This article examines a Legislative Analyst’s Office (LAO) report on the California Department of Real Estate’s (DRE’s) increasing inability to protect consumers, a failure of its primary purpose for existing.

The LAO critique dated May 12, 2009 regarding the DRE’s activities focused on two components:

  • the Licensing and Education Program; and
  • the Enforcement and Recovery Program.

Licensing and Education

At the heart of the LAO’s criticism of the DRE is the disproportionate amount of freedom and responsibility afforded licensees in relation to the relatively small degree of required education. The report observes how, in as little as three months, a person can study for and pass the DRE’s licensing exam, permitting them to represent members of the public who engage in a wide range of complex and specialized real estate related activities.

To become a sales agent, the DRE requires only three generalized courses: Principles of Real Estate, Real Estate Practice and one elective. In theory, the three qualification courses give the individual a solid understanding of the real estate industry. It is then up to the employing broker to guide the licensee with direct oversight and supervision.

However, the minimum amount of time a student must spend to pass all three courses is 54 days and no previous experience in real estate of any sort is required. An applicant who possesses a four-year degree needs no real estate-related experience before being issued a broker’s license, allowing him to hire newly licensed agents. This is a risky proposition for members of the public considering a broker is the very person charged with supervising newly licensed and established sales agents alike; a definite case of the blind leading the blind.

Once licensed, agents and brokers practice for a span of four years before each is required to undertake and complete continuing education as part of license renewal. The main problem with the continuing education requirement is that most licensees wait until a couple of weeks (or months) prior to their expiration dates to complete all the mandated hours, taking the “continual” entirely out of continuing education. This puts consumers of real estate licensee services at risk since licensees, for 80-90% of the time between renewals, are un-“educated” and potentially unaware of the changes in real estate practice and law that came into existence in the interim.

This all assumes that the education finally received was an updated continuing education (CE) course which actually included the technical updates needed by the agent or broker—and that they did read the material.

In addition, many companies in the continuing education industry are designed to accommodate the “last-minute licensee” by cutting corners on required minimums like enrollment periods and page counts. Those providers advertise their programs as the “fastest” or the “easiest,” (and some long in the education business still advertise one-day completion of 45 hours) implying little effort on the licensee’s part to become or remain eligible to help Californians with what is usually the most important financial decision of their lives—the purchase of a home. Casual research reveals many so-called “schools” not only cut vital corners, but also use outdated materials with few if any citations of California law or judicial precedence and none recent.

To be sure, most licensees mean well when enrolling in quick-renewal programs. However, too many education providers leave licensees uninformed about new laws, regulations or court rulings affecting their clients’ real estate-related transactions.

It doesn’t help that the DRE similarly makes minimal attempts to actively educate its constituency. A barely-visible quarterly bulletin is available on the DRE’s website, but it is relatively ineffective in keeping licensees up-to-date on the ever-changing laws and regulations affecting the real estate industry. Of the 12 pages that make up the Fall 2009 DRE Bulletin, seven pages are devoted to naming licensees subject to disciplinary action for violating laws and regulations governing the practice of real estate. [//www.dre.ca.gov/]

Editor’s note — Without this glut of sad details of human failings, the gossip element needed to draw licensees to read the DRE Bulletin would be missing.

Bulletins were slightly more effective when they were mailed out to licensees, but the cost of the mailings proved prohibitive for the DRE. Implementing an email list for licensees seems like a logical step toward providing brokers and agents with basic news and information. The timely email notice of adopted law changes and their effective dates makes a move toward electronic notifications the best method for informing DRE licensees and the public they serve.

Suggested improvements

In regards to the education and experience required for licensure, and the frequency and timing of continuing education, the DRE should take its cue from the Office of Real Estate Appraisers (OREA). [//www.orea.ca.gov/html/lic_reqmts.shtml]

The OREA has an initial trainee license requirement in which a newly licensed appraiser must be supervised by an experienced appraiser in good standing. The superior can only have three trainees under him at any time.

The DRE should create a similar designation such as an apprentice or trainee sales agent license, presently called a runner for those licensees who bring new talent onto their team. Newly licensed sales agents should be required to tagalong with a more experienced agent or broker in a specific real estate field of choice as a requirement before graduating into what the DRE could call a certified sales agent license. Only after acquiring further hours of education, experience, and perhaps an additional specialization endorsement as is available to attorneys, could a licensee then apply for a broker’s license.

In terms of continuing education, like the OREA, the DRE should move to require a certain number of CE hours to be completed each calendar year rather than every four years. The CE hours would then be filed electronically with the DRE by the DRE-approved course sponsor, with a renewal fee and application due every fourth year.

Also, the OREA limits the scope of activity an appraisal licensee is allowed to engage in, depending on the type of license (read: amount of education and experience in a specilization) he holds. A similar system should also be implemented by the DRE.

