BILL NUMBER: SB 647 AMENDED
BILL TEXT
AMENDED IN SENATE APRIL 7, 2015
INTRODUCED BY Senator Morrell
FEBRUARY 27, 2015
An act to amend Sections 10232.3, 10232.45, and 10238 of the
Business and Professions Code, and to amend Section 25102.2 of the
Corporations Code, relating to real estate investments.
LEGISLATIVE COUNSEL'S DIGEST
SB 647, as amended, Morrell. Real estate investments: securities:
qualification exemption.
(1) Existing law, the Real Estate Law, requires any transaction
that involves the sale of, or an offer to sell, a note secured
directly by an interest in one or more parcels of real property, or
the sale of an undivided interest in a note secured directly by one
or more parcels of real property, to comply with specified
requirements. Existing law limits the allowable percentage of the
current market value of a property, as specified, to be
the aggregate principal amount of the note or interest
sold. Existing law requires a broker to make reasonable efforts to
ensure the offer or sale of notes or interest in notes secured by a
lien on real property or a business opportunity meet certain
criteria, including, among others, the investment in the notes is
suitable and appropriate for the purchaser. To meet this requirement,
a broker may obtain a completed investor questionnaire from each
person to whom the broker offers or sells the notes and deeds of
trust.
This bill would provide that these requirements do not
apply to the sale of an undivided interest in a note secured directly
by one or more parcels of real property. The bill would
modify the allowable percentage of the current market value that can
be sold, as specified. The bill would require the investor
questionnaire to be completed within a specific time before the sale,
modify the requirement for subsequent questionnaires, and remove the
necessity of a broker obtaining an annually updated completed
investor questionnaire from each person to whom the broker sold notes
and deeds of trust. The bill would update the address of the Real
Estate Commissioner on a required notice.
(2) Existing law, the Corporate Securities Law of 1968, provides
that it is unlawful to offer or sell any security in this state
unless the offer and sale of the security has been qualified with the
Commissioner of Business Oversight, or the security or transaction
is exempt from qualification. That law also provides that all offers
and sales of a security are subject to antifraud provisions, which
requires require information provided
to offerees and purchasers to be true and to not omit any material
facts necessary to prevent the statements made from being misleading.
That law requires an issuer engaged in the business of purchasing,
selling, financing, or brokering real estate, that relies on
specified transactions exemptions or a securities exemption from
qualification for an offering that involves the offer or sale of
securities to a person who is not an accredited investor to provide
additional information to the Commissioner of Business Oversight
regarding the nature of the proposed offering on a form prescribed by
the commissioner.
This bill would remove from these requirements to provide
additional information to the commissioner, an offering of securities
that relies on an exemption for a security that is a promissory note
secured by a lien on real property, which is neither one of a series
of notes of equal priority secured by interests in the same real
property nor a note in which beneficial interests are sold to more
than one person or entity.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 10232.3 of the Business and Professions Code is
amended to read:
10232.3. (a) Any transaction that involves the sale of or offer
to sell a note secured directly by an interest in one or more parcels
of real property or the sale of an undivided
interest in a note secured directly by one or more parcels of real
property shall adhere to all of the following:
(1) Except as provided in paragraph (2), the aggregate principal
amount of the note or interest sold, together with the
unpaid principal amount of any encumbrances upon the real property
senior thereto, shall not exceed the following percentages of the
current market value of each parcel of the real property, as
determined in writing by the broker or appraiser pursuant to Section
10232.6, plus the amount for which the payment of principal and
interest in excess of the percentage of current market value is
insured for the benefit of the holders of the note or interest
by an insurer admitted to do business in this state by the
Insurance Commissioner:
(A) Single-family residence, owner occupied.. 80%
(B) Single-family residence, not owner 75%
occupied.................................
Commercial properties and income-
(C) producing properties not described in 65%
(B) or (E)...............................
