Posts Tagged ‘real estate law’

Unlicensed Places of Business

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A good real estate agent is always working. Sometimes it’s easier for an agent to have documents and correspondences sent directly to his home so he can avoid taking an unnecessary trip to the office or he can impress certain clients with a particular zip code. While not overtly improper, using a non-brokerage office address for business can have unanticipated consequences.

California Business and Professions Code Section 10163
An agent who uses his personal address in advertisements and material documents can be perceived by the Department of Real Estate as running an unlicensed place of business. Every real estate brokerage’s “place of business” must be independently revealed to and licensed by the DRE. California law delegates the DRE Commissioner full authority to determine whether an office is being used as a “place of business” for real estate brokerage purposes and every such place must have an on-sight broker representative to oversee and manage licensed activities.

Audits
The DRE may audit any individual salesperson and responsible broker suspected of operating an unlicensed place of business. Normally, the DRE comes across a business card, flier, or website which seems to direct clients and cooperating brokers to a physical address not belonging to the salesperson’s broker (usually it’s the salesperson’s home address or second job). From there, the DRE may conduct an audit or a less formal inquiry to determine the extent of business operations being conducted at the location.
If the Commissioner determines that an unlicensed office exists, the Commissioner may remedy the situation by requiring that the location become licensed (evoking tax and zoning dilemmas) or restricting/revoking the responsible party’s license.

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Of course, agents reveal their home addresses to clients and cooperating brokers for any number of reasons – most are completely proper. Audits normally result when a non-brokerage address is posted on an advertisement or a material document to the transaction.  As such, it’s advisable to have agents refrain from ever putting home addresses on their business cards, fliers, or any other medium used as the first point of contact with clients and the general public. More obviously, an agent should never post his personal address in lieu of his broker’s address on a listing agreement, agency disclosure, or purchase contract.

Cal Bus & Profs §10163 is reproduced as follows:

“If the applicant for a real estate broker’s license maintains more than one place of business within the State he shall apply for and procure an additional license for each branch office so maintained by him. Every such application shall state the name of the person and the location of the place or places of business for which such license is desired. The commissioner may determine whether or not a real estate broker is doing a real estate brokerage business at or from any particular location which requires him to have a branch office license.”


Trust Fund Handling Requirements (The 3 Business Day Rule)

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California has created very rigid timelines and rules for handling trust funds. The most basic trust fund rule is that trust funds must be properly deposited or returned within 3 business days of acceptance. Failure to comply with this rule can cause you and your brokerage trouble during a DRE audit. It can also put your client in breach of contract.

Trust Funds

Technically, “trust funds” are any funds received on behalf of others in a manner that legally creates a fiduciary responsibility to the funds’ owners. Unlike some other funds received in the normal course of business, trust funds demand the highest level of protection and a strict fiduciary duty of loyalty by the possessor-trustee. With few exceptions, the trustee generally may not comingle the funds, collect interest on the funds, or otherwise personally benefit in any way by holding the funds.

It is well settled law that purchase funds delivered to one’s real estate broker in the normal course of purchasing real property are considered trust funds.

The DRE Rule

A typical trust fund transaction begins with the broker or salesperson receiving trust funds from a principal for the purpose of making a deposit. According to Business and Professions Code Section 10145, trust funds received must be placed into the hands of the owner(s) of the funds, into a neutral escrow depository, or into a trust account maintained pursuant to Commissioner’s Regulation 2832 not later than 3 business days following receipt of the funds by the broker or by the broker’s salesperson.

This rule is explicit and rigid. Brokerages are required to return the funds or properly deposit the funds within 3 business days. The only common exception is in situations where a check is delivered by a client to his broker prior to acceptance of the client’s offer. As provided by Commissioner’s Regulation 2832, a deposit check may be held uncashed by the broker until acceptance of the offer if the following conditions are met:

1.  the check by its terms is not negotiable by the broker, or the offeror has given written instructions that the check shall not be deposited or cashed until acceptance of the offer; and

2.  the offeree is informed, before or at the time the offer is presented for acceptance, that the check is  being held.

If the offer is later accepted, the broker may continue to hold the check uncashed and undeposited only if the broker receives written authorization from the seller to do so. Otherwise, the check must be placed, not later than 3 business days after acceptance, into a neutral escrow depository or into the trust fund bank account or into the hands of the seller if both the buyer and seller expressly agree in writing.

Standard Purchase Agreement Forms

The standard CAR and PRDS purchase agreement forms each have language meant to evoke the above referenced rule and exception. For example, the CAR agreement states “Buyer has given a deposit in the amount of ___________to the agent submitting the offer (or to ___________) by personal check which shall be held uncashed until acceptance of the offer and then deposited within 3 business days after acceptance…”
Not surprisingly, standard industry practice is to deliver the deposit to escrow within 3 business days of acceptance. Failure to do so is often considered a breach of DRE rules and it may put the buyer in breach of contract. As such, agents and coordinators are advised to keep this in mind and make sure to properly deposit funds within the 3 business day period.

