The Department of Real Estate (DRE) protects the public in real estate transactions through licensing of people who want to work in the industry, dissemination of information to the public, and enforcment of the Real Estate Law. As of January 2010, about 493,000 licensed real estate agents and brokers in California were servicing an estimated 219,000 homes for sale. The number of licensees has declined by thousands during the decline of the housing market. The department is housed in the Business, Transportation and Housing Agency.
No state had regulations dictating the buying and selling of real property prior to 1917, when California began requiring sellers of property to undergo an inspection process and acquire a state-issued license. But shortly after the legislature enacted the Real Estate Law that created the California Commission on Real Estate (the DRE’s predecessor) it was declared unconstitutional by the lower courts. Two years later the law’s validity was upheld by the state Supreme Court and by 1923 the rechristened Division of Real Estate, under the Department of Investments, began issuing license examinations and overseeing subdivisions. But it did not have the power to revoke or suspend licenses for shady practices until 1945. Regulation of condominiums (1964) and time-shares (1981) was eventually added to the department’s responsibilities. In 1971, the division was renamed, once again, the Department of Real Estate, shortly after being placed under the authority of the Business and Transportation Agency. (Housing was added to the agency at a later date.) That year, the department began fingerprinting applicants for real estate licenses.
The passage of Proposition 13 in 1978, capping annual property taxes at 1% of “full cash value,” did little to change life at the Department of Real Estate, whose biggest challenge in the 1970s was real estate brokers acting simultaneously as mortgage brokers for private, non-institutional lenders. (These loan providers were required to submit advertised loans to the DRE for review and to submit disclosure statements to purchasers and lenders beginning in 1983.)
Non-depository mortgage lending, i.e. mortgage banking, was under the DRE’s purview until 1996, when the state Department of Corporations began issuing Residential Mortgage Lending licenses under the California Residential Mortgage Lending Act. This allowed licensed lenders to issue federally-related loans and to service those loans or sell them to institutional investors. Both the Department of Corporations and the DRE issue mortgage broker licenses, but only mortgage lenders with a license from the DRE may issue a direct loan to a borrower.
The state enacted legislation to combat real estate fraud in 1995. It was a voluntary program for counties, which generated funds for law enforcement for those that opted in. By 2007, an estimated 22 of the state’s 58 counties had joined but, according to the Legislative Analyst’s Office (LAO), only two counties filed the required fraud reports documenting their activities and the form of those reports “diminish the quality and usefulness of the data.” Three years later, after a recommendation by the LAO that the state give the counties a nudge, 21 of an estimated 27 participating counties were reporting.
The economic downturn of 2008 turned the real estate industry upside down. As a result, the federal government passed new legislation, known as the SAFE Act, aimed at shoddy residential lending. The SAFE Act introduced a system for licensing and regulating loan originators, which California legislators adopted effective January 1, 2011. Formerly, loan officers, also known as “loan originators,” were often just commissioned salespeople with no special training to help borrowers understand and select the right loan. Worse still, in many cases, loan companies hired “loan specialists” who had no license at all. Provisions of the act include: criminal history & record information checks, federal originator I.D. numbers, credit report checks, tracking of consumer complaints, national and state testing, national pre-licensure and continuing education, bond and recovery fund requirements, and greater accountability to the public provided free of charge via the internet. The SAFE Act applies to both current DRE license holders and new licensees.
Real Estate Fraud Prosecution (Legislative Analyst’s Office) (pdf)
History of the DRE (DRE website)
The Department of Real Estate operates primarily through three programs: Licensing, Enforcement and Recovery, and Subdivisions. The Licensing program conducts examinations to ensure that individuals who wish to work in the real estate industry meet specific qualifications. The Enforcement and Recovery program conducts compliance audits of licensees and administratively prosecutes violations of the Real Estate Law, as it is generally known. The Subdivisions program issues public reports with relevant information on subdivided lands for sale.
The state’s Real Estate Law exists primarily for the protection of the public in real estate transactions involving the services of an agent. To this end, it establishes the Department of Real Estate and the commissioner as executive director of the department, as well as rules that govern the qualifications and conduct of licensees. The law, among other things, requires the commissioner to enforce its provisions and grants him the authority to take disciplinary actions against licensees who violate the law. In particular, the commissioner may revoke or suspend a license, or issue a monetary penalty for noncompliance with the law.
The department’s functions can be broken down into seven areas:
You can’t be a real estate broker or salesperson in California without a license from the Department of Real Estate. License requirements to sell include specialized education and testing. A broker needs an additional two years experience selling.
