In his most recent Budget Proposal, Governor Brown has included plans to consolidate all businesses in the financial industry under one head. He proposes the elimination of the Department of Real Estate and the Office of Real Estate Appraisers and placing jurisdiction of these licensees under the Department of Consumer Affairs. At the same time the Department of Corporations and the Department of Financial Institutions will be merged into one new entity called the Department of Business Oversight.

It seems that the Governor wants the consumer groups to limit the operations of the mortgage brokers, and the regulators of the big banks to regulate all the lenders and securities dealers.

These changes may well result in the elimination of the opportunity for real estate brokers to arrange loans for private investors.

Please see the analysis, by Guy Puccio, below.

We welcome your comments on this issue.

As you may know, Governor Brown is proposing to shut down a number of offices and the consolidation of a number of departments and agencies in the Executive Branch of state government.  Included is the apparent restructuring of BT&H into a new Department of Business and Consumer Services. Consolidation of DFI and DOC will likely shift most of the control of the industries and the services previously regulated by the DOC to the large banks, savings banks, and thrifts.

I am concerned about the proposal to eliminate the DRE and the OREA and to transfer their licensing function to Bureaus within the Department of Consumer Affairs (“DCA”). The better option would be to consolidate DRE and OREA and leave the DRE as an independent department under the proposed Department of Business and Consumer Services. The second option is to create a separate division within the proposed consolidation of the DFI and DOC consistent with the proposal for consolidation submitted to the previous administration.

A subsequent clarification has been issued regarding mortgage brokers who would be separated from the DRE and restructured within the consolidated entity, i.e., the proposed Department of Business and Consumer Services. The remaining licensing functions of the DRE would be transferred to a bureau within the DCA.

In my opinion, the regulation of the real estate and mortgage brokerage industries is a complex endeavor and not an activity with which the DCA has any recognized experience.

Will this consolidation plan shift most of the enforcement to the feds and to the California AG removing the legal section of the DRE that is currently responsible for the enforcement of the Real Estate Law? This is similar to a proposal advanced by Governor Brown when he was Attorney General.

The following are excerpts from the recently-released Governor’s Budget Proposal:

Consolidate Oversight of Financial Businesses into a Single Department —

The Department of Corporations regulates a variety of entities involved in the financial industry including securities brokers and dealers, mortgage lenders that are not affiliated with banks, and financial planners. The Department of Financial Institutions regulates state‑chartered banks, credit unions, and money transmitters.  This proposal eliminates the Department of Financial Institutions and the Department of Corporations and consolidates their functions into a new Department of Business Oversight because both of these departments perform the same fundamental mission (i.e. the licensing and regulation of business entities). The new Department will be part of the Business and Consumer Services Agency.

Consolidate Professional Licensing Functions within the Department of Consumer Affairs —

The Department of Real Estate and the Office of Real Estate Appraisers license and oversee professionals, which is the core function of most of the bureaus in the Department of Consumer Affairs (DCA). This proposal eliminates the Department of Real Estate and the Office of Real Estate Appraisers and places them as bureaus under the DCA in order to achieve administrative savings and efficiencies. Similarly, the Structural Pest Control Board and the Board of Chiropractic Examiners will be placed under the DCA.

I: The Appraiser Qualifications Board (AQB) has issued the following Exposure Draft:

Fifth Exposure Draft of Proposed Revisions to the Real Property Appraiser Qualification Criteria

Link: https://appraisalfoundation.sharefile.com/d/s37bad6cf5694643b

Written comments requested by December 5, 2011

Send Comments to AQBComments@appraisalfoundation.org

II: The Appraisal Practices Board (APB) has issued the following Exposure Draft:

First Exposure Draft: Residential Appraising in a Declining Market

Link: https://appraisalfoundation.sharefile.com/d/sbdb218d49bc48c6a

Written comments requested by December 5, 2011

Send Comments to APBcomments@appraisalfoundation.org

The Appraisal Foundation

The 3 Wise Men invite you to post your comments here so that we may engage in a discussion with you here. We will also collect and submit your thoughts to TAF along with our commentary.

