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TABLE OF CONTENTS

Jntroduction........................................................ 1

Government Regulation of Brokerage Transactions......................... 2 Administration. by Commissioner. ................................ 3 When a Real Estate License is Required............................ 4

Enforcement of Real Estate Law............................... ?......... 5 Violations........................................... ?... , , ... 6 Examples of Unlawful Conduct - Sale, Lease, or Exchange............ 9 Examples of Unlawful Conduct - Loan Transactions, ................ 11

Agency......... , ................................. , ...... , .. , .... 13 Creation of Agency Relationships... , ..... , .......... , ... , ..... , 13 Authority of Agent. ............................. , ......... , .. 15 Agency Disclosure Form............. , . . . . . . . . . . . . . . . . . . . . . . . . 20 Duties Owed to Principals...... , .................... , ..... , . . . 23 Duties Owed to Third Parties........ , ............... , .......... 26 Rights of Agent. . , ... , , ........... , ... , ............... , ... , .. 28 Termination of Agency, ............................... , , ...... 31 Special Brokerage Relationships................................. 32 Licensee Acting for Own Account. ........ , ........... , ......... 34

Unlawful Employment and Compensation............ , .... , ........... , . 37 Broker - Salesperson Relationship.............................. , 37

Discrimination.................................................... .41 Housing Discrimination................................. , ..... 42 Other State Laws and Regulations....... , , ..... , ................ 43 The Federal Rules............................................ 44 Commissioner's Regulations 2780 and 2781 ....................... 45

Basic Contract Provisions & Disclosures in a Residential Transaction......... 50 A Basic Transaction, .................. , ...................... 50 A Basic Listing.......................... , ................... 51 Negotiability of Commission................................... 52 Purchase Contract & Receipt for Deposit. ........................ , 53 Disclosures............................................. , ... 59

Trust Funds...................... , ................................ 71 General hlformation....... , ......................... , . . . . . . . . 71 Trust Fund Bank Accounts .................... , . , .............. 73 Accounting Records .......................................... 78 Other Accounting Systems and Records........................... 80 Recording Process..... , ...................................... 81 Reconciliation of Accounting Records.................... , ....... 82 Documentation Requirements....................... , ........... 84

Table of Contents - Page 2

Additional Requirements - Documents............................ 85 Audits and Examinations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Sample Transactions.......................................... 86 Questions & Answers Regarding Trust Fund

Requirements and Record Keeping............................ 95

Escrow........................................................... 97 Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Essential Elements............................................ 97 General Escrow Procedures..... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Who May Act as Escrow Agent. ................................ 101 Prohibited Conduct. ......................................... 102 Relationship ofthe Real Estate Broker and The Escrow Holder....................................... 102 Developer Controlled Escrows - Prohibition....................... 103

Recovery Account. ................................................ 105

Mo1tgage Loans................................................... 106 Broker's Role............................................... 106 Advance Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Article 5 - The Lender. ... ; ...................... , ............ 107 Article 7 - The Borrower...................................... 110 Truth in Lending Act. ........................................ 113 Predatory Lending Law............... : ....................... 125

Subdivisions..................................................... 127 Basic Subdivision Laws...................................... 127 Subdivision Definitions....................................... 127 Types of Subdivisions........................................ 128 Compliance With the Subdivided Lands Law...................... 130 Handling of Purchasers' Deposit Money.......................... 131 Money Paid for Optional Extras Subject to Impound Laws........................................... 133

Appendix........................................................ 134 Most Common Enforcement Violations.......................... 135 Ten Most Common Violations Found in DRE Audits............... 138 Broker Compliance Evaluation Manual. ......................... 143 Frequently Asked Questions - M01tgage Loan Brokciing in California.................................... 155 Excerpts from Busi\1ess & Professions Code...................... 163 Section 10176........................................... 163 Section 10177........................................... 164 Section 10177.1 .......................................... 165

