RE 7 - Mortgage Loan Broker Compliance Evaluation Manual

Mortgage Loan Broker

Compliance Evaluation Manual

RE 7 (Rev. 05/19)

Table of Contents

SECTION – General Business Practices .......................................................................................................2

SECTION – Trust Fund Handling .................................................................................................................4

SECTION – Borrower Disclosures................................................................................................................4

SECTION – Advertising................................................................................................................................5

SECTION – Fees ...........................................................................................................................................6

SECTION – Advance Fees ............................................................................................................................7

SECTION – Article 7 - Regulated Loans ......................................................................................................7

SECTION – Article 5 - Private Money Transactions ....................................................................................8

SECTION – Article 6 – Multi-Lender (Fractionalized) Loans......................................................................13

SECTION – Business Activity and Mortgage Call Reports........................................................................16

SECTION – Covered Loans - Financial Code Section 4970 et seq. ...........................................................17

SECTION – Higher-Priced Mortgage Loans - Financial Code Section 4995 et seq...................................20

SECTION – Residential Mortgage Loan Report (RE 857) .........................................................................20

SECTION – Licensees Acting as Lenders...................................................................................................21

SECTION – Nontraditional Mortgage Loan Products.................................................................................21

Mortgage Loan Broker Compliance Checklist .................................................................................................22

Introduction

This Mortgage Broker Compliance Evaluation Manual was prepared primarily to assist the real estate broker who

engages in mortgage loan activities to assess compliance with Department of Real Estate (“Department”)

requirements. It addresses many of the questions that are asked of Department staff.

If there is any 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 include all of a

broker’s obligations and responsibilities under the Real Estate Law but rather as one of the tools to be used when

reviewing business practices and record keeping procedures related specifically to a broker’s mortgage loan activity.

This manual should be used in conjunction with the Broker Compliance Evaluation Manual (RE 5), which covers

broader licensing and compliance topics.

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. Applicable laws and regulations can be found in

the Real Estate Law Book, available on the Department’s Web site at www.dre.ca.gov.

Questions regarding information contained in this manual should be directed to the Department’s Mortgage Loan

Activities unit at (877) 373-4542.

SECTION 1 – General Business Practices

A. Is the broker properly licensed?

Correct Procedure:

A California real estate broker license is required in order to perform mortgage loan activities in California. In

addition, in order to perform residential mortgage loan origination activities, mortgage loan originator endorsements

to the real estate broker are required.

It should be noted there are other licenses that allow mortgage loan brokering under a limited set of circumstances

such as the California Finance Lenders license and the California Residential Mortgage Lending license. For

information about these licenses, contact the California Department of Business Oversight.

Reference: Sections 10016, 10130, 10131, 10131.1, 10166.02

B. Are the broker’s salespersons and broker-associates properly licensed?

Correct Procedure:

All persons performing activities requiring a real estate license - which include soliciting or negotiating loans

secured by real property or a business opportunity for compensation - must hold a valid real estate license. In

addition, an approved mortgage loan originator endorsement to the real estate license is required in order to perform

residential mortgage loan origination activities.

The broker should have some procedure in place to monitor the expiration dates of the licenses of all retained

salespersons and broker-associates. Standard broker and salesperson licenses expire four years after issuance;

mortgage loan originator license endorsements expire every December 31.

Once a license has expired, the licensee cannot perform licensed activity until the license has been renewed. The late

renewal period simply allows the licensee to renew on a late basis; it does not allow the licensee to conduct licensed

activity during the late renewal period.

It is unlawful for any broker to retain or compensate, directly or indirectly, any person for performing licensed

activity unless that person is a broker or a salesperson licensed to the broker. In addition, it is unlawful for any

broker to retain or compensate, directly or indirectly, any licensee for engaging in any activity for which a mortgage

loan originator endorsement is required if that licensee does not hold a mortgage loan originator license

endorsement. A salesperson may not accept compensation for licensed activity nor pay compensation for licensed

activity except through the broker under whom he 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 a licensed real estate broker at the time such compensation

is earned.

A broker may employ non-licensed persons to assist in meeting the broker’s obligations to his 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,

withhold income taxes, and provide workers compensation insurance and unemployment insurance. Non-licensed

persons may only be employed at a location licensed to the broker and perform those activities specifically described

in Regulation 2841.

Reference: Sections 10015.3, 10016, 10130, 10131, 10133.1, 10137, 10138, 10139, 10166.02; Regulations 2756,

2841

C. Does the broker notify the Department of Real Estate upon the hiring and termination of

salespersons and broker-associates?

Correct Procedure:

A broker shall notify the commissioner within five days of a salesperson or broker-associate’s affiliation via a

licensing change form signed by the broker and the salesperson, or broker-associate, or via the Department’s

eLicensing system at www.dre.ca.gov. The notice should include a certification by the salesperson or broker-

associate that the predecessor broker has notice of the termination of the relationship, or the predecessor broker may

give notice of the termination of the relationship if the change form is mailed to the commissioner not more than 10

days following such termination.

