Welcome back. The Summer 2023 edition of the California Department of Real Estate (DRE) Bulletin includes licensee reminders about broker supervision, adjustable rate mortgages (ARMs) and trust funds.

Read on for firsttuesday’s digest of DRE updates for real estate agents and brokers.

Commissioner’s update

DRE Commissioner Doug McCauley opens this quarter’s bulletin with a sharp and insightful lens on broker supervision.

Broker supervision shields real estate consumers against fraud, misrepresentation and negligence — goals fundamental to the DRE. Also, supervision of agents is a duty owed to the DRE.

California real estate laws and regulations govern and define acceptable levels of broker supervision. [Calif. Business and Professions Code §§10159.2 and 10177(h); DRE Regulations §2725]

The DRE requires brokers to establish policies and systems to review and manage:

  • transactions requiring a real estate license;
  • documents that may have a material effect on the rights or obligations of a transaction participant;
  • the filing, storage and maintenance of documents;
  • the handling of trust funds;
  • advertising of any service requiring a license;
  • familiarizing their agents with anti-discrimination laws; and
  • regular and consistent reports from their agents’ and broker-associates’ on licensed activities. [DRE Regs. §2725]

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ARM origination

The bulletin continues with an advisory for real estate licensees with a mortgage loan originator (MLO) endorsement who recommend ARMs to their clients. An MLO has a fiduciary duty to their client to disclose the risks involved with all residential mortgage products. The particular focus in these times is on nontraditional mortgage products such as ARMs, which are inherently intended for more savvy buyers and those whose wealth or income bear the added risks financially.

MLOs recommending ARMs need to understand and communicate to their client the drawbacks and risks — not just the benefits of additional borrowing capacity when FRM rates are higher — of such high-risk products. MLOs also need to disclose all mortgage options available, and the full terms of those mortgage options.

In the case of the ARM, disclosures include the current terms and future trends of this type of mortgage since the interest rate will adjust to market after the introductory period ends, called the teaser rate. The consumer needs to be informed of this critical distinction of the ARM explaining that rates and payments are trending up after trending down since the mid-1980s through mid-2010s.

As the fixed rate mortgage (FRM) rate continues to climb in 2023, buyers throughout 2022 did look for ways to recoup their lost purchasing power and were more willing to consider alternatives to the traditional 30-year FRM. While buyers might decide to gamble on an ARM, they need to be made fully aware of the risks by their fiduciary — their agent.

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For additional information, visit the DRE’s Guidance on Nontraditional Mortgage Product Risk brochure.

Protection of trust funds

The bulletin continues with an explanation of the proper storage and maintenance of trust funds.

Real estate brokers who collect trust funds in the course of their business are to ensure those funds are being deposited into a properly designated trust account at a financial institution located in California.

Real estate brokers need to make sure:

  • the bank account is a fiduciary trust account with federal insurance coverage for funds held in the account per principal or beneficiary;
  • the name of the trust account is properly designated in the name of the broker as trustee; and
  • the broker maintains accurate trust fund accounting records.

Also, a real estate broker who accepts funds belonging to others has three business days following receipt of the funds to deposit them:

  • into a neutral escrow depository;
  • into the hands of the owner of the funds; or
  • into a trust fund account maintained by the broker in the name of the broker as trustee. [Bus & P C §10145(a)(1); DRE Regs. §2832(a)]

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Visit the DRE website to download the full Summer 2023 DRE Bulletin and sign up for the Quilix newsletter to receive the next DRE Bulletin Digest directly in your inbox!