DRE as the enforcer at large steps up to the plate — as the umpire in chief

Why this matters: The Department of Real Estate (DRE), as legislatively designated enforcer of compliance with California real estate law, may review the status of a broker’s or agent’s license when violations occur. They are now educating their 400,000+ licensee population on the most common (and critical) violations of real estate law they encounter.

As the DRE aggressively advises, education is the best start for avoiding these violations. Thus, as California’s premier real estate educator, we present here our multimedia review of the DRE’s statement on the most common types of disciplinary actions — and of course, our video scenarios for you to avoid them.

The DRE’s top 6 enforcement violations

The California Department of Real Estate (DRE), as part of their enforcement efforts to protect the public, preserve fairness in the real estate industry and ensure best practices among licensees, has released an uncharacteristically detailed Licensee Advisory itemizing the most common violations of real estate law the DRE encounters in its position as the industry’s regulator.

The DRE’s mission is to safeguard and promote public interests in real estate matters through:

licensure;
regulation;
education; and
enforcement.

In a refreshing show of outreach engagement with the industry, the DRE is flexing its enforcement arm of the organization, bulking itself up to act on violations.

And yes, expect a serious bite to come with this bark.

Bookmark the DRE’s Summary of Enforcement Actions page to keep tabs on DRE disciplinary actions initiated against misdirected real estate licensees.

Simply, now is the time for brokers to educate their agents — and themselves. The real estate recession today is well underway, some three years and counting. Expect a lot of finger-pointing to pop up as prices drop into the range of proper valuation.

Read on — and view — to learn the six most common violations of real estate law as reported by the DRE, and best practices when dealing with flareups of troublesome licensee behavior.

The following copy builds on the six topics discussed in the DRE advisory statement. We have laced the copy with related firsttuesday videos presenting scenarios for best practices. Grab the popcorn from the microwave then sit back and take in some best conduct.

6. Advertising, team names and fictitious business names

When a real estate licensee advertises their consumer services, they are required under the “first point of contact” rule to provide information regarding their:

name;
DRE license number;
Nationwide Mortgage Licensing System (NMLS) ID number (when applicable); and
responsible broker’s identity.

To meet this agent identification rule, the information is included on:

real estate purchase agreements [See RPI Form 150];
business cards;
stationery;
advertising flyers;
television advertisements;
print advertisements;
electronic media;
directional signs; and
any other materials soliciting business from the public. [Calif. Business and Professions Code §10140.6]

The responsible broker’s identity comprises the employing broker’s name and license number, not merely a team name or fictitious business name of agents as authorized by their broker. [Bus & P C §10159.7]

An information exemption exists for signs noting “For Sale,” “For Rent,” “For Lease,” “Open House” and directional information when the sign:

displays the responsible broker’s name, or name and license number, without reference to a broker-associate or sales agent; or
does not display information identifying any licensee.

Individual and corporate real estate brokers often use fictitious business names when conducting activities requiring a real estate license.

Before using a fictitious business name to conduct any licensed real estate activity, a broker first obtains an individual or corporate broker license from the DRE bearing the fictitious name.

A real estate salesperson may not use a fictitious business name other than one permitted for use by their employing broker. [Bus & P C §10159.5; DRE Regulations §2731]

For decades, many real estate licensees join other licensees with similar goals and work ethics. They create a team to improve the level of services offered to clients they represent, all conducted on behalf of their broker. In turn, their per-agent earnings are increased. In the process, they often adapt fictitious names to title their joint operation.

The use of “team names” such as “The John Smith Team” or “John Smith & Associates” are often included on “For Sale” signs, business cards and other promotional marketing pieces.

Any marketing materials using a fictitious business name or team name need to conspicuously display the:

licensees’ names and license numbers; and
broker of record’s identity as prominently as the fictitious business name or team name. [Bus & P C §10159.5(d),(e)]

5. Criminal convictions

A licensee is required to report to the DRE in writing within 30 days from the date of any:

misdemeanor or felony conviction;
criminal complaint;
charging information;
indictment charging a felony; or
disciplinary action by another licensing entity, state authority or government agency. [Bus & P C §10186.2]

The DRE, when determining whether a crime substantially relates to the qualifications, functions or duties of a licensee, observes several characteristics relating to the crime to help them determine which course of action to take regarding the status of the license.

