For California private money brokers, the Department of Real Estate is not a background regulator. The DRE controls licensing, dictates the disclosures every loan must include, governs how trust account funds are handled, and audits brokers on its own schedule. A broker can run a clean origination practice for years and still be cited — and disciplined — for a documentation gap that surfaces only during an exam.
The framework is dense. The DRE’s Real Estate Compliance Manual (commonly the RE 7) runs the regulatory rules across licensing, disclosures, advertising, retention, fee handling, fractionalized loans, and private money transactions. Most brokers have read parts of it; few have read all of it; and the parts that get missed are usually the parts that matter most when an audit lands.
This article walks through the DRE compliance topics that drive most enforcement issues for private money brokers and the operational disciplines that keep a brokerage out of trouble. It is general guidance, not legal advice — every brokerage has its own facts, and Geraci LLP works with private lenders and brokers individually on tailored compliance programs.
Licensing: Who Has to Be Licensed and for What
The starting point of DRE compliance is licensing. Anyone negotiating loans, soliciting loans, or collecting compensation for that activity in California needs the appropriate broker license. A few rules brokers regularly miss:
- Each location and each DBA. A broker who operates from multiple offices, or under multiple fictitious names, needs licensing for each one. A single license at the parent address does not cover branch activity.
- Originator endorsement. Brokers who originate residential consumer loans need the mortgage loan originator endorsement. Brokers operating purely in business-purpose lending generally do not, but the question gets revisited any time the brokerage drifts toward owner-occupied product.
- Broker associates vs. salespersons. A broker associate holds her own broker license but works under another broker. A salesperson holds a different, more limited license. For loan-licensing compliance and the user exemption from CFL licensing, only a broker license qualifies — a salesperson license is not enough. Brokers occasionally submit a salesperson’s license number as the broker of record, and the DRE rejects it.
- Employees vs. independent contractors. True employees who do not negotiate between principals do not need their own license. Independent contractors performing the same activity do. The DRE looks past the label to the actual relationship — supervision, control, scheduling — when classifying the worker. Misclassifying a contractor as an employee to avoid licensing exposes the broker to unlicensed-activity claims.
Document Retention
The DRE’s general retention period is three years for transaction documents. Three categories carry a longer four-year requirement:
- The self-dealing statement
- The investor qualification statement
- The investor questionnaire
The clean operational answer is to retain all transaction documents for four years. The marginal storage cost is trivial; the cost of an audit asking for a document the broker no longer has is not.
Advertising
DRE advertising regulations live primarily in 10 CCR § 2848 (former Regulation 2848) and a related set of rules. The high-level rule is that advertisements may not be false, misleading, or deceptive. Underneath that, the regulations get specific:
- The broker’s license number must appear on the ad, in a font size proportionate to the ad and not buried.
- If the ad references a payment amount, it must also disclose loan amount, APR, term, and the other inputs that produce the payment.
- Compliance with the regulations applies across formats — print, digital, social, billboards, mailers.
Brokers can submit advertising to the DRE for a voluntary compliance check before publishing. For a brokerage running paid acquisition campaigns at scale, the cost of running material past counsel or the DRE is far less than the cost of a citation tied to a multi-month campaign.
Fees and the Trust Account
The DRE pays close attention to broker handling of borrower money. The threshold question on every fee is: was the fee or expense advanced by the broker?
- If the broker advanced the cost (paid the appraiser or credit-report vendor out of broker funds), the borrower’s reimbursement does not go into the trust account. It goes to the broker’s general account.
- If the borrower paid the fee up front, the funds belong in the trust account until the underlying service is completed.
For appraisal and credit report fees specifically, four operating rules:
1. Reimbursements for fees the broker already paid go to the general account, not the trust account. 2. The fee charged to the borrower may not be marked up unless any markup is disclosed as a loan cost. 3. Clear accounting records of advanced fees are required. 4. Clear written borrower instructions authorizing the broker to move funds from the trust account (or not) are required.
Advance fee agreements are tightly regulated. An advance fee — money claimed, demanded, charged, or collected before the contracted services are performed — may only be collected under a fee agreement that the DRE has individually approved for that transaction. Templates do not get pre-approved for repeated reuse; each transaction’s agreement requires its own DRE approval. The collected funds must be held in the trust account until the services are complete.
The same advance-fee rules apply when collecting fees for modifications and forbearances. The fact that a loan has already closed does not exempt subsequent fees from the advance-fee framework.
Borrower Disclosures
Brokers must provide a defined set of borrower disclosures within three business days of receiving a completed written loan application:
- Mortgage Loan Disclosure Statement (MLDS). The two MLDS forms (depending on loan structure and property type) are the central borrower-facing disclosure document. The MLDS captures fees, loan amount, interest rate, broker compensation, broker DRE number, the DRE’s contact information, and any broker-controlled funds in the transaction.
