Mortgage Loan Broker Compliance Evaluation Manual
(RE 7 new 5/06)
State of California
Department of Real Estate
Arnold Schwarzenegger
Governor
Dale Bonner
Secretary of the Business, Transportation and Housing Agency
Jeff Davi
Commissioner
Department of Real Estate
Table of
Contents
SECTION 1 – General Business Practices
Subject:
1. Properly licensing salespersons
2. Hiring and termination of salespersons
3. Written broker-salesman agreements
7. Use of fictitious business names
SECTION 2 – Trust Fund Handling
Subject:
SECTION 3 – Borrower Disclosures
Subject:
1. Mortgage Loan Disclosure Statements
2. Alternative disclosure statement
7. Consumer Caution and Home Ownership
Counseling Notice
Subject:
2. License disclosure (prospective borrowers)
3. License disclosure (prospective
lenders/investors)
5. Required disclosures when advertising
payments
6. Gifts, premiums, inducements
Subject:
3. Disclosure of loan compensation when
representing buyer/seller
Subject:
1. Approval required for advance fee agreement
2. Advance fee to remain in trust
account/Required Accountings
SECTION 7 – Article 7 – Regulated Loans
Subject:
5. Credit life/disability insurance
6. Balloon payments (owner-occupied dwelling)
7. Balloon payments (not-owner-occupied
dwelling)
SECTION 8 – Article 5 – Private Money Transactions
Subject:
5. Lender/Purchaser Disclosure Statement
8. Loan servicing – Delivery of note
9. Recordation of trust deeds and assignments
10. Delivery of conformed copies of deeds of
trust
11. Gifts, premiums, inducements
SECTION 9 – Article 6 – Private Money Transactions with Multiple Beneficiaries
Subject:
4. Prohibition on self-dealing
5. Maximum investors/Qualification statements
7. Loan to Values, construction loans, multiple
properties
8. Loan documentation for defaults
9. Receipt of funds/Trust accounts/CPA reports
10. Sale of notes/Required servicing agreement
11. Lender/Purchaser Disclosure Statement
12. Identity of note purchasers
13. Option to purchase interests
14. Annual Trust Account Report
15. Annual Business Activities Report
16. Identifying the transaction
Subject:
1. Prepayment penalty duration
2. Prepayment penalty requirements
9. Recommending default prohibited
12. Consumer Caution and Home Ownership
Counseling Notice
13. Steering, counseling/Risk Grades
16. Informing employees of penalties
18. Fiduciary relationship to borrower
19. Limitations on financing points and fees
SECTION 11 – Residential Mortgage Loan Report
Subject:
2. Residential Mortgage Loan Report criteria
SECTION 12 – Residential Mortgage Lending Notice
Subject:
1. Criteria for submitting the Notice
Mortgage Loan Broker Compliance
Checklist
This Mortgage Broker Compliance Evaluation Manual was prepared primarily to assist the real estate broker who engages in mortgage loan activities with assessing compliance with Department of Real Estate requirements. It contains many of the questions that you would be asked if visited by a Department of Real Estate representative.
If there should be a conflict between this manual
and the Real Estate Law and/or Regulations of the Real Estate Commissioner, the
law and regulations will take precedence.
This manual was not designed to encompass all of your obligations and
responsibilities under the Real Estate Law but rather as one of the tools you
may use when reviewing your business practices and record keeping procedures
related specifically to your mortgage loan business. We hope that it will
assist you.
Questions regarding information contained in this
manual should be directed to the Department’s Mortgage Loan Activities Unit at
(916) 227-0770.
Correct Procedure:
All persons performing activities requiring a real estate license (soliciting or negotiating loans secured by real property or a business opportunity) for compensation must hold a valid real estate license.