Single-family residentially zoned lot or
parcel which has installed offsite
improvements including drainage, curbs,
(D) gutters, sidewalks, paved roads, and
utilities as mandated by the political
subdivision having jurisdiction over the
lot or parcel............................ 65%
(E) Land that produces income from crops,
timber, or minerals...................... 60%
Land that is not income producing but
(F) has been zoned for (and if required,
approved for subdivision as) commercial
or residential development............... 50%
(G) Other real property...................... 35%
(2) The percentage amounts specified in paragraph (1) may be
exceeded when and to the extent that the broker determines that the
encumbrance of the property in excess of these percentages is
reasonable and prudent considering all relevant factors pertaining to
the real property. However, in no event shall the aggregate
principal amount of the note or interest sold, together
with the unpaid principal amount of any encumbrances upon the
property senior thereto, exceed 80 percent of the current fair market
value of improved real property or 50 percent of the current fair
market value of unimproved real property, except in the case of a
single-family zoned lot or parcel as defined in paragraph (1), which
shall not exceed 65 percent of the current fair market value of that
lot or parcel, plus the amount insured as specified in paragraph (1).
A written statement shall be prepared by the broker that sets forth
the material considerations and facts that the broker relies upon for
his or her determination, which shall be retained as a part of the
broker's record of the transaction. Either a copy of the statement or
the information contained therein shall be included in the
disclosures required pursuant to Section 10232.5.
(3) A copy of the appraisal or the broker's evaluation, for each
parcel of real property securing the note,
note or interest, shall be delivered to the purchaser. The
broker shall advise the purchaser of his or her right to receive a
copy. For purposes of this paragraph, "appraisal" means a written
estimate of value based upon the assembling, analyzing, and
reconciling of facts and value indicators for the real property in
question. A broker shall not purport to make an appraisal unless the
person so employed is qualified on the basis of special training,
preparation, or experience.
(4) For construction or rehabilitation loans, where the amount
withheld for construction or rehabilitation at the start of the
project exceeds one hundred thousand dollars ($100,000), the term
"current market value" may be deemed to be the value of the completed
project if all of the following safeguards are met:
(A) An independent neutral third-party escrow holder is used for
all deposits and disbursements relating to the construction or
rehabilitation of the secured property.
(B) The loan is fully funded, with the entire loan amount to be
deposited in escrow prior to recording of the deed or deeds of trust.
(C) A comprehensive, detailed draw schedule is used to ensure
proper and timely disbursements to allow for completion of the
project.
(D) 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. For purposes of this subparagraph, "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 or her official capacity.
(E) An appraisal is completed by a qualified and licensed
appraiser in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP).
(F) The documentation includes a detailed description of the
actions that may be taken in the event of a failure to complete the
project, whether that failure is due to default, insufficiency of
funds, or other causes.
(G) The entire amount of the loan does not exceed two million five
hundred thousand dollars ($2,500,000).
(5) For construction or rehabilitation loans, where the amount
withheld for construction or rehabilitation at the start of the
project is one hundred thousand dollars ($100,000) or less, the term
"current market value" may be deemed to be the value of the completed
project if all of the following safeguards are met:
(A) The loan is fully funded, with the entire loan amount to be
deposited in escrow prior to recording of the deed or deeds of trust.
(B) A comprehensive, detailed draw schedule is used to ensure
proper and timely disbursements to allow for completion of the
project.
(C) An appraisal is completed by a qualified and licensed
appraiser in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP).
(D) The documentation includes a detailed description of the
actions that may be taken in the event of a failure to complete the
project, whether that failure is due to default, insufficiency of
funds, or other causes.
(E) The entire amount of the loan does not exceed two million five
hundred thousand dollars ($2,500,000).
(6) If a note or an interest will be secured by more
than one parcel of real property, for the purpose of determining the
maximum amount of the note, note or interest,
each security property shall be assigned a portion of the note
or interest that shall not exceed the percentage of current market
value determined by, and in accordance with, the provisions of
paragraphs (1) and (2).
(b) The note or interest shall not be sold, unless the
purchaser meets one or both of the qualifications of income or net
worth set forth below and signs a statement, which shall be retained
by the broker for four years, conforming to the following:
""Transaction Identifier:___________________________
Name of Purchaser:__________________ Date:__________
Check either one of the following, if true:
( ) My investment in the transaction does not
exceed 10% of my net worth,
exclusive of home, furnishings, and automobiles.
( ) My investment in the transaction does not
exceed 10% of my adjusted
gross income for federal income tax purposes for
my last tax year or,
in the alternative, as estimated for the current
year.
