DISCLOSURES IN REAL PROPERTY TRANSACTIONS

State of California

Department of Real Estate

Disclosures in

Real Property

Transactions

Sixth Edition

2005

State of California

Department of Real Estate

Disclosures in

Real Property

Transactions

Sixth Edition

2005

ARNOLD SCHWARZENEGGER

Governor

State of California

DALE BONNER

Secretary

Business, Transportation and Housing Agency

JEFF DAVI

Commissioner

Department of Real Estate

2005 booklet was revised pursuant to a consulting contract with Wallace, Puccio &

Garrett; Principal Author and Editor – S. Guy Puccio.

PREFACE

The California Department of Real Estate has published this booklet in

response to an apparent need for information concerning disclosures

required in real property transactions. This booklet is limited to the most

common disclosures required by statute and does not include disclosures

required by agreement between the principals (buyer and seller; borrower

and lender; lessee and lessor, etc.).

Should you need assistance or further information, consult the statutory

references included, an attorney or a knowledgeable real estate professional.

Also, this booklet has a list of government agencies which you may contact

for further information, as appropriate.

Because the laws concerning disclosure obligations may change, you should

use this booklet only as a general source of information.

TABLE OF CONTENTS

PART I

TRANSFER AND FINANCING OF REAL PROPERTY

Section I

Disclosures Required of a Seller

and/or a Real Estate Broker/Agent

A. Disclosures Upon Transfer of Residential Property ................................1

1. Termination Right.............................................................................2

2. Real Estate Transfer Disclosure Statement.......................................2

3. Local Option Real Estate Transfer Disclosure Statement.................8

4. Natural Hazards Disclosure ............................................................10

5. Mello-Roos Bonds and Taxes.........................................................15

6. Property Taxes................................................................................15

7. Ordnance Locations........................................................................16

8. Window Security Bars....................................................................16

9. Industrial Uses ................................................................................16

10. Methamphetamine Contamination..................................................16

B. Earthquake Guides.................................................................................17

C. Smoke Detector Statement of Compliance............................................18

D. Disclosure Regarding Lead-Based Paint Hazards .................................18

E. California’s Environmental Hazards Pamphlet .....................................20

F. Delivery of Structural Pest Control Inspection and Certification

Reports...................................................................................................21

G. Energy Conservation Retrofit and Thermal Insulation Disclosures ......21

H. Foreign Investment in Real Property Tax Act.......................................22

I. Notice and Disclosure to Buyer of State Withholding on Disposition

of California Real Property....................................................................22

J. Furnishing Controlling Documents and Financial Statements

Concerning Common Interest Developments (CID’s) .........................23

K. Notice Regarding the Advisability of Title Insurance...........................25

L. Certification Regarding Water Heater’s Security Against Earthquake..25

M. Data Base – Locations of Registered Sex Offenders.............................26

Section II

Disclosures Required of Real Estate Agents

in the Transfer of Residential Real Property

A. Visual Inspection...................................................................................27

B. Agency Relationship Disclosures..........................................................28

C. Disclosure of the Negotiability of Real Estate Commissions................31

D. No Disclosure Required for Manner/Occurrence of Death;

Affliction of Occupant with Aids ..........................................................32

E. Disclosure of Sales Price Information...................................................32

Section III

Disclosures Required When Financing Real Property

A. Advance Fees.........................................................................................33

B. Seller Financing Disclosure Statement..................................................33

C. California Required Disclosures to Borrowers......................................36

D. California Required Disclosures to Certain Lenders or Promissory

Note Purchasers.....................................................................................38

1. General Disclosure Requirements...................................................38

2. Multi-Lender Transactions..............................................................40

3. Construction Loans and Multiple Security Properties in Multi-

Lender Transactions........................................................................41

4. Loan Servicing in Multi-Lender and in other than Multi-Lender

Transactions....................................................................................44

E. Notice of Transfer of Loan Servicing....................................................44

F. Notice of Borrower’s or Lender’s Right to Copy of Appraisal

Report ....................................................................................................45

G. Credit Terms – Truth-in-Lending and Regulation Z..............................45

H. High Cost Loans (Federal).....................................................................48

I. California High Cost Mortgage/Loan Disclosures ................................49

J. Real Estate Settlement Procedures Act (RESPA)..................................51

K. Advance Disclosures in Loan Transactions Subject to TILA and

RESPA...................................................................................................53

L. Disclosure by Agent Receiving Compensation from a Lender..............54

M. Adjustable Rate Loan Disclosure ..........................................................54

N. Equal Credit Opportunity Act – Notice of Adverse Action –

Regulation B..........................................................................................55

O. Certain Obligations of Consumer Credit Reporting Agencies...............56

P. Disclosure Required by the Housing Financial Discrimination Act

of l977 (Holden Act)..............................................................................58

Section IV

Disclosures Relative to New Residential Subdivisions

A. Public Report: Disclosure of Material Facts about a Subdivision.........60

B. Disclosure of the Right to Rescind........................................................61

C. Disclosure and Notice of Blanket Encumbrance ...................................61

D. Delivery of Governing Documents and Disclosures to

Prospective Purchaser in a Common Interest Development..................62

E. Statement of Defects Disclosure for a Common Interest

Development Conversion ......................................................................63

F. Notices to Tenants to Disclose Intent to Convert an Apartment

to Individual Ownership........................................................................64

Part II

TRANSFER OF A BUSINESS OPPORTUNITY

A. Definition of Business Opportunity.......................................................65

B. Bulk Transfer Law.................................................................................65

C. Sales Tax Clearance...............................................................................66

D. Transfer of Liquor License....................................................................66

E. Franchise Investment Law.....................................................................66

F. Fictitious Business Name (DBA) ..........................................................67

G. Notice of Other Government Agencies .................................................67

LIST OF GOVERNMENT AGENCIES (Federal and State) .............69

DEPARTMENT OF REAL ESTATE OFFICES ...........................................71

INTRODUCTION

This booklet is directed to principals and agents in real property transactions.

It is designed to provide general information on a number of disclosures

required by state and federal law and regulations, as cited in the text.

The first part of this booklet deals with disclosures required in residential

property transactions, including disclosures specific to real estate financing.

The second part covers general disclosure requirements for the transfer of a

business opportunity.

Because the disclosure requirements discussed in this booklet may change,

before proceeding with the disclosures, a principal or agent should review

the referenced codes and regulations and check for any recent legislation

which may impose new or changed requirements.

The Department of Real Estate cannot offer legal advice. If the reader needs

such advice, he/she should seek the services of a skilled professional.

It is hoped that principals and agents involved in real property transactions

will find this booklet to be an informative guide to disclosure requirements.

NOTE: The term broker, licensee or agent, as used in this brochure,

collectively refer to a real estate broker and the salesperson who is agent of

the broker.

PART I

TRANSFER AND FINANCING OF REAL PROPERTY

SECTION I

DISCLOSURES REQUIRED OF A SELLER

AND/OR A REAL ESTATE BROKER/AGENT

While these disclosures relate mainly to residential property resales, some

may also be applicable to the initial sale of subdivided interests as noted in

this section and further discussed in Section IV. Remember that sellers and

real estate agents must make the disclosures necessary to avoid fraud,

misrepresentation or deceit.

A. Disclosures Upon Transfer of Residential Property

This section deals with the major disclosures required by the California Civil

Code (commencing at Section 1102). Subject to the exemptions listed

below, these requirements apply when real property of 1 to 4 dwelling units

is transferred by sale, exchange, installment land sale contract, ground lease

coupled with improvements, lease with an option to purchase, or any other

option to purchase.

In this discussion, the term “seller” means the transferor, the term “buyer” or

“purchaser” means the transferee, and the term “transaction” includes the

sale or transfer of the property.

These requirements also pertain to the resale of a manufactured home (as

defined in Section 18007 of the Health and Safety Code) or a mobilehome

(as defined in Section 18008 of the Health and Safety Code) even if

classified as personal property, provided that the manufactured or

mobilehome is located on real property and is intended for use as a

residence.

The following transfers are exempt from these disclosure requirements:

• The sale of new homes as part of a subdivision project where a public

report must be delivered to the purchaser or a public report is not

required. However, when such new homes are sold through a real estate

broker, the broker owes the buyer a duty to disclose any material facts

which affect the value, desirability and intended use of the property;

• Foreclosure sales;

• Court ordered transfers;

• Transfers by a fiduciary in the administration of a decedent’s estate, a

guardianship, conservatorship, or trust except where the trustee is a

former owner of the property;

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• Transfers to a spouse or to a person or persons in the lineal line of

consanguinity;

• Transfers resulting from a judgment of dissolution of marriage, or of

legal separation, or from a property settlement agreement incidental to

such a judgment;

• Transfers from one co-owner to another;

• Transfers by the State Controller for unclaimed property;

• Transfers resulting from failure to pay taxes; and

• Transfers to or from any governmental entity.

AL. CIV. §§ 1102, 1102.2, 1102.3)

1. Termination Right.

Should delivery of any of these disclosures or an amended disclosure occur

after execution of an offer or of a purchase agreement, the buyer has three

days after delivery of the disclosure in person or five days after delivery by

deposit in the United States mail to terminate the offer or the agreement by

delivering a written notice of termination to the seller or the seller’s agent.

AL. CIV. §1102.3)

2. Real Estate Transfer Disclosure Statement

The Real Estate Transfer Disclosure Statement (TDS) describes the

condition of a property and, in the case of a sale, must be given to a

prospective buyer as soon as practicable and before transfer of title. In the

case of a transfer by a real property sales contract (as defined in Civil Code

Section 2985) by a lease coupled with an option to purchase, or by a ground

lease coupled with improvements, the TDS is to be delivered before the

execution of any of the foregoing.

The seller and any broker(s)/agent(s) involved are to participate in the

disclosures. If more than one broker/agent is involved, the broker/agent

obtaining the offer is to deliver the disclosures to the prospective buyer

unless the seller instructs otherwise.

Delivery to the prospective buyer of a report or opinion prepared by a

licensed engineer, land surveyor, geologist, structural pest control operator,

contractor, or other expert (dealing with matters within the scope of the

professional’s license or expertise) may limit the liability of the seller and

the real estate broker(s)/agent(s) when making required disclosures. The

overall intention is to provide meaningful disclosures about the condition of

the property being sold or transferred.

AL. CIV. § 1102.4)

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________________________________________________________________

The following is the format of the Transfer Disclosure Statement:

REAL ESTATE TRANSFER DISCLOSURE STATEMENT

THIS DISCLOSURE STATEMENT CONCERNS THE REAL PROPERTY

SITUATED IN THE CITY OF ________, COUNTY OF __________, STATE OF

CALIFORNIA, DESCRIBED AS _____________________. THIS STATEMENT

IS A DISCLOSURE OF THE CONDITION OF THE ABOVE DESCRIBED

PROPERTY IN COMPLIANCE WITH SECTION 1102 OF THE CIVIL CODE AS

OF ____________, 20___. IT IS NOT A WARRANTY OF ANY KIND BY THE

SELLER(S) OR ANY AGENT(S) REPRESENTING ANY PRINCIPAL(S) IN THIS

TRANSACTION, AND IS NOT A SUBSTITUTE FOR ANY INSPECTIONS OR

WARRANTIES THE PRINCIPAL(S) MAY WISH TO OBTAIN.

COORDINATION WITH OTHER DISCLOSURE FORMS

This Real Estate Transfer Disclosure Statement is made pursuant to Section

1102 of the Civil Code. Other statutes require disclosures, depending upon the

details of the particular real estate transaction (for example: special study zone

and purchase-money liens on residential property).

Substituted Disclosures: The following disclosures have or will be made in

connection with this real estate transfer, and are intended to satisfy the

disclosure obligations on this form, where the subject matter is the same:

! Inspection reports completed pursuant to the contract of sale or receipt for

deposit.

! Additional inspection reports or disclosures:

SELLER’S INFORMATION

The Seller discloses the following information with the knowledge that even

though this is not a warranty, prospective Buyers may rely on this information in

deciding whether and on what terms to purchase the subject property. Seller

hereby authorizes any agent(s) representing any principal(s) in this transaction to

provide a copy of this statement to any person or entity in connection with any

actual or anticipated sale of the property.

THE FOLLOWING ARE REPRESENTATIONS MADE BY THE SELLER(S) AND

ARE NOT THE REPRESENTATIONS OF THE AGENT(S), IF ANY. THIS

INFORMATION IS A DISCLOSURE AND IS NOT INTENDED TO BE PART OF

ANY CONTRACT BETWEEN THE BUYER AND SELLER.

Seller ___ is ___ is not occupying the property.

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________________________________________________________________

A. The subject property has the items checked below (read across):

__Range __Oven __Microwave

__Dishwasher __Trash Compactor __Garbage Disposal

__Washer/Dryer Hookups __Rain Gutters

__Burglar Alarms __Smoke Detector(s) __Fire Alarm

__TV Antenna __Satellite Dish __Intercom

__Central Heating __Central Air Cndtng. __Evaporative Cooler(s)

__Wall/Window Air Cndtng. __Sprinklers __Public Sewer System

__Septic Tank __Sump Pump __Water Softener

__Patio/Decking __Built-in Barbecue __Gazebo

__Sauna

__Hot Tub __ Locking

Safety Cover*

__Pool __ Child

Resistant Barrier*

__Spa__ Locking

Safety Cover*

__Security Gate(s) __Automatic Garage __Number Remote Controls

Door Opener(s)*

Garage: __Attached __Not Attached __Carport

Pool/Spa Heater: __Gas __Solar __Electric

Water Heater: __Gas __Water Heater Anchored,

Braced, or Strapped*

__Private Utility or

Other __________

Water Supply: __City __Well

Gas Supply: __Utility __Bottled

__Window Screens __Window Security Bars

__Quick Release

Mechanism on Bedroom

Windows*

Exhaust Fan(s) in _______220 Volt Wiring in ________ Fireplace(s) in ________

Gas Starter __________ Roof(s): Type: ____________ Age: ________ (approx.)

Other: ___________________________________________________________

Are there, to the best of your (Seller’s) knowledge, any of the above that are not

in operating condition? ___Yes ___No. If yes, then describe.

(Attach additional sheets if necessary): _________________________________

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________________________________________________________________

B. Are you (Seller) aware of any significant defects/malfunctions in any of the

following? __ Yes __ No. If yes, check appropriate space(s) below.

___Interior Walls ___Ceilings ___Floors ___Exterior Walls ___Insulation __Roof(s)

___Windows ___Doors ___Foundation ___Slab(s) ___Driveways ___Sidewalks

___Walls/Fences ___Electrical Systems ___Plumbing/Sewers/Septics ___Other

Structural Components (Describe: ____________________________________

________________________________________________________________)

If any of the above is checked, explain. (Attach additional sheets if necessary): _

* This garage door opener or child resistant pool barrier may not be in

compliance with the safety standards relating to automatic reversing devices

as set forth in Chapter 12.5 (commencing with Section 19890) of Part 3 of

Division 13 of, or with the pool safety standards of Article 2.5 (commencing

with Section 115920) of Chapter 5 of Part 10 of Division 104 of, the Health and

Safety Code. The water heater may not be anchored, braced, or strapped in

accordance with Section 19211 of the Health and Safety Code. Window

security bars may not have quick-release mechanisms in compliance with the

1995 Edition of the California Building Standards Code.

C. Are you (Seller) aware of any of the following:

1. Substances, materials or products which may be an

environmental hazard such as, but not limited to, asbestos,

formaldehyde, radon gas, lead-based paint, fuel or

chemical storage tanks, and contaminated soil or water on

the subject property............................................................... __Yes __No

2. Features of the property shared in common with adjoining

landowners, such as walls, fences, and driveways, whose

use or responsibility for maintenance may have an effect on

the subject property...............................................................

__Yes __No

3. Any encroachments, easements or similar matters that may

affect your interest in the subject property.............................

__Yes __No

4. Room additions, structural modifications, or other

alterations or repairs made without necessary permits .........

__Yes __No

5. Room additions, structural modifications, or other

alterations or repairs not in compliance with building codes.. __Yes __No

6. Fill (compacted or otherwise) on the property or any portion

thereof................................................................................... __Yes __No

7. Any settling from any cause, or slippage, sliding, or other

soil problems ......................................................................... __Yes __No

8. Flooding, drainage or grading problems................................ __Yes __No

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________________________________________________________________

9. Major damage to the property or any of the structures from

fire, earthquake, floods, or landslides.................................... __Yes __No

10. Any zoning violations, nonconforming uses, violations of

"setback" requirements ......................................................... __Yes __No

11. Neighborhood noise problems or other nuisances ................ __Yes __No

12. CC&R’s or other deed restrictions or obligations................... __Yes __No

13. Homeowners’ Association which has any authority over the

subject property..................................................................... __Yes __No

14. Any “common area” (facilities such as pools, tennis courts,

walkways, or other areas co-owned in undivided interest

with others)............................................................................ __Yes __No

15. Any notices of abatement or citations against the property... __Yes __No

16. Any lawsuits by or against the seller threatening to or

affecting this real property, including any lawsuits alleging a

defect or deficiency in this real property or "common areas"

(facilities such as pools, tennis courts, walkways, or other

areas co-owned in undivided interest with others) ................ __Yes __No

If the answer to any of these is yes, explain. (Attach additional sheets if

necessary.) ______________________________________________________

Seller certifies that the information herein is true and correct to the best of the

Seller's knowledge as of the date signed by the Seller.