Link to the document under consideration:

Communication and Reporting Discussion Draft

Email address for sending comments directly:

ASBComments@appraisalfoundation.org

Details (from The Appraisal Foundation):

Those who have followed the work of the Appraisal Standards Board (ASB) over the last several years are aware of the Board’s continued efforts to properly address the topic of communication and reporting in appraisal practice.  This includes, most recently, proposed revisions for the 2012-13 edition of USPAP that appeared in the first two exposure drafts during the last publication cycle, but ultimately were not adopted because the ASB believed additional information was needed to properly address public trust and avoid any significant unintended consequences.

Nevertheless, the Board continues to believe this is an important issue as there is a demonstrated need for a clearer understanding of an appraiser’s responsibilities when communicating within appraisal practice…. When commenting on various aspects of this discussion draft, it is very helpful to reference the line numbers, fully explain the reasons for concern or support, provide examples or illustrations, and suggest any alternatives or additional issues that the ASB should consider.

Click the bill titles to download the full text PDFs.

As of today, the following measures have been Chaptered:

SB 4 (Calderon and Vargas) Mortgages.

Requires the notice of sale, given pursuant to a deed of trust or mortgage secured by real property containing from 1 to 4 single-family residences, contain language notifying potential bidders of specified risks involved in bidding on property at a trustee’s sale, and a notice to the property owner informing the owner about how to obtain information regarding any postponement of the sale. Requires a good faith effort to be made to provide current information regarding sale dates and postponements and that the information be available free of charge.

SB 6 (Calderon and Vargas) Real Estate: appraisal and valuation.

Prohibits a licensee from knowingly or intentionally misrepresenting the value of real property. Prohibits a licensee who offers or provides an opinion of value (BPO) of residential real property (as defined) when originating mortgage loans from having an interest in the property (as defined). Prohibits influencing an appraiser to report a minimum or maximum value for specified property, implying to an appraiser that his or her retention depends on his or her estimate of the real property value, excluding an appraiser from future engagement because he or she reported a value that does not meet or exceed a certain threshold, and conditioning compensation paid to an appraiser on consummation of the real estate transaction.

SB 53 (Calderon and Vargas) Real Estate Licensees.

This is an omnibus bill authorizing (among others) the Real Estate Commissioner to issue citations to unlicensed persons believed to be engaging in activities for which a real estate license is required or to licensees who are in violation of any provision of the Real Estate Law or any rule or order thereunder. The Commissioner may include an order to correct the violation or to include an administrative penalty of up to $2,500 per citation. This bill authorizes the Commissioner to apply to the Superior Court for an order requiring a licensee to appear before the Commissioner or to produce evidence (as defined). Authorizes the Court to punish as contempt the failure of a licensee to comply with such an order, and authorizes the Commissioner to make information public confirming an investigation or proceeding against an unlicensed person or licensee, as specified.

Requires a real estate broker who is exempt from the Escrow Law and who engages in escrow activities for 5 or more transactions in a calendar year or whose escrow activities equal or exceed $1,000,000 in a calendar year to file a specified report with the DRE within 60 days following the completion of the calendar year. The Commissioner is authorized to assess specified penalties upon a licensee who fails to provide the report to the DRE, and the Commissioner may suspend or revoke the license of a real estate broker for failure to pay those penalties. This bill authorizes the Commissioner to suspend or revoke a real estate license if the licensee has violated any provision of law that constitutes a violation of the licensing law applicable to the licensee, as specified.

Requires a real estate broker to submit a copy of the information in the real estate broker’s transaction file relative to qualification or exemption from qualification under the Securities Law for a transaction to any investor from whom the real estate broker obtains funds in connection with the transaction. The bill also recasts specified provisions relative to the requirements that apply to transactions exempt from qualification. This bill provides the Commissioner with access to those (DMV) records for purposes of enforcing specified provisions of the Real Estate Law or the Subdivided Lands Law.

