CALIFORNIA 3-HOUR TRUST FUND HANDLING COURSE

Page 1California 3-Hour Trust Fund Handling Course

CALIFORNIA 3-HOUR TRUST FUND HANDLING COURSE

Course Description

This course will take you through all the subjects mandated by the California Department of Real Estate, and includes instruction in the legal requirements for receiving and handling trust funds in real estate transactions (as set forth in the Real Estate Law and the Regulations of the Real Estate Commissioner), the requisites for maintaining a trust fund account, and trust fund record keeping requirements.

Chapters

• Chapter 1: General Trust Fund Information

• Chapter 2: Trust Fund Integrity and Accounting

• Chapter 3: Documentation, Audits, and Use of Records

Learning Objectives

Upon completion of this course participants will be able to:

• Distinguish trust funds from non-trust funds

• Describe requirements for proper handling of trust funds and special requirements for advance fee trust funds

• Describe trust account requirements and functional procedures

• Describe trust fund liability and the importance of maintaining trust account integrity.

• Define commingling and related violations of trust fund requirements.

• Describe procedures for maintaining trust account records

• Describe documentation requirements.

• Explain the role of audits and the consequences of failing an audit

• Explain the use of records in the audit and examination processes

Chapter 1: General Trust Fund Information

Objectives

1. Distinguish trust funds from non-trust funds

2. Describe requirements for proper handling of trust funds and special requirements for advance fee trust funds

3. Describe trust account requirements and functional procedures.

Contents

• Trust Funds Vs. Non-Trust Funds

• Trust Fund Handling Requirements

» Identifying the Owner(s) of the Funds

» Advance Fee Trust Funds

• General Trust Fund Account Requirements

» Trust Account Required Features


» Out-Of-State Accounts

» Deposits

» Trust Account Withdrawals

» Interest Bearing Accounts

Trust Funds vs. Non-Trust Funds

In the course of conducting business, licensees regularly receive money and other property that does not belong to them. Money, in particular, may be received in connection with trust funds, escrow deposits, earnest money, security deposits, and rental payments.

When such funds are received, they are handled on the behalf of others, which creates a fiduciary responsibility to the funds’ owners. It is up to the licensed real estate brokers and salespersons to handle and account for these trust funds according to established legal standards.

Brokers and licensees must safeguard and account for all documents and other property received from a client or customer. State license laws regulate the broker’s accounting obligations and escrow practices.

Brokers or salespersons who fail to handle trust funds properly can face serious consequences, including possible jail time, financial damages, and the revocation or suspension of the agent’s real estate license.

The state publishes a comprehensive guide to the requirements for trust fund handling which you can view and download below:

http://www.dre.ca.gov/files/pdf/re13.pdf

Trust Funds

Trust funds are money or other things of value that are received by the broker on the part of another person--cash and non-cash items, including the following:

• Cash;

• A check used as a purchase deposit, made payable to the broker or to an escrow or title company;

• A personal note made payable to the seller; or

• The pink slip on an automobile, given as a deposit.

Non-Trust Funds

Non-trust funds, on the other hand, have separate regulations from trust funds. The non-trust funds, provided that they are not commingled with trust funds, are NOT subject to the California Real Estate Law or the DRE Commissioner’s Regulations. Non-trust funds include real estate commissions, general operating funds, and rents and deposits from broker-owned real estate.

It should be noted, however, that under certain circumstances the Department of Real Estate does have the jurisdiction to look into transactions involving non-trust funds.

While checks are universally accepted as equivalent to cash in California business transactions, promissory notes are not. Therefore, a broker must be careful not to misrepresent this fact in such a situation, because he will be violating the Real Estate Law if he directly or through implication misrepresents to the broker’s principal/ seller that a purchaser has given cash or a check as an earnest money deposit, when in fact the broker has accepted a non-negotiable promissory note.

California law has held that a post-dated check may be considered the equivalent of a promissory note. Therefore, a broker should not accept a post-dated check from a buyer, since this may result in mischaracterization of the form of earnest money deposit without adequate disclosure to the seller.

http://www.dre.ca.gov/files/pdf/re13.pdf


Trust Fund Handling Requirements

In managing trust fund accounts, it is well to remember this cardinal rule: the account must always hold an amount equal to or greater than the liabilities that are chargeable to the account. The liabilities are the amounts received to be held for the owners, and that must be paid out. Even a temporary imbalance can lead to problems, as we will explore later.

The rules for the handling of trust fund accounts are specified in Article 15 of the Regulations of the Real Estate Commissioner as contained in the California Code of Regulations, title 10 Investment Chapter 6, which can be read in full here:

Regulations of the Real Estate Commissioner

Section 2830 of Article 15 States:

The relationship between a real estate broker and a client for whom the broker holds funds in trust is an agency relationship. As an agent, the broker owes a fiduciary duty to the client regarding the handling of the trust. Any benefit received by the broker relating to the broker’s handling of client funds in trust belongs to the client by law, and the broker must pass that benefit along to the client.

§2830 further states that a broker cannot receive any consideration from anyone but the client as an inducement for the placement of a trustfund account unless permitted in writing by the client. Unlawful inducements include:

1. Assistance with business expenses.

2. Any form of consideration intended for the benefit of the broker, rather than the trust account itself.

3. Compensating balances or benefits in the pricing or fees for the maintenance of a compensating balance account. (A “compensatingbalance” is a balance maintained in an account in a bank or other recognized depository in the name of a real estate broker for thepurpose of paying bank fees on a separate trust fund account.)

4. The time or productive effort of any employee of the bank or other recognized depository for any service unrelated to the trustaccount.

5. Expenditures for food, beverages, and entertainment.

Considerations that may be received without violating the law include:

1. Promotional items with a permanently affixed company logo of the bank or other recognized depository with a value of not morethan ten dollars ($10) each. The item may not have a specific monetary value on its face, or be exchangeable for any other item having a specific monetary value.

2. Education or educational materials exclusively related to the business of trust fund management if continuing education credits arenot provided.

Check Your Understandings 1-1

These Questions are here to give you an idea of how well you understand the material you just read. Write down your answers on a separate sheet of paper. You will find the answers at the end of this chapter.

1. Define trust funds and give two examples each of trust funds and non-trust funds.

2. What is wrong with accepting a post-dated check as an earnest money deposit?

3. What is the “cardinal rule” in managing trust accounts?

https://docs.google.com/a/mckissock.com/file/d/0B4P1NSyMm6okTUY1dHdxdUI5cTQ/edit


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 Section 10145, a broker who has received a buyer’s money deposit and related instructions must take one of the following actions:

1. Give the money to the principal to the transaction;

2. Put it into a neutral escrow depository; OR

3. Put it into the broker’s trust fund account at a bank or other recognized financial institution in the state of California.

A “neutral escrow” means an escrow business conducted by a person licensed under Division 6 of the Financial Code or by a person described elsewhere in that code.

This money MUST BE DEPOSITED with the appropriate account or with the principal within 3 business days following receipt of the funds by the broker or the broker’s salesperson.

All funds deposited by the broker in a trust fund account must be maintained there until disbursed by the broker in accordance with instructions from the person entitled to the funds.

An exception to the 3-day deposit rule occurs when the money is in the form of a check that is to be held uncashed until the offer has been accepted, in accordance with Commissioner’s Regulation 2832, which states the following conditions:

1. the check must not be negotiable by the broker, or the offeror must give the broker written instructions to hold the check untilacceptance of the offer; and

2. the offeree must be informed, before or at the time the offer is presented for acceptance, that the check is being held.

If the offer is later accepted, the broker may continue to hold the check undeposited only if the broker receives written authorization from the offeree to do so.

Otherwise, the check must be placed, not later than three business days after acceptance, into a neutral escrow depository or into the trust fund bank account or into the hands of the offeree if both the offeror and offeree expressly so provide in writing.

There are occasions when a real estate SALESPERSON, rather than his broker, might accept the trust funds on his broker’s behalf. According to §10145, a real estate salesperson who accepts trust funds on behalf of the broker under whom he or she is licensed must immediately deliver the funds to the broker or, if directed to do so by the broker, place the funds into the hands of the broker’s principal or into a neutral escrow depository or deposit the funds into the broker’s trust fund bank account.

A sales person can ONLY accept such funds for the salesperson’s OWN broker, not another broker, and must immediately deliver the funds to the broker. A salesperson IS authorized to take such actions on the behalf of and at the direction of the broker under whom he or she is licensed.

Identifying the Owner(S) of the Funds

A broker must be able to identify who owns the trust funds and who is entitled to receive them, since these funds can be disposed of only upon the authorization of that person. The person entitled to the funds may or may not be the person who originally gave the funds to the broker or the salesperson.

Earnest Money

Earnest money belongs to the buyer until the offer becomes a contract. Then it is no longer the buyer’s money -- it belongs jointly to the buyer and seller. If the deal falls through, cancellation fees may be deducted from the earnest money before the funds are disbursed, and then buyer and seller must agree on the disposition of the funds.

Brokers who are in the property management business should maintain a security deposit escrow account and a rental escrow account for each entity for whom they hold funds in trust. If they also engage in sales, they need a third account for earnest money.


Security Deposits

Security deposits are tenant’s funds unless and until the landlord becomes entitled to receive all or part of them under the terms of the lease. A continuous ledger of all security deposits should be maintained, including the tenant’s name, property address, owner’s name, deposit amount, and date of deposit. The total amount reflected in the ledger should balance with the security deposit escrow account bank statement.

Rents

Rents collected by a manager of property owned by any other person belong to that owner and must be deposited in a trust account. To do otherwise constitutes commingling. Payment to the property owner as proceeds, to the real estate management company for their fees, and possibly invoices for maintenance (if so specified in the contract), will be made from this account. As with the security deposit escrow account, the rental escrow account should reconcile favorably with the monies on deposit.

In some instances the party entitled to the funds will change upon the occurrence of certain events in the transaction.

For example, in a transaction involving an offer to buy or lease, the party entitled to the funds received from the offeror (prospective buyer or lessor) will depend upon whether or not the offer has been accepted by the offeree (seller or landlord).

Prior to the acceptance of the offer, the funds received from the offeror belong to the offeror and must be handled according to the offeror’s instructions. If the funds are deposited in a trust fund bank account, they must be maintained there for the benefit of the offeror until acceptance of the offer.

Or, as previously discussed, if the offeror wishes, the broker may hold the check uncashed as long as the offeror gives written instructions to the broker to do so and the offeree is informed before or at the time the offer is presented for acceptance that the check is being held.

