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
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          |Author:    |Dodd                                                 |
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          |Version:   |June 8, 2015    Amended                              |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Eileen Newhall                                       |
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            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  







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              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  








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              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.   








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              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.








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           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


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