BILL ANALYSIS �
-----------------------------------------------------------------------
|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 �Board 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