BILL ANALYSIS
SB 537
Date of Hearing: July 5, 1995
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Richard Rainey, Chairman
SB 537 (Hughes) - As Amended: June 26, 1995
ASSEMBLY ACTIONS:
COMMITTEE L. GOV. VOTE> COMMITTEE VOTE
SUBJECT: Permits a county board of supervisors to impose a $1 recording fee
on documents transferring title for purposes of funding fraud prevention
activities.
DIGEST
Existing law requires the county recorder, upon payment of proper fees and
taxes, to accept for recordation any instrument, paper, or notice that is
authorized or required by law to be recorded.
This bill:
1) Permits a county board of supervisors to require a $1 fee to be paid at
the time of recording documents transferring title, and for the fees to be
paid into a Real Estate Fraud Prosecution Trust Fund.
2) Requires the funds to be expended for purposes of deterring, investigating
and prosecuting real estate fraud crimes, with 60% of funds to be distributed
to district attorneys and 40% to enforcement agencies, except that 100% of
funds are to be distributed to district attorneys in counties without
enforcement agencies, subject to deduction of incidental administrative costs.
3) Requires a Real Estate Fraud Prosecution Trust Fund Committee, composed of
the district attorney, the county auditor or director of finance, and the
chief officer responsible for consumer protection, or an authorized
replacement, annually to determine allocation of funds to law enforcement
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agencies based on: written application for proposed use; evidence of
qualification of funds based on prior existence of a one-year fraud
investigation or prosecution unit or a three-year assignment of personnel to
investigate or prosecute fraud; criteria evidencing fraud investigation or
prosecution; and upon reapplication for funds by an enforcement agency, an
accounting of, and an accountability for, the previous year's expenditures of
moneys.
4) Permits a district attorney's office or law enforcement agency which
undertakes investigations and prosecutions that continue into a subsequent
year to receive nonexpended funds from the previous year.
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5) Prohibits money collected pursuant to this section from being expended to
offset a reduction in any other source of funds.
FISCAL EFFECT
Unknown.
COMMENTS
1) Statewide Permissive Legislation.
This bill arises in part from a Senate Office of Research report in
December 1994 covering real estate fraud that recommended revival of
AB 2347 (Margolin) that would have imposed a $1 fee on each document filed
with a county recorder. This bill similarly permits a county board of
supervisors to fund fraud prosecution programs through recording fees.
Los Angeles and San Diego Counties have been most visible in promoting
this legislation. Numerous statistics and examples cited were provided by
Los Angeles County relevant to Los Angeles.
Even still, nationwide statistics provided by Los Angeles drawn from the
F.B.I. indicate that real estate fraud is widespread. For example, in a
March 1, 1995, report provided by Los Angeles County entitled "Real Estate
Fraud Unit Mid-Year Report," the "total number of fraud cases (presumed
real estate related) handled by the the FBI nationwide is 9,286 for the
fiscal year ending September 1994" (parentheses added).
2) A Fee or a Special Tax Requiring a 2/3 Vote?
This bill raises a difficult question of taxation that the Legislature is
being asked to decide as a matter of policy.
Legislative Council did an analysis on May 31, 1995, of SB 963 (Watson),
which repeals the sunset on fees charged when filing deeds. The proceeds
go to notify parties about recordings on property. The fee was determined
to be a legitimate fee because it reimburses the cost of notification.
The charge was opined to be reasonably related to notice of parties having
an interest in the property that is the subject of the deed.
One issue is whether a $1 charge on transferring title is reasonably
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related to fraud prevention activities. A fee must be reasonable and
related to the regulation or service that generated the charge. A special
tax, on the other hand, has a special purpose and requires a two-thirds
vote. Cal. Const. Art. XIIIA, ?4. The relevant distinction is that a
"special tax" does not include "regulatory fees" which are "reasonably
commensurate with the cost of the regulatory activity from those at whose
instance the activity is conducted." Mills v. County of Trinity, 108 Cal.
App. 3d 656, 662-663 (1980). Furthermore, it does not matter if a fee
does not benefit those charged as long as the fee is commensurate with the
burden imposed by the activity of those charged. Pennell v. City of San
Jose, 42 Cal. 3d 365, 375 (1982).
Here, the $1 fee is not being charged for the purpose of covering
administrative costs of recording a document related to the transfer of
title. Rather, the $1 charge goes to fraud prevention programs in
counties. A fee that bears no relationship to the administration of
document filings is arguably a special tax requiring a 2/3 vote. With
this fee, the benefit is indirect because the fraud prevention activities
arguably cut down on fraudulent transfers of title. Another reason the
fee charged may be a special tax is that a county board of supervisors can
impose this fee without a 2/3 vote of the people.
