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