Questions. Suggested Answers

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Gary Dennis
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1 Questions 1. Is the bank account used for trust fund handling in the name of the broker as trustee? 2. Is the bank account used for trust fund handling an interest bearing account? 3. Are control records complete and accurate? 4. Are the separate transaction records complete and accurate? 5. Is monthly reconciliation of the control records and separate records performed and documented? 6. Are trust funds deposited by the next business day or as authorized? 7. Are authorized signatories licensed and employed by the broker? 8. Are unlicensed authorized signatories covered by a fidelity bond? 9. Are broker s funds commingled with trust funds? 10. Are there unexplained Trust Account Overages? Suggested Answers 1. Is the bank account used for trust fund handling in the name of the broker as trustee? a. If broker holds an individual broker s license, the account should be set up in his or her name and designated a Trust Account. For example: John Doe Trust Account or Jane Doe Trust Account b. If broker is a corporate broker licensee, the account should be set up in the corporation s name and designated a Trust Account. For example: ABC, Inc. Trust Account c. If broker wishes to include the fictitious business name as part of the name of the account, it should be as follows: John Doe Trust Account dba 25th Century Realty; or ABC Inc. Trust Account dba Top Property Management It should be noted, however, that a fictitious business name should not be used in place of the broker s name or the corporation s name. 1

Is monthly reconciliation of the control records and separate records performed and documented? 6. Are trust funds deposited by the next business day or as authorized? 7.

2 2. Is the bank account used for trust fund handling an interest bearing account? Trust funds may be placed into an interest-bearing account at a bank or savings and loan association if the following requirements are met: a. The account is in the name of the broker as trustee for the specified beneficiary or principal of a transaction or series of transactions. b. All of the funds in the account are covered by insurance provided by an agency of the federal government. c. The funds in the account are kept separate, distinct, and apart from funds belonging to the broker or to any other person for whom the broker holds funds in trust. d. The broker discloses to the beneficiary of the funds the nature of the account, how interest will be calculated and paid under various circumstances, whether service charges will be paid to the depository and by whom, and the possible penalty for withdrawals. e. No interest earned on the funds shall inure directly or indirectly to the benefit of the broker nor to any person licensed to the broker. f. In an executory sale, lease, or loan transaction in which the broker accepts funds in trust to be applied to the purchase, lease, or loan, the parties to the contract shall have specified in the contract or by collateral written agreement, the person to whom interest earned on the funds is to be paid or credited. It should be noted that this would require the licensee to maintain a separate bank account for each beneficiary he/she wishes to earn interest for. 3. Are control records complete and accurate? Every broker shall keep a record of all trust funds received, including uncashed checks. a If a broker does not maintain a trust account and forwards all trust funds received to either the escrow or to the owner of the funds, then he/she must maintain a Record of Trust Funds Received but not Deposited to the Trust Fund Bank Account (DRE Form RE 4524). This record should show the following in chronological sequence: 1. Date funds received. 2. Form of payment. 3. Amount received. 4. Received from. 5. Description of property. 6. Identity as to whom funds were forwarded. 7. Date of disposition. 2

The account is in the name of the broker as trustee for the specified beneficiary or principal of a transaction or series of transactions. b. All of the funds in the account are covered by insurance provided by an agency of the federal government.

3 b. If a broker does maintain a trust account then he/she must maintain a Columnar Record of all Trust Funds Received and Paid Out of the Trust Fund Bank Account (DRE Form 4522). This record should show the following in chronological sequence: 1. Date funds received. 2. From whom funds received. 3. Amount received. 4. Date of deposit. 5. Check number and date of related disbursement. 6. Daily balance of trust bank account. 4. Are the separate transaction records complete and accurate? Brokers must maintain a Separate Record for Each Beneficiary or Transaction (DRE Form RE 4523). This record accounts for the funds received from, or for the account of, each beneficiary or each transaction and deposited to the trust fund bank account. This record is necessary for the broker to ascertain the total owed to each beneficiary. The record must show in chronological sequence the following: a. Date of deposit. b. Amount of deposit. c. Date of each related disbursement. d. Check number of each related disbursement. e. Amount of each related disbursement. f. If applicable, dates and amounts of interest earned and credited to the account. g. Balance after posting transactions on any date. 5. Is monthly reconciliation of the control records and separate records performed and documented? The balance of all separate beneficiary or transaction records (DRE Form 4523) must be reconciled with the record of all trust funds received and disbursed (DRE Form 4522) at least once a month. A record of reconciliation must be maintained and it must identify the following: a. Bank account name. b. Account number. c. Date of reconciliation. d. Name of beneficiary. e. Trust fund liability of the broker to each beneficiary. 3

Check number and date of related disbursement. 6. Daily balance of trust bank account. 4. Are the separate transaction records complete and accurate?

