BILL ANALYSIS SENATE COMMITTEE ON BANKING, FINANCE, AND INSURANCE Senator Ronald Calderon, Chair AB 1762 (Hayashi) Hearing Date: June 16, 2010 As Amended: June 2, 2010 Fiscal: No Urgency: No VOTES: Asm. Floor(04/08/10)73-0/Pass Asm. B. & P. (03/23/10)10-0/Pass SUMMARY Would clarify and update the definition of an advance fee, as that term is defined under the Real Estate Law. DIGEST Existing law 1. Defines an advance fee as a fee, regardless of the form, which is claimed, demanded, charged, received, or collected by a licensee from a principal before fully completing each and every service the licensee contracted to perform (Business and Professions Code Section 10026); 2. Prohibits an advance fee, or the services to be performed by a licensee pursuant to a fee agreement, from being separated or divided into components for the purpose of avoiding the application of Section 10026; 3. States that the term "advance fee" includes a fee for a listing, advertisement, or offer to sell or lease property or a business opportunity, other than in a newspaper of general circulation, as specified (Section 10026); 4. States that the term "advance fee" does not include the term security, as that term is used in Section 1950.5 of the Civil Code, or the term screening fee, as that term is used in Section 1950.6 of the Civil Code (Section 10026); 5. Requires real estate licensees to submit all materials used in obtaining advance fee agreements, including but not limited to the contract forms, radio and television advertising, and AB 1762 (Hayashi), Page 2 letters or cards used to solicit prospective sellers, to the Commissioner of Real Estate (commissioner) at least 10 days prior to their use, and grants the commissioner the authority to order any of the submitted material not be used, disseminated, or published, based on his/her belief that it would tend to mislead (Section 10085); 6. Provides that any person or entity using, disseminating, or publishing any matter which the commissioner has ordered not to be used, published, or disseminated pursuant to Section 10085 is guilty of a misdemeanor punishable by a fine not exceeding $2,500, or by imprisonment in the county jail for up to six months, or both, for each use, dissemination, or publication (Section 10085). This bill (changes to existing law are shown in bold type) 1. Would define an advance fee as a fee, regardless of its form, which is claimed, demanded, charged, received, or collected by a licensee for services requiring a license, or for a listing, as defined, before fully completing the service the licensee contracted to perform or represented would be performed; 2. Would state that neither an advance fee, nor the services to be performed, may be separated or divided into components for the purpose of avoiding the application of any provision of the Real Estate Law; 3. Would expressly exclude the following from being defined as an advance fee: a. Security, as that term is used in Section 1950.5 of the Civil Code; b. Screening fee, as that term is used in Section 1950.6 of the Civil Code; c. A fee claimed, demanded, charged, received, or collected for the purpose of advertising the sale, lease, or exchange of real estate, or of a business opportunity, in a newspaper of general circulation, any other written publication, or through electronic media comparable to any type of written publication, provided that the electronic media or the publication is not under the control or ownership of the broker; AB 1762 (Hayashi), Page 3 d. A fee earned for a specific service under a "limited service" contract. For purposes of the bill, a limited services contract is a written agreement for real estate services, which are promoted, advertised, or presented as stand-alone services, to be performed on a task-by-task basis, and for which compensation is received as each separate, contracted-for task is completed. To qualify for this exclusion, all services performed pursuant to the contract must be described in subdivisions (a), (b), or (c) of Section 10131; 4. Would state that a contract between a real estate broker and a principal that requires payment of a commission to the broker after the contract is fully performed does not represent an agreement for an advance fee; 5. Would state that the changes made by the bill are intended to supercede the changes made to Section 10026 by SB 94 (Calderon), Chapter 630, Statutes of 2009, but are not otherwise intended to alter the obligations or liability of any person pursuant to SB 94 (Calderon), Chapter 630, Statutes of 2009. COMMENTS 1. Purpose of the bill To update and clarify the Department of Real Estate's (DRE's) advance fee statute, and codify DRE's interpretation of that statute. 2. Background Section 10026 of the Business and Professions Code was enacted in 1955, and has been infrequently changed since that time. The last change to this section was requested by the California Association of Realtors (CAR) in 2009. That change, which was contained in SB 94 (Calderon), Chapter 630, Statutes of 2009, added language stating that the form of the fee was immaterial, and added the concept that that neither an advance fee, nor the services to be performed pursuant to an advance fee contract, may be separated or divided into components for purposes of avoiding the application of Section 10026. The changes proposed by CAR in this bill go beyond those enacted AB 1762 (Hayashi), Page 4 in 2009, and are intended to ensure that two types of fee arrangements, into which DRE licensees may currently enter without an advance fee agreement, are not interpreted as requiring advance fee agreements by DRE at some time in the future. These two fee arrangements include: 1) entering into a limited services contract (described in more detail below) and 2) entering into a contract in which a commission will be earned by the licensee, after the completion of the contract. Although neither of these fee arrangements has ever been interpreted by DRE as requiring an advance fee agreement, CAR is concerned that the existing language of Section 10026 does not expressly exclude them from the definition of activities for which an advance fee agreement is necessary. The changes contained in AB 1762 are intended to ensure that the statute clearly excludes these activities as ones requiring an advance fee agreement. The limited services contracts covered by this bill are a la carte arrangements, and are entered into when an individual might want a little bit of help from a DRE licensee in purchasing or selling a home or performing another real estate-related service, but does not wish to enter into a contract with the licensee for the full range of services typically provided by licensees. A limited services contract allows the licensee to price the desired services on a piece-by-piece or task-by-task basis, and to receive payment as each piece or task is completed. The language of this bill would make it clear that these types of arrangements do not require advance fee agreements. 3. What does AB 1762 have to do with SB 94? SB 94 (Calderon), Chapter 630, Statutes of 2009, prohibited anyone, including a real estate licensee, who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance or forgiveness for a fee or other compensation paid by a borrower, from demanding or receiving any preperformance compensation, requiring any security as collateral for final compensation, or taking a power of attorney from a borrower, as specified. Although SB 94 has colloquially been described as a bill that bans advance fees in connection with loan modification agreements, that bill did not base its requirements upon the definition of an advance fee in the Real Estate Law. The changes made by SB 94 to the definition of an advance fee in the Real Estate Law were unrelated to that bill's AB 1762 (Hayashi), Page 5 requirements relating to mortgage loan modification/forbearance/forgiveness contracts. However, in an attempt to avoid any misunderstanding or misinterpretations about the intent of AB 1762, this bill's author and sponsor have included language, expressly clarifying that the changes made by this bill are only intended to supercede the changes made by SB 94 to the definition of an advance fee in the Real Estate Law. AB 1762 contains express language that its changes are not otherwise intended to alter the obligations or liability of any person pursuant to SB 94. 4. Support . CAR is sponsoring this bill for the reasons stated above. In its letter of support, CAR observes that "the bill is needed to make it clear that so-called 'fee for service' or 'cafeteria' real estate services contracts are not advance fee arrangements requiring advance review." CAR asserts that the terminology of Section 10026 is important, because advertisements for advance fee contracts, and the contracts themselves, must be submitted in advance to DRE for review. 5. Opposition None received. POSITIONS Support California Association of Realtors (sponsor) Oppose None received Consultant: Eileen Newhall (916) 651-4102