- Privacy policy
- ECOA appraisal disclosure (with California’s separate unbiased-appraisal notice — different from the federal-only form)
- Patriot Act disclosure
- MLO (mortgage loan originator) information disclosure where applicable
- Fair Lending Notice — and where the lender is licensed under the California Financing Law, the broker must use the DRE-form Fair Lending Notice with the DRE’s contact information, not the DFPI version
- Borrower authorization form
- Hazard insurance disclosure
Two operational rules worth flagging. First, when negotiations occur in a language other than English, disclosures must be provided in the borrower’s primary negotiation language. The DRE provides forms in Spanish, Chinese, Vietnamese, Korean, and Tagalog; using the DRE versions is the safest path.
Second, brokers playing multiple roles in a transaction (for example, representing the borrower in the underlying purchase and arranging the loan) must provide written disclosure of the dual role within 24 hours to all parties. “Timely manner” does not apply here. The 24-hour rule is firm.
Material changes between disclosure and closing must be disclosed to the borrower as soon as practicable.
Article 5: Private Money Transactions
Article 5 of the DRE regulations governs private money transactions — non-institutional lenders and note purchasers. A few high-impact rules:
- No pooling of loan funds. When multiple investors fund a single transaction, each investor’s funds must be transmitted individually for that specific transaction. Brokers cannot pool investor money in a master account and disburse to deals.
- Self-dealing. When a broker solicits funds for a transaction in which the broker has an interest, the broker must provide a Lender/Purchaser Disclosure Statement (LPDS, RE 851A) at least 24 hours before receiving funds.
- Threshold reporting. Brokers who exceed certain volume thresholds — 10+ loans over $1 million in 12 months under specified conditions; collecting on behalf of beneficiaries or borrowers in aggregate amounts of $250,000+; certain combinations of loan-sale and real property transactions — become “threshold brokers” and take on additional reporting obligations: RE 853 (notification within 30 days), RE 854 (trust account review), RE 855 (quarterly trust fund status), RE 856, and RE 881 (business activity report).
- Investor questionnaires. Brokers must obtain a current investor questionnaire (RE 870) from each investor for each transaction. Repeat investors are not exempt; updated information is required every time.
- Loan-to-value limits. LTV is calculated on the aggregate of all encumbrances against current market value. A broker in second position must include the first position in the LTV calculation. Construction loans introduce after-repaired-value rules with their own holdback and loan-amount limits — typically capped at $2.5 million when calculated on after-repaired value.
Article 6: Fractionalized (Multi-Beneficiary) Loans
Article 6 covers fractionalized loans, also called multi-beneficiary loans. The rules largely overlap with private money rules, with a few additions:
- A multi-lender transaction notice (RE 860) is due within 30 days of the broker’s first fractionalized loan, after any material change in the broker’s lending services, or upon becoming a servicing agent for notes with payments exceeding $125,000 in any three-month period.
- LPDS, investor questionnaire, and threshold rules continue to apply.
Fractionalized loans concentrate compliance risk: more investors per transaction means more disclosure surface, more KYC documentation, and more potential for a single missed form to expose the broker on multiple files.
Brokers Acting as Loan Servicers
The DRE permits brokers to act as loan servicers, with relatively light incremental requirements under Article 5. Where servicing involves advancing funds to protect a lien or recording documents on behalf of the investor, those activities trigger trust account disclosures and additional record-keeping.
Where Brokerages Get Cited
Across DRE audits, the recurring failure modes are predictable:
- Missing or out-of-date investor questionnaires
- MLDS forms with broker compensation or fee schedules that don’t match the closing statement
- Trust account reconciliation errors and undocumented transfers
- Advance fees collected without DRE-approved agreements
- Late or missing self-dealing disclosures (LPDS) on broker-affiliated transactions
- Branch offices and DBAs operating without separate licenses
- Salesperson licenses being submitted in lieu of broker licenses
- Advertising that omits the license number or required loan terms
- Documents not retained for the four-year period applicable to investor materials
Each of these is solvable with a written compliance program, periodic internal review, and a relationship with counsel who can spot drift before the next audit.
Building a DRE-Ready Brokerage
A brokerage that intends to scale needs a compliance posture rather than a set of ad-hoc fixes:
1. A written compliance manual that mirrors the RE 7 and the brokerage’s actual operations 2. Standardized disclosure packages, kept current with DRE form updates 3. Periodic internal trust account reconciliations with documented review 4. A document retention policy that defaults to four years across all transaction files 5. A specific advance-fee protocol, including the procedure for obtaining DRE approval where required 6. Annual compliance training for all licensed staff 7. A relationship with counsel who can review advertising, evaluate threshold-broker exposure, and respond when the DRE comes calling
Geraci LLP works with California brokers, private lenders, and mortgage funds on every component of this — manual drafting, disclosure-package design, broker-of-record arrangements, advance-fee approvals, threshold-broker analysis, and audit defense. If your brokerage is preparing for an audit, scaling into new product types, or restructuring after a citation, contact Geraci LLP to evaluate where the program stands and where it has to be tightened.
