BILL ANALYSIS Ó SB 1342 Page 1 Date of Hearing: June 13, 2012 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT Cameron Smyth, Chair SB 1342 (Emmerson) - As Amended: June 7, 2012 SENATE VOTE : 29-7 SUBJECT : Counties: recording: real estate instruments. SUMMARY : Increases, from $3 to $10, the maximum fee that a county can place on certain recorded real estate documents to fund real estate fraud prevention and enforcement. Specifically, this bill : 1)Increases, from $3 to $10, the maximum additional recording fee that counties can impose on real estate instruments, papers and notices for payment into a Real Estate Fraud Prosecution Trust Fund (Fund). 2)Adds the following documents to the list of real estate instruments that are subject to the additional fee: an amended deed of trust; an abstract of judgment; an affidavit; an assignment of rents; an assignment of a lease; a construction trust deed; covenants, conditions and restrictions; a declaration of homestead; an easement; a lease; a lien; a lot line adjustment; a mechanics lien; a modification for deed of trust; a notice of completion; a quitclaim deed; a subordination agreement; a release; a trustee's deed upon sale; and any Uniform Commercial Code amendment, assignment, continuation, statement or termination. 3)Clarifies that "real estate instrument" does not include any deed, instrument, or writing recorded in connection with a transfer subject to the imposition of a documentary transfer tax. 4)Authorizes a portion of the resources in the Fund to be directly allocated to the county recorder to support real estate fraud prevention programs. 5)Requires the county auditor-controller to verify, before a county may expend resources from its Fund, that the county district attorney has complied with the existing September 1 annual reporting deadline. SB 1342 Page 2 6)Eliminates the requirement that county district attorneys must submit to the Legislative Analyst's Office (LAO) annual reports on real estate fraud activity, and that the LAO must annually compile and submit that information to the Legislature. 7)Makes findings and declarations related to the insufficiency of resources currently generated to support each county's Fund. 8)Makes other technical and non-substantive amendments. EXISTING LAW : 1)Authorizes the board of supervisors to adopt, by resolution, a fee of up to $3 for each recording of a real estate instrument, paper, or notice required or permitted by law to be recorded, except as specified, to be placed in a Fund. 2)Requires that money in the Fund be expended to support programs to enhance the capacity of local police and prosecutors to deter, investigate, and prosecute real estate fraud crimes. 3)Defines the term "real estate instrument" to mean a deed of trust, an assignment of trust, a reconveyance, a request for notice, a notice of default, a substitution of trustee, a notice of trustee sale, or a notice of rescission of declaration of default. 4)Requires a district attorney in a participating county to annually submit a report to the LAO on the effectiveness of deterring, investigating, and prosecuting real estate fraud crimes funded by the recording fee, and requires the LAO to report to the Legislature on these efforts, as specified. FISCAL EFFECT : None COMMENTS : 1)This bill is intended to authorize counties to increase funding for real estate fraud prevention and prosecution by SB 1342 Page 3 raising recordation fees for certain real estate documents. In practice, it would permit counties to increase an additional recording fee from $3 to a maximum of $10 per document, increase the number of documents to which the fee would apply, and allow the use of some of those funds to support county recorder fraud prevention programs. The bill would also clarify that the fees would not apply to documents recorded in connection with transfers subject to the documentary transfer tax (i.e. the sale of real property). Finally, the bill would delete an unnecessary LAO report requirement. The measure is sponsored by the California District Attorneys Association (CDAA). 2)Under existing law, counties can impose a $3 recording fee on certain real estate documents and put the money into a county Fund. County officials may expend money from that Fund to deter, investigate, and prosecute real estate fraud crimes, with an emphasis on fraud against individuals whose residences are in danger of, or are in, foreclosure. Administrative costs are capped at 10% of revenues. State law assigns 60% of the Fund proceeds to the county district attorney's office and 40% to eligible law enforcement agencies. In order to be eligible, a law enforcement agency must either have a unit or division devoted to real estate investigation or prosecution, or have been actively involved in such cases for the prior three years. A Real Estate Fraud Prosecution Trust Fund Committee allocates the 40% by reviewing and approving applications from law enforcement agencies. The Committee has four members: the county's chief administrative officer, the district attorney, the chief officer responsible for consumer protection, and the chief officer of one law enforcement agency that receives monies from the Fund. If a county has no eligible law enforcement agencies, the entire Fund goes to the district attorney. District attorneys in counties that impose the additional fee must provide an annual report to the county board of supervisors and the LAO on past-year expenditures, the number of filed complaints of real estate fraud, and program SB 1342 Page 4 outcomes. The LAO must annually compile the information submitted by participating counties and report to the Legislature. According to the most recent LAO report from October 2011, there were 21 counties reporting real estate fraud prosecution statistics and Fund expenditures. In FY 2010-11, those counties reported a total of 2,121 cases investigated, 931 cases filed and 268 convictions. Those counties also reported Fund revenues of $14,169,000 and Fund expenditures of $18,237,000. 