Real estate trust funds require careful management to comply with fiduciary duties and prevent legal violations.pdf

Real estate trust funds require careful management to comply with fiduciary duties and prevent legal violations 2024-09-20 09:24:26 00:00:01 Introduction. During the normal course of business, real estate licensees routinely receive trust funds. These funds may be in the form of cash, personal chec...

Real estate trust funds require careful management to comply with fiduciary duties and prevent legal violations 2024-09-20 09:24:26 00:00:01 Introduction. During the normal course of business, real estate licensees routinely receive trust funds. These funds may be in the form of cash, personal checks, or other items of value. All of these funds are received from the public in the course of performing services for which a real estate license is required. The two most common reasons for receiving trust funds are a buyer making an offer to purchase a property and tendering a good faith offer, a broker-slash-licensee managing real property for an owner. These funds do not belong to the brokerage or the licensee. 00:00:33 Because these funds belong to another person and are held for the benefit of others, these funds are called trust funds. Since trust fund handling violations are a major reason for disciplinary action, a thorough understanding of and complying with the laws and regulations regarding trust funds are important. This course will focus on the laws and regulations governing the handling of California trust funds and the maintenance of a trust fund bank account. In your first reading assignment, you will be introduced to the concept of trust funds. 00:01:17 Trust funds are money or things of value that are received by a broker or salesperson on behalf of a principal or other person. Trust funds are held for the benefit of others in the performance of any acts for which a California real estate license is required. Trust funds are not limited to cash. They can include the following items. Cash. Deposit checks made payable to the broker, the seller, a title company, or an attorney. A promissory note held as part of a property purchase price. 00:01:48 Rent money received from a tenant. Security deposits received from a tenant. A pink slip to an automobile given in lieu of a deposit. Other items of value that are given to a broker or salesperson. Salesperson to be held for the benefit of another in a transaction. Fees for brokerage services to be conducted in the future. Not all funds or things of value received by a broker or salesperson are trust funds. The following are examples of funds that a brokerage may receive which are not regarded as trust funds. Rents and deposits derived from rental property owned by the broker, whether owned by the. 00:02:22 brokerage itself or the broker as an individual. Real estate commissions. Brokerage general operating funds. The broker’s personal funds. In general, the California Department of Real Estate, DRE, does not have jurisdiction over non-trust funds accounts. However, if there is any confusion as to whether a specific account is a trust funds account subject to DRE regulation, the DRE may find it necessary to investigate a specific account to determine the source of funds and ownership of funds. Example, Broker John renews his real estate license on an account called Trust Account. 00:02:56 for John Family. The DRE would most likely investigate. This account since it would be difficult to determine if the account only contained funds for the John family or it is used to hold funds for the benefit of others. Fiduciary duty trust fund handling general procedures. The licensee has a fiduciary responsibility to the owner of the trust funds. Trust funds are entrusted to the care and handling of the real estate licensee for a limited period and are to be handled and managed according to the fiduciary duty of accounting. This duty of accounting requires licensees to put the interest of the funds owner ahead of the personal or business interests of the licensee. 00:03:34 The rules and regulations governing the handling and management of trust funds are designed to make sure this fiduciary standard is achieved. Technical note business and professional code section 10,145 of the statutory authority governing trust funds. The California Department of Real Estate Commissioners regulations sections 2830 to 2835 prescribe in more detail the procedures to be followed in accounting for trust funds. When a licensee accepts trust funds on behalf of the licensee’s broker, the licensee must take one of the following actions. 