After acceptance of the offer, the funds must be handled according to instructions from the offeror and the offeree as follows:

A check held uncashed before acceptance of the offer may continue to be held uncashed after acceptance only upon written authorization from the offeree. [Commissioner’s Regulation 2832(d)]

The offeror’s check may be given to the offeree only if the offeror and offeree expressly so provide in writing. [Commissioner’s Regulation 2832(d)]

No part of an offeror’s purchase money deposit may be refunded by an agent or subagent of the seller without the express written permission of the offeree.

Advance Fee Trust Funds

§1046 describes the situation where a broker collects an advance fee from a principal. Advance fees are trust funds and not the funds of theagent, and the broker must deposit any advance fee collected in a trust account with a bank or other recognized depository.

The broker may make withdrawals from this account only to cover an expenditure made for the benefit of the principal or five days after mailing to each principal a verified copy of accountings made at the end of each calendar quarter and when the contract has been completely performed by the licensee.

The broker must, at the request of the commissioner, provide the commissioner with authorization to examine the financial records of the trust account and provide a verified copy of any accounting to the commissioner.

It is a violation of Sections 506 and 506a of the Penal Code for a broker to fail to handle advance fees actually paid by or on behalf of any principal in accordance with the preceding paragraph. As such, the principal may recover treble damages for amounts misapplied and is entitled to reasonable attorney’s fees in any action brought to recover these amounts.




1. State the three options (and the one exception) available to the broker when receiving trust funds from a client.

2. Describe who owns earnest money deposits, security deposits, rents collected for an owner, and advance fees.

3. What are the requirements for handling advance fee trust funds, and what are the penalties under the Penal Code for mishandlingthem?

General Requirements

Trust Account Required Features

As previously explained, trust funds received by a licensee that are not forwarded directly to the broker’s principal or to a neutral escrow depository or for which the broker does not have authorization to hold uncashed must be deposited to the broker’s trust fund bank account. All funds deposited by the broker in a trust fund account must 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)

Under §10145, as well as the Commissioner’s Regulation 2832, a trust account must meet the following requirements:

1. be designated as a trust account in the name of the broker as trustee;

2. be maintained with a bank or recognized depository located in California;

3. not be an interest-bearing account for which prior written notice can, by law or regulation, be required by the financial institutionas a condition to withdrawal (except as noted in the discussion below of “Interest-Bearing Accounts”)

Out-of State Accounts

An out-of-state trust account is permitted only if the FDIC insures the account, and the account is used only to service specific first loans; and the investor or note owner is any one of the following:

1. The Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan MortgageCorporation, the Federal Housing Administration, or the United States Department of Veterans Affairs.

2. A bank, bank holding company, trust company, savings bank or savings and loan association, savings bank or savings association holding company, credit union, industrial bank or industrial loan company, or insurance company doing business under theauthority of, and in accordance with, the laws of California, another state, or the United States, as evidenced by a license, certificate, or charter issued by the United States or a state, district, territory, or commonwealth of the United States.

3. Trustees of a pension, profit-sharing, or welfare fund, if the pension, profit-sharing, or welfare fund has a net worth of not less thanfifteen million dollars ($15,000,000).

4. A corporation with outstanding securities registered under Section 12 of the Securities Exchange Act of 1934 or a wholly owned subsidiary of that corporation.

5. A syndication or other combination of any of the entities specified in the previous subparagraphs that is organized to purchase thepromissory note.

6. The California Housing Finance Agency or a local housing finance agency organized under the Health and Safety Code.

7. A licensed residential mortgage lender or servicer acting under the authority of that license.

A licensed real estate broker selling all or part of the loan, note, or contract to a lender or purchaser specified in the foregoing subparagraphs.

A real estate broker who deposits funds held in trust in an out-of-state depository institution must make available the books, records, and files pertaining to the trust accounts to the commissioner or the commissioner’s representatives or pay the reasonable expenses for travel and lodging incurred by the commissioner or the commissioner’s representatives in order to conduct an examination at an out-of-state location.


Deposits

Broker and Salesperson Requirements

A real estate broker acting as a principal pursuant to Section 10131.1 (“engages as a principal in the business of making loans or buying from, selling to, or exchanging with the public, real property sales contracts or promissory notes [eight or more per year]”) must place all funds received from others for the purchase of real property sales contracts or promissory notes secured directly or collaterally by liens on real property in a neutral escrow depository unless delivery of the contract or note is made simultaneously with the receipt of the purchase funds.

A real estate salesperson who accepts trust funds from others on behalf of the broker under whom he or she is licensed must immediately deliver the funds to the broker or, if so directed by the broker, deliver the funds into the custody of the broker’s principal or a neutral escrow depository, or deposit the funds into the broker’s trust fund account.

Trust Account Withdrawals

Section 2832.1 requires the broker to obtain the written consent of every principal who is an owner of the funds in the account prior to each disbursement if a disbursement will reduce the balance of funds in the account to an amount less than the existing aggregate trust fund liability of the broker to all owners of the funds.

Participants to a transaction may make a written agreement to disburse funds held in trust at any time. Such agreements must be signed and dated by both parties and specify how and to whom the funds may be disbursed.

A withdrawal may ONLY be made from a trust account upon the signature of one of the following parties:

1. The broker in whose name the account is maintained;

2. A specifically designated broker-officer if the account is in the name of a corporate broker;

3. A salesperson licensed to the broker, only with specific written authorization by the broker; or

4. An unlicensed employee of the broker covered by a fidelity bond (that must be equal to at LEAST the maximum amount of trustfunds to which that employee has access at any time), if this is specifically authorized in writing by the broker who is a signatory ofthe trust account.

Please note that there is NO situation in which a person from categories 3 and 4 might make withdrawals from a broker’s trust fund and by doing so, RELIEVE an individual broker (or the broker- officer of a corporate broker licensee) from the responsibility or liability of this action. All regulations setting forth the broker’s responsibility in handling trust funds in the broker’s custody would still apply to this situation, making the broker the responsible party.

Withdrawals may be made from the trust fund account of a corporate broker only upon the signature of:

1. An officer through whom the corporation is licensed; or

2. One of the persons enumerated in paragraph (1), (2) or (3) above, provided that specific authorization in writing is given by theofficer through whom the corporation is licensed and that the officer is an authorized signatory of the trust fund account.

3. The individual broker or broker-officer of a corporate broker licensee always remains responsible and liable for the properhandling of trust funds in the broker’s custody.

Exceptions to the disbursement rule may arise in the following conditions:

1. No contract: if there is no contract, but only an offer, then there is no agreement to cancel. The broker who received the funds isallowed to return them to the party who provided them.

2. Foreclosure: if the seller is foreclosed upon before closing, then the seller is typically stripped of all rights and interests in theproperty except the right of redemption. Thus, the seller’s signature on a release is worthless, and the broker holding the funds canreturn them to the party who provided them.

3. Dealing with U. S. agencies: federal government agencies, such as FHA, VA, and HUD, are not bound by state laws. Therefore, if oneof these federal entities feels that the buyer has defaulted, it may demand the funds as forfeited. The California broker must complywith the demand.




1. Please state the three basic requirements that a trust fund must meet.

2. State the general conditions under which an out-of-state trust account is permitted.

3. Describe the requirements and regulations for making withdrawals from trust accounts.

Interest-Bearing Trust Accounts

A trust fund bank account normally may NOT be interest-bearing. A broker may, however, at the request of the owner of trust funds, or of the principals to a transaction or series of transactions from whom the broker has received trust funds, deposit the funds into an interest-bearing account in a bank or savings and loan association if all of the following requirements of Business and Professions Code Section 10145(d) are met:

1. The account is in the name of the broker as trustee for a specified beneficiary or specified principal of a transaction or series oftransactions.

2. All of the funds in the account are covered by insurance provided by an agency of the federal government.

3. The funds in the account are kept separate, distinct, and apart from funds belonging to the broker or to any other person for whomthe broker holds funds in trust.

4. The broker discloses the following information to the person from whom the trust funds are received and to any beneficiary whoseidentity is known to the broker at the time of establishing the account:

» the nature of the account;

» how the interest will be calculated and paid under various circumstances;

» whether service charges will be paid to the depository and by whom; and

» possible notice requirements or penalties for withdrawal of funds from the account.

No interest earned on funds in the account may benefit directly or indirectly the broker or any person licensed to the broker, even if the funds’ owners would permit such an arrangement.

In an executory sale, lease, or loan transaction in which the broker accepts funds in trust to be applied to the transaction, the parties to the contract must specify in the contract or by collateral written agreement the person to whom interest earned on the funds is to be paid or credited.

The broker is under no obligation to place trust funds into an interest-bearing account unless requested to do so and unless all of the conditions described above are met, nor, in any event, if he or she advises the party making the request that the funds will not be placed in an interest-bearing account.

The broker must maintain a separate record of the receipt and disposition of all funds, including any interest earned on the funds.

At the request of the commissioner, a broker must furnish to the commissioner an authorization to examine the financial records of those trust fund accounts maintained in a financial institution.

The only other situation where a real estate broker is allowed to deposit trust funds into an interest-bearing account occurs when the broker is acting as an agent for a financial institution which is the beneficiary of a loan. In this case the broker may, following Commissioner’s Regulation 2830.1, deposit and maintain funds received from or for the account of a borrower into an interest-bearing trust account in a bank or savings and loan association in order to pay interest on an impound account to the borrower in accordance with Section 2954.8 of the Civil Code, as long as the following requirements are met:

1. The funds received are for the future payment of property taxes, assessments or insurance relating to a property containing a one-to-four family residence.

2. The account is in the name of the broker as trustee.


3. All of the funds in the account are covered by insurance provided by an agency of the federal government.

4. All of the funds in the account are funds held in trust by the broker for others.

5. The broker discloses to the borrower how interest will be calculated and paid.

6. No interest earned on the trust funds directly or indirectly benefits the broker or any person licensed to the broker.



1. In the case that an interest-bearing trust fund is requested and allowed, what are the requirements for how the fund is set up andused?