However, the argument for the legality of this $1 fee is that it is of a
regulatory nature, the proceeds of which are directed to regulating the
activity (transferring title to property) being conducted. Under the
Pennel test, the Legislature must decide whether a $1 fee is commensurate
with preventing the potential fraud associated with transfers of title.
In Pennel, the court approved a charge imposed on landlords to administer
a city's rent control ordinance.
3) Fraud Going Unpunished.
According to the Los Angeles District Attorney's Office, the Los Angeles
field office of the F.B.I. handled 1,152 cases of fraud in the fiscal year
ending September, 1994, of which 905 involved losses over $100,000.
Despite this number, the district attorney's office has only three
investigators assigned to its newly created Real Estate Fraud Unit, with
16 open investigations. Presumably due to the limited number of deputy
district attorneys assigned to prosecute fraud, only nine new cases have
been filed by the unit since July 1994. Many cases involve total losses
from real estate fraud in the tens of millions of dollars, and the total
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loss from fraud to victims overall is estimated at $183.8 million.
4) The Main Forms of Fraud.
The three main forms of fraud that occur are home-equity fraud, involving
undisclosed encumbrances on title resulting in foreclosure for non-payment
of loans; institutional fraud, which involves fraudulent borrowing; and,
fraudulent securities tied to real estate.
5) Examples of Prosecutions for Real Estate Fraud in Los Angeles County: In
People v. Richard Quesada.
Case No. BA066445, defendants were prosecuted for embezzling in excess of
$500,000 from escrow accounts, resulting in ruin for numerous
uncompensated victims. In People v. Merritt, Case No. BA034972, defendant
is accused of fraudulently encumbering the properties of numerous poor,
sick or unsophisticated property owners.
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6) Estimated Revenues.
For example, with $1 charged on each transfer of title, given
approximately two million annual recordings in Los Angeles County, this
bill could allow for $2 million of funding for real estate fraud
prosecutions.
7) Expected Expenditures.
According to undated documents provided by Los Angeles County,
expenditures will go to investigation and prosecution; training and
education in detecting fraud; and, legislative activities to bolster
penalties against real estate licensees who defraud buyers and sellers.
The latter expenditure of funds is somewhat vague as to its purpose and
accuracy given language in the bill specifying expenditures to deter,
investigate, and prosecute real estate fraud crimes. The intent to
conduct legislative activities may require specific authority.
8) Suggested Amendments.
a) Perhaps a Portion of the Funds Collected Should Go Into a Restitution
Fund for Victims: With the victims of fraud being admittedly destitute,
some amount of the money collected should probably be made available to
them on an application basis similar to current restitution programs
administered through the courts.
b) "Incidental" versus "Actual and Necessary": In keeping with the
spirit of efficiency and the accounting procedures required by subdivision
(c)((4), the words "incidental administrative costs" should be changed
throughout this bill to "actual and necessary administrative costs."
c) The "Determination" by the Committee Should be Clarified as by
Majority Vote.
d) The Criteria, and Accounting of Funds Requirements of Subdivision
(c)(3) and (4) Should Probably Apply to District Attorneys Offices as Well
as Law Enforcement Agencies: The author should explain the intent for
requiring application for funds by law enforcement agencies only. It
seems that the criteria and accounting procedures of subdivision (c) (3)
and (4) should be equally applicable to district attorneys.
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e) "Nonexpended funds": Under this bill, district attorneys or
enforcement agencies may receive nonexpended funds from the previous
fiscal year. A receipt of such funds should be clarified as being subject
to the application process pursuant to subdivision (c). An amendment
should be taken to the effect that nonexpended funds may be received
"pursuant to the procedures specified under subdivision (c)." If the
money was not spent, the Committee should determine the necessity of its
previous appropriation.
f) Institutional Fraud Should be Given Less Priority: Information
provided by Los Angeles County indicates that the innocent victims of home
equity fraud deserve the priority attention from a fraud
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prosecution unit. This should be made an explicit part of this bill.
Institutional investors are typically professionals who are more
sophisticated, and, even though they are no less innocent, have provided
information that they currently contribute money to anti-fraud programs as a
regular business expense.
SUPPORT OPPOSITION
Los Angeles County District CA Assoc. of Collectors
Attorney's Office [SPONSOR] CA Assoc. of Realtors
CA Advocates CA Land Title Assoc.
CA District Attorneys Assoc. Richard D. Dean, County Clerk
City of Los Angeles and Recorder, County of Ventura
Sherman Block, Sheriff,
County of Los Angeles
Paul J. Pfingst, District Attorney,
County of San Diego
Freddie Mac
Mortgage Guaranty Insurance Corp.
Western Center on Law and
Poverty, Inc.
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