California Real Estate Broker Exam — All Questions

A California deed of trust involves three parties. The party who holds bare legal title with a power of sale is the:

• a.Beneficiary, who advances the loan funds and is entitled to repayment under the note
• b.Trustor, who borrows the money and signs the promissory note and the security instrument
• c.Trustee, who reconveys on payoff or sells on default at the beneficiary's direction✓
• d.Vendor, who conveys equitable title and retains legal title until the balance is paid

In a California deed of trust the trustor is the borrower, the beneficiary is the lender, and the trustee is the neutral third party who holds bare legal title with a power of sale. On payoff the trustee executes a deed of reconveyance, and on default the trustee conducts the non-judicial sale at the beneficiary's direction. The trustor and beneficiary are named correctly in the other options but assigned the wrong role. A vendor retaining legal title while the purchaser holds equitable title describes a real property sales contract under Civil Code section 2985, not a deed of trust.

Which statement best describes the difference between a promissory note and a deed of trust?

• a.Both are security instruments, and only one of them may be recorded in California
• b.The note is the security for the debt and the deed of trust is the evidence of it
• c.Both are evidence of the debt, and only one of them needs to be signed by the borrower
• d.The note is the evidence of the debt and the deed of trust is the security for it✓

The promissory note is the borrower's written promise to repay and is the evidence of the debt; the deed of trust is the security instrument that pledges the real property so the lender can foreclose if the note is not paid. The note is normally not recorded, while the deed of trust is recorded to give constructive notice and fix priority. Reversing the two inverts the relationship. The borrower signs both. And because the note creates no interest in land, it is not a security instrument at all.

A California lender's deed of trust contains a due-on-sale clause. The clause allows the lender to:

• a.Require the borrower to pay a penalty for repaying the loan ahead of schedule
• b.Increase the interest rate automatically once each year for the life of the loan
• c.Call the entire balance due if the property is sold or transferred without consent✓
• d.Add unpaid interest to principal so that the balance grows during the loan term

A due-on-sale clause, also called an alienation clause, entitles the lender to accelerate the balance if the secured property is sold or otherwise transferred without consent, which is why most modern loans cannot simply be taken subject to or assumed. An annual rate adjustment is the feature of an adjustable rate loan and is governed by an index and margin. A charge for early payoff is a prepayment penalty, restricted for certain California loans by Business and Professions Code section 10242.6. And adding unpaid interest to principal is negative amortization.

A borrower's payment on a fully amortized fixed-rate loan stays level, but over time the portion applied to principal:

• a.Increases, while the portion applied to interest decreases✓
• b.Decreases, while the portion applied to interest increases
• c.Stays constant, because the payment itself never changes
• d.Varies with the index to which the note rate is tied

Interest on an amortized loan is charged on the outstanding balance, so as the balance falls the interest portion of each level payment falls with it and the principal portion grows. That is why the early years of a thirty-year loan pay down very little principal. The reverse pattern would require a growing balance. A constant split is impossible where the payment is level and the balance is declining. And tying the split to an index describes an adjustable rate loan, in which it is the interest rate rather than the amortization pattern that moves.

A loan whose scheduled payments do not retire the debt, so that a large final payment is required, is called:

• a.A straight note, on which interest is paid periodically and the principal falls due in one sum
• b.A fully amortized loan, in which the final payment equals every earlier installment
• c.A balloon payment loan, whose final payment is more than twice the smallest installment✓
• d.A wraparound loan, in which a new lender collects on and services the existing senior loan

A balloon payment loan is partially amortized so that a substantial final payment remains, and Business and Professions Code section 10244 uses the benchmark that no installment, including the final one, be greater than twice the amount of the smallest installment for the short-term loans it covers. A fully amortized loan retires itself, so no balloon exists. A straight note calls for interest-only payments with the whole principal due at maturity, which is a related but distinct instrument. A wraparound is an all-inclusive deed of trust layered over an existing loan.

Which instrument allows a borrower to draw, repay and redraw against the equity in a California residence up to an approved limit?

• a.A purchase money first deed of trust taken back by the seller at the close of escrow
• b.A home equity line of credit secured by a junior deed of trust on the residence✓
• c.A blanket deed of trust covering several parcels with a partial release provision
• d.A package loan financing both the real property and the personal property inside it

A home equity line of credit is revolving credit secured by a deed of trust, usually a junior lien, that lets the borrower draw and repay repeatedly during a draw period. A purchase money deed of trust taken back by the seller finances the purchase price and is a fixed obligation. A blanket deed of trust encumbers more than one parcel and typically carries a partial release clause so individual lots can be sold free of the lien. A package loan finances real property together with items of personal property such as appliances or furniture.