A copy of the DRE’s official guide for licensees regarding trust funds can be found here.


Consigliere Files: FTC Will Not Enforce Some Parts of its MARS Rule on Real Estate Professionals

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In a welcome and somewhat overdue policy shift last month, the Federal Trade Commission (FTC) pledged that it will no longer hold real estate brokerages to many of the rigid requirements spelled out in its Mortgage Assistance Relief Services (MARS) Rule published earlier this year. However, Brokerages will continue to be enjoined from making misleading statements during their agency and in their advertisements.

This policy change does not apply to real estate professionals who offer loan modification services.

The MARS Rule

The MARS Rule was published early this year to address widespread fraud within the loan modification industry. The rule was specifically envisioned to cover lawyers and loan negotiators who promised to renegotiate a debtor’s mortgage for an upfront fee. Often, these negotiations were half hearted and wholly unsuccessful – costing the debtor his upfront fee and inevitably leading him to bankruptcy.

The MARS Rule disallows upfront fees for loan modification services. It also requires that any servicer who touches the debtor’s loan make numerous mandatory disclosures and statements to the debtor. Servicers must allow the debtors to talk directly with their lenders. Servicers must also make multiple disclosures which generally emphasize that they are not members of any bank or the government and that they cannot guaranty the successful renegotiation of any particular loan.

Of course, the MARS Rule was originally interpreted to cover real estate agents who must negotiate with their clients’ creditors during the short sale process.

More information on the MARS Rule and its specific requirements can be found here.

The Recent Change

On July 15, 2011, the FTC voted 5-0 in favor of no longer enforcing most of the provisions of the MARS Rule against real estate professionals engaged in obtaining short sales for consumers. The stay applies only to real estate professionals who: 1) are licensed and in good standing under state licensing requirements; 2) comply with state laws governing the practices of real estate professionals; and 3) assist or attempt to assist consumers in obtaining short sales in the course of securing the sales of their homes. The stay exempts real estate professionals who meet these requirements from the obligation to make many of the mandatory disclosures required by the MARS Rule. These professionals, however, remain subject to the Rule’s ban on misrepresentations and deceptive advertisements.

Real Estate Practice

This change removes some direct liability for agents, but it should not cause day to day practices to change in any extreme way. The real estate industry’s standard forms changed in anticipation of the MARS requirements earlier this year and many prudent real estate agents have been using variations of the CAR form MARSMRN, 3/11 and its sister document CAR form MARSSN, 3/11, since the Rule’s publication.

CAR form MARSMRN, 3/11 states:
“This notice is required by the Mortgage Assistance Relief Services Rule when the listing agent presents the lenders short sale approval letter.”

CAR form MARSSN, 3/11 states:
“This notice is required by the Mortgage Assistance Relief Services Rule when taking a short sale listing or at the time the listing agent becomes aware that the sale will require a lender’s consent to a short sale, whichever occurs first, if the listing agent will be communicating with the short sale lender regarding their consent to a short sale.”

While the FTC’s promise of forbearance renders much of the disclosures within these forms unnecessary, I still strongly recommend that they continue to be used for the time being. It’s the clients that represent most liability faced by real estate professionals. The FTC might discontinue enforcing parts of its MARS Rule on licensed real estate professionals, but that does not mean that clients won’t file suit against brokerages when they feel that they have been ill informed about their short sale. These disclosures remain helpful when a seller files a lawsuit claiming that he did not understand what his real estate agent was doing.

Also, the FTC’s policy shift does not change its pledge to scrutinize dishonest advertisements. Any misleading advertisement, especially those that seem to evoke a dishonest suggestion about the agent’s affiliation with the lender or some government program, can still result in state and federal penalties as well as a civil lawsuit.

The FTC’s full announcement about its policy shift concerning real estate professionals can be found here.


Consigliere Files: The FTC’s New “MARS” Rule – Its Affect on Short Sale Listing Agents and Negotiators

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The Federal Trade Commission (FTC) has issued the Mortgage Assistance Relief Services (MARS) rule to protect distressed homeowners from those mortgage relief scams that have sprung up during the mortgage crisis. The rule covers any operation that, for a fee, will initiate negotiations with the seller’s mortgage lender or servicer to obtain a loan modification, short sale approval, or other relief from foreclosure. Of course, this affects many agents and negotiators who work in short sales.

MARS has three parts. It forbids advance payments, it requires certain disclosures, and it prevents the negotiator from making certain claims.

