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.
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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
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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
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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.
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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.
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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
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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
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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
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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