Unit Review

TRUST FUNDS VS. NON-TRUST FUNDS

Trust funds—things of value belonging to others, received by the broker; cash, check payable to broker or escrow company,personal note, auto pink slip

Non-trust funds—operating funds, commissions, rents and deposits belonging to broker

Note: non-negotiable promissory notes and post-dated checks are not considered cash equivalents for earnest money deposits in California

TRUST FUND HANDLING REQUIREMENTS

• Cardinal rule: trust account must always hold amount equal to or greater than liabilities chargeable to the account; even temporaryimbalance is not allowed

• Broker owes fiduciary duties to client regarding trust funds; any benefit belongs to the client

• Broker cannot receive a consideration for placing a trust fund account unless permitted by the client in writing

• Broker receiving trust funds must: give the funds to the principal, put them in a neutral escrow depository, or put them in the broker’s trust fund account within 3 business days following receipt

• Funds deposited in trust fund account must be left until disbursed according to instructions from the owner

• 3-day rule does not apply if check is non- negotiable by broker, there are instructions to hold it, and the offeree is informed; if held until offer is excepted, check must be deposited within 3 business after acceptance unless written instructions to the contrary

• Salesperson receiving trust funds for his/her own broker must deliver to the broker immediately or place them as instructed by the broker

Identifying the Owner(s) of the Funds

• Broker must identify who owns trust funds and who is entitled to receive them.

• Earnest money belongs to buyer until offer accepted; to buyer and seller after offer becomes contract; seller at closing. Buyer andseller must agree on disbursement; after acceptance, offeror’s purchase money deposit may not be refunded without permission of the offeree.

• Security deposits belong to tenant until transferred to landlord by lease terms.

• Rents belong to the property owner.


Advance Fee Trust Funds

Advance fees belong to the principal; broker may make withdrawals and payments only for the benefit of the principal or with notice when the contract is completely performed; broker must make trust account records available for inspection by Commissioner; principal may recover triple damages plus attorney’s fees if not so handled.

GENERAL TRUST FUND ACCOUNT REQUIREMENTS

Trust Account Required Features

• Designated as trust account in broker’s name, broker the trustee

• Maintained in a bank or recognized depository in California

• Not interest-bearing if prior written notice to financial institution required for withdrawals

Out-of-State accounts

• Allowed if FDIC-insured and used to service certain first loans and investor or note owner is

» FNMA, GNMA, FHLMC, FHA, VA

» A financial institution licensed, chartered, or certified by California, another state, or the US

» Trustee of a pension, profit-sharing, or welfare fund of at least $15 million

» A corporation with registered securities

» The California Housing Finance Agency or other authorized housing finance agency

» A licensed residential mortgage lender or servicer

» A licensed real estate broker selling a note, loan or contract to any of the foregoing.

• Books and records for out-of-state account must be available to the commissioner or broker must pay expenses for commissioner’s out-of-state examination.

Deposits

• Trust funds not forwarded to principal or deposited in neutral escrow depository or held uncashed by authorization must be deposited in the broker’s trust fund account andmaintained until disbursed according to instructions.

• Broker acting as a principal must place funds received for purchase of real property or notes secured by real property in a neutralescrow depository unless the contract or note is delivered simultaneously with the purchase funds.

• Salesperson acting for broker must immediately deliver trust funds received to the broker or, at the broker’s direction, to the principal, a neutral depository, or the broker’s trust account.

Trust Account Withdrawals

• Broker must have written consent of all fund owners before making a disbursement that reduces the fund balance to less than the broker’s liability to all owners.

• Transaction principals may agree in writing at any time to disburse funds from the trust account; agreement must be signed and dated and specify how and to whom disbursement is to be made.

• The only parties who can make a withdrawal, by signature, from a trust account:

» Broker whose name is on the account

» A designated broker-officer for an account in the name of a corporate broker

» An authorized salesperson licensed to the broker

» An authorized unlicensed employee of the signatory broker if bonded for the full amount to which the employee has access

• The broker whose name is on the account remains responsible for the handling of the trust funds, no matter who makes a withdrawal.

• Exceptions to disbursement rule requiring consent of all fund owners: no contract—broker may return to offeror; foreclosure before closing—broker may return funds to offeror; U.S. agency—may demand funds as forfeited.


Interest Bearing Accounts

• Trust funds may be placed in an interest-bearing account if:

» Owner of funds or the principals request it

» Broker’s name is on the account as trustee for specified beneficiary

» All funds federally insured

» Interest does not benefit the broker

» Principals specify to whom interest is paid

» Broker discloses who will pay service charges, how interest will be calculated and paid, notice requirements, withdrawalpenalties

» Broker includes interest in his/her separate record of receipt and disposition of funds

» Broker authorizes commissioner to examine the financial records of the account

• Trust funds may also be placed in an interest- bearing account if:

» Broker is acting for a financial institution as beneficiary of a loan

» Funds received are for future payments relating to a 1-4 family residence

» Broker is trustee

» Funds are federally insured

» Only trust funds are in the account

» Broker discloses to borrower how interest is calculated and paid

» Broker receives no benefit from interest

Chapter 1 Check Your Understanding Answers

Check Your Understanding Answers 1-1

1. Define trust funds and give two examples each of trust funds and non-trust funds.

Trust funds are things of value given to the broker to hold for the benefit of another, the client. The broker has fiduciaryresponsibilities and must handle the funds according to the laws regulating trust fund handling. Non-trust funds are any otherfunds, such as those belonging to the broker or the firm.

Examples of trust funds: cash, purchase deposit check, security deposit, rent collected for a managed property not owned by thebroker.

Examples of non-trust funds: company operating funds, broker’s personal funds.

2. What is wrong with accepting a post-dated check as an earnest money deposit?

The law considers it the equivalent of a promissory note, which is not acceptable as a cash equivalent for an earnest money deposit. Misrepresenting it as a cash or check deposit violates the license law.

3. What is the “cardinal rule” in managing trust accounts?

The account must always hold an amount at least equal to the total liabilities chargeable to the account.



1. State the three options (and the one exception) available to the broker when receiving trust funds from a client.

Within 3 days: give the money to the principal, deposit it in a neutral depository, or deposit it in the broker’s trust account. Ifinstructed to hold the deposit uncashed pending acceptance of an offer, and if the check is not negotiable by the broker and theofferee is informed, the broker may hold it until acceptance and then, within 3 days, do one of the three things mentioned.

2. Describe who owns earnest money deposits, security deposits, rents collected for an owner, and advance fees.

Rents are owned by the property owner and may be disbursed only for the benefit of the owner.

Security deposits are owned by the tenant unless the terms of the lease convey them to the landlord.

Earnest money deposits are owned by the buyer until an offer becomes a contract; then by the buyer and seller until the contract isexecuted; then to the seller unless the terms of the contract direct otherwise.

Advance fees belong to the principal who contributes them.

3. What are the requirements for handling advance fee trust funds, and what are the penalties under the Penal Code formishandling them?

The broker can make withdrawals only for the benefit of the principal under the terms of the contract to which the funds pertain, or five days after mailing a verified quarterly accounting statement to the principal, and when the contract has been completelyperformed. The broker must authorize the commissioner to examine the financial records of the account and provide a verifiedcopy of any accounting to the commissioner if requested. Failure to follow these rules makes the broker liable under the Penal Codefor triple damages and attorneys’ fees.


1. State the three basic requirements that a trust fund must meet.

The commissioner’s regulations require a trust account to be:

• Designated as a trust account in the broker’s name

• Maintained in a bank or depository in California

• Be non-interest-bearing unless there are no notification requirements for withdrawals

2. State the general conditions under which an out-of-state trust account is permitted.

• Must be FDIC-insured

• Must be used only to service specified first loans

• The investor or note-owner must be one of a specified group of entities

3. Describe the requirements and regulations for making withdrawals from trust accounts.

• All principals who own account funds must give written permission if the withdrawal will reduce the balance below the amount of the total liabilities of the account.

• Agreements among participants to allow withdrawals must specify how and to whom funds may be disbursed, and be signed and dated by all parties.

• Only the broker who is trustee of the account, an authorized licensee, or a bonded and authorized non-employee of the broker maysign for a withdrawal.

• The broker-trustee is responsible for the funds in the account, regardless of who makes the withdrawal.



1. In the case that an interest-bearing trust fund is requested and allowed, what are the requirements for how the fund is set up andused?

The account must:

• Be in the name of the broker as trustee for a specified beneficiary

• Be fully insured by a federal agency

• Keep broker funds and funds belonging to others apart from the funds of the beneficiary

The principals must:

• Specify in writing to whom interest will be paid

The broker must:

Disclose the details of the account to giver and the beneficiary of the funds

Not benefit from the interest

Maintain separate records of receipt and disposition of all funds, including interest

Authorize the commissioner to examine the books

Chapter 2: Trust Fund Integrity and Accounting

Objectives

1. Describe trust fund liability and the importance of maintaining trust account integrity.

2. Define commingling and related violations of trust fund requirements.

3. Describe procedures for maintaining trust account records.

Contents

• Trust Fund Liability

» Maintaining Trust Account Integrity

• Commingling And Conversion

• Accounting Records

» General Requirements

» Record Keeping Systems

» Recording Process

» Reconciliation of Accounting Records

Trust Fund Liability Trust fund liability arises when funds are received from or for the benefit of a principal. The aggregate trust fund liability at any one time for a trust account with multiple beneficiaries is equal to the total positive balances due to all beneficiaries of the account at the time. Note that beneficiary accounts with negative balances are not deducted from other accounts when calculating the aggregate trust fund liability.

Funds on deposit in the trust account must always equal the broker’s aggregate trust fund liability. If the trust account balance is less than the total liability, a trust fund shortage results. Such a shortage is in violation of Commissioner’s Regulation 2832.1, which states that a real estate broker must obtain the written consent of every principal who is an owner of the funds in the account prior to each disbursement if a


disbursement will reduce the balance of the funds in the account to an amount less than the existing aggregate trust fund liability of the broker to all owners of the funds.

Conversely, if the trust account balance is greater than the total liability, there is a trust fund overage and the broker may be in violation of Business and Professions Code Section 10176(e) for commingling.

Maintaining Trust Account Integrity

A trust fund discrepancy of any kind is a serious violation of the Real Estate Law. Many real estate licenses have been revoked after a DRE audit disclosed a trust account shortage. To ensure that the balance of the trust account always equals the trust fund liabilities, a broker should implement the following procedures:

1. Deposit intact and in a timely manner to the trust account all funds that are not forwarded to escrow or to the funds’ owner(s) orwhich are not held uncashed as authorized. This practice lessens the risk of the funds being lost, misplaced, or otherwise not deposited to the trust account.

2. A licensee is accountable for all trust funds received whether or not they are deposited. DRE auditors have seen numerous caseswhere trust funds received were properly recorded on the books but were never deposited to the trust account.