00:04:06 Within three business days, Commissioner’s Regulations 2832A. 1. The funds can be given to their owner. Note, written instructions are required from all principals to do so. 2. The funds can be deposited into a neutral escrow depository, or, 3. The funds can be deposited into the broker’s trust fund account. There is one exception to the three-day check deposit rule. Licensee can hold a check on cash that has been received in connection with an offer to purchase or lease real property when both of the following conditions are met. 00:04:40 1. The check by its terms must not be negotiable by the broker, that is, not made payable to the broker, or if the offeror, buyer, gives written instructions that the check shall not be deposited or cashed until acceptance of the offer, and, 2. The offeree,  seller, is informed that the check is being held uncashed, either before or after the offer. before or at the time the offer is presented for acceptance. If the offer is later accepted, the broker can continue to hold the check undeposited only if the broker receives written authorization from the seller. 00:05:11 Otherwise, the check must be placed into a trust account or depository within three business days. A neutral depository can be a title or escrow company, an attorney, or a financial institution. All of these neutral depositories must be conducted by a person licensed under Division 6 of the Financial Code or by any person described in Section 17006A and C of the Financial Code. Reminder, after receiving trust funds, a licensee, within three business days, must put them into a neutral depository, the broker’s trust fund account, or give them to the owner of. 00:05:45 the funds upon receipt of written instructions. The only exception to this rule is when the funds are received as part of an offer to purchase or lease property and are to be held uncashed until acceptance of the offer. Identifying the owners of the trust funds. Since trust funds can be disposed only upon the authorization of the person entitled to receive them or who owns them, a broker must be able to identify which of the parties in a transaction owns the funds or is entitled to receive them. In a transaction yet to be completed, the person entitled to the funds can change as the transaction progresses. 00:06:18 The person who tended the funds is not necessarily the person entitled to the funds. In some instances, the party entitled to the funds will change upon the occurrence of certain events in the transaction, depending on the terms stated in the purchase contract. Note, an initial good faith deposit given by a buyer will be considered the buyer’s funds. However, if the buyer defaults, ownership of the funds, depending on the agreement between the buyer and seller, may transfer to the seller. Generally, the following principles will determine the ownership of trust funds. 00:06:48 Prior to acceptance of the offer. A good faith deposit received from a buyer prior to the acceptance of the offer belongs to the buyer and is to be handled according to the buyer’s instructions. If the check is deposited… deposited in the broker’s trust fund bank account, the money should be maintained in the account for the benefit of the buyer until the offer is accepted. The deposit check can be held undeposited if the buyer gives written instructions to hold it uncashed and if the seller is informed it is to be held uncashed at the time of the offer is presented. After acceptance of the offer. After acceptance of the offer by the seller, the deposit should be handled according to. 00:07:22 the instructions of the buyer and seller as follows. The money must be placed into a neutral escrow depository or into the trust fund bank account of the broker no later than three business days after acceptance. A buyer’s check held uncashed by the broker before acceptance of the offer can be held uncashed after the acceptance of the offer only upon written authorization from the seller. The buyer’s check can be given to the seller only if the buyer and seller give written instructions. The buyer’s deposit cannot be refunded to the buyer without the express written consent of the seller. 00:07:53 The reason for this rule relates to ownership of the money. Depending on the terms of the underlying offer to purchase, the ownership of the money is, Ownership of the funds can move from the buyer to the seller upon the occurrence or non-occurrence. 00:08:30 Trust Fund Bank Accounts, Whether a broker maintains a trust fund account or elects not to maintain a trust fund account, a broker in either case is required to maintain trust fund records as soon as the broker has any contact with trust funds. Your next reading assignment will discuss the non-accounting issues associated with the handling of trust funds. This discussion will include the characteristic of a trust account along with the benefits and protections it affords the client. Once a trust account is established, there are certain actions relating to that account that, These activities will be discussed. 00:09:02 At the conclusion of your next reading assignment you will be able to, Describe the purpose of a trust account and what benefits a trust account provides. Identify prohibited activities relating to trust fund accounts. Introduction Due to the liability that arises when funds are received from or for the benefit of a principal, along with the numerous obligations and requirements for maintaining a trust account, many brokers do not maintain a trust account. These brokers simply require all funds to be deposited directly into a neutral escrow. 