BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Ronald Calderon, Chair AB 33 (Nava) Hearing Date: July 1, 2009 As Amended: June 23, 2009 Fiscal: Yes Urgency: No SUMMARY Would, effective July 1, 2011, reorganize the Departments of Financial Institutions and Corporations as divisions, under a newly-created Department of Financial Services; consolidate the Office of Real Estate Appraisals into the Department of Real Estate; and create an Office of Financial and Real Estate Consumer Advocacy within the Department of Financial Services. Would, effective January 1, 2011, require the preparation and submission of two comprehensive reports containing recommendations regarding how the consolidations and reorganizations described above should be implemented. Would, effective July 1, 2012, shift certain mortgage lending, brokering, servicing functions, and business opportunity activities out from under the Real Estate Law and over to a new law administered by the new Division of Corporations, 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, AB 33 (Nava), Page 2 which authorizes real estate brokers, and real estate 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; 2. Would expressly require firewalls to be maintained between DRE and OREA on and after July 1, 2011, to insulate the appraisal regulatory function from the real estate regulatory function, and to ensure that decisions related to appraisal license issuance, revocation, and disciplinary AB 33 (Nava), Page 3 actions are made by the Director of OREA and not by the Real Estate Commissioner; 3. 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 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 create an Office of Financial and Real Estate Consumer Advocacy, headed by a director, who would be appointed by the Governor, serve at the Commissioner's pleasure, and whose salary would be fixed by the Secretary of BT&H. The Director of the Office of Financial and Real Estate Consumer Advocacy would advise the Commissioner of DFS and the Commissioner of Real Estate on how DFS can provide a high degree of service and protection to the public. The Office would be responsible for public outreach to financial and real estate consumers, with the cooperation of DFS and DRE, and for performing other duties as determined by the Commissioner of DFS; d. 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; 4. 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 AB 33 (Nava), Page 4 Division of Corporations to assume responsibility for the provisions of the Real Estate Law that allow real estate licensees to provide commercial and residential lending, servicing, mortgage brokerage services, and business opportunity activities; would prohibit real estate licensees engaged in those activities from continuing to engage in them, after the effective date of those regulations (which would be on or after July 1, 2012); and would require the new regulations to maintain the same level of consumer protection now afforded under the Real Estate Law; 5. 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 commercial and/or residential loans and/or engage in business opportunity activities; 6. Would provide that, except for the transfer of certain authority from DRE to DOC, effective July 1, 2012, nothing in the bill expands or diminishes existing authorities of the existing departments or commissioners, nor expands or contracts existing duties, including fiduciary duties, of licensees. Would also state that nothing in the bill or the regulations it authorizes may contract existing consumer protections; 7. Would require that all existing funds and operating accounts continue, without being commingled, and only be used for purposes set forth in existing statutes or regulations pertaining to them, but would also expressly provide that a subsequent statute could be enacted to change the purposes to which these funds could be put; 8. 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 AB 33 (Nava), Page 5 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 and Real Estate Consumer Advocacy or employees; f. Effective and efficient implementation of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 within DFS; g. Additional changes that should be made in light of any developments at the federal level regarding the regulation of financial services; 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 and Real Estate 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 necessary statutory or regulatory AB 33 (Nava), Page 6 changes required to achieve the recommendations in the report; ff. Any other recommendations the Secretary of BT&H believes would be helpful; 8. Would require the Real Estate Commissioner and the Director of OREA to submit a joint report to the Legislature, 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, fourteen days after the effective date of the bill, require the Secretary of BT&H to solicit public comment on its Internet Web site regarding the recommendations required to be included in both reports. BT&H would be required to accept comments through its Web site for a period of 120 days, and would also be required to post a mailing address on its Web site, for use by members of the public who wish to submit comments by mail. BT&H would be required to consider the public comments when making its recommendations to the Legislature; 10. 