Predatory Lending and Brokering Practices +17California · Real Estate · English

Redlining (creditors/lenders drawing lines on maps to refuse loans in certain neighborhoods) has been outlawed. It was replaced by reverse redlining, which targets previously underserved areas occupied by lower socio-economic classes, racial/ethnic minorities, and recent immigrants for abusive lending. The Community Reinvestment Act (expanded 1999 by Gramm-Leach-Bliley) was a catalyst.

• ✓Redlining is an outlawed practice of refusing loans in certain neighborhoods
• ✓Reverse redlining targets previously underserved areas for abusive lending practices

Section 226.32 of Regulation Z (Section 32) implements HOEPA. For first/senior loans, if the APR exceeds comparable Treasury Securities by 8% or more, one threshold is met. For second/junior loans, the threshold is 10% over Treasury Securities. The second test is whether points and fees (including MLB compensation) exceed 8% of the net loan amount. If either test is met, it is a High-Cost Loan.

• ✓First/senior loan APR threshold under Section 32 is 8% over comparable Treasury Securities
• ✓Second/junior loan APR threshold under Section 32 is 10% over Treasury Securities
• ✓The points and fees test is 8% or more of the net loan amount
• ✓Meeting either the APR or fee test makes it a High-Cost Loan under HOEPA

Section 226.35 (Section 35) defines Higher-Priced Loans as consumer credit secured by the principal dwelling with an APR exceeding the average prime offer rate. For first/senior encumbrances, the trigger is 1.5% or more over the prime offer rate; for second/junior encumbrances, 3.5% or more. Section 35 requires lenders to consider ability to repay rather than lending solely on collateral value, and requires escrow (impound) accounts for taxes and insurance.

• ✓First/senior encumbrance Section 35 trigger is 1.5% or more over average prime offer rate
• ✓Second/junior encumbrance Section 35 trigger is 3.5% or more over average prime offer rate
• ✓Section 35 requires considering the borrower's ability to repay, not just collateral value
• ✓Escrow (impound) accounts must be established for property taxes and insurance

Predatory practices involve fraud, deceit, misrepresentation, and unfair business practices. 'Churning' is inducing borrowers to repeatedly refinance and charging high rates and fees each time, cited as unfair by the Federal Reserve under HOEPA, particularly when no demonstrable benefit inures to the borrower.

• ✓Churning is repeatedly refinancing with high fees, patently unfair when no benefit inures to the borrower
• ✓MLBs breaching fiduciary duties in predatory conduct violate applicable law

No person may give or accept any fee, kickback, or thing of value pursuant to any agreement (oral or otherwise) for the referral of settlement services in a federally related mortgage loan. A 'thing of value' is defined broadly to include money, discounts, commissions, stock, dividends, special banking terms, trips, and reductions in credit. Payment must be reasonably related to the value of goods/facilities provided and services rendered.

• ✓No fee, kickback, or thing of value may be given/accepted for the referral of settlement services
• ✓'Thing of value' is defined broadly and does not require actual transfer of money
• ✓Payment of fees must be reasonably related to the value of goods, facilities, and services provided (24 CFR 3500.14 and .15)

The 1995 HUD IBAA opinion letter allowed division of labor/service agreements between service providers. Mortgage brokers may share performance of compensable services. Each MLB/MLO must perform at least six identifiable functions (five plus the loan application for the borrower's broker). Compensation must be reasonably related to services performed. Such agreements do not work in FHA-insured transactions.

• ✓A written division of labor agreement is required describing services each broker will perform
• ✓Each broker must perform at least six identifiable functions
• ✓Division of compensation must be reasonably related to the value of services each performs
• ✓Division of labor agreements do not work in FHA-insured transactions

RESPA did not contemplate two mortgage brokers in one transaction, but the 1995 IBAA letter created a safe harbor. HUD listed 14 origination services (a through n). No violation generally occurs if the broker took the application (item a), performed at least five additional items, and fees are reasonably related to services performed. The broker who solicited the borrower is the agent/fiduciary and may delegate to a cooperating subagent broker.

• ✓The IBAA safe harbor requires taking the application plus performing at least five additional listed items
• ✓Fees must be reasonably related to the value of services performed
• ✓A cooperating broker becomes a subagent and fiduciary of the borrower upon lawful delegation and consent

HUD is concerned that a second broker's additional services not be limited to counseling-type activities causing unauthorized steering. Counseling-type services must give borrowers the opportunity to consider products from at least three different approved lenders, the counseling broker must receive the same compensation regardless of which lender is selected, and payment must be reasonably related to services and not based on business referred.

