TRUST FUND BANK ACCOUNTS

TRUST FUND BANK ACCOUNTS

General Requirements

Trust funds, such as a purchase money deposit check, 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. (Business and Professions Code
Section 10145)

Business and Professions Code Section 10145 and 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”).

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.

Trust Account Withdrawals

According to Commissioner’s Regulation 2834, withdrawals from the trust account may be made only upon the
signature of one or more of the following:

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

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

3. if specifically authorized in writing by the broker, a salesperson licensed to the broker; or

4. if specifically authorized in writing by the broker who is a signatory of the trust account, an unlicensed

employee of the broker covered by a fidelity bond at least equal to the maximum amount of trust funds to
which the employee has access at any time.

No arrangement under which a person named in items 3 or 4 is authorized to make withdrawals from a broker’s
trust fund relieves an individual broker or the broker-officer of a corporate broker licensee from responsibility or
liability as provided by law in handling trust funds in the broker’s custody.

Interest-Bearing 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 of transactions.

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 whom the 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 whose identity 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.

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

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

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, pursuant to Commissioner’s Regulation 2830.1, deposit and maintain funds received
from or for the account of an obligor (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 obligor in accordance with Section 2954.8
of the Civil Code, as long as the following requirements are met:

1. The funds received from or for the account of the obligor are for the future payment of property taxes,
assessments or insurance relating only 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 obligor how interest will be calculated and paid.

6. No interest earned on the trust funds shall inure directly or indirectly to the benefit of the broker or to any
person licensed to the broker.

Commingling Prohibited

Funds belonging to a licensee may not be commingled with trust funds. 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).

Commingling occurs when:

1. Personal or company funds are deposited into the trust fund bank account. Except for what is provided in
Section 2835 of the Commissioner’s Regulations 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 for more 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 fund bank account. Likewise, the broker may not make mortgage payments and other
payments on broker-owned properties from the trust account even if the broker reimburses the account for such
payments. Conducting personal business through the trust account is strictly prohibited and is a violation of the
Real Estate Law.

Commissioner’s Regulation 2835 provides that the following situations do not constitute “commingling” for
purposes of Business and Professions Code Section 10176(e):

(a) The deposit into a trust account of reasonably sufficient 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.

(b) The deposit into a trust account maintained in compliance with item (d) below of funds belonging in part to
the broker’s principal and in part to the broker when it is not reasonably practicable to separate such funds,
provided the part of the funds belonging to the broker is disbursed not later than 25 days after the deposit
and there is no dispute between the broker and the broker’s principal as to the broker’s portion of the funds.
When the right of a broker to receive a portion of trust funds is disputed by the broker’s principal, the
disputed portion shall not be withdrawn until the dispute is settled.

(c) The deposit into a trust account of broker-owned funds in connection with mortgage loan activities as
defined in subdivision (d) or (e) of Section 10131 of the Business and Professions Code or when making,
collecting payments on, or servicing a loan which is subject to the provisions of Section 10240 of the
Business and Professions Code provided:

(1) The broker meets the criteria of Section 10232 of the Business and Professions Code.

(2) All funds in the account which are owned by the broker are identified at all times in a separate record
which is distinct from any separate record maintained for a beneficiary.

(3) All broker-owned funds deposited into the account are disbursed from the account not later than 25
days after their deposit.

(4) The funds are deposited and maintained in compliance with item (d) below.

(5) For this purpose, a broker shall be deemed to be subject to the provisions of Section 10240 of the
Business and Professions Code if the broker delivers the statement to the borrower required by Section
10240.

(d) The trust fund account into which the funds are deposited is maintained in accordance with the provisions of
Section 10145 of the Business and Professions Code and 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 on returned checks. Trust funds may not be used to pay for these expenses. (The preferred
practice, however, is for the broker to have the 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 a period not to exceed 25 days. Regulation 2835 recognizes that it may not always be
practical to disburse the earned income immediately upon receipt. For instance, a property management
company may find it too burdensome to collect its management fee every time a rent check is received and
deposited to the trust account. Therefore, as long as the broker disburses the fee from the trust account
within 25 days after deposit there is no commingling violation. Note, however, that income earned shall not
be taken from trust funds received before depositing such funds into the trust bank account. Also, under no
circumstances may the broker pay personal obligations from the trust fund bank account even if such
payments are a draw against commissions or other income. The broker must issue a trust account check to
himself/herself for the total amount of the income earned, adequately documenting such payment, and then
pay personal obligations from the proceeds of that check.

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 the written consent of every principal who is an owner of
the funds in the account shall be obtained by a real estate broker prior to each disbursement if such 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.

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:

l. 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) or which are not held uncashed as authorized. This practice, required under
Commissioner’s Regulation 2832, lessens the risk of the funds being lost, misplaced, or otherwise not
deposited to the trust account. A licensee is accountable for all trust funds received whether or not they are
deposited. DRE auditors have seen numerous cases where trust funds received were properly recorded on
the books but were never deposited to the trust account.

2. Maintain adequate supporting papers for any disbursement from the trust account. Record the disbursement
accurately in both the Bank 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.

3. Disburse funds from a beneficiary’s account only when the disbursement will not result in a negative or
deficit balance (negative accountability) in the account. Many trust fund shortages are caused by
disbursements to a beneficiary in excess of funds received from or for account of that beneficiary. The
excess disbursements are, in effect, paid out of funds belonging to other beneficiaries. A shortage occurs
because the 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.

4. Ensure that a check deposited to the trust fund account has cleared before disbursing funds against that
check. This applies, for example, when a broker who has deposited an earnest money check for a purchase
transaction has to return the funds to the buyer because the offer is rejected by the seller. A trust fund
shortage will result if the broker issues the buyer a trust account 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 are essential to ensure that disbursements are correct.

6. On a monthly basis, reconcile the cash record with the bank statement and with the separate record for each
beneficiary or transaction.

Summary - Maintaining Trust Account Integrity

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

1. his/her personal or general operating funds are not commingled with trust funds;

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

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