Transaction and Regulatory
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.
C.A.R. sponsor legislation to authorize DRE to recover its costs related to
prosecution from the licensees that are convicted in a disciplinary
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
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
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.
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
Should a licensee be charged $1200-$1500 in order to ask for a reduction of
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
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
for additional information.
Would the prosecution cost recoveries encourage a raid on DRE
Should C.A.R. sponsor legislation to enact the proposals set out