Reprinted with Permission from the CA Dept. of Real Estate

There have been recent public announcements from federal and state regulators, including the FDIC (Federal Deposit Insurance Corporation), regarding the failure of at least two banks. DRE is aware of concerns about how client funds can be adequately protected if there are further bank failures or insolvencies. 

Real estate brokers who are collecting trust funds as part of a real estate transaction should take measures to ensure that these funds are being deposited into a properly designated trust account. Trust funds collected and held by real estate brokers may occur during a sales transaction or when the broker is acting as a property manager, loan servicer, or a mortgage loan broker, or the broker performs “broker-controlled” escrows. 

When read in combination, Business and Professions Code Section 10145(a)(1) and Commissioner’s Regulation 2832(a) require a real estate broker who accepts funds belonging to others to deposit those funds into one of three places, within three business days following receipt of the funds by the broker or by the broker’s salesperson: 

1) Into a neutral escrow depository; 

2) Into the hands of the owner of the funds; 

3) Into a trust fund account maintained by the broker 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. The account must be in a bank or recognized depository in California. 

Real estate brokers collecting trust funds should deposit these funds into a properly designated trust account at a financial institution located in California. A fiduciary trust account adds additional protection with regard to FDIC coverage up to $250,000 for each beneficiary. Real estate brokers should adhere to the following requirements: 

  1. The bank account is a fiduciary trust account that has federal insurance coverage for funds held in the account per principal or beneficiary.
    • A broker should obtain reassurances, preferably a written statement, from the bank verifying if the account has adequate FDIC coverage per beneficiary.
  2. The name of the trust account should be properly designated in the name of the broker as trustee.
    • A broker can obtain a copy of the bank signature card and review the title of the account or can also request a written statement from the bank verifying the title of the bank account. The account should be titled in the broker’s name or the broker’s fictitious business name and the word “trust’ should be in the identifying name title of the account.
  3. The broker maintains trust fund accounting records so that the trust funds can be properly accounted for and identified.
    • The link (https://dre.ca.gov/files/pdf/re13.pdf) discusses trust fund recordkeeping requirements. The real estate broker should be familiar with Commissioner Regulations 2831 and 2831.1 and verify if the trust fund accounting records contain all the elements as described in the aforementioned regulation.

If the bank cannot provide an adequate response to Items 1 and 2 above, the trust funds a real estate broker is holding for the benefit of their clients can be at risk. A real estate broker should consider looking for an alternative bank or financial institution to ensure the protection of their clients’ trust funds and also satisfy DRE’s trust fund requirements. 

Learn more about the FDIC deposit insurance “Deposit Insurance FAQs” https://www.fdic.gov/resources/deposit-insurance/faq/index.html and the “FDIC Information and Support Center” https://ask.fdic.gov/fdicinformationandsupportcenter/s/?language=en_US.