Seller _________________________________ Date ____________________

III

AGENT'S INSPECTION DISCLOSURE

(To be completed only if the Seller is represented by an agent in this transaction.)

THE UNDERSIGNED, BASED ON THE ABOVE INQUIRY OF THE SELLER(S)

AS TO THE CONDITION OF THE PROPERTY AND BASED ON A

REASONABLY COMPETENT AND DILIGENT VISUAL INSPECTION OF THE

ACCESSIBLE AREAS OF THE PROPERTY IN CONJUNCTION WITH THAT

INQUIRY, STATES THE FOLLOWING:

! Agent notes no items for disclosure.

! Agent notes the following items:

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________________________________________________________________

Agent (Broker

Representing Seller) ________________ By ________________ Date_______

(Please Print) (Associate Licensee

or Broker-Signature)

AGENT'S INSPECTION DISCLOSURE

(To be completed only if the agent who has obtained the offer is other than the

agent above.)

THE UNDERSIGNED, BASED ON A REASONABLY COMPETENT AND

DILIGENT VISUAL INSPECTION OF THE ACCESSIBLE AREAS OF THE

PROPERTY, STATES THE FOLLOWING:

! Agent notes no items for disclosure.

! Agent notes the following items:

Agent (Broker

Representing Seller) ______________ By _________________ Date_______

(Please Print) (Associate Licensee

or Broker-Signature)

BUYER(S) AND SELLER(S) MAY WISH TO OBTAIN PROFESSIONAL ADVICE

AND/OR INSPECTIONS OF THE PROPERTY AND TO PROVIDE FOR

APPROPRIATE PROVISIONS IN A CONTRACT BETWEEN BUYER AND

SELLER(S) WITH RESPECT TO ANY ADVICE/INSPECTIONS/DEFECTS

I/WE ACKNOWLEDGE RECEIPT OF A COPY OF THIS STATEMENT

Seller__________________ Date______ Buyer________________ Date______

Agent (Broker

Representing Seller) ________________ By _________________ Date_______

(Please Print) (Associate Licensee

or Broker-Signature)

Agent (Broker

Obtaining the Offer) _________________ By _________________ Date_______

(Please Print) (Associate Licensee

or Broker-Signature)

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________________________________________________________________

SECTION 1102.3 OF THE CIVIL CODE PROVIDES A BUYER WITH THE

RIGHT TO RESCIND A PURCHASE CONTRACT FOR AT LEAST THREE

DAYS AFTER THE DELIVERY OF THIS DISCLOSURE IF DELIVERY OCCURS

AFTER THE SIGNING OF AN OFFER TO PURCHASE. IF YOU WISH TO

RESCIND THE CONTRACT, YOU MUST ACT WITHIN THE PRESCRIBED

PERIOD.

A REAL ESTATE BROKER IS QUALIFIED TO ADVISE ON REAL ESTATE. IF

YOU DESIRE LEGAL ADVICE, CONSULT YOUR ATTORNEY.

(CAL. CIV. § 1102 et. seq.)

3. Local Option Real Estate Transfer Disclosure Statement

A city or county may require that the seller provide specific information

about the neighborhood or community: The Civil Code requires that such

local disclosure statements be in the following format:

LOCAL OPTION

REAL ESTATE TRANSFER DISCLOSURE STATEMENT

THIS DISCLOSURE STATEMENT CONCERNS THE REAL PROPERTY

SITUATED IN THE CITY OF _______________, COUNTY OF _____________,

STATE OF CALIFORNIA, DESCRIBED AS ________________________. THIS

STATEMENT IS A DISCLOSURE OF THE CONDITION OF THE ABOVE-

DESCRIBED PROPERTY IN COMPLIANCE WITH ORDINANCE NO. ______

OF THE ___________ CITY OR COUNTY CODE AS OF ___________, 20___.

IT IS NOT A WARRANTY OF ANY KIND BY THE SELLER(S) OR ANY

AGENT(S) REPRESENTING ANY PRINCIPAL(S) IN THIS TRANSACTION,

AND IS NOT A SUBSTITUTE FOR ANY INSPECTIONS OR WARRANTIES THE

PRINCIPAL(S) MAY WISH TO OBTAIN.

SELLER’S INFORMATION

The Seller discloses the following information with the knowledge that even

though this is not a warranty, prospective Buyers may rely on this information in

deciding whether and on what terms to purchase the subject property. Seller

hereby authorizes any agent(s) representing any principal(s) in this transaction to

provide a copy of this statement to any person or entity in connection with any

actual or anticipated sale of the property.

THE FOLLOWING ARE REPRESENTATIONS MADE BY THE SELLER(S) AS

REQUIRED BY THE CITY OR COUNTY OF ___________________ AND ARE

NOT THE REPRESENTATIONS OF THE AGENT(S), IF ANY. THIS

INFORMATION IS A DISCLOSURE AND IS NOT INTENDED TO BE PART OF

ANY CONTRACT BETWEEN THE BUYER AND SELLER.

1 ______________________________________________________________

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________________________________________________________________

2. ______________________________________________________________

(Example: Adjacent land is zoned for timber production which may be subject to

harvest.)

Seller certifies that the information herein is true and correct to the best of the

Seller's knowledge as of the date signed by the Seller.

Seller _______________________________________ Date _______________

BUYER(S) AND SELLER(S) MAY WISH TO OBTAIN PROFESSIONAL ADVICE

AND/OR INSPECTIONS OF THE PROPERTY AND TO PROVIDE FOR

APPROPRIATE PROVISIONS IN A CONTRACT BETWEEN BUYER AND

SELLER(S) WITH RESPECT TO ANY ADVICE/INSPECTIONS/DEFECTS.

I/WE ACKNOWLEDGE RECEIPT OF A COPY OF THIS STATEMENT.

Seller _______________ Date________ Buyer _____________ Date_________

Agent (Broker

Representing Seller) _________________ By ________________ Date_______

(Please Print) (Associate Licensee

or Broker-Signature)

Agent (Broker

Obtaining the Offer) _________________ By _________________ Date_______

(Please Print) (Associate Licensee

or Broker-Signature)

A REAL ESTATE BROKER IS QUALIFIED TO ADVISE ON REAL ESTATE. IF

YOU DESIRE LEGAL ADVICE, CONSULT YOUR ATTORNEY.

(CAL. CIV. § 1102.6a)

NOTE: On and after January 1, 2006, should a city or county not adopt a

different or additional local disclosure form, then the required "airport

influence area," disclosure shall be made consistent with a current airport

influence map. If there is not an available current airport influence map, a

written disclosure of an airport located within two statute miles of the

subject property shall satisfy this disclosure requirement.

When providing the above disclosure, the seller, the seller’s agent(s), or the

expert retained for such purpose shall determine whether the property is

within the jurisdiction of the San Francisco Bay Conservancy and

Development Commission, as defined in Section 66620 of the Government

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Code. If the property is within the Commission’s jurisdiction, the report

shall contain the following notice:

NOTICE OF SAN FRANCISCO BAY CONSERVATION

AND DEVELOPMENT COMMISSION JURISDICTION

This property is located within the jurisdiction of the San Francisco Bay

Conservation and Development Commission. Use and development of the

property within the commission’s jurisdiction may be subject to special

regulations, restrictions, and permit requirements. You may wish to investigate

and determine whether they are acceptable to you and your intended use of the

property before you complete your transaction.

(CAL. BUS. & PROF. § 11010; CAL. CIV. §§ 1102.6a, 1103.4, 1353)

4. Natural Hazards Disclosure

Unless the transfer of the property is subject to an exemption from this

disclosure, the seller or the seller’s agent for this purpose must make

appropriate disclosures if the property is in one or more of the following

zones or areas:

• Zone A or Zone V (special flood hazard area) as designated by the

Federal Emergency Management Agency. The seller’s agent, or the

seller, if acting without an agent, must make this disclosure if:

o The seller, or the seller’s agent has actual knowledge that the

property is in a special flood hazard area; or

o The local jurisdiction has compiled a list of parcels that are in a

special flood hazard area and has posted at the offices of the county

recorder, county assessor, and county planning agency a notice that

identifies the location of the parcel list.

AL. GOV’T § 8589.3)

• An area of potential flooding shown on a map as an area which will be

inundated if a dam fails. The seller’s agent, or the seller if acting without

an agent, must make this disclosure if:

o The seller, or the seller’s agent, has actual knowledge that the

property is within a delineated inundation area; or

o The local jurisdiction has compiled a list of parcels that are in the

inundation area and has posted at the offices of the county recorder,

county assessor, and county planning agency a notice that identifies

the location of the list.

AL. GOV’T § 8589.4)

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• A designated very high fire hazard severity zone. The seller and the

seller’s agent must make this disclosure if:

o The seller, or the seller’s agent, has actual knowledge that the

property is in a designated very high fire hazard severity zone; or

o The local agency has received a map of such properties which

includes the seller’s property and has posted at the offices of the

county recorder, county assessor, and county planning agency a

notice that identifies the location of the map and any changes to it.*

AL. GOV’T § 51183.5)

• A designated wildland area (“state responsibility area”) that may

contain substantial forest fire risks and hazards. The seller and the

seller’s agent must make this disclosure if:

o the seller or the seller’s agent has actual knowledge that the

property is in a designated wildland fire zone; or

o the city or county has received a map of such properties which

includes the seller’s property and has posted at the offices of the

county recorder, county assessor, and county planning agency a

notice that identifies the location of the map and any changes to it.*

AL. PUB. RES. § 4136)

• An earthquake fault zone. These zones are over earthquake faults and

are usually about one quarter mile in width. The seller’s agent, or the

seller if acting without an agent, must disclose that the property is in one

of these zones if:

o the seller, or the seller’s agent, has actual knowledge that the

property is within a delineated earthquake fault zone; or

o the city or county has received a map of such properties which

includes the seller’s property and has posted at the offices of the

county recorder, county assessor, and county planning agency a

notice that identifies the location of the map and any changes to it.*

AL. PUB. RES. § 2621.9)

• A seismic hazard zone. In an earthquake, properties in one of these

zones may be subject to strong ground shaking, soil liquefaction, or

landslide. The seller’s agent, or the seller if acting without an agent,

must disclose that the property is in one of these zones if:

o the seller, or the seller’s agent, has actual knowledge that the

property is within a delineated seismic hazard zone; or

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o the city or county has received a map of such properties which

includes the seller’s property and has posted at the offices of the

county recorder, county assessor, and county planning agency a

notice that identifies the location of the map and any changes to it.*

AL. PUB. RES. § 2694)

* NOTE: If, when looking at the map, a reasonable person cannot tell with

certainty whether the property is in the zone, the seller or seller’s agent must

mark “YES” on the disclosure form, unless there can be attached to the

form an expert’s report, prepared pursuant to Civil Code Section 1102.4(c),

indicating that the property is not located in the zone.

These disclosures must be made on the Natural Hazard Disclosure Statement

(NHDS) or on the Local Option Real Estate Transfer Disclosure Statement

(Local Option Disclosure), if the local jurisdiction has mandated use of a

Local Option Disclosure for the same disclosure purposes and the

information and warnings are substantially the same as on the NHDS.

The seller or his or her agent may elect to use the services of a third party

consultant to complete the NHDS in lieu of completing the NHDS

themselves. The use of a third party consultant does not relieve the seller or

his/her agent from the obligation to deliver NHDS to the buyer.

AL CIV. §§ 1103, 1103.1, 1103.2, 1103.3, 1103.4)

The following is the required format for the NHDS:

NATURAL HAZARD DISCLOSURE STATEMENT

This statement applies to the following property:______________________

The transferor and his or her agent(s) or a third-party consultant disclose the

following information with the knowledge that even though this is not a warranty,

prospective transferees may rely on this information in deciding whether and on

what terms to purchase the subject property. Transferor hereby authorizes any

agent(s) representing any principal(s) in this action to provide a copy of this

statement to any person or entity in connection with any actual or anticipated

sale of the property.

The following are representations made by the transferor and his or her agent(s)

based on their knowledge and maps drawn by the state and federal

governments. This information is a disclosure and is not intended to be part of

any contract between the transferee and transferor.

THIS REAL PROPERTY LIES WITHIN THE FOLLOWING HAZARDOUS

AREA(S):

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A SPECIAL FLOOD HAZARD AREA (Any type Zone "A" or "V") designated

by the Federal Emergency Management Agency.

Yes _____ No _____ Do not know and

information not

available from local

jurisdiction _________

AN AREA OF POTENTIAL FLOODING shown on a dam failure inundation

map pursuant to Section 8589.5 of the Government Code.

Yes _____ No _____ Do not know and

information not

available from local

jurisdiction _________

A VERY HIGH FIRE HAZARD SEVERITY ZONE pursuant to Section 51178

or 51179 of the Government Code. The owner of this property is subject to

the maintenance requirements of Section 51182 of the Government Code.

Yes _____ No _____

A WILDLAND AREA THAT MAY CONTAIN SUBSTANTIAL FOREST FIRE

RISKS AND HAZARDS pursuant to Section 4125 of the Public Resources

Code. The owner of this property is subject to the maintenance requirements

of Section 4291 of the Public Resources Code.

Additionally, it is not the state's responsibility to provide fire protection

services to any building or structure located within the wildlands unless the

Department of Forestry and Fire Protection has entered into a cooperative

agreement with a local agency for those purposes pursuant to Section 4142

of the Public Resources Code.

Yes _____ No _____

AN EARTHQUAKE FAULT ZONE pursuant to Section 2622 of the Public

Resources Code.

Yes _____ No _____

A SEISMIC HAZARD ZONE pursuant to Section 2696 of the Public

Resources Code.

Yes (Landslide Zone) _____ Yes (Liquefaction Zone) _____

No _____ Map not yet released by

state _______

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THESE HAZARDS MAY LIMIT YOUR ABILITY TO DEVELOP THE REAL

PROPERTY, TO OBTAIN INSURANCE, OR TO RECEIVE ASSISTANCE

AFTER A DISASTER.

THE MAPS ON WHICH THESE DISCLOSURES ARE BASED ESTIMATE

WHERE NATURAL HAZARDS EXIST. THEY ARE NOT DEFINITIVE

INDICATORS OF WHETHER OR NOT A PROPERTY WILL BE AFFECTED BY

A NATURAL DISASTER. TRANSFEREE(S) AND TRANSFEROR(S) MAY WISH

TO OBTAIN PROFESSIONAL ADVICE REGARDING THOSE HAZARDS AND

OTHER HAZARDS THAT MAY AFFECT THE PROPERTY.

Signature of Transferor(s)_____________________ Date__________________

Agent(s)___________________________________ Date__________________

Check only one of the following:

! Transferor(s) and their agent(s) represent that the information herein is true

and correct to the best of their knowledge as of the date signed by the

transferor(s) and agent(s).

! Transferor(s) and their agent(s) acknowledge that they have exercised good

faith in the selection of a third-party report provider as required in Civil Code

Section 1103.7, and that the representations made in this Natural Hazard

Disclosure Statement are based upon information provided by the independent

third-party disclosure provider as a substituted disclosure pursuant to Civil Code

Section 1103.4.

Neither transferor(s) nor their agent(s) (1) has independently verified the

information contained in this statement and report or (2) is personally aware of

any errors or inaccuracies in the information contained on the statement. This

statement was prepared by the provider below:

Third-Party

Disclosure Provider(s)_________________________ Date_________________

Transferee represents that he or she has read and understands this document.

Pursuant to Civil Code Section 1103.8, the representations made in this Natural

Hazard Disclosure Statement do not constitute all of the transferor's or agent's

disclosure obligations in this transaction.

Signature of Transferee(s)______________________ Date_________________

NOTE: Although the form for the natural hazard disclosures is mandated

only for properties described on page 1 of this booklet, the appropriate

disclosure must be made in some manner when any real property located in

one of the zones is to be sold or transferred.

AL. CIV. § 1103.2)

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5. Mello-Roos Bonds and Taxes

The Mello-Roos Community Facilities Act of 1982 authorizes the formation

of community facilities districts, the issuance of bonds, and the levying of

special taxes to finance designated public facilities and services. The seller

of a property consisting of 1 to 4 dwelling units subject to the lien of a

Mello-Roos community facilities district or subject to a fixed lien

assessment collected in installments to secure bonds issued pursuant to the

Improvement Bond Act of 1915 (Division 10, commencing with Section

8500, of the Streets and Highway Code) must make a good faith effort to

obtain from the district a disclosure notice concerning the special tax and

must give the notice to a prospective buyer. If a district notice is not

obtained, a notice obtained from a non-governmental source may be used,

provided that it clearly and accurately describes the related tax liabilities.