00:09:33 depository by having good faith deposit checks made payable directly to a title or escrow company. Here’s a tip, a broker is not required to maintain a trust fund account, but is required to maintain trust fund records. If a broker does maintain a trust account, the broker and their salespersons must carefully follow the rules and procedures required by the business and professions code, as well as the commissioner’s regulations relating to the establishment and maintenance of trust accounts. The trust account will be maintained by the broker, and the trust fund accounts will be, Trust account must be kept in good order at all times. To a large degree, this is a record-keeping function. 00:10:05 Supporting records must show that all accounts balance to the trust fund’s bank account. Supporting records should also reinforce the fact that no violations of law have occurred in the custodial management of the funds. The broker should ensure that personal and company operating funds are not commingled with trust funds and that at all times the trust fund account balance equals the broker’s trust fund liability, without shortages or overages. To perform this task efficiently and in accordance with the real estate law, the broker must keep the trust fund records current, complete and accurate. 00:10:36 A trust account does not protect a client from dishonest acts of a broker. However, the reasons for having a trust account and for maintaining trust account records are much more practical. Some of the reasons are. Trust account funds cannot be frozen pending litigation against the broker or if the broker becomes incapacitated or dies. Funds maintained as trust funds are not subject to claims against the broker that are personal in nature. Each client receives up to $250,000 FDIC insurance protection if the account is FDIC account meeting appropriate regulatory requirements. 00:11:09 This means that each client with funds deposited in a trust account in a federally insured bank is insured up to $250,000, as opposed to just $250,000 for the entire account. It should also be noted that an individual’s trust funds would be added together with any other single ownership funds the client may have on deposit at the institution, up to a total aggregate coverage of $250,000 per person per institution. A trust account provides the DRE with easy audit access to client trust fund records. Trust fund segregation from other funds of the broker ensures the integrity of the funds and prevents accidental commingling. 00:11:45 Interest earned on any trust account, where permitted, may not be for the benefit of the broker. General Trust Account Requirements The Business and Professions Code Section 10145-01 and the Commissioner’s Regulations. Regulations 2832 require trust accounts to meet the following criteria. The account must be designated as a trust account in the name of the broker, as trustee. The account must be maintained with a bank or recognized depository located in the state of California, and the account must not be an interest-bearing account requiring prior. 00:12:19 written notice as a condition of the withdrawal of funds. Commissioners Regulation 2832b. Interest-Bearing Accounts. A broker has no obligation to place trust funds into an interest-bearing account. In fact, normally, trust fund bank accounts are not interest- bearing. The only exception to this rule is permitted under Business and Professions Code Section, 10145d. Under this section, a real estate broker may place the trust funds in an interest-bearing account at the request of the owner of the trust funds or the principals involved in. 00:12:52 a series of related transactions. The broker may open an interest-bearing account only if all of the following requirements are met. The account is in the name of the broker as trustee for a specified beneficiary or specified principle of a transaction or series of transactions. All of the funds in the account must be covered by insurance provided by an agency of the federal government. The funds in the account must be kept separate, distinct, and apart from funds belonging to the broker or to any other person for whom the broker holds funds in trust. The broker must disclose as 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. 00:13:32 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. In an executory sale, lease, or loan transaction, the person who shall receive earned interest needs to be specified in writing. No interest earned on funds in the account shall go directly or indirectly to the benefit of the broker or to any person licensed to the broker. Warning, even authorization by the funds owners will not legally permit the broker to collect the earned interest on trust funds. 