Why this article is important: This article presents three real-life scenarios in which each licensed brokerage corporation’s designated officer conducted unlawful activities which led to disciplinary and enforcement actions by the DRE in fulfillment of its duty of consumer protection in DRE licensee real estate services.
Trust fund issues
Consider a corporation providing property management services as a licensed corporate broker. As part of their brokerage operations, the corporation collects security deposits from tenants and holds them in bank trust accounts.
The California Department of Real Estate (DRE) conducts a routine audit on the corporation to ensure compliance with real estate law.
The audit revealed a trust fund shortage. [Calif. Business & Professions Code §10145; DRE Regulations §2832.1]
A trust fund shortage occurs when the balance of a trust fund bank account is less than the total of all funds held for owners as documented in the broker’s separate trust fund ledgers for each owner, called beneficiaries. Trust fund shortages are often the result of:
- failing to record a disbursement;
- understating the amount of a check disbursed; or
- overstating the amount of a deposit on the beneficiary ledger.
Based on the trust fund shortage, the DRE found the corporation’s designated officer (DO) failed to adequately supervise its employees. The DO failed to establish policies, rules or procedures for handling trust funds. [Bus & P C §10159.2; 10177(h); DRE Reg §2725]
The DRE revoked the corporate license and the DO’s individual broker license. However, the DRE allows reinstatement of the licenses as restricted licenses, so long as the DO applies and makes payment for the restricted licenses within 90 days of the license revocations.
Further, the corporation is required to pay for the DRE’s audit costs which have already accrued, as well as future audits the DRE conducts to ensure the corporation has corrected the trust fund violation and remains compliant. The corporation also needs to pay for the DRE’s investigation and enforcement costs. [D E Equity Group and Scott Lee Ellis H-03615 FR]
Proper oversight for trust fund handling
A broker maintains a record of all trust funds received and deposited for each separate owner of funds (beneficiary) or transaction. The trust fund entries are in columnar form and chronological order. This record accounts for all deposited funds and identifies each owner of funds held in the bank trust account. [DRE Reg §2831; see DRE Form RE 4522]
The broker reconciles the total of all separate ledgers on each owner or transaction with the balance of all trust funds deposited and paid out of the bank trust account at least once a month, unless no bank account activities occurred. This confirms the balance of all the broker’s trust fund ledgers is equal to the bank account’s cash balance. [DRE Reg. §2831.2; see RPI Form 544-1]
Of note: When handling trust funds for multiple owners of the funds, a broker is required to obtain written consent from every owner of funds in the account prior to any disbursement that will cause the balance of the account to be less than the trust funds held by all owners of trust funds. [DRE Reg. 2832.1]
Within three business days of receiving trust funds on behalf of another, the broker is required to place the funds received:
- into the hands of the owner of the funds;
- into a neutral escrow depository; or
- into a trust fund account maintained by the broker. [Bus & P C §10145; DRE Reg. §2832]
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Failure to supervise
Consider a corporation, a licensed broker, advertising real estate services and soliciting homeowners to sell their homes to the corporation. The corporation operates under an unregistered fictional business name.
Their acquisition advertisements use the wording “We buy houses for cash.” However, the corporation does not actually fund or take title to any homes they negotiate to purchase. Rather, the corporation sets up meetings between sellers and the corporation’s unlicensed transaction administrator to review property information and fill out some initial paperwork.
The transaction administrator then presents the seller with an offer to purchase from a third-party LLC which the brokerage corporation also represents. When the seller accepts the offer, the unlicensed administrator opens an escrow.
The administrator then locates a buyer who acquires the rights to purchase the property by an assignment from the third-party LLC.
Throughout, the corporation’s unlicensed administrator provides advice and assistance to the seller.
A seller submits a complaint to the DRE, claiming the corporation violated real estate law by misleading the seller into believing the corporation was the buyer of the property and not a third party which later assigned its purchase rights to the ultimate buyer.