AL. CIV. § 1102.6b)

6. Property Taxes

New legislation effective January 1, 2006, requires a seller or his or her

agent to deliver to the prospective purchaser a disclosure notice that includes

both of the following:

(1) A notice, in at least 12-point type or a contrasting color, as follows:

"California property tax law requires the Assessor to revalue real

property at the time the ownership of the property changes. Because of

this law, you may receive one or two supplemental tax bills, depending

on when your loan closes.

The supplemental tax bills are not mailed to your lender. If you

have arranged for your property tax payments to be paid through an

impound account, the supplemental tax bills will not be paid by your

lender. It is your responsibility to pay these supplemental bills directly to

the Tax Collector.

If you have any question concerning this matter, please call your

local Tax Collector's Office."

(2) A title must be included in at least 14-point type or a contrasting

color that reads as follows:

"Notice of Your 'Supplemental' Property Tax Bill."

The disclosure notice requirements of this section may be satisfied by

including the required information in the Mello-Roos disclosure (see Part I,

Section I, Subsection A, Item 5 – Mello-Roos Bonds and Taxes).

Supplemental taxes may be assessed whether a new loan is obtained or an

existing loan is assumed to accomplish the purchase of the property, or

whether the property is purchased without financing.

AL. CIV. §1102.6c)

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7. Ordnance Locations

Federal and state agencies have identified certain areas once used for

military training and which may contain live ammunition. A seller of

residential property (again, 1 to 4 dwelling units) located within one mile of

such a potential hazard must give the buyer written notice thereof as soon as

practicable before transfer of title. This obligation depends upon the seller

having actual knowledge of the hazard.

AL. CIV. § 1102.15)

8. Window Security Bars

A seller must disclose on the Real Estate Transfer Disclosure Statement

(TDS) or if mandated in the Local Option TDS, the existence of window

security bars and any safety release mechanism on the bars.

AL CIV. § 1102.16)

9. Industrial Uses

A seller who has actual knowledge must disclose on the Real Estate Transfer

Disclosure Statement (TDS) or if mandated in the local option TDS, should

the property be adjacent to or zoned to allow an industrial use described in

Section 731A of the Code of Civil Procedure, or affected by a nuisance

created by such use.

AL. CIV. § 1102.17)

10. Methamphetamine Contamination

New legislation effective January 1, 2006, requires local health officers to

make an assessment of a property after receiving notification from a law

enforcement agency of potential contamination or of known or suspected

contamination by a methamphetamine laboratory activity. If the property is

determined to be contaminated, an order prohibiting its use or habitation

shall be issued. Until the property owner receives a notice from a local

health officer that the property identified in an order requires no further

action, the property owner shall notify the prospective buyer in writing of

the order, and provide the prospective buyer with a copy of the order. The

prospective buyer shall acknowledge, in writing, the receipt of a copy of the

order.

AL. HEALTH & SAFETY § 25400.10 et. seq.)

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B. Earthquake Guides

The California Seismic Safety Commission has developed a “Homeowner’s

Guide to Earthquake Safety.” The guide includes information on geologic

and seismic hazards, explanations of related structural and nonstructural

hazards, recommendations for mitigating earthquake damage, and a

statement that safety cannot be guaranteed with respect to a major

earthquake and that only precautions such as retrofitting can be undertaken

to reduce the risk of various types of damage. The Seismic Safety

Commission has also developed a “Commercial Property Owner’s Guide to

Earthquake Safety.” These guides are available at www.seismic.ca.gov or

by calling (916) 263-5506.

If a buyer receives a copy of the Homeowner’s Guide (or, if applicable, the

Commercial Property Owner’s Guide), neither the seller nor the

broker(s)/agent(s) are required to provide additional information regarding

geologic and seismic hazards, except that sellers and brokers/agent(s) must

disclose what they actually know, including whether a property is in an

earthquake fault zone.

Delivery of a booklet is required in the following transactions:

• Transfer of any real property improved with a residential dwelling built

prior to January 1, 1960 and consisting of 1 to 4 units any of which are

of conventional light-frame construction (Homeowner’s Guide); and

• Transfer of any unreinforced masonry building with wood-frame floors

or roofs built before January 1, 1975 (Commercial Property Owner’s

Guide).

In a transfer of residential dwellings consisting of 1 to 4 units, the following

structural deficiencies and any corrective measures taken, which are within

the seller’s actual knowledge, are to be disclosed to prospective buyers:

• Absence of foundation anchor bolts;

• Unbraced or inappropriately braced perimeter cripple walls;

• Unbraced or inappropriately braced first-story walls;

• Unreinforced masonry perimeter foundation;

• Unreinforced masonry dwelling walls;

• Habitable room or rooms above a garage; or

• Water heater not anchored, strapped, or braced.

Certain exemptions apply to the obligation to deliver the booklet when

transferring either a dwelling of 1 to 4 units or a reinforced masonry

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building. These exemptions are essentially the same as those that apply to

delivery of the Real Estate Transfer Disclosure Statement. (See Part I,

Section I, Subsection A, Item 2 – Real Estate Transfer Disclosure

Statement.)

AL. PUB. RES. §§2621 et. seq., 2690 et. seq.; CAL. BUS. & PROF. §§ 10147,

10149; C

AL. CIV. §§2079.8, 2079.9; CAL. GOV’T §§ 8875 et. seq., 8893.2,

§8897 et. seq.)

C. Smoke Detector Statement of Compliance

Whenever a sale (or exchange) of a single family dwelling occurs, the seller

must provide the buyer with a written statement representing that the

property is in compliance with California law regarding smoke detectors.

Some local ordinances impose more stringent smoke detector requirements

than state law. Therefore, local city or county building or public safety

departments should be consulted regarding smoke detector requirements.

The State Building Code mandates that all existing dwelling units have a

smoke detector installed in a central location outside each sleeping area. In a

two-story home with bedrooms on both floors, at least two smoke detectors

would be required.

New construction, or any additions, alterations or repairs exceeding $1,000

and for which a permit is required, must include a smoke detector installed

in each bedroom and also at a point centrally located in a corridor or area

outside of the bedroom(s). This standard applies for the addition of one or

more bedrooms, no matter what the cost.

In new home construction, the smoke detector must be hard-wired, with a

battery backup. In existing dwellings, the detector may be battery operated.

AL. HEALTH & SAFETY § 13113.8; CAL. BUILDING CODE § 1210; STATE

FIRE MARSHALL REGULATIONS 740 et. seq.)

D. Disclosure Regarding Lead-Based Paint Hazards

Many housing units in California still contain lead-based paint. This paint

was banned for residential use in 1978. Lead-based paint can peel, chip, and

deteriorate into contaminated dust, thus becoming a hazard. A child’s

ingestion of the lead-laced chips or dust may result in learning disabilities,

delayed development or behavior disorders.

The federal Real Estate Disclosure and Notification Rule (the Rule) requires

that owners of “residential dwellings” built before 1978 to disclose to their

agents and to prospective buyers or lessees/renters the known presence of or

any information and any reports about lead-based paint and/or lead-based

paint hazards (e.g., location and condition of the painted surfaces, etc.). The

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Rule defines a residential dwelling as a single-family dwelling or a single-

family dwelling unit in a structure that contains more than one separate

residential dwelling unit, and in which each such unit is used or occupied or

intended to be used or occupied, in whole or in part, as the residence of one

or more persons.

Properties affected by the Rule are termed “target housing.” Target housing

does not include pre-1978 housing which is:

• Sold at a foreclosure sale (but a subsequent sale of such a property is

covered);

• A “0-bedroom dwelling” (e.g., a loft, efficiency unit or studio);

• A dwelling unit leased for 100 or fewer days (e.g., a vacation home or

short-term rental), provided the lease cannot be renewed or extended;

• Housing designated for the elderly or handicapped, unless children

reside or are expected to reside there;

• Leased housing for which the requirements of the Rule have been

satisfied, no pertinent new information is available, and the lease is

renewed or renegotiated; or

• Rental housing that has been inspected by a certified inspector and

found to be free of lead-based paint.

Sellers and lessors of units in pre-1978 multifamily structures must provide a

buyers or lessees with any available records or reports pertaining to lead-

based paint and/or lead-based paint hazards in areas used by all the residents

(e.g., stairwells, lobbies, recreation rooms, laundry rooms, etc.). If there has

been an evaluation or reduction of lead-based paint and/or lead-based paint

hazards in the entire structure, the disclosure requirement extends to any

available records or reports regarding the other dwelling units.

The Rule requires that a seller of target housing offer a prospective buyer 10

days to inspect for lead-based paint and lead-based paint hazards. The 10

days to inspect can be increased, decreased, or waived by written agreement

between buyer and seller. The Rule does not require a seller to pay for an

inspection or to remove any lead-based paint/hazards, but gives a buyer the

opportunity to have the property inspected. A list of certified lead inspectors

and contractors is available by calling the California Department of Health

Services at 1-800-597-LEAD.

The federal Environmental Protection Agency (EPA) publishes a pamphlet

entitled, “Protect Your Family From Lead In Your Home,” which is

available at http://www.epa.gov/opptintr/lead/leadprot.htm. This

pamphlet describes ways to recognize and reduce lead hazards. The Rule

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requires that a seller or lessor/landlord of target housing deliver this

pamphlet to a prospective buyer or lessee/tenant before a purchase, lease or

rental agreement is formed.

The Rule further requires that the seller’s or lessor’s/landlord’s Lead-Based

Paint or Lead-Based Paint Hazards Disclosures; the Lead Warning

Statement; and the prospective buyer’s or lessee’s/tenant’s acknowledgment

of receipt of that information; the offer of inspection period (or waiver of

same); and the EPA pamphlet each be included in an attachment to the

transaction documentation. The Seller or lessor/landlord, the prospective

buyer or lessee/tenant, and the agent(s) must each sign and date the

attachments. The retention period for sellers or lessors/landlords and

agent(s) of this document is three years from completion of the sale or

transfer, or from commencement of the lease/rental.

A real estate agent must ensure that:

• His or her principal (seller/lessor/landlord) is aware of the disclosure

requirements;

• The transaction documentation includes the required notifications and

disclosures;

• The buyer or lessee/renter receives the EPA pamphlet; and

• In the case of a sale or transfer, the buyer is offered an opportunity to

have the property inspected for lead-based paint and lead-based paint

hazards.

Violation of the Rule may result in civil and/or criminal penalties. For the

purposes of these requirements, real estate “agent” does not include one who

represents only the buyer and receives compensation only from the buyer.

To obtain the essential compliance information, a person may call the EPA

at 1-800-424-LEAD.

(42 U.S.C. § 4852d; 24 C.F.R.. P

ART 35; CAL. HEALTH & SAFETY §§ 124125

to 124165)

E. California’s Environmental Hazards Pamphlet

As previously discussed in this section, a California seller of residential real

property consisting of 1 to 4 dwelling units (with a few exceptions) must

give the buyer a Real Estate Transfer Disclosure Statement (TDS). The

statement must specify environmental hazards of which the seller is aware

(e.g., asbestos, radon gas, lead-based paint, formaldehyde, fuel or chemical

storage tanks, contaminated soil or water, etc.). The seller or the seller’s

agent(s) may give the buyer of real property subject to Section 1102 of the

Civil Code or of any other real property, including manufactured housing as

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defined in Section 18007 of the Health and Safety Code, a pamphlet entitled,

“Environmental Hazards: A Guide for Homeowners, Buyers, Landlords, and

Tenants.” If the buyer receives the pamphlet, neither the seller nor any agent

in the transaction is required to furnish more information concerning such

hazards, unless the seller or the agent(s) has/have actual knowledge of the

existence of an environmental hazard on or affecting the property.

NOTE: The environmental hazards pamphlet has been maintained and

updated by the California Association of REALTORS® for several years. It

is available for purchase at http://www.car.org/mall/mall.htm or from Val

Forms, a private vendor, at (925) 461-0570.

AL. CIV. § 2079.7)

F. Delivery of Structural Pest Control Inspection and

Certification Reports

The law does not require that a structural pest control inspection be

performed prior to transfer of a real property. However, if required by the

purchase contract or by the lender, the seller or the seller’s agent(s) must

deliver to the buyer a copy of the report and written certification, prepared

by a registered structural pest control company, regarding the presence or

absence of wood-destroying organisms. Delivery must occur before transfer

of title.

If more than one real estate broker is acting as the seller’s agent, the broker

who obtained the offer is responsible for delivery of the report in person or

by mail, unless the seller directs otherwise in writing. The real estate broker

responsible for delivery must retain for 3 years a record of the actions taken

to effect delivery.

AL. BUS. & PROF. §§ 8519 et. seq., 10148; CAL. CIV. § 1099;

OMMISSIONER’S REGULATION 2905)

G. Energy Conservation Retrofit and Thermal Insulation

Disclosures

State law prescribes minimum energy conservation standards for all new

construction. Some local governments also have ordinances that impose

additional energy conservation measures on new and/or existing homes.

These local ordinances may impose energy retrofitting as a condition of the

sale of an existing home. The seller and/or the seller’s agent(s) are to

disclose to a prospective buyer the requirements of the various ordinances,

as well as who is responsible for compliance.

Federal law requires that a “new home” seller (including a subdivider)

disclose in every sales contract the type, thickness, and R-value of the

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insulation which has been or will be installed. However, if the buyer signs a

sales contract before it is known what type of insulation will be installed, or

if there is a change in the contract regarding insulation, the seller shall give

the buyer the required information as soon as it is available.

(16 C.F.R. PART 460 et. seq.; C

AL. PUB. RES. § 25402 et. seq.)

H. Foreign Investment in Real Property Tax Act

Federal law requires that a buyer of real property must withhold and send to

the Internal Revenue Service (IRS) l0% of the gross sales price if the seller

of the real property is a “foreign person.” The primary grounds for

exemption from this requirement are: the seller’s non-foreign affidavit and

U.S. taxpayer I.D. number; a qualifying statement obtained through the IRS

attesting to other arrangements resulting in collection of or exemption the

tax; or the sales price does not exceed $300,000 and the buyer intends to

reside in the property.

Because of the number of exemptions and other requirements relating to this

law, principals and agents should consult the IRS or a qualified tax advisor

for more information.

(26 U.S.C. § 1445)

I. Notice and Disclosure to Buyer of State Withholding on

Disposition of California Real Property.

In certain California real estate sale transactions, buyers must withhold

3 1/3% of the total sales prices as state income tax and deliver the sums

withheld to the State Franchise Tax Board. In applicable transactions, the

escrow holder is required by law to notify the buyer of this responsibility.

A buyer’s failure to withhold and deliver the required sum may result in the

buyer being subject to penalties. If the escrow holder fails to notify the

buyer, penalties may be levied against the escrow holder.

Transactions are exempt from withholding if:

• The total sales price is less than $100,000.

• The property qualifies as the seller’s or decedent’s principal residence

under Internal Revenue Service Code Section 121. Generally, a home

will qualify as a principal residence if, during the five-year period

ending on the date of sale, the seller or the decedent owned and lived in

the property as their main home for at least two years. Notwithstanding

the two-year requirement, the last use of the property must be that of the

seller’s or decedent’s principal residence.

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• The transaction must result in either a net loss or a net gain that is not

required to be recognized for California income or franchise tax

purposes. The seller must complete Form 593-L, “Real Estate

Withholding-Computation of Estimated Gain or Loss.”

• The property is subject to an involuntary conversion and, therefore, the

transaction will qualify for non-recognition of gain for California

income tax purposes under Internal Revenue Service Code Section

1033.

• The property is being transferred by certain corporations, partnerships,

or other entities which have no permanent place of business in

California and/or otherwise qualify for an exemption.

• The property is being transferred by a trustee under a deed of trust or a

mortgage with a power of sale, or pursuant to a decree of foreclosure, or

by a deed in lieu of foreclosure.

There may be other restrictions, limitations, or exceptions for special

circumstances. For more information, obtain IRS Publication 523, “Selling

Your Home,” at www.irs.gov, or contact the IRS toll free at 1-800-829-

3676. In addition, withholding may be reduced or deferred when:

• The sale qualifies as an IRS Code Section 1031 exchange. However,

withholding will be required on any cash the seller receives.

• The sale is an installment sale and the buyer agrees in writing to

withhold on each principal payment including the down payment and on

any balloon payment. The buyer must complete Form 593-I, “Real

Estate Withholding Installment Sale Agreement.”

For further information, contact the Franchise Tax Board and/or a qualified

tax advisor.

AL. REV. & TAX. § 18662)

J. Furnishing Controlling Documents and Financial

Statements Concerning Common Interest

Developments (CID’s)

The owner (other than a subdivider) of a separate interest in a common

interest development (community apartment project, condominium project,

planned development, or stock cooperative) must provide a prospective

buyer with the following:

• A copy of the governing documents of the development, including any

operating rules and a copy of the association’s articles of incorporation,

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or if not incorporated, a written statement from an authorized

representative that the association is not incorporated;

• If there is an age restriction not consistent with Civil Code Section 51.3,

a statement that the age restriction is only enforceable to the extent

permitted by law and specifying the applicable provisions of law;

• A copy of the financial documents of the association including financial

statement, the operating budget, the most recent reserve study and the

assessment and reserve funding disclosure summary form (see Civil

Code 1365 and 1365.5);

• A written statement from an authorized representative of the association

specifying the amount of the current regular and special assessments, the

current fees, as well as any unpaid assessments, late charges, interest,

and costs of collection which are or may become a lien against the

separate interest and any fines or penalties levied upon the owner and

which remain unpaid.