00:14:07 Commissioners Regulations 2830.1 provide the only other situation that allows a real estate broker to deposit funds into an interest bearing account. This situation is when the broker is acting as an agent for a financial institution that is the beneficiary of a loan. When this is the case, the broker can deposit and maintain funds received from or for the account of an obligor into an interest bearing account to pay interest on an impound account to the obligor as long as the following conditions are met. The account is in the name of the broker, as trustee. 00:14:37 All of the funds in the account are covered by insurance provided by an agency of the federal government. All of the funds in the account are funds held in trust by the broker for others. The broker discloses to the obligor how interest will be calculated and paid, and no interest earned on the funds shall go directly or indirectly to the benefit of the broker, or to any person licensed to the broker. Reminder, most trust fund bank accounts are not interest-bearing. The broker has no obligation to place trust funds into an interest-bearing account. 00:15:09 Withdrawals of Trust Funds. Once trust funds have been deposited into a trust account, the funds can only be withdrawn upon the signature of one or more of the following. Commissioner’s Regulation 2834. The broker in whose name the account is maintained. The designated broker officer, if the account is in the name of a corporate broker, or, if specifically authorized in writing by the broker, individual or corporate broker, any one of the following persons. A salesperson licensed to the broker. An associate broker licensed to the broker, or. 00:15:42 An unlicensed employee of the broker covered by a fidelity bond in an amount at least equal to the maximum amount of the trust funds to which the employee has access. Note, if the broker or broker officer elects to have a salesperson, associate broker, or unlicensed employee handle the trust account, the broker or broker officer is not required, remains responsible and liable for the funds and handling of the account. The fact that an employee might be negligent or intentionally mishandle the account does not relieve the broker or broker officer of compliance with the trust fund law. 00:16:13 Commingling. Commingling means combining the funds of the client with the funds of the broker or licensee in the same account. Real estate law strictly prohibits commingling. It can be grounds for suspension or revocation of a real estate license under the Business and Professions Code Section 10176E. Commingling occurs when personal or company funds are deposited into the trust fund bank account. Trust funds are deposited into the licensee’s general or personal bank account rather than into the trust fund account. 00:16:43 Commissions owed to the broker are left in the trust account for more than 25 days from the date they were earned. Rents and security deposits on broker-owned properties are deposited into the trust account. Since these funds relate to the broker’s property, they are not trust funds and may not be deposited into the trust account. Conducting personal business through the trust account, even if it relates to real estate, is strictly prohibited and is a violation of the real estate law. The following two cases are not commingling for purposes of Business and Professions Code Section 10176E as provided for by Commissioners Regulation 2835. 00:17:18 The broker may maintain up to $200 of personal funds in a trust account to cover service fees and other bank charges. These fees may include charges made against the account for check printing, monthly account service charges, or fees on return deposit items. However, the trust account is specifically prohibited from paying these charges out of trust funds. Most banks will debit the broker’s personal or operational account for any trust account charges or fees, as is the preferred practice. Commissioners Regulations 2835A. 00:17:49 Commissions and other fees owed the broker out of trust fund money may remain in the account for no more than 25 days. This is not considered commingling under the Commissioners Regulations. This exception is for, For practical reasons, it would be burdensome for a broker to be forced to withdraw funds each time a commission or property management fee is earned or upon receipt of a rent checkout of which a fee may be due to the broker. Under no circumstances may a broker withdraw an earned fee before depositing the funds which triggered the fee. Under no circumstances may a broker pay personal or company expenses from the trust fund bank. 00:18:22 account. This includes payments that are a draw against commissions or other earned income. Here’s a tip, the proper procedure is for the broker to issue a check on the trust fund bank account to themself or their company for the total amount of income earned, then pay personal or company expenses from that check. Note, it should also be noted that if there is a dispute as to the broker’s right to receive any portion of trust funds, the disputed portion of the funds should not be withdrawn until the dispute is settled. Trust Fund Liability. 