3. Maintain adequate supporting papers for any disbursement from the trust account. Record the disbursement accurately in both theBank Account Record and the Separate Beneficiary Record.

The broker must be able to account for all disbursements of trust funds. Any unidentified disbursement will cause a shortage.

1. Disburse funds from a beneficiary’s account only when the disbursement will not result in a negative or deficit balance (negativeaccountability) in the account.

2. Many trust fund shortages are caused by disbursements to a beneficiary in excess of funds received from or for account of thatbeneficiary. The excess disbursements are, in effect, paid out of funds belonging to other beneficiaries. A shortage occurs becausethe balance of the trust fund bank account, even if it is a positive balance, is less than the broker’s liability to the other beneficiaries.

3. Ensure that a check deposited to the trust fund account has cleared before disbursing funds against that check.

4. This applies, for example, when a broker who has deposited an earnest money check for a purchase transaction has to return thefunds to the buyer because the offer is rejected by the seller. A trust fund shortage will result if the broker issues the buyer a trustaccount check and the buyer’s deposit check bounces or for some reason fails to clear the bank.

5. Keep accurate, current and complete records of the trust account and the separate record for each beneficiary. These records areessential to ensure that disbursements are correct.

6. Reconcile, on a monthly basis, the cash record with the bank statement and with the separate record for each beneficiary ortransaction.

In summary, to maintain the integrity of the trust fund bank account, a broker must ensure that:

• personal or general operating funds are not commingled with trust funds;

• the balance of the trust fund account is equal to the broker’s trust fund liability to all owners of the funds; and

• the trust fund records are in an acceptable form and are current, complete and accurate.

Don’t • fail to properly account, within a reasonable time, for money coming into the broker’s possession that belongs to others.

• fail to properly remit, within a reasonable time, money that belongs to others.

• commingle money belonging to others with the broker’s funds.

• fail to deposit money belonging to others in a separate federally insured account in a California or other approved financial institution.

• fail to account, at all times, for funds being held for others.

• fail to keep financial records of funds belonging to others, including to whom the money belongs, date deposited, date withdrawn,and other pertinent information, for at least three years.


Do • Deposit and account, at all times, for funds belonging to others in one or more separate federally insured accounts in a California or

other approved financial institution.

• Be a customer of the institution with authority to deposit and withdraw funds and to write checks on the account.

• Ensure that salespersons who receive funds in trust pay over the funds to the broker immediately upon receipt.

• Deposit funds received in trust unless relieved of this responsibility by written instruction.

• Deposit funds received in cash immediately.

• Deposit funds received by check at the time specified by contract or law.

• Be responsible for all trust funds when currently providing services under contract for sale, lease or management to an owner.

• Promptly account for any trust funds held.

• Promptly disburse trust funds to the appropriate party within 7 days of completion of the relevant transaction.

• Disburse funds only when there is

» a written agreement signed by all parties, or

» according to some other lawful procedure.



1. Define trust fund liability, trust fund shortage, and trust fund overage.

2. Summarize the six steps for maintaining trust account integrity.

Commingling and Conversion

A general definition of commingling of funds is a broker’s depositing of client funds in the broker’s own business or personal account, or depositing personal funds in the client’s account. It is not usually considered commingling if a broker keeps a minimum amount of his or her own money in a trust account to keep the account open, or holds an uncashed check until acceptance of an offer when so directed by the buyer or after acceptance when so directed by the seller. Commingling is strictly prohibited by the Real Estate Law. It is grounds for the revocation or suspension of a real estate license pursuant to Business and Professions Code Section 10176(e).

A general definition of conversion is the appropriation of property belonging to another, namely, a broker’s use of client funds for the broker’s own purposes. For example, if a broker spends the principal’s deposit (without the principal’s authorization), he has not, technically, commingled the funds but instead has converted those funds (into his own). While both commingling and conversion are illegal, conversion is a much more serious violation than commingling, and has heavy criminal penalties.

It is not appropriate to “borrow” from an escrow account to pay business or personal expenses, even if related to services performed for the client, unless the written agreement allows it. Likewise, it is not appropriate to apply escrow funds belonging to one client to expenses incurred by another client.

Conducting personal business through the trust account is strictly prohibited and is a violation of the Real Estate Law.

Commingling occurs when:

1. Personal or company funds are deposited into the trust fund bank account.

Except for what is provided in Business and Professions Code Section 10176(e) and Section 2835 of the Commissioner’sRegulations as noted below, this is a violation of the law even if separate records are kept.

2. Trust funds are deposited into the licensee’s general or personal bank account rather than into the trust fund account.


In this case the violation is not only commingling, but also handling trust funds contrary to Business and Professions Code Section 10145. It is also grounds for suspension or revocation of a license under Business and Professions Code Section 10177(d).

3. Commissions, fees, or other income earned by the broker and collectible from the trust account are left in the trust account formore than 25 days from the date they were earned.

A common example of commingling is depositing rents and security deposits on broker- owned properties into the trust account.As these funds relate to the broker’s properties, they are not trust funds and, therefore, may not be deposited into the trust fundbank account.

Likewise, the broker may not make mortgage payments and other payments on broker-owned properties from the trust accounteven if the broker reimburses the account for such payments.

NOT Commingling

The Business and Professions Code Section 10176(e) specifies certain situations that are NOT considered to be commingling. These are:

1. The deposit into a trust account of funds, not to exceed $200, to pay service charges or fees levied or assessed against the account by the bank or financial institution where the account is maintained.

2. The deposit into a trust account of funds belonging partly to the broker’s principal and partly to the broker when it is notreasonably practicable to separate these funds, as long as the broker’s part is disbursed not later than 25 days after the deposit andthere is no dispute as to the broker’s portion of the funds. If there is a dispute, the disputed portion may not be withdrawn until thedispute is settled.

3. The deposit into a trust account of broker- owned funds in connection with mortgage loan activities as defined in the Business andProfessions Code or when making, collecting payments on, or servicing a loan which is subject to the provisions of Section 10240 ofthe Business and Professions Code provided:

» The broker meets the criteria of Section 10232 of the Business and Professions Code.

» All broker-owned funds in the account are identified at all times in a separate record which is distinct from any separate recordmaintained for a beneficiary.

» All broker-owned funds are disbursed from the account not later than 25 days after their deposit.

» The funds are deposited and maintained in compliance with the provisions of Section 10145 of the Business and Professions Codeand the Commissioner’s Regulations.

To summarize, a real estate broker’s personal funds may be in the trust account in the following two specific instances:

1. Up to $200 to cover checking account service fees and other bank charges such as check printing charges and service fees onreturned checks. Trust funds may not be used to pay for these expenses. (The preferred practice, however, is for the broker to havethe bank debit his/her own personal account for any trust account fees and charges.)

2. Commissions, fees, and other income earned by a broker and collectible from trust funds may remain in the trust account for aperiod not to exceed 25 days. For instance, a property management company may find it impractical to collect its management feeevery time a rent check is received and deposited to the trust account. As long as the broker disburses the fee from the trustaccount within 25 days after deposit there is no commingling violation.

Note, however, that income earned may not be taken from trust funds received before depositing such funds into the trust bankaccount. Also, under no circumstances may the broker pay personal obligations from the trust fund bank account even if suchpayments are a draw against commissions or other income. The broker must issue a trust account check to himself/herself for thetotal amount of the income earned, adequately documenting such payment, and then pay personal obligations from the proceeds ofthat check.



1. Define commingling and conversion and give examples of each.

2. Describe the three situations that are specifically stated in the Code as NOT being commingling


Accounting Records

In the course of doing business, a real estate agency receives, holds, and disburses money from, for, and to various parties. This money may be received in connection with such activities as:

• property management contracts

• partnerships

• limited liability companies

• syndications

• rent or lease contracts

• advance fee contracts

• guest deposits for short term rentals

• escrow contracts

• collection contracts

• earnest money contracts

• future investment

Regardless of the purpose, the law requires that funds held for clients and others outside the brokerage be retained in special, separate accounts designated as trust accounts.

A broker who receives and deposits money it into an escrow account becomes a fiduciary and must protect the funds in the manner described in the contractual agreement between the broker and the owner of the funds. If there is no contractual agreement, state regulations control the broker’s use of the funds.

The broker must keep accurate records of the funds as prescribed by law. The “cardinal rule” of accounting for trust accounts mandates that, at any given point in time, a trust account must always hold an amount equal to or greater than the liabilities chargeable to that account. This means that the reconciled escrow bank account cash balance must equal the escrow account liabilities found in the contract.


The maintenance of adequate records to account for trust funds received and disbursed is one of the broker’s fiduciary duties to the client. Records are required whether the funds are deposited to the trust fund bank account, sent to escrow, held uncashed, or released to the owner of the funds. These records:

• provide a basis for the broker’s accounting for clients.

• state the amount the broker owes the account beneficiaries at any one time (account liability).

• provide proof that the account is in balance or has an imbalance. If a DRE audit shows a shortage or overage in the account withwhich the broker disagrees, the broker’s only recourse is to provide documentation to support his or her position.

• guarantee that funds in the trust account will be insured up to the maximum FDIC insurance coverage.

The general requirements governing the handling of trust funds are contained in Business and Professions Code Section 10145. Details about accounting systems and specific requirements are given in the following Commissioner’s Regulations:

• Regulation 2831 - Maintaining columnar records of trust funds received.

• Regulation 2831.1 - Maintaining separate records for each beneficiary.

• Regulation 2831.2 - Performing monthly reconciliation of trust fund accounts.

• Regulation 2834 - Allowing unlicensed and unbonded signatories on a trust account.


Record-Keeping Systems

Two types of accounting records are acceptable for trust funds:

• columnar records in the formats prescribed by Commissioner’s Regulations 2831 and 2831.1

• records other than columnar that are in accordance with generally accepted accounting practices (GAAP) which include details specified in Section 2831 (a) of the Regulations and are in a format that will readily enable tracing and reconciliation in accordancewith Section 2831.2.

Whichever system is used, the system must include the following information:

• all trust fund receipts and disbursements, with pertinent details, presented in chronological sequence;

• the balance of the trust fund account, based on recorded transactions;

• all receipts and disbursements affecting each beneficiary’s balance, presented in chronological sequence; and

• the balance owing to each beneficiary or for each transaction.

Records may be manually produced or computer-generated. A real estate operation will choose the type and form of records that are most suitable depending on factors such as the nature of the business, the number of clients, the volume of transactions, and the types of reports needed. For example, a broker handling a small number of transactions may find manual recording on columnar records to be adequate, while a large property management operation will probably find a computerized system more practical.

