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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