Comparing Fiduciary Duties Under California Real Estate and Finance Lender Licensing
When private lenders decide where to fund, they look at various state regimes but one often missed consideration is different obligations (and liabilities) that can occur just as a matter of licensing.
In California, real estate licensees who solely operate under the California Department of Real Estate (DRE) owe clients comprehensive fiduciary duties grounded in agency law and reinforced by statute, regulation, and decades of common law. In contrast, finance lenders and brokers licensed under the California Financing Law (CFL), administered by the Department of Financial Protection and Innovation, do not have these traditional fiduciary obligations because of the statutory disclosure and consumer-protection framework that it imposes.
That distinction is most important when the same financing transaction, deal team, or set of loan documents touches different licensed roles, where the legal relationship (and the duties of loyalty, disclosure, care, and compliance) depends on the licensing regime involved. This article compares the scope, source, and practical implications of duties owed by DRE-licensed real estate brokers and salespersons with the regulatory duties imposed on CFL licensees, and explains why the two regimes reflect different policy objectives and legal traditions.
What are the fundamental differences?
Fundamentally, real estate brokers are agents who act on behalf of and in place of their principals and an agency relationship triggers fiduciary duties as a matter of common law. In contrast, CFL licensees are principals in their own transactions (as lenders) or facilitators/arrangers (as brokers), but not agents of the borrower. The borrower is the opposing party or consumer in an arm’s-length transaction, not the principal in an agency relationship.
On a technical issue, this means that litigation involving fiduciary duty claims requires expert testimony on what is appropriate and whether the conduct met the standard of care. In contrast, litigation involving a CFL licensee is entirely contractual and those cases can be more easily resolved (i.e. less costly litigation) by simple reference to the statutory obligations.
The real estate agent framework and fiduciary duties
California real estate brokers and salespersons function as agents of their principals and are thus subject to the full range of fiduciary duties recognized under common law agency principles. (Montoya v. McLeod (1985) 176 Cal. App. 3d 57, 65.) A repeated refrain is real estate licensees owe “the same obligation of undivided service and loyalty that [the law] imposes on a trustee in favor of his beneficiary.” (Id.) This fiduciary relationship demands the highest standards of good faith, requiring the licensee to place the principal’s interests above the licensee’s at all times.
California Business and Professions Code § 10010.5 codifies this common law obligation providing that nothing in recent legislative amendments affects “any fiduciary duties owed by a real estate broker to a person who retains that broker to perform acts for which a license is required,” and confirms that responsible brokers remain “liable for the actions or negligence of a salesperson or broker associate retained by the responsible broker to perform acts for which a license is required.”
These duties overlap but can be put into five categories.
- Duty of Undivided Loyalty and Utmost Care
First, the broker must provide “undivided service and loyalty” to the principal, exercising “utmost care, integrity, honesty and loyalty” in all dealings. (Horiike v. Coldwell Banker Residential Brokerage Co. (2016) 1 Cal. 5th 1024, 1042.) Brokers are thus prohibited from competing with the principal, self-dealing, or favoring the broker’s own interests or those of third parties over the principal’s interests.
- Duty of Full Disclosure
A real estate licensee is “charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision.” (Montoya, supra, 176 Cal. App. 3d at p. 65.) This duty extends to all compensation arrangements, profits, assignment fees, conflicts of interest, and any information that could influence the principal’s consent or negotiating position. (Roberts v. Lomanto (2003) 112 Cal. App. 4th 1553, 1563.) The duty requires the disclosure of all “reasonably obtainable material information” and for a residential property, to conduct a “reasonably competent and diligent visual inspection.” (Cal Civ Code § 2079.)
A failure to disclose material information constitutes constructive fraud, which does not require proof of actual fraudulent intent but instead arises from “any act, omission or concealment involving a breach of legal or equitable duty, trust or confidence which results in damage to another” as “a unique species of fraud applicable only to a fiduciary or confidential relationship.” (Lazar v. Bishop (2024) 107 Cal. App. 5th 668, 680.) As a result, courts have imposed constructive trusts, rescission, and forfeiture of commissions as remedies. (Nguyen v. Scott (1988) 206 Cal. App. 3d 725; Wilson v. Lewis (1980) 106 Cal. App. 3d 802.)
