ENFORCEMENT OF REAL ESTATE LAW

ENFORCEMENT OF REAL ESTATE LAW


A licensing and regulatory law is effective only to the extent of its enforcement. The Commissioner, as the chief officer of the Department, is duty bound to enforce the provisions of the Real Estate Law.
The Commissioner shall upon a verified written complaint, or may, upon the Commissioner’s own motion, investigate the actions of any person engaged in the business or acting in the capacity of a licensee within this state, and has the power to suspend or revoke the real estate license. The Commissioner also has the authority to deny a license to an applicant if the applicant does not meet the full requirements of the law. Through a screening process (including the fingerprint record) of an applicant for a license, if it is ascertained that the applicant has a criminal record or some other record that may reflect on the applicant’s character, an investigation is made by the Commissioner’s staff. A formal hearing may be ordered to determine whether or not the applicant meets the requirements of honesty and truthfulness. The Commissioner also has the authority to require evidence of honesty and truthfulness of officers, directors and persons who own or control more than 10% of the shares of the applicant for a corporate real estate brokerage license. Once an individual becomes licensed, the Commissioner will receive a report from the California Department of Justice of subsequent arrests or convictions.
Generally speaking, an investigation of a licensee is based upon a written statement from one who believes he or she has been wronged by a licensee who was acting in the capacity of an agent. The following investigative procedures are followed by the Commissioner’s staff: statements are obtained from witnesses, if any; a statement may be obtained from the licensee involved; bank records, title company records and public records are checked as necessary. As part of the investigation, an informal conference may be called, and all parties concerned may be requested to attend for the purpose of determining the validity and seriousness of the complaint. If it appears that the complaint is of a serious nature and that a violation of law has occurred, an accusation is filed and there may be a formal hearing which could result in suspension or revocation of the license.


Formal Hearings


The formal hearing is conducted in accordance with procedures set forth in the Administrative Procedure Act. The accusation or statement of issues is served upon the affected licensee, who is informed of the rights of an accused. In the hearing, the Commissioner becomes the complainant, and brings the charges against the licensee. The original complainant usually becomes a witness. The licensee, known as the respondent in the

hearing procedure, may appear with or without counsel. A record is made of the proceedings and the hearing is conducted according to rules of evidence. Testimony is taken under oath. An administrative law judge from the Office of Administrative Hearings hears the case. The Commissioner’s case is presented by the Commissioner’s counsel. The administrative law judge issues a proposed decision based upon the findings. The Commissioner may reject or accept the proposed decision, or reduce the proposed penalty and make an official decision. The respondent may petition for reconsideration, and has the right of appeal through the courts.
If the charges are not sustained at the hearing, they are dismissed. On the other hand, if the testimony substantiates the charges and they appear to be sufficiently serious, the license of the respondent is suspended or revoked. After a license is revoked, the person affected may not apply for reinstatement of the license until at least one year has passed, or for the period of time specific to the decision revoking the license, whichever is greater.
Representatives of the Commissioner also investigate persons or firms who appear to be operating improperly, or without benefit of a license, or who subdivide land without complying with the subdivision laws enforced by the Commissioner. If sufficient evidence of a violation is obtained, an Order to Desist and Refrain is issued, or a complaint is brought and the parties are prosecuted in a court of competent jurisdiction.
When determined to be in the public interest, the Commissioner also has the authority to issue a bar order to preclude individuals from engaging in specified real estate business activities for a period of up to three years. When issued, these orders can bar a revoked licensee, or unlicensed individual, from any position of employment, management or control of a real estate brokerage, finance lender, residential mortgage lender, bank, credit union, escrow company, title company or underwritten title company. Individuals who receive a Bar Order have the right to request an administrative hearing on the merits of the order.


