ILLINOIS CORE A - AGENCY, LICENSE LAW AND ESCROW

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1 ILLINOIS CORE A - AGENCY, LICENSE LAW AND ESCROW This course is designated to fulfill the core A requirement for Illinois real estate professionals. The course will discuss the steps that the General Assembly took in an attempt to prevent misunderstandings and miscommunications about the relationships that licensees have with clients and customers. Students will examine the various types of relationships that a licensee can have with a real estate consumer, as well as what duties are owed to the consumer in each relationship. How an agency relationship is formed will be detailed as well. Participants will also look at some of the changes/updates to Real Estate License Act of 2000, including changes to the definitions of managing broker and office and the requirements for sponsoring brokers. The course will include a lengthy discussion of unprofessional conduct and some of the actions that could lead a licensee to be disciplined by the Department of Professional Regulation. Participants will also discuss the handling, deposits, maintenance and disbursement of escrow funds. The course will also touch on a sponsoring broker's options when there is a dispute over the disbursement of funds. Chapters: Chapter One: Agency Chapter Two: License Law Chapter Three: Escrow Learning Objectives: Explain the relationship between licensees and consumers and all parts of the Agency Relationship Disclosure Describe minimum service requirements Discuss the legislative intent of Article 15 Recognize the updated definitions for terms in the Real Estate License Act of 2000 Comprehend what constitutes unprofessional conduct Identify causes of disciplinary actions Discuss disciplinary causes related to escrow Demonstrate knowledge of ledger card, journal, and reconciliation worksheet used for recordkeeping of escrow accounts Identify the escrow law as it applies to handling of escrow monies Page 1

2 Chapter One: Agency Introduction: Our first chapter will discuss the steps that the General Assembly took in an attempt to prevent misunderstandings and miscommunications about the relationships that licensees have with clients and customers. We will examine the various types of relationships that a licensee can have with a real estate consumer, as well as what duties are owed to the consumer in each relationship. How an agency relationship is formed will be detailed as well. The chapter will conclude with a brief look at the minimum services that must be provided to consumers. Learning Objectives Explain the relationship between licensees and consumers and all parts of the Agency Relationship Disclosure Describe minimum service requirements Discuss the legislative intent of Article 15 Chapter Outline Legislative Intent Relationship between Licensees and Consumers Duties of Licensees Representing Clients Fiduciary Duties Stigmatized Properties Licensees Relationship with Customers Termination of Agency Expiration Completion Agreement Abandonment Performance is Impossible Agency Relationship Disclosure Compensation does not Determine Agency Misconception One Misconception Two Misconception Three Dual Agency Designated Agency Minimum Services Legislative Intent The agency relationship between a licensee and a real estate consumer is arguably the most important business relationship a licensee can have. The General Assembly has determined that the real estate brokerage industry has a significant impact on the economy of the state of Illinois, and because the application of common law to agency relationships between brokers and consumers was leading to misunderstandings and consequences contrary to the best interests of the public, the General Assembly enacted Article 15 of the Real Estate License Act of The General Assembly enacted this Article in order to provide codification of the relationships between real estate brokers and salespersons and consumers of real estate brokerage services. The intent of the legislation is to prevent misunderstandings and misinterpretations of these agency relationships, thus promoting stability in the market. Article 15 only governs agency relationships to the extent that they are not governed by a specific written agreement between a sponsoring broker and a consumer. In addition, the Article is not intended to actually affect the contractual relationships between brokers and their affiliated licensees. Both real estate licensees and consumers, including buyers, sellers, landlords and tenants, may use Article 15 as a basis for private rights of action and defenses. Relationships between Licensees and Consumers Section outlines the relationship between a licensee and a consumer. Essentially it says that licensees should always assume that they are a designated agent for the consumer with whom they are working. The section lists two instances in which this rule would not apply. Page 2

3 Unless a licensee is performing only ministerial acts, which will be defined later in the course, he or she should assume that they are representing whatever consumer, either the buyer or the seller that they are working with. The only other exception to this rule is when there is a written agreement between the sponsoring broker and the consumer detailing an alternative relationship. Duties of Licensees Representing Clients Article 15, Section states that a licensee representing a client shall: Perform the terms of the brokerage agreement between a broker and the client. Promote the best interest of the client by: o Seeking a transaction at the price and terms stated in the brokerage agreement or at a price and terms otherwise acceptable to the client. o Timely presenting all offers to and from the client, unless the client has waived this duty. o Disclosing to the client material facts concerning the transaction of which the licensee has actual knowledge, unless that information is confidential information. Material facts do not include the following when located on or related to real estate that is not the subject of the transaction: physical conditions that do not have a substantial adverse effect on the value of the real estate, fact situations, or occurrences o Timely accounting for all money and property received in which the client has, may have, or should have had an interest. o Obeying specific directions of the client that are not otherwise contrary to applicable statutes, ordinances, or rules. o Acting in a manner consistent with promoting the client s best interests as opposed to a licensee s or any other person s self-interest. Exercise reasonable skill and care in the performance of brokerage services. Keep confidential all confidential information received from the client. Comply with all requirements of this Act and all applicable statutes and regulations, including without limitation fair housing and civil rights statutes. Fiduciary duties In addition to the duties set forth in Article 15, licensees also have fiduciary responsibilities to their clients. When a broker or salesperson enters into an agency relationship with a client, they are also agreeing to take on certain responsibilities. These added responsibilities are commonly referred to as fiduciary duties. The fiduciary duties that a licensee owes to a client are: Loyalty Obedience Confidentiality Disclosure Reasonable care and diligence Accounting Loyalty Loyalty refers to the fact that the agent must demonstrate loyalty by acting in the best interests of the principal or client. If you take a listing from a seller, you are duty bound to try to get the best deal for your client. You have to work for the best price and terms. You have to investigate all offers received and strive to maximize the benefits to the seller. Obedience Obedience means that you as agent are under the control of your principal and must obey their instructions; as long as they are within the law. If you are asked to discriminate against a customer or withhold information about a property defect, or engage in any other illegal endeavor, you must refuse. Confidentiality Confidentiality means the agent owes a bond of confidentiality to the principal or client. As agent, you may not discuss or reveal facts or information that may harm the interests of your client. This is similar to the confidentiality arrangement between doctors and their patients and attorneys and their clients. Certain information is privileged and may not be revealed without the client s consent. Page 3

