BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     AB 607


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          Date of Hearing:  April 14, 2015


                   ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS


                                Susan Bonilla, Chair


          AB 607  
          (Dodd) - As Introduced February 24, 2015


          SUBJECT:  Real estate trust fund accounts:  bond requirement.


          SUMMARY:  Codifies Bureau of Real Estate (BRE) regulations  
          allowing brokers to employ certain persons to manage real estate  
          broker trust fund accounts, including non-real estate licensees,  
          if the broker has fidelity bond coverage for the maximum amount  
          of the trust fund account to which the employee has access to at  
          any time, and authorizes the fidelity bond to have a deductible  
          of up to 5%. 


          EXISTING LAW


          1)Provides for the licensure and regulation of real estate  
            brokers and real estate salespersons by the (BRE) under the  
            direction of the Real Estate Commissioner (Commissioner).  
            (Business and Professions Code (BPC) Sections 10000 - 10580) 


          2)Prohibits any person from engaging in the business of, act in  
            the capacity of, advertise as, or assume to act as a real  
            estate broker or a real estate salesperson without first  
            obtaining a real estate license.  (BPC Section 10130) 









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          3)Defines a real estate broker, in part, as one who sells, buys,  
            or who offers to sell or buy, solicits prospective sellers or  
            purchasers of, solicits or obtains listings of, or negotiates  
            the purchase, sale or exchange of real property or a business  
            opportunity; or who leases or rents, or offers to lease or  
            rent, places for rent, or solicits listings of places for  
            rent, or solicits for prospective tenants, or negotiates the  
            sale, purchase or exchanges of leases on real property or on a  
            business opportunity, or collects rents from real property, or  
            improvements thereon, or from business opportunities.  (BPC  
            Section 10131)


          4)Requires a real estate broker, who accepts funds belonging to  
            others in connection with a transaction, to deposit those  
            funds in either a neutral escrow depository, into the hands of  
            the broker's principal, or into a trust fund account, as  
            specified, and requires all funds deposited by the broker in a  
            trust fund account to be kept there until disbursed by the  
            broker in accordance with instructions from the person  
            entitled to the funds, as specified.  (BPC Section 10145) 


          5)Authorizes withdrawals to be made from a trust fund account of  
            an individual broker only upon the signature of the broker or  
            one or more of the following persons if specifically  
            authorized in writing by the broker: (10 CCR Section 2834(a)) 

             a)   A salesperson licensed to the broker.

             b)   A person licensed as a broker who has entered into a  
               written agreement pursuant to 10 CCR Section 2726 with the  
               broker.

             c)   An unlicensed employee of the broker with fidelity bond  
               coverage at least equal to the maximum amount of the trust  
               funds to which the employee has access at any time.  

          THIS BILL








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          1)Authorizes withdrawals from a trust fund account of an  
            individual broker only upon signature of that broker, or one  
            or more of the following persons if specifically authorized in  
            writing by the individual broker: 


             a)   A real estate salesperson licensed under the broker; 


             b)   Another broker acting pursuant to a written agreement  
               with the individual broker that conforms to the  
               requirements of this part and any regulations; or, 


             c)   An unlicensed employee of the individual broker if the  
               broker has fidelity bond coverage equal to at least the  
               maximum amount of the trust funds to which the unlicensed  
               employee has access to at any time.  For purpose of this  
               section, bonds providing coverage may be written with a  
               deductible of up to five percent of the coverage amount.


          2)Authorizes the Commissioner, by regulation, to require  
            separate evidence of financial responsibility by the employing  
            broker that is sufficient to protect members of the public  
            against a loss subject to the deductible amount, if any. 


          FISCAL EFFECT:  Unknown.  This bill is keyed fiscal by the  
          Legislative Counsel.   


          COMMENTS


          1)Purpose. This bill is sponsored by the California Association  
            of REALTORS.  According to the author, "[This bill] would  








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            allow real estate broker trust accounts to operate more  
            efficiently and better protect the public.  Currently, real  
            estate brokers can use unlicensed employees - like CPAs or  
            professional bookkeepers - to manage their broker trust  
            accounts. However, regulations make it very difficult to do so  
            because the brokers must secure a zero deductible bond to  
            cover the amount in the trust, and such zero deductible bonds  
            are not generally available. Since CPAs and other  
            professionals are ideally suited to manage these accounts, the  
            public interest is hindered by this requirement.  This bill  
            would fix the problem by allowing brokers to obtain fidelity  
            bonds with deductibles of up to [five]%. The bill ensures the  
            public is well protected by giving the BRE the power to  
            require evidence of financial responsibility from the broker  
            to protect against a loss subject to the deductible."


          2)Background.  Trust Funds and Trust Accounts.  Real estate  
            brokers and salespersons receive trust funds in the normal  
            course of doing business, on behalf of others, thereby  
            creating a fiduciary responsibility to the funds' owners.   
            Trust funds are money or other things of value received by a  
            broker or salesperson on behalf of a principal or any other  
            person, and which are held for the benefit of others in the  
            performance of any acts for which a real estate license is  
            required.  Some examples are cash, a check used as a purchase  
            deposit, or a personal note made payable to the seller.  Trust  
            accounts are set up as a means to separate trust funds from  
            non-trust funds, and to separate a client's funds from the  
            broker's own funds.  


            A typical trust fund transaction begins with the broker or  
            salesperson receiving trust funds from a principal in  
            connection with the purchase or lease of real property.   
            According to BPC Section 10145, trust funds received must be  
            placed into the hands of the owners of the funds, into a  
            neutral escrow deposit or into a trust account in the name of  
            the broker, or in a fictitious name if the broker is the  








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            holder of a license bearing such fictitious name, as trustee  
            at a bank or other financial institution not later than three  
            business days following receipt of the funds by the broker or  
            by the broker's salesperson.  Real estate brokers keep trust  
            accounts to deposit funds belonging to others that are not  
            immediately deposited in a neutral escrow depository or with  
            the broker's principal.  