• A copy or summary of any notice previously sent to the owner that sets

forth any alleged violation of the governing documents that remains

unresolved.

• A copy of any preliminary list of any construction defects and a

statement that a final determination of the defects has yet to occur,

including whether the list of defects is accurate and complete.

• A disclosure of any settlement agreement or other instrument between

the association and the developer regarding construction defects, and the

following information in connection therewith:

“(1) A general description of the defects that the association reasonably

believes, as of the date of the disclosure, will be corrected or

replaced.

(2) A good faith estimate, as of the date of the disclosure, of when the

association believes that the defects identified in (1) will be

corrected or replaced. The association may state that the estimate

may be modified.

(3) The status of the claims for defects in the design or construction of

the common interest development that were not identified in

paragraph (1) whether expressed in a preliminary list of defects sent

to each member of the association or otherwise claimed and

disclosed to the members of the association.”

• Information regarding any approved change in the assessments or fees

which are not yet due and payable as of the disclosure date.

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NOTE: Upon written request, the association is to provide within 10 days

the above information to or as directed by the owner. In addition, some

transactional documents require that the owner secure for the prospective

buyer copies of minutes of proceedings, which may be obtained from the

association by the owner in accordance with Civil Code Section 1365.2.

AL. CIV. §§ 1368, 1375 , 1375.1(a)(1),(2),(3))

K. Notice Regarding the Advisability of Title Insurance

In an escrow for a sale (or exchange) of real property where no title

insurance is to be issued, the buyer (or both parties to an exchange) must

receive and sign/acknowledge the following notice as a separate document

in the escrow:

“IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT

MAY BE ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH

THE CLOSE OF ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS

AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE

PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE

SHOULD BE OBTAINED IN ORDER TO INSURE YOUR INTEREST IN THE

PROPERTY THAT YOU ARE ACQUIRING.”

NOTE: While the statute does not expressly assign the duty, it is reasonable

to assume that delivery of the notice is an obligation of the escrow holder. A

real estate broker conducting an escrow pursuant to the exemption set forth

in Financial Code Section 17006(a)(4) would, therefore, be responsible for

delivery of the notice.

AL. CIV. § 1057.6)

L. Certification Regarding Water Heater’s Security Against

Earthquake

The seller of any real property containing a water heater must certify in

writing to a prospective buyer that the water heater has been braced,

anchored or strapped to resist falling or horizontal movement due to

earthquake motion. The minimum standard for this security is set forth in the

California Plumbing Code, which may be more restrictively amended by

local or municipal code or ordinance. The certification can be included with

the Homeowner’s Guide to Earthquake Safety, in the Real Estate Purchase

Contract or Receipt for Deposit, or with the Real Estate Transfer Disclosure

Statement.

AL. HEALTH & SAFETY § 19211)

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M. Data Base – Locations of Registered Sex Offenders

Written leases or rental agreements for residential real property and

contracts (including real property sales contracts as defined in Civil Code

Section 2985) for the sale of residential real property of 1 to 4 dwelling units

must contain, in not less than eight-point type, a notice as specified in

paragraph (1), (2), or (3):

(1) A contract entered into by the parties on or after July 1, 1999, and

before September 1, 2005, shall contain the following notice:

Notice: The California Department of Justice, sheriff’s departments,

police departments serving jurisdictions of 200,000 or more, and

many other local law enforcement authorities maintain for public

access a database of the locations of persons required to register

pursuant to paragraph (1) of subdivision (a) of Section 290.4 of the

Penal Code. The database is updated on a quarterly basis and is a

source of information about the presence of these individuals in any

neighborhood. The Department of Justice also maintains a Sex

Offender Identification Line through which inquiries about individuals

may be made. This is a “900” telephone service. Callers must have

specific information about individuals they are checking. Information

regarding neighborhoods is not available through the “900”

telephone service.

(2) A contract entered into by the parties on or after September 1, 2005,

and before April 1, 2006, shall contain either the notice specified in

paragraph (1) or the notice specified in paragraph (3).

(3) A contract entered into by the parties on or after April 1, 2006, shall

contain the following notice:

Notice: Pursuant to Section 290.46 of the Penal Code, information

about specified registered sex offenders is made available to the

public via an Internet Web site maintained by the Department of

Justice at www.meganslaw.ca.gov. Depending on an offender’s

criminal history, this information will include either the address at

which the offender resides or the community of residence and ZIP

Code in which he or she resides.

(CAL. CIV. § 2079.10a)

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SECTION II

DISCLOSURES REQUIRED OF REAL ESTATE AGENTS

IN THE TRANSFER OF RESIDENTIAL REAL PROPERTY

Although this section relates to an agent’s duties and responsibilities, the

seller may be responsible for disclosures concerning the condition of the

property to the same or greater extent than the seller’s agent(s). The seller

may also be responsible for those disclosures required by law that his/her

agent(s) for that purpose fail(s) to make.

A. Visual Inspection

Listing and selling brokers/agents must each conduct a reasonably

competent and diligent visual inspection of real property, which consists of 1

to 4 dwelling units, that is sold through said brokers/agents. The same

obligation applies to manufactured homes (as defined in Health and Safety

Code Section 18007) when the foregoing property is being transferred

through brokers/agents. The purpose of the visual inspection is to disclose to

the prospective buyer all material facts affecting the property’s value,

desirability, and intended use.

This inspection/disclosure requirement applies to property of 1 to 4 dwelling

units, but does not apply to the sale of new homes as part of a subdivision

project when the sale is either subject to or exempted from the issuance of a

Public Report.

However, the agents remain obligated to disclose material facts about which

they have notice or knowledge whether such facts are included in a

Subdivision Public Report or in disclosures made by the developer when no

Public Report is required.

For the limited purpose of making disclosures as a result of the aforesaid

visual inspections, the agents do not have to inspect:

• Areas not reasonably accessible;

• Areas off the site of the property;

• Public records or permits concerning the title or use of the property; or

• The common area if the property is in a common interest development if

the seller and the seller’s broker(s)/agent(s) comply with Civil Code

Section 1368. (See Part I, Section I, Subsection J – Furnishing

Controlling Documents and Financial Statements Concerning CIDs.)

Nothing in the law relieves a buyer of the duty to exercise reasonable care to

protect himself/herself by considering facts which are known to or within the

reasonably diligent attention and observation of the buyer.

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Each agent’s inspection certification is contained in the Real Estate Transfer

Disclosure Statement. In addition to the foregoing, real estate agents must

disclose all material facts affecting the value, desirability, and intended use

about which they have or should have notice or knowledge that may not be

discernable from the required visual inspection.

AL. BUS. & PROF. § 10176(a); CAL. CIV. § 2079 et. seq.)

B. Agency Relationship Disclosures

To provide an explanation of agency relationships and duties, the law

requires that a real estate broker disclose in writing the general duties which

arise from certain agency relationships. Additionally, the broker’s status as

agent of the seller, agent of the buyer, or agent of both the seller and buyer

(dual agent) is to be disclosed to the principals of the transaction who must

consent to the agency relationship(s) disclosed. This requirement applies to

the sale, exchange, or lease (for more than one year) of real property

improved with 1 to 4 dwelling units, or the sale of a manufactured home (as

defined in Health and Safety Code Section 18007).

The required agency disclosure form includes the following specific

language:

DISCLOSURE REGARDING REAL ESTATE AGENCY RELATIONSHIP

(As required by the Civil Code)

When you enter into a discussion with a real estate agent regarding a real estate

transaction, you should from the outset understand what type of agency

relationship and representation you wish to have with the agent in the

transaction.

SELLER’S AGENT

A Seller’s agent under a listing agreement with the Seller acts as the agent for

the Seller only. A Seller’s agent or a subagent of that agent has the following

affirmative obligations:

To the Seller:

(a) A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings

with the Seller.

To the Buyer and the Seller:

(a) Diligent exercise of reasonable skill and care in performance of the agent’s

duties.

(b) A duty of honest and fair dealing and good faith.

or desirability of the property that are not known to, or within the diligent attention

and observation of, the parties.

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An agent is not obligated to reveal to either party any confidential information

obtained from the other party which does not involve the affirmative duties set

forth above.

BUYER’S AGENT

A selling agent can, with a Buyer’s consent, agree to act as agent for the Buyer

only. In these situations, the agent is not the Seller’s agent, even if by agreement

the agent may receive compensation for services rendered, either in full or in part

from the Seller. An agent acting only for a Buyer has the following affirmative

obligations:

To the Buyer:

(a) A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings

with the Buyer.

To the Buyer and the Seller:

(a) Diligent exercise of reasonable skill and care in performance of the agent’s

duties.

(b) A duty of honest and fair dealing and good faith.

or desirability of the property that are not known to, or within the diligent attention

and observation of, the parties. An agent is not obligated to reveal to either party

any confidential information obtained from the other party which does not involve

the affirmative duties set forth above.

AGENT REPRESENTING BOTH SELLER AND BUYER

A real estate agent, either acting directly or through one or more associate

licensees, can legally be the agent of both the Seller and the Buyer in a

transaction, but only with the knowledge and consent of both the Seller and the

Buyer.

In a dual agency situation, the agent has the following affirmative obligations to

both the Seller and the Buyer:

(a) A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings

with either the Seller or the Buyer.

(b) Other duties to the Seller and the Buyer as stated above in their respective

sections.

In representing both Seller and Buyer, the agent may not, without the express

permission of the respective party, disclose to the other party that the Seller will

accept a price less than the listing price or that the Buyer will pay a price greater

than the price offered.

The above duties of the agent in a real estate transaction do not relieve a Seller

or Buyer from the responsibility to protect their own interests. You should

carefully read all agreements to assure that they adequately express your

understanding of the transaction. A real estate agent is a person qualified to

advise about real estate. If legal or tax advice is desired, consult a competent

professional.

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________________________________ ___________________________

Throughout your real property transaction you may receive more than one

disclosure form, depending upon the number of agents assisting in the

transaction. The law requires each agent with whom you have more than a

casual relationship to present you with this disclosure form. You should read its

contents each time it is presented to you, considering the relationship between

you and the real estate agent in your specific transaction.

This disclosure form includes the provisions of Sections 2079.13 to 2079.24,

inclusive, of the Civil Code set forth on the reverse hereof. Read it carefully.

Agent Buyer/Seller (date)

(Signature)

Associate Licensee (date) Buyer/Seller (date)

(Signature) (Signature)

In the contract to purchase or sell or in a separate writing signed by the agent(s)

and principals to the transaction, the agent(s) must confirm as follows the agency

relationship intended:

____________________________________ is the agent of (check one):

(Name of Listing Agent)

[ ] the seller exclusively; or

[ ] both the buyer and seller.

____________________________________ is the agent of (check one):

(Name of Selling Agent if not

the same as the Listing Agent)

[ ] the buyer exclusively; or

[ ] the seller exclusively; or

[ ] both the buyer and seller.

The law requires that “When you [the principal] enter into a discussion with

a real estate agent regarding a real estate transaction, you [the principal]

should from the outset understand what type of agency relationship

representation you [the principal] wish to have with the agent in the

transaction.” Accordingly, the disclosure form must be provided in a timely

fashion as follows:

“(a) The listing agent, if any, shall provide the disclosure form to the seller

prior to entering into the listing agreement.

(b) The selling agent shall provide the disclosure form to the seller as soon

as practicable prior to presenting the seller with an offer to purchase, unless

the selling agent previously provided the seller with a copy of the disclosure

form pursuant to subdivision(a).

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seller, the disclosure form prepared by the selling agent may be furnished to

the seller (and acknowledgment of receipt obtained for the selling agent

from the seller) by the listing agent, or the selling agent may deliver the

disclosure form by certified mail addressed to the seller at his or her last

known address, in which case no signed acknowledgment of receipt is

required.

(d) The selling agent shall provide the disclosure form to the buyer as soon

as practicable prior to execution of the buyer’s offer to purchase, except that

if the offer to purchase is not prepared by the selling agent, the selling agent

shall present the disclosure form to the buyer not later than the next business

day after the selling agent receives the offer to purchase from the buyer.”

Should either the buyer or seller refuse to sign the required

acknowledgement of receipt of the disclosure form, the broker/agent

representing that principal must prepare, sign, and date a written declaration

of the facts surrounding the refusal.

Neither the payment of compensation nor the obligation of the buyer or

seller to compensate the broker(s)/agent(s) will determine a particular

agency relationship. Agency relationship(s) are factual and arise out of the

conduct of the parties. However, the disclosure of and consent to the

described agency relationship(s) establishes a rebuttable presumption of the

agency relationship(s) which are intended by the parties.

A dual agent (where the same broker/agent represents both the seller and the

buyer) is expressly prohibited from discussing without the prior written

consent of the appropriate principal any asking or offering price (e.g., that

the seller would take less or the buyer would pay more than that which has

been set forth in the written listing agreement or the written offer to

purchase). The parties may agree in writing to change the agency

relationship(s) prior to the commencement of the real estate transaction.

AL. CIV. § 2079.13 et. seq.)

C. Disclosure of the Negotiability of Real Estate Commissions

An agreement (such as a listing or sales agreement) which establishes or

increases the amount or rate of a real estate broker’s/agent’s compensation

for the sale of residential real property of not more than four units or a

mobilehome must contain the following disclosure in not less than 10-point

boldface type:

Notice: The amount or rate of real estate commissions is not

fixed by law. They are set by each broker individually

and may be negotiable between the seller and broker.

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This notice must be physically placed before the provision in the agreement

for compensation of the broker(s)/agent(s), and the amount or rate of

compensation cannot be preprinted. Further, any compensation to be

received by the broker from the transaction must be fully disclosed.

AL. BUS. & PROF. §§ 10147.5, 10176(g))

D. No Disclosure Required for Manner/Occurrence of Death;

Affliction of Occupant with Aids

No cause of action arises against an owner or the owner’s broker/agent (or

any cooperating broker/agent) when selling, leasing, or renting real property

for failing to disclose to the buyer, lessee, or renter the following:

• the manner or occurrence of an occupant’s death upon the real property

if the death occurred more than 3 years prior to the transferee’s offer to

purchase, lease, or rent the property; or

• that an occupant of the property was afflicted with, or died from,

Acquired Immune Deficiency Syndrome (AIDS).

This controlling statute does not change the law relating to disclosure of any

other physical or mental condition or disease of an occupant or the physical

condition of the property. If the buyer asks a direct question concerning

deaths occurring on the real property, this statute will not protect the owner

or broker(s)/agent(s) from misrepresentations.

AL. CIV. § 1710.2)

E. Disclosure of Sales Price Information

Within one month after the close of escrow for the transfer of title to real

property or the sale of a business opportunity through a real estate broker,

the broker must inform the buyer and seller in writing of the sales price. In

the case of an exchange of real property or a business opportunity, the

information must include a description of the property and the amount of

added money consideration, if any.

Should the transaction be closed through neutral escrow, a closing statement

from the escrow holder will constitute compliance on the part of the broker.

AL. BUS. & PROF. § 10141)

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SECTION III

DISCLOSURES REQUIRED WHEN FINANCING REAL PROPERTY

This section deals primarily with disclosures a real estate licensee or a

lender must make to a prospective borrower in certain real property secured

loan transactions. Disclosures required in certain defined seller “carry-

backs” are also included.

A. Advance Fees

Unless an appropriate exemption applies, should any kind of fee or charge

be contracted for or demanded, imposed, or collected by a mortgage broker

(but not a lender) in advance of providing the service or closing the loan,

California law requires that the broker use with the public an “advance fee”

agreement which has been pre-approved by the Real Estate Commissioner.

The advance payment of appraisal and credit report fees collected by the

broker for payment in the same amount to third-party service providers do

not require a prior approved advanced fee agreement.

Advance fees must be deposited into the broker’s trust account and

disbursements from the trust account may only be made consistent with

applicable law, including the requirements set forth in the Commissioner’s

Regulations.

AL. BUS. & PROF. §§ 10026, 10085, 10085.5, 10146; COMMISSIONER’S

REGULATIONS 2970 and 2972)

B. Seller Financing Disclosure Statement

Some sellers participate in financing the sale of their property by extending

credit to the buyer in the form of a seller “carry-back.” This is usually in the

form of a promissory note secured by a deed of trust. The state legislature

enacted a disclosure law to ensure adequate disclosure and to prevent abuses

involving seller-assisted financing plans. This law applies to real property

transactions involving residential dwellings of not more than four units when

the seller extends credit to the buyer through a written agreement which

provides for either a finance charge or more than four payments of principal

and interest, or interest only, excluding the down payment.

Unless an exemption applies, written disclosures required by this law are to

be delivered to the seller and are the responsibility of the arranger of credit.

An “arranger of credit” is defined as a person who is not a party to the

transaction (except as noted below), but is involved in negotiation of the

credit terms and completion of the credit documents. Unless performing as a

defined principal, the arranger must be compensated for arranging the credit

for the transaction.

