BILL ANALYSIS Ó SENATE COMMITTEE ON BANKING AND FINANCIAL INSTITUTIONS Senator Marty Block, Chair 2015 - 2016 Regular Bill No: AB 607 Hearing Date: June 17, 2015 ----------------------------------------------------------------- |Author: |Dodd | |-----------+-----------------------------------------------------| |Version: |June 8, 2015 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- Subject: Real estate trust fund accounts: bond requirement. SUMMARY Prescribes the circumstances under which withdrawals may be made from a real estate broker's trust fund account. DESCRIPTION 1. Provides that withdrawals from a real estate broker's trust fund account may be made only upon the signature of that broker (or, in the case of a corporate broker, only upon the signature of an officer through whom the corporation is licensed), or one or more of the following persons, if specifically authorized in writing by the broker or officer: a. A real estate salesperson licensed to the broker. b. Another broker acting pursuant to a written agreement with the broker that controls the trust fund account. c. An unlicensed employee of the broker, if the broker has fidelity bond coverage equal to or greater than the maximum amount of the trust funds to which the unlicensed employee has access at any time. 2. Clarifies that fidelity bonds providing coverage for unlicensed employees with access to trust fund accounts may be written with deductibles of up to 5% of their coverage AB 607 (Dodd) Page 2 of ? amounts. However, when a bond is written with a deductible, the employing broker must have evidence of financial responsibility sufficient to cover the amount of the deductible. Evidence of financial responsibility must include one or more of the following: a. Separate fidelity bond coverage adequate to cover the amount of the fidelity bond deductible. b. A cash deposit held in a separate account, apart from other funds of the broker, the broker's employees, or the broker's principals, in a bank or recognized depository in the state, adequate to cover the amount of the fidelity bond deductible, and held exclusively and solely for the purpose of covering the deductible. c. Any other evidence of financial responsibility approved by the Real Estate Commissioner (commissioner). EXISTING LAW 3. Requires a real estate broker who accepts funds belonging to others in connection with a transaction regulated under the Real Estate Law to deposit all of those funds that are not immediately placed into a neutral escrow depository or into the hands of the broker's principal (i.e., client), into a trust fund account maintained by the broker in a bank or recognized depository in this state (Business and Professions Code Section 10145). 4. Requires all funds deposited by the broker in a trust fund account to be maintained there until disbursed by the broker in accordance with instructions from the person entitled to the funds (Business and Professions Code Section 10145). EXISTING REGULATION 1. Provides that withdrawals from a real estate broker's trust fund account may be made only upon the signature of that broker (or, in the case of a corporate broker, only upon the signature of an officer through whom the corporation is licensed), or one or more of the following persons, if specifically authorized in writing by the individual broker or officer (Bureau of Real Estate AB 607 (Dodd) Page 3 of ? Regulation 2834): a. A real estate salesperson licensed to the broker. b. Another broker acting pursuant to a written agreement with the broker that controls the trust fund account. c. An unlicensed employee of the broker, if the broker has fidelity bond coverage equal to or greater than the maximum amount of the trust funds to which the unlicensed employee has access at any time. 2. Provides that an arrangement under which a person other than the broker or corporate officer is authorized to make withdrawals from a trust fund account shall not relieve an individual broker, nor the broker-officer of a corporate broker licensee, from responsibility or liability as provided by law in handling trust funds in the broker's custody (Regulation 2834). COMMENTS 1. Purpose: AB 607 is sponsored by the California Association of Realtors (CAR) to give real estate brokers greater flexibility in meeting their fidelity bonding requirements, when they authorize unlicensed employees to make withdrawals from their real estate trust fund accounts. 2. Background: As summarized above, Real Estate Regulation 2834 allows real estate brokers to authorize their unlicensed employees to withdraw funds from the brokers' trust fund accounts, as long as the brokers hold fidelity bond coverage equal to or greater than the maximum amount of trust funds to which the unlicensed employees have access at any one time. Regulation 2834 is silent on the extent to which the fidelity bonds it requires may have deductibles. Given the cost of housing, brokers wishing to grant unlicensed employees permission to withdraw funds from their trust fund accounts are commonly required to obtain fidelity bonds greater than $100,000. However, according to CAR, many brokers are unable to obtain fidelity bond coverage in amounts greater than $100,000 without a deductible. AB 607 (Dodd) Page 4 of ? Deductibles on fidelity bonds greater than $100,000 range from 1% to 5%. Because Regulation 2834 does not expressly authorize the fidelity bonds it requires to contain deductibles, the Bureau of Real Estate (BRE) has interpreted that regulation as failing to allow deductibles in this context. CAR is sponsoring AB 607 to codify Regulation 2834, and to expressly authorize deductibles of up to 5%, provided brokers maintain evidence of financial responsibility sufficient to cover the amounts of their deductibles. 3. Discussion: According to BRE, Regulation 2834 has existed in substantially the same form as it currently reads since 1964. For that reason, codifying the regulation, as AB 607 proposes to do, does not appear problematic. However, as discussed below in the Suggested Amendments section, the current version of AB 607 fails to codify the entire regulation; the bill does not contain the provision of the regulation which clarifies that, regardless of who is authorized to withdraw trust funds, brokers retain the ultimate responsibility for trust funds under their control. Amendments are suggested to rectify this omission. 4. Summary of Arguments in Support: CAR is sponsoring the bill for the reasons stated above. "AB 607 (Dodd) 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." The North Bay Association of Realtors writes, "Current policy was established when homes in California rarely sold for more than $100,000 and consumer trust funds were almost always 100% protected." Nowadays, insurers do not sell coverage for more than $100,000 without a deductible. "Given that the price of real state in California is typically well over $100,000, 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." 5. Summary of Arguments in Opposition: None received. AB 607 (Dodd) Page 5 of ? 6. Amendments: a. AB 607 would codify one portion of Regulation 2834, but not the entire regulation. The portion of the regulation that is not currently included in AB 607 is the portion which clarifies that, regardless of who is authorized to withdraw money from a broker's trust fund account, the broker ultimately retains responsibility for the money in that account. Because the allocation of responsibility regarding trust funds is an important consumer protection, staff recommends adding the following language to the bill, to mirror the wording of Regulation 2834: Page 3, between lines 16 and 17, insert: (D) An arrangement under which a person enumerated in subparagraph (A), (B), or (C) of paragraph (2) of subdivision (a) is authorized to make withdrawals from a trust fund account of a broker shall not relieve an individual broker, nor the broker-officer of a corporate broker licensee, from responsibility or liability as provided by law in handling trust funds in the broker's custody. LIST OF REGISTERED SUPPORT/OPPOSITION Support California Association of Realtors (sponsor) California Society of Certified Public Accountants North Bay Association of Realtors Opposition None received -- END -- AB 607 (Dodd) Page 6 of ?