BILL ANALYSIS Ó ----------------------------------------------------------------------- |Hearing Date:May 2, 2011 |Bill No:SB | | |53 | ----------------------------------------------------------------------- SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT Senator Curren D. Price, Jr., Chair Bill No: SB 53 Author:Calderon As Amended:April 14, 2011 Fiscal:Yes SUBJECT: Real estate licensees. SUMMARY: Would make several changes to California's Real Estate Law, to give the Department of Real Estate more enforcement tools to enable them 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. NOTE: This measure was heard in the Banking and Financial Institutions Committee on April 6, 2011, and passed out of Committee by a vote of 6-1. Existing Real Estate Law: 1) Establishes in the Business, Transportation and Housing Agency (BT&H) the Department of Real Estate (DRE), the chief officer of which is the Real Estate Commissioner (Commissioner) and specifies that the Commissioner, through the Department, is responsible for the regulation of real estate transactions and licensure of real estate agents, brokers and salespersons. 2) Provides that the Commissioner shall enforce the provisions of the Real Estate Law and has full power to regulate and control the issuance and revocations, both temporary and permanent, of all licenses to be issued, and to perform all other acts and duties provided under the Real Estate Law. (Business and Professions Code (BPC) § 10071) 3) Makes any person, including officers, directors, agents or SB 53 Page 2 employees of corporations, who willfully violates or knowingly participates in the violation of the Real Estate Law shall be guilty of a misdemeanor punishable by a fine not exceeding ten thousand dollars ($10,000), or by imprisonment in the county jail not exceeding six months, or by a fine and imprisonment. (BPC § 10185) 4) Provides that the Attorney General (AG) shall render to the Commissioner opinions upon all questions of law relating to the construction or interpretation of the Real Estate Law, or arising in the administration thereof that may be submitted to him by the Commissioner. The AG shall also act as the attorney for the Commission in all actions and proceedings brought by or against him under or pursuant to any provision of the Real Estate Law. (BPC § 10079) 5)Provides that any board, bureau, or commission within the DCA may establish, by regulation, a system for the issuance to a licensee of a citation which may contain an order of abatement or an order to pay an administrative fine assessed by the board, bureau, or commission where the licensee is in violation of the applicable licensing act or any regulation adopted pursuant thereto. Specifies the procedures to be followed in both the issuance of the citation and fine, and appeal of the citation or fine assessment. This citation and fine authority, however, does not prevent a board, bureau, or commission from establishing by statute their own citation and fine authority, as long as it is consistent with the aforementioned procedures. (BPC § 125.9) 6)Provides that any board, bureau, or commission within the DCA may in addition to the administrative citation system authorized by Section 125.9 (as against licensees, Item #5, above), may also be established by regulation for issuance of an administrative citation to an unlicensed person who is acting in the capacity of a licensee under the jurisdiction of that board, bureau, or commission. The administrative citation system shall meet the requirements of Section 125.9 above. However, the establishment of an administrative citation system for unlicensed activity does not preclude the use of other enforcement statutes for unlicensed activities at the discretion of the board, bureau, or commission. (BPC § 148) 7) Requires a real estate broker who intends or reasonably expects in a successive 12 month period to negotiate a combination of 10 or more transactions, as specified, in an aggregate amount of more than $1,000,000, shall file reports as specified to DRE within 90 SB 53 Page 3 days after the end of the broker's fiscal year or any additional time as the Commissioner may allow for filing for good cause. (BPC § 10232.2) 8) Provides that the Commissioner may suspend or revoke a real estate license, or deny the issuance of a license to an applicant, who has violated any or the provisions of the Real Estate Law as specified, or other laws as specified, or may suspend or revoke the license of a corporation, or deny the issuance of a license to a corporation, if an officer, director or person owning 10 percent or more of the corporation's stock has violated any of those provisions as specified. (BPC § 10177) 9) Entitles the applicant for a real estate license to continue operating under his or her existing license after its expiration date, if not previously suspended or revoked, and they have complied with other requirements as specified. Provides that if the Commissioner determines that the applicant has not complied with continuing education (CE) then the Commissioner may allow for an extended period of time for compliance, or advise the licensee that their license may expire for noncompliance and of their right to a hearing. (BPC § 10156.2) 10)Makes it unlawful for any person to offer or sell any security in an issuer transaction unless the sale has been qualified or the security or transaction is exempted or is not subject to qualification, as specified. Exempts from qualification a transaction that involves the sale of a series of notes secured directly by an