4 For example, as an agent you would be prohibited from revealing personal information about a client s marital problems, financial problems, or need to sell a property. You may not disclose a price that a principal has indicated as acceptable for a sale. Disclosure Disclosure laws require that an agent must make a full disclosure, in a timely fashion, of all known facts that are material to the transaction. Material includes: 1. Of, relating to, or consisting of physical matter 2. Being of real importance or consequence 3. Being an essential component 4. Being relevant to a subject under consideration 5. Being such as would affect or be taken into consideration by a reasonable person in acting or making decisions Examples of material disclosures would include the fact that other offers have been made (until the sale is closed), the buyer s financial situation, the relationship between an agent and participants of a transaction, and the commission split between a listing and selling agent. Disclosure is required, even if the effect is adverse and might result in quashing the deal. Disclosure is required even if the information is discovered after the purchase contract is signed. A listing broker must also disclose to the seller such things as the fact that they are loaning money to a buyers for a down payment or that the buyer is a relative. Reasonable Care and Diligence Reasonable care and diligence must be employed by the agent. Expectations of the agent exceed simply finding a buyer. The agent is considered to be qualified to exercise judgment and be knowledgeable about the title and physical considerations of the property. Brokers are not attorneys but are held to a reasonable standard of care in knowing and being able to explain basic real estate law such as legal restrictions and contingency clauses. They should be familiar with financing procedures and tax implications of real estate ownership. Because of their professional status, state license and fiduciary responsibilities, brokers are help to a higher standard of care than a lay person. For example a broker acting as agent for a seller would be expected to: Arrive at a reasonable listing and selling price Investigate and discover material facts Explain listing agreements, purchase contracts and other legal documents Recommend employing independent experts, when appropriate Accounting Accounting for monies or contracts received on behalf of a client or principal is part of the agent s fiduciary responsibilities. Monies received by an agent as earnest money for a deposit according to a purchase contract are to be held in trust for the principal and delivered in a reasonable time. Brokers who retain trust funds must do so in a trust account that is separate from their own accounts. We will discuss more about escrow accounts later in the course. A licensee representing a client does not breach a duty or obligation to the client by showing alternative properties to prospective buyers or tenants or by showing properties in which the client is interested to other prospective buyers or tenants. Keep in mind that if a licensee is preparing offers for multiple buyers to purchase or lease the same property, the licensee must make a written disclosure to all clients for whom an offer is being prepared that the licensee is making multiple offers simultaneously. Also, if a client, upon being made aware of the multiple offer situation, requires a referral from another designated agent, the licensee must grant the request and refer the client to another designated agent. A licensee representing a buyer or a tenant client will not be presumed to have breached a duty or obligation to that client by working on the basis that the licensee will receive a higher fee or compensation based on higher selling price or lease cost. A licensee shall not be liable to a client for providing false information to the client if the false information was provided to the licensee by a customer unless the licensee knew or should have known the information was false. Page 4

5 There is nothing in section 15-5 that should be construed as changing a licensee s duties and obligations as it pertains to negligent or fraudulent misrepresentation of material information. Basically, this section does not allow a licensee to forgo any of his or her responsibilities to disclose material facts to his or her client. Stigmatized Properties No cause of action shall arise against a licensee for the failure to disclose: that an occupant of the property was afflicted with Human Immunodeficiency Virus (HIV) or any other medical condition that the property was the site of an act or occurrence that had no effect on the physical condition of the property or its environment or the structures located thereon; fact situations on property that is not the subject of the transaction; or physical conditions located on property that is not the subject of the transaction that do not have a substantial adverse effect on the value of the real estate that is the subject of the transaction There may be times when a licensee shows a client a home that has a negative stigma attached to it. While there are some clients who would refuse to purchase a home with such stigmas, licensees are not required to disclose such stigmas if they do not represent a material defect to the subject property. Some examples of negative stigmas that may be associated with a property, but do not have to be disclosed are: The property was the site of a murder or suicide The property is supposedly haunted A known sex offender lives near the property Licensees should also keep in mind that people with HIV/AIDS are protected under federal Fair Housing Laws and that licensees are not permitted to disclose whether a previous occupant had HIV or AIDS. Licensee s Relationship with Customers Licensees will also find that they need to have a relationship with real estate customers as well. Customers are those real estate consumers for whom a licensee performs ministerial acts, but does not have an agency relationship with. For example, a seller s broker may set up a showing for a potential buyer. In this instance, the seller would be the client and the potential buyer would be a customer. Section states: Licensees shall treat all customers honestly and shall not negligently or knowingly give them false information. A licensee engaged by a seller client shall timely disclose to customers who are prospective buyers all latent material adverse facts pertaining to the physical condition of the property that are actually known by the licensee and that could not be discovered by a reasonably diligent inspection of the property by the customer. A licensee shall not be liable to a customer for providing false information to the customer if the false information was provided to the licensee by the licensee s client and the licensee did not have actual knowledge that the information was false. No cause of action shall arise on behalf of any person against a licensee for revealing information in compliance with this Section. A licensee representing a client in a real estate transaction may provide assistance to a customer by performing ministerial acts. Performing those ministerial acts shall not be construed in a manner that would violate the brokerage agreement with the client, and performing those ministerial acts for the customer shall not be construed in a manner as to form a brokerage agreement with the customer. Termination of Agency There are a number of different ways in which an agency relationship can be terminated. Let s take a look at each in detail. Expiration Expiration of the agreement is a common means of termination. Once the expiration date specified in the written agency agreement is reached, the licensee s Page 5

6 fiduciary obligations to the client end; however there are certain obligations which remain after the agency agreement has been terminated. Their obligations are detailed in Section 15-20, which states: Except as may be provided in a written agreement between the broker and the client, neither a sponsoring broker nor any licensee affiliated with the sponsoring broker owes any further duties to the client after termination, expiration, or completion of performance of the brokerage agreement, except to account for all moneys and property relating to the transaction and to keep all confidential information received during the course of the brokerage agreement Completion Completion of the goal of the agreement could also end the relationship. Basically if the seller s property is sold, or a buyer closes on a home, the agency relationship will come to an end. Agreement An Agency relationship can be dissolved through mutual agreement of the parties. Circumstances change, and sometimes personalities may clash, either of which could lead the parties to come to an amicable agreement to end the relationship. Abandonment Abandonment is unilateral decision by one of the parties to end the agreement. Typically this is a breach of contract and may result in a lawsuit for the abandoning party. Performance is Impossible Sometimes an agency agreement needs to be terminated because it would be impossible to complete the goals of the agreement. This could occur if the property were destroyed by a natural disaster, or if one of the parties passed away. Agency Relationship Disclosure Licensees must disclose who their client(s) is/are in every transaction. This disclosure allows consumers to know what their relationship is with a broker and make a more informed decision about their need, or lack thereof, for representation. We mentioned it previously, but it bears repeating here: Article 15 specifically states that, unless there is a written agreement specifying otherwise, licensees are presumed to be representing the consumer with whom they are working as the consumer s designated agent, unless the licensee is performing only ministerial acts. Sponsoring brokers are required to advise the consumer of the following: That a designated agency relationship exists, unless there is written agreement between the sponsoring broker and the consumer providing for a different brokerage relationship. The name or names of his or her designated agent or agents in writing. The sponsoring broker s compensation and policy with regard to cooperating with brokers who represent other parties in a transaction. This notification must be given no later than when the sponsoring broker enters into a written brokerage agreement with the consumer. Licensees are also required to disclose, in writing, to a customer that the licensee is not acting as the agent of the customer. This disclosure must come early enough so that the customer is prevented from disclosing confidential information to the licensee, but never later than the preparation of an offer to purchase or lease a property. This does not mean that a licensee cannot perform ministerial acts for the customer; however, since Article 15 presumes that a designated agency relationship exists, the licensee must clarify that they are not an agent of the customer. This does not apply to residential lease or rental transactions unless the lease or rental agreement includes an option to purchase real estate. Page 6