SB 217 (Vargas) Mortgage Loan Originators: licensure.

Provides that an expunged or pardoned felony conviction does not require denial of a license or license endorsement but would authorize the consideration of the underlying crime, facts, or circumstances of the expunged or pardoned felony conviction when determining whether to issue a license or license endorsement, as specified. Existing law exempts from the provisions of the California Finance Lenders Law specified persons and entities, including any person doing business under any law of any state or of the United States relating to banks, trust companies, savings and loan associations, and insurance premium finance agencies. Authorizes a person exempt from the provisions of the California Finance Lenders Law to apply to the Commissioner of Corporations for an exempt company registration to allow sponsoring one or more individuals required to be licensed as mortgage loan originators who originate mortgage loans solely on behalf of the exempt person.

Requires an exempt person to comply with all rules and orders that the Commissioner deems necessary to ensure compliance with the federal SAFE Act and would require an exempt person to pay an annual registration fee. Authorizes a licensed mortgage loan originator who is an insurance producer to originate loans on behalf of an exempt person or on behalf of a licensed finance lender that originates loans for an exempt person, as specified.

SB 458 (Corbett) Mortgages: deficiency judgments.

Expands those provisions to prohibit a deficiency judgment upon a note secured solely by a deed of trust or mortgage for a dwelling of not more than 4 units in any case in which the trustor or mortgagor sells the dwelling for a sale price less than the remaining amount of the indebtedness outstanding at the time of sale, in accordance with the written consent of the holder of the deed of trust or mortgage if the title has been voluntarily transferred to a buyer by grant deed or by other document that has been recorded and the proceeds of the sale are tendered as agreed.

Provides, following the sale, in accordance with the written consent, the voluntary transfer of title to a buyer, as specified, and the tender of the sale proceeds, the rights, remedies, and obligations of any holder, beneficiary, mortgagee, trustor, mortgagor, obligor, obligee, or guarantor of the note, deed of trust, or mortgage, and with respect to any other property that secures the note, shall be treated and determined as if the dwelling had been sold through foreclosure under a power of sale, as specified. Prohibits the holder of a note from requiring the trustor, mortgagor, or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.

Provides that the limitations on a deficiency judgment are inapplicable if the trustor or mortgagor is a corporation, limited liability company, limited partnership, or political subdivision of the state. The provisions would also be inapplicable to any deed of trust, mortgage, or other lien given to secure the payment of bonds or other evidence of indebtedness authorized, or permitted to be issued, by the Commissioner of Corporations, or that is made by a public utility subject to the Public Utilities Act.

SB 510 (Correa) Real Estate Brokers: corporate officers: designating branch managers.

Authorizes an employing broker or corporate designated broker officer appointed by an employing broker to appoint a manager of a branch office or division of the employing broker’s real estate business and delegate to that manager responsibility to oversee and supervise operations and activities, as specified. Requires the appointment be made by means of a written contract and the employing broker or corporate designated broker officer send a notice to the DRE identifying the appointed manager and branch office or division, as specified. Requires the employing broker or corporate designated broker officer to notify the Commissioner whenever a branch manager is terminated or changed.

Specifies that an appointee shall not hold a restricted license, be subject to debarment, or have less than 2 years of full-time real estate experience within 5 years preceding the appointment. Authorizes the Commissioner to suspend or revoke the license of an appointed licensee for failure to properly oversee and supervise operations, as specified.

SB 706 (Price) Business and Professions.

Authorizes the DRE to enter into a settlement with a real estate licensee or applicant instead of the issuance of an accusation or statement of issues against the licensee or applicant and requires the settlement to identify the factual basis for the action being taken and the statutes or regulations that have been violated. Authorizes an administrative law judge to order a licensee in a disciplinary proceeding to pay, upon request of the Commissioner, the reasonable costs of investigating and prosecuting the disciplinary case against the licensee.