- Prohibition on Secret Profits
A real estate licensee may not retain any undisclosed profit or compensation arising from the agency relationship, and any secret assignment fee, undisclosed higher purchase price, or other financial benefit obtained without the principal’s knowledge and consent constitutes a breach of fiduciary duty. (Roberts, supra, 112 Cal. App. 4th at 1563.)
- Duty of Honesty and Fair Dealing to Non-Clients
A real estate broker also owes “a duty of honesty and fair dealing” to all parties, even though those with no formal agency relationship like prospective purchasers. (Nguyen, supra, 206 Cal. App. 3d at p. 735.) The broker may not secretly compete with a prospective buyer or fail to transmit offers in order to pursue personal acquisition of the property because the real estate broker’s relationship to the buyer is such that the buyer usually expects the broker to protect his interests. (Id.)
- Duty of Reasonable Care and Professional Skill
Because they are professionals, real estate licensees must “use a higher degree of skill and diligence in the conduct of [their] duties” than ordinary agents. (Montoya, supra, 176 Cal. App. 3d at p. 65.) This includes an obligation to perform necessary research and investigation to learn material facts affecting the principal’s decision and provide competent counsel regarding the transaction. (Assilzadeh v. Cal. Fed. Bank (2000) 82 Cal. App. 4th 399, 414-415.)
The contrasting regulatory framework for CFL license holders
Unlike real estate licenses, finance lenders and brokers who make or arrange consumer and commercial loans are regulated under the California Financing Law, codified in Division 9 of the Financial Code. (Cal. Fin Code § 22100, et seq.) The CFL’s scope extends to residential mortgage loans, commercial financing transactions, and other consumer credit products.
Unlike real estate brokers, CFL licensees are not agents of borrowers under California law, and therefore the CFL does not impose fiduciary duties on finance lenders or brokers. Instead, the relationship between a CFL licensee and a borrower is fundamentally transactional and contractual, governed by statutory disclosure requirements, licensing conditions, and consumer-protection prohibitions rather than common law agency principles.
Instead of fiduciary duties, undivided loyalty, or the duty of utmost care, the regulatory framework is focused on transparency, disclosure, fair dealing within defined parameters, and protection against specific prohibited practices.
Violations of the CFL subject licensees to administrative enforcement by the Commissioner, including suspension, revocation, and civil penalties. Borrowers harmed by CFL violations instead generally pursue remedies through contract law, consumer-protection statutes, and specific statutory remedies rather than through more open-ended fiduciary-breach claims.
- Disclosure Requirements
Finance lenders must deliver to the borrower a written statement showing the lender’s and broker’s name, address, and license number; the loan amount, maturity, and repayment terms; the nature of any security; and the agreed rate of charge or annual percentage rate. (Cal. Fin. Code § 22337.) For commercial financing transactions, providers must disclose the total amount of funds provided, total dollar cost, term, payment method and frequency, prepayment policies, and annualized rate. (Cal. Fin. Code § 22802.) The borrower must sign the disclosure before the transaction is consummated. (Cal. Fin. Code § 22802.)
- Prohibition on Waiver of Rights
Because the entire framework is statutory, a CFL licensee cannot require, as a condition of providing a loan, that the borrower waive any legal right, penalty, remedy, forum, or procedure, including the right to file civil actions or complaints with regulatory authorities. (Cal. Fin. Code § 22370.) Any waiver required as a condition of doing business is presumed involuntary, unconscionable, and unenforceable. (Id.) From there, the licensee bears the burden of proving that any waiver was knowing, voluntary, and not a condition of the contract. (Id.) CFL licensees may not refuse to do business with or discriminate against a borrower who refuses to waive legal rights or who exercises the right to file complaints or pursue legal remedies. (Id.)