7 Compensation does not Determine Agency Article 15, Section states: Compensation does not determine agency relationship. The payment or promise of payment of compensation to a licensee is not determinative of whether an agency relationship has been created between any licensee and a consumer. Basically what this means is that it does not matter who pays the broker their commission, the broker s agency relationship is determined by the written agency agreement that they enter into with their client. For example, if a licensee is representing a buyer and the terms of the purchase agreement between the buyer and seller call for the seller to pay the buyer s broker s commission, the licensee would still have an agency agreement with, and fiduciary responsibilities to, the buyer. Even though the seller is paying the commission, the buyer is the client and the seller is a customer. There are a number of common misconceptions that may come up during real estate transactions. The majority of them involve misunderstandings and misconceptions about agency. Here are some of the most common. Misconception Number One: The agent who is showing you a property automatically represents you. This is absolutely the most common misconception about agency. Everybody seems to think that as soon as an agent approaches them or shows them a property, the agent is working in their best interests. Wrong. In the normal course of business, the seller s agent lists the property and puts it into the multiple listing service. In order for an agent to represent the buyer in the transaction, that buyer would have to knowingly enter into an agency agreement with the agent. It s as simple as that. An individual can never assume that an agent is looking out for his or her best interests. Misconception Number Two: In order to create an agency relationship, a client must provide immediate compensation. Neither money nor any other form of payment is required to create an agency relationship. At the same time, a person is not necessarily an agent of those paying compensation. Misconception Number Three: The party that pays the fees determines agency relationships. It is entirely possible for the seller to pay a fee to the agent for the buyer without disturbing the agent s fiduciary responsibilities to the contracted buyer. The most common way to do this is to notify the seller in the listing agreement that a cooperating broker may represent the buyer and the commission may be divided between the listing agent and the buyer agent. Dual Agency It is possible for a broker to represent both the buyer and seller in the same transaction. This type of relationship is known as dual agency. In a dual agency situation, the broker must undertake to pursue the fiduciary interests of both parties, which are generally in opposition. A licensee may act as a dual agent only with the informed written consent of all clients. Informed written consent shall be presumed to have been given by any client who signs the Dual Agency Disclosure Form which reads: The undersigned (insert name(s)), ( Licensee ), may undertake a dual representation (represent both the seller or landlord and the buyer or tenant) for the sale or lease of property. The undersigned acknowledge they were informed of the possibility of this type of representation. Before signing this document please read the following: Representing more than one party to a transaction presents a conflict of interest since both clients may rely upon Licensee s advice and the client s respective interests may be adverse to each other. Licensee will undertake this representation only with the written consent of ALL clients in the transaction. Page 7

8 Any agreement between the clients as to a final contract price and other terms is a result of negotiations between the clients acting in their own best interests and on their own behalf. You acknowledge that Licensee has explained the implications of dual representation, including the risks involved, and understand that you have been advised to seek independent advice from your advisors or attorneys before signing any documents in this transaction. What a Licensee can do for Clients when Acting as a Dual Agent Treat all clients honestly. Provide information about the property to the buyer or tenant. Disclose all latent material defects in the property that are known to the Licensee. Disclose financial qualification of the buyer or tenant to the seller or landlord. Explain real estate terms. Help the buyer or tenant to arrange for property inspections. Explain closing costs and procedures. Help the buyer compare financing alternatives. Provide information about comparable properties that have sold so both clients may make educated decisions on what price to \ accept or offer. What a Licensee Cannot Disclose to Clients when Acting as a Dual Agent Confidential information that Licensee may know about a client, without that client s permission. The price the seller or landlord will take other than the listing price without permission of the seller or landlord. The price the buyer or tenant is willing to pay without permission of the buyer or tenant. A recommended or suggested price the buyer or tenant should offer. A recommended or suggested price the seller or landlord should counter with or accept. If either client is uncomfortable with this disclosure and dual representation, please let the Licensee know. You are not required to sign this document unless you want to allow Licensee to proceed as a Dual Agent in this transaction. By signing below, you acknowledge that you have read and understand this form and voluntarily consent to Licensee acting as a Dual Agent (that is, to represent BOTH the seller or landlord and the buyer or tenant) should that become necessary. This disclosure form should be signed by the buyer, seller and the licensee in the transaction. The dual agency disclosure form must be presented by a licensee, who offers dual representation, to the client at the time the brokerage agreement is entered into and may be signed by the client at that time or at any time before the licensee acts as a dual agent to the client. A licensee acting in a dual agency capacity in a transaction must obtain a written confirmation from the licensee s clients of their prior consent for the licensee to act as a dual agent in the transaction. This confirmation should be obtained at the time the clients are executing any offer or contract to purchase or lease in a transaction in which the licensee is acting as a dual agent. This confirmation may be included in another document, such as a contract to purchase, in which case the client must not only sign the document but also initial the confirmation of dual agency provision. That confirmation must state, at a minimum, the following: The undersigned confirm that they have previously consented to (insert name(s)), ( Licensee ), acting as a Dual Agent in providing brokerage services on their behalf and specifically consent to Licensee acting as a Dual Agent in regard to the transaction referred to in this document. Dual agency often results in an untenable situation for a broker as it is extremely difficult to please both sides equally, and if any problems arise there is a high likelihood of the deal falling through, and potentially being followed by lawsuits. A consumer may not file suit against a licensee for making the dual agency disclosures required by Article Page 8

9 15. Additionally, the dual agent does not terminate any agency relationship simply by making the required disclosures set for in Article 15. In the case of dual agency, each client and the licensee possess only actual knowledge and information. Information or knowledge is not imputed among or between clients and brokers or the broker s affiliated licensees. In other words, simply because a broker is working as a dual agent this does not mean that any knowledge he or she has about one client is implied to be known by the other client, nor is it implied to be known by the broker s affiliated licensees. In any transaction, a licensee may, without liability, withdraw from representing a client who has not consented to a disclosed dual agency. The withdrawal shall not prejudice the ability of the licensee to continue to represent the other client in the transaction or limit the licensee from representing the client in other transactions. When a withdrawal occurs, the licensee shall not receive a referral fee for referring a client to another licensee unless written disclosure is made to both the withdrawing client and the client that continues to be represented by the licensee. Designated Agency A sponsoring broker entering into an agreement with any person for the listing of property or for the purpose of representing any person in the buying, selling, exchanging, renting, or leasing of real estate may specifically designate any licensee employed by or affiliated with the sponsoring broker to act as the designated agent of that person to the exclusion of all other licensees employed by or affiliated with the sponsoring broker. This designated agency can allow the sponsoring broker to avoid a dual agency situation if the firm represents both the buyer and seller in the same transaction as each client will be assigned a specific licensee affiliated with the firm. These designated agents will work only for the client to which they are assigned and will not be privy to any of the confidential information that the other client shares with their designated agent. For example, Agent A is showing a house to a potential buyer. The listing agent for the house is Agent B. Agents A and B work for the same real estate firm. In this case, Agent A would be working exclusively in the best interests of the buyer and Agent B would be working for the seller. A sponsoring broker entering into an agreement under a designated agency relationship shall not be considered to be acting for more than one party in a transaction if the licensees specifically designated as legal agents of a person are not representing more than one party in a transaction. A sponsoring broker designating affiliated licensees to act as agents of clients shall take ordinary and necessary care to protect confidential information disclosed by a client to his or her designated agent. A designated agent may disclose to his or her sponsoring broker or persons specified by the sponsoring broker confidential information of a client for the purpose of seeking advice or assistance for the benefit of the client in regard to a possible transaction. Confidential information shall not be disclosed by the sponsoring broker or other specified representative of the sponsoring broker unless otherwise required by the Real Estate License Law Act of 2000 or requested or permitted by the client who originally disclosed the confidential information. Minimum Services Illinois law (225 ILCS 454/15-75) requires that minimum services are provided to consumers by licensed real estate agents when the home buyer or seller has signed an exclusive brokerage agreement for professional services. The minimum services law is designed to protect the home buyer or seller and require that all exclusive brokerage agreements must specify that the sponsoring broker, through one or more sponsored licensees, must provide, at a minimum, these services: accept delivery of and present to the client offers and counteroffers to buy, sell, or lease the client s property or the property the client seeks to purchase or lease; assist the client in developing, communicating, negotiating, and presenting offers, counteroffers, Page 9