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The duty to provide the disclosures also applies to an attorney or a real estate

licensee who is a principal in the transaction. The disclosure statement

required by this law must be delivered as soon as possible before the

execution of any note or security document. The arranger of credit, the

buyer, and the seller each must sign and receive a copy of the disclosure

statement. If there is more than one arranger of credit, the arranger obtaining

the offer from the buyer is responsible for making the disclosure. However,

another person may be designated in writing by the parties to the transaction

to make the disclosures.

Notwithstanding the foregoing, the arranger of credit representing the seller

would have a duty, as agent of the seller, to ensure that the seller receives an

appropriate disclosure of the material credit terms of the credit transaction as

described herein.

The disclosure statement is to include comprehensive information about the

financing, cautions applicable to certain types of financing, and suggestions

of procedures that are intended to protect the parties during the term of the

financing. The disclosures include:

• Identification of the note, credit, and security document and the property

which is or will become the security;

• A copy of the note, credit, and security document, or a description of the

terms of these documents;

• The terms and conditions of each encumbrance recorded against the

property which will remain as a lien or is an anticipated lien that will be

senior to the financing being arranged;

• A warning about the hazards and potential difficulty of refinancing and,

if the existing financing or the financing being arranged involves a

balloon payment, the amount and due date of the balloon payment and a

warning that new financing may not be available;

• An explanation of the possible effects of an increase in the amount owed

due to negative amortization as a result of any variable or adjustable-rate

financing being arranged, particularly if senior to the seller financing;

• If the financing involves an all-inclusive trust deed (AITD), a statement

of the possible penalties, discounts, responsibilities, and rights of parties

to the transaction with respect to acceleration and/or prepayment of a

prior encumbrance as the result of the creation and/or refinancing of the

AITD;

• If the financing involves an AITD or a real property sales contract, a

statement identifying the party to whom payments will be made and to

whom such payments will be forwarded; and if the party receiving and

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forwarding the payments is not a neutral third party, a warning that the

principals may wish to designate a neutral third party;

• A complete disclosure about the prospective buyer, including credit and

employment information along with a statement that the disclosure is

not a representation of the credit worthiness of the prospective buyer; or,

a statement that no representation regarding the credit worthiness of the

prospective buyer is being made;

• A warning regarding possible limitations on the seller’s ability, in the

event of foreclosure, to recover proceeds of the sale financed (Code of

Civil Procedure Section 580b);

• A statement recommending loss payee clauses be added to the property

insurance policy to protect the seller’s interest (e.g., Board of Fire

Underwriters’ Endorsement No. B.F.U. 438) and advising of the

existence or availability of services which will notify the seller if the

property taxes are not paid;

• A statement suggesting or acknowledging that the seller should file or

has filed a request for notice of delinquency (Civil Code Section 2924e)

and a request for notice of default (Civil Code Section 2924b) in case

the buyer fails to pay liens senior to the financing being arranged;

• A statement that a title insurance policy has been or will be obtained and

furnished to the buyer and seller insuring their respective interests, or

that the buyer and seller should each obtain title insurance coverage;

• A disclosure whether the security documents for the financing being

arranged have been or will be recorded, and what might occur if the

documents are not recorded; and

• Information as to whether the buyer is to receive any “cash back” from

the sale, including the amount, source, and purpose of the cash refund.

The requirement of a seller financing disclosure statement also applies to

transactions by real property sales contracts (as defined in Civil Code

Section 2985) and to leases with option-to-purchase provisions where the

facts demonstrate intent to transfer equitable title. If the extension of credit is

subject to a balloon payment, a balloon payment notice is to be included on

the face of the promissory note or other evidence of debt.

An arranger of credit must inform the seller that a buyer who intends to

occupy the real property involved may have the right to homeownership

counseling in the event of a default in the mortgage payments, including the

payments being made on the seller “carry-back.” The person collecting the

payments, whether the seller or a loan servicing agent, has the duty to inform

the defaulting homeowner of the availability of such counseling. The duty to

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inform a defaulting homeowner of the availability of counseling is operative

regardless of the nature of the credit transaction, whether the homeowner has

suffered a reduced ability to make payments, or whether an arranger of

credit is present in the transaction.

AL. CIV. § 2956 et. seq.; 12 U.S.C. § 1701x – THE HOUSING AND

COMMUNITY DEVELOPMENT ACT OF 1987)

C. California Required Disclosures to Borrowers

Unless an appropriate exemption applies, a real estate broker who solicits or

negotiates loans on behalf of borrowers or lenders to be secured directly or

collaterally by liens on real property must deliver a written disclosure

statement to the borrower. The statement is to be delivered within three

business days of receipt of the borrower’s written loan application or before

the borrower becomes obligated to complete the loan, whichever is earlier.

The required statement, known as the Mortgage Loan Disclosure Statement

(MLDS) or the Mortgage Loan Disclosure Statement/Good Faith Estimate

(MLDS/GFE) must be in a form approved by the Real Estate Commissioner

and shall contain the following disclosures:

1. Expected maximum costs and expenses of making or arranging the loan

which are to be paid by the borrower, including, but not limited to, fees

for appraisal, settlement/escrow, credit report, title insurance, recording,

and notary services.

2. Total amount of real estate commissions/fees to be received by the

broker, regardless of the form, time, and source of payment, for services

performed in arranging the loan including, but not limited to, points,

loan origination fees, bonuses, rebates, premiums, discounts as well as

other charges received by the real estate broker in lieu of interest in

transactions where the broker acts as the lender. For example, the broker

may act as the lender only, as the lender and the arranger of the secured

loan transaction, or as a broker/agent only in the secured loan

transaction. The disclosure must distinguish between commissions/fees,

bonuses, rebates and premiums paid to the broker and loan origination

fees, bonuses, and discounts paid to the lender.

3. Liens against the real property disclosed by the borrower and whether

each lien will remain senior or will be subordinate to the lien that will

secure the subject loan(s).

4. Liens, including the lien securing the subject loan, which are anticipated

to be secured by the real property and the order of priority of such liens.

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5. Estimated amounts to be paid by the borrower for:

• Fire insurance coverage;

• Balances due on prior liens, including interest, prepayment

penalties, fees for reconveyance, or other removal from record of

prior liens;

• Amounts due other creditors; and

• Assumption, transfer, forwarding and beneficiary statement fees.

6. Estimated balance of the loan(s) to be paid to the borrower after

deducting all commissions, loan fees, penalties, and costs and expenses

to secure the loan.

7. The principal amount of the loan(s).

8. Rate of interest (whether fixed or variable).

9. Term of the loan(s); number and amount of each installment; the

approximate loan balance at maturity; and the following notice in 10-

point bold typeface:

NOTICE TO BORROWER: IF YOU DO NOT HAVE THE

FUNDS TO PAY THE BALLOON PAYMENT WHEN IT COMES

DUE, YOU MAY HAVE TO OBTAIN A NEW LOAN AGAINST

YOUR PROPERTY TO MAKE THE BALLOON PAYMENT. IN

THAT CASE, YOU MAY AGAIN HAVE TO PAY

COMMISSIONS, FEES, AND EXPENSES FOR THE

ARRANGING OF THE NEW LOAN. IN ADDITION, IF YOU

ARE UNABLE TO MAKE THE MONTHLY PAYMENTS OR

THE BALLOON PAYMENT, YOU MAY LOSE THE PROPERTY

AND ALL OF YOUR EQUITY THROUGH FORECLOSURE.

KEEP THIS IN MIND IN DECIDING UPON THE AMOUNT AND

TERMS OF THIS LOAN.

10. A statement containing the name, real estate license number and

business address of the real estate broker negotiating the loan.

11. If the broker anticipates the loan will be made from funds owned or

controlled by the broker, the broker’s relative(s), or an entity in which the

broker alone or together with a relative(s) has/have a 10% or greater interest,

the broker’s statement to that effect.

12. Terms of prepayment of the loan, including the amount of penalty, if

any.

13. A statement that the purchase of credit life or disability insurance is not

required as a condition of the loan.

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14. If the loan is secured by a senior trust deed of less than $30,000 or a

junior trust deed of less than $20,000, a statement that the loan is being

made in compliance with Article 7 of Chapter 3 of the Real Estate Law.

NOTE: If the loan is negotiated in Spanish, Chinese, Tagalog, Vietnamese

or Korean, the MLDS or the MLDS/GFE must be provided in that language.

The Real Estate Commissioner’s Regulations contain approved forms for the

MLDS AND MLDS/GFE. The forms each include a notice to the borrower

of the importance of stating accurately the amount, type, and priority of

existing and anticipated liens. The borrower and the broker/agent negotiating

the loan must each sign the MLDS or the MLDS/GFE. The broker/agent

negotiating the loan must keep a signed copy of the statement on file for

three years.

A broker/agent who initially holds himself/herself out as an agent arranging

a loan will be subject to this disclosure requirement even though he/she

ultimately makes the loan with his/her own money or with broker-controlled

funds. In that case, the amount of compensation disclosed will include any

loan origination fees, discounts, bonuses, or other compensation that the

broker collects as the lender.

AL. BUS. & PROF. §§ 10240, 10241, 10245; COMMISSIONER’S

REGULATIONS 2840, 2841, 2842.5, 2843)

D. California Required Disclosures to Certain Lenders or

Promissory Note Purchasers

1. General Disclosure Requirements.

Depending on the fact situation, a real estate broker may arrange:

• A loan secured by real property;

• The sale of a loan secured by real property;

• A loan secured by a loan (the collateralized loan) which is secured by

real property; or

• The sale of a loan secured by a collateralized loan.

Should a loan or sale of a promissory note (other than when collateralized)

have multiple lenders or note purchasers, it is governed by the multi-lender

statute and is issued as discussed below pursuant to an exemption from

qualifications and registration under the Corporate Securities Law of 1968,

as discussed below.

In both multi-lender and non multi-lender loan transactions, the broker must

give the lender or note purchaser the Lender/Purchaser Disclosure Statement

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(LPDS) except in those fact situations where the LPDS is not required by

statute. Because of the statute’s many defined institutional and licensed

lender exemptions, this disclosure obligation is owed primarily to private

parties and to pension plans regulated by the Employees’ Retirement Income

Security Act (ERISA) having net worths of less than 15 million dollars. In

addition, this disclosure obligation is owed to certain non-ERISA regulated

pension plans, e.g., IRA’s or SEP-IRAS.

The disclosures contained in the LPDS must include:

• Material terms of the loan;

• Status of all existing loans/liens against the security property;

NOTE: A broker is to inform the prospective lender or note purchaser

of the option to purchase a title insurance policy or an endorsement to

an existing title insurance policy insuring the lender’s or note

purchaser’s interests in the security property. A broker should also

deliver to the prospective lender or note purchaser a copy of the

intended borrower’s written loan application and the borrower’s credit

report.

• Information about the security property as follows:

o Address, assessor’s parcel number, and, if available, the legal

description;

o Age, size, and type of construction of any improvements;

o The fair market value as estimated by an appraisal, a copy of which

appraisal report shall be provided to the prospective lender; and

NOTE: A lender may waive the requirement of an independent

appraisal in writing, on a case-by-case basis, in that event the real

estate broker shall provide the broker’s written estimate of fair

market value for the security property, which shall include the

objective data upon which the broker’s estimate is based.

o Existing and expected or anticipated encumbrances and the

investor’s protective equity (the difference between the market

value of the property and the total senior indebtedness plus the

subject loan or loans).

• Pertinent data about the borrower, including identity, occupation,

employment, income and credit, as represented to the broker by the

borrower or through third parties; or, in the sale of a loan, similar

information about the ability of the trustor to meet the contractual

obligations under the note or contract, including payment history;

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• Loan servicing arrangements or lack thereof in other than multi-lender

transactions;

• The broker’s capacity in the secured transaction as an agent or principal,

or as both an agent and principal (a broker may initially hold

himself/herself out as arranging a loan but ultimately make the loan with

his/her own funds or with broker-controlled funds); and

• If the broker in other than multi-lender transactions will directly or

indirectly obtain the use or benefit of some or all of the funds other than

for commissions, fees, costs, and expenses for services as an agent, a

detailed statement of the intended use and disposition of the funds,

including an explanation of the nature of the benefit to the broker.

The lender/purchaser must receive the statement before becoming obligated

to complete the loan transaction. The broker must also deliver the statement

to the Department of Real Estate (DRE) in advance of accepting loan funds

if the broker will directly or indirectly obtain the use or benefit of the funds.

2. Multi-Lender Transactions.

Certain multi-lender transactions arranged by a real estate broker are exempt

from qualification and registration under the Corporate Securities Law of

1968 through the Department of Corporations. Unless a securities permit

issued by the Department of Corporations or other bona fide exemption, the

broker must comply with all the provisions of Business and Professions

Code Sections 10237 et seq., including specified notices, advertising, trust

accounting, reporting to the Department of Real Estate, disclosure to the

prospective lenders or note purchasers and other related requirements. The

interests of each lender/purchaser is to be secured directly by a recorded

deed of trust on California property describing each lender’s interest or an

assignment of fractionalized interest in the deed of trust. The deed of trust or

an assignment of the interest in the deed of trust must be properly recorded

and in no event later than 10 days as set forth Business and Professions Code

10234. These transactions, commonly known as “fractionalized” loans, may

not include more than ten lenders or note purchasers, as defined. Each lender

or note purchaser must have a qualified net worth or annual income, as

specified.

AL. BUS. & PROF. § 10238)

“Self-dealing” is not permitted in multi-lender transactions except in limited

circumstances that are statutorily defined and the transaction must be fully

disclosed in the Lender/Purchaser Disclosure Statement. Further, multi-

lender transactions must provide for loan servicing by a real estate broker or

other authorized party and, therefore, are to include servicing agreements

with the identified loan servicing agent. In addition, the broker shall disclose

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the same information as previously described for single lender/purchaser

transactions, as well as the following information:

• A separate notice of the right to obtain a copy of the appraisal;

• A written statement from the broker including the analysis of and

support for exceeding the maximum statutory loan-to-value ratios (the

amount of the loan or loans in relationship to the market value of the

security property, which in no event is to exceed 80 percent of the

current fair market value of improved real property or 50 percent of the

current market value of unimproved real property or 65% in those

circumstances where the unimproved real property is zoned single

family residential and all offsite improvements are in place;

NOTE: if the loan is subject to certain defined mortgage insurance

coverage, the foregoing loan-to-value ratio maximums may be exceeded

by the amount of the loan covered by the such insurance;

• Default and foreclosure procedures for governing the actions of all

holders of interests in the loan by the vote of holders of more than 50

percent of the beneficial interests, excluding any interest held by the

broker or an affiliate of the broker;

NOTE: This requirement must be included in the documentation of the

transaction.

• The identity of the escrow holder for the transaction; and

• The right, upon demand, to obtain the names and addresses of the other

lenders or note holders of the loan.

AL. BUS. & PROF. § 10238)

3. Construction Loans and Multiple Security Properties in

Multi-Lender Transactions.

As of January 1, 2004, the multi-lender statutory exemption was amended

expanding the ability of a real estate broker to arrange transactions which

would include construction loans and loans with multiple security properties.

Although this expansion provides limited authority, such loan transactions

have become commonplace within the mortgage industry.

The amendments, among others, redefined the phrase “current market value”

which may now be deemed to be the value of the completed project (the

construction, development, or improvements being financed), provided that

the following safeguards are met and appropriate disclosures thereof are

delivered to the lenders or note purchasers:

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• An independent neutral third party escrow holder is used for all deposits

and disbursements. This safeguard specifically excludes real estate

brokers from issuing construction or improvement loan disbursements

and requires the use of joint control agents pursuant to Financial Code

Section 17005.1;

• The loan must be fully funded up front with all loan proceeds deposited

in an authorized escrow prior to recording the deed or deeds of trust;

• A comprehensive, clearly drafted and detailed “draw schedule” must be

developed and included in the loan documentation to ensure proper and

timely disbursements to allow for the completion of the construction,

land development or building improvement project;

• The disbursement “draws” are to be based upon verification from an

independent qualified person who certifies the work completed to the

date of inspection meets the related building codes and construction

standards, and that the “draws” were made in accordance with the

construction, development or building improvement contract and

“draw” schedule;

• The qualified person may not be an employee, agent, or affiliate of the

real estate broker and is defined to be licensed architect, general

contractor, structural engineer, or a local government building inspector

acting in an official capacity;

NOTE: It is unlikely that a local government building inspector could

or would provide the service required to meet this safeguard standard

within the scope of his/her official capacity.

• The appraisal is to be completed in accordance with the Uniform

Standards of Professional Appraisal Practice (USPAP) by an

appropriately state licensed or certified appraiser. As required by

USPAP, the appraisal report is to include “as is” and “as completed”

values when the appraisal report is based upon a hypothetical condition,

e.g., improvements to be constructed or a development to be

accomplished in the future.