Changes in affiliation must also be filed electronically through the Nationwide Mortgage Licensing System and

Registry (NMLS) for salespersons and broker-associates who hold mortgage loan originator license endorsements.

Reference: Section 10161.8; Regulations 2752, 2758.5

D. Does the broker retain copies of all documents?

Correct Procedure:

A broker must retain copies of all documents related to transactions, trust accounts, and other documents executed or

obtained by him in connection with any transaction for which a broker’s license is required for a period of three

years. 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.

Three documents require retention for four years: self-dealing statements (Section 10231.2), investor qualification

statements for a private money loan (Sections 10232.3(b) and 10238(f)), and the information used to determine

investor suitability for private-money loans, which may include the Investor Questionnaire, RE 870 (Section

10232.45).

Files may be stored electronically or digitally if the broker complies with the requirements described in Regulations

2729 and 2729.5. The broker must make the files available to the Department and must be willing to provide copies

of the files. The files must be stored in a “write once, read many” mode that cannot be erased or overwritten.

Reference: Section 10148, 10231.2(b), 10232.3(b), 10232.45, 10238(f), Regulations 2729, 2729.5

E. Does the broker have a license for each business location?

Correct Procedure:

A broker is authorized to conduct business only at the address listed on the real estate license. If the broker maintains

more than one place of business within the State, the broker must apply for and procure an additional license for

each branch office so maintained. In addition, if a broker is performing residential mortgage loan origination

activities from a branch office, the broker must have a branch office license endorsement.

Reference: Section 10163, Regulation 2758.5

F. Is the broker using a licensed fictitious name?

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 real estate license bearing the fictitious name. A fictitious business name is frequently referred to as a

“dba” (doing business as). If the broker conducts residential mortgage loan origination activities, the broker’s NMLS

record must reflect all fictitious business names used to conduct those activities.

Reference: Section 10159.5; Regulations 2731, 2758.5

G. Do independent contractor processors and underwriters of residential mortgage loan

transactions have a mortgage loan originator license endorsement?

Correct Procedure:

All independent contractor loan processors and loan underwriters must have mortgage loan originator license

endorsements in conjunction with their real estate broker license.

Reference: Section 10166.02, 10166.03

SECTION 2 - Trust Fund Handling

Does the broker collect appraisal or credit report fees?

Correct Procedure:

Typically, the broker will collect an appraisal and/or credit report fee from the prospective borrower up front. These

must be treated as trust funds unless the broker is being reimbursed for advancing payment of the fees to the

vendors. The following rules will apply:

1. Funds received by the broker are not trust funds if they are reimbursing the broker for fees that the broker

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 the fees. For 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 an 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 Department examination, so that it may be clearly established if 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 general account. This may be contained in the escrow instructions signed by the borrower.

The following compliance questions apply to brokers who collect appraisal 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.)

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 licensed to the broker or unlicensed employees who are bonded or insured?

7. Are broker’s funds separate from trust funds?

Reference: Section 10145; Regulations 2831, 2831.1, 2831.2, 2832, 2832.1, 2834, 2835

SECTION 3 - Borrower Disclosures

A. Does the broker provide the required borrower disclosures in every transaction?

Correct Procedure:

1. In a transaction in which a broker is arranging a loan, a Mortgage Loan Disclosure Statement, Traditional (RE

882) or a Mortgage Loan Disclosure Statement (RE 883) must be provided within three days of receiving a

completed, written loan application from prospective borrowers. A copy of the disclosure statement signed by the

borrowers and the broker, or the broker’s representative, must be retained by the broker for three years.

2. When a transaction involves a nontraditional loan product, a Mortgage Loan Disclosure Statement, Nontraditional

Mortgage Loan Product - One to Four Residential Units (RE 885) must be provided according to the same rules as in

#1. A nontraditional loan product is defined in Regulation 2842. See also Section 15 for additional compliance

information on nontraditional loan products.

3. The disclosures must include the real estate broker’s license number and NMLS unique identifier number.

4. The disclosures must contain the amount of all compensation to be earned by the broker including the amount of

any 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 borrowers in a timely manner.

5. 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 “loan estimate” that meets the requirements of and is

compliant with the TILA-RESPA Integrated Disclosure Rule will fulfill the requirement under B&P section

10240(c) and 10236.4 as long as the borrowers sign the loan estimate and are provided with a separate disclosure –

contemporaneously with the loan estimate – that includes a statement that the loan estimate does not constitute a loan

commitment and that the borrower may check the license status of the broker and/or loan officer by calling the

Department of Real Estate’s license information telephone number at 1-877-373-4542 or by visiting DRE’s Web site

at www.dre.ca.gov. If compensation that is paid by a source other than the borrower cannot be disclosed on the loan

estimate, that compensation to be received by the real estate broker and/or loan originator may be disclosed on the

separate disclosure. The broker must retain a true and correct copy of the disclosures as acknowledged by the

borrowers for three years.