Columnar Records

A broker may decide to use the columnar records prescribed by Commissioner’s Regulations 2831 and 2831.1. The records required will depend on whether the trust funds received are deposited to the trust account or forwarded to an escrow depository or to the owner of the funds.

These records are:

1. Columnar Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account (DRE form RE 4522);

2. Separate Record for Each Beneficiary or Transaction (DRE form RE 4523); and

3. Record of All Trust Funds Received - Not Placed in Broker’s Trust Account (DRE form RE 4524).

The first two records are required when trust funds are received and deposited to the trust fund bank account. The third record is required when trust funds received are not deposited to the trust account, but are instead forwarded to the authorized person(s).

If the trust fund account involves clients’ funds from rental properties managed by the broker, the Separate Record for Each Property Managed (DRE form RE 4525) may be used in lieu of the Separate Record for Each Beneficiary or Transaction.

A broker who has an escrow division pursuant to Financial Code Section 17006(a)(4) must keep the above-mentioned records for escrow funds. (Commissioner’s Regulation 2951)

Record-Keeping Systems: Trust Fund Bank Account

Record of All Trust Funds Received and Paid Out - Trust Fund Bank Account

This record (Form RE 4522 or its equivalent) is used to journalize trust funds deposited to and disbursed from the trust fund bank account. At a minimum, it must show the following information in columnar form:

• date funds were received

• name of payee or payor

• amount received

• date of deposit

• amount paid out

Page 19 California 3-Hour Trust Fund Handling Course

• check number and date

• daily balance of the trust account.

All transactions affecting the trust account are entered in chronological order on this record, regardless of payee, payor or beneficiary.

If there is more than one trust fund bank account, a different columnar record must be maintained for each account, pursuant to Commissioner’s Regulation 2831.

Here is a simplified version of a form that meets the requirements.

Columnar Record of All Trust Funds Received and Paid Out

Trust Fund Bank Account

Click here to view or download Form RE 4522.

Record-Keeping Systems: Separate Records Separate Record for Each Beneficiary or Transaction

This record (Form RE 4523 or its equivalent) is maintained to account for funds received from or for the account of each beneficiary, or for each transaction, and deposited to the trust account. With this record, the broker can ascertain the funds owed to each beneficiary or for each transaction.

The record must show the following in chronological order:

• date of deposit

• amount of deposit

• name of payee or payor

• check number

• date and amount

• balance of the individual account after posting transactions on any date.

https://docs.google.com/file/d/0B4P1NSyMm6okVlVtMEl0bzhuX0E/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/RE4522.pdf



A separate record must be maintained for each beneficiary or transaction from whom the broker received funds that were deposited to the trust fund bank account. If the broker has more than one trust account, each account must have its own set of beneficiary records so that they can be reconciled with the individual trust fund bank account record required by Commissioner’s Regulation 2831.2.


Separate Record for Each beneficiary or Transaction For Client’s funds placed in trust fund bank account


Record-Keeping Systems: Not in Trust Account Record of All Trust Funds Received - Not Placed in Broker’s Trust Account

This record (Form RE 4524 or its equivalent) is used to keep track of funds received and not deposited to a trust fund bank account. In this situation, the broker is handling the funds and must keep records of the funds. Examples of funds that might be held in this way include:

• earnest money deposits forwarded to escrow

• rents forwarded to landlords

• borrowers’ payments forwarded to lenders.

https://docs.google.com/file/d/0B4P1NSyMm6okUEdUR0gyYTNybTg/edit



• This record must show:

• the date funds were received

• the form of payment (check, note, etc.)

• amount received

• description of property

• identity of the person to whom funds were forwarded

• date of disposition.

Trust fund receipts are recorded in chronological sequence, while their disposition is recorded in the same line where the corresponding receipt is recorded.


Record of All Trust Funds Received — Not Placed In Brokers Trust Account (Include Notes and Uncashed Checks Taken As Deposits)


The transaction folders brokers usually maintain for each real estate sales transaction showing the receipt and disposition of undeposited checks are not acceptable alternatives to the Record of Trust Funds Received But Not Deposited to the Trust Fund Bank Account.

An exception to this record keeping requirement is provided in Commissioner’s Regulation 2831(e), which states that a broker is not required to keep records of checks made payable to service providers, including but not limited to escrow, credit and appraisal services,

https://docs.google.com/file/d/0B4P1NSyMm6okLVpiUUoxdTZtWFU/edit



when the total amount of such checks for any transaction does not exceed $1,000. However, a broker must retain copies of receipts issued or obtained in connection with the receipt and distribution of such checks for three years and, at the request of the Department or the maker of the checks, account for the receipt and distribution of the checks.

Record-Keeping Systems: Properties Managed Separate Record for Each Property Managed

This record (Form RE 4525 or its equivalent) is similar to, and serves the same purpose as, the Separate Record for Each Beneficiary or Transaction. It does not have to be maintained if a separate record is already used for a property owner’s account. The Separate Record for Each Property Managed is useful when the broker wants to show some detailed information about a specific property being managed.


Separate Record for Each Property Managed


https://docs.google.com/file/d/0B4P1NSyMm6okbl9fZVBzWkk5OU0/edit



Other Accounting Systems

Brokers are allowed to use trust fund records that are not in the columnar form as prescribed by Commissioner’s Regulations 2831 and 2831.1. These records must be in accordance with generally accepted accounting principles and must include detail specified in subdivision 2831 (a) of the Regulations and be in a format that will readily enable tracing and reconciliation in accordance with Section 2831.2. Whether prepared manually or by computer, they must include at least the following:

• A journal to record in chronological sequence the details of all trust fund transactions.

• A cash ledger to show the bank balance as affected by the transactions recorded in the journal. The ledger is posted in the form of debits and credits. (In some cases the cash ledger may be combined with the journal.)

• A beneficiary ledger for each of the beneficiary accounts to show in chronological sequence the transactions affecting each beneficiary’s account, as well as the balance of the account.

To comply with generally accepted accounting principles, there must be one set of journal, cash ledger, and beneficiary ledger for each trust fund bank account.

Journal

A journal is a daily chronological record of trust fund receipts and disbursements. A single journal may be used to record both the receipts and the disbursements, or a separate journal may be used for each. To meet minimum record keeping requirements, a journal must:

1. Record all trust fund transactions in chronological sequence.

2. Contain sufficient information to identify the transaction such as the date, amount received or disbursed, name of or reference to payee or payor, check number or reference to another source document of the transaction, and identification of the beneficiary account affected by the transaction.

3. Correlate with the ledgers. For example, it should show the same figures that are posted, individually or in total, in the cash ledger and in the beneficiary ledgers. The details in the journal must be the basis for posting transactions on the ledgers and arriving at the account balances.

4. Show the total receipts and total disbursements regularly, at least once a month.

The broker must keep copies of all records pertaining to an escrow account, including, but not limited to, deposit slips, books, and statements of accounts.

The standard method of escrow accounting uses a journal, or log, covering all accounts plus separate ledgers for each separate account. Reconciliation is the comparison of records with bank balance statements.

The journal is kept on a cash accounting basis (entries are made when funds are received or paid out) unless beneficiaries demand an accrual basis (entries are made as items become receivable or payable). An entry in a cash accounting system should never be recorded in the journal unless the funds have actually been received or paid out.

Cash Ledger

The cash ledger shows, usually in summary form, the periodic increases and decreases (debits and credits) in the trust fund bank account and the resulting account balance. It can be incorporated into the journal or it can be a separate record, for example a general ledger account. If a separate record is used, the postings must be based on the transactions recorded in the journal. The amounts posted on the ledger must be those shown in the journal.

Beneficiary Ledger

A separate beneficiary ledger must be maintained for each beneficiary or transaction or series of transactions. The beneficiary ledger shows in chronological sequence the details of all receipts and disbursements related to the beneficiary’s account, and the resulting account balance. It reflects the broker’s liability to a particular beneficiary. Entries in all these ledgers must be based on entries recorded in the journal.

The broker opens the ledger record when funds are received from a party or when the broker deposits his or her own funds to pay the expenses of maintaining the account.


The ledger record for each beneficiary must contain the same transactional information as that prescribed for the journal. No ledger may ever be allowed to have a negative cash balance and the sum of all ledger balances must at all times agree with the corresponding cash balance in the journal after each transaction has been posted.

Each beneficiary of an escrow account will have a separate ledger. For a managed property, the owner will have a ledger, each tenant will have a ledger, the seller, and the buyer will have ledgers. There will also be a ledger for any unclaimed property.

To keep a manual record, a broker should set up a system of notebooks to keep the ledgers organized by client name or property address. The notebook should be organized with the journal pages in front of the beneficiary’s ledger and broker’s ledger. When the ledgers are closed, they should be placed in the transaction file for safekeeping for the requisite three-year period.



1. Describe the minimum information requirements for a record-keeping system for trust accounts. What must the system show?

2. Describe the forms used in the columnar system of record-keeping.

3. Describe the main elements of accounting systems other than the columnar system.

Recording Process

Ongoing Daily and Monthly Procedures Keeping complete and accurate trust fund records is easier when specific procedures are regularly followed. The following procedures may be useful in developing a record keeping routine:

1. Record transactions daily in the trust fund bank account and in the separate beneficiary records.

2. Use the same specific source documents consistently as the basis for recording receipts and disbursements.

3. Calculate the account balances on all applicable records at the time entries are made.

4. Reconcile the records monthly to ensure that transactions are properly recorded on both the bank account record and the applicable subsidiary records.

5. Reconcile the trust records to the trust account bank statement on a monthly basis to ensure that the bank’s reported amounts agree with the trust fund records.

6. If more than one trust fund bank account is maintained, keep a different set of properly labeled columnar records (cash record and beneficiary record) for each account.

Since, in principle, the qualifying broker must be prepared to show the business’s accounts to the Commission at any time, the broker needs to scan the books on an ongoing basis. The balance in the journal should equal the sum of the balances in the ledgers, which must equal the balance of the bank account.

Unexplained Trust Account Overages If large amounts of money, or excess amounts, are allowed to accrue in a trust account, the risk of theft and error is increased. Any excesses must be explained.

Trust funds should always be paid out to the rightful owner as soon as possible after the completion of a transaction. Where landlords are out of state, arrangements should be made to transfer any funds owed to the landlord’s bank account. Commissions on sales should be paid into the agency’s general account as soon as settlement has occurred. Disbursements of commissions should be made from the agency’s general business account rather than a trust account.

