BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 33 (Nava) Hearing Date: June 17, 2009
As Amended June 11, 2009
Fiscal: Yes
Urgency: No
SUMMARY Would reorganize the Departments of Financial
Institutions and Corporations as divisions, under a
newly-created Department of Financial Services, effective July
1, 2011; consolidate the Office of Real Estate Appraisals into
the Department of Real Estate, effective July 1, 2011; create an
Office of Financial Consumer Advocacy within the Department of
Financial Services; shift certain mortgage lending, brokering,
servicing functions, and business opportunity activities out
from under the Real Estate Law and to a new law administered by
the new Division of Corporations, effective July 1, 2012; and
would require the preparation and submission of two
comprehensive reports containing recommendations regarding how
the consolidations described above should be implemented, 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,
which authorizes real estate brokers, and real estate
AB 33 (Nava), Page 2
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.
Would make no other substantive changes to the Director's or
to OREA's authority or responsibilities;
2. 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
AB 33 (Nava), Page 3
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 provide that, if the Commissioner of Financial
Services finds that any provision of federal law
applicable to financial services providers doing business
in California is substantively different from the
provisions of the Financial Code applicable to state
licensees, the Commissioner may, by regulation, apply
that provision of federal law to the state licensees
without having to comply with the provisions of the
Government Code that typically govern public notice and
review of proposed regulations, as specified;
d. Would create an Office of Financial Consumer
Advocacy within DFS, headed by a director, who would be
appointed by the Commissioner of Financial Services and
serve at the Commissioner's pleasure;
e. 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;
3. 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
Division of Corporations to assume responsibility for the
provisions of the Real Estate Law that allow real estate
licensees to provide lending, servicing, mortgage brokerage
services, and business opportunity activities, and would
prohibit real estate licensees engaged in those activities
AB 33 (Nava), Page 4
from continuing to engage in them, after the effective date
of those regulations;
4. 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
loans and/or engage in business opportunity activities, and
would provide that all of these individuals shall be deemed
to be fiduciaries in their relationship with, and have
attendant fiduciary duties toward, their principals;
5. 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
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
Consumer Advocacy or employees;
f. Effective and efficient implementation of the
federal Secure and Fair Enforcement for Mortgage
Licensing Act of 2008 within the Department of Financial
Services;
g. Additional changes that should be made in light of
any developments at the federal level regarding the
regulation of financial services;
AB 33 (Nava), Page 5
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 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 other recommendations the
Secretary of BT&H believes would be helpful;
ff. Any necessary statutory changes
required to achieve the recommendations in the report;
8. Would require the Real Estate Commissioner and the Director
of the Office of Real Estate Appraisers to submit a joint
report to the Secretary of BT&H, 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 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
AB 33 (Nava), Page 6
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: OREA should be consolidated under
the authority of DRE, and the independence of OREA's
licensing and disciplinary actions should be retained.
Language preserving the independence of OREA's licensing and
disciplinary functions should be codified, concurrent with,
or before the consolidation, and should be vetted with the
Appraisal Subcommittee (ASC) to ensure that it will not
result in California's "disapproval" by the ASC. 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
should be developed with input from the public and affected
members of the appraisal and real estate industry, and
submitted to the Legislature. Further justification in
support of this recommendation is included on page 12 of
this analysis.
Consolidating DFI and DOC into a single department: This
proposal should not be implemented, 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 implemented, until
more detail is provided in support of the idea, and until
the mechanism to fund the new DFS is identified. This idea
may have merit, if the Conference Committee's vote to
eliminate BT&H is ultimately adopted. However, if BT&H
remains as an entity overseeing DFI and DOC, it is unclear
why the state would need three layers of bureaucracy
overseeing financial services (division-level, DFS, and
BT&H).
Narrowing the authorized activities in which real estate
licensees may engage by removing mortgage brokering,
lending, and servicing, and business opportunity activities,
AB 33 (Nava), Page 7
from that license, and moving these activities, when
performed by persons who do not have finance lender law or
residential mortgage lending act licenses or a bank or
credit union charter, to a new law, administered by DOC.
Give DOC the authority to draft this new law through
regulation: This proposal should not be implemented, until
detailed language is provided to the Legislature regarding
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,
and until the Legislature is provided with detail regarding
how commercial lending/brokering/servicing activities will
be regulated. 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, the risks of giving carte blanche to the
Commissioner of Financial Services to craft a new law
through regulation, without any assurance that it will
provide an equal or greater level of consumer protection
than the existing Real Estate Law, and without knowing how
licensees and licensing requirements will be affected by the
transition, are too great to approve the proposal without
more specifics.
Require 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: This report should be developed by the
departments, with input from the public and the financial
services industry. It should be used by the Administration
and the Legislature to craft legislation that implements
only those consolidation proposals that make sense, once
they have been thoroughly reviewed during and after the
report preparation process. DFI and DOC should not be
consolidated under DFS, and the scope of the real estate
license should not be narrowed, nor should a new law
regulating those activities formerly regulated under the
real estate law be drafted, until the findings of the report
are issued and evaluated.
