BILL ANALYSIS Ó
AB 607
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CONCURRENCE IN SENATE AMENDMENTS
AB
607 (Dodd)
As Amended June 23, 2015
Majority vote
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|ASSEMBLY: | 77-0 |(May 7, 2015) |SENATE: | 39-0 | (July 9, 2015) |
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Original Committee Reference: B. & P.
SUMMARY: Authorizes real estate 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% if the broker
has evidence of financial responsibility that is sufficient to
protect members of the public against a loss subject to the
deductible amount.
The Senate amendments:
1)Clarify that cash deposits used as evidence of financial
responsibility should also be held separately from funds
belonging to the broker's principals.
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2)Prohibit an arrangement under which a person is authorized to
make withdrawals from a trust fund account of a broker from
relieving an individual broker, or 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, in accordance with existing regulations.
FISCAL EFFECT: According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS:
Purpose. This bill is sponsored by the California Association
of REALTORS. According to the author, "[This bill] would allow
real estate broker trust accounts to operate more efficiently
and better protect the public. Currently, real estate brokers
can use unlicensed employees - like [certified public accounts]
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 [Cal]BRE the power to require evidence of financial
responsibility from the broker to protect against a loss subject
to the deductible."
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
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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
Business and Professions Code (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 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 California Code of Regulations 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 California Bureau
of Real Estate (CalBRE) 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
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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 certified public account (CPA)
or skilled 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 0% 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 if the employing broker has evidence of financial
responsibility, as specified.
Analysis Prepared by:
Eunie Linden / B. & P. / (916) 319-3301 FN:
0001187
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