NOTE: This means that to finance a construction, development, or

building improvement project without knowing in advance the form,

type, quality, square footage, etc., of the improvements based upon

plans, specifications, and estimated cost breakdowns and the prices of

comparable improved properties in that marketplace would be

inappropriate. This limitation would also apply to loans secured by raw

land where subsequent loan disbursements are contemplated to fund the

development project including, but not limited to, the acquisition of

entitlements and the cost of preparation by a registered civil engineer or

-42-

other design professionals of the tentative tract map, grading and site

plans, and the design and location of roads and utilities.

• The transactional documents are to include a detailed description of the

actions that may be taken in the event of a failure to complete the

project, whether the failure is due to default, insufficiency of funds, or

other causes; and

• The entire amount of the construction, development, or rehabilitation

loan cannot exceed 2.5 million dollars.

The aforementioned amendments also expand the ability of a real estate

broker to arrange transactions secured by more than one parcel of real

property. When the loan being arranged by the real estate broker is intended

to be secured by more than one parcel of real property, the multi-lender

statute (as amended) requires safeguards be established and that the lenders

or note purchasers receive disclosures regarding each of same as follows:

• The intended security properties are to be separately appraised and a

current market value is to be established for each;

• Each intended security property is to be assigned a portion of the

principal of the note or interest therein which may not exceed the

percentage of the current market value statutorily established for the

type of security property involved;

• The address, description and estimated current market value of each

intended security property must be disclosed to each lender or note

purchaser;

• The loan-to-value percentage for each intended security property, after

the loan amount is proportioned, must be established and disclosed to

each lender or note purchaser;

• The amount of available equity (the total equity as well as the equity

allocated by each intended security property) after the principal amount

has been proportioned to each intended security property must be

established and disclosed to each lender or note purchaser;

• The use of the revised Lender/Purchaser Disclosure Statement forms

promulgated by the Department of Real Estate are now required; and

• The real estate broker is to disclose any other information that may be

material or essential to avoid misleading the lenders or note purchasers,

i.e., all material loan terms and investment risks are to be disclosed.

Finally, in multi-lender transactions, the real estate broker must include a

disclosure within each loan file describing whether the exemption from

qualification and registration or the permit issued pursuant to qualification

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and registration by the Department of Corporations upon which the broker is

relying for the securities being issued in connection with the transaction.

4. Loan Servicing in Multi-Lender and in other than Multi-

Lender Transactions.

Real estate brokers who service loans are required to provide certain

disclosures to the lenders or note holders as well. Any such servicing on

behalf of a borrower, lender or note holder must be done pursuant to a

written authorization or servicing agreement. California law does not allow

the advancing of funds by a broker for payments that should have been paid

or tendered by the borrower without a securities permit from the Department

of Corporations.

In the event that a borrower does not make a scheduled payment and the

broker causes other funds to be applied to protect the security of the note or

contract being serviced, including the debt service on a senior lien, the

broker must give a written notice of the advance to the lender or note holder

not later than 10 days after making such payment. Payments made by the

broker from funds other than the borrower’s; any promise by the broker to

pay, or to guarantee the payments or the investment, or to ensure the rate of

return on the investment are to occur only under a securities permit obtained

from the Department of Corporations.

In multi-lender transactions, separate loan servicing by an authorized person

or entity for that purpose must take place. Also, the servicing agreement is to

provide that the lenders or note purchasers are to receive the funds to which

they are entitled from borrower loan payments within 25 days of receipt of

said payments by the servicing agent.

AL. BUS. & PROF. §§ 10231.2, 10232.4, 10232.5, 10232.6, 10233,

10233.1, 10237, 10238 et. seq.; C

AL. CORP. § 25707; COMMISSIONER’S

REGULATION 2846)

E. Notice of Transfer of Loan Servicing

Should a loan be secured by California real property containing 1 to 4

residential units, the entity servicing the loan is required to provide a written

notice to the borrower whenever the servicing/collection function is

transferred, even though the loan transaction was not subject to the Real

Estate Settlement Procedures Act (RESPA). The notice must be delivered by

first class mail before the borrower is obligated to redirect the payments.

Transfer of the servicing/collection function to a trustee exercising a power

of sale under a deed of trust or other applicable security instrument does not

constitute a transfer of loan servicing under California law controlling the

notice requirements described above.

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NOTE: Federal regulations have also been promulgated for notice of

transfer of loan servicing and a notice to the borrower is now a requirement

of RESPA.

AL. CIV. § 2937; 12 U.S.C. §2601 et. seq.)

F. Notice of Borrower’s or Lender’s Right to Copy of

Appraisal Report

A lender on a loan to be secured by residential real property must give the

applicant (borrower) notice of the applicant’s right, upon request, to receive

a copy of the appraisal report, provided the applicant has paid for the

appraisal or other valuation of the intended security property.

The lender must give this notice with the “good faith estimate” of loan

charges required by the Real Estate Settlement Procedures Act (RESPA) and

by California law. If the loan does not fall under the RESPA requirement,

the lender must give the appraisal notice at the time of application or not

later than 15 days after receipt of the application. The notice must be a

separate document printed in not less than 10-point type. For non-residential

property (i.e., other than 1 to 4 residential units), the notice is only required

if the loan involves purchase money financing or a refinancing of purchase

money debt.

If a real estate broker makes or arranges a loan in an amount less than

$30,000 secured by a senior trust deed, or a loan of less than $20,000

secured by a junior trust deed, the broker must deliver a copy of the

appraisal to both the borrower and the lender at or before the closing of the

loan transaction. This requirement only depends on the borrower being

charged a fee for the appraisal or other valuation of the improved security

property. Finally, certain lenders and note purchasers are also entitled to

receive copies of appraisal reports prepared in connection with intended

security properties for loans being made or promissory noted being

purchased.

(15 U.S.C. § 1691 et. seq.; C

AL. BUS. & PROF. §§ 10238, 10232.4, 10232.5,

10238, 10241.3, 11423)

G. Credit Terms – Truth-in-Lending and Regulation Z

The Truth-in-Lending Act (TILA) is a federal law enacted to promote the

informed use of consumer credit by requiring creditors/lenders to disclose

various terms and conditions of credit. Regulation Z and the Official Staff

Commentaries which interpret the Regulations are issued by the Board of

Governors of the Federal Reserve System to implement TILA. The Federal

Trade Commission enforces TILA and Regulation Z.

-45-

TILA requires a creditor to be responsible for furnishing certain disclosures

to the consumer before making a contract for a loan. With respect to real

estate loans, a “creditor” includes (among others) a person or company who

regularly extends credit for loans secured by a dwelling, including a

mobilehome or trailer (if used as a residence), and the credit extended is

subject to a finance charge or is payable by written agreement in more than

four installments, excluding the down payment. For the purposes of TILA,

regularly extending credit is defined to mean five or more transactions per

year. In the case of high-cost mortgages, the threshold is two or more per

year if made directly by the creditor/lender, or one or more per year when

the loan is made through a real estate broker performing as a mortgage

broker.

Exemptions from TILA with respect to real estate loans include, among

others:

• credit extended primarily for business, commercial, or agricultural

purposes; or

• credit extended to other than a natural person, i.e., an entity.

Regulation Z requires that creditors make certain disclosures for real

property secured loans. The first four disclosures must include simple

descriptive phrases of explanation similar to those shown in italics, as

follows:

• Amount financed – The amount of credit provided to you or on your

behalf (principal amount borrowed less prepaid finance charges

includable);

• Finance charge – The dollar amount the credit will cost you;

• Annual percentage rate – The cost of your credit as a yearly rate;

• Total of payments – The amount you will have paid when you have

made all the scheduled payments;

• Payment schedule – The number, amount, and timing of payments;

• Identity of the creditor/ lender – The name of the person or entity

making the disclosure;

• Itemization of the amount financed – A statement that the consumer

has a right to receive a written itemization and a space in the statement

for the consumer to indicate whether the itemization is requested;

• Variable interest rate and discounted variable rate loans –

Disclosures of the limitations and the effects of a rate increase and an

example of payment terms resulting from the increase (may be

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accomplished by giving the consumer the “Consumer Handbook on

Adjustable-Rate Mortgages” or a suitable substitute, as defined);

• Demand features of the loan – When the creditor/lender may demand

payment in full of the loan irrespective of any stated maturity date,

excluding borrower default or the exercise of due-on-sale clauses;

• Loan prepayment penalties – Whether such penalties are charged by

the creditor/lender or, if uncertainty exists, a statement to that effect and

whether any prepaid finance charge is subject to rebate;

• Late payment charge –The amount of charge for delinquent payments

stated either as a percentage or a dollar amount;

• Description of the security interest – The deed of trust or mortgage

which will be retained by the creditor/lender as security for the loan;

• Insurance – Whether premiums for coverage are included in the finance

charge;

• Charges or fees to be excluded from the finance charge – Certain

security interest charges such as taxes or other fees paid to public

entities, or the premium for insurance in lieu of perfecting the security

interest (if subject to the Real Estate Settlement Procedures Act

(RESPA), the required RESPA statement is a sufficient disclosure);

• Specific terms of the contract – Those terms related to nonpayment,

default, acceleration, or prepayment penalties;

• Due-on-sale clauses – In applicable transactions, a statement that the

loan is subject to acceleration upon sale or transfer of the security

property or of other conditions about the loan assumption policy which

are contained in the loan documents and a statement whether the

creditor/lender will allow subsequent buyers to assume the remaining

obligation; and

• Required deposit balances by the borrower – Whether, as a condition

of the loan such balances are required and a statement that the annual

percentage rate does or does not reflect such required deposit.

The right to rescind a real estate loan applies to most consumer credit

transactions in which the creditor/lender will acquire or retain a security

interest in the borrower’s principal dwelling. The creditor/lender must

provide each borrower who is entitled to rescind with a written notice of this

right. The borrower has the right to rescind without penalty until midnight of

the third business day (Sundays and federal holidays excluded) subsequent

to completion of the following events, whichever occurs last:

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• Consummation of the loan transaction;

• Delivery of all material truth-in-lending disclosures; or

• Delivery of the notice of the right to cancel.

Certain real estate loan transactions are exempt from rescission under

Regulation Z, including a residential mortgage funded for the purpose of

purchasing the intended security property; refinancing or consolidation by

the same lender who currently holds the loan secured by the borrower’s

principal dwelling, provided no “new” money is advanced; any transaction

in which a state agency is the creditor/lender; loans for vacant lots or

vacation and retirement homes which are not the principal residence of the

borrower; and a business-purpose line of credit even though secured by the

borrower’s dwelling.

(15 U.S.C. § 1601, et. seq.; 12 C.F.R. PART 226 (REG. Z, T

RUTH IN

LENDING))

H. High Cost Loans (Federal)

The Truth-in-Lending Act (TILA) was amended in 1994 with respect to

certain loans, other than purchase money loans, secured by the borrower’s

principal dwelling. In these “high rate/high cost loan transactions, also

known as “Section 32” loans, further restrictions are placed on

creditors/lenders, including additional disclosures and cancellation rights.

The amendment defines a creditor/lender as someone who, in any 12-month

period, originates more than one high-rate/high-cost loan, i.e., two or more.

Also, any such loan (one or more) arranged by a real estate broker acting as

a mortgage broker is subject to these requirements.

A “high-rate loan” is one in which the annual percentage rate (APR) exceeds

by 10 points or more the yield on Treasury Securities having a similar term.

A high-rate loan is defined as:

• For a senior loan/mortgage, the APR exceeds by more than 8 percentage

points the rates on Treasury Securities of comparable maturity;

• For a junior loan/mortgage, the APR exceeds by more than 10

percentage points the rates on Treasury Securities of comparable

maturity.

A “high-cost loan” is one in which the total points and fees exceed the

greater of 8% of the loan amount or, as of January 1, 2005, $510.00

(adjusted annually as of each January 1 thereafter based on the change in the

applicable Consumer Price Index).

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At least three business days before a high-rate OR high-cost loan is funded,

the following disclosures must be made:

• The creditor/lender must provide a written notice stating that the loan

need not be completed, even if the borrower has signed the loan

application and received the required disclosures. The borrower has

three business days to decide whether to sign the loan agreement after

the borrower receives the special Section 32 disclosures;

• The notice must include a warning to the borrower that, he/she could

lose his/her residence (the security property) and any money put into it,

if payments are not made; and

• The lender must disclose the APR, the regular payment amount, any

authorized balloon payment, and the loan amount (plus where the

amount borrowed includes credit insurance premiums that fact must be

stated). For variable rate loans, the lender must disclose that the rate and

monthly payment may increase and state the amount of the maximum

monthly payment and interest rate, as applicable.

These disclosures are in addition to the other TILA disclosures that must be

provided no later than the closing of the loan or prior thereto as required by

law.

(15 U.S.C. § 1601 et. seq.)

I. California High Cost Mortgage/Loan Disclosures

The California Financial Code defines certain high cost loans as “covered

loans,” which loans are subject to various requirements, restrictions,

standards and penalties. A “covered loan” is one that does not exceed the

most current conforming loan limit for a single-family first mortgage loan

established by the Federal National Mortgage Association (FNMA) and

which exceeds specified points, fees, and/or includes APRs that exceed a

defined limit in comparison to Treasury Securities of a similar term as the

contemplated loan.

For 2006, the conforming FNMA loan limit is set at $359,650 for

loans/mortgages secured by single-family properties. This law adjusts the

covered loan limits automatically to track with FNMA conforming loan

limits.

The following are disclosures required in covered loan transactions:

• At least three business days prior to loan consummation, the loan

originator (defined as either the lender or broker for this purpose) must

disclose in writing to the borrower the terms of any lawfully allowed

prepayment penalty and the rates, points, and fees for the “covered loan”

-49-

that would be charged as compared to the rates, points, and fees for

accepting a “covered loan” without a prepayment penalty.

• A “covered loan” shall not contain a provision for negative

amortization, unless the “covered loan” is a first (senior) mortgage. The

loan originator must disclose to the borrower that the loan contains a

negative amortization provision that may add principal to the balance of

the loan.

• A “covered loan” shall not be made unless the following disclosure,

written in 12-point font or larger, has been provided to the borrower no

later than three business days prior to signing of the loan documents for

the transaction:

CONSUMER CAUTION AND HOME OWNERSHIP

COUNSELING NOTICE

If you obtain this loan, the lender will have a mortgage on your home.

You could lose your home, and any money you have put into it, if you do not

meet your obligations under the loan.

Mortgage loan rates and closing costs and fees vary based on many

other factors, including your particular credit and financial circumstances,

your earnings history, the loan-to-value requested, and the type of property

that will secure your loan. Higher rates and fees may be justified depending

on the individual circumstances of a particular consumer’s application. You

should shop around and compare loan rates and fees.

This particular loan may have a higher rate and total points and fees

than other mortgage loans and is, or may be, subject to the additional

disclosure and substantive protections under Division 1.6 (commencing with

Section 4970 of the Financial Code. You should consider consulting a

qualified independent credit counselor or other experienced financial adviser

regarding the rate, fees, and provisions of this mortgage loan before you

proceed. For information on contacting a qualified credit counselor, ask your

lender or call the United States Department of Housing and Urban

Development's counseling hotline at 1-888-466-3487 or go to

http://www.hud.gov/fha/sfh/hcc for a list of counselors.

You are not required to complete any loan agreement merely because

you have received these disclosures or have signed a loan application. If

you proceed with this mortgage loan, you should also remember that you

may face serious financial risks if you use this loan to pay off credit card

debts and other debts in connection with this transaction and then

subsequently incur significant new credit card charges or other debts. If you

continue to accumulate debt after this loan is closed and then experience

financial difficulties, you could lose your home and any equity you have in it

if you do not meet your mortgage loan obligations.

Property taxes and homeowner's insurance are your responsibility. Not

all lenders provide escrow services for these payments. You should ask your

lender about these services.

-50-

Your payments on existing debts contribute to your credit ratings. You

should not accept any advice to ignore your regular payments to your

existing creditors.

• Upon request, the loan originator of a “covered loan” shall provide to its

licensing agency or to the borrower, at no cost, documentation that

clearly demonstrates whether the loan is a “covered loan.” This

documentation shall include, but not be limited to, full disclosure of the

original principal balance, the annual percentage rate (APR), and the

total point and fees, as defined in Financial Code Section 4970.

AL. FIN. § 4970 et. seq.)

J. Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement Procedures Act (RESPA) is a federal law whose

primary purpose is to help consumers become better shoppers for settlement

services. RESPA requires that borrowers receive various disclosures

regarding the proposed loan transaction. Some disclosures spell out the costs

and expenses associated with the settlement or closing of the loan

transaction. Others describe lender servicing and escrow account practices.

RESPA also requires that borrowers receive disclosures about business

relationships that may exist among lenders/creditors and settlement service

providers. RESPA disclosures include:

• Good Faith Estimate of Settlement Costs. RESPA requires that the

lender and the real estate broker acting as a mortgage broker (if present)

each provide to the borrower their own good faith estimate of settlement

service charges or of anticipated closing costs. In the case of a mortgage

broker, the good faith estimate is to be issued with the mortgage loan

disclosure statement (MLDS/GFE) previously described in Section III ,

Subsection C – California Required Disclosures to Borrowers. This

estimate is to be given at the time of the lender’s or mortgage broker’s

receipt of the borrower’s loan application, and the estimate is to be

mailed or otherwise delivered within the next three business days. The

amounts listed on the Good Faith Estimate are only estimates and not a

guarantee — actual fees, costs, and expenses may vary. However, as the

name implies, the lender and mortgage broker must prepare and offer

the estimates of the expected fees, costs, and expenses in good faith.