The broker should have some procedure in place to monitor the expiration dates of the licenses of his/her salespersons. Standard broker and salesperson licenses expire four years after issuance. However, a conditional salesperson license expires 18 months after issuance unless the salesperson has submitted evidence to the Department of completion of the mandatory educational requirements. The broker must also retain possession of the licenses of his/her salespersons while in the broker's employ. If the broker employs other broker licensees as broker-associates, the broker need not retain possession of the licenses, however, he/she should monitor the expiration dates.
Once a license has expired, the licensee can perform no licensed activity until the license has been renewed. The late renewal period simply allows the licensee to renew on a late basis without retaking the examination; it does not allow the licensee to conduct licensed activity during the late renewal period.
It is unlawful for any broker to employ or compensate, directly or indirectly, any person for performing licensed activity unless that person is a licensed broker, or a salesperson licensed to the broker. A salesperson may not accept compensation for licensed activity nor pay compensation for licensed activity except through the broker under whom he/she is at the time licensed.
It is a
misdemeanor, punishable by a fine of $100 for each offense, for any person,
whether obligor, escrow holder or otherwise, to pay or deliver to anyone
compensation for performing any licensed acts who is not known to be or who
does not present evidence that he/she is a licensed real estate broker at the
time such compensation is earned.
A broker may employ non-licensed persons to assist the broker in meeting the broker’s obligations to its customers in residential mortgage loan transactions as defined in Financial Code Section 50003, where the lender is an institutional lender, provided the employee does not participate in any negotiations occurring between the principals. The broker must exercise reasonable direction, control and supervision over the activities of non-licensed persons who may only be employed at a location licensed to the broker. The broker must be obligated to withhold income taxes and provide workers compensation insurance and unemployment insurance. The non-licensed person may only perform those activities specifically described in Regulation 2841.
Reference:
Real Estate Law Book, Sections 10130, 10131, 10132, 10133.1(c), 10137, 10138,
10153.4, 10160, Regulation 2841.
(Unless otherwise noted, all “Section” references are to the Business and
Professions Code and “Regulation” references are to the Regulations of the Real
Estate Commissioner.)
Correct Procedure:
Whenever a real estate salesperson enters the employ of a broker, the broker shall notify the commissioner of that fact within five days. This notification shall be given on a form prepared by the Department which shall be signed by the broker and the salesperson or via the Department’s E-licensing system availability at www.dre.ca.gov. The notification shall provide at least the following information:
1. Name and business address of the broker.
2. Mailing address of the salesperson, if different from the business address.
3. Date when the salesperson entered the employ of the broker.
4. Certification by the salesperson that he/she has complied with the provisions of Section 10161.8(d) of the Business & Professions Code.
5. Name and business address of the real estate broker to whom the salesperson was last licensed and the date of termination of that relationship.
6. Certification by the salesperson that the predecessor broker has notice of the termination of the relationship.
As an acceptable alternative to 5 and 6 above, the form may be utilized by the predecessor broker to give notice of the termination of the broker/salesperson relationship as required by Section 10161.8(b) of the Business & Professions Code if this notice is mailed to the commissioner not more than ten days following such termination.
Reference:
Real Estate Law Book, Section 10161.8; Regulation 2752
Correct Procedure:
Every broker must have a written agreement with each of his/her salespersons, whether licensed as a salesperson or as a broker under a broker-salesperson arrangement. The agreement shall be dated and signed by the parties and shall cover material aspects of the relationship between the parties, including supervision of licensed activities, duties and compensation.
Reference:
Real Estate Law Book, Regulation 2726
Correct Procedure:
A broker shall exercise reasonable supervision over the activities of his or her salespersons. Reasonable supervision includes, as appropriate, the establishment of policies, rules, procedures and systems to review, oversee, inspect and manage:
1. Transactions requiring a real estate license.
2. Documents which may have a material effect upon the rights or obligations of a party to the transaction.
3. Filing, storage and maintenance of such documents.
4. The handling of trust funds.
5. Advertising of any service for which a license is required.
6. Familiarizing salespersons with the requirements of federal and state laws relating to the prohibition of discrimination.