An unexplained overage is defined as funds in a real estate broker’s trust account which exceed the account’s aggregate trust fund liability and where the broker is unable to determine the ownership of the excess funds.


Unexplained trust account overages are trust funds and must be maintained in the broker’s trust fund account or in a separate trust fund account established to hold such funds. Unexplained trust account overages may not be used to offset or cover shortages that may exist otherwise in the broker’s trust account.

A broker must keep a separate record of unexplained trust account overages including a separate subsidiary ledger to record the potential trust fund liability. Such records must include the date of recording and the date on which such funds became an unexplained trust account overage. A broker holding unexplained trust account overages must perform a monthly reconciliation of such funds in accordance with Commissioner’s Regulation 2831.2.

Reconciliation of Accounting Records

Reconciliation

The trust fund bank account record, the separate beneficiary or transaction record, and the bank statement are all interrelated. Any entry made on the bank account record must have a corresponding entry on a separate beneficiary record. By the same token, any entry or transaction shown on the bank statement must be reflected on the bank account record. This applies to columnar as well as to other types of records.

The accuracy of the records is verified by reconciling them at least once a month. Reconciliation is the process of comparing two or more sets of records to determine whether their balances agree. It discloses whether the records have been completed accurately and compares the broker’s total liability with the reconciled bank balances of all trust accounts. Total liability includes the sum total of all deposits received, pending and being held by the broker at any point in time.

For trust fund record keeping purposes, two reconciliations must be made at the end of each month:

1. reconciliation of the bank account record (RE 4522)

This reconciliation discloses recording errors. If the balance on the bank account record agrees with the bank statement balance as adjusted for outstanding checks, deposits in transit, and other transactions not yet included in the bank statement, it is likely that the balance on the bank account record is correct.

Although this reconciliation is not required by the Real Estate Law or the Commissioner’s Regulations, it is an essential part of any good accounting system.

2. reconciliation of the bank account record (RE 4522) with the separate beneficiary or transaction records (RE 4523).

This reconciliation substantiates that all transactions entered on the bank account record were posted on the separate beneficiary or transaction records. The balance on the bank account record should equal the total of all beneficiary record balances. Any difference should be located and the records corrected to reflect the correct bank and liabilities balances.

This reconciliation is required by Commissioner’s Regulation 2831.2 to be performed monthly except in those months when there is no activity in the trust fund bank account, and that a record of each reconciliation be maintained. The reconciliation record should identify:

• the bank account name and number

• the date of the reconciliation

• the account number or name of the principals or beneficiaries or transactions

• the trust fund liabilities of the broker to each of the principals, beneficiaries or transactions.

Here are some recommendations for how to perform the trust account reconciliations.

1. Before performing the reconciliations, record all transactions up to the cut-off date in both the bank account record and the separate beneficiary or transaction records.

2. Use balances as of the same cut-off date for the two records and the bank statement.

3. For the bank account reconciliation, calculate the adjusted bank balance from the bank statement and from the bank account record. (Brokers commonly err by calculating the adjusted bank balance based solely on the bank statement, ignoring the bank account record. While they may know the correct account balances, they may not realize their records are incomplete or erroneous.)

4. Keep a record of the two reconciliations performed at the end of each month, along with the supporting schedules.

5. Locate any difference between the three sets of accounting records. A difference can be caused by:


» failing to record a transaction

» recording an incorrect figure

» making erroneous calculations in arriving at account balances

» overlooking missing beneficiary records

» bank errors.



1. What daily and monthly procedures should be followed to keep trust fund records accurate?

2. Describe the reconciliation process. What records are compared?

Unit Review Trust Fund Liability

• Aggregate liability at any one time equals the total of all balances due to all beneficiaries at that time; negative balances for any beneficiary are not deducted from other accounts.

• Trust fund shortage--trust account balance is less than total liability; violates regulations.

• Trust fund overage--trust account balance is greater than total liability; may indicate commingling

Maintaining Trust Account Integrity

• Procedures to maintain equality of account balance with liability:

» Make timely deposits

» Maintain supporting documents and forms

» Disburse only when account balance will not be less than liability

» Wait for deposited checks to clear before disbursing against them

» Keep records current and accurate for each beneficiary

» Reconcile cash record, bank statement, and beneficiary records every month

» Keep personal funds out

» Disburse funds only according to written instructions signed by all parties or other lawful procedure

COMMINGLING AND CONVERSION

Commingling—illegal mixing of trust funds with personal or other funds

• Broker or business funds in trust account, or trust funds in business or personal account

• Commissions, fees, or other broker collectible income left in the account after 25 days after deposit.

• Common exceptions—broker money in trust account to pay account charges; uncashed check held by broker until acceptance of offer when so instructed.


Conversion—illegal appropriation of another’s property; using client money for the broker’s own purposes

• Using the trust account to conduct personal business, or “borrowing” from an escrow account to pay personal expenses

• Using funds belonging to one client for the benefit of another client

NOT Commingling

• Up to $200 of broker funds for account maintenance

• Funds jointly owned by broker and principal if ownership is undisputed and broker’s portion not left over 25 days

• Broker-owned funds in connection with mortgage loan and servicing activities

ACCOUNTING RECORDS


• Records required for every receipt, deposit or release of trust funds

• Records purposes: basis for accounting, statement of what beneficiaries are owed, proof of account balance, guarantee all funds are insured

• Requirements detailed in BPR §10145 and in commissioner’s regulations 2831, 2834

Record Keeping Systems

• Two acceptable types of accounting systems: columnar, others that comply with generally accepted accounting principles (GAAP) and allow tracing and reconciliation

• System must show: receipts and disbursements in chronological sequence; trust account balance related to transactions; beneficiary receipts, disbursements and balance in chronological order

• System may be manual or electronic

• Columnar system uses four forms: Trust Fund Bank Account, Separate Record for each beneficiary, Record Of Funds Received and not placed in trust account, Separate Record for each property managed

• Other systems use a journal, cash ledger, and beneficiary ledger for each beneficiary account

Recording Process

• Daily and monthly procedures: record transactions daily in trust fund bank account and separate beneficiary records; use source documents consistently; calculate balances at the time of making entries; reconcile records monthly; keep separate set of records for each trust account

• Pay out trust funds as soon as possible to avoid unexplained overages

Reconciliation of Accounting Records

• Reconciliation: the process of comparing records to determine if balances agree; do monthly, if not more often

• Two reconciliations to be done: bank account record with bank statement (recommended, not required); bank account record with separate beneficiary records (required monthly unless no activity)


Chapter 2 Check Your Understanding Answers Check Your Understanding Answers 2-1

1. Define trust fund liability, trust fund shortage, and trust fund overage.

Trust fund liability is the amount due all beneficiaries of a trust account at any particular time.

A trust fund shortage is the condition where the account balance is less than the total liability.

A trust fund overage is the opposite condition, where the account balance exceeds the total liability.

2. Summarize the six steps for maintaining trust account integrity.

• Make timely and complete deposits

• Keep supporting documents for all deposits and disbursements

• Do not make disbursements that will short the fund

• Let deposits clear before writing checks against them

• Keep current and accurate records of trust account balance and beneficiary balances

• Reconcile accounts and statements monthly


1. Define commingling and conversion and give examples of each.

Commingling — the broker mixes non-trust funds with trust funds. Examples: personal funds deposited in trust account, client funds deposited in personal or business account; leaving earned commissions and fees too long in the trust account.

Conversion — using the funds of another for one’s own purposes. Examples: spending client funds to pay business expenses; conducting personal business through the trust account.

2. Describe the three situations that are specifically stated in the Code as NOT being commingling.

• Placing broker funds of no more than $200 in the trust account to pay account charges.

• Leaving earned fees and commissions, or funds partly belonging to the broker and partly to the principal, in the account for no more than 25 days if ownership is not disputed.

Depositing broker-owned funds in the trust account in connection with mortgage loan or loan servicing activities where all funds are kept distinct and broker-owned funds are disbursed within the 25-day time limit.


1. Describe the minimum information requirements for a record-keeping system for trust accounts. What must the system show?

• All trust fund receipts and disbursements in chronological order, with supporting details

• Account balance based on recorded transactions

• All receipts and disbursements for each beneficiary, in chronological order

• The balance due to each beneficiary or for each transaction

2. Describe the forms used in the columnar system of record-keeping.

• Record of funds deposited to or paid out from the trust fund account: shows dates of receipt, deposit, pay out; payee and payor; amount; check numbers; daily balance

• Separate record for each beneficiary, transaction, or property managed: shows the same information as it pertains to an individual account in the trust account

• Record of funds received but not deposited in the trust account: shows date of receipt, form of payment, amount, property identification, person to whom forwarded, date of disposition; receipts, but not disbursements, in chronological sequence


3. Describe the main elements of accounting systems other than the columnar system.

• Journal or log – daily record of receipts and disbursements

• Cash ledger—abbreviated record of the account balance, showing debits and credits. Amounts posted match transactions in journal.

Beneficiary ledger—receipts and disbursements for each beneficiary in chronological order, with balance for that beneficiary.


1. What daily and monthly procedures should be followed to keep trust fund records accurate?

• Record transactions daily in two records—trust fund bank account and separate beneficiary or property records.

• Use the source documents consistently.

• Recalculate balances after every entry.

• Reconcile bank statement with trust fund account and separate records monthly.

• Keep separate set of records for each trust fund account

2. Describe the reconciliation process. What records are compared?

Reconciliation compares the trust bank account record with the statement issued by the bank; then it compares the separate beneficiary or property records with the trust fund bank account record. The total of the separate account balances should equal the trust fund bank account record total, which should equal the bank statement (adjusted for non-posted items).

Chapter 3: Documentation, Audits, and Use of Records Objectives

1. Describe documentation requirements.

2. Explain the role of audits and the consequences of failing an audit

3. Explain the use of records in the audit and examination processes

Contents

• Documentation Requirements

» Special Reports

» Activities And Related Documents

» Person Signing Contract to be Given Copy

» Records Retention

» Electronic Storage

» Uniform Electronic Transactions Act

• Audits And Examinations

» Consequences of Trust Fund Conversion

• Sample Transactions To Illustrate Use Of Records


Documentation Requirements

Special Reports

Under California law 10141.6, the following requirements apply to Real estate brokers who engage in five or more escrow transactions in a calendar year or whose escrow activities equal or exceed one million dollars ($1,000,000) in a calendar year:

• Within 60 days following the end of the calendar year, file a report with the department, in a form acceptable to the commissioner, documenting the number of escrows conducted and the dollar volume escrowed during the calendar year in which the threshold was met.