The recently-passed SB 36 created a mortgage loan brokerage endorsement requirement in response to the passage by California’s legislature of the Secure and Fair Enforcement for Mortgage Licensing Act (the SAFE Act). Under the SAFE Act, licensees engaged in mortgage loan brokering are required to:

  • complete pre-license and continuing education specific to mortgage loan brokerage;
  • be licensed specifically as mortgage loan originators in their state; and
  • register with a national mortgage licensing system and registry. [See Legislative Watch SB 36]

The DRE could require endorsements for a variety of the more specialized and complex activities that a real estate licensee can currently engage in at will, such as property management and leasing agent transactions, apartment or nonresidential sales transactions, subdivisions and equity purchase (EP) transactions, etc. If the DRE won’t require an endorsement for these activities, at the very least it should implement a supervised experience requirement.

Without an extensive re-work of real estate licensing requirements, especially in light of the more complex aspects of real estate, the DRE is and will continue to fail to protect the general public from untrained and inexperienced individuals, licensed to take consumers for a ride. Education and experience must be mandated and its quality somehow controlled; free from the taint of status symbols and not left to the vagaries of the marketplace.

Enforcement and Recovery

The DRE concerns itself with three types of cases, ostensibly to protect the public from the unlawful conduct of its licensees:

  • consumer complaints;
  • investigations into applicants/licensees guilty of felonies that may or may not have anything to do with a real estate transaction, called rap cases, such as driving under the influence (DUI), domestic violence, petty theft, failure to pay spousal/family support, etc.; and
  • licensee petitions to have a restricted or suspended license reinstated. [See LAO Report, page 7]

Rap cases represented 55% to 60% of the workload between 2004-05 and 2007-08. This rise corresponded with the upswing in the number of applicants due to the booming real estate market. The LAO expects to see the number of rap cases decline as the bust market and the October 2007 elimination of the one-course-licensing of agents have put a damper on the number of people applying to become agents. [See LAO Report, page 7, Figure 5]

Between 2003-04 and 2007-08, only 0.1% of licensees were disciplined by the DRE, and most of these actions were for rap-related incidents and not complaints regarding real estate transactions. [See LAO Report, page 9, Figure 7]

The number of consumer complaints against licensees is increasing. The LAO also noted that the number of complaints filed by the DRE itself is decreasing, a sign that the DRE’s proactive effort to investigate misconduct and enforce an incentive for licensees to comply with the law is diminishing. However, the numbers still suggest the cat is away and no sufficient disciplinary action is doled out to the mice at play. [See LAO Report, page 10, Figure 9]

Suggested improvements

The LAO report recommends the DRE limit its investigation efforts to violations committed as part of a real estate transaction. For instance, the DRE should focus on those who fail to disclose a dual agency to their clients, fail to advise on critical property information known to the licensee, accept advance fees or commit trust fund handling violations. Victims of DRE licensee negligence and fraud in real estate transactions are underserved by the DRE when the department oversteps its bounds and wastes resources investigating rap cases.

Those suspected of felonies should be investigated and prosecuted by local and state authorities whose duty it is to police and enforce criminal law. The DRE should then act to suspend or revoke a license based on the findings of a court of law, beyond which no further investigation is needed.

Furthermore, the DRE claims to uphold its licensees to a standard of honesty and integrity, but fails to implement any minimum, concrete qualifications for such terms. The DRE should more clearly state what type of felony convictions are grounds for losing one’s license or outlaw felons from practicing or obtaining a real estate license outright. Doing so would remove the requirement for discretion entirely, and greatly reduce the resources spent investigating rap cases. Freeing up staff to investigate consumer- and fellow licensee-generated complaints does more to protect the public from risk of loss brought about by incompetent or dishonest licensees.

The Legislature should broaden the DRE Commissioner’s authority to revoke licenses, hold hearings and enforce additional types of sanctions. Granting the Commissioner a broader reach expedites the investigation and penalty process. Currently, the DRE is only at liberty to suspend or revoke a license after much investigation. Implementing a system of sanctions or fines against licensees found guilty of violating the DRE’s standards would serve as a deterrent for nefarious acts, an incentive to learn and abide by DRE regulations and a source of income to replenish the DRE’s Recovery Account. Even educators know who is cheating on exams from time to time, and could become part of team effort with the DRE to collaborate on information about improper use of course approvals by licensees who never enrolled.

Further steps to be taken by the Legislature in encouraging the DRE’s self-reform should focus on crafting policy to make the DRE more accountable for its actions. For example, the Legislature should require the Commissioner to submit an annual report, documenting what steps the DRE has taken to focus its caseload only on potential violations of Real Estate Law.

If a concerted effort is made by the Legislature, the DRE Commissioner and each of the department’s seasoned licensees, change can happen from within. With help, the DRE can effectively reform its licensing and educational requirements to ensure only qualified and upstanding professionals are licensed and practicing. Then, with a skilled and ethical base of agents and brokers, the DRE can work toward realizing its stated purpose: consumer protection.

[See the Legislative Analyst’s Office’s report “Department of Real Estate: Opportunities to Improve Consumer Protection (May 12, 2009)”]