Violations


Sections 10176 and 10177 of the Code constitute the foundation for most license suspensions or revocations. Section 10176 is concerned with the actions of a real estate licensee performing or attempting to perform any of the licensed acts within the scope of the Real Estate Law. As a general rule, the licensee must have been acting as an agent in a real estate transaction before the section will apply. The provisions of some parts of Section 10177, on the other hand, will apply to situations where the licensee was not necessarily acting as an agent. The following is a brief discussion of the various grounds for disciplinary action against a licensee and the reasons for which a real estate license may be denied:
Misrepresentation. Section 10176(a). Many complaints received by the Commissioner allege misrepresentation on the part of the broker or salesperson. Included also as a cause for discipline under this section is failure of a broker or salesperson to disclose to his or her principal material facts of which the principal should be made aware. If the misrepresentation was not important, and the person to whom it was made would have proceeded with the transaction anyway, the misrepresentation probably would not be material. However, an Attorney General’s opinion holds that damage or injury need not be present to support an action under this section. The reason is that the California Real Estate Law concerns the conduct of licensees rather than the settling of disputes about damages or injuries between licensees and their clients.
False promise. Section 10176(b). A false promise and a misrepresentation are not the same thing. A misrepresentation is a false statement of fact. A false promise is a false statement about what the promisor is going to do. Many times a false promise is proved by showing that the promise was impossible to perform and that the person making the promise knew it was impossible.
Continued misrepresentation. Section 10176(c). This section gives the Commissioner the right to discipline a licensee for “a continued and flagrant course of misrepresentation or making of false promises through real estate agents or salespersons.”
Dual agency. Section 10176(d). Failure to inform all principals that the licensee is acting as agent for more than one party in the transaction.
Commingling. Section 10176(e). Commingling takes place when a broker has mixed the funds of a principal with the broker’s own money. (Conversion is misappropriating and using principal’s funds. Conversion, of course, can be a more serious offense.)

Definite termination date. Section 10176(f). Failure to include a specified termination date on all exclusive listings relating to transactions for which a real estate license is required. The exclusive listing itself must be clear as to expiration.
Secret profit. Section 10176(g). Secret profit cases usually arise when the broker, who already has a higher offer from another buyer, makes a low offer, usually through a “dummy” purchaser. The broker then sells the property to the interested buyer for the higher price. The difference is the secret profit.
Listing-option. Section 10176(h). A licensee who has used a form which is both an option and a listing must inform the principal of the amount of profit the licensee will make, and must obtain the written consent of the principal approving the amount of such profit, before the licensee may exercise the option. This section does not apply where a licensee is using an option only.
Dishonest dealing. Section 10176(i). “Dishonest dealing” is a sort of catch-all section similar in many ways to Section 10177(f). The difference is that under Section 10176(i) the acts must have been those requiring a license, while there is no such need under Section 10177(f).
Signatures of prospective purchasers. Section 10176(j). Brokers must obtain a written authorization to sell from a business owner before securing the signature of a prospective purchaser to any agreement providing for compensation to the broker if the purchaser buys the business.
Disbursement of funds. Section 10176(k). Failing to disburse funds in accordance with a commitment to make a mortgage loan that is accepted by the applicant when the real estate broker represents to the applicant that the broker is either of the following:
1. Lender
2. Authorized to issue the commitment on behalf of the lender or lenders in the mortgage loan transaction.
Delaying the close of escrow. Section 10176(l). Intentionally delaying the closing of a mortgage loan for the sole purpose of increasing interest, costs, fees, or charges payable by the borrower.
Inaccurate opinion of value. Section 10176(m). Generating an inaccurate opinion of the value of residential real property, requested in connection with a debt forgiveness sale, in order to do either or both of the following:
1. Manipulate the lienholder to reject the proposed debt forgiveness sale.
2. Acquire a financial or business advantage, including a listing agreement, that directly results from the inaccurate opinion of value, with regard to the subject property.
Obtaining a license by fraud. Section 10177(a). Misstatements of fact in an application for a license; procurement of a license by fraud, misrepresentation, or deceit (e.g., failure to reveal a previous criminal record).
Convictions. Section 10177(b). Criminal conviction for either a felony or a misdemeanor which involves moral turpitude and is substantially related to the qualifications, functions, or duties of a real estate licensee. A court has defined moral turpitude as “everything done contrary to justice, honesty, modesty, or good morals.”
False advertising. Section 10177 (c). Includes subdivision sales as well as general property sales.
Violations of other sections. Section 10177(d). This section is the Department’s authority to proceed against the licensee for violation of any of the other sections of the Real Estate Law, the Regulations of the Commissioner, and the Subdivided Lands Law.
Misuse of trade name. Section 10177(e). Use of any trade name or insignia of membership in any real estate organization if the licensee is not a member of that organization.
Conduct warranting denial. Section 10177(f). An essential requirement to the issuance of a license is that the applicant be honest and truthful. If any of the acts of a licensee establish that a licensee is not possessed of these characteristics, Section 10177(f) will apply. This section also provides for disciplinary actions when a real estate licensee has either had a license denied or a license issued by another agency of this state, another state,