___________________________
Signature''
SEC. 2. Section 10232.45 of the Business and Professions Code is
amended to read:
10232.45. (a) Any broker subject to the provisions of Section
10232.3 or Article 6 (commencing with Section 10237) shall make
reasonable efforts to ensure all of the following with respect to the
offer or sale of notes or interest in notes to be secured
by a lien on real property or a business opportunity:
(1) All persons to whom notes or interests are sold can
be reasonably assumed to have the capacity to understand the
fundamental aspects of the investment, by reason of their
educational, business, or financial experience.
(2) All persons to whom notes or interests are sold can
bear the economic risk of the investment.
(3) The investment in the notes or interests is
suitable and appropriate for the purchaser, given the purchaser's
investment objectives, portfolio structure, and financial situation.
(b) A broker shall make this determination on the basis of
information he or she obtains from the purchaser. Relevant
information for this purpose includes, at least, the age, investment
objective, investment experience, income, net worth, financial
situation, and other investments of the prospective purchaser, as
well as any other pertinent factors the commissioner shall establish
through regulation.
(c) A broker shall maintain records of the information used to
determine that an investment is suitable and appropriate for each
purchaser and shall retain these records for at least four years.
(d) A broker that complies with all of the following shall be
deemed to have complied with subdivision (a):
(1) Obtains from each person to whom notes and deeds of trust
or interests therein are offered or sold, at least
two business days and not more than one year prior to completing each
sale, a completed investor questionnaire in a form approved by the
commissioner. After obtaining an initial questionnaire, any
subsequent questionnaire from the same person need only reflect any
material changes updates from the
immediately preceding questionnaire obtained by the broker.
(2) Uses the responses in that questionnaire as an aid in
complying with subdivision (a).
(e) Nothing in this section shall be construed to require a broker
to utilize an investor questionnaire to ensure compliance with
subdivision (a). Reliance of a broker on an investor questionnaire in
a form approved by the commissioner shall not prohibit that broker
from utilizing additional information to ensure compliance with
subdivision (a).
SEC. 3. Section 10238 of the Business and Professions Code is
amended to read:
10238. (a) A notice in the following form and containing the
following information shall be filed with the commissioner within 30
days after the first transaction and within 30 days of any material
change in the information required in the notice:
TO: Real Estate
Commissioner
Mortgage Loan
Section
1651 Exposition Boulevard
Sacramento, CA 95818
This notice is filed pursuant to Sections 10237
and 10238 of the Business and Professions
Code.
( ) Original Notice ( ) Amended Notice
1. Name of Broker conducting transaction under
Section 10237:
_______________________________________________
2. Broker license identification number: _________
3. List the month the fiscal year ends: __________
4. Broker's telephone number: ____________________
5. Firm name (if different from ""1''):
_______________________________________________
6. Street address (main location):
_____________________________________________
# and Street City State ZIP Code
7. Mailing address (if different from ""6''):
_______________________________________________
8. Servicing agent: Identify by name, address,
and telephone number the person or entity who
will act as the servicing agent in
transactions pursuant to Section 10237
(including the undersigned Broker if that is
the case):
_______________________________________________
_______________________________________________
9. Total number of multilender notes arranged: ___
10. Total number of interests sold to investors on
the
multilender's notes: ______
11.
10. Inspection of trust account
(before answering
this question, review the provisions of
paragraph (3) of subdivision (k) of Section
10238).
CHECK ONLY ONE OF THE FOLLOWING:
( ) The undersigned Broker is (or expects to be)
required to file reports of inspection of its
trust account(s) with the Real Estate
Commissioner pursuant to paragraph (3) of
subdivision (k) of Section 10238.
Amount of Multilender Payments Collected Last
Fiscal Quarter: ___________________________________
Total Number of Investors Due Payments Last Fiscal
Quarter: __________________________________________
( ) The undersigned Broker is NOT (or does NOT
expect to be) required to file reports of
inspection of its trust account(s) with the
Real Estate Commissioner pursuant to paragraph
(3) of subdivision (k) of Section 10238.
12.
11. Signature. The contents of this
notice are
true and correct.
____________ __________________________________
Date Type Name of Broker
__________________________________
Signature of Broker or of
Designated Officer of
Corporate Broker
__________________________________
Type Name of Person(s) Signing
This Notice
NOTE: AN AMENDED NOTICE MUST BE FILED BY THE BROKER WITHIN 30 DAYS OF
ANY MATERIAL CHANGE IN THE INFORMATION REQUIRED TO BE SET FORTH
HEREIN.