Ban on Advance Fees

MARS completely bans upfront fees for short sale negotiators. What this means is that short sale negotiators may no longer require payment upfront upon the commencement of their efforts with the bank. Rather, the negotiator may only collect fees after satisfactory agreement between the bank and the seller.

Further, the agreement will only be deemed “satisfactory” if there is evidence that the seller knew 1) how the terms of his mortgage would change, and 2) that he had an option to refuse the modification. Therefore, this rule imparts a more pronounced duty on both the listing agent and the negotiator (if they are different) because they are on the hook if the client comes back later and claims, “I didn’t understand what was happening.”

Of course, this part of the rule is easily complied with so long as negotiators only get paid upon closing, which is advisable.

Disclosures

MARS further requires standard disclosures for the short sale negotiator to make before executing a loan modification agreement. The FTC will assume that the seller was mislead if he was not explicitly informed that:

  • The negotiator is not associated with the government, and the negotiator’s services have not been sanctioned by the government or the bank;
  • The bank has the right to refuse to modify the existing loan;
  • The seller has the right to refuse an offer and, if he does, he owes nothing to the negotiator,
  • The seller may lose his home and damage his credit rating if he discontinues making mortgage payments, and
  • The amount of the fee.

Prohibited claims

Coupled with its mandatory disclosures, the MARS rule prohibits negotiators from making any false or misleading claims about their services. This is not new (fraud or false promises have always been a trade violation). However, the rule gives examples of misleading claims. Generally, advertisements about the following topics will be scrutinized to determine whether they are misleading:

  • The likelihood of sellers getting the results they seek (essentially, claims that promise or impart certainty that the seller will get approval at the seller’s terms. For example, “I have a 99% success rate” is now likely a violation if things don’t work out);
  • The negotiator’s affiliation with government or private entities (For example, ads that say things like “this is made possible by the federal stimulus plan” and the like will now be scrutinized);
  • The seller’s payment and other mortgage obligations (Any ad that would make a seller think he doesn’t need to pay his mortgage or that his mortgage agreement has standard language that entitles the seller to a short sale will be scrutinized);
  • The negotiator’s refund and cancellation policies (Any statement that leads people to think they can get a full refund from their agent or negotiator, if reasonably untrue, will be scrutinized);
  • Whether the negotiator has performed the services promised (the negotiator must negotiate a settlement that is knowingly accepted by the seller and bank. Any statement that seems to entitle the negotiator to money for anything short of this is a violation);
  • Whether the negotiator will provide legal representation to the seller (if the negotiator’s company makes it seem that they will act as the seller’s attorney, they need to be duly licensed to do so and they need to follow through. Attorney affiliates will be scrutinized to determine what percentage of “bone-fide legal work” they deliver);
  • The availability or cost of any alternative to for-profit mortgage assistance relief services (any assertion about other services or options needs to be 100% accurate. It is not appropriate to discourage making payments, talking to a lawyer, working with the bank directly, or looking into government programs. Ads stating “don’t waste money on a lawyer” or “stop letting your bank call the shots” and the like will be scrutinized);
  • The money and/or credit a seller will preserve by using these services (if the total benefit does not seem to match the prior promises, the FTC will scrutinize that situation. This makes it even more important to request that the client seek independent legal/financial advice);
  • The cost of the services (hidden fees and unusual costs will be scrutinized); or
  • Any advertisement or advice that tells sellers to discontinue speaking with their bank.

What it Means

In California, most legitimate negotiators have DRE licenses and work with listing agents to negotiate with the bank. The negotiator is then paid out of the commission. The bank and the seller know about it and the listing agent is arguably the one losing money. As such, the seller does not pay until the agreement is made and the seller gets the service for which he bargained.

However, this rule should cause all short sale listing agents and negotiators to revisit their practices. Be sure that the client is given those disclosures listed above and be sure that the client knows how the negotiator is compensated. Further, negotiators and listing agents must be careful that their advertisements can survive FTC scrutiny. This is more a good-faith judgment call than anything else. If it sounds disingenuous, change it. And always advise that the client seek outside counsel.

Finally, and probably most importantly, NEVER require any up-front payment for negotiation. While the rule technically allows negotiators to collect after short sale approval and prior to closing, the short sale negotiators and listing agents who avoid trouble always and only get paid upon a successful closing.


Consigliere Files: The Benefit of the Doubt Program

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Last year, Commissioner Davi implemented a program designed to encourage brokers to report criminal or unethical licensees. The program is named the “Benefit of the Doubt Program.” The basic principle of the program is that the DRE will protect brokers who blow the whistle on past agents who were fired for improper conduct. If the reporting broker is found to be without gross negligence or direct fault, no DRE action will be taken against that broker. Conversely, past brokers who fired the same licensee will be investigated and held to a higher standard if it is determined that they failed to report the habitually wrongful actor to the DRE.