7. Regular and consistent reports of licensed activities of salespersons.
The form and extent of such policies, rules, procedures and systems shall take into consideration the number of salespersons employed and the number and location of branch offices.
A broker shall establish a system for monitoring compliance with such policies, rules, procedures and systems. A broker may use the services of brokers and salespersons to assist in administering the provisions of this section so long as the broker does not relinquish overall responsibility for supervision of the acts of salespersons licensed to the broker.
Reference:
Real Estate Law Book, Regulation 2725
Correct Procedure:
A licensed broker must retain for 3 years copies of all documents related to the loan transaction, trust account records, and other documents executed by him or her or obtained by him or her in connection with any transaction for which a broker's license is required. The retention period shall run from the date of the closing of the transaction or from the date of the loan application if the transaction is not consummated. After reasonable notice, the books, accounts and records shall be made available for audit, examination, inspection and copying by a Department representative during regular business hours.
Reference:
Real Estate Law Book, Section 10148
Correct Procedure:
A broker is authorized to conduct business only at the address listed on his/her license. If the broker maintains more than one place of business within the State, he/she shall apply for and procure an additional license for each branch office so maintained. The application for a branch office license must state the name of the person and the location of the place or places of business for which the license is desired.
Reference:
Real Estate Law Book, Section 10163
Correct Procedure:
A broker shall not use a fictitious name in the conduct of any activity requiring a real estate license unless the broker first obtains a license bearing the fictitious name. (A fictitious business name is frequently referred to as a "dba" - doing business as.)
To obtain a license bearing a fictitious name, the broker must apply to the Department and attach a certified copy of the fictitious business name statement filed with the county clerk.
The Real Estate Commissioner may refuse to issue a license bearing a fictitious name to a broker if the fictitious name:
1. Is misleading or would constitute false advertising.
2. Implies a partnership or corporation when a partnership or corporation does not exist.
3. Includes the name of a real estate salesperson.
4. Constitutes a violation of the provisions of Sections 17910, 17910.5, 17915 or 17917 of the Code. (These Sections provide the procedures for issuance of a fictitious business name.)
5. Is the name formerly used by a licensee whose license has since been revoked.
Reference:
Real Estate Law Book, Section 10159.5 and Regulation 2731
Correct Procedure:
Section 17006(a)(4) of the Financial Code exempts a licensed real estate broker from the Escrow Law when the broker is conducting an escrow in the course of or incidental to a real estate transaction in which the broker is an agent or a party to the transaction and in which the broker is performing an act for which a real estate license is required. The exemption is personal to the broker and the broker shall not delegate any duties other than duties performed under the direct supervision of the broker.
The broker's exemption provided for above is not available for any arrangement entered into for the purpose of performing escrows for more than one business.
Section 17403.4 of the Financial Code requires all written escrow instructions executed by a buyer or seller to contain a statement in not less than 10-point type which shall include the license name and the name of the department issuing the license or authority under which the person is operating. This section does not apply to supplemental escrow instructions or modifications to escrow instructions.
Real Estate Commissioner's Regulation 2950 sets forth acts which are prohibited and may be grounds for disciplinary action:
(a) Soliciting or accepting an escrow instruction (or amended or supplemental escrow instruction) containing any blank to be filled in after signing or initialing of such escrow instruction (or amended or supplemental escrow instruction).
(b) Permitting any person to make any addition to, deletion from, or alteration of an escrow instruction (or amended or supplemental escrow instruction) received by such licensee, unless such addition, deletion or alteration is signed or initialed by all persons who had signed or initialed such escrow instruction (or amended or supplemental escrow instruction) prior to such addition, deletion or alteration.
(c) Failing to deliver at the time of execution of any escrow instruction or amended or supplemental escrow instruction a copy thereof to all persons executing the same.
(d) Failing to maintain books, records and accounts in accordance with accepted principles of accounting and good business practice.
