Mortgage Industry Information, Opinions & Tips
DRE Audits and You: Part 3
Remember the old days when licensees received the DRE Real Estate Bulletin in the mail every quarter and we quickly opened to the middle of the publication to read the list of brokers who were suspended, restricted or revoked? Remember how many of those suspensions, restrictions or revocations were caused by trust account violations? Even though we don’t get to rush and open the mail to look, we can now see the list on the internet every month or even receive e-mail notifications of disciplinary actions right to our inboxes. And, guess what? The majority of those actions are still due to trust account violations.
The DRE has a zero tolerance policy for violations of the rules and regulations regarding the handling of trust funds. In order to understand the requirements of recordkeeping, it is extremely important for anyone dealing with the broker’s trust account to thoroughly read and understand Chapter 21 of the Real Estate Reference Book. This is available online at the DRE’s website (www.dre.ca.gov) under PUBLICATIONS.
In an investigation by a DRE Special Investigator or during an audit conducted by a DRE Auditor, the following trust account documentation is requested from the broker for review:
A Certified Copy of the Bank Signature Card for All Trust Accounts
The Department is checking to make sure that the account is set up in the name of the broker, corporation or dba, that the account is designated as a Trust Account, that the broker is a signer on the account and is identified as “Broker, as Trustee” on the account, that any additional signers are licensed to the broker and have a written agreement with the broker specifically authorizing the ability to sign on the trust account (separate from the Broker-Licensee Contract/Commission Agreement) OR that any additional non-licensed signers are W-2 employees of the broker, with a written agreement authorizing the ability to sign, and that the broker has obtained an acceptable fidelity bond naming such employee(s) that is insuring an amount that equals or exceeds the maximum amount of funds that ever hit the trust account, that the account is held in a California chartered bank and that the broker receives no interest or benefits from the account. If the account is an analysis account, that fact must be disclosed to the investor or borrower.
Bank Statements and Monthly Reconciliation Records
The auditor could ask for up to three (3) complete years’ worth of records, but will generally choose a cut-off date for their audit and will review three (3) months’ to one years’ worth of recent records.
Copies of Cancelled Checks (Back and Front)
Many banks do not provide originals or copies of checks, but this is a DRE requirement. Check with your bank to see how far you can go back online (remember, retention period is three (3) years!) or talk to your bank about your options. Some offer CD’s of check copies with the bank statements (for a fee, of course).
Record of all Receipts/Deposits
Columnar Record of Trust Funds Received and Paid Out (Control Record)
In plain English, this is the daily running balance of the account (like a checkbook register).
Separate Beneficiary Records
Invoices Related to Trust Account Disbursements
In their letter of request, the DRE Special Investigator will often provide the following expanded request:
Columnar and control records showing all funds received and disbursed described in Regulation 2831, Title 10, Chapter 6 of the California Code of Regulations for the past three (3) years;
Separate records for monies received and disbursed in the separate transactions as described in Regulation 2831.1, Title 10, Chapter 6 of the California Code of Regulations for the past three (3) years;
All monthly reconciliations of the columnar and separate records as described in Regulation 2831.2, Title 10, Chapter 6 of the California Code of Regulations for the past three (3) years.
Now, once you provide the DRE employee with the above, the digging begins. It can take them days or weeks to go through every deposit, every credit, every debit, every beneficiary statement, each reconciliation and bank statement, well, everything. They may request more information, additional explanations, etc.
Ask yourself one simple question: Am I prepared to face a DRE trust account audit if the DRE walked into my office today?
Pam Strickland is a compliance consultant who helps DRE brokers prepare for and survive DRE audits and office surveys. She can be reached at email@example.com.