• ✓Counseling must offer products from at least three different approved lenders
• ✓The counseling broker must receive the same compensation regardless of which lender is selected
• ✓Payment must be reasonably related to services and not based on the amount of loan business referred

In 1997 HUD exempted payments by employers to bona fide W-2 employees from fee-splitting limits, provided the relationship is not a sham. Exempt payments include those for generating business, referrals by marketing/managerial employees (with ABA notice), and performance-based managerial payments (not per loan). Independent contractors are NOT subject to these exemptions and must be licensed MLBs/MLOs performing compensable services documented by a division of labor agreement.

• ✓Payments to bona fide W-2 employees are exempt if the relationship is not a sham
• ✓Managerial employee payments must not be on a per-loan basis
• ✓Independent contractors must be licensed/registered as MLBs/MLOs and perform compensable services
• ✓Independent contractor compensation must be reasonably related to services and documented by a division of labor agreement

In addition to actual damages, a creditor may be liable for a statutory penalty of twice the finance charge, with a minimum of $100 and maximum of $1,000. For an individual action on a credit transaction secured by real property or a dwelling (not open-end), liability is not less than $400 or greater than $4,000. Prevailing borrowers also recover costs and reasonable attorney's fees.

• ✓Statutory penalty: twice the finance charge, minimum $100, maximum $1,000
• ✓For real property/dwelling-secured non-open-end transactions: not less than $400 or greater than $4,000
• ✓Prevailing borrower recovers costs and reasonable attorney's fees

Statutory liability applies to specific violations: failing to properly disclose the right of rescission (where applicable); and improper disclosure of the amount financed, finance charge, APR, total of payments, payment schedule, or security interest taken. For Section 1639 (Section 32) violations, the creditor is liable for the sum of all finance charges and fees paid unless the failure is shown non-material.

• ✓Violations include failure to disclose right of rescission and improper disclosure of amount financed, finance charge, APR, total of payments, payment schedule, or security interest
• ✓Section 32 (1639) violations: liable for all finance charges and fees paid unless failure is non-material
• ✓Statutory liability applies to seven specific violation categories

In class actions, no minimum recovery applies per member, and total recovery for the same failure by the same creditor cannot exceed $500,000 or 1% of the creditor's net worth, whichever is less. Creditors are not liable for unintentional violations resulting from bona fide errors (clerical, calculation, computer malfunction/programming, printing) if procedures reasonably prevented such errors. Errors of legal judgment do NOT qualify as bona fide.

• ✓Class action total recovery capped at $500,000 or 1% of net worth, whichever is less
• ✓Bona fide errors include clerical, calculation, computer, and printing errors
• ✓Errors of legal judgment do not qualify as bona fide errors

Creditors are deemed in compliance with non-numerical disclosure provisions if they use an FRB model form/clause, or use one with deletions of non-required information or format rearrangements, provided the changes do not affect the substance, clarity, or meaningful sequence of disclosures.

• ✓Use of an FRB model form/clause is deemed compliant with non-numerical disclosure provisions
• ✓Deletions or format rearrangements must not affect substance, clarity, or meaningful sequence
• ✓Multiple failures on a single account entitle borrower to a single recovery

Zoning ordinances list special land uses authorized only with a conditional use permit (CUP). These uses are potentially incompatible and may create spillover effects like noise, traffic, or pollution. CUPs authorize the use subject to mitigating conditions.

• ✓A CUP authorizes potentially incompatible uses subject to conditions alleviating spillover effects
• ✓A local government may revoke a CUP after a public hearing if conditions are not met
• ✓A conditional use permit runs with the land and applies despite change of ownership

California Civil Code Section 1102.3 requires a seller of one-to-four residential dwelling units to deliver a written disclosure statement (TDS) concerning the property's condition. It covers matters within the personal knowledge of the seller and agent and matters from a reasonably diligent inspection. It applies to sale, exchange, installment land sale contract, lease with option, and ground lease with improvements.

• ✓Civil Code Section 1102.3 requires the TDS for one-to-four residential dwelling units
• ✓Covers personal knowledge and reasonably diligent inspection matters
• ✓Applies to sales, exchanges, installment land sale contracts, lease-options, and ground leases with improvements
• ✓Discloses defects, easements, permits, flood/soil problems, zoning violations, HOA obligations, and earthquake zones

Exempt transfers include those requiring a subdivision public report, court-ordered transfers, transfers to a mortgagee by a defaulting mortgagor or by foreclosure, fiduciary transfers (estate/guardianship/conservatorship/trust), transfers between co-owners, transfers to a spouse or lineal relative, dissolution transfers, State Controller transfers, tax-default transfers, and transfers to/from a government entity.