• The broker may use a consolidated report to meet the requirements of this section as well as those of Section 10232.2 (see below), if applicable, indicating that the report is intended to satisfy both sections. A real estate broker who fails to submit the required report will be assessed a penalty of fifty dollars ($50) per day for each day the report has not been received by the department, up to and including the 30th day after the first day of the assessment penalty. On and after the 31st day, the penalty is one hundred dollars ($100) per day, not to exceed a total penalty of ten thousand dollars ($10,000), regardless of the number of days, until the department receives the report.

The commissioner may suspend or revoke the license of a real estate broker who fails to pay a penalty imposed pursuant to this section. In addition, the commissioner may bring an action in an appropriate court of this state to collect payment of that penalty.

Section 10232.2, mentioned above, applies to brokers who:

• intend to negotiate loans, sales, or exchanges secured by real estate liens, as agent or owner, totaling more than $1,000,000;

• make collections, for owners, totaling $250,000 or more on promissory notes secured by real estate liens or real estate sales contracts

• make collections totaling two hundred fifty thousand dollars ($250,000) or more on behalf of obligors of promissory notes secured directly or collaterally by liens on real property or of lenders of real property sales contracts.

Such brokers are required to file an annual report with the Department of Real Estate within 90 days after the end of the broker’s fiscal year. The report must:

• document the receipt and disposition of all funds of others to be applied to the making of loans, the purchasing of promissory notes or real property sales contracts, or in connection with the servicing of the accounts of owners of promissory notes and real property sales contracts.

• include an itemized trust fund accounting of the broker and confirmation that the trust funds are on deposit in an account maintained

If a broker otherwise subject to Section 10232.2 has not received any payments in a form convertible to cash during the fiscal year, the broker may instead provide the commissioner with a notarized statement to that effect on a form pro-vided by the department within 30 days after the end of the broker’s fiscal year.

Activities and Related Documents In addition to accounting records, the Department of Real Estate requires that the broker maintain all documents prepared or obtained in connection with any real estate transaction handled. Here is a list of typical activities and the corresponding documentation.



Person Signing Contract to be Given Copy

Under Business and Professions Code Section 10142, whenever a licensee prepares an agreement authorizing or employing the licensee to perform acts requiring a real estate license, or whenever the licensee obtains the signature of any person to a contract pertaining to services, the licensee must deliver a copy of the agreement to the person signing it at the time the signature is obtained. Such documents include:

• listing agreements

• real estate purchase contracts

• receipt for deposit forms

• addenda to contracts

• property management agreements

Records Retention

Under 10148, a broker must keep, for three years, copies of:

• all listings, deposit receipts, canceled checks, trust records, and other documents executed or obtained by the broker in connection with any transactions for which a real estate broker license is required.

The three-year period begins at the date of the closing of the transaction or the date of the listing if the transaction is not consummated.

Electronic Storage

California law 2729 allows the use of electronic storage of records of listings, deposit receipts, canceled checks, trust records and other documents executed or obtained by the broker in connection with any transaction for which a real estate broker license is required, provided:

1. The electronic image storage is non-erasable “write once, read many” (“WORM”) that does not allow changes to the stored document or record.

2. The stored document or record is made or preserved as part of and in the regular course of business.

3. The original record was made or prepared by the broker or the broker’s employees at or near the time of the act, condition or event reflected in the record.

4. The custodian of the record is able to identify the stored document or record, the mode of its preparation, and the mode of storing it on the electronic image storage.

5. The electronic image storage media contains a reliable indexing system that provides ready access to a desired document or record, appropriate quality control of the storage process to ensure the quality of imaged documents or records, and date-ordered arrangement of stored records to assure a consistent and logical flow of paperwork and to preclude unnecessary search time.

6. Records copied and stored under this section are retained for three years.

7. The broker maintains at the broker’s office a means of viewing stored copies of documents or records stored.

8. The broker provides, at the broker’s expense, a paper copy of any document or record requested by the Department.

Uniform Electronic Transactions Act When documents contain an electronic signature pursuant to the Uniform Electronic Transactions Act (Section 1633.1 et seq. of the Civil Code) or the Electronic Signatures in Global and National Commerce Act, California law 2729.1 requires the broker to keep a copy, including the electronic signatures, as follows, by:

1. making a paper copy of the document to be made or using electronic image storage media pursuant to Section 2729. The broker may keep these copies at a location other than the broker’s place of business.

2. maintaining at the broker’s office a means of viewing copies of documents or records, and

3. on notice, making such documents or records available for examination, inspection, and copying by the Commissioner or designated representative during regular business hours. The broker must provide, at the broker’s expense, a paper copy of any document or record requested by the Department.




1. Describe the two special trust fund reports required of certain brokers and the circumstances that require them.

2. List four common trust fund-related activities and the documents that can be used to support trust fund records of them.

3. How long must a broker preserve trust fund records and supporting documentation?

Audits and Examinations

Because of the importance of trust fund handling, the Commissioner has an ongoing program of examining brokers’ records. As necessary, audited licensees are made aware of deficiencies in trust fund handling and record keeping. If an audit discloses actual trust fund imbalances or money handling procedures which may cause monetary loss, the Commissioner initiates appropriate disciplinary proceedings.

Section 10148 of the Business and Professions Code requires real estate brokers to retain copies of all listings, deposit receipts, canceled checks, trust records, and other documents executed by or obtained by the broker in connection with any transaction for which a real estate broker license is required for a period of three years. The three-year period begins at the date of the closing of the transaction or the date of the listing if the transaction is not consummated.

On notice, the broker must make the books, accounts, and records available for examination, inspection, and copying by the commissioner or designated representative during regular business hours; on the appearance of sufficient cause, the records are subject to audit without further notice, except that the audit may not be harassing in nature.

If the commissioner finds, in a final cease and desist order or in a final decision following a disciplinary hearing, that the broker has violated Section 10145 or a related commission rule or regulation, the commissioner will charge the real estate broker for the cost of the audit.

• If the broker does not pay for the cost of the audit so charged within 60 days of the mailing of the billing, the commissioner may suspend or revoke the broker’s license or deny renewal of the broker’s license. The suspension or denial will remain in effect until the cost is paid or until the broker’s right to renew a license has expired.

• The commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost incurred by the commissioner for an audit, the commissioner may use the estimated average hourly cost for all persons performing audits of real estate brokers.

Consequences of Trust Fund Conversion

Among the most common problem areas investigated by the Department’s Enforcement Section and referred to the Department’s Legal Section for disciplinary action are trust fund handling and record keeping. Brokers handling trust monies on behalf of others often convert the monies to their own use or, failing to maintain proper accounting records, end up with shortages in their trust accounts. This course has covered the details of how the laws and regulations govern the handling of trust funds by real estate brokers. Now consider what can happen if the broker makes a mistake.

In general, trust fund conversion and other violations of the rules and regulations regarding the handling of trust funds can lead to:

• Loss of license

• Receivership

• Civil liability

• Tax liability

• Criminal sanctions

Sections 10175-10186.9 of Division 4, Part 1, Chapter 3, Article 3, of the Business and Professions Code describe disciplinary actions the Department may take against a licensee.


License Suspension or Revocation

Section 10176(e) of the Code states that the commissioner may investigate the actions of any real estate licensee working in the state, and may temporarily suspend or permanently revoke a real estate license if the licensee is found guilty of commingling the licensee’s money with that received and held for others. The commissioner has the option of imposing a fine instead of suspending or revoking the license (§10175.2).

Fines and Imprisonment

Section 10185 of the code states that any person who willfully violates or knowingly participates in the violation of the law, including the law concerning trust fund handling, is guilty of a misdemeanor punishable by a fine of up to $10,000, imprisonment for up to six months, or both.

Section 10186 states that commissioner may also hold the licensee liable for:

• costs associated with monitoring the licensee’s activities

• monetary restitution to any person who was harmed by the licensee’s activities

• costs associated with the licensee’s petition for reinstatement of the license



1. List when does the commissioner conduct an examination or audit of a real estate firm?

2. What can the broker are expected to show the commissioner’s examiner in an examination?

3. Describe some of the consequences for a broker who is found guilty of commingling or conversion of trust funds?

Sample Transactions

The following case example illustrates how to comply with the recordkeeping and accounting requirements for trust funds using the columnar record of trust funds received and paid out, record of all trust funds received and not placed in the trust account, separate records for each beneficiary, and separate records for properties managed.

A real estate broker, Roger Mortimer, has one trust fund account to handle his residential sales and property management business. He keeps four kinds of columnar records:

1. Record of All Trust Funds Received and Paid Out – Trust Fund Bank Account (referred to below as “Bank Account Record”).Required by Regulation 2831 for each trust account.

2. Record of All Trust Funds Received – Not Deposited in Broker’s Trust Account (referred to as “Record of Undeposited Receipts”).Required by Reg 2831.

3. Separate Record for Each Beneficiary or Transaction (referred to as “Separate Beneficiary Record”). Required by Reg 2831.1

4. Separate Record for Each Property Managed (referred to as “Separate Property Record”). This system can be used as an alternative to #3 for managed properties.


For the sake of simplicity, we assume that Broker Mortimer opens the trust account on the first day of the month, so the account has a zero beginning balance. In the month of July, Mortimer

• opens the account

• receives earnest money deposits on two listings

• receives security deposits and rent checks for three managed properties

• pays utilities and maintenance expenses for the managed properties

• transfers funds to an escrow company

Click here to open a detailed list of Mortimer’s transactions for the month of July.

You’ll probably want to print this and the following exhibits on paper to make cross-referencing more convenient.

Click the link below to open a table which shows the documentation and the necessary recording on one of the forms for each transaction.

Documentation and Recording

The columns show the transaction dates in chronological order; the documents created by the transaction that the broker should retain in a transaction file; and the entries to be made on one or more of the trust account forms.

Note that for every transaction that involves placing funds into, or disbursing funds from, the trust account, an entry is necessary on the “Bank Account Record” and on either a “Separate Record for Each Beneficiary” or a “Separate Property Record.” If funds are held by the broker without depositing until acceptance of an offer, an entry must be made on the “Record of Undeposited Receipts.” Likewise, when such funds are deposited or returned, an entry must be made on this record.