10 and notices that relate to the offers and counteroffers until a lease or purchase agreement is signed and all contingencies are satisfied or waived; and answer the clients questions relating to the offers, counteroffers, notices, and contingencies This is effective for all exclusive brokerage agreements signed after August 19, The failure of a broker to provide such services would constitute a violation of the Real Estate License Act. Chapter One Review That concludes the first chapter of the Illinois Core A course. If you feel that you need to refresh your memory on this chapter, you may look over the material in this review. You may also go back to the chapter content by using the arrows at the bottom of the screen or by clicking on a specific page title to the right. Our first chapter took an in-depth look at Article 15 of the Real Estate License Act of Article 15 covers the different relationships that licensees may have with consumers, both clients and customers, and the duties owed to each party in each type. Legislative Intent The agency relationship between a licensee and a real estate consumer is arguably the most important business relationship a licensee can have. The General Assembly has determined that the real estate brokerage industry has a significant impact on the economy of the state of Illinois, and because the application of common law to agency relationships between brokers and consumers was leading to misunderstandings and consequences contrary to the best interests of the public, the General Assembly enacted Article 15 of the Real Estate License Act of The General Assembly enacted this Article in order to provide codification of the relationships between real estate brokers and salespersons and consumers of real estate brokerage services. The intent of the legislation is to prevent misunderstandings and misinterpretations of these agency relationships, thus promoting stability in the market. Relationships between Licensees and Consumers Section outlines the relationship between a licensee and a consumer. Essentially it says that licensees should always assume that they are a designated agent for the consumer with whom they are working. Duties of Licensees Representing Clients In addition to the duties set forth in Article 15, licensees also have fiduciary responsibilities to their clients. When a broker or salesperson enters into an agency relationship with a client, they are also agreeing to take on certain responsibilities. These added responsibilities are commonly referred to as fiduciary duties. The fiduciary duties that a licensee owes to a client are: Loyalty Obedience Confidentiality Disclosure Reasonable care and diligence Accounting Licensee s Relationship with Customers Licensees will also find that they need to have a relationship with real estate customers as well. Customers are those real estate consumers for whom a licensee performs ministerial acts, but does not have an agency relationship with. For example, a seller s broker may set up a showing for a potential buyer. In this instance, the seller would be the client and the potential buyer would be a customer. Termination of Agency An agency relationship can be terminated in a number of different ways, including: Expiration Completion Agreement Abandonment Impossible performance Agency Relationship Disclosure Licensees must disclose who their client(s) is/are in every transaction. This disclosure allows consumers to know what their relationship is with a broker and make a more informed decision about their need, or lack thereof, for representation. Licensees are required to provide disclosure for every transaction stating which party they represent, and which party they do not represent. Page 10

11 Compensation does not Determine Agency Article 15, Section states: Compensation does not determine agency relationship. The payment or promise of payment of compensation to a licensee is not determinative of whether an agency relationship has been created between any licensee and a consumer. Basically what this means is that it does not matter who pays the broker their commission, the broker s agency relationship is determined by the written agency agreement that they enter into with their client. For example, if a licensee is representing a buyer and the terms of the purchase agreement between the buyer and seller call for the seller to pay the buyer s broker s commission, the licensee would still have an agency agreement with, and fiduciary responsibilities to, the buyer. Even though the seller is paying the commission, the buyer is the client and the seller is a customer. Dual Agency It is possible for a broker to represent both the buyer and seller in the same transaction. This type of relationship is known as dual agency. In a dual agency situation, the broker must undertake to pursue the fiduciary interests of both parties, which are generally in opposition. A licensee may act as a dual agent only with the informed written consent of all clients. Informed written consent shall be presumed to have been given by any client who signs the Dual Agency Disclosure Form. The dual agency disclosure form must be presented by a licensee, who offers dual representation, to the client at the time the brokerage agreement is entered into and may be signed by the client at that time or at any time before the licensee acts as a dual agent to the client. Designated Agency A sponsoring broker entering into an agreement with any person for the listing of property or for the purpose of representing any person in the buying, selling, exchanging, renting, or leasing of real estate may specifically designate any licensee employed by or affiliated with the sponsoring broker to act as the designated agent of that person to the exclusion of all other licensees employed by or affiliated with the sponsoring broker. This designated agency can allow the sponsoring broker to avoid a dual agency situation if the firm represents both the buyer and seller in the same transaction as each client will be assigned a specific licensee affiliated with the firm. These designated agents will work only for the client to which they are assigned and will not be privy to any of the confidential information that the other client shares with their designated agent. Minimum Services The minimum services law is designed to protect the home buyer or seller and require that all exclusive brokerage agreements must specify that the sponsoring broker, through one or more sponsored licensees, must provide, at a minimum, these services: accept delivery of and present to the client offers and counteroffers to buy, sell, or lease the client s property or the property the client seeks to purchase or lease; assist the client in developing, communicating, negotiating, and presenting offers, counteroffers, and notices that relate to the offers and counteroffers until a lease or purchase agreement is signed and all contingencies are satisfied or waived; and answer the clients questions relating to the offers, counteroffers, notices, and contingencies Chapter Two: License Law Our second chapter will begin by providing definitions for terms that are of great importance to licensees. We will also look at some of the changes/updates to the Real Estate License Act of 2000, including changes to the definitions of managing broker and office and the requirements for sponsoring brokers. The chapter will conclude with a lengthy discussion of unprofessional conduct and some of the actions that could lead a licensee to be disciplined by the Department of Professional Regulation. Learning Objectives Upon completing this section, students will be able to: Recognize the updated definitions for terms in the Real Estate License Act of 2000 Comprehend what constitutes unprofessional Page 11