Two measures regarding independent contractor relationships were just enacted into law by the California Legislature. These legislative measures signed by Governor Brown are AB 1396 (Committee on Labor and Employment) and SB 459 (Corbett). Effective January 1, 2013, AB 1396 requires whenever an employer enters into a contract of employment for services to be rendered within this state and the contemplated method of payment involves commissions (as defined), the contract is to be in writing and is to include the method by which the commissions are to be computed and paid. This measure amends Section 2751 and repeals 2752 of the Labor Code. The term “commissions” is apparently defined in 204.1 of the Labor Code.

SB 459 adds Sections 226.8 and 2753 to the Labor Code, effective January 1, 2012. Section 226.8 makes it unlawful to willfully misclassify an individual as an independent contractor or to make deductions from compensation for any purpose, including (but not limited to) goods, materials, space rental, services, government licenses, repairs, equipment maintenance, or imposing fines which would have been unlawful if the individual had been properly classified as an employee. Employers who misclassify employees will be subject to civil penalties of not less than $5,000 or more than $15,000 for each violation (or not less than $10,000 or more than $25,000 for each violation, if engaged in a pattern or practice of such mischaracterization), plus additional penalties or fines and other remedies as authorized by law.

Employers are required to post a notice informing workers who believe that they are being misclassified of the right to contact the Labor and Workforce Development Agency presumably to file a complaint. The contact information is to be included in the notice. Further, Section 2753 provides any person who for money or other valuable consideration knowingly advises an employer to treat an individual as an independent contractor to be jointly and severally liable with the employer, if the individual is found not to be an independent contractor.

Apparently, this is to apply to accounting, bookkeeping, and tax professionals.

It has been reported, the joint and several liability includes the payment of income taxes, interest, and penalties resulting from the mischaracterization, but the statute does not specifically say that. Rather, it may be limited to the civil penalties and fines for which the professionals are jointly and severally liable. Unless regulations or public policy statements are issued, a legal opinion may be required to clarify this issue. A lawyer who provides legal advice in the course and scope of the practice of law is exempt from the provisions of Labor Code Section 2753.

IRS is also pursuing employers who utilize independent contractors in an apparent effort to reduce such relationships and to increase the number of individuals who are W-2 employees.

Reportedly, the U. S. Labor Department and IRS are now sharing leads along with a number of states on misclassified workers. IRS expects the pressure they are bringing to bear to encourage firms misclassifying workers to correct voluntarily the status of these individuals to employees.

This requires employers to agree to treat the workers as W-2 employees for future tax periods subject to a maximum penalty of 1.086% of the compensation paid to the workers for the previous year plus all taxes that would be due because of the mischaracterization. IRS describes in its announcement 2011-64 how to comply with the voluntary program. Each employer should discuss the independent contractor issue with its accounting, bookkeeping, or tax professionals (assuming these professionals will provide such advice), or this issue should be discussed with legal counsel representing the employer.

Remember, the FRB’s regulations on the payment of compensation to loan originators performing as salesperson or broker associates in federally related residential mortgage transactions require a W-2 employee relationship.

Contact us if you need assistance understanding and/or complying with the new laws.

By Guy Puccio

Business and Professions Code Section 10240(c) purportedly extends an exemption to mortgage brokers when arranging “federally regulated residential mortgage loans.” However, this exemption is inapplicable to most loan transactions conducted by mortgage brokers registered with the NMLS as an LO (MLB/MLO) and even when arranging transactions where the loan proceeds are used for personal, family, or household purposes.

The phrase “federally regulated” is substantially narrower than “federally related.” Under current law, “federally regulated” loan transactions are loans made by nationally chartered or licensed banks, savings and loans, savings banks, thrifts, and credit unions; or if state chartered or licensed, those financial institutions that have opted for FDIC insurance coverage. The phrase “federal regulation” is operative with financial institutions and licensed lenders where oversight by the federal government extends to underwriting and funding loans, i.e., to ensure the “safety and soundness” of the financial institution.

