BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Juan Vargas, Chair SB 53 (Calderon and Vargas) Hearing Date: April 6, 2011 As Amended: March 22, 2011 Fiscal: Yes Urgency: No SUMMARY Would make several changes to California's Real Estate Law, to give the Department of Real Estate (DRE) more enforcement tools with which to crack down against mortgage fraud and other real estate violations, add safeguards to protect consumers who seek out services from real estate licensees, and make technical changes, intended to clean up certain portions of the Real Estate Law. DESCRIPTION 1. Would grant DRE the authority to issue citations and/or citations and fines to licensees found to have violated provisions of the Real Estate Law. Licensees would be authorized to appeal the findings of any such citation. Fines would be capped at $2,500 per violation. Fines collected would be deposited into the Real Estate Fund's Recovery Account, where they would be available to reimburse consumers for losses resulting from violations of the Real Estate Law. 2. Would authorize DRE to represent itself in court to enforce an administrative subpoena that it had issued. 3. Would authorize DRE to warn the public about ongoing investigations, and to release the identities of those under investigation, if the Department knows of one or more licensees or unlicensed persons engaging in real estate-related activities which pose an immediate risk of grievous harm to the public. 4. Would give DRE statutory authority to obtain photographs of individuals from the Department of Motor Vehicles, for purposes of enforcing the Real Estate Law and Subdivided Lands Law. SB 53 (Calderon and Vargas), Page 2 5. Would authorize DRE to decline to renew the license of a licensee known or believed to be engaging in activities that would disqualify them from licensure. 6. Would require any real estate broker, who performs escrow activities for five or more transactions in a calendar year under the scope of his or her real estate license, or whose escrow activities equal or exceed $1 million in a calendar year, to file a report with DRE, documenting the number of escrows conducted and the dollar volume escrowed during the calendar year in which the threshold is met. 7. Would make technical changes to the provisions of the Real Estate Law authorizing licensees to make multi-lender loans, and would add a provision requiring these licensees to provide specified information to their investors and to DRE. The information which would have to be shared with investors and DRE is currently required to be document in a licensee's files, but is not required to be shared with either investors or DRE. EXISTING LAW Relevant provisions of existing law are described below, within the detailed explanation of each of the bill's provisions. COMMENTS 1. Background and Discussion: Each of the bill's main provisions is described in a separate section, immediately below. a. Citation and Fine Authority: Business and Professions Code Section 10148 gives DRE the authority to examine the books, accounts, and records of real estate licensees. Section 10071 grants the commissioner of Real Estate with authority to enforce the Real Estate Law, by granting him or her full power to regulate and control the issuance and revocation, both temporary and permanent, of all real estate licenses, and to perform all other acts and duties necessary to enforce the Real Estate Law. However, the Real Estate Law lacks any provision that authorizes DRE to issue an on-the-spot citation or a fix-it ticket to a licensee who has been found to have violated a provision of the Real Estate Law. For that reason, if a DRE auditor or investigator SB 53 (Calderon and Vargas), Page 3 identifies a violation during a routine audit or investigation, the auditor or investigator must return to the office and write up his/her findings, then send those findings up the chain of command for review and approval. In all but the most serious cases, DRE sends a letter to the licensee once the auditor or investigator's findings have been approved, informing the licensee of the violation(s), and ordering that corrective action be taken. While a lengthy review of audit or investigation findings may be appropriate in complex cases, simpler cases could be more efficiently handled by granting DRE licensees on-the-spot citation authority. Licensees would not lose the ability to appeal, but straightforward findings, about which both DRE and licensee agreed, could be handled far more expeditiously than under existing law. Granting DRE citation authority will help both consumers and licensees, by allowing DRE enforcement staff to more quickly share the results of their inquiries with licensees, and by directing licensees to more quickly correct those items found to be in violation. The precedent for this proposal already exists within the Financial Code (Section 23058) and elsewhere in the Business and Professions Code (Sections 125.9 and 148). SB 53 would give DRE citation and fine