Unlicensed mortgage loan activity (in state loan officers originating out of state loans) – cutting edge real estate legal issues.
Here is a recent real estate question that popped up in my law office.
Do you know if there have been any enforcement actions (D & R) or Accusations against IN STATE mortgage brokers who have agents in CA who only negotiate loans in other states (being properly licensed in the other states). Meaning, the loan officers LIVE HERE, but do not handle loans for CALIFORNIA borrowers. The loans are secured by real estate in OTHER STATES where the agents are properly licensed. Under California B & P 10031 it says if someone “acts in the capacity of a real estate broker”……..”within this state” they need a CA real estate license. I was just wondering if there were any bulletins, commissioner interpretations, or accusations that you are aware of that have been filed on this point? Any direction you can provide would be appreciated.
Fact pattern: California mortgage lending company has a office in California and originates loans in both California, and other states. All of the loan officers are licensed in the states where they originate loans, and the deeds of trust or mortgages are recorded in those states where both the property is located, and where the security instruments are recorded. All laws of the state where the property is located are properly followed. Following a real estate audit by the California Bureau of Real Estate, one of the noted violations is failure to have the loan officers (who do out of state loans only) be properly licensed under 10166.02(b)(2) and unlawful payment of real estate commissions to unlicensed persons under 10130 / 10137 and 10166.02(b)1)(2) and 10166.02(a).
Legal issue: Does a person soliciting or negotiating loans for out-of-state borrowers have to have a California real estate license if the act of negotiating or soliciting the loan is done while physically present within the State of California?
Case of first impression?
This might be a case of first impression. What doe the laws set forth below mean? Is California trying to protect out of state borrowers by requiring that those loan officers physically present within California have a real estate brokers license? Does applying this law to the California broker have any mechanism of protecting California borrowers? Can there be any constitutional violations in applying the law in this manner (ex. substantive due process, violating the fundamental right to interstate travel, or some other constitutional violation)? These are all interesting questions and the legislative history of the passage of these laws may need to be examined).
This appears to be a possible case of first impression. Looks first take a look at the law being cited above:
A. Cal. Business & Professions Code Section 10130
10130. It is unlawful for any person to engage in the business of, act in the capacity of, advertise as, or assume to act as a real estate broker or a real estate salesperson within this state without first obtaining a real estate license from the department, or to engage in the business of, act in the capacity of, advertise as, or assume to act as a mortgage loan originator within this state without having obtained a license endorsement. The commissioner may prefer a complaint for violation of this section before any court of competent jurisdiction, and the commissioner and his or her counsel, deputies, or assistants may assist in presenting the law or facts at the trial. It is the duty of the district attorney of each county in this state to prosecute all violations of this section in their respective counties in which the violations occur.
As you can see, violation of this law has harsh potential consequences. But in the example above, is the in-state mortgage loan originator “acting as a real estate broker” in California? (paraphrasing the statute) given that they only negotiate loans in other states where they are properly licensed? This is no easy question to answer.
B. Cal. Business & Professions Code Section 10131
10131. A real estate broker within the meaning of this part is a person who, for a compensation or in expectation of a compensation, regardless of the form or time of payment, does or negotiates to do one or more of the following acts for another or others:
(a) Sells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity.
(b) Leases or rents or offers to lease or rent, or places for rent, or solicits listings of places for rent, or solicits for prospective tenants, or negotiates the sale, purchase or exchanges of leases on real property, or on a business opportunity, or collects rents from real property, or improvements thereon, or from business opportunities.
(c) Assists or offers to assist in filing an application for the purchase or lease of, or in locating or entering upon, lands owned by the state or federal government.
(d) Solicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity.
(e) Sells or offers to sell, buys or offers to buy, or exchanges or offers to exchange a real property sales contract, or a promissory note secured directly or collaterally by a lien on real property or on a business opportunity, and performs services for the holders thereof.
Again, this section is not 100% clear. If the in-state loan officer is negotiating loans or performing services for borrowers in connection with loans secured by California properties, the statute is unquestionable, and the need to protect California borrowers is definitely present. But what about loans secured by real estate located in other states. The statute is not directly answering this question, and appears somewhat vague on this point. Here is an excerpt from the DRE guide (link provided below) for licensees:
So again, the general rule is cited, but it is not 100% clear if this applies to in-state mortgage officers who engage in out of state mortgage origination.