- Record-Keeping and Reporting
Finance lenders must obtain a signed statement from the borrower disclosing whether any broker participated in the transaction and, if so, the sums paid or payable to that broker. (Cal. Fin. Code § 22337.) These records must be maintained for three years. (Id.)
- Advance Payment Rights
All loan contracts must permit the borrower to make payments in advance at any time without penalty. (Cal. Fin. Code § 22337.)
Summary of various elements
Here is a summary of the various regimes.
Element | DRE-Licensed Real Estate Broker | CFL-Licensed Finance Lender/Broker |
Legal relationship | Agent/fiduciary of client. | Lender (principal) or transaction facilitator |
Duty of loyalty | Undivided loyalty; utmost care; and must place client’s interests first. (Horiike v. Coldwell Banker Residential Brokerage Co., (2016) 1 Cal. 5th 1024, 1042; Montoya v. McLeod (1985) 176 Cal. App. 3d 57, 65.) | No fiduciary duty of loyalty; fair dealing within statutory parameters. |
Duty to disclose | Full disclosure of all material facts affecting principal’s decision, including all compensation, profits, and conflicts. (Montoya at p. 65; Roberts v. Lomanto (2003) 112 Cal. App. 4th 1553, 1563. | Statutory disclosure of loan terms, costs, rates, fees; broker participation (Cal. Fin. Code §§ 22337, 22802.) |
Prohibition on secret profits | Absolute prohibition; any undisclosed profit breaches fiduciary duty. (Roberts, supra, 112 Cal. App. 4th at p. 1563.) | No prohibition on lender profit; only disclosure of agreed charges required. (Cal. Fin. Code § 22337 |
Standard of care | Professional standard; higher degree of skill and diligence; duty to investigate and counsel. (Montoya, supra, 176 Cal. App. 3d at p. 65; Assilzadeh v. Cal. Fed. Bank (2000) 82 Cal. App. 4th 399, 415.) | Compliance with statutory lending and disclosure requirements. |
Remedies for breach | Constructive fraud, rescission, constructive trust, forfeiture of commission, and damages. (Nguyen v. Scott (1988) 206 Cal. App. 3d 725; Roberts, supra, 112 Cal. App. 4th p. 1563; Lazar v. Bishop (2024) 107 Cal. App. 5th 668, 680.) | Statutory penalties, contract remedies, consumer-protection claims. |
Closing Thoughts
When considering the preparation of the loan documents, consider the liability for the license regime for the preparers. Although it is simpler to operate as a mere real estate brokers, they function as agents, and owe more fuzzy fiduciary duties requiring undivided loyalty, full disclosure, and the highest standards of care to all parties in a transaction. In contrast, finance lenders and brokers operate under more black-and-white detailed statutory disclosure and consumer-protection requirements but do not owe traditional fiduciary duties.
Practically, a difference licensing regime can limit the complexity and consequences should a borrower sue. Real estate professionals face forfeiture of compensation, rescission, and constructive-fraud liability, while finance professionals (although subject to rigorous disclosure standards) are limited to prohibitions on unfair practices.
Consider a firm that knows now just how to prepare loan documents that protect a private lender, but also how to prepare the loan drafters from excessively complex litigation.
About Geraci LLP
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Geraci LLP is a private lending and real estate law firm based in Irvine, California. Our transactional and regulatory advisory practice spans all 50 states, supporting private lenders on loan documentation, multi-state licensing and compliance, structured lending, fund formation, and securities work. Our attorneys are admitted in California, Arizona, and New Jersey, where we also handle foreclosure, enforcement, and litigation matters. The firm’s Automate platform generates compliant loan documentation for all 50 states.
For strategy before, during, and after a foreclosure, or for any other matters that would benefit from direct attorney engagement at origination to foreclosure or beyond, contact Geraci LLP at 90 Discovery, Irvine, California 92618, or by phone at 949-403-3488 or email at info@geracillp.com.
