Transaction and Regulatory Committee
Legislative Committee

This material is for discussion purposes only and has not been approved by the Transaction and Regulatory Committee, the Legislative Committee, Executive Committee or the Board of Directors.

Issue :
Should C.A.R. sponsor legislation to authorize DRE to recover its costs related to prosecution from the licensees that are convicted in a disciplinary action?

Action :
Optional; difficult to implement in 2010.

Options:
1. Do Nothing.
2. Defer action now and consider for inclusion in C.A.R.'s 2011 sponsored legislation package.
3. Support DRE-sponsored legislation to allow recovery of the costs described below, but not introduce as C.A.R. legislation.
4. Sponsor separate legislation to authorize the cost recovery described below.
5. Do Nothing 

Status / Summary:
In 2009 the Legislative Analyst's Office released a report on DRE entitled "Opportunities to Improve Consumer Protection" which included, among other things,   recommendations for changes to the DRE disciplinary process.  The report did not specifically recommend cost recovery changes, except in that it suggested DRE should more aggressively pursue restitution to the Recovery Fund, and that the maximum fines for violation of the real estate law be increased.  The possible legislation arose during discussions among DRE and C.A.R. leadership, but DRE has not been authorized by the Administration to sponsor any legislation, or to implement the LAO report recommendations.

The deadline for introduction of legislation in the 2010 legislative session is February 19 (approximately two weeks after the Board of Directors meeting).  Whether an appropriate, capable, author can be found to carry the legislation on short notice, or that a bill draft can make it through the required administrative processes in time to be successfully sponsored in 2010 is problematic. In all likelihood, a sponsored bill would fare better as a 2011 effort.

Discussion:
As noted, DRE (like other regulatory agencies) has not been authorized to sponsor legislation in 2010. However, in technical discussions with C.A.R. several areas of possible cost recovery have emerged. One suggestion that appeared repeatedly in the LAO report was that DRE allocates too big a share of its resources on areas other than prosecution of consumer complaints, but it is not clear that increased cost recovery would change the emphasis of DRE's workload. The argument can be made that in exiting practice law abiding licensees are forced to subsidize the costs associated with lawbreakers, and the full cost of a violation should fall on the "bad guy."  On the other hand, the argument could be fairly made that the administrative costs discussed below are all parts of a licensing and regulatory system, and paying for the costs of that system is what license fees are for.

What sort of costs would be recovered?
1. Petitions for reinstatement of a license. After one year, a disciplined licensee can petition the DRE for reinstatement of a license or a reduction in penalty imposed (such as a license restriction). The cost of processing and responding to such a petition is part of the administrative budget of the department. Of course, the ability to make the petition is no guarantee that it will actually be granted. The administrative cost of processing such a petition is estimated in the neighborhood of $1200. If the request is granted, and the license restored, should the charge still be imposed? Should only unsuccessful petitioners be charged? Would such a rule give DRE a financial incentive to deny otherwise valid petitions?

Should a licensee be charged $1200-$1500 in order to ask for a reduction of the penalty?

2. Restricted license surcharge. One disciplinary option available to the department is to restrict a license (e.g. no access to trust funds) rather than a complete revocation or suspension.  However, the restricted license and the extra monitoring associated with the restriction require additional effort and cost.  It is estimated that the restricted license results in an increased cost to the department of around $725 per license cycle. 

Should a licensee whose license is restricted be charged an additional fee of up to $725 to cover the actual costs of monitoring his or her conduct? What about the employing broker of a restricted licensee?

3. Costs of prosecution.  While the department has a limited ability to recover the costs of follow-up audits of licensees that have been disciplined, the costs of the accusation and prosecution are borne by the DRE budget as part of its overall operations.  Should the department be able to recover its costs of prosecution, in addition to any fines or penalties imposed, when it successfully prosecutes a licensee? Would the ability to recover its costs create inappropriate incentives in the selection or prosecution of cases - in other words a "bounty hunter" mentality? Would the liability for prosecution costs create an unfair pressure on the accused to plead guilty rather than defend and risk the costs of the other side over which the defense has no control?

Note: It has not been suggested that the DRE pay the costs of the defense when the prosecution is unsuccessful.

4. Costs of Subpoena. The DRE has the power to subpoena records of a licensee. However, if a licensee refuses to comply, the department must use the services of the Attorney General to bring legal action to force compliance with the subpoena. Since the action is quasi-criminal in nature, there is concern that the licensee may conceal or destroy records during the delay in compelling production.  The threat of DRE's legal fees may be a significant consideration. It has been suggested that the threat of attorney fees will provide a powerful incentive to induce the licensee to produce requested documents, which will speed up prosecutions and reduce DRE costs.

Is the award of attorney fees consistent with due process? Will the threat of such a penalty still allow a licensee to mount a vigorous defense?

Will DRE savings be passed on to licensees?  Will the additional funds invite a budget raid?
If the cost recoveries discussed above were in place, they would almost certainly improve DRE's fiscal situation. However, it is not clear that the costs of prosecution are an unworkable burden for the DRE. Indeed, last year the department, along with other administrative agencies, increased its license, examination and subdivision fees to the statutory maximum. The last increase effectively doubled the various fees. In the current fiscal environment, the legislature is desperate for sources of funds to support the state's troubled budget and might be tempted to extract revenues from an agency that is flush with revenues.

While DRE is a so-called "special fund" agency, funded by the fees paid by licensees and not part of the general fund of the state, that fact has not stopped the legislature from raiding DRE funds to support other programs.  Indeed, just last year the department's reserves were "raided" for a "loan" to fund a program in another department. In response, C.A.R. is sponsoring legislation in 2010 to increase the "poison pill" statute that is designed protect the DRE reserves.  Unfortunately, if the legislature is prepared to repeal it, the DRE reserves are ultimately still vulnerable.   Please see the October 2009 issue paper "DRE Reserve Fund Restrictions" at http://www.car.org/meetings/carmeetings/committee-materials-archive/oct2009committees/legmem1009/354785/  for additional information.

Would the prosecution cost recoveries encourage a raid on DRE reserves?

Should C.A.R. sponsor legislation to enact the proposals set out above?