6. The broker must advise the borrowers whether or not the loan will be made with broker-controlled funds.

7. At the time of application, the broker must provide a Fair Lending Notice (RE 867A) to the prospective

borrowers. The notice must also be posted in a conspicuous place for public inspection. A signed acknowledgement

of receipt of the notice (RE 867A) should be retained by the broker for three years.

8. If the broker is making or arranging a “covered loan”, the “Consumer Caution and Home Ownership Counseling

Notice” is provided to the prospective borrowers no later than three business days prior to signing the loan

documents. (See also Section 10 – Covered Loans.)

9. If the broker negotiates a loan primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean, a translated

Mortgage Loan Disclosure Statement must be provided to the borrowers in one of the appropriate languages in order

to comply with Civil Code Section 1632. Translated forms are available on the Department’s Web site.

Reference: Sections 10176, 10236.4, 10240, 10240.3, 10241; Regulations 2840, 2840.1, 2842, 2842.5; Health and

Safety Code Section 35830; Civil Code Section 1632

B. Is the broker representing a buyer or seller in a real estate transaction and also being

compensated for obtaining the loan for the buyer?

Correct Procedure:

If a broker or his agent will be arranging financing for a buyer and will also represent the buyer or seller in the real

estate transaction, the broker or his agent must make a written disclosure of the broker or agent’s roles pertaining to

the transaction within 24 hours to all parties. In addition, the broker must disclose to the parties in the transaction the

form, amount, and source of the compensation received or expected for the loan.

The broker may wish to consult with the U.S. Department of Housing and Urban Development (HUD), U.S.

Department of Veterans Affairs (VA), U.S. Department of Agriculture (USDA), and California Department of

Veterans Affairs (CalVet) to determine their rules regarding real estate sales and the arranging of Federal Housing

Administration (FHA) loans, VA, USDA, and CalVet loans, respectively.

Reference: Section 10177.6; Regulation 2904

SECTION 4 – Advertising

Does the broker’s mortgage loan advertising comply with the Department’s advertising

criteria?

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 that

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.

2. Every advertisement disseminated primarily in California for a loan must include within the printed text or oral

text (radio or television) a disclosure of the license under which the loan will be made or arranged with the licensee

and broker’s real estate license numbers and NMLS unique identifier numbers. The following are the approved

license disclosures: “Real Estate Broker, California Bureau of Real Estate” or “California Bureau of Real Estate,

Real Estate Broker”. (“California” may be abbreviated as “CA”, “CAL”, or “Calif”, a dash may be used instead of

the comma, and Department may be used instead of Bureau.) The type size of the license disclosure must be at least

as large as the smallest size type in the advertisement.

3. Advertisements to prospective lenders or note purchasers must include the broker license identification number.

4. When an advertisement contains a representation of an interest rate, the annual percentage rate must be disclosed

in equally prominent type and font.

5. When an advertisement contains a representation of a payment, all of the following must be included in equally

prominent type and font: principal loan amount, interest rate, annual percentage rate, and term of the loan. When the

loan is an adjustable rate loan, there must also be equally prominent disclosure of how long the initial interest rate is

in effect, how often and how much the interest rate and/or payments can change, and, if there is the potential for

negative amortization (deferred interest), a statement to that effect. If the loan contains a provision for a balloon

payment, the amount of the balloon payment must be disclosed in equally prominent type and font. There are

additional rules for advertising payments on adjustable rate, interest-only or payment-option loans.

6. When advertising a “low doc/no doc”, “stated income”, or similar loan product, there must be a statement that the

product may have a higher interest rate, more points, or more fees than other products requiring documentation.

7. When an advertisement offers a gift, premium, or rebate prospective borrowers, there must be a disclosure of all of

the conditions that must be met in order to receive the gift, premium, or rebate. These inducements may not be

offered to a prospective lender or note purchaser.

8. When advertising the sale of a note to prospective note purchasers, no specific yield may be indicated or implied

without disclosure of the note interest rate and the discount from the remaining principal balance at which it is being

offered for sale.

9. Regulation 2848 requires the Department to take such action as is appropriate to prevent or halt the publication of

advertising that is false, misleading, or deceptive in and of itself or through the omission of information that would

prevent it from being false, misleading, or deceptive. In addition to the actual text, consideration is given to such

factors as format, pictorial display, and emphasis in determining whether an advertisement is likely to create a false

impression. Real estate licensees must ensure that their advertising complies with Regulation 2848.

Brokers may submit their proposed mortgage loan advertisements on a voluntary basis to the Department for review

and approval. The submission must include a Mortgage Loan Advertising Submittal (RE 884) signed by the broker

or, if a corporate broker, the designated officer, a fee of $40.00, and the proposed advertisement in triplicate. The

submission may be made in person or by mail.

