Nava), Page 14




                         Business and Professions Code:  Retain the  
                         references to 10131(d) and (e) and add references  
                         to Sections 10008.5, 10030, and 10131.1 of the  
                         Business and Professions Code;
                         
                         v.             Strike the section of the bill that  
                         gives the Commissioner of DFS the ability to undo  
                         state statute through regulation, as specified:   
                         Delete page 12, lines 22 through 40 and page 13,  
                         lines 1 through 31;
                         
                         vi.            Page 19, between lines 26 and 27,  
                         insert:  "(q) Recommendations regarding any  
                         necessary regulation changes necessary to achieve  
                         the recommendations made in the report."
                         
          6.  Historical Context  

           The three departments and one office that would be reorganized  
              under the provisions of AB 33 are described below, to  
              provide an historical context for the proposal before the  
              Committee.  All but one (OREA) have undergone significant  
              reorganization over the years.  OREA is described first,  
              because it presents a special case, as federal law mandates  
              its independence.

           OREA  California's Office of Real Estate Appraisers had its  
              origin in the Savings and Loan Crisis of the late 1980's,  
              and a federal law enacted as part of the legislative  
              response to that crisis.  Title XI of the federal Financial  
              Institutions Reform , Recovery, and Enforcement Act of 1989  
              (FIRREA; 12 USC 3331 et seq.) subjected the real estate  
              appraisal profession to federal oversight, required each  
              state to create a regulatory agency overseeing the  
              regulation of appraisers involved in federally-related real  
              estate transactions, and created the Appraisal Subcommittee  
              (ASC), an entity established to oversee the operations of  
              all state appraiser regulatory agencies, including OREA, to  
              ensure that they conform to Title XI.  

          According to individuals familiar with the history of OREA's  
              creation, California originally planned on creating OREA as  
              an independent division of DRE.  Placement of the Appraisal  
              Law in the Business and Professions Code, in code sections  
              that begin where the Real Estate Law ends, is one reflection  
              of those original plans.  Although a last-minute decision  




                                                   AB 33 (Nava), Page 15




              resulted in the creation of OREA as a separate body, there  
              have been periodic attempts to merge it with other  
              regulatory agencies (including, but not limited to, SB 1866  
              from 2002, a vetoed bill that would have folded OREA into  
              DOC, and the California Performance Review, which proposed  
              to fold OREA into DRE, much like the proposal contained in  
              AB 33).  

          OREA's Independence -- A Federal Mandate:  Although FIRREA  
              provides that recommendations of the ASC are nonbinding on  
              the states, that federal law also gives the ASC power to  
              "disapprove" a state's appraiser regulatory scheme, if the  
              ASC determines that a state agency's policies, practices,  
              and procedures are inconsistent with Title XI.  If a state's  
              regulator is disapproved, no appraisers licensed or  
              certified by that state may provide valuations in  
              federally-related real estate transactions, something which  
              effectively eliminates the profession in any state so  
              disapproved.  

          ASC Policy Statement 1 sets out ASC's standards regarding the  
              structure and independence of state appraisal regulatory  
              agencies.  According to that policy statement, ASC does not  
              impose any particular organizational structure on states.   
              However, the subcommittee believes that: "Ideally, States  
              should maintaining totally independent State agencies  
              answerable only to the governor or a cabinet level official  
              who has no regulatory responsibility for real estate  
              licensing/certification, promotion, development or financing  
              functions ('realty related activities').  A state, however,  
              may choose to locate its state agency within an existing  
              regulatory body.  Any state with its appraiser regulatory  
              function in a department that regulates realty related  
              activities must ensure that adequate safeguards exist to  
              protect the independence of the appraiser regulatory  
              function."

          In August 2004, the ASC sent a letter to Governor Schwarzenegger  
              in response to a proposal in the CPR to transfer OREA from  
              BT&H to a new Department of Commerce and Consumer  
              Protection, under an Undersecretary for Real Estate, who  
              would also supervise DRE.  In that letter, the ASC reminded  
              the Governor that the organizational structure of any state  
              agency that oversees the state appraisers' regulatory body  
              must provide maximum insulation for that regulatory body  
              from the influence of any industry or organization whose  




                                                   AB 33 (Nava), Page 16




              members have a direct or indirect financial interest in the  
              outcome of the agency's decisions.  The ASC concluded by  
              stating:  "The ASC strongly urges that State agency  
              decisions, especially those relating to license or  
              certificate issuance, revocation and disciplinary actions,  
              not be made by State officials who are also responsible for  
              realty related activities.  State officials should accept  
              and implement the actions of the appraiser board unless they  
              are inconsistent with the public interest and trust.   
              Additionally, such State agency decisions should be final  
              administrative actions subject only to appropriate judicial  
              review."

          For these reasons, any consolidation of OREA with DRE must  
              maintain OREA's ability to issue and revoke licenses and act  
              as the sole administrative (non-judicial) arbiter of  
              disciplinary actions involving appraiser licensees.