INTRODUCTION

The Department of Real Estate (DRE) has prepared this Professional Responsibility Exam Course Booklet as a basis of study for the Professional Responsibility Examination. The booklet - contains infornmtion_designed to clarify those.areas of the Real Estate Law and Commissioner's Regulations that are most frequently cited when formal disciplinary action is taken upon an individual or corporate real estate license. The purpose of this course is to provide the reader with an oppmtunity to broaden his/her understanding of the responsibilities of a California real estate licensee within the context of the various types of real estate trn.nsactions for which licensure is required. It is hoped that successful completion oftlris course and the required examination will enable the reader to participate in the real estate profession with an enhanced awareness of conduct that is appropriate ? for a real estate licensee. This course booklet contains excerpts from the Real Estate Reference Book, Real Estate Law Book, various Department publications, and Real Estate Bulletin articles. There are other resources you should consider reviewing in preparing for the Professional Responsibility Exam. The Real Estate Law Book, which contains the Business and Professions Code administered by the Department, as well as the Commissioner's Regulations, and the Real Estate Reference Book may be of assistance to you and are available for purchase from the Department of Real Estate. These books, as well as other Deparh.nent publications, can also be downloaded from the DRE website at dre.. Since this course is designed solely to assist you in preparing for the Professional Responsibility Exam, it may not be used for continuing education credit.

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GOVERNMENT REGULATION OF BROKERAGE TRANSACTIONS

As our country's development passed through the pioneering and homesteading stages to urbanization, people across the land found it increasingly difficult to "strike a deal" with strangers for land and homes. There was a real need for m1 intem1ediary to provide basic real estate knowledge and services and negotiate trm1sactions. The real estate agent met this need and continues to fill this important role today.

Along with increasing oppo1tunities to provide real estate services to the maturing nation can1e abuses of the public trnst in the form of unethical, illegal or sharp practices by dishonest or incompetent agents operating in a climate of unorganized and often unscrupulons competition. Real estate practitioners themselves began to see the need for government regulation. The public's legitimate interest in the buying, selling, exchanging and financing of real property has led to regulation of the real estate business through the adoption of!egislative and administrative controls.

California's Legislature passed the nation's first real estate licensing law in 1917. The comts declared that law to be unconstitutional, based on its conditions compared to the licensing requirements of the Insurance Commissioner. California then adopted the Real Estate Act of 1919, which the State Supreme Court upheld as a reasonabje exercise of the power of the state to regulate the conduct of its citizens in the interest of the common good.

All fifty states and the District of Columbia have enacted statutes governing, to some degree, the licensing, regulation and conduct ofreal estate agents. This type of government regulation and supervision has its foundation in what is known as the police power.

The Police Power and the Real Estate Law For many people, the pln?ase "police power" evokes images of police officers, jails mid courtrooms. But the police power involves much more than the business of detecting crime and criminals and maintaining public orde1: and tranquility. The following, excerpted from a United States Supreme Court case, gives a useful desc1iption of the police power:

"By means ofit, the legislature exercises a supervision over matters affecting the commonweal and enforces the observance by each individual member of society of duties which he owes to others and the community at large. The possession and enjoyment of all rights are subject to this power. Under it the state may prescribe regulations promoting the health, peace, morals, education and good order of the people, and legislate so as to increase the industries of the state, develop its resources and add to its welfare and prosperity."

In short, police power is the power of the state to enact laws within constitutional limits to promote the order, safety, health, morals and general welfare of our society.

The police power does not vest arbitrary authority in any legislative body. Laws emanating from exercise of the police power must be necessary and proper for the protection or advancement of a genuine public interest. Neither state-nor local authmity may impose onerous, unreasonable or mmecessm?y burdens upon persons, property or business.

Legislation intended to protect the public safety, health and morals may impact the manner of conducting lawful occupations mid businesses without, of course, taking away the right to be gainfully employee!.

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