• ✓Court-ordered transfers are exempt
• ✓Foreclosure and default transfers to a mortgagee are exempt
• ✓Fiduciary transfers in estate/guardianship/conservatorship/trust administration are exempt
• ✓Transfers between spouses or lineal relatives are exempt
• ✓Transfers to or from a governmental entity are exempt

The listing agent and any cooperating agent each have the duty to conduct a reasonably competent and diligent visual inspection of accessible areas of one-to-four unit residential property (or manufactured home) and disclose material facts. For condos/PUDs/co-ops, only the unit need be inspected, not common areas. It excludes off-site areas and public records absent special circumstances.

• ✓Agents must conduct a reasonably competent and diligent visual inspection of accessible areas
• ✓Inspection excludes areas not reasonably accessible and off-site areas
• ✓For condominium/PUD/stock cooperative, only the unit is inspected, not common areas
• ✓The buyer still has a duty to exercise reasonable care (Civil Code Section 2079.3)
• ✓The agent's certification is contained in the TDS

Under Commissioner's Regulation 2834, withdrawals from the trust account may be made only upon the signature of specified persons.

• ✓The broker in whose name the account is maintained, or the designated broker-officer of a corporate broker
• ✓A salesperson licensed to the broker if specifically authorized in writing
• ✓An unlicensed employee if specifically authorized in writing and covered by a fidelity bond at least equal to the maximum trust funds accessible
• ✓Such authorizations do not relieve the broker of responsibility or liability for handling trust funds

Blockbusting is the practice by unscrupulous speculators/agents of inducing panic selling of homes below market value, especially by exploiting prejudices about changing racial makeup of a neighborhood. This is a prohibited discriminatory practice.

• ✓Blockbusting induces panic selling by exploiting prejudices about neighborhood racial change
• ✓Blockbusting is a prohibited discriminatory practice

The Housing Financial Discrimination Act of 1977 (Holden Act), California Health and Safety Code §35800 et seq., is designed primarily to eliminate discrimination in lending practices based on the character of the neighborhood where property is located (redlining).

• ✓The Holden Act prohibits lending discrimination based on neighborhood character (redlining)
• ✓The Holden Act is found at California Health and Safety Code §35800 et seq.

Filtering is the process whereby higher-priced properties become available to lower income buyers over time. Directional growth is the direction toward which residential sections of a city are destined to grow.

• ✓Filtering makes higher-priced properties available to lower income buyers over time
• ✓Directional growth indicates where a city's residential development is heading

A net listing lets the agent keep all sums over a net price to the owner. An open listing is nonexclusive with commission to the first agent producing a buyer. Multiple listing pools listings among broker organization members.

• ✓Net listing: agent retains all amounts above net price to owner
• ✓Open listing: nonexclusive, only the first producing agent is paid
• ✓Multiple listing is usually an exclusive right to sell shared among members

Ostensible authority is authority a third person reasonably believes an agent has due to the principal's acts. Warranty of authority is a representation that the agent acts within conferred authority.

• ✓Ostensible authority arises from the principal's acts or omissions
• ✓Warranty of authority is a representation the agent acts within scope
• ✓Ratification is approval of unauthorized acts after they are performed

Procuring cause is the cause originating from an unbroken series of events that produces a final buyer; the agent who first procures a ready, willing, and able buyer is entitled to the commission.

• ✓Requires unbroken continuity of events producing the buyer
• ✓The agent who first procures a ready, willing, able buyer earns the commission

A Multiple Listing Service (MLS) is an association of real estate agents providing for a pooling of listings and the sharing of commissions on a specified basis.

• ✓MLS pools listings among member agents
• ✓Provides for sharing of commissions on a specified basis

A power of attorney is a written instrument giving authority from a principal to an agent (attorney in fact). A special power of attorney confers only limited authority for prescribed acts.

• ✓Power of attorney gives authority in writing to an agent
• ✓Agent acting under it is an attorney in fact
• ✓Special power of attorney confers limited authority for prescribed acts

A ready, willing and able buyer is one fully prepared to enter the contract, genuinely wants to buy, and unquestionably meets the financing requirements of the purchase.