Pursuant to the Truth in Lending Act (TILA), MLBs/MLOs are not “creditors” and, therefore, the completion and delivery of TILA required disclosure statements and notice of rights by brokers as third party originators is ineffective.

This issue was discussed in a case where a car dealer completed and delivered a TILA disclosure statement to a consumer/borrower when the loan was funded by a commercial bank. Similar to a mortgage broker, the car dealer was acting as a third party originator and not acting as the actual lender/creditor. The court held that the completion and delivering of a TILA disclosure statement by other than the actual lender/creditor is ineffective. See 15 USC Section 1601 et seq. and 12 CFR 226 et seq.; Vallies v. Sky Bank, Third Circuit No. 08-4160, 591 F.3d 152 (2009).1

California mortgage brokers may not characterize themselves as a lender/creditor unless the loan is made with the broker’s “own funds,” as defined. Except when subject to a specific exemption authorized by the Real Estate Law for commercial loans being delivered to a financial institution (as defined), mortgage brokers may not concurrent or table fund loans in California transactions. Further, neither California finance lenders acting under the Finance Lender Law nor mortgage bankers acting under the Residential Mortgage Lending Act may engage in concurrent or table funding, except when the mortgage banker is relying on funds advanced by a financial institution with whom the mortgage banker is affiliated or is a subsidiary. See Business and Professions Code Section 10234 et seq.; 10 CCR, Chapter 3, Section 1460; and, Financial Code Section 50003(t).2

Mortgage brokers typically act in an agency capacity. To fit the definition of a lender and creditor, the mortgage broker is required to make the loan from his, her, or its own capital or with funds obtained from an independent credit line that appears as a debt on the broker’s financial statement and the lender extending the line neither is committed to nor engages in the purchase of the loans funded off the line. In addition, the mortgage broker must approve of the loan and the loan may not be prior approved by the extender of the credit line. While it is possible to delegate loan underwriting, it is inappropriate to delegate loan approval. Unless the entity making the loan is a federally regulated financial institution or a federally approved mortgagee or seller/servicer (holds a “federal eagle”), the person or entity qualifying as a lender/creditor must regularly make loans with their or its name appearing as the payee on the promissory note and the beneficiary on the deed of trust, must approve of each loan, and must rely on their or its own capital or independent credit lines, as previously defined.2ibid Also, See 12 USC Section 2601 et seq. and 24 CFR Parts 3500 et seq.; and 15 USC Section 1601 et seq. and 12 CFR Section 226 et seq.

Even if a mortgage broker could fit the lender/creditor definition as outlined above, such loans would not be “federally regulated” under current law when funded by a mortgage broker. This may change if regulations under the “Dodd-Frank…Act” are promulgated as the Obama Administration would like control over all mortgages, including loans made by “non-banks,” e.g., mortgage brokers, mortgage bankers, hedge funds, etc. and whether such loans are secured by one to four units or otherwise secured.

In the meantime, TILA disclosures to have any effect or validity must be completed and delivered by the lender/creditor and not by a third party. However, a mortgage broker may act as the exclusive agent of the lender/creditor or as an authorized subsidiary of the lender/creditor (as defined) and, in such capacity, complete and deliver the TILA disclosures and notices of rights to the intended borrower. Few institutional or licensed lenders/creditors will authorize a mortgage broker to act as their exclusive agent or as a subsidiary. Thus, when the mortgage broker is acting as an agent of the borrower, the broker cannot comply with Section 10240(c). Accordingly, this statutory exemption from completing and delivering the mortgage loan disclosure statement would be inoperative and without efficacy.1ibid. In my opinion, Business and Professions Code Section 10240(c) should be repealed, as its application is too limited to have any significant effect.

a. Business and Professions Code Citations – 10166.01 – 10166.17 (Implementation of the SAFE Act under the Real Estate Law)
b. Civil Code Citations – 1090.5 (Requirements for Hiring/Using/Terminating Real Estate Appraisers)
c. Financial Code Citations – 4970 et seq. and 4995 et seq. (California Requirements for “High Cost” and “Higher Cost” or “Higher Priced” Residential Mortgage Loans)