interest in real property or the sale of undivided interest in a note secured directly by real property equivalent to a series transaction. Requires a real estate broker to indicate in the real estate broker's transaction file the provisions of law pertaining to qualification or exemption from qualifications under which a transaction is being conducted and requires the broker to file certain information with the Commissioner relative to conducting these transactions that are exempt from qualification. (BPC §§ 10237-10239.4) Existing law, the Financial Code (FC): 1)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. (FC § 17006) SB 53 Page 4 Existing law, the Vehicle Code (VC): 1)Generally provides that all records of the Department of Motor Vehicles (DMV) relating to the physical or mental condition of any person, and convictions of any offense involving the use or possession of controlled substances not arising from circumstances involving a motor vehicle, are confidential and not open to public inspection. (VC § 1808.5) 2)Provides specified government law enforcement entities with access to records of the DMV. Existing law, the Government Code (GC): Provides that notwithstanding Section 1808.5 of the Vehicle Code, the board ÝBoard of Equalization], as a board, individually, or through its staff, may obtain copies of full-face engraved pictures of photographs of licensee directly from the DMV for the purposes of enforcing the Revenue and Taxation Code. This bill: 1) Provides that in cases where a licensee may ignore or refuse to obey an order of the court, or obey a subpoena, the Commissioner may apply to the Superior Court, without the need to involve the Attorney General, and the Court may issue an order requiring the licensee to appear before the Commissioner to produce documentary evidence, or to give evidence regarding an investigation. Failure of the licensee to obey the order of the Court may be punished by the Court as contempt. 2) Grants to the 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 through an administrative hearing process. 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. 3) Specifies that nothing prevents the Commission from also issuing an order to desist and refrain from engaging in a specific business activity or activities or an order to suspend all business operations to a person who is engaged in continued or repeated violations of the Real Estate Law. 4) Provides that after the filing of a desist and refrain order or a SB 53 Page 5 bar order, or the commencement of a formal disciplinary action by the Commissioner, and upon a finding by the Commissioner that action is warranted for the protection of the public, and that failure to act is likely to result in grievous harm to the public, the Commissioner may make information public confirming the fact of an investigation or proceeding regarding a licensee or unlicensed person believed to be engaging in activities for which a real estate license is required. Provides that any release of the information shall include language explaining that the person is entitled to a hearing on the matter and the procedural aspects and current status of the investigation or proceeding. 5) Requires a real estate broker who engages in escrow activities for five or more transactions within a year, as specified under FC 17006 (Item # 1, Financial Code, above), or whose escrow activities exceed $1,000,000 within a year, shall file with the DRE a report within 60 days providing certain information as specified. Provides that the real estate broker may also file consolidated reports that include all of the information as specified in Section 10232.2 (Item # 7, Real Estate Law, above). Provides for penalties for failure to submit the report, and for suspension of revocation of the realtor's license for failure to pay penalties imposed. 6) Makes findings pursuant to the information provided to DRE, as specified in Item # 5 above, that in order to allow the DRE to fully accomplish its goals, it is imperative to protect the interests of those persons submitting information to the DRE to ensure that any personal or sensitive business information that this act requires of those persons to submit is protected as confidential information. 7) Provides that the Commissioner may delay renewal of a license pursuant to any acts as specified in Section 10177 (Item # 8, above), and that any decision to delay renewal of a license shall toll the expiration of that license until the results of any pending disciplinary actions against the licensee are final, or until the licensee voluntarily surrenders his, her or its license, whichever is earlier. 8) Specifies that the Commissioner may also delay renewal of a license pursuant to any acts as specified in Section 10177 (Item # 8, above), even though the licensee has fulfilled the requirements for licensure pursuant to Section 10156.2 (Item # 9, above); including fulfilling their CE requirement. 9) Would require a real estate broker to submit a copy of information SB 53 Page 6 in the real estate broker's transaction file relative to securities qualification, or exemption from securities qualification, pursuant to a transaction involving secured notes on real property (see Item # 10, above) to any investor from whom the real estate broker obtains funds in connection with the transaction or other provision of law pertaining to these types of transactions. Recasts and updates certain provisions and clarifies the repeal of specified provisions relative to these transactions. 