4 For example: ABC Realty Inc. Trust Account 12/31/20xx Jones $500 Smith $250 Thompson $100 Total $ Are trust funds deposited by the next business day or as authorized? Unless otherwise specified by the beneficiary of the funds in writing, the broker is required to do one of the following three things with trust funds no later than three business days following receipt of the funds: a. Deposit the funds into a neutral escrow depository. b. Place funds accepted on behalf of the owner into the hands of the owner of the funds. c. Deposit the funds into a trust fund bank account maintained by the broker. 7. Are authorized signatories licensed and employed by the broker? Withdrawals may be made from the trust account only upon the signature of the broker or one or more of the following persons with written authorization from the broker: a. A salesperson licensed to the broker. b. An unlicensed employee of the broker with fidelity bond coverage at least equal to the maximum amount of trust funds to which the employee would have access. c. A person licensed as a broker who has entered into a written agreement with the employing broker. 8. Are unlicensed authorized signatories covered by a fidelity bond? An unlicensed signatory on the trust account must have fidelity bond coverage at least equal to the maximum amount of trust funds to which the employee could have access to at any time. It is recommended that the fidelity bond specifically identify the trust account that is being covered. 4

receipt of the funds: a. Deposit the funds into a neutral escrow depository. b. Place funds accepted on behalf of the owner into the hands of the owner of the funds. c.

5 9. Are broker s funds commingled with trust funds? Funds belonging to the licensee should not be commingled with trust funds. Common examples of commingling are: personal or company funds deposited into the trust fund bank account, trust funds deposited into the general or personal bank account, and funds collected on real property wholly owned by the broker handled through the trust account. A broker, however, is allowed to maintain up to $200 of personal funds in a trust account to cover checking account service fees and other bank charges. Commissions, fees, other income earned by a broker, and funds belonging in part to the broker s principal and in part to the broker when it is not reasonably practicable to separate such funds, must be withdrawn from the trust account within 25 days from the date of deposit. 10. Are there unexplained Trust Account Overages? Funds in a broker s trust account that exceed the aggregate trust fund liability of the account, where the broker is unable to determine the beneficiary of the funds, are considered unexplained trust account overages. A broker is required to do the following: a. If unable to identify the owner, the funds remain in the trust account or in a separate trust account. b. A separate record must be kept on the overage amount. c. Include the overage in monthly reconciliations. Trust Account Overages cannot be used by the broker to cover shortages in the trust account nor shall they be withdrawn by the broker. Unless the broker can establish the ownership of such funds, the funds should remain in the account for 3 years at which time they will then escheat to the State. Licensees may contact the State Controller s Office regarding the escheat law and the required procedures to escheat trust funds to the State. 5

property wholly owned by the broker handled through the trust account.

6 Sample Trust Fund Transactions Assume Mr. Bruce Broker is a licensed real estate broker, working on his own. Recently, he decided to try property management in addition to his residential real estate sales activity. The following trust funds events occurred during the first several weeks after he had opened the account: XX XX XX XX XX XX XX XX Opened client trust account with $100 of his own funds. Received $1,000 from Mr. Ron Smith, a landlord. Received check for $9,000 from Gail Smith, payable to Acme Escrow, to accompany an offer. Deposited $9,000 check from Gail Smith in escrow. Received check for $6,000 from Fred Spring, payable to Acme Escrow, to accompany an offer. Deposited $6,000 check from Fred Spring, in escrow. Received check for $25,000 from Pat Green, payable to Old Time Title Insurance Company, to accompany an offer. Returned check for $25,000 to Pat Green when offer was rejected by seller XX Paid $140 to Ace Plumbing for repairs to 25 Lake Street, #2. Review how these events are entered in the DRE forms on the following pages. 6

The following trust funds events occurred during the first several weeks after he had opened the account: 8-29-20XX 8-30-20XX 9-06-20XX 9-07-20XX 9-11-20XX 9-12-20XX 9-15-20XX 9-16-20XX Opened client

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Broker Compliance Evaluation. Manual

Broker Compliance Evaluation. Manual Broker Compliance Evaluation Manual August 2010 Broker Compliance Evaluation Manual This Broker Compliance Evaluation Manual was prepared primarily to assist the real estate broker conducting residential