3)According to the sponsor, "real estate fraud has emerged as the fastest growing white-collar crime in the country. California is currently one of the leading states in terms of the incidence of mortgage fraud and this trend is likely to continue given the high number of California families who find themselves at risk of foreclosure." CDAA adds that, according to the LAO, "the number of real estate fraud cases investigated in 2009-2010 was almost double what it was in 2008-2009, and the number of cases filed was almost triple that of the previous year. Californians lost $619 million to real estate fraud in 2010-11. Fewer than half of the real estate fraud cases investigated progress to actual charges filed, and a mere 28% of those charges earn actual convictions. This disparity is further intensified by a lack of adequate funding. Despite the best efforts of local police and prosecutors to stem this tide, their efforts are hampered by a lack of individuals able to effectively investigate and prosecute these crimes." The sponsor contends that in order "to ensure that local police and prosecutors are able to fight real estate fraud, an increase in revenues earmarked for real estate fraud prevention and prosecution is vital. Increasing the maximum amount a county can opt to charge for a document recording fee and adding to the pool of documents considered real estate instruments are two reasonable ways to assist counties in addressing this problem." 4)There is no current estimate for the total number of transactions that would be affected or the amount of money that might be raised statewide under this measure. However, CDAA's own projected revenue estimates assume that the SB 1342 Page 5 expanded list of affected transactions proposed by this bill would increase the number of transactions subject to the fee by roughly 25%. Accordingly, CDAA estimates that, based on FY 2009-10 figures, the proposed fee authority could bring in revenues in the following general ranges, depending on the extent of the fee increase ($3-$10): Riverside County: $1,000,000 to $4,000,000 Ventura County: $300,000 to $1,000,000 Santa Cruz County: $100,000 to $400,000 1)It is possible that the fee increase contemplated by this bill would constitute a tax pursuant to the terms of Proposition 26, which was approved by the voters of California in November, 2010. Proposition 26 amended Article XIII C of the Constitution to define a tax as any levy, charge or exaction of any kind imposed by a local government, subject to seven specific exemptions. A tax imposed at the county level would require voter approval. General taxes, which provide discretionary revenue to be spent as a local agency's governing body directs, require majority approval. Special taxes, the proceeds of which may be spent only on specified purposes, require a two-thirds voter approval. Because the fee increase enabled by this bill would go towards funding real estate fraud prevention and prosecution in the authorizing county, and if no enumerated exemption is found to apply, it may be classified as a special tax. If so, the board of supervisors of the county would, if it chose to authorize the increase by ordinance, need to secure approval of two-thirds of the county voters before the increase could go into effect. The Howard Jarvis Taxpayers Association has taken an oppose unless amended position on the bill, requesting that language be inserted into the bill explicitly stating that the bill authorizes a special local tax requiring 2/3 approval of county voters. The Committee may also wish to consider, if a two-thirds local vote is indeed required, whether or not individuals counties would actually choose to exercise the expanded fee authorization provided by this bill. SB 1342 Page 6 2)There are two bills from the 2011-12 legislative session that contained provisions related to those of this bill: AB 1950 (Davis) would have, among other provisions, imposed a fee of $25 to be paid at the time of recording a notice of default to fund a state Real Estate Fraud Prosecution Trust Fund. However, the bill was amended on May 21, 2012, to delete the fee increase. The bill is currently pending in the Senate Rules Committee. SB 1220 (DeSaulnier) would have imposed a $75 fee on recorded real estate documents, excluding any document recorded in connection with a transfer subject to a documentary transfer tax, and directed the money to a Housing Opportunity and Market Stabilization Trust Fund. The Legislature could have then appropriated these funds for the development, acquisition, rehabilitation, and preservation of homes affordable to low- and moderate-income households, including emergency shelters, transitional and permanent rental housing, foreclosure mitigation, and homeownership opportunities. The measure failed passage (25-13) on the Senate Floor on May 31, 2012. 3)Support arguments : According to the sponsor, "SB 1342 will ensure that local police and prosecutors are able to fight real estate fraud by increasing revenues earmarked for real estate fraud prevention and prosecution." Opposition arguments : Arguably, a new recording fee would place an additional financial burden on ordinary Californians engaged in routine real estate transactions, while draining local government staff resources to collect fees and address unsatisfied customers. REGISTERED SUPPORT / OPPOSITION : Support California District Attorneys Association ÝSPONSOR] California Association of Realtors County Recorders' Association of California Office of the California Attorney General SB 1342 Page 7 Opposition Howard Jarvis Taxpayers Association Analysis Prepared by : Hank Dempsey / L. GOV. / (916) 319-3958