12 conduct Identify causes of disciplinary actions Chapter Outline Definitions Sponsoring Broker Unlicensed Personal Assistants Disciplinary Action Unprofessional Conduct Grounds for Discipline Definitions Agency: a relationship in which a real estate broker or licensee, whether directly or through an affiliated licensee, represents a consumer by the consumer s consent, whether express or implied, in a real property transaction. Broker: An individual, partnership, limited liability company, corporation, or registered limited liability partnership other than a real estate salesperson or leasing agent who, whether in person or through any media or technology, for another and for compensation, or with the intention or expectation of receiving compensation, either directly or indirectly: Sells, exchanges, purchases, rents, or leases real estate Offers to sell, exchange, purchase, rent, or lease real estate Negotiates, offers, attempts, or agrees to negotiate the sale, exchange, purchase, rental, or leasing of real estate. Lists, offers, attempts, or agrees to list real estate for sale, lease, or exchange Buys, sells, offers to buyer or sell, or otherwise deals in options on real estate or improvements thereon Supervises the collection, offer, attempt, or agreement to collect rent for the sue of real estate Advertises or represents himself or herself as being engage in the business of buying, selling, exchanging, renting, or leasing real estate Assists or directs in procuring or referring of leads or prospects, intended to result in the sale, exchange, lease, or rental of real estate Assists or directs in procuring or referring of leads or prospects, intended to result in the sale, exchange, lease, or rental of real estate Assists or directs in the negotiation of any transaction intended to result in the sale exchange, lease, or rental of real estate Opens real estate to the public for marketing purposes Sells, leases, or offers for sale or lease real estate at auction Brokerage Agreement: A written or oral agreement between a sponsoring broker and a consumer for licensed activities to be provided to a consumer in return for compensation or the right to receive compensation from another. Brokerage agreements may constitute either a bilateral or unilateral agreement between the broker and the broker s client depending upon the content of the brokerage agreement. All exclusive brokerage agreements shall be in writing. Compensation: The valuable consideration given by one person or entity to another person or entity in exchange for the performance of some activity or service. Compensation shall include the transfer of valuable consideration, including without limitation the following: Commission Referral fees Bonuses Prizes Merchandise Finder fees Performance of services Coupons or gift certificates Discounts Rebates A change to win a raffle, drawing, lottery, or s imilar game of change not prohibited by any other law or statute Retainer fee Salary Confidential Information: Information obtained by a licensee from a client during the term of a brokerage agreement that: Was made confidential by the written request or written instruction of the client Page 12

13 Deals with the negotiating position of the client Is information the disclosure of which could materially harm the negotiation position of the client, unless at any time the client permits the disclosure of information given by that client by word or conduct, the disclosure is required by law, or the information becomes public from a source other than the licensee Confidential information shall not be considered to include material information about the physical condition of the property. Customer: a consumer who is not being represented by the licensee but for whom the licensee if performing ministerial acts. Dual Agency: An agency relationship in which a licensee is representing both buyer and seller or both landlord and tenant in the same transaction. When the agency relationship is designated agency, the question of whether there is a dual agency shall be determined by the agency relationships of the designated agent of the parties and not of the sponsoring broker. Escrow Moneys: all moneys, promissory notes or any other type or manner of legal tender or financial consideration deposited with any person for the benefit of the parties to the transaction. A transaction exists once an agreement has been reached and an accepted real estate contract signed or lease agreed to by the parties. Escrow moneys includes without limitation earnest moneys and security deposits except those security deposits in which the person holding the security deposit is also the sole owner of the property being leased and for which the security deposit is being held. Managing Broker: A broker or licensed managing broker who has supervisory responsibilities for licensees in one or, in the case of a multi-office company, more than one office and who has been appointed as such by the sponsoring broker. All licensees acting as a managing broker or self-sponsored broker after April 30, 2012 must have a managing broker license or obtain one within 90 days after being names a managing broker. Ministerial Acts: Those acts that a licensee may perform for a consumer that are informative or clerical in nature and do not rise to the level of active representation on behalf of a consumer. Examples of these acts include without limitation: Responding to phone inquiries by consumers as to the availability and pricing of brokerage services Responding to phone inquiries from a consumer concerning the price or location of property Attending an open house and responding to questions about the property from a consumer Setting an appointment to view property Responding to questions of consumers walking into a licensee s office concerning brokerage services offered or particular properties Accompanying an appraiser, inspector, contractor, of similar third party on a visit to a property Describing a property or the property s condition in response to a consumer s inquiry Completing business or factual information for a consumer on an offer or contract to purchase on behalf of a client Showing a client through a property being sold by an owner on his or her own behalf Referral to another broker or service provider Office: A real estate broker s place of business where the general public is invited to transact business, from which sponsored licensees work and where records may be maintained and licenses displayed, whether or not it is the broker s principal place of business. When determining whether an office exists, the following shall be considered by the Division. An office is any location or structure that is owned, controlled, operated, or maintained by a person who, at that location or structure, is: Engaging in licensed activities Offering real estate services to consumers Holding out to the public that the person is engaged in the practice of real estate brokerage Maintaining original real estate documents and records related to active or pending transactions Maintaining current escrow records Meeting consumers for the purpose of engaging in real estate licensed activities Page 13

14 The following places do not constitute an office: A motor vehicle primarily used for transportation A place whose purpose is solely devoted to advertising real estate matters of a general nature or to making a sponsoring broker s business name generally known A place that a licensee uses solely for storage or archiving of records A licensee s residence unless held out to the public as a location at which real estate brokerage services are available to the public A licensee engaged in the practice of real estate brokerage shall maintain an office. If the licensee is sponsored by another, then the office shall be the office of the sponsoring broker. A post office box, mail drop location, or other similar facility shall not constitute an office, so long as none of the activities described in this definition take place at that facility. Sponsoring Broker A licensee may only perform activities which require a license for a sponsoring broker. In addition, the licensee may only work for a single sponsoring broker at any one time. Sponsoring brokers who employ, or have an independent contractor relationship, with licensees must have a written employment agreement with each licensee. The broker named in the written employment agreement must serve as that licensee s sponsoring broker. Brokers must also have a written employment agreement with every licensed personal assistant who works with a licensee sponsored by the sponsoring broker. This requirement applies regardless of whether or not the assistant performs licensed activities in their capacity as a personal assistant. The written employment agreement must be signed and dated by both parties and must address the employment or independent contractor relationship terms, including but not limited to: Supervision Duties Compensation - a sponsoring broker may pay compensation directly to a corporation owned solely by the licensee, and having been formed for the purpose of receiving compensation. The corporation does not need to be licensed provided the sole shareholder of the corporation is licensed. Duration - this is not intended to require a specific termination date, rather to allow the parties to negotiate the terms such as at will or for a specific length of time, and how the agreement can be renewed or terminated. Termination The sponsoring broker shall give to every employee and independent contractor a copy of the employment agreement and any modifications. Unlicensed Personal Assistants An Unlicensed Assistant may not engage in licensed activities. An excellent list of examples of what an Unlicensed Assistant may and may not do appears in Rule paragraphs (b) and (c). An Unlicensed Assistant may be employed directly by the licensee being assisted. The licensee being assisted is responsible for the actions of the Unlicensed Assistant. Compensation for an Unlicensed Assistant does NOT need to pass through the sponsoring broker of the licensee being assisted. Disciplinary Action Unprofessional Conduct Unprofessional conduct is defined as; Conduct that constitutes dishonorable, unethical or unprofessional conduct of a character likely to deceive, defraud or harm the public. Some examples of unprofessional conduct include: Failure to act in the best interests of a client. Deliberately misleading a client as to the market value of the property. Failing to advertise the property as obligated by the listing agreement. Deliberately misrepresenting the condition of the property or the availability of access to show the property. Purchasing or transferring of the property through an intermediary in order to conceal the purchase by the licensee. Inducing a seller to list the property through false representations. Inducing a seller through false representations Page 14