Enforcement Program
Investigations are made by the Department's Enforcement and Audit Sections on the basis of written complaints from the public alleging possible violations of the Real Estate Law or the Subdivided Lands Law. The department may take disciplinary action if a violation has taken place. This action may result in license suspension or revocation of a license, issuance of a restricted license or filing of an order to cease and desist. Some violations may result in civil injunctions, criminal prosecutions or substantial fines.
When someone receives a judgment against a real estate licensee as a result of fraud, misrepresentation, deceit or conversion of trust funds on the part of a licensee acting as an agent in the transaction, under certain conditions, that person may be eligible for reimbursement from the Recovery Account. The Recovery Account is a separate account of the Real Estate Fund. Currently, 12% of all license fees collected go into this account.
Subdivision laws enforced by the department help ensure that subdividers deliver to buyers what was agreed to at the time of sale. Before real property which has been subdivided can be marketed in California, the subdivider must obtain a public report from the department. The public report discloses to prospective buyers pertinent information about a particular subdivision. The subdivider must file an application along with supporting documents before a public report is issued. If improvements to the subdivision are not complete at the time of filing the application, the subdivider must also submit evidence to the department that adequate financial arrangements have been made for their completion.
Education and Research
The department maintains a real estate financial literacy program for young adults through senior citizens. It conducts workshops, promotes courses for college and produces educational material with the understanding that such knowledge not only gives greater understanding real estate transactions, but is the best weapon against fraud.
Mortgage Loan Activities
The department monitors certain activities of real estate licensees doing business as mortgage lenders and mortgage brokers and, in some circumstances, requires that reports be submitted to the department to assure broker compliance with the law.
The department offers many publications of interest to consumers and licensees, such as the Real Estate Reference Book, which provides general information on many aspects of real estate practice; and the Real Estate Law book and CD, which contain the current Real Estate Law, the Commissioner's Regulations, and pertinent excerpts from other California codes. The quarterly Real Estate Bulletin, reporting on industry issues and recent changes in the Real Estate Law and department policies, is furnished to all licensees.
For decades the department’s sole purpose was licensing the state’s real estate sales professionals and real estate lenders, leaving any caveat emptor (“buyer beware”) concerns for the free market to sort out. Today, almost two-thirds of the DRE’s $48.4 million budget is dedicated to “enforcement and recovery” actions, i.e. investigating citizen complaints of unlawful conduct by license-holders and punishing misbehaving license-holders accordingly.
In addition to investigating complaints of misconduct by license-holders and real estate activity conducted by unlicensed salespeople or brokers, the department also periodically audits mortgage brokers, escrow accounts or other accounts where mishandling could result in a significant problem to the public.
About a quarter of the department’s budget is spent on “licensing and education.” This includes background checks of applicants seeking mortgage broker or real estate salesperson licenses and ensuring that applicants meet minimum qualifications. Applicants must have completed prerequisite courses or seminars and passed a department-administered test. The department does not administer the required education classwork, which is given through department-approved private instruction.
As a public advocate, the department conducts education efforts aimed at making people aware of predatory lending scams, many of which increased during the subprime mortgage meltdown that began in the late 2000s. Because non-English-speaking communities have been particularly vulnerable, the department has shifted considerable resources to Spanish-language outreach, producing radio and television commercials focused on educating would-be homebuyers and refinancers. The state law that was passed to bring California into compliance with the federal SAFE Act by 2011 included a provision aimed at salesmen marketing “forensic loan audits” to homeowners facing foreclosure. It prohibits any person from charging an upfront fee from a homeowner in connection with a promise to modify the borrower’s residential loan or some other form of mortgage loan forbearance. The DRE has issued subsequent fraud alerts concerning the practice and in November 2010 the state filed a $60 million lawsuit against a pair of companies that engaged in the practice.
The department was given the power to “blacklist” a fraudulent lender or salesperson in 2009. Barred real estate professionals are prohibited from engaging in a host of real estate-related activities, from lending to sales. A list of former real estate professionals who are “barred” is published on the department website.
The Department of Real Estate is a “special fund” department, which means it doesn’t rely on money from the state’s general fund. Its expenses are covered entirely by the industry (primarily license and examination fees). Revenues from these fees are deposited into the Real Estate Fund to support department operations. A portion of the revenues, however, is set aside in two sub accounts: the Education and Research Account, and the Recovery Account. Specifically, up to 8% of license fee revenues may be deposited into the Education and Research Account to support education and research to advance the field of real estate. Another 12% of license fee revenues is required to be deposited into the Recovery Account from which a victim of fraud may receive compensation. (This is determined by a court judge, not by the DRE.) The remainder, $7.6 million, pays for staffing and administrative costs.