00:18:53 Once trust funds are placed into a trust account, the broker trustee becomes liable for those funds. The broker remains liable for those trust funds. It’s not a bad idea to keep the trust funds until the funds are dispersed according to instructions from the principals who own the funds. The amount of total liability that the broker has at any given moment is the total trust fund positive balances due to all the beneficiaries of the account at that time. If a beneficiary account has a negative balance, it is not deducted from the total liability. That would allow the broker to be liable for less than what is due the other beneficiaries of the account. 00:19:24 Some of the reasons for a possible negative balance in a trust fund are The broker overdraws a particular beneficiary’s account balance by mistake. For example, Broker Bob transfers $2,500 to a Skrow company on behalf of Beneficiary B. The balance in Beneficiary B’s account prior to the transfer is only $2,000. Beneficiary B, after the transfer, has a negative balance of $500 in his trust fund account. The broker overdraws a particular beneficiary’s account balance due to a bounce check by one of the trust fund beneficiaries. 00:19:56 For example, Broker Bob transfers $2,500 to a Skrow company on behalf of Beneficiary B. It’s. 00:20:39 still. such. a. example example of trust fund overage slash underage broker Bob maintains a trust account that currently has four account beneficiaries on May 1st the. 00:21:10 trust account owes beneficiary of $5,000 beneficiary be $2,000 beneficiary see $10,000 and beneficiary D $8,000 the broker trustee owes the beneficiaries a total of $25,000 regardless of how much money is actually in the account broker Bob transfers beneficiary these $2,000 to escrow company X upon proper written instructions however one day after the transfer beneficiary B’s check is returned for non-sufficient funds NSF the broker owes beneficiaries a C and D a. 00:21:42 total of $23,000 because of the transfer of these funds to escrow and B’s NSF check there is only $21,000 in the trust fund account broker Bob is liable for the shortage on May 5th beneficiaries D transaction closes on that day broker Bob is entitled to a commission in the account, The amount of the $8,000 in Beneficiary D’s trust fund account. On June 10th, the total trust account balance is still $21,000. The total account aggregate liability is now $15,000. 00:22:12 This balance includes an overage of $8,000 in Beneficiary D’s trust fund account and a shortage of $2,000 in Beneficiary B’s trust fund account balance. Warning, both trust fund account shortages and overages are a violation of the real estate law. Whether the trust fund account has a shortage or an overage, any discrepancy of any kind is a serious violation. Many brokers and salespersons can testify to the fact that the California Department of Real Estate takes these account discrepancies seriously, as license suspension or revocation. 00:22:43 are the result even if the account discrepancies have been corrected prior to a DRE audit. Each broker must at all times ensure that the trust account balance equals the trust fund liabilities. The following measures should be taken to ensure account integrity. Deposit all trust funds intact. and in a timely manner that are not forwarded to escrow, forwarded to the fund’s owners, and are not held uncashed as authorized. Following this simple rule will lessen the risk of funds being lost or misplaced. The licensee and broker are responsible for all funds received, whether or not they are. 00:23:15 deposited. DRE auditors frequently identify cases where the trust funds received were properly recorded on the books but were never deposited into the bank. Maintain adequate supporting papers and documentation for any disbursements. This documentation may include copies of invoices, purchase and sale agreements, commission agreements and the like. Care should be taken to accurately record disbursements both in the bank account record and in the separate beneficiary record. Since the total liability of beneficiary records must equal all times the balance in the bank. 00:23:46 account record, accurate recording of disbursements in both records is a necessity. Disperse funds against a beneficiary’s account only when the disbursement will not result in a negative balance. This type of shortage usually occurs when a broker makes a disbursement in the bank. This may require that a broker verify with a trust fund account bank that the funds deposited by a particular beneficiary are cleared funds prior to dispersing those beneficiary funds. 00:24:19 to an escrow company. This situation frequently arises when a broker deposits a buyer’s earnest money check for a purchase transaction that is rejected by the seller. Before the broker returns the earnest money to the buyer for the rejected offer, the broker should verify that the buyer’s funds are actually collected. Keep accurate, complete and timely records of the trust account. This would include records relating to the trust bank account and the records representing the corresponding beneficiary accounts on a monthly basis. Reconcile the trust account bank statement with a separate record for each beneficiary. 