15 or false promises to transfer the property to the licensee. Taking unfair advantage of a client s or customer s age, disability or lack of understanding of the English language. Engaging in conduct with the public or other real estate licensees in the practice of real estate in a manner that is abusive, harassing or lewd. Representing oneself as a sponsoring broker or managing broker without providing the actual supervision and management of the real estate business. Failing to reasonably safeguard confidential information or improperly using confidential information. Obstructing an inspection, audit, investigation, examination or disciplinary proceeding. Violation of Section , Special Accounts. Assisting or inducing a licensee to violate the Act or Section Any conduct that constitutes a breach of duty to the client and causes harm to the client in the future. Every application for a leasing agent, broker and managing broker license contains a series of questions which may provide basis to deny an application, including: Have you ever been convicted of any criminal offense in any state or federal court? Have you been denied a professional license or permit or the privilege of taking an examination? Have you ever had a professional license or permit disciplined in any way by any licensing authority in Illinois or any other state/ jurisdiction? Have you ever been discharged other than honorable discharge from the armed services or from a city, county, state, or federal position? Are you more than 30 days in arrears on any court ordered child support payments? Are you in arrears on any state taxes due to the Illinois Department of Revenue? Are you in arrears on any student loan acquired through the Illinois Student Assistance Commission? Answering in the affirmative to any of these questions may result in the transfer of the application to the DPR Legal Department for review. An affirmative answer will not automatically result in a denial of the license. The Legal Department may arrange for an informal meeting with the applicant and representatives of the Real Estate Administration and Disciplinary Board to discuss a resolution to the application. The Legal Department may also choose to issue a formal Intent to Deny Notice. All applicants have a right to a Formal Evidentiary Hearing on the application. Note - Failing to answer all questions on the application honestly and accurately will likely result in the denial of the license. The primary basis for DPR to deny a license falls under Section of the Act. Grounds for Discipline The department may refuse to issue or renew a license, may place on probation, suspend, or revoke any license, reprimand, or take any other disciplinary or non-disciplinary action as the Department may deem proper or impose a find not to exceed $25,000 upon any licensee under this Act or against a licensee in handling his or her own property, whether held by deed, option, or otherwise, for any one of any combination of the following causes. Fraud: Fraud or Misrepresentation in applying for, or procuring, a license under this Act or in connection with applying for renewal of a license under this Act. Conviction: The conviction of, plea of guilty or plea of no contest to a felony or misdemeanor, an essential element of which is dishonesty or fraud or larceny, embezzlement, or obtaining money, property, or credit by false pretenses or by means of a confidence fame in this State or any other jurisdiction. Inability to Practice: Inability of practice the profession with reasonable judgment, skill, or safety as a result of a physical or mental illness or disability. Lack of Office: Practice under this Act as a licensee in a retail sales establishment from an office, desk, or space that is not separated from the main retail business by a separate and distinct area within the establishment. Page 15

16 Disciplinary Action of Another State: Disciplinary action of another state or jurisdiction against the license or other authorization to practice as a managing broker, broker, salesperson, or leasing agent if at least one of the grounds for that discipline is the same as or the equivalent of one of the grounds for discipline set forth in this Act. A certified copy of the record of the action by the other state or jurisdiction shall be prima facie evidence thereof. Practice without a License: engaging in the practice of real estate brokerage without a license or after the licensee s license was expired or while the license was inoperative. Cheating: Cheating on or attempting to subvert, including aiding or abetting another applicant to subvert or cheat on the Real Estate License Exam or continuing education exam. Advertising: Advertising that is inaccurate, misleading, or contrary to the provisions of the Act such as making any substantial misrepresentation or untruthful advertising, and advertising by any means, including displaying a for rent of for sale sign on any property without the written consent of an owner or his or her duly authorized agent. False Promises: Making any false promises of a character likely to influence, persuade, of induce. Misrepresentation: pursuing a continued and flagrant course of misrepresentation or the making of false promises through licensees, employees, agents, advertising, or otherwise. Misleading: Any misleading or untruthful advertising, or using any trade name or insignia of membership in any real estate organization of which the licensee is not a member. Dual Agent: Acting as a dual agent without providing written notice to all parties for whom the licensee acts. Sponsoring Broker: Representing or attempting to represent a broker other than the sponsoring broker. Escrow Issues: Failure to account for or to remit any moneys or documents coming into his or her possession that belongs to others. Failure to maintain and deposit in a special account, separate and apart from personal and other business accounts, all escrow moneys belonging to others entrusted to a licensee while acting as a real estate broker, escrow agent, or temporary custodian of the funds of others or failure to maintain all escrow moneys on deposit in the account until the transactions are consummated or terminated, except to the extent that the moneys, or any part thereof, shall be disbursed prior to the consummation or termination. Failure to make available to the Department all escrow records and related documents maintained in connection with the practice of real estate within 24 hours of a request for those documents by Department personnel. Requiring a party to the transaction who is not a client of the licensee to allow the licensee to retain a portion of the escrow moneys for payment of the licensee s commission or expenses as a condition for release of the escrow moneys to that party. Failing to furnish copies: Failing to furnish copies upon request of documents relating to a real estate transaction to a party who has executed that document. Failure of a Sponsoring Broker: Failure of a sponsoring broker to timely provide information, sponsor cards, or termination of licenses to the Department. Commingling: Commingling the money or property of others with his or her own money or property. Permitting the Use of License: Permitting the use of his or her license as a broker to enable a salesperson or unlicensed person to operate a real estate business without actual participation therein and control thereof by the broker. Failing to Provide Information: Failing to provide information requested buy the Department, or otherwise respond to that request, within 30 days of the request. Guaranteed Sales Plans: Offering guaranteed sales plans (e.g. Your house sold in 60 days of we ll buy it! ) except to the extent hereinafter set forth: A guaranteed sales plan is any real estate purchase or sales plan whereby a licensee enters into a conditional or unconditional written contract with a seller, prior to entering into a brokerage agreement with the seller, by the terms of which a licensee agrees to purchase a Page 16