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 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: The proposal contained in AB 33 should be approved. Under this proposal, OREA will be consolidated under the authority of DRE, and the independence of OREA's licensing and disciplinary actions will be retained. Language preserving the independence of AB 33 (Nava), Page 7 OREA's licensing and disciplinary functions will be codified, concurrent with, or before the consolidation, in a manner that ensures the reorganization will not result in California's "disapproval" by the Appraisal Subcommittee (see page 13 of this analysis for further discussion on this point). 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 will be developed with input from the public and affected members of the appraisal and real estate industry, and submitted to the Legislature. Consolidating DFI and DOC into a single department: This proposal should not be approved, 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 approved, until more justification is provided in support of the idea, and until the funding source(s) for the new DFS is/are identified. This idea may have merit, particularly if the Conference Committee's vote to eliminate BT&H is ultimately adopted. However, there is insufficient information available with which to evaluate the proposal at the present time, and insufficient justification for creating a third layer of bureaucracy overseeing financial services (division-level, the new DFS, and BT&H), without clarification regarding which level of bureaucracy will have which responsibilities and authority. Narrowing the authorized activities in which real estate licensees may engage by removing mortgage brokering, lending, and servicing, and business opportunity activities from that license, and moving these activities, when performed by persons who do not have a finance lender law or residential mortgage lending act license, or a bank or credit union charter, to a new law, administered by DOC. Giving DOC the authority to draft this new law through regulation: 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, this proposal should not be implemented, until detailed language is provided to the Legislature regarding AB 33 (Nava), Page 8 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. AB 33 was recently amended to clarify that the new law may not provide a lesser level of consumer protection than that provided under the existing Real Estate Law. This is an important assurance. However, the risks of giving carte blanche to the Commissioner of Financial Services to craft a new law through regulation, without any details regarding what it will look like, and without knowing how licensees and licensing requirements will be affected by the transition, are too great to approve the proposal without more specifics. Requiring 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: The proposed report described in Section 48 (pages 19 and 20 of the bill) should be approved. Under this proposal, the report will be developed by the departments, with input from members of the public and the financial services industry. It can be used by the Administration and the Legislature to craft legislation that implements those consolidation proposals which make sense, once they have been thoroughly reviewed during and after the report preparation process. Creating an Office of Financial and Real Estate Consumer Advocacy within the Department of Financial Services, whose director is appointed by the Governor, whose salary is determined by the Secretary of BT&H, and who serves at the pleasure of the Commissioner: The proposal to create an Office of Financial and Real Estate Consumer Advocacy should not be approved, until more information is provided about the duties and authority of this office and its director, and until the funding source(s) for the office is/are identified. The Director of Financial and Real Estate Consumer Advocacy should be an independent position, with a fixed term, to ensure that the advocate is not beholden to, nor unduly influenced by, the Commissioner of Financial Services or Real Estate. 3. Discussion As currently drafted, AB 33 presents the Legislature with BT&H's preferred answer (consolidation of AB 33 (Nava), Page 9 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 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, AB 33 (Nava), Page 10 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 business. 4. Input from interested parties 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 and for the reactions of those groups that have not yet taken an official position on the bill. Nearly all of those who have reviewed its language have the same AB 33 (Nava), Page 11 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. One of the primary concerns raised by depository institutions -- the need to continue siloing their assessments, so that bank assessments are used to support bank regulatory activities, and credit union assessments are used to support credit union activities -- was addressed by recent amendments to the bill. However, the depositories continue to be concerned about the possibility that their institutions could be examined by individuals unused to, and untrained to, examine depositories. They would also like to see a requirement that the Commissioner of DFS, the Director of the Division of Financial Institutions, and the director or deputy director of the unit overseeing credit unions have relevant experience, either as a former regulator of depository institutions or as a former employee, director, or board member of a depository financial institution. The credit unions would like assurance that they will not be directly regulated by someone unfamiliar with their business model. The depositories 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 AB 33 (Nava), Page 12 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. 