Reference: Sections 10140.6, 10235, 10235.5, 10236.1, 10236.4, 10240.3; Regulations 2770.1, 2773, 2847.3, 2848

SECTION 5 – Fees

Does the broker fully disclose all fees, costs, and compensation?

Correct Procedure:

1. No costs and expenses of making a loan may be charged to a borrower that have not been paid, incurred, or

reasonably earned by the broker. No fee may be charged as part of the costs and expenses of making a loan that

exceeds the fee customarily charged for the same service or comparable service in the community where the service

was rendered. If an escrow is conducted by a licensed escrow agent, title insurance company, bank or trust company,

or a savings institution and a fee is charged to the borrower by the escrow depository for the service, no additional

fee can be charged to the borrower by the broker, a salesperson licensed to the broker, or any entity controlled by the

broker for services related to the escrow.

2. A broker must disclose to the prospective borrowers all anticipated compensation, including yield/spread

premiums, rebates, and other compensation, being paid from all sources, including from the borrower and the lender.

3. A real estate licensee who acts as the agent for either party in a transaction for the sale, lease, or exchange of real

property, a business opportunity, or a mobilehome and receives or anticipates receiving compensation for securing a

loan to finance the transaction, must disclose to the parties to the transaction, prior to closing, the form, amount and

source of compensation received or expected.

Reference: Sections 10176(g), 10240; Regulations 2843, 2904

SECTION 6 – Advance Fees

Does the broker collect any fees from prospective borrowers, other than for appraisals or

credit reports, for any services that will be provided by the broker or others?

Correct Procedure:

1. An advance fee is defined as “a fee, regardless of the form, that is claimed, demanded, charged, received, or

collected by a licensee for services requiring a real estate license, or for a listing, as that term is defined in Section

10027, before fully completing the service the licensee contracted to perform or represented would be performed”. In

a mortgage loan transaction, it is unlawful for a broker to collect a fee in advance for services to be rendered to a

principal (client) without first submitting and obtaining approval of an advance fee agreement and related materials

from the Department. This includes loan modification activities. As stated in Section 2 - Trust Fund Handling, a

broker may collect a fee for an appraisal report and/or credit report in advance without having an advance fee

agreement.

2. When a broker collects an advance fee pursuant to an approved agreement, the fee must be held in a trust account

and the funds remain the property of the principal (client) until the service or services are completed. An accounting

must be provided to the principal at the end of each calendar quarter and when the contract has been completed.

3. Real estate licensees are prohibited from claiming, demanding, charging, receiving, or contracting for an advance

fee for residential loan modification or loan forbearance activities. Services or fees may not be separated for the

purpose of avoiding the advance fee laws and prohibitions.

Reference: Sections 10026, 10085, 10085.5, 10085.6, 10131.2, 10146; Civil Code Section 2945; Regulations 2970,

2972

SECTION 7 – Article 7 - Regulated Loans

With the exception of the disclosure statement requirement and rules regarding late charges and prepayment

penalties, Article 7 only applies to bona fide senior liens under $30,000 and bona fide junior liens under $20,000, so

called “regulated loans”. NOTE: These rules may also apply to a “covered loan” discussed in Section 11.

Does the broker make or arrange loans secured directly or collaterally by liens on real

property where the principal amount on a senior lien is less than $30,000 or on a junior lien is

less than $20,000?

Correct Procedure:

1. With the exception of the disclosure statement requirement (see Section 3 – Borrower Disclosures), Article 7

applies only to loans secured by a dwelling which is defined as a single dwelling in a condominium or cooperative or

any parcel containing four or fewer residential buildings.

2. The broker must provide the Mortgage Loan Disclosure Statement (RE 882, RE 883, or RE 885 as applicable) or

alternative disclosure statements to the borrowers. (See Section 3 – Borrower Disclosures.)

3. The maximum amount of all costs and expenses for obtaining the loan, not counting actual charges for title

insurance and recording fees, cannot exceed 5% of the principal amount of the loan or $390 if the 5% amount is less

than $390. In no event can the fees exceed $700. Only costs and expenses that have actually been paid, incurred, or

reasonably earned by the broker can be charged to the borrower.

4. The maximum commissions that can be charged are determined by the lien priority and loan term as follows:

• For a senior lien, 5% of the principal amount of the loan if the term is less than three years, and 10% if the

term is for three years or more.

• For a junior lien, 5% of the principal amount of the loan if the term is less than two years, 10% if the term is

two years but less than three years, and 15% if the term is three years or more.

5. The purchase of credit life or credit disability insurance cannot be a condition of making the loan.

6. If the property securing the loan, either directly or collaterally, is an owner-occupied dwelling of less than three

units and is not a note given back to the seller by the purchaser, then no payment that is more than twice the amount

of the smallest payment can be due in less than 73 months; therefore, the installment payments must be substantially

equal for an owner-occupied dwelling loan with a term of six years or less.