           Justification for consolidating OREA under the authority of DRE:   
               OREA is a department that has been largely neglected by  
              both the Administration and the Legislature for several  
              years.  Until the confirmation of Director Bob Clark in  
              March 2009, the Office had been without a confirmed director  
              since Jerry Jolly left in May 1998.  OREA's $4.2 million  
              annual budget is dwarfed by the size of its outstanding  
              $16.6 million loan to the General Fund.  Its 26 authorized  
              positions are similarly dwarfed by the number of positions  
              authorized at DRE, DOC, and DFI (336, 314, and 250,  
              respectively)

          The office has also struggled for autonomy for many years.  For  
              as long as staff at both OREA and DRE can recall, OREA has  
              contracted out its human relations/personnel and  
              budget/fiscal functions to DRE.  OREA also relies on DRE and  
              BT&H staff for informal input on other matters, such as  
              legislation and rule-making.  At present, the Office lacks  
              in-house legal counsel, and Director Clark has chosen to  
              hold off on moving forward with any rulemaking packages  
              until he fills that vacant position.  Given OREA's existing  
              reliance on, and close relationship with, DRE, and the  
              overlap in the types of real estate transactions in which  
              their licensees both engage, consolidation, with the  
              independence required by federal law, is recommended.  

           DRE:   California has regulated the transfer of real estate since  
              1917, and the sale and leasing of subdivided agricultural  




                                                   AB 33 (Nava), Page 17




              lands since 1921.  Regulation of business and residential  
              subdivisions was added in 1933.  The Real Estate Law was  
              established in 1943, overseen by the Division of Real Estate  
              within the Department of Investment.  The existing  
              department known as DRE was created in 1969 (Chapter 138,  
              Statutes of 1969).  DRE has a budget of $44.8 million and  
              336 authorized positions in fiscal year 2008-09.  

          The proposal to shift mortgage lending, brokering, and  
              servicing, and business opportunity activities out from the  
              Real Estate Law and over to a separate law administered by  
              DOC is not the first proposal to shift certain lending  
              activities out of the Real Estate Law and over to DOC.  In  
              1994, SB 1978 (Chapter 994, Statutes of 1994), established  
              the California Residential Mortgage Lending Act (CRMLA).  SB  
              1978 created a new licensing and regulatory scheme for  
              federally-approved residential mortgage lenders and mortgage  
              servicers.  Those familiar with the shift describe it as a  
              response to the recognition that the Real Estate Law, which  
              covers myriad activities in which real estate licensees may  
              engage, was a bad fit for the group of lenders now covered  
              under the CRMLA.  Because the new law was specifically  
              crafted with that subset of former DRE licensees in mind, it  
              could be tailored to their specific activities.  By all  
              accounts, the law has worked well, and as intended, since  
              its creation.  The process used to create the CRMLA provides  
              a model for use by BT&H and its departments when crafting  
              the new mortgage lending/brokering/servicing law envisioned  
              by AB 33.

           DOC:   From 1929 until 1968, the Department of Corporations  
              existed as the Division of Corporations within the  
              Department of Investment.  In 1968, the Department of  
              Investment was abolished, and the Division of Corporations  
              became DOC.  The earliest DOC was organized into three  
              divisions, including the Division of Lender-Fiduciary Laws,  
              Division of Trading and Markets, and Division of Corporate  
              Finance.  DOC underwent a reorganization in 1974, which  
              reorganized the department into its existing three divisions  
              (Enforcement, Financial Services, and Securities  
              Regulation), and its existing three administrative offices  
              (Executive, Legislation & Policy, and Management and  
              Budget).  DOC's 2008-09 budget was $40.2 million and 314  
              positions.  

          As noted immediately above, DOC has already assumed  




                                                   AB 33 (Nava), Page 18




              responsibility for administering some of the residential  
              mortgage lending activities previously authorized under the  
              Real Estate Law.  In 1994, the same year that the CRMLA was  
              created, three separate laws previously administered by the  
              DOC, including the Personal Property Brokers Law, the  
              Consumer Finance Lenders Law, and the Commercial Finance  
              Lenders Law, were consolidated into a single new law, titled  
              the California Finance Lenders Law (CFLL; AB 2885, Chapter  
              1115, Statutes of 1994).  The CFLL is one of the laws likely  
              to be recommended for amendment, once BT&H and its  
              departments compile their recommendations in the two reports  
              due July 1, 2011.  

          DFI:  The State of California has had some form of banking  
              regulation since its formation.  In 1887, regulation was  
              formalized through the creation of the Board of Bank  
              Commissioners.  The 1909 Bank Act reorganized banking  
              regulation through the creation of the State Banking  
              Department.  In 1996, in an effort to consolidate the  
              regulation of all state-licensed depository institutions  
              into one department, DFI was created, by combining the State  
              Banking Department, Department of Savings and Loan, and a  
              division spun out of the Department of Corporations, which  
              regulated credit unions and industrial loan companies (AB  
              3351, Chapter 1064, Statutes of 1996).  Internally, DFI  
              includes a banking division, credit union division, and  
              money services division.  DFI's 2008-09 budget was $33.6  
              million and 250 PYs.  The department is in the third year of  
              a multi-year process of reorganizing all of the Financial  
              Code sections it oversees, in order to improve  
              administration of the laws it administers. 
           
          7.  Support  .  None received.

           8.  Opposition    A formal letter of opposition was received from  
              five former state banking commissioners, as described above.  
               

           











                                                   AB 33 (Nava), Page 19




          POSITIONS
          
          Support
           
          None received
           
          Oppose
               
          Five former State Banking Commissioners:  Howard Gould, James  
          Gilleran, Conrad Hewitt, Walter Mix, and Stan Cardenas


          Consultant:  Eileen Newhall  (916) 651-4102