BRE Defense Attorney – Interest bearing trust accounts are illegal in California
For real estate Brokers (in particular, those in the property management business) in California it is important to understand the various trust fund accounting requirements. Some of these compliance rules arise under California Business & Professions Code section 10145 and under Commissioners Regulation 2832. This blog discusses the requirement to keep trust funds (funds held in trust for the benefit of your clients) in a non-interest bearing account. This is a topic that can pop up during the course of a property management trust fund audit.
Broker trust funds must be kept in a non-interest bearing trust account
The real estate rules and regulations can be found in both the Business and Professions code (10145) and in the Commissioner’s Regulation (2832). Let’s look at these two rules.
(d) If not otherwise expressly prohibited by this part, a real estate broker may, 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, savings and loan association, credit union, or industrial loan company, the accounts of which are insured by the Federal Deposit Insurance Corporation, if all of the following requirements are met:
(1) The account is in the name of the broker as trustee for the designated beneficiary or principal of a transaction or series of transactions.
(2) All of the funds in the account are covered by insurance provided by an agency of the United States.
(3) The funds in the account are kept separate, distinct, and apart from funds belonging to the broker or to any other person for whom the broker holds funds in trust.
(4) The broker discloses to the person from whom the trust funds are received, and to a beneficiary whose identity is known to the broker at the time of establishing the account, the nature of the account, how interest will be calculated and paid under various circumstances, whether service charges will be paid to the depository and by whom, and possible notice requirements or penalties for withdrawal of funds from the account.
(5) Interest earned on funds in the account may not inure directly or indirectly to the benefit of the broker or a person licensed to the broker.
This section indicates that if the beneficiaries approve the broker to keep money in a trust account, (by evidence of a writing agreeing to such interest being earned), then the trust funds COULD be placed in a broker trust account that earns interest on the trust funds as long as the interest does not inure directly or indirectly to the broker.
Commissioner’s Regulation 2832 require that a trust account meet the following criteria:
1.designated as a trust account in the name of the broker as trustee;
2.maintained with a bank or recognized depository located in California; and
3.not an interest-bearing account for which prior written notice can, by law or regulation, be required by the financial institution as a condition to withdrawal (except as noted in the discussion below of “Interest-Bearing Accounts”).
2 A broker may have an out-of-state trust account if the account is insured by the Federal Deposit Insurance Corporation (FDIC) and is used to service first loans for the types of note owners/investors specified in Section 10145(a)(2) of the Business and Professions Code.
These are just part of the rules. There are also other sections to be aware of:
2832. Trust Fund Handling.
(a) Compliance with Section 10145 of the Code requires that the broker place funds accepted on behalf of another into the hands of the owner of the funds, into a neutral escrow depository or into a trust fund account in the name of the broker, or in a fictitious name if the broker is the holder of a license bearing such fictitious name, as trustee at a bank or other financial institution not later than three business days following receipt of the funds by the broker or by the broker’s salesperson.
(b) Except as expressly provided by subdivision (d) of Section 10145 of the Code or by a regulation in this article, the account into which the trust funds are deposited shall not be an interest-bearing account for which prior written notice can by law or regulation be required by the financial institution as a condition to the withdrawal of funds.
What happens if I am earning interest on my broker trust fund account?
When a DRE / BRE auditor comes to your office and discovers that you may be violating the trust fund accounting rules, you might find your self in a position where your company or your individual broker’s license is on the line and you get an accusation filed against you, or you could face a “cite and fine” real estate citation that could cost you up to $2,500. These are things to take serious, and could result in the suspension, or even revocation of your real estate license. So you need to know that it is not legal to place broker trust funds into a designated trust fund account that earns interest to the benefit of the broker.
Keep in mind, we can help California brokers and real estate agents who are charged with accusations, and have to set a pending hearing in front of the OAH. In many cases, we can help you negotiate a successful settlement to your case without having to go to trial.
Contact a Trust Fund Attorney for BRE Compliance Issues
Our law firm has helped numerous real estate brokers. Call us to speak with of our real estate trust fund lawyers who can help you review and analyze trust fund accounting requirements in California, including analyzing the duties and rules under 10145 and 2832. We offer low flat rate legal fees. We can be reached at (877) 276-5084 or by filling out the form below to have one of our civil litigation and arbitration lawyer contact you.
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