00:24:51 account. Trust fund conversion. Conversion of trust funds is a theft of the funds. Conversion is. not the same thing as commingling. The act of conversion, as defined by Black’s Law Dictionary, is the unauthorized assumption and exercise of the right of ownership over the goods or personal chattels belonging to another, to the exclusion of the owner’s rights. The California Penal Code Section 503 defines embezzlement, which is a form of conversion, as the fraudulent appropriation of property by a person to whom it has been entrusted. 00:25:23 In the case of trust fund conversion, it means the misappropriation of the trust funds by one not entitled to them. In other words, it is stealing from the funds. The act of commingling trust funds is regarded as a serious matter by the DRE that may subject the licensee to a range of possible DRE-imposed penalties. However, if a broker-slash- licensee is involved in trust fund conversion, a violation of the California Penal Code 506 may have occurred. Not only will the DRE be involved in disciplinary action against a licensee involved in trust. 00:25:54 fund conversion, but the criminal embezzlement, felony law, and resulting penalties may also be imposed. Any licensee or broker who is guilty of conversion will lose their real estate license. If a complaint for conversion is filed with the DRE, or if a DRE audit should uncover conversion of client funds, the DRE will file a formal accusation of conversion under the Administrative Procedures Act. The real estate commissioner will be the complainant, and the licensee will be the respondent. The case will be heard before an administrative law judge from the Office of Administrative Hearings. 00:26:26 The Commissioner’s Legal Counsel presents the case for the commissioner. Respondent’s independent counsel will make the respondent’s case. The judge makes a proposed decision based upon the evidence presented. The commissioner issues an official decision, accepting or rejecting the judge’s proposed decision. If the charges are upheld, the commissioner will almost certainly call for the revocation of the respondent’s license. If the respondent disagrees with the decision based upon the evidence, they may petition for reconsideration. If the petition for reconsideration is denied, then the respondent has the right to appeal to the courts. 00:27:00 If a licensee has been convicted of trust fund conversion, a receivership may be imposed upon the licensee’s assets in order to find and recover the stolen trust funds. Assets of the licensee may have to be sold or otherwise recovered in order to reclaim the embezzled trust funds. If the licensee has converted funds and then becomes insolvent, not able to pay, the situation becomes very complicated. In the resulting bankruptcy action, creditors of the licensee will make claims against the licensee’s assets. Since the trust funds that were converted are stolen funds, the licensee never had a. 00:27:31 right to the funds and consequently the creditors will have no valid claim to those funds either. The problem for the bankruptcy court is to identify the stolen funds or the assets derived from the stolen funds and to separate those assets from the general bankrupt estate. Once the stolen funds or the assets derived from the stolen funds have been identified, the bankruptcy court will distribute them to the rightful owner. If funds are converted, the broker or licensee can both be civilly and criminally liable. When a broker or licensee receives funds… trust funds, they are liable for them until they are dispersed to the rightful parties. 00:28:04 If conversion has been committed, the rightful owner of the funds may sue to recover the funds. If necessary, all assets of the broker-slash-licensee may be sold in order to satisfy the civil judgment. Depending on the nature of the conversion, the district attorney in the county in which the conversion took place may seek a grand jury indictment. If indicted, the licensee will be tried in criminal court. The DRE will act as a witness for the prosecution if the commissioner believes that the licensee committed the conversion. If convicted, imprisonment and fines are potential penalties. 