(e) Failing to maintain the office, place of books, records, accounts, safes, files and papers relating to such escrows freely accessible and available for audit, inspection and examination by the Commissioner.
(f) Failing to deposit all money received as an escrow agent and as part of an escrow transaction in a bank trust account, or escrow account on or before the close of the next full working day after receipt thereof.
(g) Withdrawing or paying out any money deposited in such trustee account or escrow account without the written instruction of the party or parties paying the money into escrow.
(h) Failing to advise all parties in writing if he/she has knowledge that any licensee acting as such in the transaction has any interest as a stockholder, officer, partner or owner of the agency holding the escrow.
(i) Failing upon closing of an escrow transaction to render to each principal in the transaction a written statement of all receipts and disbursements together with the name of the person to whom any such disbursement is made.
(j) Delivering or recording any instrument which purportedly transfers a party's title or interest in or to real property without first obtaining the written consent of that party to the delivery or recording.
Reference:
Financial Code Sections 17006(a)(4) and 17403.4
Real Estate Law Book, Regulation 2950
Typically
the broker will only collect an appraisal and/or credit report fee from the
prospective borrower. These must be
treated as trust funds unless the broker is being reimbursed for advancing
payment of the fee(s) to the vendor(s).
Under those circumstances, the following rules will apply:
1. The
funds must be strictly for the purposes of reimbursing the broker for fees that
he or she has advanced for an appraisal or credit report on behalf of the borrower. If the broker has not advanced the funds,
and is receiving a check from escrow on behalf of the borrower to pay an
appraiser or a credit-reporting agency, the funds must be deposited to a trust
account for payment to the vendor.
2. There
can be no markups of any sort of the fees.
Example: If an appraisal costs
$250.00 and that is the amount advanced by the broker, a “reimbursement” for
$300.00 must be deposited to the trust account and the additional $50.00 must
be identified as a actual cost or expense of the loan.
3. The
broker must keep clear general account records of the funds expended on behalf
of the borrower and paid to the vendor, subject to DRE examination, so that it
may be clearly established that the broker advanced funds to an appraiser or
credit reporting agency for a specific borrower.
4. There
must be clear instructions from the beneficiary (borrower) to the broker
authorizing the reimbursement to his or her general account. This may be contained in the escrow
instructions signed by the borrower.
The
following questionnaire applies to brokers who collect appraisal and/or credit
report fees in advance where the funds are negotiable by the broker. No other fees may be collected in advance
without an approved advance fee agreement (see Section 6 - Advance Fees).
Trust Fund Handling
Questionnaire
Does the broker collect trust
funds from prospective borrowers?
1. Is
the bank account used for trust fund handling in the name of the broker as
trustee?
2. Are
control records complete and accurate?
3. Are
the separate transaction records complete and accurate?
4. Is
monthly reconciliation of the control records and separate records performed
and documented?
5. Are
trust funds deposited in a timely manner?
6. Are
authorized signatories either employed by the broker and licensed or unlicensed
but bonded?
7. Are
broker's funds commingled with trust funds?
Correct Procedure:
1. If the broker holds an individual broker's license, the account should be set up in his or her name or in the name of a fictitious business name if the broker is the holder of a license bearing such fictitious name and designated a "Trust Account."
For example:
John
Doe Trust Account
or
Jane Doe Trust Account
or, assuming broker has registered dba of 25th Century Realty:
25th Century Realty Trust Account
2. If the broker is a corporate broker licensee, the account should be set up in the corporation's name or in the name of a fictitious business name if the corporate broker is the holder of a license bearing such fictitious name and designated a "Trust Account."
For example:
ABC,
Inc. Trust Account
or, assuming corporate broker has registered dba of ABC Realty:
ABC Realty Trust Account
Reference:
Real Estate Law Book, Regulation 2832
Correct Procedure:
Every broker shall keep a record of all trust funds received, including uncashed checks.