17 property of the seller within a specified period of time at a specific price in the event the property is not sold in accordance with the terms of a brokerage agreement to be entered into between the sponsoring broker and the seller. A licensee offering a guaranteed sales plan shall provide the details and conditions of the plan in writing to the party to whom the plan is offered. A licensee offering a guaranteed sales plan shall provide to the party to whom the plan is offered evidence of sufficient financial resources to satisfy the commitment to purchase undertaken by the broker in the plan. Any licensee offering a guaranteed sales plan shall undertake to market the property of the seller subject to the plan in the same manner in which the broker would market any other property, unless the agreement with the seller provides otherwise. The licensee cannot purchase seller s property until the brokerage agreement has ended according to its terms or is otherwise terminated Any licensee who fails to perform on a guaranteed sales plan in strict accordance with its terms shall be subject to all the penalties provided in this Act for violations thereof and, in addition, shall be subject to a civil fine payable to the party injured by the default in an amount of up to $25,000. More Grounds for Discipline Blockbusting: Influencing or attempting to influence, bur any words or acts, a prospective seller, purchase, occupant, landlord, or tenant of real estate, in connection with viewing, buying, or leasing real estate, so as to promote or tend to promote the continuance or maintenance or racially and religiously segregated housing or so as to retard, obstruct, or discourage racially integrated housing on or in any street, block, neighborhood, or community. Illinois Human Rights Act: Engaging in any act that constitutes a violation of any provision of Article 3 of the Illinois Human Rights Act, whether or not a complaint has been filed with or adjudicated by the Human Rights Commission. Contract Assignment: Inducing any party to contract of sale of lease or brokerage agreement to break the contract of sale or lease or brokerage agreement for the purpose of substituting, in lieu thereof, a new contract for sale or lease or brokerage agreement with a third party. Stealing Clients: Negotiating a sale, exchange, or lease of real estate directly with any person if the licensee knows that the person has an exclusive brokerage agreement with another broker, unless specifically authorized by that broker. Free Services: Advertising or offering merchandise or services as free is any conditions or obligations necessary for receiving the merchandise or services are not disclosed in the same advertisement or offer. These conditions or obligations include without limitation the requirement that the recipient attend a promotional activity or visit a real estate site. As used in this subdivision, free includes terms such as award, prize, no charge, free of charge, without charge, and similar words or phrases that reasonably lead a person to believe that he or she may receive or has been selected to receive something of value, without any conditions or obligations on the part of the recipient. Violation of Article 10: Paying or failing to disclose compensation in violation of Article 10 of this Act Minimum Services: Failing to provide the minimum services required by Section of this Act when acting under an exclusive brokerage agreement. Drugs: Habitual or excessive use or addiction to alcohol, narcotics, stimulants, or any other chemical agent, or drug that results in a managing broker, broker, salesperson, or leasing agent s inability to practice with reasonable skill or safety. The Department may refuse to issue or renew or may suspend the license of any person who fails to: file a tax return pay the tax, penalty or interest shown in a filed return pay any final assessment of tax, penalty, or interest Page 17

18 The Department may also refuse to issue or renew a license for anyone who: Has defaulted on an educational loan or scholarship issued by any state or governmental agency Is more than 30 days delinquent in the payment of child support The Department may, upon a showing of a possible violation, compel a licensee or applicant to submit to a mental or physical examination, or both, as required by and at the expense of the Department. The examining physician(s) will be chosen by the Department, though the individual being examined may have, at their own expense, a physician of their choice present during all aspects of the examination. Failure of an individual to submit to a mental or physical examination, when directed, shall be grounds for suspension of his or her license until the individual submits to the examination if the Department finds, after notice and hearing, that the refusal to submit to the examination was without reasonable cause. If the Department finds an individual unable to practice due to mental or physical illness or disability, the Department may require that individual to submit to care or treatmentby physicians approved by the Department as a condition for continued, reinstated or renewed licensure. If the individual fails to comply with this condition, the Department may immediately suspend their license pending a hearing. Chapter Two Review That concludes the second chapter of the Illinois Core A course. If you feel that you need to refresh your memory on this chapter, you may look over the material in this review. You may also go back to the chapter content by using the arrows at the bottom of the screen or by clicking on a specific page title to the right. In our second chapter we provided definitions given in the Real Estate License Act of 2000, many of which have been added or updated since the original version of the Act was published. We also discussed the requirements that sponsoring brokers must follow when entering into a written employment agreement. We concluded the chapter with a detailed examination of unprofessional conduct and actions that could result in discipline from the Department of Professional Regulation. Definitions The definitions for agency, broker, brokerage agreement, compensation, confidential information, customer, dual agency, escrow moneys, managing broker, ministerial acts and office are all provided. Special attention should be paid to the definitions of managing broker and office as they have been changed since the original version of the Act was released. Sponsoring Broker A licensee may only perform activities which require a license for a sponsoring broker. In addition, the licensee may only work for a single sponsoring broker at any one time. Sponsoring brokers who employ, or have an independent contractor relationship, with licensees must have a written employment agreement with each licensee. The broker named in the written employment agreement must serve as that licensee s sponsoring broker. Brokers must also have a written employment agreement with every licensed personal assistant who works with a licensee sponsored by the sponsoring broker. This requirement applies regardless of whether or not the assistant performs licensed activities in their capacity as a personal assistant. Disciplinary Action Unprofessional conduct is defined as; Conduct that constitutes dishonorable, unethical or unprofessional conduct of a character likely to deceive, defraud or harm the public. Some examples of unprofessional conduct include: Failure to act in the best interests of a client. Deliberately misleading a client as to the market value of the property. Failing to advertise the property as obligated by the listing agreement. Deliberately misrepresenting the condition of the property or the availability of access to show the property. Every application for a leasing agent, broker and managing broker license contains a series of questions which may provide basis to deny an application. Answering in the affirmative to any of these questions may result in the transfer of the application to the DPR Legal Department for review. An affirmative answer will not automatically result in a denial of the license; however, failing to answer all the questions on the Page 18

19 application honestly and accurately will likely result in the denial of the license. There are a number of actions for which the Department may refuse to issue or renew a license, suspend or revoke a license or take any other disciplinary action the Department deems to be proper. Generally speaking, those actions include: Fraud Physical or mental inability to practice Practicing without a license False advertising Escrow issues Blockbusting Violation of the Illinois Human Rights Act Failing to provide minimum services Drug addiction Chapter Three: Escrow Chapter Overview Our final chapter will examine some of the issues that sponsoring brokers face when dealing with escrow money. Specifically we will focus on the handling, deposits, maintenance and disbursement of escrow funds. We will also touch on a sponsoring broker s options when there is a dispute over the disbursement of funds. Finally, we will recap some of the things that may lead to disciplinary action from the Department as it pertains to escrow money. Learning Objectives Discuss disciplinary causes related to escrow Demonstrate knowledge of ledger card, journal, and reconciliation worksheet used for recordkeeping of escrow accounts Identify the escrow law as it applies to handling of escrow monies Chapter Outline Escrow Overview Initial Handling Deposits Maintenance Disbursement Disputes Escrow Overview Initial Handling The Escrow Rule found at is relatively long and detailed. All supervising brokers who accept escrow money should carefully study the Escrow Rule as it is strictly enforced. Generally defined, escrow money is any money in the possession of a broker that does not belong to the broker. Refer to Section 1-10 of the Act and paragraph (a) of the Escrow Rule for the complete definition. Only sponsoring brokers may hold real estate escrow money. The supervising broker of each office is responsible to ensure compliance with the Escrow Rule. Branch offices have the option to either maintain escrow money or to forward escrow money to the main office. Leasing agents, salespersons, or brokers who are sponsored by another broker may NOT hold real estate escrow money. Unlicensed persons, leasing agents, salespersons, or brokers who are sponsored by another broker may assist in the escrow bookkeeping duties in the office. The Act and Rules do NOT require that a sponsoring broker accept escrow money. It is the choice of the sponsoring broker whether to accept escrow money. The sponsoring broker may recommend to the principals to the transaction that an attorney, closing agent, or other professional serve as the escrow agent. The sponsoring broker should ensure that the real estate contract, or any other document, does not contain language in conflict with the sponsoring broker s choice not to accept the escrow money. A supervising broker must file with the Licensing Department in Springfield a Consent to Examine and Audit All Escrow Accounts form at the time of application for license and at every renewal date. In addition, in between renewal dates, the supervising broker must file a new form within 10 days after: adding new escrow account(s) with the existing bank changing signatories on an existing escrow account(s) changing or adding a new bank at which escrow accounts will be maintained Grounds for Discipline Related to Escrow Page 19