• ✓Must be fully prepared to enter the contract
• ✓Must genuinely want to buy
• ✓Must meet the financing requirements

A subagent is a person upon whom the powers of an agent have been conferred not by the principal but by an agent as authorized by the agent's principal.

• ✓A subagent's powers are conferred by an agent, not directly by the principal
• ✓The conferral must be authorized by the agent's principal

A broker may recover a commission under a tort theory rather than contract by proving the owner's actions constituted intentional interference with the broker's prospective economic advantage. In the leading example, a broker negotiated with a buyer based only on a 'FOR SALE - CONTACT YOUR LOCAL BROKER' sign, notified the owner in writing that he was the procuring cause, and the owner then sold to that same group without the broker. The court denied recovery in contract (no signed written commission agreement) but allowed a tort suit for intentional interference with the broker's reasonable expectation of a commission.

• ✓A broker may recover under a tort theory of intentional interference with prospective economic advantage even without a written commission contract
• ✓The claim requires the owner's intentional interference with the broker's reasonable expectation of a commission

Although a broker's interests in prospective economic advantage may be protected against negligent injury, six criteria determine whether a duty of care is owed: (1) the extent to which the transaction was intended to affect the agent; (2) the foreseeability of harm to the agent; (3) the degree of certainty the agent suffered injury; (4) the closeness of connection between the principal's conduct and the injury; (5) the moral blame attached to the principal's conduct; and (6) public policy regarding preventing future harm.

• ✓Six criteria govern whether a duty of care is owed to an agent's prospective economic advantage
• ✓Criteria include intent to affect the agent, foreseeability of harm, certainty of injury, connection to conduct, moral blame, and public policy

A neighborhood is a group of similar land uses similarly affected by the four forces (utility, scarcity, demand, transferability). Its life cycle includes growth, peak desirability, stability, deterioration, and possible renewal. Neighborhood analysis defines the best search area for comparables.

• ✓Neighborhood = group of similar land uses affected by the four forces
• ✓Life cycle: growth, peak, stability, deterioration, then renewal
• ✓Neighborhood analysis defines the best search area for comparable data

Cities are classified by the functions that stimulate growth: Commercial, Industrial, Extractive industry (mining, fishing, lumber), Political (government employment), Recreation and health (tourist/resorts), and Education (college/university anchor).

• ✓City types: Commercial, Industrial, Extractive, Political, Recreation/Health, Education
• ✓Extractive industry revenue comes from natural resources (mining, fishing, lumber)
• ✓Education cities are anchored by a college or university

In 1989 Congress passed FIRREA (the Savings and Loan Bailout Bill). Title XI contains the Real Estate Appraisal Reform Amendments requiring each state to establish a program to license and certify appraisers for federally related transactions and to adhere to qualifications criteria set by the Appraiser Qualifications Board (AQB) of The Appraisal Foundation.

• ✓FIRREA (1989) Title XI requires states to license/certify appraisers for federally related transactions
• ✓States must follow AQB qualifications criteria from The Appraisal Foundation

In response to FIRREA, California enacted the Real Estate Appraisers' Licensing and Certification Law (Business and Professions Code Section 11300 et seq.) in 1990, creating the Office of Real Estate Appraisers (OREA), organized in 1991. OREA regulates appraisers by issuing licenses and investigating complaints of illegal or unethical activity.

• ✓OREA was created under B&P Code Section 11300 et seq. (1990), organized 1991
• ✓OREA issues appraiser licenses and investigates complaints

Certain subdivisions are excepted from the Notice of Intention and Application requirement, including completed in-city residential lots and commercial/industrial subdivisions.

• ✓Not required for standard subdivisions within city limits sold with completed residential structures (or satisfactory financial arrangements) if the subdivider complies with Sections 11013.1, 11013.2, 11013.4
• ✓Subdivisions limited to commercial and industrial purposes by zoning or CC&Rs are excepted
• ✓Land offered by a state agency, University of California, local agency, or other public agency is excepted

When filing for a final public report, subdividers may choose minimum filing, substantially complete application, or totally complete filing methods based on completeness.

• ✓Minimum filing package: basic method; DRE notifies within 15 days if substantially complete or held pending a Quantitative Deficiency Notice
• ✓Substantially complete application: DRE must provide a Qualitative Deficiency Notice within 20 days (standard) or 60 days (common interest)
• ✓Totally complete filing: package certified complete and correct, allowing expedited issuance
• ✓A package failing minimum requirements is returned with the fee unprocessed

The property manager must maintain sound policies for building maintenance and purchasing without consuming all income, since an owner left with no profit will seek another manager. The manager must routinely inspect the building and correct repair problems immediately, as delaying is more expensive. Preventive maintenance is the goal, providing more profit for the owner.

