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Financial Institutions agency seeks self-funding

The demands placed on the Arizona Department of Financial Institutions grew rapidly with the state’s booming housing market, and haven’t abated much with the subsequent bust.

What’s more, the state’s crippling budget crisis has stripped the department of some of its resources at a time when it needs them most.

But if agency officials get legislation they’re banking on, concerns over resources and personnel could be a thing of the past.

The Department of Financial Institutions is hoping to get legislation passed next year that will allow it to become a self-funded agency, according to current and former agency officials. The revenue for that self-funding would come from assessments of financial institutions, licensing and renewal fees, and penalties.

“It’s part of our budget proposal for 2011, and we’re ever hopeful,” said Thomas Wood, superintendent of the Department of Financial Institutions.

Because demand for the agency’s services varies depending on market conditions, self-funding would provide increased revenues when the market is high and when investigators, examiners and regulators are most needed, said Felecia Rotellini. The agency’s recently departed superintendent said Arizona is one of just five states that do not have self-funded banking regulatory departments.

If the change is made, a portion of the money – probably about 90 percent, Rotellini said, just like other agencies with similar arrangements – would go directly to the department, as opposed to the state’s general fund, where it goes now. The agency’s budgets would still require approval from the Legislature, as well as from the Governor’s Office of Strategic Planning and Budgeting, she said.

“The policy behind that is simple,” Rotellini said of the agency’s hopes to become self-funded. “Rather than using taxpayer money to pay for regulation, you assess the companies that are regulated, and they pay for their own regulation.”

Though the real estate boom is long gone, the department still has its hands full dealing with reports of fraud and the prospect of collapsing state-chartered banks. Unfortunately for Rotellini and now Wood, the agency’s personnel has dropped from 50 people at the beginning of the 2009 fiscal year to 33 today, according to Assistant Superintendent Tom Giallanza.

The 12 positions the agency lost in fiscal 2009 included three escrow examiners, three mortgage examiners, two investigators, one payday loan examiner and one credit union examiner. So far in fiscal 2010, it has lost five more employees, including a banking examiner, credit examiner and mortgage examiner, Giallanza said. The agency’s regulatory investigations unit used to have two full-time and one part-time employee. Now, he said, the full-time employees are gone, leaving just one investigator working 20 hours a week to oversee about 3,800 licensees.

“You can see how this will impact our ability to examine our licensees, which by the way is a statutory obligation,” Giallanza said. “Now we have been essentially incapacitated in effectively doing that.”
Fortunately for Wood and Giallanza, the change in statute that would be required for the agency to become self-funded seems to have little opposition. Tanya Wheeless, president and CEO of the Arizona Bankers Association, said the industry supports the change.

“It’s our feeling that if we pay fees into the department for the services, we’d like to see those fees used for actual operations and proper regulation. I think from our perspective, when you just take the money in and then it doesn’t get used within the industry, it starts to feel more like a general tax than really a fee for service,” she said.

Wheeless said the industry supported recent efforts to have the Department of Financial Institutions license loan officers, but now the agency doesn’t have the funding necessary to do so.

Paul Senseman, a spokesman for Gov. Jan Brewer, said he did not know the governor’s position on self-funding for the Department of Financial Institutions, though he said self funding may become an increasingly attractive option for different agencies due to the state’s fiscal condition. In August, Brewer signed a budget bill that allowed the Land Department to become self-funded, a policy change she also included in her June budget proposal.

“There’s been a number of discussions for different agencies about some self-funding mechanisms. We’re certainly entertaining a number of those as we deal with this financial crisis, and that could certainly be one of them,” Senseman said. “I think as you see the general fund more and more limited, and increasingly focused on maintaining the most core and vital functions, you’ll see that the state will continue to move in that direction toward self-funding mechanisms for other smaller agencies.”

Rotellini said she believes the push for self-funding would have to come from the industries the agency regulates to have the greatest chance of success. Wheeless said her organization has no immediate plans to get behind such legislation in 2010, but didn’t close the door to the possibility.

“We haven’t discussed our proactive agenda for next session yet,” Wheeless said. “It’s something we would definitely support. I don’t know that it would be a bill that we would run proactively or not. We just haven’t made that decision yet, but certainly if there was a bill we would be supportive.”

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