II. “Dodd-Frank” Act

a. HR 2509 (Federal Legislation Sponsored by NAMP/CAMP to Amend Dodd-Frank Regarding LO Compensation)
b. Summary, prepared by S. Guy Puccio and Herman Thordsen, Esquire (A Summary of Significant Issues of This Act that Affect Residential Mortgage Loans and Mortgage Brokers)

III. Federal Reserve Board-Appraisal Regulations

a. Appraisal Regulations (Promulgated by Federal Agencies Applicable to Most Mortgage Loan Transactions)
b. Definitions and Standards from USPAP – Applicable 2010-2011 (Definitions and Standards to be Followed by Appraisers)

IV. Industry Q & A

a. NMLS Analysis (Frequently Asked Q&As)

V. TILA

a. 12CFR 226.32 (Federal “High Cost” Requirements)
b. 12CFR 226.35 (Federal “Higher Cost” or “Higher Priced” Requirements)
c. 12CFR 226.36 (LO Compensation)
d. 12CFR 226.42 (Valuation Requirements)
e. Article from the Federal Reserve Board’s Consumer Compliance Outlook, Third Quarter 2011, The Federal Reserve Board’s Interim Final Rule on Valuation Independence
f. Exempt Transactions (as Revised) by S. Guy Puccio (Brief Statement of Tests to Apply to Establish Exemptions from TILA)

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The source for the following summaries is the Legislative Digest for each bill.

Click the bill titles to download the full text PDFs.

The following measures have been Enrolled, awaiting the Governor’s action:

SB 6 (Calderon and Vargas) Real Estate: appraisal and valuation.

Prohibits a licensee from knowingly or intentionally misrepresenting the value of real property. Prohibits a licensee who offers or provides an opinion of value (BPO) of residential real property (as defined) when originating mortgage loans from having an interest in the property (as defined). Prohibits influencing an appraiser to report a minimum or maximum value for specified property, implying to an appraiser that his or her retention depends on his or her estimate of the real property value, excluding an appraiser from future engagement because he or she reported a value that does not meet or exceed a certain threshold, and conditioning compensation paid to an appraiser on consummation of the real estate transaction.

SB 53 (Calderon and Vargas) Real Estate Licensees.

This is an omnibus bill authorizing (among others) the Real Estate Commissioner to issue citations to unlicensed persons believed to be engaging in activities for which a real estate license is required or to licensees who are in violation of any provision of the Real Estate Law or any rule or order thereunder. The Commissioner may include an order to correct the violation or to include an administrative penalty of up to $2,500 per citation.

This bill authorizes the Commissioner to apply to the Superior Court for an order requiring a licensee to appear before the Commissioner or to produce evidence (as defined). It also authorizes the Court to punish as contempt the failure of a licensee to comply with such an order, and authorizes the Commissioner to make information public confirming an investigation or proceeding against an unlicensed person or licensee, as specified.

The bill requires a real estate broker who is exempt from the Escrow Law and who engages in escrow activities for 5 or more transactions in a calendar year or whose escrow activities equal or exceed $1,000,000 in a calendar year to file a specified report with the DRE within 60 days following the completion of the calendar year. The Commissioner is authorized to assess specified penalties upon a licensee who fails to provide the report to the DRE, and the Commissioner may suspend or revoke the license of a real estate broker for failure to pay those penalties.

This bill authorizes the Commissioner to suspend or revoke a real estate license if the licensee has violated any provision of law that constitutes a violation of the licensing law applicable to the licensee, as specified. Requires a real estate broker to submit a copy of the information in the real estate broker’s transaction file relative to qualification or exemption from qualification under the Securities Law for a transaction to any investor from whom the real estate broker obtains funds in connection with the transaction. The bill also recasts specified provisions relative to the requirements that apply to transactions exempt from qualification.

This bill provides the Commissioner with access to those (DMV) records for purposes of enforcing specified provisions of the Real Estate Law or the Subdivided Lands Law.