Legality

It’s not entirely clear how the nuts and bolts of the program work out legally – it’s not like brokers are absolved of their past wrongdoings simply for reporting them after the fact. Also, it is hard to justify holding certain brokerages to a higher standard than others for similar acts of “failure to oversee.” However, the program continues to exist as a promise by the DRE that enforcement will go easier on reporting brokers who identify and help eliminate poor licensees.

Effect

The number of DRE license revocations for discipline nearly doubled in 2010. This increase is not attributed to any one program. Rather it was primarily brought on by political pressure to address the housing market and the general practices involved in facilitating the buying and selling of residential real estate. That said, many believe that 2010 was simply a sign of things to come. In the 2010 gubernatorial election, then candidate Brown promised an even greater crackdown on professional misconduct and he promised to revisit and strengthen the rules that govern the oversight of state licensees.

Commissioner Davi and Governor Brown have stated that Commissioner Davi will care take the office until Governor Brown appoints a replacement. As such, the Benefit of the Doubt program is still in effect and will likely strengthen during the next administration. Below, I have re-printed Commissioner Davi’s introduction of the Benefit of the Doubt Program.

A message from Commissioner Davi

The recently formed Broker Supervision Task force was established in order to examine the laws, regulations and policies that shape a supervising broker’s responsibilities in overseeing the activities of the brokerage and its employees. The notion behind this endeavor is to determine how existing requirements can be improved upon to ensure that consumer protections are maximized while giving supervising brokers guidance in discharging their duties.

The task force consists of leaders from the industry along with legal and enforcement staff from the DRE. While relatively new, the group has been extremely productive. One of the ideas that has been put into practice on a trial basis is the “Benefit of the Doubt Program”. The idea is simple – establish clear protocols that allow the broker who fires an employee for cause to notify the DRE without fear that the DRE will automatically investigate the broker for lack of supervision. Existing law requires that a broker notify the DRE when the broker discharges an employee for a violation of the Real Estate Law. The law also requires the broker provide the DRE a detailed written description of the reasons the employee was fired. However, based on the small number of notifications received by the DRE, it is clear few brokers are notifying the DRE when they let a rogue agent go.

The Benefit of the Doubt program will make certain that the reporting broker will not automatically be named as a suspect. All cases involving brokers who notify the DRE of the termination of a licensed employee for cause will be centralized from Sacramento reviewing evidence and facts through a single lens. This will ensure consistency and promises that statewide investigative and compliance standards will be employed.

The program also provides for an isolated investigation focusing on alleged salesperson misconduct unless the facts warrant investigation expansion. The Benefit of the Doubt process guarantees that investigators will review the agent’s history with prior brokers and look at any new current broker as well.

This program also introduces a reporting broker discipline hierarchy. If the reporting broker is found to be without gross negligence or fault, no DRE action would be taken against him or her. A reporting broker may receive a corrective action letter, which is not a public record, if technical compliance issues are uncovered despite the fact that the broker properly supervised agents either directly or through office manager designations, took actions to remedy problems, has office procedures and controls in place, and personally or through the designated office manager reviewed business activities and management reports.

Formal disciplinary action against the reporting broker would be considered when circumstances exist, such as active broker participation in unlawful acts, or when guilty knowledge is substantiated, if the reporting broker is routinely absent from the office without designating an office manager, the broker fails to oversee the office manager, no office procedures are established, or there is a demonstrated lack of oversight. Additional factors include ignoring prior corrective action letters, or if a rent-a-broker situation exists.

Prior brokers, or in some cases, new current employing brokers, will be included in the investigation process to determine if a pattern exists which can lead to a maximum penalty against the agent. New employing brokers may also be contacted to establish the applicable disciplinary action proceedings against the previous broker, to substantiate and support reporting broker findings, to promote broker reporting, and to deter agent misconduct.

Prior brokers, or in some cases, new current employing brokers, will be included in the investigation process to determine if a pattern exists which can lead to a maximum penalty against the agent. New employing brokers may also be contacted to establish the applicable disciplinary action proceedings against the previous broker, to substantiate and support reporting broker findings, to promote broker reporting, and to deter agent misconduct.

The specific governing laws and regulations for this program are Business and Professions Code Sections 10178, 10179, and 10177(h), and Section 2725 of the Regulations of the Real Estate Commissioner. Further information can be found in the Broker Compliance Evaluation Manual available on our Web site, http://www.dre.ca.gov/pdf_docs/brkrcomp.pdf. It is my sincere hope this program is a success. We all win, the public and industry, when the bad or incompetent agents are put out of business.