California Department of Real Estate official discusses lending fraud

Since the collapse of the housing market and the start of the recession, the California Department of Real Estate has seen its fair share of bad real estate actors and defunct hard-money lending firms.

While the department does not keep statistics to show whether fraudulent behavior is worse in this county, Jeff Davi, commissioner of the agency charged with monitoring and regulating the real estate industry, said he’s dismayed by what’s happening here.

“It’s disheartening and sad that it has occurred there,’’ said Davi, noting that he is aware of the recent conviction of Estate Financial Inc. executives Karen Guth and Joshua Yaguda.

“A lot of it was being caught up in this whole economic upturn since 2000. Everybody was out to make money, and some of us may have hooked up with people who were more unscrupulous than others.”

He added: “The two people from Estate Financial … they are going to go where they belong.”

Davi said the economic turmoil and illegal activity on the part of some in the industry have put consumers and investors on guard.

“We know real estate is cyclical,” he said. “It happened in the 1980s, in the 1990s and in 2006. We know real estate will come back, and a lot of this will happen again. We need to make sure we learn the lesson and don’t fall victim again.”

In an interview last week, Davi discussed the dangers posed by high-risk investments, the challenges of overseeing the agency and what investors can do to protect themselves from fraud.

Q: You’re aware of what’s happening on the Central Coast. Can you explain why such malfeasance appears to be widespread here? Could it be that there’s such a concentration of wealth due to affluent baby boomers and retirees?

A: Criminals are predators and will go where it’s a good opportunity for them. I think they look for individuals with decent resources and idle investments, and they go after it. They may even look to that as their driving force. I don’t have anything data-wise to show how widespread it is in your area. But your idea is probably spot on.

Q: How does the DRE ensure that such firms aren’t engaging in illegal behavior, and what would you say to investors who believe more should have been done to prevent this from happening?

A: We have two types of audits. We have random audits, which are out of the blue, and audits that are the result of a complaint. Any time a complaint is filed, an investigation is opened. We do target mortgage lending organizations and hard-money lenders because they are more prone to have problems. We will do, over a period of 12 months, anywhere from 400 to 800 audits. We’re going to go after the ones that have complaints first of all, and then the random audits will be of those with the highest propensity to violate laws.

When there are investment crimes, we’re called in, and many times the Department of Corporations is with us. We’re filing accusations and rescinding licenses, but many times it’s after the damage has been done. We have 342 people at the DRE, and half of those are dedicated to enforcement and investigations. Now, imagine regulating half a million licensees. Sometimes, there’s no way to know beforehand if a criminal decides to take advantage of someone.

Q: Given the demise of many such firms, what steps has your agency taken to tighten standards?

A: Our limited jurisdiction allows us to revoke licenses. Sometimes, there are assets there, and an individual can go for a civil recovery. Of course, we work closely with the district attorney, and the (California) attorney general can also get involved.

We have also passed some additional things to make it more punitive for criminals like this. We have the ability to bar someone from real estate for 36 months, and that wasn’t available two years ago. Also, some counties have decided to set up a real estate fraud prosecution trust fund. (San Luis Obispo County established such a fund in 2008.) Under state law, counties can assess a $3 fee on recorded documents, which would set aside money for the District Attorney’s Office to investigate real estate fraud. Although we’re facing difficult times budget wise, if a county has this in place, I think it’s an effective tool for deterring and exposing these crimes.

We’re always looking for things the department can do to enforce the law. In general, we leave it up to legislators to set new laws and determine what new things should be happening.

Q: In what other ways has the DRE enhanced its enforcement efforts, and have you been working with local legislators to make this happen?

A: We have increased penalties on those found to have violated real estate regulations. We have also gone ahead (at the suggestion of Assemblyman Sam Blakeslee, R-San Luis Obispo) and increased the requirements for firms advertising these types of investments (in first trust deeds). They’re required to include language about the risks related to the investments so anybody looking at the ad would be better informed that these are not your standardized, securitized, government-backed investments. The company is also required to retain the ad for three years to prove the ad wasn’t misleading if we need to investigate. These are all small steps, but it will make it better in the future when the market comes around.

Q: Some have criticized investors for not doing their due diligence and for placing too much stock in these investments. What’s your response?

A: I think we are all somewhat responsible for the positions we find ourselves in. But we can be taken advantage of. Criminals can pursue those who have their guard down. I understand why people might say they should have known better. But if someone is a criminal, we should go after them and try to shut them down.

Q: What can consumers do to educate and protect themselves from companies that may not have their best interest at heart?

A: You can look at the principals of companies. You can look at their history. If they have a real estate license, have they been disciplined in the past? And look at other investors. I also encourage people to access the information on the Internet. There’s a whole host of resources.

You know, if you’re doing something like this, you don’t want to put all of your life savings into it. If I was able to talk to someone before they made these investments, I would say, “Please, think of this as your last dollar. Is it wise to put it in this investment?” It’s the advice my father gave to me and the same advice I give to my kids.