In the mortgage market, the secondary market consists of:

• a.Brokers who arrange loans for borrowers in exchange for a commission paid by the lender
• b.Lenders that originate junior liens after a first deed of trust has already been recorded
• c.Escrow companies that disburse the loan proceeds at the close of the purchase transaction
• d.Investors and agencies that buy existing loans from the lenders that made them✓

The primary market is where loans are originated with borrowers; the secondary market is where existing loans are bought and sold among investors and agencies such as Fannie Mae, Freddie Mac and Ginnie Mae, which replenishes the originator's funds so it can lend again. The label has nothing to do with lien position, so a second deed of trust originated by a lender is still a primary market transaction. Escrow companies disburse funds but do not buy loans. And a loan broker arranging a loan is operating in the primary market.

Which source of real estate financing is a depository institution regulated primarily for the safety of insured deposits?

• a.A mortgage banker funding loans from a warehouse line and selling them onward
• b.A private individual lending personal funds through a licensed loan broker
• c.A federally insured commercial bank funding loans from customer deposits✓
• d.A real estate investment trust pooling investor capital to hold mortgage assets

A commercial bank is a depository institution: it takes insured deposits and is regulated first for the safety and soundness of those deposits, which shapes what it will lend on and on what terms. A private party lending personal money through a broker is an individual investor, and in California the loan brokerage rules in Article 7 of the Real Estate Law govern how a licensee may arrange that loan. A mortgage banker funds from credit lines rather than deposits and sells its production. And a real estate investment trust is a pooled investment vehicle, not a depository.

The California Veterans Farm and Home Purchase Program, commonly called CalVet, differs structurally from a conventional purchase loan because the Department of Veterans Affairs:

• a.Purchases the completed loan from a private lender and places it in a mortgage-backed pool
• b.Guarantees a portion of a private lender's loan against loss but never takes title itself
• c.Insures the entire loan for the private lender in exchange for an annual insurance premium
• d.Buys the property and sells it to the veteran under a contract of sale✓

Under the CalVet program the California Department of Veterans Affairs itself purchases the property selected by the eligible veteran and then sells it to the veteran under a contract of sale, retaining legal title until the balance is repaid. That is why CalVet is often described as a land contract rather than a loan. Guaranteeing a private lender's loan describes the federal VA program. Insuring the loan for a premium describes FHA. Buying completed loans for securitization describes the secondary market agencies.

An FHA-insured loan differs from a conventional loan chiefly in that FHA:

• a.Requires that the property be occupied by a veteran of the armed forces
• b.Lends the money directly to the borrower from a federal appropriation
• c.Sets the maximum sale price a seller may charge for the insured property
• d.Insures the approved lender against loss on the loan✓

The Federal Housing Administration does not lend; it insures approved lenders against loss on qualifying loans, and the borrower funds that protection through an up-front and an annual mortgage insurance premium. Because the risk is insured, lenders accept smaller down payments. FHA does not appropriate funds to borrowers. It appraises the property for insurance purposes and issues a value conclusion but does not cap what a seller may ask. And veteran occupancy is a feature of the VA and CalVet programs rather than of FHA.

Under Civil Code section 2924c, a California trustor in default under a deed of trust generally may reinstate the loan by curing the default:

• a.Only before the notice of default has been recorded by the trustee
• b.At any time within one year after the trustee's sale has been completed
• c.Up to five business days before the date set for the trustee's sale✓
• d.Only with the written consent of every junior lienholder of record

Section 2924c gives the trustor the right to cure the default and reinstate the obligation by paying the delinquent amounts plus permitted costs and expenses, and the statutory notice states that this right normally runs until five business days before the date set for the sale. The one-year period belongs to the statutory right of redemption after a judicial foreclosure, which non-judicial sales do not carry. The right arises after the notice of default is recorded, not before it. And reinstatement is the trustor's own right, requiring no consent from junior lienholders.

Code of Civil Procedure section 580d bars a lender from obtaining a deficiency judgment after:

• a.The recording of a notice of default that the borrower fails to cure in time
• b.A judicial foreclosure in which the property sells for less than the debt
• c.The borrower's discharge of the obligation in a chapter 7 bankruptcy proceeding
• d.A non-judicial trustee's sale conducted under the power of sale in the deed of trust✓

Section 580d bars a deficiency judgment after a sale conducted under the power of sale in a deed of trust, which is why a lender that wants to pursue the borrower personally must foreclose judicially instead. Judicial foreclosure preserves the possibility of a deficiency, subject to fair value limits and the borrower's redemption rights. A bankruptcy discharge is federal relief and operates on a different footing. And the recording of a notice of default merely begins the process; it decides nothing about deficiency liability.