or the federal government, revoked or suspended for acts which if done by a real estate licensee would be grounds for the suspension or revocation of a California real estate license.
Negligence or incompetence. Section 10177(g). The Department proceeds in those cases where the licensee is so careless or unqualified that to allow the licensee to handle a transaction would endanger the interests of clients or customers.
Supervision of salespersons. Section 10177(h). Disciplinary action may result if a broker fails to exercise reasonable supervision over the activities of the broker’s salespersons.
Violating government trust. Section 10177(i). Using Government employment to violate the confidential nature of records thereby made available.
Other dishonest conduct. Section 10177(j). Any other conduct which constitutes fraud or dishonest dealing.
Restricted license violation. Section 10177(k). Violation of the terms, conditions, restrictions and limitations contained in any order granting a restricted license.
Inducement of panic selling. Section 10177(l). To solicit or induce the sale, lease, or the listing for sale or lease, of residential property on the grounds, wholly or in part, of loss of value, increase in crime, or decline in the quality of the schools due to the present or prospective entry into the neighborhood of a person or persons of another race, color, religion, ancestry or national origin.
Violation of Franchise Investment Law. Section 10177(m). Violation of any of the provisions of the Franchise Investment Law (Division 5 commencing with Section 31000) of Title 4 of the Corporations Code) or any regulations of the Corporations Commissioner pertaining thereto.
Violation of Corporations Code. Section 10177(n). Violation of any of the provisions of the Corporations Code or of the regulations of the Commissioner of Corporations relating to securities as specified in Section 25206 of the Corporations Code.
Failure to disclose ownership interest. Section 10177(o). Failure to disclose to buyer the nature and extent of ownership interest a licensee has in property which is the subject of a transaction in which the licensee is an agent for the buyer. Also, failure to disclose such ownership on the part of licensee’s relative or special acquaintance or entity in which licensee has ownership interest.
Violation of Article 6 of the Real Estate Law. Section 10177(p).
Violation of Chapter 2 (commencing with Section 2920) of Title 14 of Part 4 of Division 3 of the Civil Code, related to mortgages. Section 10177(q).


Other Penalty Sections


There are additional sections in the Business and Professions Code which provide for the revocation or suspension of licenses. These violations could be included under Section 10177(d) of the law. The following are brief summaries:
Section 10085 - pertains to the use of advance fee agreements and materials.
Sections 10137 and 10138 - employing or compensating any unlicensed person to perform acts requiring a license.
Section 10140 - false advertising.
Section 10140.6 - advertising of acts which require a license must contain a designation disclosing that the licensee is performing such acts.
Section 10141 - broker must cause notice of sales price to be given to both buyers and sellers within one month after the sale is completed.
Section 10141.5 - specifies a broker’s responsibility for recording trust deeds.
Section 10142 - licensee must give a copy of any contract to the party signing it at the time it is signed.
Section 10145 - specifies licensee’s responsibilities in handling trust funds.

