New Penalties for Unlicensed Real Estate Practice?Legislative Committee

This material is for study only and has not been approved by the Legislative or Executive Committees or the Board of Directors.Issue: Should DRE have additional powers to penalize people practicing real estate without a license?Action: OptionalOptions:
1.  Do Nothing – maintain status quo.
2.  Explore additional enforcement authority with DRE and report to committee in January 2008.
3.  Sponsor legislation to create authority for DRE that can be applied to individuals that engage in real estate activities without a license.
4.  OtherStatus/Summary: DRE's primary role isto license and regulate licensees in their practice of real estate. Its actual authority extends only to licensees, and not other individuals. An unlicensed individual that engages in activity requiring a real estate license will be ordered to “desist and refrain” from such activity. Disobedience of the order can only be enforced by a referral to the local prosecutor who, in theory, is obligated to pursue the case. DiscussionWhy Doesn't Somebody Stop That Guy? In many states, the real estate commissioner polices not only the real estate professionals, but the real estate business as well. It is not uncommon for other states regulators to be a source of standard forms, oversee errors and omissions insurance, and to protect against unlicensed practice of real estate.In California the Department of Real Estate has a more limited jurisdiction, based upon its licensing authority.  In regard to unlicensed practice for example, the DRE cannot threaten to revoke a license the unlicensed practitioner doesn't have.  Without the jurisdiction over a license, the department does not have the regulatory connection to assess a fine for misconduct – and since the misconduct itself is practicing without a license, DRE canissue no penalty. The Business and Professions Code (Section 10086) provides that the DRE can order an unlicensed individual to desist and refrain from licensed activities, and allows the department to go to court as a plaintiff in a civil action toseek an injunction against the prohibited behavior. The code does not provide DRE with any ability on its own to punish a violation of the “D&R” order (although it can bring a civil action). Instead, DRE can make a complaint about the violation to the local prosecutor for enforcement.  Section 10130 says in part that “It is the duty of the district attorney of each county in this state to prosecute all violations of this section in their respective counties...”DRE  Activity. Over the past decade DRE has sent a “D&R” order to a little over 750 companies and individuals.  Staff has not yet been able to verify whether any prosecutions have occurred that were not part of a larger real estate fraud prosecution.  It should not be surprising that a relatively low profile license violation, especially if no theft is occurring in conjunction with it, does not receive much priority from an elected district attorney who has a docket choked with higherprofile crimes of violence and large property loss.Unlicensed practice is already criminalized. Section 10139 makes it a misdemeanor punishable by fines up to $10,000 and/or six months in jail for “any person” to act as licensee when they arenot. However, DRE is not a criminal enforcement entity.Civil Fine Authority. DRE can fine a licensee for license violations, but the fine is really a penalty in lieu of loss of the license. If the licensee doesn't pay, the ultimate leverage that the department has is to suspend or revoke the license.  Again however, if the defendant has no license to lose, the civil penalty is an empty threat. 

“In theory, there is no differencebetween theory and practice. In practice, there is”.
                                                                                            Mike Bennett
                                                                                            Astronomical Society of the PacificIn theory, DRE could go to court as a civil plaintiffand seek an injunction to stop the unlicensed activity.  In practice, a court action is reportedly rare and generally part of a larger action such as putting a receiver in place to take over a collapsing company. Unfortunately, the cost and delay ofa formal court action have effectively deterred the use of an injunction against low profile violators like an unlicensed sales or mortgage office or an unlicensed vacation rental office.Interestingly, DRE used to have the authority to issue fines againstmortgage brokers, but allowed the authority to expire about 2000. The department had apparently concluded that the lack of license-based leverage, and the typical insolvency of the defendants, made seeking a fine a useless exercise.It is unclear what position the department might take on legislation to grant it greater authority to level a civil penalty for unlicensed practice.Changing the Economics of Enforcement. Attempting to increase the penalty for unlicensed practice violations, and thus make thema higher profile crime more likely to be prosecuted, is not likely to be a viable strategy. In the current political climate the legislature is not receptive to the creation of new crimes, especially one that might count as a “strike” for thecalculations of the very controversial three strikes law.It is possible that a change in the distribution of civil penalties could create a financial incentive for local prosecutors to pursue unlicensed practice. If the proceeds of civil penalties went tothe prosecutors’ dedicated programs, prosecution might be better supported.In the alternative, it might be possible to create a recovery-sharing incentive program by which a civil plaintiff or plaintiff's attorney, or even a private association, could be given an incentive to bring the injunctive actions or civil complaints that DRE finds uneconomical or unfeasible.Caution: Is it really in the best interests of organized real estate to create incentives to bring suit based on the license law? Would the cadre of plaintiffs' attorneys that become familiarized with the law then be inclined to bring more actions against licensed practitioners?Should staff collaborate with DRE and report back on additional options in January 2008?