SB 217 (Vargas) Mortgage Loan Originators: licensure.

Provides that an expunged or pardoned felony conviction does not require denial of a license or license endorsement but would authorize the consideration of the underlying crime, facts, or circumstances of the expunged or pardoned felony conviction when determining whether to issue a license or license endorsement, as specified.  Existing law exempts from the provisions of the California Finance Lenders Law specified persons and entities, including any person doing business under any law of any state or of the United States relating to banks, trust companies, savings and loan associations, and insurance premium finance agencies. Authorizes a person exempt from the provisions of the California Finance Lenders Law to apply to the Commissioner of Corporations for an exempt company registration to allow sponsoring one or more individuals required to be licensed as mortgage loan originators who originate mortgage loans solely on behalf of the exempt person.

Requires an exempt person to comply with all rules and orders that the Commissioner deems necessary to ensure compliance with the federal SAFE Act and would require an exempt person to pay an annual registration fee. Authorizes a licensed mortgage loan originator who is an insurance producer to originate loans on behalf of an exempt person or on behalf of a licensed finance lender that originates loans for an exempt person, as specified.

SB 510 (Correa) Real Estate Brokers: corporate officers: designating branch managers.

Authorizes an employing broker or corporate designated broker officer appointed by an employing broker to appoint a manager of a branch office or division of the employing broker’s real estate business and delegate to that manager responsibility to oversee and supervise operations and activities, as specified. Requires the appointment be made by means of a written contract and the employing broker or corporate designated broker officer send a notice to the DRE identifying the appointed manager and branch office or division, as specified. Requires the employing broker or corporate designated broker officer to notify the Commissioner whenever a branch manager is terminated or changed. Specifies that an appointee shall not hold a restricted license, be subject to debarment, or have less than 2 years of full-time real estate experience within 5 years preceding the appointment. Authorizes the Commissioner to suspend or revoke the license of an appointed licensee for failure to properly oversee and supervise operations, as specified.

SB 706 (Price) Business and Professions.

Authorizes the DRE to enter into a settlement with a real estate licensee or applicant instead of the issuance of an accusation or statement of issues against the licensee or applicant and requires the settlement to identify the factual basis for the action being taken and the statutes or regulations that have been violated. Authorizes an administrative law judge to order a licensee in a disciplinary proceeding to pay, upon request of the Commissioner, the reasonable costs of investigating and prosecuting the disciplinary case against the licensee.

The following measures have been signed by the Governor and therefore are Chaptered:

SB 4 (Calderon and Vargas) Mortgages.

Requires the notice of sale, given pursuant to a deed of trust or mortgage secured by real property containing from 1 to 4 single-family residences, contain language notifying potential bidders of specified risks involved in bidding on property at a trustee’s sale, and a notice to the property owner informing the owner about how to obtain information regarding any postponement of the sale.  Requires a good faith effort to be made to provide current information regarding sale dates and postponements and that the information be available free of charge.

SB 458 (Corbett) Mortgages: deficiency judgments.

Expands those provisions to prohibit a deficiency judgment upon a note secured solely by a deed of trust or mortgage for a dwelling of not more than 4 units in any case in which the trustor or mortgagor sells the dwelling for a sale price less than the remaining amount of the indebtedness outstanding at the time of sale, in accordance with the written consent of the holder of the deed of trust or mortgage if the title has been voluntarily transferred to a buyer by grant deed or by other document that has been recorded and the proceeds of the sale are tendered as agreed.

Provides, following the sale, in accordance with the written consent, the voluntary transfer of title to a buyer, as specified, and the tender of the sale proceeds, the rights, remedies, and obligations of any holder, beneficiary, mortgagee, trustor, mortgagor, obligor, obligee, or guarantor of the note, deed of trust, or mortgage, and with respect to any other property that secures the note, shall be treated and determined as if the dwelling had been sold through foreclosure under a power of sale, as specified. Prohibits the holder of a note from requiring the trustor, mortgagor, or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale. Provides that the limitations on a deficiency judgment are inapplicable if the trustor or mortgagor is a corporation, limited liability company, limited partnership, or political subdivision of the state.

