BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 33 (Nava) Hearing Date: July 9, 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
Business, Transportation & Housing Agency (sponsor)
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