The characteristics indicating a crime’s substantial relationship to licensee qualifications include:

the fraudulent taking of funds or property belonging to another;
counterfeiting, forging or altering an instrument or making a false statement;
willfully attempting to gain financial benefit through nonpayment of government taxes, assessments or levies;
bribery, fraud, deceit, falsehood or misrepresentation;
sexual conduct affecting a non-consenting observer or participant;
willfully violating or failing to comply with laws controlling real estate licensees;
willfully engaging in a business activity without obtaining a license or permit required to perform the activity;
committing an unlawful act for financial or economic benefit, or with the intent of harming another person or property;
willfully failing to comply with a court order;
conduct which demonstrates repeated disregard for the law; or
two or more convictions involving alcohol consumption or drug use when at least one of the convictions involves driving under the influence. [DRE Regs. §2910]

Related article:

DRE Hot Seat: Broker’s criminal activities “substantially related” to real estate license

4. Misrepresentations

Implicit as part of a broker’s representation agreement with their client is the affirmative agency obligation owed to the client of a fiduciary duty to maintain utmost care, integrity, honesty and loyalty in dealings with the client. [Calif. Civil Code §2079.16]

Fiduciary duty is the obligation owed by an agent to act in the highest good faith toward their client, called a principal, and take no advantage of the client by the slightest misrepresentation, concealment, duress or undue influence.

As a fiduciary, the conduct of a broker and their agents representing a client is equated to the conduct required of a trustee acting on behalf of a beneficiary. This fiduciary duty, also called an agency, remains owed to the client after the employment is terminated.

The broker with authority to act as the exclusive representative of a client buyer or seller takes reasonable steps to promptly gather all material facts about the property in question which are readily available to the broker or the broker’s agent. Government agencies are a primary source of information on the conditions of the physical property and surrounding area.

After gathering factual information about the property conditions, an agent does all reasonable and ethical advisory and marketing activities with utmost care, in pursuit of the purpose intended by the employment.

At a bare minimum for obtaining a salesperson or broker license, the DRE requires an applicant to be honest and truthful. Thus, honesty, fair dealing and good faith are fundamental aspects of a licensee’s requirements.

3. Unlicensed activity

Brokers licensed by the DRE may hire unlicensed assistants to perform administrative activities on their behalf and behalf of their agents.

All employees of a broker are hired by entering into written employment agreements with the broker, including unlicensed assistants. [See RPI Form 507]

Further, a broker managing transient housing or apartment complexes may hire unlicensed assistants to perform administrative and nondiscretionary duties. All of these unlicensed assistants act only under the broker’s supervision and control, not for or on behalf of agents — those salespersons and broker-associates the broker employs. [Bus & P C §10131.01(a)]

When assisting a broker engaged in mortgage loan origination (MLO) services, an unlicensed assistant may perform administrative duties, such as information gathering and mortgage processing — activities which are non-discretionary activities not requiring a real estate license or MLO license endorsement. [Bus & P C §10137]

Thus, 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 service providers in a transaction.

However, unlicensed personnel acting on behalf of a broker need the broker’s permission and their activities continuously supervised. [DRE Bulletin, Winter 1993]

2. Broker supervision

A broker employing an agent or broker-associate to act on their behalf needs to exercise reasonable supervision to police and control the activities the agent or broker-associate performs. Brokers who do not actively supervise their agents risk having the DRE review the status of their license. [Bus & P C §10177(h)]

Here, the employing broker’s responsibility to the public, and thus to the DRE, includes the:

agent’s on-the-job training in the procedures and practice of real estate brokerage; and
broker’s continuous policing of the agent’s compliance with the duties owed to buyers, owners and tenants.