(b) A broker or person who becomes the servicing agent for notes
or interest sold pursuant to this article, upon which
payments due during any period of three consecutive months in the
aggregate exceed one hundred twenty-five thousand dollars ($125,000)
or the number of persons entitled to the payments exceeds 120, shall
file the notice required by subdivision (a) with the commissioner
within 30 days after becoming the servicing agent.
(c) All advertising employed for transactions under this article
shall show the name of the broker and comply with Section 10235 and
Sections 260.302 and 2848 of Title 10 of the California Code of
Regulations. Brokers and their agents are cautioned that a reference
to a prospective investor that a transaction is conducted under this
article may be deemed misleading or deceptive if this representation
may reasonably be construed by the investor as an implication of
merit or approval of the transaction.
(d) Each parcel of real property directly securing the notes
or interests shall be located in this state, the note or notes
shall not by their terms be subject to subordination to any
subsequently created deed of trust upon the real property, and the
note or notes shall not be promotional notes secured by liens on
separate parcels of real property in one subdivision or in contiguous
subdivisions. For purposes of this subdivision, a promotional note
means a promissory note secured by a trust deed, executed on
unimproved real property or executed after construction of an
improvement of the property but before the first purchase of the
property as so improved, or executed as a means of financing the
first purchase of the property as so improved, that is subordinate,
or by its terms may become subordinate, to any other trust deed on
the property. However, the term "promotional note" does not include
either of the following:
(1) A note that was executed in excess of three years prior to
being offered for sale.
(2) A note secured by a first trust deed on real property in a
subdivision that evidences a bona fide loan made in connection with
the financing of the usual cost of the development in a residential,
commercial, or industrial building or buildings on the property under
a written agreement providing for the disbursement of the loan funds
as costs are incurred or in relation to the progress of the work and
providing for title insurance ensuring the priority of the security
as against mechanic's and materialmen's liens or for the final
disbursement of at least 10 percent of the loan funds after the
expiration of the period for the filing of mechanic's and materialmen'
s liens.
(e) The notes or interests shall be sold by or through
a real estate broker, as principal or agent. At the time the notes
or interests are originally sold or assigned, neither the
broker nor an affiliate of the broker shall have an interest as
owner, lessor, or developer of the property securing the loan, or any
contractual right to acquire, lease, or develop the property
securing the loan. This provision does not prohibit a broker from
conducting the following transactions if, in either case, the
disclosure statement furnished by the broker pursuant to subdivision
( l ) discloses the interest of the broker or affiliate in
the transaction and the circumstances under which the broker or
affiliate acquired the interest:
(1) A transaction in which the broker or an affiliate of the
broker is acquiring the property pursuant to a foreclosure under, or
sale pursuant to, a deed of trust securing a note for which the
broker is the servicing agent or that the broker sold to the holder
or holders.
(2) A transaction in which the broker or an affiliate of the
broker is reselling from inventory property acquired by the broker
pursuant to a foreclosure under, or sale pursuant to, a deed of trust
securing a note for which the broker is the servicing agent or that
the broker sold to the holder or holders.
(f) (1) The notes or interests shall not be sold to
more than 10 persons, each of whom meets one or both of the
qualifications of income or net worth set forth below and signs a
statement, which shall be retained by the broker for four years,
conforming to the following:
Transaction Identifier:__________________________
Name of Purchaser:_____________________ Date:____
Check either one of the following, if true:
( ) My investment in the transaction does not
exceed 10% of my net worth, exclusive
of home, furnishings, and automobiles.
( ) My investment in the transaction does not
exceed 10% of my adjusted gross income for
federal income tax purposes for my last tax
year or, in the alternative, as estimated
for the current year.
_________________
Signature
(2) The number of offerees shall not be considered for the
purposes of this section.
(3) Spouses and their dependents, and an individual and his or her
dependents, shall be counted as one person.