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 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. 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 and Real Estate 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 and Real Estate 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. AB 33 (Nava), Page 13 As discussed immediately below, two organizations representing licensees who would be directly affected by this bill have taken official positions - the California Financial Services Association (CFSA), which represents finance lenders, and the California Association of Mortgage Brokers (CAMB), which represents real estate licensees who broker mortgages. Both are opposed. 5. Support None received. 6. Opposition CFSA believes that AB 33 should be made a two-year bill, based on the complexity of the issues involved in consolidating DOC and DFI into a new DFS, the multitude of unanswered questions, including whether or not a consolidation makes sense, and the bill's delayed implementation date of July 1, 2011. CFSA echoes the concerns, expressed above, that SAFE Act implementation will be a massive undertaking for DOC and its licensees, and CFSA does not believe that DOC has the resources to accomplish its SAFE Act duties at the same time it is helping prepare the comprehensive report required by this bill. In addition to the timing and resource concerns, CFSA has several questions, which include: a) how the authority of the new DFI and DOC division heads will be shared with the Commissioner of DFS; b) whether the new layer of bureaucracy will affect the responsiveness of these state departments to consumer concerns, slow innovation, and impact licensees' ability to function in an open and competitive market; c) how licensee examinations will be impacted under the consolidation, and whether examiners will be familiar with CFSA's non-depository business model(s); d) what the role and responsibilities of the new Office of Financial and Real Estate Consumer Advocacy will be, how the Office will be funded, and how the consumer complaint process will be handled; and e) how licensees will be assessed for the cost of the consolidation and the continuing costs of the new DFS. CAMB is opposed to the bill, based on the bill's lack of details and its failure to address how the existing Real Estate Recovery Fund will be handled, as it relates to those (such as CAMB's members) whose activities will be regulated by DOC, rather than DRE, under the provisions of the bill. CAMB believes that details regarding the shift of AB 33 (Nava), Page 14 lending/brokering/servicing and business opportunity activities from DRE to DOC should be provided, before the Legislature authorizes it. The bill "places the cart in front of the horse by moving DRE licensees to the DOC, then asking for recommendations on what to do next." CAMB is also concerned about the fate of the Real Estate Recovery Fund under the reorganization. The organization observes that the SAFE Act allows mortgage brokers to operate without surety bonds or net worth requirements, if their state maintains a recovery fund that is available to consumers who are unsuccessful in collecting judgments from mortgage brokers (which California does). If the licensing framework for mortgage brokers currently regulated by DRE is moved to DOC, CAMB believes that the DRE Recovery Fund, or a reasonable facsimile, must also be moved. The alternative to the recovery fund - surety bonds and/or net worth requirements - are problematic. CAMB is concerned that the cost of surety bonds will cause many competent and experienced DRE mortgage brokers to close their small businesses. Furthermore, CAMB notes, especially after such a challenging business year, net worth requirements will further thin small business ranks, to the detriment of consumers. 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. Keith Bishop, who is a former Deputy Secretary and General Counsel to BT&H, former Commissioner of Corporations, and former Interim Savings & Loan Commissioner, does not believe AB 33 (Nava), Page 15 that combining DOC and DFI into a new DFS will improve the regulatory programs in any of the departments, increase consumer protection, or result in significant savings to the General Fund. "To the extent this bill is intended to address perceived shortcomings in the regulation of the mortgage lending industry, I believe that these matters are far more effectively addressed through changes in the substantive regulation than through rearranging the regulators." Mr. Bishop observes that DFI and DOC administer and enforce laws with fundamentally different objectives. Although all three departments are generally concerned with regulating financial services, the industries they regulate are fundamentally different. DFI is focused on safety and soundness, while DOC is focused on protecting investors and potential franchisees under the Corporate Securities Law of 1968 and the Franchise Investment Law. Neither the CFLL nor the