authority patterned on Financial Code Section 23058 and Business and Professions Code Sections 125.9 and 148. Fines would be capped at $2,500 per violation. Fines collected would be deposited into the Real Estate Fund's Recovery Account. b. Improved Access to Examine the Books, Accounts, and Records of Real Estate Licensees: Business and Professions Code Section 10148 requires real estate brokers to retain copies of all books, accounts, and records related to any transaction for which a real estate broker license is required. Brokers are required to retain these books, accounts, and records for at least three years, and to make them available for examination, inspection, and copying by the Commissioner or his or her designated representative during regular business hours, after notice by the Commissioner or his representative. If, after appropriate notice, a real estate broker refuses to allow the Commissioner or his or her representative SB 53 (Calderon and Vargas), Page 4 access to the broker's books, accounts, or records, DRE is authorized to seek an administrative subpoena to compel the production of those books, accounts, or records. If a real estate broker continues to refuse access, even after being presented with an administrative subpoena, DRE may seek to enforce the subpoena in a Superior Court. However, because the law requires DRE to be represented by the Department of Justice in all civil court matters, DRE must request, and the Department of Justice (DOJ) must agree, to represent DRE, in cases where DRE seeks to enforce a subpoena in a Superior Court. The problem then becomes time - often the DOJ lacks sufficient resources to expedite these cases, which allows rogue real estate brokers who hold out against producing their books, accounts, and records to continue to operate. SB 53 authorizes DRE to go to court directly, to enforce an administrative subpoena. Precedent for granting this authority to other regulators tasked with protecting the public already exists; the Department of Corporations has this authority, to help it enforce the Corporate Securities Law of 1968. The language of SB 53 is patterned directly on the language in Corporations Code Section 25531, granting DOC this authority. c. Publication of Those Under Investigation for Serious Violations: Existing law provides no mechanism for use by DRE to warn the public, if the department knows of one or more licensees who are engaging in activities that pose an immediate risk of grievous harm to the public. The public must wait for DRE to file a formal action, such as a Desist and Refrain Order or an Accusation, in order to learn which persons or companies may pose a risk. Because the California State Bar has the authority to release the identities of lawyers who are under investigation (see Business and Professions Code Section 6086(b)(2)), it was able to warn the public about several members of the Bar, who were engaging in unscrupulous loan modification activities. DRE, in contrast, lacked this authority, so was unable to warn the public about specific individuals and businesses who were engaging in unscrupulous loan modification behavior. Such reporting not only acts as a warning to the public, but also as a deterrent to unscrupulous behavior. SB 53 (Calderon and Vargas), Page 5 SB 53 would give DRE very limited authority to release the identities of those under investigation. To protect the rights of those who are innocent until proven guilty, DRE's authority would be limited to situations in which failure to disclose the information is likely to lead to grievous harm to the public. DRE would also have to include language in each of its releases, explaining that the persons under investigation are innocent, until proven guilty, and that they are entitled to a public hearing on the merits of DRE's accusation. d. Access to DMV Photographs: For many years, DRE had access to driver's license and vehicle registration information from DMV. DRE used this information to help it identify and locate individuals upon whom it sought to issue subpoenas, desist and refrain orders, and accusations, and when interviewing victims of real estate fraud or other real estate violations, in order to properly identify the individuals with whom these victims interacted. In 2001, DMV changed its policies regarding access to its records, by limiting such access to sworn peace officers. This technically cut DRE off from the records, because none of DRE's personnel are sworn peace officers. Despite the 2001 change to DMV's policy, some DRE offices continued receiving access to DMV records until very recently. That changed in late 2010, when DMV began more formally enforcing its policies, and terminated all access to its records by DRE employees. Without access to DMV information, DRE lacks access to photographs of those persons it needs to investigate, and those on whom the department seeks to serve process. DMV's records can also help DRE identify the most recent address of a licensee or individual improperly