            Trust Account Withdrawals.  Under BPC Section 10145, all funds  
            deposited by a broker in a trust fund account are required to  
            be maintained there until disbursed by the broker in  
            accordance with instructions from the person entitled to the  
            funds.  Under 10 CCR Section 2834(a), withdrawals may be made  
            from a trust account of an individual broker only upon the  
            signature of the broker or one or more of the following  
            persons if specifically authorized in writing by the broker:  
            1) a salesperson licensed to the broker; 2) a person licensed  
            as a broker who entered into a written broker-salesperson  
            agreement with the broker; or 3) an unlicensed employee of the  
            broker with fidelity bond coverage at least equal to the  
            maximum amount of the trust funds to which the employee has  
            access at any time.  With regard to the third type of person  
            who may make withdrawals, existing law does not specify  
            whether these bonds can or cannot have a deductible.  However,  
            the BRE has required that these bonds may not have a  
            deductible based on the language which requires that the  
            unlicensed employee have fidelity bond coverage at least equal  
            to the maximum amount of the trust funds to which the employee  
            has access.      


            Fidelity Bond Coverage.  Brokers and salespersons must handle,  
            control and account for those trust funds according to  
            established legal standards.  Improper handling of trust funds  
            is cause for revocation or suspension of a real estate  
            license, and may also open the door to financial liability for  
            damages incurred by clients.  According to the author, real  
            estate brokers often prefer to retain a CPA or skilled  








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            bookkeeper rather than a salesperson for the administration of  
            larger real estate broker trust accounts.  However, because  
            CPAs and bookkeepers are not licensed, they must have fidelity  
            bond coverage in the total amount they have access to, with a  
            zero percent deductible.  According to the author, real estate  
            brokers have reported that insurers (bond companies) are  
            unwilling or unable to sell the required fidelity bond  
            coverage in amounts greater than $100,000 without a  
            deductible.  Given housing prices, these trust accounts  
            routinely exceed $100,000 in total funds, so $100,000 policies  
            are insufficient.  As a result, brokers need trust fund bond  
            coverage for financial professionals, but that requisite  
            coverage is not available in the general marketplace.  



            Under existing regulations, the only alternative to obtaining  
            bond funding would be to require CPAs and bookkeepers to  
            obtain real estate licenses, since salespersons licensed to  
            the broker are not subject to the bond requirement.  This bill  
            would fix this problem by allowing fidelity bonds to have up  
            to a 5% deductible, while also allowing the BRE to require  
            evidence of financial responsibility by the employing broker  
            sufficient to protect members of the public against a loss  
            subject to the deductible.
          3)Prior Related Legislation.  AB 2602 (Lieu), Chapter 107,  
            Statutes of 2006, authorized a commercial mortgage banker  
            licensed as a real estate broker under the Real Estate Law to  
            retain or arrange to allocate the interest earned on funds  
            placed in an interest-bearing account, as specified.


          ARGUMENTS IN SUPPORT 


          According to the  California Association of REALTORS  , "[BRE's]  
          current regulations allow an unlicensed employee of a broker,  
          such as a bookkeeper or Certified Public Accountant (CPA), to  
          manage the broker's trust account if the employee has fidelity  








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          bond coverage that is equal to the maximum amount of funds to  
          which the employee has access.  This regulation is interpreted  
          to mean that the bond must be a zero deductible bond.  REALTORS  
          have reported that bond companies will not send bond coverage  
          exceeding $100,000 unless the bond contains a deductible,  
          usually of 1-5%.  This measure would, among other things, allow  
          bonds for unlicensed employees to include a deductible of up to  
          5%.  [This bill] creates the clarity needed to allow regulations  
          to conform to the types of bonds available on the market.  With  
          the necessary fidelity bonds in place, REALTORS will be able to  
          continue to employ skilled bookkeepers and CPAs to administer  
          their trust accounts." 



          According to the  North Bay Association of REALTORS  , "Insurers?do  
          not sell [fidelity bond] coverage for more than $100,000 without  
          a deductible.  Current policy was established when homes in  
          California rarely sold for more than $100,000 and consumer trust  
          funds were almost always 100% protected.  This bill provides the  
          necessary mechanisms to address this problem.  At the momeny,  
          the only option for brokers to have coverage on their trust  
          funds is to ensure that CPAs and bookkeepers have real estate  
          licenses.  This is because those with real estate licenses under  
          the broker are not required to have the bond requirement - in  
          reality, this requirement is infeasible?.it is essential that  
          this policy is changed to ensure that insurance products are  
          available to protect the funds entrusted by consumers to real  
          estate brokerages." 
          POLICY ISSUE FOR CONSIDERATION.  Currently, the bill authorizes  
          the Commissioner to require, via regulation, separate evidence  
          of financial responsibility by the employing broker that is  
          sufficient to protect members of the public against a loss  
          subject to the deductible amount.  Instead of waiting for this  
          requirement to be adopted via regulations, which may delay the  
          ability to implement this bill, if enacted, the author may wish  
          to consider working with the Commissioner to place such language  
          in the bill.  









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          ARGUMENTS IN OPPOSITION


          None on file. 


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Association of REALTORS (sponsor)


          North Bay Association of REALTORS




          Opposition


          None on file. 




          Analysis Prepared by:Eunie Linden / B. & P. / (916) 319-3301















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