• Servicing Disclosure Statement. RESPA requires the lender or

mortgage broker to provide a written disclosure as to whether he/she

expects that someone else will be servicing the loan. Again, this

disclosure is to be given at the time of the loan application or within

three business days thereof.

-51-

• Affiliated Business Arrangements. Several businesses that offer

settlement services may be owned or controlled by a common parent.

These businesses are known as “affiliates.” When a lender, a real estate

broker, a real estate broker acting as a mortgage broker, or other

participant in the settlement or loan escrow refers the borrower to an

affiliate for a settlement service (e.g., a real estate broker refers a buyer

to a mortgage broker affiliate), RESPA requires the referring party to

give the borrower an Affiliated Business Arrangement Disclosure. This

form states that the buyer/borrower is generally not required, with

certain exceptions, to use the affiliate and is free to shop for other

service providers. Affiliated business arrangements may also exist

between creditors/lenders and settlement service providers and may

include continuing business relationships arising from agreements

between the parties.

• HUD-1 Settlement Statement. One business day before the settlement

or the anticipated close of the loan escrow, the borrower has the right to

inspect the proposed HUD-1 Settlement Statement. This statement

itemizes the services provided and the fees charged and the costs and

expenses imposed. This form is filled out by the settlement agent or the

escrow holder who is conducting the settlement or the escrow. The fully

completed and final HUD-1 Settlement Statement generally must be

delivered or mailed to the borrower on or before the settlement or the

close of the loan escrow. In cases where the principals of the settlement

or of the escrow do not meet, the settlement or escrow agent will mail

the HUD-1 statement after settlement or loan closing.

• Escrow Account Operation and Disclosures. At the settlement or loan

closing or within the next 45 days, the loan servicer must give an initial

escrow account statement. The form will show all of the payments

which are expected to be deposited into the escrow account and all of

the disbursements which are expected to be made from the escrow

account during the year ahead. The lender or servicer will annually

review the escrow account (a trust account maintained for the future

payment of insurance premiums and property taxes) and send a

disclosure each year which shows the prior year’s activity and any

adjustments necessary in the escrow payments that will be made in the

forthcoming year.

RESPA prohibits any “kickbacks” or the payment of unearned fees to any

person or entity (including a real estate broker) as compensation for referrals

to any real estate settlement/escrow service provider. This includes non-cash

inducement offers to brokers such as paid vacations. RESPA does not

prohibit a lender or settlement service provider from offering an incentive to

a borrower, provided that the incentive is not based on the borrower

-52-

referring business to the lender or service provider. Written agreements

between real estate brokers to cooperate and share customary and reasonable

commissions may be acceptable if limited to compensation for the sale

transaction.

RESPA Regulations require that third parties providing settlement services

in loan transactions subject to this law be reasonably compensated in relation

to the value of the services rendered and of the goods and facilities provided.

Generally, when a real estate broker receives customary and reasonably

earned commissions/fees for services rendered and/or reimbursements for

costs and expenses actually incurred, it would neither be in violation of

RESPA nor California law as long as such commissions/fees, costs and

expenses are fully disclosed. This includes any compensation the broker

receives directly or indirectly from the lender as well as from the borrower.

The HUD-1 Settlement Statement must also show any direct or indirect

payments by the lender to affiliated or independent settlement service

providers. If payments are made outside of escrow, they must be shown as

“P.O.C.” (paid outside of closing) on the HUD-1 settlement statement.

HUD/FHA is charged with the responsibility of enforcing RESPA, and their

General Counsel’s Office or their Enforcement Section should be contacted

for further information and clarification.

(12 U. S.C. §. 2601 et. seq. - T

HE REAL ESTATE SETTLEMENT PROCEDURES

ACT (RESPA); 24 C.F.R. PART 3500 – (REGULATION X – THE HOUSING AND

COMMUNITY DEVELOPMENT ACT OF 1992); CAL. BUS. & PROF. §§ 10240,

10176(a),(g))

K. Advance Disclosures in Loan Transactions Subject to TILA

and RESPA

In addition to being subject to the Truth-in-Lending Act (TILA), senior and

junior loan transactions for the financing of the initial purchase,

construction/take-out, refinancing or further encumbering of owner and non-

owner occupied residential property of 1 to 4 units may be also subject to the

Real Estate Settlement Procedures Act (RESPA). Generally, loans to be

secured by 1 to 4 residential units will be subject to either TILA or RESPA,

or both, depending upon the facts of the situation. When such loans are

subject to either TILA or RESPA, they are commonly termed as “Federally

related.”

Borrowers of loans subject to RESPA are typically entitled to receive a

TILA disclosure from the creditor/lender concurrently with the RESPA

Good Faith Estimate. The purpose of the early TILA disclosure and of the

RESPA Good Faith Estimate is to give the borrower an opportunity to

compare the loan terms being offered to the terms available from other

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creditors/lenders. In such transactions, a real estate broker acting as a

mortgage broker is to complete and timely deliver to the borrower the

California required Mortgage Loan Disclosure Statement/Good Faith

Estimate (MLDS/GFE).

TILA also includes detailed requirements for the advertising of consumer

credit, including real estate loans, and TILA describes various acts which

creditors/lenders are prohibited from performing.

(15 U. S.C. § 1601, et. seq.; 12 C.F.R. PART 226 et. seq.- (REG. Z, T

RUTH IN

LENDING))

L. Disclosure by Agent Receiving Compensation from a

Lender

A real estate licensee who acts as the agent for either party in the sale, lease

or exchange of real property, a mobilehome, or a business opportunity must

disclose to both parties the form, amount, and source of any compensation

received or expected to be received from a lender in connection with the

securing of financing related to the transaction. The disclosure must be given

to each party to the transaction before the transaction closes escrow. Real

estate licensees must disclose to their principals all compensation or

expected compensation, regardless of the form of the time of payment.

OMMISSIONER’S REGULATION 2904 AND CAL. BUS. & PROF. § 10176(a),

(g))

NOTE: California Business and Professions Code Section 10177.4 prohibits

certain referrals for compensation. A real estate licensee may not receive

compensation for referring customers to any escrow agent, structural pest

control firm, home protection company, title insurer, controlled escrow

company, or underwritten title company. Further, receipt of such

compensation from an employee of a title insurer, underwritten title

company or controlled escrow company may constitute commercial bribery.

See Penal Code Section 641.4.

M. Adjustable Rate Loan Disclosure

A lender offering adjustable-rate residential mortgage loans must provide

prospective borrowers with a copy of the most recent Federal Reserve Board

publication which provides information on such loans. It is entitled

“Consumer Handbook on Adjustable-Rate Mortgages” and is available at

http://www.hud.gov/cnsumgd.cfm. The publication must be given at the

earlier of:

-54-

• The request of the prospective borrower; or

• When the lender first provides information concerning adjustable-rate

mortgages or credit sales, other than by direct mail advertising.

Federally regulated lenders and lenders who have adopted, entitled to adopt,

or are otherwise subject to federal rules (alternative mortgage lenders) may

achieve compliance by providing the disclosures at the same time and under

the same circumstances when the lender/creditor makes federally required

disclosures pursuant to the Truth-in-Lending Act (TILA).

Any lender who fails to provide the information required by this law may be

enjoined and may be liable for actual damages, court costs and reasonable

attorney’s fees. Federal Truth-in-Lending disclosures made in connection

with adjustable-rate loans should include the worst case and best case

scenarios.

(12 U.S.C. § 3801 et. seq.; 12 C.F.R. PART 226 (REG. Z, T

RUTH IN

LENDING); 12 C.F.R. § 560.210; CAL. CIV. § 1921)

N. Equal Credit Opportunity Act – Notice of Adverse Action

– Regulation B

The Equal Credit Opportunity Act makes it unlawful for any creditor to

discriminate against any credit applicant with respect to any aspect of a

credit transaction on the basis of race, color, religion, national origin or

ancestry, sex, marital status, or age (provided the applicant has the capacity

to contract). The law prohibits discrimination against applicants who receive

income from a public assistance program or against an applicant who has

exercised, in good faith, any right under the Consumer Credit Protection

Act. In all cases, credit guidelines must be applied in a uniform manner.

A lender/creditor who denies an application for credit must provide the

applicant with a statement of reasons or a written notification of the

applicant’s right to obtain a statement of reasons. The statement and notice

of adverse action must generally be provided within 30 days after receiving

the completed loan application. (In certain credit transactions, the notice

period may be longer.) The notification and statement from the

lender/creditor may be verbal if in the preceding calendar year the

lender/creditor acted on less than l50 loan applications.

Adverse action includes a denial, revocation, or change in the terms of an

existing credit arrangement and does not include a refusal to extend credit

under an existing credit arrangement where the applicant is delinquent or

otherwise in default. Nor does it include additional credit which would cause

an extension of credit to exceed an established limit.

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In addition to the foregoing federal law, state law regulates the issuance of

consumer credit reports, access by the consumer to such reports, and the

obligations of credit reporting agencies. Also, users of consumer credit

reports are subject to the requirements of state law and must provide notice

to the consumer when credit is denied.

(15 U.S.C. § 1691 et. seq.; 12 C.F.R. PART 202 et. seq. (REG. B); C

AL. CIV.

§ 1785.1 et. seq.)

O. Certain Obligations of Consumer Credit Reporting

Agencies

Since 2000 numerous amendments or additions to the Consumer Credit

Reporting Law have been made by the California Legislature. Most of these

changes have occurred as a result of growing incidences of credit and

identity fraud and as a result of the adoption by various lenders/creditors of

the use of credit scores as a means of measuring a consumer’s credit history

and to permit near instant evaluation of the credit risk presented by a

particular consumer/borrower.

The term “credit score” is defined as “… a numerical value or a

categorization derived from a statistical tool or modeling system used by a

person who makes or arranges a loan to predict the likelihood of certain

credit behaviors, including default. The numerical value of the

categorization derived from this analysis may also be referred to as a “risk

predictor” or “risk score.” “Credit score” does not include any mortgage

score or rating of an automated underwriting system that considers one or

more factors in addition to credit information, including but not limited to,

the loan-to-value ratio, the amount of down payment, or a consumer’s

financial assets. “Credit score” does not include other elements of the

underwriting process or underwriting decisions.

To establish a consumer’s “credit score,” certain relevant elements or

reasons are identified which are believed by the developers of this system to

affect the “credit score” for the particular consumer/borrower. The elements

or reasons are defined in the Civil Code as “key factors.”

When a “credit score” has been issued on a particular individual or

consumer and the consumer is an applicant for a home loan, the consumer is

to receive the following notice:

NOTICE TO THE HOME LOAN APPLICANT

In connection with your application for a home loan, the lender must disclose

to you the score that a credit bureau distributed to users and the lender used in

connection with your home loan, and the key factors affecting your credit scores.

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The credit score is a computer generated summary calculated at the time of

the request and based on information a credit bureau or lender has on file. The

scores are based on data about your credit history and payment patterns. Credit

scores are important because they are used to assist the lender in determining

whether you will obtain a loan. They may also be used to determine what interest

rate you may be offered on the mortgage. Credit scores can change over time,

depending on your conduct, how your credit history and payment patterns

change, and how credit scoring technologies change.

Because the score is based on information in your credit history, it is very

important that you review the credit-related information that is being furnished to

make sure it is accurate. Credit records may vary from one company to another.

If you have questions about your credit score or the credit information that is

furnished to you, contact the credit bureau at the address and telephone number

provided with this notice, or contact the lender, if the lender developed or

generated the credit score. The credit bureau plays no part in the decision to take

any action on the loan application and is unable to provide you with specific

reasons for the decision on a loan application.

If you have questions concerning the terms of the loan, contact the lender.

In addition to the above notice, the individual or consumer is to receive,

together with a copy of the credit report issued by a credit reporting agency,

a list of the factors not to exceed four which have materially affected the

outcome of the “credit score.” The notice and the disclosure of the four

factors affecting the “credit score” are to occur early in the loan process to

allow the consumer to address any issues presented by the credit report or

the “credit score,” including the four factors about which the individual

consumer may be in disagreement.

The individual or consumer is to be provided with the name and address and

the website of the person or entity who developed the score or methodology

of the score. In addition, the individual or consumer is to be provided with

the name, address, website and other contact information for the credit

repositories who maintain credit and financial information about each

individual or consumer who issue their own form of credit score. These

repositories are:

• EQUIFAX PO BOX 740241, ATLANTA, GA 30374-0241

1-800-525-6285 www.equifax.com

• EXPERIAN PO BOX 9532, ALLEN, TX 75013

1-888-397-3742 www.experian.com

• TRANSUNION PO BOX 6790, FULLERTON, CA 92864-6790

1-800-680-7289 www.transunion.com

As previously discussed, credit and identity fraud have become an epidemic

in America and in California. In an effort to provide some protection to

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consumers from the misuse of their credit standing, financial worthiness, and

their identity, the California legislature has added to the Civil Code two

procedures. The first is known as a “Security Alert” and is authorized by

Civil Code Section 1785.11.1. This procedure allows a consumer to make a

request in writing or by telephone to a consumer credit reporting agency to

include an alert in the credit file to be included in any subsequent report

issued on that consumer. Each recipient of a credit report issued on the

consumer following the imposition in the file of the “Security Alert” will

notify the recipients of the reports that the consumer’s identity may have

been used without the consumer’s consent to fraudulently obtain goods and

services in the consumer’s name.

The second protection enacted by the legislature pursuant to Civil Code

Section 1785.11.2 is a “Security Freeze” which may be placed on a

consumer’s credit report. The “Security Freeze” would prohibit the release

to third parties of a credit report or other information about the consumer. A

consumer may elect to place a “Security Freeze” on his or her credit report

by making a request in writing by certified mail to a credit reporting agency,

or directly to one or more of the credit repositories.

The result of the foregoing is a notice placed in a consumer’s credit report

that subject to certain exceptions would prohibit a consumer credit reporting

agency from releasing a consumer’s credit report or any information from

the report without the express authorization of the consumer. Upon request,

the credit repositories previously identified in this section will issue to the

consumer a personal identification number (PIN) which must be used by the

consumer when an authorized credit request has been made. The use of the

PIN number will allow a credit reporting agency to lawfully issue a credit

report, or information from the report, to a third party who may extending

credit or making a loan to or arranging the loan for the consumer.

AL. CIV. § 1785.1, et. seq.)

P. Disclosure Required by the Housing Financial

Discrimination Act of l977 (Holden Act)

Federal policy is to ensure fair housing by prohibiting discrimination based

on race, color, religion, sex, national origin, marital status, age, or physical

disabilities in connection with the sale, rental, construction, or financing of

housing. To supplement federal legislation, state laws have been enacted to

forbid the discriminatory practice known as “red-lining” that results in

blanket refusals by some lenders to make loans in neighborhoods of

declining property values.

The Holden Act prohibits the consideration of race, color, religion, sex,

marital status, national origin, or ancestry in lending for the purchase,

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construction, improvement, or rehabilitation of housing. Further, lenders

cannot deny loan applications because of ethnic composition, conditions,

characteristics, or expected trends in the neighborhood or geographic area

surrounding the property. The Act encourages increased lending in

neighborhoods where, in the past, financing has been unavailable. The major

goal of the Act is to ensure and increase the supply of safe and decent

housing for credit-worthy borrowers and to prevent neighborhood decay.

To ensure that prospective borrowers are aware of their rights under this law,

lenders must notify all applicants of the provisions of the Holden Act at the

time of the loan application. The notice must include the address where

complaints may be filed and where information may be obtained. The notice

must be in at least 10-point type and must be posted in a conspicuous

location in the lender’s place of business.

Any applicant seeking a real estate loan in connection with financing a

personal residence (containing not more than four dwelling units) who

believes he/she has been subjected to discrimination may file a complaint

with the Secretary of the Business, Transportation and Housing Agency or

his/her designee. The Secretary’s decision will be final unless the applicant

or lender requests a hearing.

AL. HEALTH & SAFETY § 35800 et. seq.)

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SECTION IV

DISCLOSURES RELATIVE TO NEW RESIDENTIAL SUBDIVISIONS

Under the Subdivided Lands Law, a subdivision exists when improved or

unimproved land is divided for the purpose of sale, lease or financing

(whether immediate or future) into five or more parcels. The law applies to

residential single-lot subdivisions, common interest developments, time-

shares (of 12 or more interests), and mandatory leases of five or more years

in a mobilehome park. Among other exemptions, this law does not apply to:

certain industrial and commercial subdivisions, standard in-city

subdivisions wherein each lot, parcel or unit will be sold with a completed

residential structure, and subdivisions located entirely outside of California

(except a time-share subdivision with one or more component sites located

within the United States).