The department’s limited authority to impose fines on wayward brokers and sales people means that fines comprise less than 1%, or $435,000, of its overall $46 million budget. Nearly the department’s entire budget supports its licensing, investigation and public education activities.
3-Year Budget (pdf)
Insufficient Education
The reason for licensing real estate brokers and salespersons is to ensure that those who enter the profession are qualified and competent. In California, there is a minimum level of education (and in the case of brokers, experience) required. However, a 2009 review by the Office of the Legislative Analyst found a “fundamental mismatch” between the educational requirements for the license and the actual skills and knowledge to do the job. The courses for the salespersons were deemed “rudimentary” and limited in scope, even though the work they did was complex and covered a broad range of subjects. Real estate finance and mortgage loan brokerage were singled out as areas demanding expertise, although no specific training was required.
Continuing education, which the department requires, is not continual. California licenses are good for four years and require 45 hours of continued education, but all 45 hours can theoretically be obtained in the fourth year. And there is no department process for verifying that the licensee actually took any courses. The process is also vulnerable to cheating because licensees who complete a course can easily share with others the information necessary to get credit for it.
The analyst’s office concluded that continuing education should be completed annually and that education requirements should be upgraded.
As lax as California licensee education may be, it used to be much worse. Prior to 2007, the only prerequisite to take the state real estate exam was completion of one college-level course in the principles of real estate. The licensee would then receive a conditional license that required them to take two additional classes within 18 months to qualify for a 4-year license. The new law requires prospective licensees to complete three Department of Real Estate-mandated courses before they can qualify to take the state’s license examination.
Opportunities to Improve Consumer Protection
Spare the Rod, Spoil the Licensee
The Department of Real Estate disciplines about 12% of those licensees that it investigates in any given year. In fiscal year 2009-2010, it flagged 6,263 potential cases and found 4,852 of those suitable for investigation. Because of deteriorating market conditions (i.e., fewer real estate transactions), those numbers represented about a 37% decline in the number of investigations from the year before. But its rate of revocations, suspensions, public reprovals and license surrenders held steady. That works out to about 0.1% of all licensees facing some sort of disciplinary measure.
Most of the department’s investigations concern violations unrelated to real estate. On average, about 55% of probes are so called “rap cases,” which most often do not involve crimes committed as part of a real estate transaction. Typically, they include such crimes as driving under the influence of alcohol, domestic violence or petty theft. Critics question this focus, considering the department’s mandate to protect consumers from real estate fraud.
A review of the department’s statistics indicates that between 30% and 40% of the disciplinary actions are based on “technical violations”, although it’s difficult to know precisely how many because of the way the department collects and reports data. Some examples of technical violations include failure to post a license at the office.
Average processing time for a complaint is 14 months, which is heavily influenced by the time given to “rap cases” and the high standard of proof required to take disciplinary action. Legal precedent generally dictates that a high standard of proof, “clear and convincing evidence,” is required in administrative hearings for professions where a high level of education and training is required, such as doctors or lawyers. But that’s the standard used by the Department of Real Estate, although its agents and brokers are considerably less prepared. Critics contend that the lesser, more easily proven, standard, “a preponderance of evidence”, is more appropriate.
A state Senate committee has recommended that the Department of Real Estate be given “more teeth” to oversee the state’s real estate industry. Among the reforms recommended by the Senate Business, Professions and Economic Development Committee are more power for the department to impose fines and citations, the ability to recover costs directly from licensees proven to have broken the law and more consumer access to disciplinary proceedings (some of which are largely internal).
The committee released a background paper citing more than 30 issues and recommendations for the department. In addition to enforcement, the committee is looking at the department’s budget, technology issues, education requirements for licensees and reinstatement of a department advisory commission.
The committee is also considering recommendations that the Office of Real Estate Appraisers be consolidated within the Department of Real Estate.
The California Libertarian Party has expressed a slightly different approach to reform. In its 2006 platform, the party called for the abolition of the Department of Real Estate, “whose regulations restrict and delay urban condominium developments and rural residential subdivisions and commercial land developments, and whose procedures for real estate brokers limit occupational mobility and competition in the market for the sale of real property.”
Senate Panel to Consider Giving Real Estate Department More Teeth (by Robert Lewis, Sacramento Bee)
Should Licensees be Suspended during Criminal Investigations?