7. If the property securing the loan, either directly or collaterally, is not a note given back to the seller by the

purchaser and is not an owner-occupied dwelling of less than three units, then no payment that is more than twice the

amount of the smallest payment can be due in less than three years; therefore, the installment payments must be

substantially equal for loan on an owner-occupied dwelling of less than three units.

8. A late charge cannot be more than 10% of the principal and interest installment due except that a minimum of $5

can be charged if the late charge would be less than $5. No charge can be imposed more than once for the same late

payment. A late charge cannot be imposed if the payment is made within 10 days of its scheduled date. For a balloon

payment, the late charge cannot be more than that assessed for the largest single monthly payment other than the

balloon payment. A late charge for a balloon payment can be imposed for each month the balloon payment is past

due.

9. A prepayment penalty on a loan secured by a single-family, owner-occupied dwelling can be charged only if the

prepayment is made within seven years of the date the loan was executed. A prepayment not exceeding 20% of the

unpaid balance of the loan can be made without penalty in any 12-month period, and any prepayment made in excess

of that amount can be subject to a charge of not more than six months’ advance interest.

Reference: Sections 10240, 10240.1, 10240.2, 10240.3, 10241, 10241.1, 10242, 10242.5, 10242.6, 10244, 10244.1,

10245; Regulations 2840, 2840.1, 2843

SECTION 8 – Article 5 - Private Money Transactions

Article 5 does not apply to the negotiation or sale of notes that were created for the purpose of financing the sale or

exchange of real property where the broker acted as an agent, was not a party to the transaction, and where the

required disclosures were given to each party to the transaction. The provisions of Article 5 dealing with “threshold”

reporting, loan servicing agreements, and the delivery of appraisals do not pertain to transactions where the

lenders/purchasers are institutional lenders or investors or where the note or sale is negotiated or the loan is being

serviced pursuant to a permit issued by the Department of Business Oversight pursuant to the Corporate Securities

Law of 1968.

Does the broker arrange loans for, sell existing notes to, or service loans for private

individual, non-institutional lenders or note-purchasers?

Correct Procedure:

1. Pooling of loan funds – Except as authorized by a permit from the Department of Business Oversight pursuant to

the Corporate Securities Law of 1968, funds accepted by the broker from a lender/purchaser or caused to be

deposited into an escrow from a lender/purchaser must be for a specific loan transaction. Payments of loan funds

payable according to the terms of a note secured by real property or by a real property sales contract, including

payoffs, cannot be retained by a broker for more than 25 days without a written agreement with the lender/purchaser.

2. Self-dealing - When a broker, or a salesperson acting on behalf of a broker, solicits funds from a prospective

lender or note purchaser for a purchase or loan transaction that will directly or indirectly benefit the broker (so-called

self-dealing), certain rules must be followed. Prior to making the solicitation or presenting the investor with the

Lender/Purchaser Disclosure Statement (LPDS), the broker must first submit a complete copy of the disclosure

statement, without the investor’s signature, to the Department. The completed disclosure is sent along with a

statement that it is being submitted pursuant to Section 10231.2. (Self-dealing does not include transactions where

the broker is benefiting only from the commissions, costs, or expenses of making or arranging a loan.) The broker

must then provide the investor with the completed LPDS not less than 24 hours before receiving any funds from the

investor or the execution of any agreement obligating the investor to make the loan or purchase the note. The

disclosure statement must be signed by the prospective lender/purchaser, and an exact copy must be retained by the

broker for four years.

3. Threshold reporting – Brokers who meet the “threshold” reporting criteria are required to submit specified

quarterly and annual reports to the Department. There are several ways for a broker to meet the reporting criteria as

follows:

• Negotiation of 10 or more of the following transactions in an aggregate amount of more than $1 million in a

successive 12-month period:

o loans secured directly or collaterally by liens on real property or business opportunities as an agent of

another

o sales or exchanges of real property sales contracts or notes secured directly or collaterally by liens on

real property or business opportunities as an agent of another or others

o sales or exchanges of real property sales contracts or notes secured directly or collaterally by liens on

real property or business opportunities as the owner of those notes or contracts

• Making collections of payments in an aggregate amount of $250,000 or more on behalf of owners

(beneficiaries) of notes secured directly or collaterally by liens on real property, owners of real property sales

contracts, or both in a successive 12-month period

• Making collections of payments in an aggregate amount of $250,000 or more on behalf of obligors

(borrowers) of notes secured directly or collaterally by liens on real property, lenders of real property sales

contracts, or both in a successive 12-month period

• Negotiation of a combination of two or more new loans, sales, or note or real property sales contract

exchanges in an aggregate amount of more than $250,000 in any successive three months or a combination

of five or more new loans, sales, or exchanges in an aggregate amount of more than $500,000 in any

successive six months

Within 30 days of meeting any of the above criteria, the broker must submit a Threshold Notification (RE 853) to

the Department. The “threshold” reporting criteria apply only to transactions where the prospective lender/purchaser

is a private individual investor or trustees of a pension, profit-sharing, or welfare fund with a net worth of less than

$15 million and where the loan or sale is not negotiated or the note is not serviced under the authority of a permit

issued by the Department of Business Oversight pursuant to the Corporate Securities Law of 1968.