A. Public Report: Disclosure of Material Facts about a

Subdivision

Unless the project is exempt by operation of law, a person intending to offer

subdivided lands for sale or lease, if that is the marketing plan, must apply

for and obtain a public report from the Department of Real Estate. The

public report discloses to prospective buyers pertinent facts about a

subdivision. The report may include information about utilities and water,

roads, soil and geologic conditions, title, zoning and use, hazards, and any

financial arrangements for completion of the subdivision.

In the case of a common interest development, information is also provided

about the homeowners association, the assessments, budget including

estimated reserves, and the governing documents. For further information

regarding common interest developments, please refer to booklets which are

published by the Department of Real Estate available at www.dre.ca.gov

entitled:

• “Living in a California Common Interest Development;”

• “Operating Cost Manual for Homeowners Associations;” and

• “Reserve Study Guidelines for Homeowner Association Budgets.”

A subdivider or his/her broker(s)/agent(s) must post a copy of the public

report in a conspicuous place in any office where sales of subdivision

interests are conducted and must give a copy to any member of the public

who asks for one and to each prospective buyer prior to entering into a

contract to purchase. The subdivider, owner, or the broker(s)/agent(s) of the

subdivider or owner must have each prospective buyer sign a receipt that he

or she has received and has had an opportunity to read the public report

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before entering into an agreement to purchase. The subdivider is required to

keep the receipt for three years.

If the subdivision interest being offered is in a common interest development

(a planned development, stock cooperative, condominium, or community

apartment project), the subdivider or his/her broker(s)/agent(s) must give the

buyer a statement called, “Common Interest Development General

Information.” This statement, contained in the public report, explains what

ownership in a common interest development means with regard to:

mandatory membership in the association; rights and remedies under the

governing documents; payment of assessments; ownership and use of the

recreational facilities; the responsibilities and powers of the governing body;

voting rights; and other rights inuring to the members/owners.

AL. BUS. & PROF. § 11000, et. seq.; CAL. CIV. § 1350 et. seq.)

B. Disclosure of the Right to Rescind

Purchasers in two types of subdivisions have an unqualified right of

rescission as follows:

1. Timeshare buyers have a right to rescind the purchase within seven

calendar days after receipt of the Public Report or the date of signing the

purchase contract, whichever is later.

2. Undivided interest buyers have a right to rescind the purchase by

midnight of the third calendar day following the day the purchaser

executed the offer to purchase.

AL. BUS. & PROF. §§ 11000.2, 11238)

The owner, subdivider, or broker(s)/agent(s) of the owner or subdivider must

conspicuously disclose to all prospective buyers the right of rescission and

give each buyer a rescission form for the possible exercise of this right.

Statute and Regulations specify the exact language, type, and size of print to

be used. By following the instructions on the rescission form, a person who

has made an offer to purchase may cancel/rescind without giving any reason

or incurring any penalty.

AL. BUS. & PROF. §§ 11238, 11239; COMMISSIONER’S REGULATIONS

2792.30, 2792.31)

C. Disclosure and Notice of Blanket Encumbrance

A blanket encumbrance is a deed of trust, mortgage, or other lien or

encumbrance (excepting taxes or assessments levied by public authority)

which affects more than one lot or unit in a subdivision. Section 11013.2 of

the Business and Professions Code mandates protection of a buyer’s funds,

unless the lot or unit can be unconditionally released from the blanket

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________________________ __________________________________

encumbrance. If there is a blanket encumbrance and the project is not subject

to Section 11013.2, a prospective buyer, or lessee for a period of more than

five years, must receive and sign the following notice prior to the sale, or

lease:

BUYER/LESSEE IS AWARE OF THE FACT THAT THE LOT, PARCEL, OR

UNIT WHICH HE OR SHE IS PROPOSING TO PURCHASE OR LEASE IS

SUBJECT TO A DEED OF TRUST, MORTGAGE, OR OTHER LIEN KNOWN AS

A “BLANKET ENCUMBRANCE”.

IF BUYER/LESSEE PURCHASES OR LEASES THIS LOT, PARCEL, OR UNIT,

HE OR SHE COULD LOSE THAT INTEREST THROUGH FORECLOSURE OF

THE BLANKET ENCUMBRANCE OR OTHER LEGAL PROCESS EVEN

THOUGH BUYER/LESSEE IS NOT DELINQUENT IN HIS OR HER PAYMENTS

OR OTHER OBLIGATIONS UNDER THE MORTGAGE, DEED OF TRUST, OR

LEASE.

Date Signature of Buyer or Lessee

When the prospective buyer or lessee receives and signs the foregoing

notice, the buyer or lessee acknowledges awareness of the blanket

encumbrance and the possible consequences thereof. This may include the

inability of the builder/developer to use or retain earnest money deposits

advanced by the prospective purchaser prior to the release of the blanket

encumbrance from the parcel being purchased.

AL. CIV. § 1133)

D. Delivery of Governing Documents and Disclosures to

Prospective Purchaser in a Common Interest

Development

Any person offering to sell or lease lots or units in a common interest

development (a community apartment project, condominium project,

planned development, or stock cooperative) which requires a public report

prior to the offering must make available the following documents to the

prospective buyer or lessee before the execution of an offer to purchase or

lease:

• The declaration of covenants, conditions, and restrictions;

• The articles of incorporation and bylaws for the association;

• Any other instrument which establishes or defines the common, mutual,

and reciprocal rights and responsibilities of the owners or lessees of

interests in the development;

• The current budget including estimated reserves and related financial

statements of the association; and

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• A statement prepared by the governing body of the association

regarding any outstanding delinquent assessments and related charges

levied by the association against the subdivision interest the prospective

buyer (or lessee) is considering buying (or leasing).

In addition, the subdivider and the broker(s)/agent(s) must deliver to the

prospective buyer (or lessee) copies of the foregoing documents prior to

close of escrow.

In the case of resale of common interest developments, the owner or his/her

agent must provide various documents to the prospective purchaser. (See

Part I, Section I, Subsection J – Furnishing Controlling Documents and

Financial Statements Concerning CID’s).

AL. BUS. & PROF. § 11018.6; CAL. CIV. § 1368)

E. Statement of Defects Disclosure for a Common Interest

Development Conversion

As soon as practicable before the transfer of title for the first sale of a unit in

a common interest development which has been converted from an existing

dwelling, the owner, subdivider, or the broker(s)/agent(s) for the owner or

subdivider must deliver to a prospective buyer a written statement of defects.

This statement must disclose all substantial or material defects and

malfunctions in the major systems in the individual unit and in the common

area, as known to the owner after a reasonable inspection. Major systems

include, but are not limited to, the roof, walls, floors, heating, air

conditioning, plumbing and electrical systems, and recreational facilities.

After making the inspection, if the owner finds no defects or malfunctions,

the owner must provide a written statement to the buyer disclaiming

knowledge of any defects or malfunctions.

If the required disclosure is delivered to the prospective buyer after he/she

has executed an offer to purchase, the buyer has three days after personal

delivery of the disclosure statement or five days after delivery by deposit in

the mail to terminate the offer. The termination must be by written notice to

the owner, subdivider, or the broker(s)/agent(s) of the owner or subdivider.

Any disclosure delivered after the prospective buyer has signed an offer to

purchase must contain a statement describing his/her rights, methods, and

the time to rescind. Any person who willfully fails to carry out the

requirements of this law will be liable for any actual damages suffered by

the buyer.

AL. CIV. § 1134)

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F. Notices to Tenants to Disclose Intent to Convert an

Apartment to Individual Ownership

The owner of an existing apartment building may decide to convert the units

to condominiums (or other form of common interest development) and offer

the units for sale. Among the requirements for approval of such a

subdivision are certain notices to current and prospective tenants. These

notices must include information relative to public hearings regarding the

proposed conversion and the right of a current tenant to purchase his/her

unit.

A developer and a city or county may, as a condition of condominium map

approval, enter into an agreement that newly-constructed units will be rented

for ten years (or more) and then may be sold as condominiums. As part of

this agreement, the developer must provide current and prospective tenants

with certain notices relative to the eventual sale. Again, a tenant must

receive notice of his/her right to purchase the unit.

(CAL. GOV’T §§ 66427.1, 66452.8, 66452.9, 66452.50, 66452.51)

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PART II

TRANSFER OF A BUSINESS OPPORTUNITY

Unless an exemption applies, a real estate license is required to engage in

the listing, sale, transfer or lease of business opportunities on behalf of

another or others for compensation or expectation of compensation

regardless of form or time of payment.

The listing, sale, and lease of business opportunities is a very complex and

highly specialized field. This part of the booklet provides only a brief

overview of some general requirements and disclosures required of the

seller and the seller’s broker(s)/agent(s) in the transfer of a business

opportunity. A buyer’s broker(s)/agent(s) may also be required to make

certain disclosures.

NOTE: Securities dealers (brokers-dealers) may engage in certain mergers

and acquisitions of business opportunities without possessing a real estate

broker’s license.

A. Definition of Business Opportunity

The term “business opportunity” is defined in the Real Estate Law as the

sale or lease of the business and goodwill of an existing business enterprise

or opportunity. The sale or lease of a business usually involves the transfer

of business personal property, although sometimes real property is involved.

The sale or lease of a business opportunity usually includes the sale or

transfer of the stock-in-trade, fixtures, and goodwill. Typical business

opportunities include grocery stores, drug stores, gasoline service stations,

beverage shops, bars, bakeries, among others.

AL. BUS. & PROF. § 10030)

B. Bulk Transfer Law

The bulk transfer law is designed to prevent a merchant from defrauding his

or her creditors by selling the assets of a business and neglecting to pay any

amounts owed the creditors. The law requires notice so that creditors may

take whatever legal steps are necessary to protect their interests. For a

description of the required notices to creditors and the manner of giving

them, consult Sections 6104 – 6107 of the Uniform Commercial Code.

Businesses subject to this law include those whose principal activity is the

sale of merchandise, as well as those that manufacture what they sell. Also

included are the businesses described above, among others.

Unless otherwise limited by law, bulk transfers of goods within California

are subject to this law.

(U.C.C. § 6101 et. seq.)

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C. Sales Tax Clearance

Under the sales and use tax law, the State Board of Equalization must be

notified before the sale of all or part of a business or the stock of goods of an

enterprise engaged in selling tangible business personal property. The

purpose of the notification is to obtain a certificate of tax clearance and a

seller’s permit.

Any unpaid sales tax could become the liability of the buyer, whose identity

must be made known to the State Board of Equalization. An escrow holder

will generally not close a bulk sale escrow without notice to, and clearance

from, the State Board of Equalization.

AL. REV. & TAX. § 6811)

D. Transfer of Liquor License

Before completing the transfer of a business involved in the sale of alcoholic

beverages, the Department of Alcoholic Beverage Control (ABC) must be

contacted. ABC will require that certain notices be given and that the

applicant (the buyer) submit certain information before the liquor license

will be transferred.

AL. BUS. & PROF. § 24073)

E. Franchise Investment Law

The Franchise Investment Law requires that a prospective buyer receive

detailed information about a franchise opportunity. Unless specifically

exempt, every franchisor who offers a franchise for sale in California must

Department of Corporations may be required in advance of such offering.

A person authorized to sell certain defined non-exempt franchises is a person

who is:

• Identified in an application registered with the Corporations

Commissioner for an offering of a franchise in California;

• Licensed as a real estate broker; or

• Licensed by the Corporations Commissioner as a broker-dealer or agent

thereof under the Corporate Securities Law of l968.

AL. CORP. § 31210)

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F. Fictitious Business Name (DBA)

Every individual or entity that regularly transacts business for profit in

California under a fictitious business name must file a fictitious business

name statement no later than 40 days after commencing business.

The statement, in a form prescribed by law, must be filed with the county

clerk of the county of the principal place of business in the state, or if there

is no place in the state, then in Sacramento.

The statement must be published in a newspaper of general circulation in the

county where publication of the notice is intended and an affidavit of

publication is to be filed with the appropriate county clerk within 30 days

after publication.

A “fictitious business name” is:

• A name that does not include the surname of the individual owner, or a

name that suggests there are any additional owners;

• A partnership name that does not include the surnames of all general

partners, or a name that suggests additional owners;

• A corporate name other than that stated in the Articles of Incorporation

for the corporation.

AL. BUS. & PROF. § 17900 et. seq.)

G. Notice of Other Government Agencies

The buyer should be informed of other government agencies which should

be contacted for permits and clearances. These include, but are not limited

to:

• Internal Revenue Service for employer identification number for federal

withholding taxes;

• State Department of Benefit Payments regarding state payroll tax

withholding;

• State Department of Industrial Relations regarding worker’s

compensation insurance; and

• Other county and municipal agencies for local licenses, permits, and

information about various local requirements for operating a business.

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-68-

GOVERNMENT AGENCIES

Federal Agencies

Federal Trade Commission (FTC)

Consumer Specialists

901 Market Street, # 570

San Francisco, CA 94103

877-FTC-HELP (382-4357)

www.ftc.gov

U.S. Department of Housing and Urban Development (HUD)

Local offices in, Fresno, Los Angeles, Sacramento, San Diego, San Francisco,

Santa Ana. (202) 708-1112 or www.hud.gov/localoffices.cfm

State Agencies

Alcoholic Beverage Control

3927 Lennane Drive, Suite 100

Sacramento, CA 95834

(916) 419-2500

www.abc.ca.gov

Business, Transportation & Housing Agency

980 9th Street, Suite 2450

Sacramento, CA 95814-2719

(916) 323-5400

www.bth.ca.gov

Corporations, Department of

1515 K Street, Suite 200

Sacramento, CA 95814-4052

(916) 445-7205

(866) 275-2677 or 866-ASK-CORP

www.corp.ca.gov

Energy Commission

1516 9th Street

Sacramento, CA 95814

916-654-5106

(800) 772-3300

www.energy.ca.gov

Equalization, Board of

450 N Street

Sacramento, CA 95814

(800) 400-7115

www.boe.ca.gov

Financial Institutions, Department of

111 Pine Street, Suite 1100

San Francisco, CA 94111-5613

(415) 263-8500

www.dfi.ca.gov

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State Agencies (continued)

Franchise Tax Board

P. O. Box 1468

Sacramento, CA 95812-1468

(800) 338-0505 or (916) 845-6600

www.ftb.ca.gov

Geologist, State

California Geological Survey

801 K Street

Sacramento, CA 95814

(916) 445-1825

www.consrv.ca.gov/cgs/

Insurance, Department of

Consumer Communications Bureau

300 South Spring Street, South Tower

Los Angeles, CA 90013

1-800-927-HELP (4357) or (213) 897-8921

www.insurance.ca.gov

Real Estate Appraisers, Office of

1102 Q Street, Suite 4100

Sacramento, CA 95814

(916) 552-9000

www.orea.ca.gov

Seismic Safety Commission

1755 Creekside Oaks Drive, Suite 100

Sacramento, California

(916) 263-5506

www.seismic.ca.gov

Structural Pest Control Board

1422 Howe Avenue, Suite 18

Sacramento, CA 95825-3280

(916) 561-8708

www.pestboard.ca.gov

Toxic Substances Control, Department of

P.O. Box 806

Sacramento, CA 95812-0806

(916) 255-3545

www.dtsc.ca.gov

Water Resources, Department of

P. O. Box 942836,

Sacramento, CA 94236

(916) 653-6192

www.dwr.ca.gov

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Department of Real Estate Offices

Sacramento Principal Office

651 Bannon Street, STE 500

Sacramento, CA 95811

(877) 373-4542

Fresno District Office

2550 Mariposa Mall, Suite 3070

Fresno, CA 93721-2273

(559) 445-5009

Oakland District Office

1515 Clay Street, Suite 702

Oakland, CA 94612-1402

(510) 622-2552

Los Angeles District Office

320 W. 4th Street, Suite 350

Los Angeles, CA 90013-1105

(213) 620-2072

San Diego District Office

8620 Spectrum Center Blvd.,

Suite 301

San Diego, CA 92123

(619) 525-4192

Following are additional DRE publications available at www.dre.ca.gov:

"# Real Estate Law

"# Reference Book – A Real Estate Guide

"# Instructions to License Applicants

"# Real Estate Bulletin

"# Mortgage Loan Bulletin

"# Subdivision Industry Bulletin

"# Trust Funds

"# Broker Compliance Evaluation Manual

"# Frequently Asked Questions – Mortgage Loan Brokering in California

"# Trust Deed Investments – What You Should Know!!

"# Using the Services of a Mortgage Broker

1, 2

"# Sources of Home Loans

1, 2

"# Reverse Mortgages – Is One Right for You?

"# Living in a California Common Interest Development

1, 2

"# Reserve Study Guidelines for Homeowner Association Budgets

"# Operating Cost Manual for Real Estate Homeowner Associations

"# Subdivision Public Report Application Guide

"# A Guide for Residents Purchasing their Mobilehome Park

"# A Consumer Guide to Filing Real Estate Complaints

1, 2

"# Recovery Account

1, 2

"# Publications Request Form (RE 350)

Available in Spanish

Available in Traditional Chinese

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RE 6 (rev. 2005)