acting without a license. In a letter to DRE's Chief Counsel regarding its latest move, DMV pointed to its longstanding policy, and encouraged DRE to seek legislation, granting DMV authority to share with DRE the records desired by DRE. Precedent for such legislation already exists; the Board of Equalization sought and obtained access to DMV's records in 2003, when faced with a problem similar to the one now faced by DRE. SB 53 (Calderon and Vargas), Page 6 SB 53 provides the statutory authority for DRE to request the DMV information, and for DMV to provide the requested information to DRE. e. Authorize DRE to Deny the License Renewal Application of a Licensee Under Investigation for a Serious Violation of the Real Estate Law: Business and Professions Code Section 10177 authorizes the DRE commissioner to suspend or revoke the license of a real estate licensee, or deny the issuance of a license to a real estate applicant, who has engaged in one or more of several enumerated bad acts. However, the commissioner lacks the authority to deny the renewal of a license application submitted by a real estate licensee who is under investigation by DRE for having engaged in behavior that would warrant a license suspension or revocation. This creates a situation under which DRE must renew the license of a licensee that has paid his or her renewal fee and completed his or her continuing education requirements, even when DRE plans to issue a formal administrative accusation to that individual, suspending or revoking his or her license. Recent press accounts have criticized DRE for continuing to license individuals known to be engaging in acts that would disqualify them from licensure. One way to stop this practice is to amend Section 10177, and allow DRE to deny the renewal of a license to these types of individuals. SB 53 grants DRE the ability to deny a license renewal to an individual known or suspected to have engaged in or to be engaging in acts that would disqualify them from licensure. Individuals denied a renewal pursuant to Section 10177 would have appeal rights, just as they would if DRE were required to re-issue their license, and then pursue a license suspension or revocation. DRE already has the authority to deny the renewal of a mortgage loan originator licensee endorsement, if the endorsement holder fails at any time to meet specified requirements or withholds information or makes a material misstatement in their application for endorsement renewal (Section 10166.051). SB 53 also makes a conforming change to Section 10156.2, to ensure that a licensee's license does not automatically renew, upon payment of the SB 53 (Calderon and Vargas), Page 7 renewal fee and certification by a licensee that he or she has complied with his or her continuing education requirements. f. Provide Express Authority For DRE To Enforce Violations of Certain Laws by Its Licensees: A number of statutes whose language is codified outside of the Real Estate Law (including the Covered Loan Law and the law prohibiting inappropriate influence of appraisers) contain statements to the effect that, "A violation of this law by a licensed person is a violation of the licensed person's licensing law." This boilerplate language is intended to allow departments, such as DRE, the Department of Corporations, and the Department of Financial Institutions, to take enforcement actions against any of their licensees that are found to be violating the specified statute. DRE legal staff has expressed concern that the boilerplate language in these other statutes is insufficient, on its own, to permit DRE to bring an enforcement action against one of its licensees for violating one of these statutes. SB 53 adds language to the Real Estate Law, to ensure that DRE has the authority to pursue enforcement actions against licensees who, while acting within the scope of their license, violate certain statutes not explicitly contained within the Real Estate Law. g. Notification Of Escrow-Related Activities Conducted By Real Estate Licensees: Existing law authorizes licensed real estate brokers to act as escrow agents, without obtaining an Escrow Law license, if the brokers are performing acts in the course of, or incidental to a real estate transaction in which the broker is an agent or a party to the transaction, and in which the broker is performing an act for which a real estate license is required (Financial Code Section 17006). DRE currently lacks the authority to determine which of its licensed brokers engage in escrow activities pursuant to the exemption in Financial Code Section 17006, nor to require these licensees to notify DRE about their volume of escrow business. Without access to information about the activities of its licensees, DRE is limited to using consumer complaints to help prioritize which of its licensees to examine. During the last year alone, real SB 53 (Calderon and Vargas), Page 8 estate licensees were found to have mishandled over $2.5 million in trust fund deposits; it is unknown