If a broker who meets the threshold reporting criteria fails to notify the Department in writing of that fact within 30

days of meeting the criteria, the broker shall be assessed a penalty of $50 per day for each additional day the

notification is not received for the first 30 days and then a penalty of $100 per day not to exceed $10,000 until the

Department receives written notification. The notification must also be submitted when a broker will no longer meet

the above reporting criteria.

4. Threshold reports – Brokers who meet the above criteria must submit quarterly and annual reports to the

Department based on their fiscal year as follows:

• Within 90 days after the end of the broker’s fiscal year, an independent California-licensed accountant’s

report of a review of trust funds (Trust Account Review). If a broker did not collect trust funds during the

entire fiscal year, the broker may submit a Trust Fund Non-Accountability Report (RE 854) signed before a

notary. If the broker’s fiscal year ends between November 30 and the last day of February, then the Trust

Account Review shall be due no later than May 31 of each calendar year.

• Within 90 days after the end of the broker’s fiscal year, a Business Activity Report (online RE 881) that

reports the broker’s business activities during the fiscal year.

• Within 30 days after the end of each of the first three of the broker’s fiscal quarters, a Trust Fund Status

Report (RE 855), a Trust Fund Bank Account Reconciliation (RE 856), and the bank statement for the last

month of the fiscal quarter. If the broker did not collect trust funds during a fiscal quarter, the broker shall

submit a Trust Fund Non-Accountability Report (RE 854) for that fiscal quarter.

If the broker fails to submit any of the above reports by the established due date or within any additional time as the

Department may allow for good cause, the Department may conduct an audit of the brokers books and records and

prepare the reports at a cost to the broker of one and a half times the cost of conducting the audit and preparing the

reports.

5. Investor suitability - The broker must make reasonable efforts to ensure investor suitability by making certain:

• the investor has the capacity to understand the fundamental aspects of the investment;

• the investor can bear the economic risk of the investment; and

• the investment is suitable and appropriate for the investor.

The broker must obtain from the investor at least the age, investment objective, investment experience, income net

worth, financial situation, and other investments of the investor.

A broker can be deemed to have complied with the investor suitability determination requirement by:

• having the investor complete the Investor Questionnaire, RE 870, and

• using the information from the questionnaire as an aid in the broker’s determination of investor suitability.

The completed questionnaire should be obtained from each investor at least two business days – and not more than

one year – prior to completing each sale. After obtaining an initial questionnaire, any subsequent questionnaire from

the same investor need only reflect any updates from the immediately preceding questionnaire.

6. Disclosure statements – When soliciting or negotiating the arrangement of a loan or sale of a note, a broker must

provide the prospective investor with a LPDS (RE 851) as early as practicable and before the receipt of funds by or

on behalf of the investor. The LPDS must be signed by the lender/purchaser and by the broker, or a salesperson

licensed to the broker, and must be retained for a period of three years. There are separate versions of the LPDS for

the arrangement of a loan, the sale of a note, or the collateral assignment of a note. Each must be fully completed

with the required information in order for the lender/purchaser to be able to make an informed decision whether or

not to make the loan or purchase the note. Each disclosure must contain the real estate broker’s license identification

number if an individual broker or the corporation’s license identification number if a licensed corporation. The

prospective lender/purchaser is entitled to a copy of a written, independent appraisal. On a case-by-case basis, the

investor may waive his right to the appraisal in writing. In that case, the broker must provide the investor with a

written estimate of the fair market value of the property securing the loan supported by objective data.

The LPDS is not required with respect to the following persons:

• The prospective purchaser of a security offered under the authority of a permit issued by the Department of

Business Oversight pursuant to the Corporate Securities Law of 1968 which requires that each prospective

purchaser be given a prospectus or other approved disclosure statement.

• The seller of real property carrying back all or part of the purchase price.

• The prospective purchaser of a security offered pursuant to a Department of Business Oversight regulation

granting an exemption from qualification of the offering if one of the conditions is that each prospective

purchaser be given a prescribed disclosure statement before becoming obligated to purchase the security.

• The prospective lender or purchaser is a bank, savings institution, finance lender, or other institutional lender

or investor or is a licensed residential mortgage lender.

• A licensed real estate broker selling all or part of the note to a person that is not required to receive a LPDS.