1. If a broker does not maintain a trust account or maintains a trust account but forwards all trust funds received to either the escrow or to the owner of the funds, then he/she must maintain a Record of Trust Funds Received but not Deposited to the Trust Fund Bank Account (for example, DRE Form RE 4524). This record should show the following in chronological sequence:
a. Date funds received.
b. Form of payment.
c. Amount received and from whom received.
d. Description of property or other identification.
e. Identity as to whom funds were forwarded.
f. Date of disposition.
However, a broker is not required to keep the above records of passing through checks made payable to service providers (e.g., escrow, credit and appraisal services) when the total of such checks from any one principal for any transaction does not exceed $1,000. Upon request of the Department or the maker of such checks, a broker shall account for the receipt and distribution of such checks. A broker shall retain for three years copies of receipts issued or obtained in connection with the receipt and distribution of such checks.
2. If a broker does maintain a trust account, he/she must maintain a Columnar Record of all Trust Funds Received and Paid Out of the Trust Fund Bank Account (for example, DRE Form RE 4522). This record should show the following in chronological sequence:
a. Date funds received.
b. From whom funds received.
c. Amount received.
d. Date of deposit.
e. Check number and date of related disbursement.
f. Daily balance of trust bank account.
Reference:
Real Estate Law Book, Regulation 2831
Correct Procedure:
Brokers must maintain a Separate Record for Each Beneficiary or Transaction (for example, DRE Form RE 4523). This record accounts for the funds received from, or for the account of, each beneficiary or each transaction and deposited to the trust fund bank account. These records are necessary for the broker to ascertain the total owed to each of the beneficiaries. The record should show in chronological sequence the following:
1. Date of deposit.
2. Amount of deposit.
3. Date of each related disbursement.
4. Check number of each related disbursement.
5. Amount of each related disbursement.
6. If applicable, dates and amounts of interest earned and credited to the account.
7. Balance after posting transactions on any date.
Reference:
Real Estate Law Book, Regulation 2831.1
Correct Procedure:
The balance of all separate beneficiary or transaction records (for example, DRE Form RE 4523) must be reconciled with the record of all trust funds received and disbursed (for example, DRE Form RE 4522) at least once a month. A record of reconciliation must be maintained and it must identify the following:
1. Bank account name.
2. Account number.
3. Date of reconciliation.
4. Name of beneficiaries.
5. Trust fund liabilities of the broker to each beneficiary.
For example:
ABC
Realty, Inc. Trust Account
0339-000011
5/31/99
|
Balances
per Separate Beneficiary Records: |
|
|
Jones |
$500.00 |
|
Smith |
$250.00 |
|
Thompson |
$100.00 |
|
Total
of Separate Records |
$850.00 |
|
Balance
per Record of All Trust Funds Received: |
$850.00 |
|
Difference
(if any, should be fully explained) |
$0.00 |
Reference:
Real Estate Law Book, Regulation 2831.2
Correct Procedure:
Unless otherwise specified in writing by the beneficiary of the funds, a broker is required to do one of the following three things with trust funds no later than three business days following receipt of the funds by the broker or the broker’s salesperson:
1. Deposit the funds into a neutral escrow depository.
2. Place funds accepted on behalf of the owner into the hands of the owner of the funds.
3. Deposit the funds into a trust fund bank account maintained by the broker.
When broker is handling escrow funds:
A real estate broker who is not licensed under the Escrow Law (Section 17000 et seq. of the Financial Code), when acting in the capacity of an escrow holder in a real estate transaction in which the broker is performing acts for which a real estate license is required, shall place all funds accepted on behalf of another into one of the three places listed above not later than the next business day following receipt of the funds by the broker or the broker’s salesperson.
Reference:
Real Estate Law Book, Regulation 2832
Correct Procedure:
Withdrawals may be made from the trust account only upon the signature of the broker or one or more of the following persons with written authorization from the broker:
1. A salesperson licensed to the broker.
2. A person licensed as a broker who has entered into a written agreement with the employing broker.
3. An unlicensed employee of the broker with fidelity bond coverage at least equal to the maximum amount of trust funds to which the employee would have access.