10)Provides that the DRE may obtain copies of full-face engraved pictures or photos of individuals directly from the DMV and allows the Commissioner access to records of the DMV for purposes of enforcing the Real Estate Law and the Subdivided Lands Law. 11)Clarifying and technical changes to certain enforcement provisions of the Real Estate Law. FISCAL EFFECT: Unknown. Legislative Counsel has keyed this bill as "fiscal." COMMENTS: 1.Purpose. This measure is sponsored by Authors. The Authors indicate that this bill makes several changes to California's Real Estate Law, to give the DRE more enforcement tools with which to crack down against mortgage fraud and other real estate violations, and add safeguards to protect consumers who seek out services from real estate licensees. This bill also makes technical changes intended to clean up certain portions of the Real Estate Law. 2.According to the Authors, this Measure Specifically Provides the Following Enforcement Enhancements and Changes to the Real Estate Law: a. Enhance DRE's ability to obtain, have access to, and examine the books, accounts and records of Real Estate Licensees. Problem: Current Real Estate Law 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 SB 53 Page 7 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 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 must agree, to represent DRE in cases where DRE seeks to enforce a subpoena in a Superior Court. The problem then becomes time sensitive; 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. What the Bill Does: This measure 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. b. Provides for Citation and Fine Authority. Problem: Current Real Estate Law gives DRE the authority to examine the books, accounts, and records of real estate licensees. The Law also grants the Commissioner 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 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 SB 53 Page 8 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 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). What the Bill Does: This measure 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, and would be imposed in lieu of, rather than in addition to, other discipline. Fines collected would be deposited into the Real Estate Fund's Recovery Account. Failure to pay a fine would result in disciplinary action. c. Disclosure of those under investigation for serious violations. Problem: Existing law provides no mechanism for use by the 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 the 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, it was able to warn the public about several members of the Bar, who were engaging in unscrupulous loan modification activities. The 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 Page 9 The ability to release the names of those under investigation is not limited to the State Bar. The Fair Political Practices Commission recently announced that it would publicize the identities of those under investigation for campaign violations. What the Bill Does: This measure would give the DRE 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. The 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 the DRE's accusation. d. Notification about escrow-related activities conducted by real estate licensees. Problem: 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) The DRE currently lacks the authority to determine which of its licensed brokers engage in escrow activities pursuant to the exemption provided in Financial Code Section 17006, nor does it require these licensees to notify the DRE about their volume of escrow business. Without access to information about the activities of its licensees, the DRE is limited to using consumer complaints to help prioritize which of its licensees to examine. During the last year alone, real 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 the 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. What the Bill Does: This measure requires any real estate broker who engages in escrow activities for five or more transactions SB 53 Page 10 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 the DRE, documenting the number of escrows conducted and the dollar volume escrowed during the calendar year in which the threshold was met. e. Authorizes the DRE to deny the license renewal application of a licensee under investigation for a serious violation of the Real Estate Law. Problem: Current Real Estate Law authorizes the 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 the DRE for having engaged in behavior that would warrant a license suspension or revocation. This creates a situation under which the 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 the DRE plans to issue an accusation to that individual, suspending or revoking his or her license. Recent press accounts have criticized the 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 allow the DRE to deny the renewal of a license to these types of individuals. What the Bill Does: This measure 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 this provision would have appeal rights, just as they would if the DRE were required to re-issue their license, and then pursue a license suspension or revocation. The 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. This measure also makes a conforming change to ensure that a licensee's license does not automatically renew upon payment of the renewal fee and certification by a licensee that he or she has complied with SB 53 Page 11 his or her continuing education requirements. f. Updates the Real Estate Law