CRMLA are focused on safety and soundness in the same manner as the banking law. Furthermore, while the staffs of DFI and DOC are well-trained and experienced, this does not mean they can be easily substituted. A bank examiner cannot be immediately turned into a securities regulator (or vice versa). "Because the training and experience [of] the DFI and DOC staff differ so significantly, I would not expect that any real efficiencies would be realized by housing them under a single regulator. In fact, consolidation would likely dilute regulatory focus and efficiency" and result in significant disruptions. Finally, Mr. Bishop concludes: "The causes of the collapse of the subprime mortgage industry would not be addressed by consolidating regulators. [These problems] would be far more effectively addressed by a careful review of the substantive laws governing the mortgage lending industry." Robb Evans, former Special Deputy Superintendent of Banks and a Special Deputy Commissioner of Financial Institutions, believes that if the status of DFI is "demoted," as contemplated by AB 33, it would materially lessen the capacity of the Commissioner to represent the state in financial crisis situations. The Business Law Section of the California State Bar Financial Institutions Committee (the Committee) is opposed to the AB 33 (Nava), Page 16 bill, because it believes that an independent DFI has proved to be a major benefit to, and resource for, California banks, and because they feel that the bill will profoundly diminish the value of this resource. By combining DFI with DOC and portions of DRE, AB 33 will result in the loss of DFI's existing focused oversight on the depository institutions under its jurisdiction and in the impairment of the dual banking system. The Committee is also concerned that the proposed consolidation could hamper the ability of California's state banks to recover from their economic troubles, by distracting DFI's examination and legal staff from their current focus on regulatory oversight and enforcement. "The exclusive focus of DFI on safety and soundness is crucial to the overall wellbeing of California's deposit taking institutions. In contrast, the concept of safety and soundness is not found in the laws administered by the Department of Corporations and Real Estate." The Committee expresses doubt that the proposed merger will result in any savings or efficiencies, and notes that AB 33 does not consider the long-term damage to California's residents and businesses that would result from a reduction in the strength, vitality, and desirability of a state banking charter. "If banking institutions within the state lose confidence in the state charter, the state banking system will become weaker as banks convert to a national charter or new banks form under a national charter. The result would be more and more of the decisions involving banking and our financial system will be decided in Washington DC rather than by knowledgeable administrators in California." 7. Technical amendments Although the June 23, 2009 amendments made several technical corrections, the amendment which broadened the scope of the Office of Financial Consumer Advocacy to additionally cover real estate functions (pages 10 and 11 of the bill) created three technical problems. First, the responsibilities of the Office are still limited to how DFS can provide a high degree of service and protection to the public, not to how DFS and DRE can do so. Second, the Office is required to perform "such other duties as determined by the Commissioner of Financial Services," not those as determined by the Commissioner of Financial Services and the Real Estate Commissioner. Third, the Office is still housed within DFS, despite the Office being AB 33 (Nava), Page 17 expanded to include real estate functions outside DFS (and within DRE). Staff had previously understood the intent of the sponsor and author to create the Office of Consumer Advocacy as a separate entity, outside the organizational structure of DFS, but that intent was not reflected in the June 23rd amendments. 8. 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 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 AB 33 (Nava), Page 18 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 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. AB 33 (Nava), Page 19 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, the consolidation proposed in AB 33, 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 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. AB 33 (Nava), Page 20 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 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 AB 33 (Nava), Page 21 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. POSITIONS Support None received Oppose Business Law Section of the California State Bar Financial Institutions Committee California Association of Mortgage Brokers California Financial Services Association Former Commissioner of Corporations Keith Bishop Former Special Deputy Superintendent of Banks Robb Evans Former State Banking Commissioners Howard Gould, James Gilleran, Conrad Hewitt, Walter Mix, and Stan Cardenas Kathy Pinkard, President and CEO of First Community Bank of Santa Rosa Timothy Avery, President and CEO of Scott Valley Bank (Yreka, California) William Martin, President and CEO of Bank of Sacramento AB 33 (Nava), Page 22 Consultant: Eileen Newhall (916) 651-4102