7. Maximum number of investors and investor qualification statements - The notes or interests cannot be sold to

more than 10 persons who meet one or both of the qualifications based on income or net worth. The person must

sign a specified statement which must be retained by the broker for a period of four years.

8. Maximum loan to value ratios, construction loans - The aggregate principal amounts of the notes or interests sold,

including the balance of any senior encumbrances, are subject to maximum loan to value percentages. The

percentages are based on the current market value of the property as determined by the broker or appraiser as

required by Section 10232.6. This amount can be exceeded if mortgage insurance is obtained through a licensed

insurer for the benefit of the holders of the notes or interests. The maximum loan to value percentages are:

• Single-family, owner-occupied - 80%

• Single-family, not owner-occupied - 75%

• Commercial and income-producing properties - 65%

• Single-family residentially zoned lot or parcel which as installed offsite improvements including drainage,

curbs, gutters, sidewalks, paved roads, and utilities as required - 65%

• Land that produces income from crops, timber, or minerals - 60%

• Land that is not income producing but has been zoned for commercial or residential development - 50%

• Other real property - 35%

The percentages above can be exceeded when and to the extent that the broker determines that exceeding the

percentages is reasonable and prudent considering all relevant factors pertaining to the property; however, in no

event can the aggregate principal amounts of the notes or interests sold, including any senior encumbrances, exceed

80% of the current market value of improved real property or 50% of the current market value of unimproved real

property, except in the case of a single-family zoned lot or parcel as described above which cannot exceed 65% of

the current market value plus any insured amount as described above. The broker must keep a written statement of

the material considerations and facts he relied upon in the transaction file. Either a copy of the statement or the

information in the statement must be in the LPDS. A copy of the appraisal or broker’s evaluation for each parcel or

property securing the note must be delivered to each purchaser, and the broker must advise each purchaser of his

right to receive a copy.

For construction and rehabilitation loans, the term “current market value” may be deemed the value of the completed

project where the amount withheld for construction or rehabilitation at the start of the project exceeds $100,000 if all

of the following safeguards are met:

• An independent neutral third-party escrow holder is used for all deposits and disbursements.

• The loan is fully funded, with the entire amount to be deposited in escrow prior to recording the deed of

trust.

• A comprehensive, detailed draw schedule is used to ensure proper and timely disbursement to allow for

completion of the project.

• The disbursement draws from the escrow account are based on verification from an independent qualified

person who certifies that the work completed to date meets the related codes and standards and that the draws

were made in accordance with the construction contract and draw schedule. ("Independent qualified person"

means a person who is not an employee, agent, or affiliate of the broker and who is a licensed architect,

general contractor, structural engineer, or active local government building inspector acting in his official

capacity.)

• An appraisal is completed by a qualified and licensed appraiser in accordance with USPAP.

• The documentation includes a detailed description of actions that may be taken in the event of a failure to

complete the project, whether the failure is due to default, insufficiency of funds or other causes.

• The entire amount of the loan does not exceed $2,500,000.

For construction and rehabilitation loans, the term “current market value” may be deemed the value of the completed

project where the amount withheld for construction or rehabilitation at the start of the project is $100,000 or less if

all of the following safeguards are met:

• The loan is fully funded, with the entire amount to be deposited in escrow prior to recording the deed of

trust.

• A comprehensive, detailed draw schedule is used to ensure proper and timely disbursement to allow for

completion of the project.

• An appraisal is completed by a qualified and licensed appraiser in accordance with USPAP.

• The documentation must include a detailed description of actions that may be taken in the event of a failure

to complete the project, whether the failure is due to default, insufficiency of funds or other causes.

• The entire amount of the loan does not exceed $2,500,000.

9. Servicing agreements – A real estate broker who undertakes to service a promissory note secured directly or

collaterally by a lien on real property or a real property sales contract must have the written authorization of the

borrower, lender, or note owner that complies with the following:

• The terms of the servicing agreement must satisfy all the requirements of Section 10238(k)(1), (2), (4), and

(5).

• The licensee must provide the lender with the following accountings that identifies the person who holds the

original note or contract and deed of trust:

o An accounting of the unpaid principal balance at the end of the year

o An accounting of collections and disbursements received and made during each year

• The licensee must provide the lender or note owner written notification within 15 days of any of the fol-

lowing:

o The recording of a notice of default

o The recording of a notice of trustee sale

o The receipt of any payment constituting an amount greater than or equal to five monthly payments,

together with a request for partial or total reconveyance of the real property, in which case the notice

shall also indicate any further transfer or delivery instructions

o The delinquency of any installment or other obligation under the note or contract for over 30 days

10. Advancing funds – If a broker is servicing a note secured by real property on behalf of a mortgagee, beneficiary,

or note owner and causes funds other than funds received from the obligor (borrower) to be applied toward a

payment to protect the security of the note being serviced, including a payment on a senior lien, the broker shall give

written notice to the mortgagee, beneficiary, or note owner of the date and amount of the payment, the name of the

person to whom the payment was made, the source of the funds, and the reason for making the payment. The notice

must be made no later than 10 days after making the payment.

