Trust Fund Accounts
Handling the Trust Funds IF a broker accepts a check (or promissory note) as an earnest money deposit, the following regulations apply: That broker must make full disclosure to the seller. If a buyer has given a check to the broker as an earnest money deposit with written instructions to hold the check until acceptance of the offer, the buyer's instructions should be followed. But the seller must be informed in writing that the buyer's check is being held and not negotiated, and the seller must receive this disclosure at the exact time the actual offer is presented to him. During the time between the receipt of the check by the broker and the acceptance of the purchase offer by the seller, the broker must record a receipt of the check in the broker's trust fund records and hold the check in a safe place.
A broker who has received a buyer's money deposit and related instructions must take one of the following actions: Give the money to the principal to the transaction; Put it into a neutral escrow depository; OR Put it into the broker's trust fund account at a bank or other financial institution. This money MUST BE DEPOSITED with the appropriate account or with the principal within 3 business days following receipt of the funds by the broker or the broker's salesperson. This is true unless the money is in the form of a check that is to be held uncashed until the offer has been accepted.
Commingling and Conversion Remember that commingling, the practice of mixing a client's money with the agent's personal funds, is ILLEGAL. In the same way, if the broker places the buyer's cash OR check in the broker's PERSONAL account, this is also a form of commingling. Conversion, another illegal accounting practice, is the unlawful misappropriation and use of a client's funds by a licensee. For example, if a broker SPENDS the principal's deposit (without the principal's authorization), he has not, technically, COMMINGLED the funds, but he instead has CONVERTED those funds (into his own).
Except for the broker making an initial deposit to open the account (which is usually about $200.00), the broker's personal money may NOT be kept in the account. While both commingling and conversion are illegal, as we said, conversion is a MUCH MORE serious violation than commingling, and has HEAVY CRIMINAL penalties.
California Trust Account Violations Advance Fees for a Loan Secured by Lien on Real Property: Under Section 10085.5, it is illegal for anyone to claim, demand, charge, receive, collect, or contract for an advance fee for EITHER: (a) soliciting lenders on behalf of borrowers or performing other services for borrowers in connection with any loan to be secured directly or collaterally by a lien on real property, before the borrower becomes obligated to complete the loan; OR (b) performing any other activities for which a license is required, unless the person is a licensed real estate broker and is acting in accordance with the law. Note that the above regulations do not apply to advance fees charged by a bank, savings association, credit union, industrial loan company, or anyone who is licensed under Division 9 of the Financial Code, in connection with loans to be secured directly or collaterally by a lien on real property, NOR do these regulations apply to any charges made by title insurers and controlled escrow companies as outlined in the California Insurance Code.
If an audit conducted by the Commissioner shows either commingling or conversion of trust funds in excess of $10,000.00, then the court may issue an order that restrains the licensee from committing any more or additional acts to continue to inappropriately handle the funds of his clients or others in his practice as a real estate licensee. Under this order, the licensee may not conduct business authorized under his real estate license, until he receives a further order of the court, and providing that the hearing is held within 5 days after the order is given. A person who violates these regulations has committed a "public offense" and may be disciplined through a fine up to a maximum of $10,000.00, or with up to 6 months' prison time, or a combination of the two, while a corporation violation of this section is punishable by a fine up to a maximum of $50,000.00.
Non-trust funds one of a broker's most important responsibilities is handling the money of other people. A broker is given the authority to receive earnest money deposits on behalf of the seller, and it's up to him to ensure the secure handling of these funds.
NOT subject to the California Real Estate Law or the BRE Commissioner's Regulations. Non-trust funds include real estate commissions, general operating funds, and rents and deposits from broker-owned real estate.
California Trust Fund Regulations As we discussed earlier in this course, California law has held that a post-dated check may be considered the equivalent of a promissory note. Therefore, a broker should not accept a post-dated check from a buyer, since this may result in mischaracterization of the form of earnest money deposit without adequate disclosure to the seller.
Remember that while checks are universally accepted as equivalent to cash in California business transactions, promissory notes are not. Therefore, a broker must be careful not to misrepresent this fact in such a situation, because he will be violating the Real Estate Law if he directly or through implication misrepresents to the broker's principal/seller that a purchaser has given cash or a check as an earnest money deposit, when in fact the broker has accepted a non-negotiable promissory note.
California Trust Funds and the Real Estate Salesperson:
There are occasions when a real estate SALESPERSON, rather than his broker, might accept the trust funds on his broker's behalf. Such a situation is outlined under the California Business and Professions Code Section 10145. The real estate salesperson that accepts trust funds on behalf of his broker (and remember he could ONLY accept such funds for his OWN broker, not another broker) must immediately deliver the funds to the broker. At that point, the broker might direct the salesperson to put the funds into the hands of the broker's principal; place the funds into a neutral escrow depository; OR deposit the funds into the broker's trust fund bank account. A salesperson IS authorized to take such actions on the behalf of and at the direction of the broker under whom he is licensed.
Trust Fund Accounts
Trust funds are money or other things of value that are received by the broker on the part of another person--cash and non-cash items, including the following: Cash; A check used as a purchase deposit, made payable to the broker or to an escrow or title company; A personal note made payable to the seller; or The pink slip on an automobile, given as a deposit.
California Trust Account Requirements Note that there is NO situation in which a person from the above-listed items C and D might make withdrawals from a broker's trust fund and by doing so, RELIEVE an individual broker (or the broker-officer of a corporate broker licensee) from the responsibility or liability of this action. All regulations setting forth the broker's responsibility in handling trust funds in the broker's custody would still apply to this situation, making the broker the responsible party.
Under the California Business and Professions Code Section 10145, as well as the Commissioner's Regulation 2832, a trust account must meet the following requirements: A trust account must be designated as a trust account in the name of the broker as trustee; A trust account must be maintained with a bank or recognized depository located in California; A trust account must be a NON-interest-bearing account; An out-of-state trust account is permitted only if the FDIC insures the account, and the account is used only to service specific first loans; and A withdrawal may ONLY be made from a trust account upon the signature of one of the following parties: The broker in whose name the account is maintained; A specifically designated broker-officer if the account is in the name of a corporate broker; A salesperson licensed to the broker, only with specific written authorization by the broker; or An unlicensed employee of the broker covered by a fidelity bond (that must be equal to at LEAST the maximum amount of trust funds to which that employee has access at any time), if this is specifically authorized in writing by the broker who is a signatory of the trust account.