The DRE finds the corporation violated real estate law by:
- allowing unlicensed employees to conduct activities which require a real estate license, then failing to supervise corporate employees for compliance with licensing laws; [Bus & P C §10131; 10159.2]
- providing the corporation’s license number in a font smaller than any other size font on its website; [Bus & P C 10140.6]
- failing to provide its license number on advertisements, including on its social media pages and tv advertisements; [Bus & P C 10140.6]
- fraudulently claiming the corporation will purchase the property, when in fact it negotiates a sale to a third party buyer; [Bus & P C 10177(d)] and
- use of an unregistered fictional business name when rendering licensed services. [Bus & P C 10177(c)]
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DRE Hot Seat: A broker’s website needs to comply with real estate advertisement laws
The DRE issues a desist and refrain order to stop the corporation from allowing unlicensed individuals to perform acts which require a real estate license.
Editor’s note — At the time of this writing, no disciplinary actions have been filed against the corporation or DO. However, following the issuance of a desist and refrain order, additional disciplinary actions typically follow and likely will in this case.
[Seller’s Advantage, Inc.; and Adele Loraine Rawls Tucker, individually and as designated officer of Seller’s Advantage, Inc. H-43175 LA]
Supervision of unlicensed assistants required
It is unlawful for any person to assume to act or engage in the business of a real estate broker or agent without first obtaining the proper real estate license from the DRE. [Bus & P C §10130]
Brokers may assign tasks to their unlicensed employees, such as:
- handling documents;
- performing tenant-related functions;
- canvassing for prospective clients;
- opening a property to third-party service providers; and
- communicating with parties to a transaction.
In this case, the unlicensed assistants’ activities went far beyond what is allowed of unlicensed employees — and the DO will be held accountable by the DRE.
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DRE Hot Seat: Unlicensed activities and trust fund violations
A DO misleads an elderly homeowner into refinancing
Consider a DO of a corporation licensed as a broker and endorsed as a mortgage loan originator (MLO) by the DRE.
The DO is responsible for the supervision of activities conducted by employees on behalf of the corporation. [Bus & P C §10159.2]
An elderly homeowner contacts an employee of the corporation expressing their interest in obtaining a reverse mortgage on their primary residence.
An unlicensed employee of the corporation responds to the homeowner’s inquiry. The homeowner is informed they are confirmed as eligible for an FHA-insured reverse mortgage based on their age and level of equity in their home.
The employee orders a credit report on the homeowner (even though a credit report is not required to qualify for an FHA-insured reverse mortgage). The employee informs the homeowner they will need to complete credit repair work before they qualify for the reverse mortgage which the corporation will handle. They request and receive upfront payment for the costs of the credit repair.
While they wait for the credit repair to be completed, the employee convinces the homeowner of the need to refinance the current mortgage on their home. The DO for the corporation completes and submits the refinance application to a private money broker on behalf of the homeowner. The application contains whited-out and handwritten sections not made by the homeowner.
The refinance loan closes escrow with a private money lender. The loan includes an 11-month short-term repayment plan as well as 10% interest-only payments. Further, the points and fees on the transaction exceed the threshold ceiling for the type of mortgage, making it subject to Section 32 mortgage disclosures.
However, the loan lacked the necessary disclosures, including the:
- Fair Lending Notice;
- Lender Purchaser Disclosure Statement;
- Investor Questionnaire; and
- Investor Qualification Statement.
Meanwhile, the homeowner completes reverse mortgage counseling and their credit is pulled (unnecessarily) again. No appraisal is ordered for the reverse mortgage.
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The corporation is aware the homeowner is unable to pay off the short-term loan without refinancing. The DO instructs the homeowner to proceed with a second mortgage to obtain funds. The homeowner signs a Notice of Intent to Proceed with the DO acting as the MLO. The second mortgage closes escrow.
Under direction from a different employee at the same corporation, the homeowner also submits a second reverse mortgage application. The employee pulls the homeowner’s credit a second time. Again, the corporation does not order an appraisal to accompany the reverse mortgage application.
The homeowner meets with the DO and unlicensed officer regarding the many delays in their reverse mortgage origination.
During the meeting, the unlicensed officer suggests the homeowner sell their home and sets up a meeting with the officer’s spouse, who is a licensed real estate agent employed by the corporation.
The homeowner meets with the agent but declines to sell their home, choosing to wait for origination of the reverse mortgage.
