What Sellers and Realtors® Need to Know About California’s Financial Privacy Rights


Julia Wei

by Julia Wei on January 14, 2014

in Banking Issues, Lending/Lender Issues, Negotiating Transactions, Real Estate Law

When a seller decides to carry-back some portion of the purchase price, he or she becomes a lender.

As a lender, the seller is now in possession of the borrower’s financial information, which would ordinarily be private, but is being disclosed as part of the borrower’s application to “borrow” money from the seller.  So while the lender is not actually handing over money to the borrower, the seller is agreeing not to receive all the purchase price in one transaction.  This is documented in the form of a loan.  Usually that means a promissory note and a deed of trust.

This means the seller (and possibly even the Realtor®) are now seeing a credit report, W-2 earning statements, bank statements, possibly even tax returns from the buyer.  The buyer is considered a “consumer” which means that many consumer protection laws apply.

How Long Should the Seller Keep the Records?

The seller’s remedy, if the borrower does not make the payments, is to conduct a non-judicial foreclosure.  This means that the seller will likely need the loan documents and other information that would assist the loan servicer and later the foreclosure trustee.  Prudence suggests the seller should keep these financial documents as long as their tax adviser deems necessary and until the loan is paid in full, after which it the canceled promissory note should be returned to the borrower or destroyed, and the deed of trust reconveyed.

How Long Should the Realtor® Keep the Records?

Things kept in the salesperson’s file should be kept as long as the CalBRE (formerly the California Department of Real Estate) requires.  California Business and Professions Code Section 10148(a) states that a real estate broker shall retain for three years copies of all listings, deposit slips, canceled checks, trust records, and other documents executed by him or her or obtained by him or her in connection with any transactions for which a real estate license is required.  Further, the CalBRE notes that among the top 10 violations it discovers during audits is the licensee’s failure to maintain records. http://www.dre.ca.gov/files/pdf/CommonViolationsFoundInAudits.pdf

What Happens if Someone Requests the Financial Information in Litigation?

California’s Code of Civil Procedure Section 1985.3 requires a Notice to Consumer when a subpoenaing party is looking for financial records of a consumer.

In a standard residential real estate transaction, a borrower’s loan application and other financials submitted as part of the seller carry-back would definitely be considered “personal records” with respect to the Realtor® or mortgage broker who had them in their files.

The California Law Revision Commission issued a memo on this issue and noted:

“The statute applies whenever a litigant seeks to subpoena a “personal record” of a consumer. The term “personal record” is statutorily defined; it generally includes any record maintained by a medical provider, financial institution, attorney, accountant, telephone corporation, or school.

The statute requires the subpoenaing party to provide advance notice of the subpoena to the consumer that is the subject of the record before the date specified for production of the record. The section further provides the consumer an opportunity to object to production of the record, and relieves a subpoenaed person who is notified of an objection from complying with the subpoena, in the absence of agreement or court order.

Failure to comply with the procedural requirements of Section 1985.3 permits a record holder to refuse to produce the subpoenaed records. Code Civ. Proc. § 1985.3(k). Non-compliance may also subject a litigant to some type of sanction (although the statutory basis for imposition is somewhat unclear), and at least theoretically could result in civil liability. See Mansell v. Otto, 108 Cal. App. 4th 265, 133 Cal. Rptr. 2d 276 (2003)”

Specifically the statute enumerates the categories of record holders who must comply with the Notice to Consumer.  Those categories include Realtors®, mortgage brokers and escrow agents: “anyone authorized by this state to make or arrange loans that are secured by real property, security brokerage firm, insurance company, title insurance company, underwritten title company, escrow agent licensed pursuant to Division 6 (commencing with Section 17000) of the Financial Code or exempt from licensure pursuant to Section 17006 of the Financial Code, attorney, accountant…”

In practical terms, this means that if parties are in litigation, the person holding the financial records would receive a subpoena.  At that stage the custodian should either request a Notice to Consumer from the litigant seeking the information, issue one themselves to the consumer, which would give the consumer time to object to the production of the financial information, or refuse to produce the records until compliance has been demonstrated.

Practice Tip → When a party is entertaining a seller carry-back offer, the seller and Realtor® should consider how they will store and safeguard the buyer’s private financial information and calendar for later the destruction or return of the private materials to the buyer.

If you or a friend is seeking real estate legal counsel regarding a California based property, don’t hesitate to contact our law firm at (650) 327-2900 or to learn more about our firm and read attorney bios, visit us on the web at www.BrewerFirm.com.

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