Create an Office of Financial Consumer Advocacy within the
Department of Financial Services, whose director is
appointed by the Commissioner of DFS, and who serves at the
pleasure of the Commissioner: The Director of Financial
Consumer Advocacy should be an independent position, with a
AB 33 (Nava), Page 8
fixed term, to ensure that the advocate is not beholden to,
nor unduly influenced by, the Commissioner of Financial
Services. Thought should be given to requiring the position
to be appointed by the Governor and subject to Senate
confirmation. The responsibilities of the Office of
Financial Consumer Advocacy should be broadened beyond those
envisioned in the bill, to include not only laws regulated
by DOC and DFI, but also laws overseen by DRE and OREA. The
duties of the Financial Consumer Advocate should be more
clearly spelled out in the law authorizing the Office's
formation. The funding source(s) for the Office of
Financial Consumer Advocacy should be identified.
3. Discussion As currently drafted, AB 33 presents the
Legislature with BT&H's preferred answer (consolidation of
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
AB 33 (Nava), Page 9
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,
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
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business.
4. Input from interested parties Because of the short length
of time between the latest amendments to AB 33 and the date
of this Committee's hearing, interested parties were unable
to submit letters of support or opposition by the Committee
deadline. However, 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.
Nearly all of those who have reviewed its language have the same
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. They believe
that the assessments they pay should continue to be siloed
(bank assessments used to support bank regulatory
activities, credit union assessments used to support credit
union regulatory activities), and are seeking assurances
that their assessments will not be commingled with
assessments paid by other members of the financial services
community. They are also concerned about the possibility
AB 33 (Nava), Page 11
that their institutions could be examined by individuals
unused to, and untrained to, examine depositories.
Optimally, they would like to see a requirement that the
Commissioner of DFS and the Director of the Division of
Financial Institutions have experience, either as a former
regulator of depository institutions or as a former
employee, director, or board member of a depository
financial institution. They 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
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.
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.
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
AB 33 (Nava), Page 12
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. Like the depositories, these
organizations are watchfully interested in AB 33; they are
not opposed.
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 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 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.
5. Author's Amendments The author plans to offer the following
amendments in Committee, to address technical concerns
raised by Committee staff prior to the hearing, and to begin
addressing some of the more substantive issues and questions
that have been raised about the bill's language since that
language was shared with interested parties. Specific
language to implement the non-technical amendments was not
available for review, when this Committee analysis was
prepared, but may be available for review in time for the
hearing.
AB 33 (Nava), Page 13
a. Non-technical amendments:
i. Provide for public input during
development of the two reports by posting draft
recommendations on the BT&H web site and
soliciting public input on those recommendations
before preparing the final reports;
ii. Create the Office of Financial
Consumer Advocacy as an independent entity, and
move it out from under DFS. More fully describe
the duties of the Consumer Advocate;
iii. Clarify that the bill is not
intended to expand or diminish the fiduciary duty
that any licensee currently has toward his or her
client(s);
iv. Clarify that the bill is not
intended to expand or diminish existing
authorities of the existing departments or
commissioners;
v. Clarify that existing funds for
licensing operations will continue by expanding
the list already contained on page 14, lines 34
through 40 and page 15, lines 1 through 3.
b. Technical amendments:
i. Page 11, lines 7 and 8, strike
"Institutions" and insert: "Services";
ii. Page 11, line 16, after
"regulations," insert: "which shall be on or
after July 1, 2012,"
iii. Page 11, line 17, strike "licenses"
and insert: "licenses or licenses and license
endorsements";
iv. Page 11, line 14, page 11, lines 20
and 21, and other sections of the bill that
describe mortgage lending, mortgage brokerage
services, and business opportunity activities by
reference to Section 10131(d) and 10131(e) of the
AB 33 (Nava), Page 14
Business and Professions Code: Retain the
references to 10131(d) and (e) and add references
to Sections 10008.5, 10030, and 10131.1 of the
Business and Professions Code;
v. Strike the section of the bill that
gives the Commissioner of DFS the ability to undo
state statute through regulation, as specified:
Delete page 12, lines 22 through 40 and page 13,
lines 1 through 31;
vi. Page 19, between lines 26 and 27,
insert: "(q) Recommendations regarding any
necessary regulation changes necessary to achieve
the recommendations made in the report."
6. 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
AB 33 (Nava), Page 15
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
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
AB 33 (Nava), Page 16
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.
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, consolidation, 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
AB 33 (Nava), Page 17
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.
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
AB 33 (Nava), Page 18
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
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.
7. Support . None received.
8. Opposition A formal letter of opposition was received from
five former state banking commissioners, as described above.
AB 33 (Nava), Page 19
POSITIONS
Support
None received
Oppose
Five former State Banking Commissioners: Howard Gould, James
Gilleran, Conrad Hewitt, Walter Mix, and Stan Cardenas
Consultant: Eileen Newhall (916) 651-4102