20 However, a new form is not required if a new escrow account is opened which falls under an umbrella escrow account which has already by identified in a prior form. Deposits Paragraph (b) (1) of the Escrow Rule provides that the escrow money must be deposited into a non-interest bearing escrow account unless all of the principals to the transaction provide written instructions requiring the deposit into an interest bearing escrow account, or unless some other law requires a deposit into an interest bearing escrow account (e.g. security deposits for leases at some types of buildings). Absent any other written agreement, earnest money deposits should NOT be deposited until a real estate contract is executed. Once a real estate contract or lease is executed, escrow monies should be deposited into an escrow account not later than the end of the next business day following the broker s receipt of the escrow money. This deposit requirement holds true even if an earnest money check is tendered days prior to the execution of a contract, or if subsequent installments of earnest monies are received. Paragraph (e) of the Escrow Rule requires that the supervising broker notify all principals in writing if escrow monies that are required to be deposited into the broker s escrow account are not tendered or do not clear. Only escrow money related to real estate transactions and broker funds (funds the broker may deposit into the escrow account to avoid or to pay bank service charges) may be deposited into an escrow account. Mixing escrow money in an account with personal or business funds constitutes commingling. Great care should be taken to avoid commingling. It is recommended that managing brokers use escrow accounts that have check writing ability to allow for direct disbursements from the escrow accounts. However, if the escrow account does not have check writing ability, the managing broker may transfer the escrow money to a business account with check writing ability for immediate disbursement from the business account (e.g. on the day of closing). This type of transfer, as long as the escrow money is immediately forwarded from the business account to the authorized recipient of the escrow money, does NOT constitute commingling. Maintenance DPR has samples of a ledger card, journal, and reconciliation worksheet. Sample escrow records may be viewed at EscrowRequirements-1005.pdf Great care should be taken to ensure that all of the required data is included in each required escrow record. Each sponsoring broker who accepts earnest money shall maintain, in his or her office or place of business, a bookkeeping system in accordance with sound accounting principles, and without limiting the foregoing, the system shall consist of at least: a journal, a ledger, monthly reconciliation statements, a master escrow account log and copies of all escrow money instruments. A journal shall be maintained for each escrow account. The journal shall show the chronological sequence in which funds are received and disbursed by the sponsoring broker. For funds received, the journal shall include the date the funds were received, the name of the person on whose behalf the funds are delivered to and the amount delivered. For fund disbursement, the journal shall include the date, the payee, the check number and the amount disbursed. A running balance shall be shown after each entry (receipt or disbursement). A ledger shall be maintained for each transaction. The ledger shall show the receipt and the disbursement of funds affecting a single transaction such as between buyer and seller. The ledger shall include the names of all parties to a transaction, the amount of funds received by the sponsoring broker and the date of receipt. The ledger shall show, in connection with the disbursements of funds, the date of disbursement, the payee, the check number and the amount disbursed. The ledger shall segregate one transaction from another transaction. There shall be a separate ledger or separate section of each ledger for each of the various kinds Page 20

21 of real estate transactions (e.g., lease). If the ledger is computer generated from the same data entry from which the journal is generated, the sponsoring broker must maintain copies of the bank deposit slips, bank disbursement slips, or other bank receipts, to account for the data on the ledger. Each sponsoring broker shall reconcile, within 10 days after receipt of the monthly bank statement, each escrow account maintained by the broker except when there has been no transactional activity during the previous month. Reconciliation shall include a written work sheet comparing the balances as shown on the bank or savings and loan association statement, the journal and the ledger, respectively, in order to insure agreement between the escrow account and the journal and the ledger entries with respect to the escrow account. Each reconciliation shall be kept for at least 5 years from the last day of the month covered by the reconciliation. Each sponsoring broker shall maintain a Master Escrow Account Log identifying all escrow bank account numbers, and the name and address of the bank where the escrow accounts are located. The Log must specifically include all bank account numbers opened for individual transactions, even if account numbers fall under another umbrella account number. The Division shall have available for distribution, on request, samples of an approved journal, ledger, monthly reconciliation statement and Master Escrow Account Log. Except as otherwise provided by law, the broker shall retain copies of all escrow money instruments received from a principal as part of a transaction, including copies of all personal checks, cashier s checks, certified checks, money orders, promissory notes or other financial instruments. The broker shall also retain copies and/or documentation of all disbursements or transfers into or out of an escrow account. Escrow records shall be retained for 5 years. The escrow records for the immediate prior 2 years shall be available in the office location and shall be produced within 24 hours after request by the Division. The balance of the records can be available at another location and are subject to request by the Division pursuant to Section (a)(19) of the Act as soon as available, but no later than within 30 days after the request. If escrow records are lost, stolen or destroyed due to fire, flood or any other circumstances, the broker must report the loss to the Division s enforcement division within 30 days by signature restricted delivery. The broker must also immediately obtain copies of monthly bank statements, deposit and disbursement receipts, and any other available records, to reconstruct the loss of escrow records. Disbursement If a transaction closes and the managing broker is directed to forward the escrow money to the closing agent, the managing broker must forward the escrow money to the closing agent as instructed. If a transaction closes and the managing broker is directed to pay commissions (either the broker s own commission or a cooperating commission) directly from the escrow deposit, the escrow money must be transferred out of the escrow account not later than the end of the next business day after the closing. This is true even if there is a dispute regarding commissions - the escrow money must be moved out of the escrow account by the end of the next business day after closing (unless of course a possession escrow is in issue). If a transaction does not close, the managing broker must keep the escrow money in the escrow account until the broker receives written authorization from all of the principals to the transaction (or their attorneys) showing agreement as to how the escrow money is to be disbursed, or until receipt of a court order. Upon receipt of the written authorization or court order, the broker must disburse accordingly by no later than the end of the next business day. If escrow moneys are transferred from an escrow account to another account for disbursement, the sponsoring broker must maintain a copy of all records reflecting a disbursement from the other account. A managing broker must disburse escrow money upon receipt of written direction from the attorneys for the principals to the transaction, rather than from the principals themselves. Note - duly authorized agent does NOT include the principal s real estate agent. Page 21

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