C. Cal. Business & Professions Code Section 10166.02(a) / 10166.02(b)(2) / 10166(b)(1)(2)
10166.02. (a) A real estate broker who acts pursuant to Section 10131.1 or subdivision (d) or (e) of Section 10131, and who makes, arranges, or services loans secured by real property containing one to four residential units, and any salesperson who acts in a similar capacity under the supervision of that broker, shall notify the department by January 31, 2010, or within 30 days of commencing that activity, whichever is later. The notification shall be made in writing, as directed, on a form that is acceptable to the commissioner. (b) No individual may engage in business as a mortgage loan originator under this article without first doing both of the following: (1) Obtaining and maintaining a real estate license pursuant to Article 2 (commencing with Section 10150). (2) Obtaining and maintaining a real estate license endorsement pursuant to this article identifying that individual as a licensed mortgage loan originator.
What are the fines for unlicensed real estate mortgage loan activity in California?
A. For licensees – $2,500 maximum fine (See California real estate cite and fine video).
B. For unlicensed entities – $2,500 PER INCIDENT of unlicensed activity
Attorney Steve Tip: Keep in mind, facing criminal prosecution by the California attorney general is even more concerning that than fines, and is more reason to make sure you are in compliance.
What are some alternatives to avoid legal compliance issues?
1. Obtain licensing under California Department of Business Oversight (ex. CFL lender’s license or Residential Mortgage Lender license)
2. Certain mortgage employees can engage in unlicensed mortgage loan activities. See California B & P 10133.1
10133.1. (a) Subdivisions (d) and (e) of Section 10131, Section 10131.1, Article 5 (commencing with Section 10230), and Article 7 (commencing with Section 10240) of this code and Section 1695.13 of the Civil Code do not apply to any of the following: (1) Any person or employee thereof doing business under any law of this state, any other state, or the United States relating to banks, trust companies, savings and loan associations, industrial loan companies, pension trusts, credit unions, or insurance companies. (2) Any nonprofit cooperative association organized under Chapter 1 (commencing with Section 54001) of Division 20 of the Food and Agricultural Code, in loaning or advancing money in connection with any activity mentioned therein. (3) Any corporation, association, syndicate, joint stock company, or partnership engaged exclusively in the business of marketing agricultural, horticultural, viticultural, dairy, livestock, poultry, or bee products on a cooperative nonprofit basis, in loaning or advancing money to the members thereof or in connection with any business of that type. (4) Any corporation securing money or credit from any federal intermediate credit bank organized and existing pursuant to the provisions of an act of Congress entitled the “Agricultural Credits Act of 1923,” in loaning or advancing money or credit so secured. (5) Any person licensed to practice law in this state, not actively and principally engaged in the business of negotiating loans secured by real property, when that person renders services in the course of his or her practice as an attorney at law, and the disbursements of that person, whether paid by the borrower or other person, are not charges or costs and expenses regulated by or subject to the limitations of Article 7 (commencing with Section 10240), and the fees and disbursements are not shared, directly or indirectly, with the person negotiating the loan or the lender. (6) Any person licensed as a finance lender when acting under the authority of that license. (7) Any cemetery authority as defined by Section 7018 of the Health and Safety Code, that is authorized to do business in this state or its authorized agent. (8) Any person authorized in writing by a savings institution to act as an agent of that institution, as authorized by Section 6520 of the Financial Code or comparable authority of the Office of Thrift Supervision of the United States Department of the Treasury by its regulations, when acting under the authority of that written authorization. (9) Any person who is licensed as a securities broker or securities dealer under any law of this state, or of the United States, or any employee, officer, or agent of that person, if that person, employee, officer, or agent is acting within the scope of authority granted by that license in connection with a transaction involving the offer, sale, purchase, or exchange of a security representing an ownership interest in a pool of promissory notes secured directly or indirectly by liens on real property, which transaction is subject to any law of this state or the United States regulating the offer or sale of securities. (10) Any person licensed as a residential mortgage lender or servicer when acting under the authority of that license.
Conclusion – Contact a California Mortgage Lending Compliance Law Firm
The answer to this legal question is not clear. If you are facing a real estate audit, investigation, cite and fine or accusation from the California Bureau of Real Estate (formerly the Department of Real Estate), contact us for legal assistance. We can help you make your case, and seek to avoid legal difficulty. Keep in mind, with the penalties cited above, the best advice is to get all your real estate people licensed under the BRE or the DBO to avoid potential shut down of your business, costly fines, and potential accusation which will blemish and tarnish your public database record. Call us at (877) 276-5084 or fill out the contact form below to have one of our real estate lawyers contact you, normally within the hour. We have flexible legal fees.
BRE compliance resources
1. BRE instructions to license applications (when is a real estate license needed)
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