(4) A retirement plan, trust, business trust, corporation, or
other entity that is wholly owned by an individual and the individual'
s spouse or the individual's dependents, or any combination thereof,
shall not be counted separately from the individual, but the
investments of these entities shall be aggregated with those of the
individual for the purposes of the statement required by paragraph
(1). If the investments of any entities are required to be aggregated
under this subdivision, the adjusted gross income or net worth of
these entities may also be aggregated with the net worth, income, or
both, of the individual.
(5) The "institutional investors" enumerated in subdivision (i) of
Section 25102 or subdivision (c) of Section 25104 of the
Corporations Code, or in a rule adopted pursuant thereto, shall not
be counted.
(6) A partnership, limited liability company, corporation, or
other organization that was not specifically formed for the purpose
of purchasing the security offered in reliance upon this exemption
from securities qualification is counted as one person.
(g) The notes or interests of the purchasers shall be
identical in their underlying terms, including the right to direct or
require foreclosure, rights to and rate of interest, and other
incidents of being a lender, and the sale to each purchaser pursuant
to this section shall be upon the same terms, subject to adjustment
for the face or principal amount or percentage interest purchased and
for interest earned or accrued. This subdivision does not
preclude different selling prices for interests to the extent that
these differences are reasonably related to changes in the market
value of the loan occurring between the sales of these interests. The
interest of each purchaser shall be recorded pursuant to
subdivisions (a) to (c), inclusive, of Section 10234 .
(h) (1) Except as provided in paragraph (2), the aggregate
principal amount of the notes or interests sold, together
with the unpaid principal amount of any encumbrances upon the real
property senior thereto, shall not exceed the following percentages
of the current market value of each parcel of the real property, as
determined in writing by the broker or appraiser pursuant to Section
10232.6, plus the amount for which the payment of principal and
interest in excess of the percentage of current market value is
insured for the benefit of the holders of the notes or interests
by an insurer admitted to do business in this state by the
Insurance Commissioner:
(A) Single-family residence, owner occupied
........................................ 80%
(B) Single-family residence, not owner
occupied ............................... 75%
(C) Commercial properties and income-
producing properties ................... 65%
(D) Single-family residentially zoned lot
or parcel not described in (B) or
(E) which has installed offsite
improvements including drainage, curbs,
gutters, sidewalks, paved roads, and
utilities as mandated by the political
subdivision having jurisdiction over
the lot or parcel ...................... 65%
(E) Land that produces income from crops,
timber, or minerals..................... 60%
(F) Land that is not income producing but
has been zoned for (and if required,
approved for subdivision as) commercial
or residential development ............. 50%
(G) Other real property .................... 35%
(2) The percentage amounts specified in paragraph (1) may be
exceeded when and to the extent that the broker determines that the
encumbrance of the property in excess of these percentages is
reasonable and prudent considering all relevant factors pertaining to
the real property. However, in no event shall the aggregate
principal amount of the notes or interests sold, together
with the unpaid principal amount of any encumbrances upon the
property senior thereto, exceed 80 percent of the current fair market
value of improved real property or 50 percent of the current fair
market value of unimproved real property, except in the case of a
single-family zoned lot or parcel as defined in paragraph (1), which
shall not exceed 65 percent of the current fair market value of that
lot or parcel, plus the amount insured as specified in paragraph (1).
A written statement shall be prepared by the broker that sets forth
the material considerations and facts that the broker relies upon for
his or her determination, which shall be retained as a part of the
broker's record of the transaction. Either a copy of the statement or
the information contained therein shall be included in the
disclosures required pursuant to subdivision (l).
(3) A copy of the appraisal or the broker's evaluation, for each
parcel of real property securing the notes,
notes or interests, shall be delivered to each purchaser. The
broker shall advise purchasers of their right to receive a copy. For
purposes of this paragraph, "appraisal" means a written estimate of
value based upon the assembling, analyzing, and reconciling of facts
and value indicators for the real property in question. A broker
shall not purport to make an appraisal unless the person so employed
is qualified on the basis of special training, preparation, or
experience.
(4) For construction or rehabilitation loans, the term "current
market value" may be deemed to be the value of the completed project
if the following safeguards are met:
(A) An independent neutral third-party escrow holder is used for
all deposits and disbursements.
(B) The loan is fully funded, with the entire loan amount to be
deposited in escrow prior to recording of the deed or deeds of trust.
(C) A comprehensive, detailed, detailed
draw schedule is used to ensure proper and timely disbursements
to allow for completion of the project.