00:28:36 Note, a more detailed discussion of the DRE disciplinary procedures is presented in segment 5 of this course. Attempt to use trust funds as an offset. Situations may arise where a client, who has funds in a broker’s trust account, owes the broker or a licensee of the broker a debt. Although the debt may be valid, funds of the client in the broker’s trust account may not be used to offset debt. Example, example, Broker Bob loaned seller Sam $10,000 so that Sam could purchase a boat. 00:29:06 Sam signed a promissory note that was due on June 1st, 2000. Sam, on September 1st, 2000, listed his personal residence with Broker Bob. Bob obtained a buyer for Sam’s property and deposited buyer Betty’s real estate purchase contract deposit for $5,000 into his brokerage trust account. At the time of closing, Sam still owed Bob the entire $10,000 plus accrued interest. Bob may not offset Sam’s trust account funds for $5,000 against the debt Sam personally owes Bob. Bob’s remedy is to bring a civil action against Sam. 00:29:38 Bob may not use trust money to offset any debt Sam owes him under any circumstances. Advance Fees An advance fee is any fee received by a licensee in advance of providing the actual services for which the fee is paid. Section 10,026 of the Business and Professions Code defines an advance fee as a fee, regardless of the form, that is paid. It is claimed, demanded, charged, received, or collected by a licensee for services requiring a license, or for a listing, as that term is defined in Section 10,027. 00:30:10 Before fully completing the service the licensee contracted to perform or represent it would be performed. Neither an advance fee nor the services to be performed shall be separated or divided into components for the purpose of avoiding the application of this division. Some brokers will collect advance fees from a client for services to be rendered in the future, perhaps marketing or renting a property. Some fee-for-service brokers may collect an advance fee retainer which they can draw against as services are performed. All advance fees received by a broker must be deposited into the broker’s trust fund account. 00:30:41 They are not the funds of the broker. They are the funds of the client. If the funds are deposited directly into the account of the broker, such a deposit is deemed embezzlement, and the principal can recover trouble damages, triple the normal amount, and attorney’s fees. Once the fees have been deposited into the trust fund account, they cannot be withdrawn except for the benefit of the client. of the principal whose funds they are. They may be withdrawn for the benefit of the broker when the agent’s services are completed, and then only upon following required DRE procedures. Prior to collecting an advance fee, the broker-slash-licensee must comply with the provisions of the Business. 00:31:15 and Professions Code Section 10085 and DRE approval requirements. These requirements are found in Commissioner’s Regulation 2970. Any violation of these rules can also lead to DRE disciplinary action. The law requires that advance fee agreements, letters, advertisements, and other solicitation materials should be submitted for DRE approval at least 10 days prior to their use or prior to the actual collection of any advance fee. All advance fee agreements and materials must be printed in at least 10-point type. 00:31:47 The DRE will disapprove any materials found to be misleading. All materials are deemed approved if not disapproved within 15 days after DRE submission. Soliciting or charging an advance fee without receiving it is illegal. In DRE, approval of all material used in the solicitation is a misdemeanor. The potential penalty is a fine up to $2,500 and six months in jail. Use of material that has been disapproved is also a misdemeanor. Advance fees that are deposited into a trust fund account are the funds of the principal. 00:32:17 They must be accounted for in a manner consistent with other kinds of trust funds. Section 10146 of the California Business and Professional Code is the statutory authority allowing the DRE to establish rules regulating the accounting for advance fees. The DRE’s rules regarding advance fees is found in Commissioner’s Regulations Section, 2972. This section requires the following. Principals of advance fee trust funds are to receive verified copies of the accounting for their funds from the broker at the end of each quarter and or at completion of their. 00:32:48 contract with the broker. Accounting procedures for receiving advance fees includes the following. Proper recording of the names of the agent and the principal. The amount collected. Identification of the agent. A description of the services rendered or to be rendered for the advance fee. Accounting procedures for disbursements require an itemization of the purpose of each withdrawal as per the following. Disbursements for each service listed in the description of services rendered or to be rendered. Disbursements to pay commissions to agents and representatives. 00:33:22 Disbursements to pay for costs and profit. Disbursements for advertising must include a copy of the advertisement, the name of the publication, the number of advertisements published and the dates published. Disbursements for an advance fee for the arrangement of a loan secured by a real property or a business opportunity must include a list of the names and addresses of the persons to whom information pertaining to the principal’s loan requirements were submitted and the dates of the submittal.