For a broker to ensure their agents are diligently complying with the duties owed to clients and others, an employing broker establishes office policies, procedures, rules and systems relating to:

soliciting and obtaining written representation agreements with all clients;
negotiating real estate transactions of all types;
documenting all licensed activities which may affect the rights and obligations of any party, such as agreements, disclosures, reports, and authorizations prepared or received by the agent;
the filing, maintenance and storage of all documents affecting the rights of the participants;
the documenting and safekeeping of trust funds received by the agent for deposit, retention or transmission to others;
advertisements, such as flyers, brochures, press releases, multiple listing service (MLS) postings, etc.;
agents’ compliance with all federal and state laws relating to unlawful discrimination; and
the receipt of regular periodic reports from agents on their performance of activities within the course and scope of their employment. [DRE Regs. §2725]

1. Trust fund account and record keeping

Checks or cash are occasionally made payable and handed to a real estate broker in a transaction. These items are trust funds and do not belong to the broker. Rather, checks payable to the broker and cash are received “in trust” by the broker and held on behalf of the client.

These funds will be deposited into a non-interest-bearing trust account, unless endorsed and handed to others as instructed by the client.

The trust account opened for the deposit of cash and items payable to the broker is in the name of the broker — as trustee — at a bank or state-recognized depository. [Bus & P C §10145]

Once deposited, the trust funds may only be withdrawn or disbursed as authorized and instructed by the owner of the trust funds. A third party who has an interest in the funds may also be necessary to authorize disbursement, such as a seller who acquires an interest in the buyer’s good faith deposit on acceptance of a purchase agreement offer. [Bus & P C §10145(a)(1)]

Withdrawals or disbursements from the trust account in the name of an individual broker are made under the signature of:

the broker named as trustee on the account;
a licensed broker or sales agent employed by the named broker under a broker-agent employment agreement [See RPI Form 505]; or
an unlicensed employee of the named broker, provided the unlicensed employee is bonded or insured for the total amount of the trust funds the employee can access, and the bond or insurance protects the broker from intentional wrongful acts committed by the employee. [DRE Regs. §2834(a); Bus & P C §10145(a)(2)(c)]

A broker does not deposit trust funds into an account the broker uses to receive and disburse personal or business funds. To do so, the broker has improperly commingled the different types of funds. Similarly, improper commingling occurs when the broker places or leaves personal funds in a trust account. [Stillman Pond, Inc. v. Watson (1953) 115 CA2d 440]

Except to the limited extent authorized by the DRE, commingling is always improper.

A broker is only permitted to commingle personal or business funds with trust funds in the following two authorized situations:

The broker may maintain a deposit of up to $200 of their own funds in the trust account to cover bank service charges on the account; and
Fees or reimbursement for costs due the broker from the trust funds may remain in the trust account for up to 25 days before being disbursed to the broker. [DRE Regs. §2835]

The improper commingling of trust funds exposes the broker to a complaint or discovery on an audit and in turn, a review by the DRE regarding the status of their license. [Bus & P C §10176(e)]

When a representation agreement expires, the broker makes a final accounting of trust funds to the person who owns the funds. When any funds remain, they will be returned to the client with the final accounting. [Bus & P C §10146]

The statement of account for the trust funds includes the following information:

the amount of the deposit toward advance costs;
the amount of each disbursement of funds from the trust account;
an itemized description of the cost obligation paid on each disbursement;
the current remaining balance of the advance cost deposit; and
an attached copy of any advertisements paid from the advance cost deposit.

A broker needs to know who owns and controls the funds held in their trust account at all times. Trust funds may only be disbursed on the authorization of the owner of the funds. The ownership of trust funds is documented using subaccount ledgers set up to identify the owners of funds and the amount held in trust for each owner.

Further, the broker is required to account monthly to the owner on the status, expenditure and location of trust funds, called an owner’s statement.

Similarly, brokers maintaining trust accounts need to reconcile the entire trust account against the separate subaccount ledger for each person and each transaction at least once during each calendar month deposits or withdrawals are made. [DRE Regs. §2831.2]

Lastly, the broker is to keep all accounting records for at least three years. Further, the broker needs to make the records available to the DRE upon request. [Bus & P C §10148]