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