The provisions would also be inapplicable to any deed of trust, mortgage, or other lien given to secure the payment of bonds or other evidence of indebtedness authorized, or permitted to be issued, by the Commissioner of Corporations, or that is made by a public utility subject to the Public Utilities Act.

By S. Guy Puccio

The agency relationships intended among principals and real estate and mortgage brokers are material facts. Regardless of whether it is a dual agency, a bifurcated agency, or an agency relationship with one party leaving the other unrepresented, it is a material fact to be disclosed at the outset or when the relationship becomes more than casual. See, Business and Professions Code Sections 10176(a) and (d), Civil Code Sections 2079.13 et seq., 2295 et seq., and 2923.1 and Huijers v. DeMarrais (1992) 11 Cal.App.4th 676.

The obligation to disclose agency relationships in commercial transactions exists notwithstanding the typical interpretation that Civil Code Section 2079.13 et seq. is limited to real properties, defined as one to four residential units. It is interesting to note the disclosure form to be given within this statutory scheme applies to “real estate transactions” while the definition within this scheme applied to the term “real property” or “real property transaction” is limited to one to four residential units.

The question to be considered is whether the term “real estate transaction” used in the statutory disclosure form broadens the application of the use of this form to other than one to four residential units, as defined. See, Business and Professions Code Sections 10176(a) and 10176(d), Civil Code Sections 2079.16 and L. Byron Culver & Associates v. Jaoudi Industrial & Trading Corp. (1991) 1 Cal.App.4th 300.

An agency relationship is established (if not before) when a real estate broker agrees with the seller of real property to solicit buyers on behalf of the seller in consideration for the payment of a commission (if a willing and able buyer is identified who agrees to purchase the property under price and terms acceptable to the seller). Depending upon the facts, the agreement may be in writing (in the form of a listing or other written memorandum) or it may be oral in the case of an open listing.

However, the failure to construct a written agreement for the payment of the commission may well defeat the real estate or mortgage broker’s ability to collect a commission. Such agreements are to be in writing to avoid violating the statue of frauds, to ensure the agreement is enforceable and adequately describes the broker’s assignment, and to disclose and obtain consent to the agency relationship(s) intended. See, Business and Professions Code Sections 10176(a) and (d), Civil Code Sections 1624, 2079.13 et seq., 2295 et seq., among others. Also, See, Phillippe v. Shapell Industries (1987) 43 Cal. 3d 1247, 1255-1258.

The disclosure obligation of a real estate or mortgage broker who is an agent and fiduciary of the principal to whom the disclosures are being made requires the performance of fiduciary duties, including offering advice, making recommendations, explaining the significance and consequences of what was disclosed, and counseling the principal within the course and scope of the agency relationship to ensure the principal makes informed and considered decisions regarding the subject transaction.

The applicable fiduciary duties are based upon the knowledge, experience, and training ascribable to real estate or mortgage brokers in a particular real property or real property secured transaction and is measured by the standard of care to which such brokers are subject. This would include the specific and special knowledge of brokers who hold themselves out as experts within a given field of practice, e.g., mortgage lending or brokerage, appraisal, property management, commercial transactions, and the like. See, Article 11 of the National Association of Realtors Code of Ethics.

Thus, when the real estate or mortgage broker is an agent and fiduciary of the principal(s) to whom the disclosures are being made, this material fact must be disclosed, and the performance of fiduciary duties is required of the broker in the subject transaction. See, Carl Michel et al. v. Moore and Associates, Inc. (2007) 156 Cal App. 4th 756; Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18; Shaucat Sallahutin et al. v. Valley of California, Inc. (1994) 24 Cal App. 4th 555; Easton v. Strassburger (1984) 152 Cal.App. 3d 90); Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773; and, Lingsch v. Savage (1963) 213 Cal.App.2d 729,736.