Section 10146 - requires advance fess to be deposited in a trust account.
Section 10148 - requires retention and availability for inspection and copying of all listings, deposit receipts, cancelled checks, trust records, etc. for a three year period.
Section 10160 - brokers shall retain and make available for inspection the licenses of salespersons in the broker’s employ.
Section 10161.8 - broker must notify DRE when a salesperson is employed or terminated.
Section 10162 - all active brokers must maintain a definite place of business in the State of California.
Section 10163 - brokers maintaining more than one place of business must first procure branch office license(s).
Section 10165 - failure to make licenses available for inspection and to maintain a place of business.
Section 10167 - requires the licensing of individuals, other than real estate licensees, engaged in prepaid rental listing services and makes a willful violation of the law a misdemeanor.
Section 10176.5 - violation of any of the Civil Code Sections (1102, et seq.) which deal with use of the Real Property Transfer Disclosure Statement.
Section 10177.1 - suspension without hearing if license procured by fraud, misrepresentation, deceit, or by the making of any material misstatement of fact in the application for license.
Section 10177.2 - violations while performing acts under Section 10131.6 (mobilehome sales).
Section 10177.4 - compensation for referring customers to escrow, pest control, home warranty, title insurer or underwritten title company or controlled escrow company.
Section 10177.5 - final judgment in a civil action against a licensee upon the grounds of fraud, misrepresentation or deceit.
Section 10178 - broker terminates a salesperson for cause and then fails to notify the Commissioner.
Section 10475 - automatic suspension of a real estate license if the Commissioner pays a claim against a licensee from the Recovery Account. No license reinstatement until full reimbursement to the fund, with interest.


Examples of Unlawful Conduct - Sale, Lease, or Exchange


In a sale, lease, or exchange transaction, conduct such as the following may result in license discipline under Sections 10176 or 10177 of the Business and Professions Code:
1. Knowingly making a substantial misrepresentation of the likely value of real property to:
A. Its owner either for the purpose of securing a listing or for the purpose of acquiring an interest in the property for the licensee's own account.
B. A prospective buyer for the purpose of inducing the buyer to make an offer to purchase the real property.
2. Representing to an owner of real property when seeking a listing that the licensee has obtained a bona fide written offer to purchase the property, unless at the time of the representation the licensee has possession of a bona fide written offer to purchase.
3. Stating or implying to an owner of real property during listing negotiations that the licensee is precluded by law, by regulation, or by the rules of any organization, other than the broker firm seeking the listing, from charging less than the commission or fee quoted to the owner by the licensee.
4. Knowingly making substantial misrepresentations regarding the licensee's relationship with an individual broker, corporate broker, or franchised brokerage company or that entity's/person's responsibility for the licensee's activities.

5. Knowingly underestimating the probable closing costs in a communication to the prospective buyer or seller of real property in order to induce that person to make or to accept an offer to purchase the property.
6. Knowingly making a false or misleading representation to the seller of real property as to the form, amount and/or treatment of a deposit toward the purchase of the property made by an offeror.
7. Knowingly making a false or misleading representation to a seller of real property, who has agreed to finance all or part of a purchase price by carrying back a loan, about a buyer's ability to repay the loan in accordance with its terms and conditions.
8. Making an addition to or modification of the terms of an instrument previously signed or initialed by a party to a transaction without the knowledge and consent of the party.
9. A representation made as a principal or agent to a prospective purchaser of a promissory note secured by real property about the market value of the securing property without a reasonable basis for believing the truth and accuracy of the representation.
10. Knowingly making a false or misleading representation or representing, without a reasonable basis for believing its truth, the nature and/or condition of the interior or exterior features of a property when soliciting an offer.
11. Knowingly making a false or misleading representation or representing, without a reasonable basis for believing its truth, the size of a parcel, square footage of improvements or the location of the boundary lines of real property being offered for sale, lease or exchange.
12. Knowingly making a false or misleading representation or representing to a prospective buyer or lessee of real property, without a reasonable basis to believe its truth, that the property can be used for certain purposes with the intent of inducing the prospective buyer or lessee to acquire an interest in the real property.
13. When acting in the capacity of an agent in a transaction for the sale, lease or exchange of real property, failing to disclose to a prospective purchaser or lessee facts known to the licensee materially affecting the value or desirability of the property, when the licensee has reason to believe that such facts are not known to nor readily observable by a prospective purchaser or lessee.
14. Willfully failing, when acting as a listing agent, to present or cause to be presented to the owner of the property any written offer to purchase received prior to the closing of a sale, unless expressly instructed by the owner not to present such an offer, or unless the offer is patently frivolous.
15. When acting as the listing agent, presenting competing written offers to purchase real property to the owner in such a manner as to induce the owner to accept the offer which will provide the greatest compensation to the listing broker without regard to the benefits, advantages and/or disadvantages to the owner.
16. Failing to explain to the parties or prospective parties to a real estate transaction for whom the licensee is acting as an agent the meaning and probable significance of a contingency in an offer or contract that the licensee knows or reasonably believes may affect the closing date of the transaction, or the timing of the vacating of the property by the seller or its occupancy by the buyer.
17. Failing to disclose to the seller of real property in a transaction in which the licensee is an agent for the seller the nature and extent of any direct or indirect interest that the licensee expects to acquire as a result of the sale. (The licensee should disclose to the seller: prospective purchase of the property by a person related to the licensee by blood or marriage; purchase by an entity in which the licensee has an ownership interest; or purchase by any other person with whom the licensee occupies a special relationship where there is a reasonable probability that the licensee could be indirectly acquiring an interest in the property.)
18. Failing to disclose to the buyer of real property in a transaction in which the licensee is an agent for the buyer the nature and extent of a licensee's direct or indirect ownership interest in such real property: e.g., the direct or indirect ownership interest in the property by a person related to the licensee by blood or marriage; by an entity in which the licensee has an ownership interest; or by any other person with whom the licensee occupies a special relationship.

