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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