relating to Multi-Lender Loans. Problem: 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 that was intended to replace the formerly existing Articles 6 and 6.5. A recent review of Article 6 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. What the Bill Does: This measure 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. g. Grants the DRE access to DMV Photographs and certain DMV Records to aid the DRE in enforcing the Real Estate and Subdivided Lands Laws. Problem: For many years, the DRE had access to driver's license and vehicle registration information from the DMV. The 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, the DMV changed its policies regarding access to its records, by limiting such access to sworn peace officers. This technically cut the DRE off from the records, because none of the DRE's personnel are sworn peace officers. Despite the 2001 change to the DMV's policy, some DRE offices continued receiving access to the DMV records until very recently. That changed in late 2010, when the DMV began more formally enforcing its policies, and terminated all access to its records by the DRE employees. Without access to the DMV information, the DRE lacks access to photographs of those SB 53 Page 12 persons it needs to investigate, and those on whom the department seeks to serve process. The DMV's records can also help the DRE identify the most recent address of a licensee or individual improperly acting without a license. In a letter to the DRE's Chief Counsel regarding its latest move, the DMV pointed to its longstanding policy, and encouraged the DRE to seek legislation, granting the DMV authority to share with the DRE the records needed. Precedent for such legislation already exists; the Board of Equalization sought and obtained access to the DMV's records in 2003, when faced with a problem similar to the one now faced by the DRE. What the Bill Does: This measure provides the statutory authority for the DRE to request the DMV information, and for the DMV to provide the requested information to the DRE. h. Gives the DRE express enforcement authority for violations of certain laws by its licensees. Problem: 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 the 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. The DRE legal staff has expressed concern that the boilerplate language in these other statutes is insufficient, on its own, to permit the DRE to bring an enforcement action against one of its licensees for violating one of these statutes. What the Bill Does: This measure 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. 3.Related Legislation. SB 706 (Price) makes numerous enforcement enhancements to the Department of Real Estate (DRE) and the Office of Real Estate Appraisers (OREA); transfers OREA into DRE; requires DRE to appoint a Real Estate Advisory Commission; requires licensing boards to post information about licensees on the Internet, as specified; makes updating and conforming changes. SB 53 Page 13 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. It would cap the maximum amount of the fine at $1,000. It is sponsored by the California Association of Realtors. It is pending a hearing in the Assembly Business, Professions, and Consumer Protection Committee. 4.Arguments in Support. The California Mortgage Association (CMA) supports the efforts of this bill's Authors to give the 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 this measure, which it views as a way for the 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 as currently amended. The CAR had concerns about disclosure of enforcement action without prior proof but believes the language in the bill now strikes a balance between concern for immediate protection of the public and basic due process for licensees by requiring stringent findings by the DRE and requiring the imposition of preliminary sanctions before releasing information regarding the investigation of a licensee to the public. The CAR also had concerns about the authority granted to DRE to refuse renewal of a license while a licensee was under investigation by the DRE. Recent language allows more flexibility to DRE to toll the expiration of the license under review and reinstate the license if the licensee is absolved. The CAR is also in support of a limited citation and fine authority and is actually sponsoring a similar bill but the cap is $1,000. They indicate that they will continue to work with the Authors to reconcile the two provisions. The Escrow Institute of California (EIC) is in support of this measure, especially as to the provision which would require DRE licensees who conduct escrows to annually report their number of transactions to the DRE. According to the EIC, under the California Escrow Law real estate and mortgage brokers, title companies, banks and attorneys who engage in escrow activities are exempt from the stringent requirements contained in the Escrow Law. The EIC has SB 53 Page 14 advocated for years the elimination of the exemption for unlicensed escrow practitioners and the regulation of all escrow agents under a uniform Escrow Law and Regulations. The EIC believes that this bill is an important first step for the DRE to identify who among their real estate licensees are conduction escrows so as to evaluate and determine if any appropriate regulatory measures and follow up may be required. SUPPORT AND OPPOSITION: Support: California Association of Realtors California Mortgage Association Escrow Institute of California Opposition: None Received as of April 27, 2011. Consultant:Bill Gage