11. Loan servicing – For the purposes of the California Commercial Code, if a broker arranges or sells a note secured

by real property, or any interest therein, and then undertakes to service the note on behalf of the lender or purchaser,

delivery, transfer, and perfection shall be deemed complete even if the broker retains possession of the note or

collateral instruments as long as the deed of trust or assignment of deed of trust in favor of the lender or purchaser is

recorded in the office of the county recorder in the county in which the securing property is located and the note is

made payable to the lender or is endorsed or assigned to the purchaser.

12. Recordation of trust deeds and assignments - When a licensee negotiates a loan secured by a deed of trust, the

licensee must cause the deed of trust to be recorded in the name of the beneficiary or the beneficiary’s nominee. The

deed of trust cannot be recorded in the name of the licensee or licensee’s nominee (so-called table funding). The

deed of trust must be recorded with the county recorder in the county in which the securing property is located

before funds are disbursed unless the lender has given written authorization for prior release.

If funds are released on the lender’s written authorization prior to recording, the deed of trust must be recorded or

delivered to the lender or beneficiary with a written recommendation that it be recorded within 10 days following

release of the funds.

When a licensee sells, exchanges, or negotiates the sale or exchange of a real property sales contract or note secured

by a deed of trust, the licensee must cause a proper assignment of the real property sales contract or deed of trust to

be executed and cause the assignment to be recorded in the name of the purchaser or purchaser’s nominee (who shall

not be the licensee or licensee’s nominee). The assignment must be recorded in the office of the county recorder in

the county in which the secured property is located within 10 working days after the licensee or seller receives funds

from the buyer or after close of escrow, or the real property sales contract or deed of trust must be delivered to the

purchaser with a written recommendation that the assignment thereof be recorded forthwith.

The above requirements do not apply if the lender/purchaser is any person or entity listed in Section 10232(c)(1), the

deed of trust is recorded with the county recorder in the county in which the property is located, and the property is

not a single dwelling unit in a condominium or cooperative or any parcel containing only one to four residential

units.

13. Delivery of copies of deed of trust – In addition to the above requirements, a broker must deliver or cause to be

delivered conformed copies of any deed of trust to both the investor or lender and the borrower in a reasonable

amount of time from the date of recording.

14. A real estate licensee cannot advertise to give or offer to give to a prospective note purchaser or lender, any

premium, gift, or any other object of value as an inducement to make or purchase a promissory note secured directly

or collaterally by a lien on real property or a real property sales contract.

A real estate licensee may offer an inducement to a prospective borrower; however, any advertisement or offer must

include all of the conditions required to receive the offer and no fees, costs, or expenses may be increased by the

licensee in order to offset to cost of giving the inducement.

Reference: Sections 10230, 10231, 10231.1, 10231.2, 10232, 10232.2, 10232.25, 10232.4, 10232.5, 10236.4,

10236.5, 10233, 10233.1, 10233.2, 10234, 10234.5, 10235, 10236.1; Regulations 2846, 2846.5, 2846.7, 2846.8,

2849.01, 2849.1

SECTION 9 – Article 6 – Multi-Lender (Fractionalized) Loans

Article 6 applies only to the exemption from securities qualification claimed under Section 25102.5 of the

Corporations Code and does not apply to transactions conducted pursuant to a permit issued by the Department of

Business Oversight to qualify the offer and sale of securities under the Corporate Securities Law of 1968 or to any

other exemption from securities qualification which may be claimed without complying with Article 6. Transactions

conducted pursuant to the exemption from securities qualification must comply with each and every provision of

Article 6.

Does the broker arrange loans for, sell existing notes to, or service loans for private

individual, non-institutional lenders or note-purchasers where there are multiple (fractional)

beneficial interests?

Correct Procedure:

1. The notice - A broker must submit the Multi-Lender Transaction Notice (RE 860) to the Department within 30

days of:

• the broker’s first multi-lender transaction;

• any material change to the information required in the notice; or

• becoming the servicing agent for notes upon which the payments due in any consecutive three-month period

exceeds $125,000 or the number of persons entitled to payments exceeds 120.

2. Advertising - All advertising must show the name of the broker and comply with Section 10235, Regulation 2848,

and Section 260.302 of Title 10 California Code of Regulations. Referencing Article 6 in any advertising may be

considered misleading or deceptive if the representation may be reasonably construed as an implication of merit or

approval of the transaction.

3. The security - Loans must be directly secured by real property located in California. No collateral assignments are

permitted. Loans cannot be, by their terms, subject to subordination to any subsequently created deed of trust. The

notes cannot be promotional notes as defined in Section 10238(d).

4. Investor suitability determination - The broker must make reasonable efforts to ensure investor suitability by

making certain: