Threshold and multi-lender broker reporting requirements in California are a source of confusion for many people who broker loans in California, resulting in compliance violations which could have easily been avoided.
This article will provide a road map for California mortgage brokers to determine (a) whether they are subject to the additional compliance obligations and (b) if so, what must be done.
WHO MUST COMPLY?
Threshold Broker Reporting Criteria
Brokers that answer yes to the following questions must file threshold broker reports:
- Are you licensed and regulated by the California Department of Real Estate (“DRE”)?
- Do you broker transactions to any of the following where the loan or sale is not negotiated or serviced by a licensee regulated by the California Department of Financial Protection and Innovation:
- Private individual investors
- Trustees of pension, profit-sharing, or welfare funds with a net worth of less than $15 million
- Have you met one of the following criteria within the prescribed time period?
- (a) In any successive twelve-month period you have:
- Negotiated 10 or more of the following transactions with an aggregate loan amount of more than $1 million: (i) loans secured directly or collaterally by liens on real property or business opportunities on behalf of another (“Subject Loans”); (ii) sales or exchanges of real property sales contracts or Subject Loans on behalf of another; or (iii) sales or exchanges of real property sales contracts or Subject Loans as owner of such.
- Collected payments of $250,000 or more on behalf of owners of Subject Loans, owners of real property sales contracts, or both.
- Collected payments of $250,000 or more on behalf of borrowers under Subject Loans, lenders of real property sales contracts, or both.
- (b) In any successive six-month period you have:
- Negotiated a combination of 5 or more loans, sales, or note or real property sales contract exchanges of $500,000 or more.
- (c) In any successive three-month period you have:
- Negotiated a combination of 2 or more loans, sales, or note or real property sales contract exchanges of $250,000 or more.
- (a) In any successive twelve-month period you have:
It should be noted that the testing periods are not based on a calendar year. Therefore, transactions covering two different calendar years could be considered. Furthermore, the requirements in (b) and (c) create a rebuttable presumption that a subject broker intends to conduct its business in a manner that will meet the twelve-month figures and thus will be required to comply.
Multi-Lender Broker Reporting Criteria
Brokers that are licensed and regulated by the DRE and broker one or more multi-lender transactions must file multi-lender broker reports.
It should be noted that in many instances, a broker is both a threshold broker and multi-lender broker. If a broker does meet the criteria for both, the broker must comply with the reporting requirements for both.
HOW DOES ONE COMPLY WITH THRESHOLD AND MULTI-LENDER BROKER REPORTING REQUIREMENTS?
Threshold Brokers
Brokers that meet the threshold reporting criteria, in addition to any other broker reporting requirements, must file the following reports by the indicated deadlines to remain compliant:
- Threshold Notification. Within 30 days of meeting any of the threshold criteria, the broker must notify the DRE by filing the Threshold Notification. This form must also be filed upon a change in a threshold broker’s fiscal year or company name, as well as within 30 days of the broker no longer meeting the threshold criteria.
- Quarterly Trust Fund Status Reports. Within 30 days after the end of each of the broker’s first three fiscal quarters, the broker must file either (a) a Trust Fund Status Report and Trust Fund Bank Account Reconciliation (if trust funds were accepted during the reporting period) or (b) a Trust Fund Non-Accountability Report (if no trust funds were accepted during the reporting period).
- Annual Trust Account Review (TAR). Within 90 days after the end of the broker’s fiscal year (or by May 31 if the fiscal year ends on or between November 30 and February 29), (a) a TAR prepared by an independent certified public accountant must be submitted to the DRE (if trust funds were accepted during the reporting period) or (b) a Trust Fund Non-Accountability Report (if no trust funds were accepted during the reporting period).
- Annual Business Activity Report (BAR). Within 90 days after the end of the broker’s fiscal year Part B of the BAR must be filed with the DRE.
Multi-Lender Brokers
Brokers that meet the multi-lender reporting criteria, in addition to any other broker reporting requirements, must file the following reports by the indicated deadlines to remain compliant:
- Multi-Lender Transaction Notice. Within 30 days of brokering its first multi-lender transaction, the broker must notify the DRE by filing the Multi-Lender Transaction Notice. This form must also be filed within 30 days of any material change, as well as within 30 days of the broker no longer meeting the threshold criteria.
- Quarterly Trust Account Reports (QTAR). Within 30 days after the end of each of the broker’s fiscal quarters, a QTAR prepared by an independent certified public accountant must be submitted to the DRE (if a TAR will be filed, the QTAR for the fourth quarter is not required). A QTAR is only required if a broker is or becomes the servicing agent for multi-lender notes with (a) an aggregate of $125,000 in payments due in a three-month period or (b) an aggregate of more than 120 investors.
- Annual Trust Account Review (TAR). Within 90 days after the end of the broker’s fiscal year (or by May 31 if the fiscal year ends on or between November 30 and February 29), a TAR prepared by an independent certified public accountant must be submitted to the DRE (if trust funds were accepted during the reporting period).
- Annual Business Activity Report (BAR). Within 90 days after the end of the broker’s fiscal year Part B of the BAR must be filed with the DRE.