(D) 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. For purposes of this subparagraph, "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 or her official capacity.
(E) An appraisal is completed by a qualified and licensed
appraiser in accordance with the Uniform Standards of Professional
Appraisal Practice (USPAP).
(F) In addition to the transaction documentation required by
subdivision (i), the documentation shall include a detailed
description of actions that may be taken in the event of a failure to
complete the project, whether that failure is due to default,
insufficiency of funds, or other causes.
(G) The entire amount of the loan does not exceed two million five
hundred thousand dollars ($2,500,000).
(5) If a note or an interest will be secured by more
than one parcel of real property, for the purpose of determining the
maximum amount of the note, note or interest,
each security property shall be assigned a portion of the note
which or interest that shall not
exceed the percentage of current market value determined by, and in
accordance with, the provisions of paragraphs (1) and (2).
(i) The documentation of the transaction shall require that (1) a
default upon any note or interest is a default upon all
notes or interests and (2) the holders of more than 50
percent of the recorded beneficial interests of the notes or
interests may govern the actions to be taken on behalf of all
holders in accordance with
Section 2941.9 of the Civil Code in the event of default or
foreclosure for matters that require direction or approval of the
holders, including designation of the broker, servicing agent, or
other person acting on their behalf, and the sale, encumbrance, or
lease of real property owned by the holders resulting from
foreclosure or receipt of a deed in lieu of foreclosure. The terms
called for by this subdivision may be included in the deed of
trust trust, in the assignment of interests,
or in any other documentation as is necessary or appropriate to
make them binding on the parties.
(j) (1) The broker shall not accept any purchase or loan funds or
other consideration from a prospective lender or purchaser, or
directly or indirectly cause the funds or other consideration to be
deposited in an escrow or trust account, except as to a specific loan
or note secured by a deed of trust that the broker owns, is
authorized to negotiate, or is unconditionally obligated to buy.
(2) All funds received by the broker from the purchasers or
lenders shall be handled in accordance with Section 10145 for
disbursement to the persons thereto entitled upon recordation of the
interests of the purchasers or lenders in the note and deed of trust.
No provision of this article shall be construed as modifying or
superseding applicable law regulating the escrow holder in any
transaction or the handling of the escrow account.
(3) The books and records of the broker or servicing agent, or
both, shall be maintained in a manner that readily identifies
transactions under this article and the receipt and disbursement of
funds in connection with these transactions.
(4) If required by paragraph (3) of subdivision (k), the review by
the independent certified public accountant shall include a sample
of transactions, as reflected in the records of the trust account
required pursuant to paragraph (1) of subdivision (k), and the bank
statements and supporting documents. These documents shall be
reviewed for compliance with this article with respect to the
handling and distribution of funds. The sample shall be selected at
random by the accountant from all these transactions and shall
consist of the following: (A) three sales made or 5 percent of the
sales made pursuant to this article during the period for which the
examination is conducted, whichever is greater, and (B) 10 payments
processed or 2 percent of payments processed under this article
during the period for which the examination is conducted, whichever
is greater.
(5) For the purposes of this subdivision, the transaction that
constitutes a "sale" is the series of transactions by which a series
of notes of a maker maker, or the interests
in the note of a maker, are sold or issued to their various
purchasers under this article, including all receipts and
disbursements in that process of funds received from the purchasers
or lenders. The transaction that constitutes a "payment," for the
purposes of this subdivision, is the receipt of a payment from the
person obligated on the note or from some other person on behalf of
the person so obligated, including the broker or servicing agent, and
the distribution of that payment to the persons entitled thereto. If
a payment involves an advance paid by the broker or servicing agent
as the result of a dishonored check, the inspection shall identify
the source of funds from which the payment was made or, in the
alternative, the steps that are reasonably necessary to determine
that there was not a disbursement of trust funds. The accountant
shall inspect for compliance with the following specific provisions
of this section: paragraphs (1), (2), and (3) of subdivision (j) and
paragraphs (1) and (2) of subdivision (k).