19. Failing to disclose to a principal for whom the licensee is acting as an agent any significant interest the licensee has in a particular entity when the licensee recommends the use of the services or products of such entity.


Examples of Unlawful Conduct - Loan Transactions


Conduct such as the following when soliciting, negotiating or arranging a loan secured by real property or the sale of a promissory note secured by real property may result in license discipline:
1. Knowingly misrepresenting to a prospective borrower of a loan to be secured by real property or to an assignor/endorser of a promissory note secured by real property that there is an existing lender willing to make the loan or that there is a purchaser for the note, for the purpose of inducing the borrower or assignor/endorser to utilize the services of the licensee.
2. Knowingly making a false or misleading representation to a prospective lender or purchaser of a loan secured directly or collaterally by real property about a borrower's ability to repay the loan in accordance with its terms and conditions.
3. Failing to disclose to a prospective lender or note purchaser information about the prospective borrower's identity, occupation, employment, income and credit data as represented to the broker by the prospective borrower.
4. Failing to disclose information known to the broker relative to the ability of the borrower to meet his or her potential or existing contractual obligations under the note or contract including information known about the borrower's payment history on an existing note, whether the note is in default or the borrower in bankruptcy.
5. Knowingly underestimating the probable closing costs in a communication to a prospective borrower or lender of a loan to be secured by a lien on real property for the purpose of inducing the borrower or lender to enter into the loan transaction.
6. When soliciting a prospective lender to make a loan to be secured by real property, falsely representing or representing without a reasonable basis to believe its truth, the priority of the security, as a lien against the real property securing the loan, i.e., a first, second or third deed of trust.
7. Knowingly misrepresenting in any transaction that a specific service is free when the licensee knows or has a reasonable basis to know that it is covered by a fee to be charged as part of the transaction.
8. Knowingly making a false or misleading representation to a lender or assignee/endorsee of a lender of a loan secured directly or collaterally by a lien on real property about the amount and treatment of loan payments, including loan payoffs, and the failure to account to the lender or assignee/endorsee of a lender as to the disposition of such payments.
9. When acting as a licensee in a transaction for the purpose of obtaining a loan, and in receipt of an advance fee from the borrower for this purpose, failure to account to the borrower for the disposition of the advance fee.
10. Knowingly making a false or misleading representation about the terms and conditions of a loan to be secured by a lien on real property when soliciting a borrower or negotiating the loan.
11. Knowingly making a false or misleading representation or representing, without a reasonable basis for believing its truth, when soliciting a lender or negotiating a loan to be secured by a lien on real property, about the market value of the securing real property, the nature and/or condition of the interior or exterior features of the securing real property, its size or the square footage of any improvements on the securing real property.


Regulations


The Commissioner has the authority to adopt regulations to aid in the administration and enforcement of the Real Estate Law and the Subdivided Lands Law. The Regulations of the Real Estate Commissioner have the force and effect of the law itself. Licensees and prospective licensees should have a thorough knowledge of the regulations.