How quickly should the Department of Real Estate move against activity it suspects is in violation of the law? An investigation in November 2010 by the Sacramento Bee found that dozens of real estate professionals charged with real estate-related crimes or sued by the state for fraud still have their licenses. The paper further noted that none of the accused had “notations, flags or disciplinary sanctions” on their records with the department. The poster child for real estate scofflaws, according to the Bee, was Christopher J. Warren, a Sacramento-area mortgage broker. In February 2009, Warren was caught trying to cross from Canada into the United States with four ounces of platinum and $70,000 hidden in his cowboy boots. Despite having his arrest featured on the national news and being put on trial for fraud, he continued to be a licensed real estate broker with no notation of his notoriety on the DRE website.
The Bee asked, “So what does it take for a California real estate broker to lose his or her license?” A spokesman for the department, Tom Pool, responded that it would have to be somewhat more than an accusation. "We can't use the arrest or the indictment as the basis for disciplinary action. We have to wait for the ultimate conviction." In other words, the accused are entitled to due process. It’s the law. In the case of a real estate complaint, the process works like this. A complaint or accusation leads to legal filings by both department investigators and the accused. Then comes a hearing before an administrative law judge, who issues a ruling. That ruling goes before the real estate commissioner, who accepts or rejects it. Criminal legal proceedings could then follow.
Miles Weiss, who heads the Ventura County district attorney’s real estate fraud division, said the Department of Real Estate shouldn’t have to wait. “The burden of proof should be shifted from the Department of Real Estate to the licensee to show that the charged criminal acts were in no way related to the performance as a real estate professional.” Weiss made his comments in February 2011 after 14 local residents who had been arrested in connection with mortgage fraud the previous summer retained their state licenses to conduct business. Realtor Jim Keith, who chairs Ventura County’s professional standards committee, said he would support a change in the law allowing for suspended licenses during the adjudication process.
Real Estate Commissioner Jeff Davi acknowledged consumers cannot rely on his department’s website for a complete picture of whom they’re dealing with. “Now we’re saying you have to do Google searches,” he said. Davi said he is hoping that legislation can be passed to give the department authority to move quicker.
But some aren’t anxious to see the law changed and this note of skepticism was sounded on a real estate fraud blog. “We’ve all seen abuses of power by government agencies and/or persons who have an ax to grind. I wouldn’t want to see anybody’s ability to make a living suspended without a trial or administrative hearing; to do otherwise would be a violation of that person’s due process.”
Jeff Davi, a Monterey resident, graduated from Saint Mary’s College in Moraga in 1989. He entered politics as an unsuccessful candidate for Monterey County supervisor in 1993 and 1996. The father of five has two decades of experience in real estate sales, leasing, management and financing. He has been a commercial real estate broker since 1994 and was managing broker and co-owner of a family-owned real estate and property management firm from 1994-2004.
Davi was director of the California Association of Realtors from 1994-1997 and again from 2003-2004. He was president of the Monterey County Association of Realtors in 2002. Davi also served as president of the Economic Development Corporation of Monterey County, was co-founder of the Affordable Housing Steering Council of Monterey County and was on the founding board of director of the Monterey County Visitor and Convention Bureau. He was elected three times as 5th District Representative of the Monterey County Republican Party and is still a member of the executive committee. Davi was appointed commissioner by Governor Arnold Schwarzenegger in October 2004 and resigned in April 2011.
Paula Reddish Zinnemann, 1999-2004. The first woman to head the Department of Real Estate.
Jim Antt, Jr., 1995-1998
Clark Wallace, 1991-1994
James A. Edmonds, 1983-1990
E. Lee Brazil, 1992
David H. Fox, 1976-1981
Robert W. Karpe, 1971-1975
Burton E. Smith, 1967-1971
Milton G. Gordon, 1963-1967.
W.A. Savage, 1959-1963
F.W. Griesinger, 1957-1959
D.D. Watson, 1948-1957
Hubert B. Scudder, 1943-1948
Clarence Urban, 1939-1943
J. Mortimer Clark, 1934-1939
Joseph P. Smith, 1931-1934
Stephen Barnson, 1927-1931
J.R. Gabbert, 1925-1927
Edwin T. Keiser, 1921-1925
Ray L. Riley, 1919-1921
Freeman H. Bloodgood, 1917-1919
- Table of Contents
- Overview
- History
- What it Does
- Where Does the Money Go
- Controversies
- Suggested Reforms
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