(6) Within 30 days of the close of the period for which the report
is made, or within any additional time as the commissioner may in
writing allow in a particular case, the accountant shall forward to
the broker or servicing agent, as the case may be, and to the
commissioner, the report of the accountant, stating that the
inspection was performed in accordance with this section, listing the
sales and the payments examined, specifying the nature of the
deficiencies, if any, noted by the accountant with respect to each
sale or payment, together with any further information as the
accountant may wish to include, such as corrective steps taken with
respect to any deficiency so noted, or stating that no deficiencies
were observed. If the broker meets the threshold criteria of Section
10232, the report of the accountant shall be submitted as part of the
quarterly reports required under Section 10232.25.
(k) The notes or interests shall be sold subject to a
written agreement that obligates a licensed real estate broker, or a
person exempted from the licensing requirement for real estate
brokers under this chapter, to act as agent for the purchasers or
lenders to service the note or notes and deed of trust, including the
receipt and transmission of payments and the institution of
foreclosure proceedings in the event of a default. A copy of this
servicing agreement shall be delivered to each purchaser. The broker
shall offer to the lenders or purchasers the services of the broker
or one or more affiliates of the broker, or both, as servicing agent
for each transaction conducted pursuant to this article. The
agreement shall require all of the following:
(1) (A) That payments received on the note or notes be deposited
immediately to a trust account maintained in accordance with this
section and with the provisions for trust accounts of licensed real
estate brokers contained in Section 10145 and Article 15 (commencing
with Section 2830.1) of Chapter 6 of Title 10 of the California Code
of Regulations.
(B) That payments deposited pursuant to subparagraph (A) shall not
be commingled with the assets of the servicing agent or used for any
transaction other than the transaction for which the funds are
received.
(2) That payments received on the note or notes shall be
transmitted to the purchasers or lenders pro rata according to their
respective interests within 25 days after receipt thereof by the
agent. If the source for the payment is not the maker of the note,
the agent shall inform the purchasers or lenders in writing of the
source for payment. A broker or servicing agent who transmits to the
purchaser or lenders the broker's or servicing agent's own funds to
cover payments due from the borrower but unpaid as a result of a
dishonored check may recover the amount of the advances from the
trust fund when the past due payment is received. However, this
article does not authorize the broker, servicing agent, or any other
person to issue, or to engage in any practice constituting, any
guarantee or to engage in the practice of advancing payments on
behalf of the borrower.
(3) If the broker or person who is or becomes the servicing agent
for notes or interests sold pursuant to this article upon
which the payments due during any period of three consecutive months
in the aggregate exceed one hundred twenty-five thousand dollars
($125,000) or the number of persons entitled to the payments exceeds
120, the trust account or accounts of that broker or affiliate shall
be inspected by an independent certified public accountant at no less
than three-month intervals during the time the volume is maintained.
Within 30 days after the close of the period for which the review is
made, the report of the accountant shall be forwarded as provided in
paragraph (6) of subdivision (j). If the broker is required to file
an annual report pursuant to subdivision (o) or pursuant to Section
10232.2, the quarterly report pursuant to this subdivision need not
be filed for the last quarter of the year for which the annual report
is made. For the purposes of this subdivision, an affiliate of a
broker is any person controlled by, controlling, or under common
control with the broker.
(4) Unless the servicing agent will receive notice pursuant to
Section 2924b of the Civil Code, the servicing agent shall file a
written request for notice of default upon any prior encumbrances and
promptly notify the purchasers or lenders of any default on the
prior encumbrances or on the note or notes subject to the servicing
agreement.
(5) The servicing agent shall promptly forward copies of the
following to each purchaser or lender:
(A) Any notice of trustee sale filed on behalf of the purchasers
or lenders.
(B) Any request for reconveyance of the deed of trust received on
behalf of the purchasers or lenders.
(l) The broker shall disclose in writing to each purchaser or
lender the material facts concerning the transaction on a disclosure
form adopted or approved by the commissioner pursuant to Section
10232.5, subject to the following:
(1) The disclosure form shall include a description of the terms
upon which the note and deed of trust are being sold, including the
terms of the undivided interests being offered therein, including the
following:
(A) In the case of the sale of an existing note:
(i) The aggregate sale price of the note.
(ii) The percent of the premium over or discount from the
principal balance plus accrued but unpaid interest.
(iii) The effective rate of return to the purchasers if the note
is paid according to its terms.
(iv) The name and address of the escrow holder for the
transaction.