Code of Civil Procedure section 580b protects a California borrower from a deficiency judgment on:

• a.A commercial loan secured by an office building where the borrower is a corporation
• b.Any refinance loan taken out after the borrower has owned the property for five years
• c.A seller carryback loan, and a purchase money loan on an owner-occupied dwelling✓
• d.A home equity line of credit used to consolidate the borrower's unsecured debts

Section 580b bars a deficiency under a deed of trust given to the vendor to secure the balance of the purchase price, and under a deed of trust on a dwelling for not more than four families given to a lender to secure a loan used to pay all or part of the purchase price of that dwelling, occupied in whole or in part by the purchaser. Subdivision (b) extends the protection to refinances of a purchase money loan, but only to the extent they do not advance new principal. Commercial loans and cash-out equity lines used for other purposes fall outside the section.

The federal Truth in Lending Act requires a residential mortgage disclosure of the cost of credit expressed as:

• a.The note rate alone, excluding all points, fees and other charges paid by the borrower
• b.The annual percentage rate, which combines interest with certain finance charges paid✓
• c.The capitalization rate the lender would apply if the property were an income property
• d.The loan-to-value ratio computed from the appraised value of the security property

The annual percentage rate is Truth in Lending's standardized measure of the cost of credit, combining the note rate with prepaid finance charges so that borrowers can compare offers on a common basis. It is normally higher than the note rate for that reason. The note rate alone is exactly what the statute refuses to treat as the full cost. A capitalization rate is a valuation input for income property. And a loan-to-value ratio measures how much is being borrowed against value rather than what the borrowing costs.

The federal Equal Credit Opportunity Act prohibits a lender from discriminating against a credit applicant on the basis of:

• a.Race, color, religion, national origin, sex, marital status, age or public assistance✓
• b.The applicant's credit history, outstanding debts and record of past late payments
• c.The applicant's employment stability and the verified amount of the applicant's income
• d.The condition, location and appraised value of the property offered as security

The Equal Credit Opportunity Act lists race, color, religion, national origin, sex, marital status and age as prohibited bases, and adds that income from a public assistance program may not be used against the applicant, provided the applicant has the capacity to contract. Credit history, existing obligations, employment stability and verified income are legitimate underwriting factors the statute leaves untouched. So is the quality of the collateral, although appraising a property lower because of the racial composition of its neighborhood is unlawful under fair lending and fair housing law.

Business and Professions Code section 10240 requires a California broker who negotiates a loan secured by real property to deliver the mortgage loan disclosure statement:

• a.Within three business days after a completed written loan application, or before the borrower is obligated✓
• b.Within thirty calendar days after the written loan application, or after the note is signed, whichever is later
• c.At the close of escrow, or when the escrow holder issues the final settlement statement, whichever is later
• d.Within one week after the deed of trust is recorded, or after the loan funds are released, whichever is later

Section 10240 requires the statement containing the information listed in section 10241 to be delivered within three business days after receipt of a completed written loan application or before the borrower becomes obligated on the note, whichever is earlier, signed personally by the borrower and by the broker or the licensee acting for the broker. The broker must keep a true copy for three years. The one-week recording duty belongs to section 10141.5 and concerns recording the deed of trust after closing, and the one-month duty in section 10141 concerns reporting the selling price.

Under Business and Professions Code section 10085.6, a California licensee who negotiates a residential mortgage loan modification for a fee may not:

• a.Advertise the service in any medium other than the licensee's own internet website
• b.Charge more than five percent of the outstanding principal balance of the modified loan
• c.Negotiate with the lender unless the borrower is already more than ninety days delinquent
• d.Collect any compensation until every service contracted for has been fully performed✓

Section 10085.6 makes it unlawful for a licensee performing a mortgage loan modification or other forbearance for borrower-paid compensation to claim, demand, charge, collect or receive any compensation until the licensee has fully performed each and every service contracted for, and it also forbids taking a wage assignment, a lien or a power of attorney to secure payment. The prohibition is on advance fees, not on a percentage. There is no delinquency threshold. And section 10147.6 regulates a required borrower notice rather than restricting advertising media.

A California real estate broker who takes residential mortgage loan applications and offers or negotiates loan terms for compensation must:

• a.Surrender the real estate broker license and apply instead for a finance lender license
• b.Obtain a mortgage loan originator license endorsement and a unique identifier✓
• c.Register the activity annually with the county recorder in each county where loans are made
• d.Operate only through a corporation, because an individual may not hold the endorsement

The federal SAFE Act as implemented in the Real Estate Law requires a licensee engaged in mortgage loan origination to hold a mortgage loan originator license endorsement issued by the Department of Real Estate and to obtain a unique identifier from the Nationwide Multistate Licensing System and Registry. It is unlawful to act as a mortgage loan originator without the endorsement, and section 10140.6 requires the unique identifier on first point of contact solicitation materials. No surrender of the broker license is required, no county registration exists, and individuals hold endorsements routinely.