Withdrawals may be made from the trust account of a corporate broker only upon the signature of an officer through whom the corporation is licensed or one of the persons detailed above. The corporate broker should always be a signatory on the trust account.
Concerning an unlicensed employee with fidelity bond coverage, it is recommended that the fidelity bond specifically identify the trust account which is being covered. The fidelity bond must not include a deductible clause.
Reference:
Real Estate Law Book, Regulation 2834
Correct Procedure:
Funds belonging to a broker should not be commingled with trust funds. Common examples of commingling are:
A broker, however, is allowed to maintain up to $200 of personal funds in a trust account to cover checking account service fees and other bank charges.
Commissions, fees, other income earned by a broker, and funds belonging in part to the broker's principal and in part to the broker when it is not reasonably practicable to separate such funds, must be withdrawn from the trust account within 25 days from the date of deposit.
Reference:
Real Estate Law Book, Section 10176(e); Regulation 2835
SECTION
3 - Borrower Disclosures
Correct Procedure:
1.
In a transaction in which a broker is arranging a loan, a
Mortgage Loan Disclosure Statement (RE 882 or RE 883) must be provided within
3 days of receiving a completed written loan application from a prospective
borrower(s). A copy of the disclosure
statement signed by the borrower(s) and the broker, or the broker’s
representative, must be retained by the broker for 3 years.
2.
In the alternative, in a federally-related loan
transaction where the principal loan amount for a senior lien is $30,000 or
more or for a junior lien is $20,000 or more, a broker may provide a “good
faith estimate” that complies with RESPA and meets the following
conditions: the disclosure sets forth
the broker’s real estate license number, contains a clear and conspicuous
statement on its face that the “good faith estimate” is not a loan commitment,
all applicable disclosures required by the Truth in Lending Act are provided,
and, if the loan contains a balloon payment, an acceptable disclosure of the
balloon payment. Prior to becoming
obligated to the loan, the borrower(s) must acknowledge receipt of the “good
faith estimate” and disclosures in writing.
The broker must retain a true and correct copy of the “good faith
estimate” and disclosures as acknowledged by the borrower(s) for 3 years.
3.
The disclosures must include the real estate broker’s
license identification number if an individual broker, or the corporation’s
license identification number is a licensed corporation.
4.
The disclosures must contain the amount of all
compensation to be earned by the broker including the actual amount of any
yield/spread premium if known, or an estimate of any anticipated yield/spread
premium or other rebates from the lender.
The disclosures must also contain the Department’s licensing information
telephone number. Disclosure of any
material changes to the costs, expenses, or terms of the loan must be made to
the borrower(s) in a timely manner.
5.
The broker must advise the borrower(s) whether or not
the loan will be made with “broker-controlled funds” as defined.
6.
At the time of application, the broker must provide a Fair
Lending Notice (RE 867A) to the prospective borrower(s). The notice must also be posted in a
conspicuous place for public inspection.
A signed acknowledgement of receipt of the notice (RE 867) should be
retained by the broker for 3 years.
7.
If the broker is making or arranging a “covered loan”
the “Consumer Caution and Home Ownership Counseling Notice” is provided to the
prospective borrower(s) no later than 3 business days prior to signing the loan
documents. (See also Section 10 –
Covered Loans).
Reference:
Real Estate Law Book Sections 10176(a),(c),(g), 10236.4(b), 10240, 10241,
Regulations 2840, 2840.1, 2842.5.
Health and Safety Code Section 35830
Correct Procedure:
1.
No real estate licensee shall advertise,
or cause to be advertised in any manner, any statement or representation with
regard to rates, terms or conditions for making, purchasing or negotiating
loans secured by real property which are false, misleading or deceptive. The advertisement cannot contain any claims
or representations that are misleading or cannot be supported with satisfactory
evidence to the Department.