When brokers find themselves handing funds or collecting advance fees, they must follow California Department of Real Estate (“DRE”) regulations to avoid liability. In some cases, a trust account must be used; in other cases, advance fee agreements are required. The regulations are mostly straightforward, but there are nuances brokers should be aware of. Below is a detailed list of specific DRE regulations brokers can expect.
In most cases, trust accounts should be used for appraisal or credit report fees that have not been marked up. The only instance where appraisal or credit report fees do not go into the broker’s trust account is when the fees are reimbursing the broker for fees the broker has advanced. However, brokers should receive clear instructions from the borrower before reimbursing the broker’s general account. The DRE has more strict requirements for negotiable appraisal and credit report fees; if you are unsure whether funds should be held in a trust account or not, we recommend consulting an attorney who is familiar with DRE compliance.
When to Use a Trust Account
For fees received that do not qualify as appraisal or credit report fees, an advance fee agreement should be executed before accepting the funds into a trust account. Advance fees are simply any fees collected by a DRE licensee before fully completing the agreed-upon services. Brokers must submit the advance fee agreement to the DRE before collecting advance fees. Even with an advance fee agreement in place, the advance fees must be held in a trust account until the broker has completed the services for which the fees have been paid.
Guidelines for Appraisal & Credit Report Fees
In some transactions, brokers are prohibited from collecting advance fees—whether an advance fee agreement is in place or not. The most common transactions where advance fees are prohibited are loan modifications and forbearances. Before collecting advance fees, appraisal fees, or credit report fees, the RE7 and all advance fee regulations should be reviewed; if there is any uncertainty regarding whether a fee should be collected, or placed in a trust account, an attorney should be consulted.
When to Consult an Attorney
Generally, brokers should not be collecting fees from a trust account until the fees have been earned. Even with an advance fee agreement in place, the DRE prohibits brokers from collecting fees from a trust account until the broker has completed the services contracted for; brokers are strictly prohibited from collecting advance fees for modifications and forbearances. Brokers who are unsure about collecting advance fees should consult the RE7 compliance manual, and, if they are still unsure, an attorney familiar with DRE compliance. However, for tailored legal support, working with an experienced legal team is crucial.
The Geraci LLP Banking & Finance team specializes in helping brokers and private lenders navigate DRE compliance with confidence. Whether you need assistance with trust account requirements, advance fee agreements, or broader regulatory concerns, our attorneys are here to provide expert guidance. Contact us today to ensure your lending practices align with DRE regulations.