(v) A description of, and the estimated amount of, each cost
payable by the seller in connection with the sale and a description
of, and the estimated amount of, each cost payable by the purchasers
in connection with the sale.
(B) In the case of the origination of a note:
(i) The name and address of the escrow holder for the transaction.
(ii) The anticipated closing date.
(iii) A description of, and the estimated amount of, each cost
payable by the borrower in connection with the loan and a description
of, and the estimated amount of, each cost payable by the lenders in
connection with the loan.
(C) In the case of a transaction involving a note or interest
secured by more than one parcel of real property, in addition
to the requirements of subparagraphs (A) and (B):
(i) The address, description, and estimated fair market value of
each property securing the loan.
(ii) The amount of the available equity in each property securing
the loan after the loan amount to be apportioned to each property is
assigned.
(iii) The loan to value percentage for each property after the
loan amount to be apportioned to each property is assigned pursuant
to subdivision (h).
(2) A copy of the written statement or information contained
therein, as required by paragraph (2) of subdivision (h), shall be
included in the disclosure form.
(3) Any interest of the broker or affiliate in the transaction, as
described in subdivision (e), shall be included with the disclosure
form.
(4) When the particular circumstances of a transaction make
information not specified in the disclosure form material or
essential to keep the information provided in the form from being
misleading, and the other information is known to the broker, the
other information shall also be provided by the broker.
(5) If more than one parcel of real property secures the
notes, notes or interests, the disclosure form
shall also fully disclose any risks to investors associated with
securing the notes or interests with multiple parcels of
real property.
(m) The broker or servicing agent shall furnish any purchaser of a
note, note or interest,
upon request, with the names and addresses of the purchasers of the
other notes or interests in the loan.
(n) No agreement in connection with a transaction covered by this
article shall grant to the real estate broker, the servicing agent,
or any affiliate of the broker or agent the option or election to
acquire the interests of the purchasers or lenders or to acquire the
real property securing the interests. This subdivision shall not
prohibit the broker or affiliate from acquiring the interests, with
the consent of the purchasers or lenders whose interests are being
purchased, or the property, with the written consent of the
purchasers or lenders, if the consent is given at the time of the
acquisition.
(o) Each broker who conducts transactions under this article, or
broker or person who becomes the servicing agent for notes or
interests sold pursuant to this article, who meets the criteria
of paragraph (3) of subdivision (k) shall file with the commissioner
an annual report of a review of its trust account. The report shall
be prepared and filed in accordance with subdivision (a) of Section
10232.2 and the rules and procedures thereunder of the commissioner.
That report shall cover the broker's transactions under this article
and, if the broker also meets the threshold criteria set forth in
Section 10232, the broker's transactions subject to that section
shall be included as well.
(p) Each broker conducting transactions pursuant to this article,
or broker or person who becomes the servicing agent for notes or
interests sold pursuant to this article, who meets the
criteria of paragraph (3) of subdivision (k) shall file with the
commissioner a report of the transactions that is prepared in
accordance with subdivision (c) of Section 10232.2. If the broker
also meets the threshold criteria of Section 10232, the report shall
also include the transactions subject to that
section as well. section. This report shall be
confidential pursuant to subdivision (f) of Section 10232.2.
SEC. 4. Section 25102.2 of the Corporations Code is amended to
read:
25102.2. The commissioner shall require any issuer that is
engaged in the business of purchasing, selling, financing, or
brokering real estate, and that relies upon an exemption authorized
by subdivision (e), (f), (h), or (n) of Section 25102, for an
offering which involves the offer or sale of securities to any person
who is not an accredited investor, as defined in Regulation D of the
Securities and Exchange Commission (17 C.F.R. 230.501 et seq.), in a
transaction that is not registered pursuant to the Securities Act of
1933, to provide additional information regarding the nature of the
proposed offering on a form prescribed by the commissioner. This
information shall include the names of the issuer's officers and
directors in the case of a corporation, managers in the case of a
manager-managed limited liability company, members in the case of a
member-managed limited liability company, general partner in the case
of a limited partnership, or persons performing similar
functions, functions in the case of other types
of issuers, the offering disclosure documents provided to prospective
purchasers, a list of all state and federal licenses required to
further the purposes of the investment, and the names of all licensed
persons that will undertake those activities.