Meanwhile, the homeowner becomes unable to make the new, higher mortgage payments due to the terms of the refinancing. The corporation arranges for a third refinance via a private money loan to cover two months of loan payments with a 24% interest rate and a 10-day default clause with a right to foreclose. To close this loan, the homeowner pays appraisal fees, origination fees, preparation and document fees to the corporation.
The homeowner’s reverse mortgage applications are rejected by institutional mortgage lenders due to:
- the high debt-to-income ratio the homeowner’s residence was now subject to due to refinancing multiple times at the direction of the employees of the corporation;
- multiple unanswered communications from the corporation by the reverse mortgage lender processing the application; and
- an incomplete mortgage application following the failure of the corporation to order appraisals.
The homeowner files a complaint with the DRE.
Mortgage fraud
Here, the DO and licensed corporation defrauded an elderly mortgaged homeowner, making substantial misrepresentations and false promises to induce the homeowner to refinance their home several times. The DO misrepresented the status of the mortgages and failed to provide full disclosure of any of the material facts concerning the mortgage originations.
At the close of mortgage origination escrows, the DO and the corporation received compensation.
The DRE’s investigation found the corporation and officer:
- made substantial misrepresentations; [Bus & P C 10176(a)]
- made false promises likely to influence the homeowner to take out each mortgage; [Bus & P C 10176(b)]
- committed fraud or dishonest dealing; [Bus & P C §10176(i); 10177(j)]
- charged a points and fee amount exceeding 6% of the total loan amount on a covered transaction (making it subject to Section 32 limitations and disclosures); [Calif. Financial Code §4970; 4974; 4975]
- taking unlawful compensation for facilitating a mortgage loan origination without an MLO endorsement; [Bus & P C 10137]
- failing to provide the appropriate Fair Lending Notice and disclosures to the borrower; [Calif. Health & Safety Code 3830]
- failing to supervise employees or implement policies, rules or procedures to oversee transactions requiring a real estate license; [Bus & P C 10177(h); 10159.2] and
- showing a willful disregard for real estate law. [Bus & P C 10177(d)]
The DRE orders the corporation and the designated officer’s licenses be suspended for 90 days. The corporation is also ordered to pay the DRE’s investigation and enforcement fees, plus a monetary penalty.
The DRE accepts the voluntary surrender of the corporation license. The DO is permitted to reinstate their individual broker license to fully active status by not being subject to further disciplinary action for 12 months following the order of suspension and paying the required monetary penalties.
[Tomas E. Schoff, individually and as Designated Officer of TDE Capital Inc, TDE Capital Inc. dba American Mortgage Bank, Sun Pacific Mortgage & Real Estate, and Jay T. Kister, individually and as former Designated Officer of Sun Pacific Mortgage & Real Estate H-05840 SD]
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Reverse mortgage scams
Senior homeowners are vulnerable to reverse mortgage scams. Unlike a fixed rate mortgage, reverse mortgages are complex, atypical financial arrangements. As such, homeowners frequently do not understand their terms, much less their consequences — even when the MLOs involved operate in a proper and lawful manner.
Thus, to promote the proper use of reverse mortgages, or home equity conversion mortgages (HECMs), mortgage counseling is required to originate the mortgage. The counselor ensures the homeowner better understands the risks, benefits and design of reverse mortgages before they take out a reverse mortgage or a home equity conversion mortgage (HECM), often commonly called a HELOC.
HECM housing counseling is available for free or at very low cost from housing counseling agencies throughout the country.
To initiate the mandated counseling, the lender provides the homeowner with a list of HUD-approved housing counselors, at least one of whom must be local to the homeowner. [12 USC §1715z-20(e)(1); 24 CFR §204.41(a)]
During the counseling session, information communicated will cover:
- the potential for mortgage fraud;
- the standard ways a homeowner accesses their HECM proceeds; and
- predatory lending practices, including a warning against assigning their HECM funds to MLOs or other parties involved in the transaction. [HUD Handbook 7610.1 Chapter 4-7]
When the HECM counseling session is concluded, the agency provides the homeowner with an HECM Counseling Certificate to evidence the homeowner’s completion of counseling. [HUD Handbook 7610.1 Chapter 4-18]
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