what volume of mishandled money went undetected. Providing DRE with specific information about its licensees will help give the department a better sense for the activities in which its licensees are engaging, which, in turn, will help the department identify potential problems before they result in harm to consumers. SB 53 requires any real estate broker who engages in escrow activities for five or more transactions in a calendar year pursuant to the exemption from the Escrow Law contained in Section 17006 of the Financial Code, or whose escrow activities pursuant to that exemption equal or exceed $1 million in a calendar year, to file a report with DRE, documenting the number of escrows conducted and the dollar volume escrowed during the calendar year in which the threshold was met. h. Update Article 6 of the Real Estate Law, Relating to Multi-Lender Loans: Article 6 of Chapter 3 of Part 1 of the Real Estate Law, titled, "Claim of Exemption from Securities Qualification," (Business and Professions Code Section 10237- 10239.4) was added to the codes in 2003, as part of a bill which was intended to delete the pre-existing Articles 6 and 6.5. For reasons that remain unclear, the pre-existing, now-outdated Articles 6 and 6.5 were never stricken from the codes. SB 53 achieves this necessary clean-up. In addition, a recent review of the Article 6 that is currently operative identified a handful of changes, which would correct, update, and clarify the operation of the Article, while at the same time better informing investors who purchase interests in multi-lender loans about the rules under which the real estate brokers selling those loans are operating. SB 53 makes the needed cleanup changes, and adds a provision to require real estate licensees that engage in multi-lender loans to provide information to their investors regarding the provisions of law under which they are operating. Licensees are already required to document this information in their files; this bill would require that it be provided to investors. SB 53 (Calderon and Vargas), Page 9 2. Summary of Arguments in Support: The California Mortgage Association (CMA) supports the efforts of this bill's authors to give DRE the tools the department needs to effectively and efficiently enforce the law. "Fundamentally, SB 53 is a consumer protection measure. The bill is well thought-out and crafted." CMA specifically cites its support for the "cite and fine" provision of SB 53 (provision one), which it views as a way for DRE to deal with minor violations of the law quickly and conclusively, without having to resort to formal accusations against licensees in each instance. This, in turn, will free up department resources to focus on egregious violations of the law. The California Association of Realtors (CAR) supports the bill, with the understanding (see below) that the authors will continue working with CAR to address a few outstanding, unresolved issues. 3. Summary of Arguments in Opposition: None received. 4. Outstanding, Unresolved Issues: a. The authors of this measure are currently negotiating with CAR on changes to two of this bill's provisions. These two provisions include provision 3 (publishing the names of those under investigation for engaging in acts that are causing serious harm to the public) and provision 5 (authorizing DRE to decline to renew the license of a licensee known or believed to be engaging in acts that would disqualify that person from licensure). While CAR agrees with the intent of the author on both of these topics, the trade association is seeking additional amendments, to ensure that DRE does not abuse the additional authority these provisions would give the department. CAR is also seeking to minimize the extent to which the bill erodes licensees' due process and right to appeal accusations of wrongdoing. Both parties expect to resolve their differences in the near future. However, specific language reflecting a final agreement was not available at the time this analysis was prepared. 5. Amendments: a. CMA has requested, and the bill's authors have SB 53 (Calderon and Vargas), Page 10 agreed to, an amendment to provision 7 of the bill (cleanup of Article 6, relating to multi-lender loans). The amendment, which is intended to eliminate an unnecessary reporting burden on licensees, would delete lines 17 through 20 on page 13 of the bill . 6. Prior and Related Legislation: a. AB 278 (Hill): Would authorize the DRE commissioner to promulgate regulations authorizing the issuance of citations and fines to DRE licensees and unlicensed persons engaging in activities for which a real estate license is required. Would cap the maximum amount of the fine at $1,000. Sponsored by the California Association of Realtors. Pending a hearing in the Assembly Business, Professions, and Consumer Protection Committee. LIST OF REGISTERED SUPPORT/OPPOSITION Support California Mortgage Association California Association of Realtors Opposition None received Consultant: Eileen Newhall (916) 651-4102