Entries on all of the forms except the “Record of Undeposited Receipts” are in chronological sequence and have a corresponding current balance for the account.

Print this table to facilitate comparison with the other tables and forms.

Click the link below to open the “Bank Account Record” that reflects all the transactions.

Columnar Record of all Trust Funds Received and Paid Out

For each transaction date, compare the transaction description on the “Transactions” table with the corresponding documents and accounting entries listed on the “Documentation and Recording” table and the entries made on the “Bank Account Record.” Please note that there is an Amount Received or an Amount Paid with a resulting balance for each transaction that uses the trust account. The entries also include the name of the party who gives or receives the payment, states the purpose of the payment, and identifies the property or person the transaction concerns.

Print this form to facilitate comparison with the other tables and forms.

For funds being held by the broker without depositing them, there is the “Record of Undeposited Receipts.”

Click here to open the Record of All Trust Funds Received.

This form tracks the earnest money deposits the broker holds, names the amount and the maker of the check or note, identifies the property, and describes how and when the funds are disposed of - by deposit to the trust fund or other escrow, according to instructions, or returned to the maker. When deposited to the trust fund, there should be corresponding entries on the Bank Account Record and the Separate Beneficiary or Separate Property Record.

Print this form to facilitate comparison with the other tables and forms.

There are six beneficiaries and three properties managed in the case example. Each time a deposit or disbursement occurs in the trust fund, a corresponding entry must be made on one of these forms. The balances are used in the final reconciliation of the trust account balance with the bank statement.

https://docs.google.com/file/d/0B4P1NSyMm6okTmFmNXBnT3Q5YlU/edit

https://docs.google.com/a/mckissock.com/file/d/0B4P1NSyMm6okc1JmWWRqWjBQbjQ/edit

https://docs.google.com/file/d/0B4P1NSyMm6okSk4xdzZCX2ZMdDA/edit

https://docs.google.com/file/d/0B4P1NSyMm6okbFBmWTRGUk1tSk0/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/MortimerstransactionsforthemonthofJuly.pdf

https://s3.amazonaws.com/vc5-course-documents/courses/2700/ColumnarRecordofallTrustFundsReceivedandPaidOut.pdf

https://s3.amazonaws.com/vc5-course-documents/courses/2700/RecordofAllTrustFundsRecived.pdf


On the following screens are “Separate Beneficiary Records” and “Separate Property Records” for the case. There will be a link on each screen to print these forms to facilitate comparison with the other tables and forms.

Click here to print the Separate Beneficiary Record for Roger Mortimer

Separate Record for Each Beneficiary or Transaction for Client’s Funds Placed in Trust Fund Bank Account

https://docs.google.com/file/d/0B4P1NSyMm6okV25hZV9QNV9YWVk/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SeparateBeneficiaryRecordforRogerMortime.pdf


Click here to print the Separate Beneficiary Record for Mabel Maus.

Separate Record for Each beneficiary or Transaction for Client’s funds placed in trust fund bank account

https://docs.google.com/file/d/0B4P1NSyMm6okRHI5OXJTMWFzMzg/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SeparateBeneficiaryRecordforMabelMaus.pdf


Click here to print the Separate Beneficiary Record for Mary Cutting.


https://docs.google.com/file/d/0B4P1NSyMm6okMmhzVjJFbzZPVWs/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SeparateBeneficiaryRecordforMaryCutting.pdf


Click here to print the Sample Beneficiary Record for Samantha Pilgrim.


https://docs.google.com/file/d/0B4P1NSyMm6okRldEV0ZvRGg1S2c/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SampleBeneficiaryRecordforSamanthaPilgrim.pdf


Click here to print the Separate Beneficiary Record for Sibyl Knightley.

Separate Record for Each Beneficiary or Transaction for Client’s funds placed in trust fund bank account

https://docs.google.com/file/d/0B4P1NSyMm6okbmI2NWpTSmFmY3c/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SeparateBeneficiaryRecordforSibylKnightley.pdf


Click here to print the Separate Beneficiary Record for Ellen Doughty.

Separate Record for Each Beneficiary or Transaction for Client’s funds placed in trust fund bank account

https://docs.google.com/file/d/0B4P1NSyMm6okU2x5SE1vS2V6aEE/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SeparateBeneficiaryRecordforEllenDoughty.pdf


Click here to print the Separate Property Record for 775 Maple St.


https://docs.google.com/file/d/0B4P1NSyMm6okOUxRRENRVmZRek0/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SeparatePropertyRecordfor775MapleS.pdf


Click here to print the Separate Property Record for 1321 Park St.


https://docs.google.com/file/d/0B4P1NSyMm6okSmlZUERUZ1BScDg/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SeparatePropertyRecordfor1321ParkSt.pdf


Click here to print the Separate Property Record for 91 Jackson St.


https://docs.google.com/file/d/0B4P1NSyMm6okVjItVlU0ZXVyQUU/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/SeparatePropertyRecordfor91JacksonSt.pdf


Click here to print the Bank Statement for this case. STATEMENT

https://docs.google.com/file/d/0B4P1NSyMm6okd1FHcTk1ak1DdzQ/edit

https://s3.amazonaws.com/vc5-course-documents/courses/2700/BankStatementforthiscase.pdf


After receiving the bank statement, the broker must perform two tasks:

1. reconcile the bank account, which means adjusting the balance for outstanding debits and credits that have not yet been posted and do not appear in the statement to get a true “checkbook balance”

2. reconcile the adjusted bank balance with the balances reported for the separate beneficiaries or properties. The total of the separate accounts should equal the final balance for the Bank Account Record and the adjusted balance of the bank statement.


Unit Review DOCUMENTATION REQUIREMENTS

Special Reports

• For brokers who do at least 5 escrow transactions or more than $1 million in escrow transactions in a year: a volume report to the department within 60 days of calendar year end; commissioner may fine licensee or suspend or revoke license for failure to comply

• For brokers who negotiate real estate loans, sales, or exchanges totaling more than $1 million, or make collections for note owners or obligors of more than $250,000: accounting of receipts and dispositions of all related trust funds and confirmation that necessary funds are on deposit, within 90 days of fiscal year end.

Activities and Related Documents

• Activities to be documented include: purchase deposits, rents, and security deposits received; trust funds deposited; checks forward to escrow, checks returned to buyer; trust funds disbursed; offers and counteroffers received; management fees collected; reconciliation.

• Related documents include: purchase contracts, deposit receipts, collection receipts, bank deposit slips, copies of checks, invoices, escrow statements, billings, disclosure statements, management agreements, cancelled checks, reconciliation records.

Person Signing Contract to be Given Copy

• Licensee must give a copy of any listing agreement, purchase contract, deposit receipt, management agreement or other such agreement to any person who signs the agreement at the time of signing.

Records Retention

• Broker must keep copies of all documents executed or obtained in connection with a real estate transaction for three years.

Electronic Storage

• Electronic storage of required records is allowed if: non-erasable, prepared by the broker at or near the time of the event recorded, easily identifiable, indexed, accessible, viewable at the broker’s office, deliverable on paper if requested.

Uniform Electronic Transactions Act

• Copies of documents containing electronic signatures must retained on paper or electronically, be viewable at the broker’s office, be deliverable on paper

AUDITS AND EXAMINATIONS

• Audit and examination program is ongoing

• Copies Books and records must be retained three years, be available for examination and copying; subject to audit without further notice but audit may not be harassing in nature

• Commissioner may charge broker for the audit if broker is found to be in violation of a code or regulation; suspend or revoke license; refuse to renew; take action to recover costs

Consequences of Trust Fund Conversion

• Possible penalties: loss of license, receivership, civil liability, tax liability, criminal sanctions

• Commissioner has the option of imposing a

• fine instead of suspending or revoking license

• A misdemeanor (trust fund mishandling) is punishable by fine of $10,000, six months in jail, or both

• Licensee may be liable for costs associated with monitoring, petitioning for reinstatement, and for monetary restitution to persons harmed.


Chapter 3 Check Your Understanding Answers Check Your Understanding Answers 3-1

1. Describe the two special trust fund reports required of certain brokers and the circumstances that require them.

Brokers who do five or more escrow transactions or more than $1 million in escrow transactions in a year must file a transaction volume report. Brokers who negotiate real estate transactions totaling more than $1 million or make collections for clients of more than $250,000 in a year must file an itemized account of funds received and disbursed.

2. List four common trust fund-related activities and the documents that can be used to support trust fund records of them.

• Purchase deposit received from buyer - purchase contract, signed receipt

• Funds deposited in trust account - bank deposit slip

• Buyer’s check returned to buyer - copy of check signed and dated by buyer to indicate receipt

• Trust funds disbursed - invoice, bill, escrow statement, receipt, canceled check

3. How long must a broker preserve trust fund records and supporting documentation?

Three years.


1. When does the commissioner conduct an examination or audit of a real estate firm?

Examinations can occur at any time. If the examination indicates irregularities, an audit will be conducted without further notice.

2. What can the broker be expected to show the commissioner’s examiner in an examination?

Copies of all listings, deposit receipts, canceled checks, trust records, and other documents executed by or obtained by the broker in connection with any transaction during the previous three years.

3. Describe some of the consequences for a broker who is found guilty of commingling or conversion of trust funds?

License suspension or revocation, fines up to $10,000, imprisonment for up to six months, receivership, liability for costs, monetary restitution to the public


End of Course Study Materials

PLEASE READ!You have reached the end of the California 3-Hour Trust Fund Handling course. You are now ready to take your course exam.

Exam Information: California 3-Hour Trust Fund Handling Course

You have two attempts to pass the final exam. If you fail the second attempt at the final exam you will need to start the course over again, this will start the study time regulated by the California Department of Real Estate to start over again. See DRE regulations for exam eligibiliy below.

• Number of questions: 15

• Passing Requirement: 70%

DRE Regulations for Exam Eligibility

The California Department of Real Estate strictly regulates the timing of when exams can be taken for continuing education courses. Exams will only be available when the following two con-ditions are met:

1. The Corresponding number of study hours have been accumulated.

• 8 hours of study time is granted automatically every 24 hours starting at the time ofpurchase.

2. TakingthisexamwillnotputthelicenseeovertheDRElimitof15-creditsoffinalexamsin a 24-hour period.

• Our system will allow you to proceed to the online exam as long as you have nottaken a 15 credit exam in the last 24-hours.

Please call one of our knowledgeable customer service representatives for further questions or assistance, at 1-800-328-2008 or email [email protected].

Thank You!