• ✓Making repairs immediately is less expensive than delaying and allowing problems to worsen
• ✓Ongoing preventive maintenance should be the goal to reduce large future expenditures
• ✓Purchasing must emphasize obtaining the best value for the owner's money
• ✓The manager must know both current and deferred maintenance needs

A buyer should be given opportunity to evaluate all material aspects of the seller's business including liens/liabilities (successor liability), lease terms, financial history, present and future risks, and probable future income. Though the buyer must exercise due diligence, the agent should advise the buyer to seek competent accountant and attorney advice.

• ✓Buyer should evaluate liens/liabilities, lease terms, financial history, future risks, and future income stream
• ✓Buyer must exercise due diligence in evaluating a business opportunity
• ✓Agent should advise buyer to seek competent accountant and attorney advice

A broker must exercise reasonable care in screening potential buyers and keep in mind both seller's and buyer's motives. Seller motives include retirement, burnout, poor health, relocation, imminent bankruptcy, or a desire to work for others. Buyer motives include wanting to be boss, more income, lack of employment skills, a second career, buying a dream, or expanding an existing business.

• ✓A broker must exercise reasonable care in screening potential buyers
• ✓A defunct business has little or no value while real property retains some value
• ✓Broker must keep both seller's and buyer's motives in mind

Numerous trade and professional bodies are related to real estate. NAR affiliate members include: Certified Commercial Investment Member (CCIM), Institute of Real Estate Management (IREM), Realtors Land Institute (RLI), Council of Real Estate Brokerage Managers (CRB), Council of Residential Specialists (CRS), Society of Industrial and Office Realtors (SIOR), The Counselors of Real Estate (CRE), and Women's Council of Realtors (WCR).

• ✓CCIM, IREM, RLI, CRB, CRS, SIOR, CRE, and WCR are NAR affiliate members
• ✓IREM is the Institute of Real Estate Management (property management focus)

Construction-related associations include the California Building Industry Association, National Association of Home Builders (originally a NAR affiliate), Building Owners and Managers Association (BOMA), and the Prefabricated Home Manufacturers Institute. Finance-related associations include the American Bankers Association, U.S. Savings and Loan League, California Mortgage Bankers' Association, California Mortgage Association, and California Association of Mortgage Professionals.

• ✓BOMA is the Building Owners and Managers Association
• ✓The National Association of Home Builders was originally a NAR affiliate
• ✓The American Bankers Association impacts real estate via mortgage lending

Under Section 18551 of the Health and Safety Code, four prerequisites transform a mobilehome into real property, making it subject to local property tax as a fixture/improvement.

• ✓Requires: building permit, attachment to approved foundation, recording a document of affixation, and certificate of occupancy
• ✓A mobilehome on a foundation system is deemed a fixture/improvement to real property
• ✓Section 5802: base year value is full cash value on lien date of first enrollment
• ✓Removal from foundation requires consent of all title holders and 30 days' notice to HCD and assessor

Residential selling accounts for most sales in a typical realty office. After a good start in general home selling, a licensee may specialize in areas such as homes of a defined district, homes within a certain price range, residential rentals, or specific property types (new home sales, land acquisition, farms/ranches, commercial, industrial, multiple units, motels, business opportunities, franchising, or mobile homes).

• ✓Residential selling accounts for the majority of sales in a typical office
• ✓Specialization can be by district, price range, rentals, or specific property types

After extended experience, a licensee may become a licensed appraiser, real estate investment counselor, subdivider, builder, property manager, mortgage loan broker, syndicator, franchise investment specialist, commercial/industrial property leasing agent, or business opportunities specialist.

• ✓Advanced career paths include appraiser, subdivider, builder, and property manager
• ✓Other paths include mortgage loan broker, syndicator, and leasing agent

Mineral, oil and gas brokerage is a specialized branch of the general real estate brokerage business. Success requires a broad knowledge of the elementary principles of geology relating to the field and sound knowledge of the fundamentals of real estate practice and ethics. Candidates should develop a working knowledge of the technical subject matter, emphasizing the functions and duties of a real estate broker in M.O.G. practice.

• ✓M.O.G. brokerage is a specialized branch of general real estate brokerage
• ✓Success requires knowledge of geology principles plus real estate practice and ethics