Are You in Regulatory Hot Water?

If so, you're not alone. Among the most frequent reasons that brokers get into trouble is mishandling of escrow funds, say state real estate commissions.

BY ROBERT LIPARULO

Escrow fund mishandling is one of the most common violations of real estate regulations, according to real estate commission officials from six states with large numbers of practitioners.

Without exception, officials in California, Florida, Illinois, New York, Texas, and Virginia say they see a lot of escrow problems, though not all of them list it as their number one problem.

Terminology and nuances of law vary from state to state. But many officials group escrow-related infractions into a category called mishandling of escrow funds. The term describes a grab bag of offenses, including commingling escrow money with company funds; not being licensed or bonded to accept escrow funds; shoddy bookkeeping; failing to collect deposits from buyers or renters; "borrowing" from escrow accounts to fund business operations; and, as Clifford Stein, chairman of Florida's Real Estate Commission, says, "brokers playing judge and jury by deciding who gets what when disputes arise."

Escrow funds are money given with an offer to purchase property to demonstrate the buyer's good faith. After the offer is accepted, the funds are held, often by a broker, in trust for the buyer and seller until settlement. At settlement the funds are turned over to the seller as part of the purchase price in exchange for the property deed. (If there's no settlement because either the buyer or the seller defaults, the escrow holder will be held strictly accountable for the funds and their proper distribution in accordance with the directions that should be part of the purchase contract.)

Ellen Acevedo, director of enforcement for the Texas Real Estate Commission, Austin, cites commingling of funds as the predominant offense. "I think the majority of violators do it carelessly, not with intention to defraud."

Escrow infractions constitute the single most frequent violation in Illinois as well, with about 1,200 annual complaints yielding 180 disciplinary actions. But unlike Acevedo, Maureen Lydon, deputy executive director of the state's real estate commission, guesses that "about half of the violators are probably playing fast and loose with the law. They may be using escrow money that doesn’t belong to them and replacing it later."

A Broad Category of Runners-Up
New York receives and investigates roughly 2,500 complaints annually, about 40 percent of which result in disciplinary action. Escrow-related infractions, specifically the illegal retention of deposits and unearned commissions, rank second in volume.

The most frequently reported offenses involve agency disclosure. "Consumers just don't understand agency laws," says Marjorie Eilertsen, director of public information for the New York Real Estate Commission. "The complaints point to practitioners’ failure to adequately explain whose interests they represent---the buyer's or the seller's."

In some states, infractions are classified into broad categories, making it hard to determine what specific problems crop up most frequently. In Virginia, for example, 59 percent of all complaints fall into the category of professional misconduct. "That means everything that's not escrow or misrepresentation related," says James Guffey, the state's deputy director of enforcement. His office logs about 500 complaints annually. "We're heading for a system that can pinpoint specific violations, but we're not there yet."

Precise figures for specific violations are difficult to come by, no matter whom you ask. One reason many states sort complaints into broad categories is that classifying offenses can be tricky. For example, Charles Koenig, manager of Sacramento's enforcement office for California's Department of Real Estate, says, "A common violation is salespeople running an ad that doesn’t disclose their status as licensed real estate professionals. That could be called false or misleading advertising, or it could fall under the 'misrepresentation-dishonest dealing' category. A lot depends on what else is involved." Another state might classify that action as something completely different.

Even the Association of Real Estate License Law Officials, based in Centerville, Utah, doesn't keep tabs on the frequency of specific offenses. It does, however, send questionnaires asking its members about the types of complaints they see. In the most recent questionnaire, compiled in early 1996, most states said undisclosed information is an often-cited complaint. And several states pointed out the preponderance of escrow violations, though ARELLO didn't list that category.

Brokers Share Blame
Brokers, as opposed to salespeople, are more likely to violate escrow laws, says Acevedo. "They have access to the funds or are responsible for depositing the money into the right accounts. It's fairly easy to prove their involvement."

Even when salespeople are the culprits, as is often the case in nondisclosure offenses, brokers can't rest easy. State officials say brokers are often responsible for their errant salespeople's actions. "We always investigate the broker's culpability in a salesperson's violation," says Acevedo. "Sometimes we find that brokers are directly involved by encouraging or enabling violations. Or, they're indirectly responsible by failing to supervise salespeople adequately---an infraction for which they can be disciplined. Occasionally, brokers aren't responsible, because their salespeople took steps to conceal their actions from them."

When brokers break a rule, there's no telling who's going to turn them in. In Alabama other licensees lodge more than half of all complaints. "Disgruntled salespeople have been known to bring their brokers' questionable practices to our attention," says Koenig. In Georgia, however, consumer complaints outnumber those by licensees three to one.

The Cause of Violations
Why practitioners violate regulations is difficult to decipher, though some officials will speculate. "The primary reason for most violations," suggests Eilertsen, "is simple ignorance. We believe most brokers are trustworthy and honest, and the violators just didn't understand or overlooked some of the requirements."

Koenig says some brokers don't find out the proper way to conduct business before they do it. "Sounds like common sense," he says, "but most violations result from carelessness and ignorance, which are fancy terms for not using your noggin."

For instance, the number of calls Koenig receives from brokers requesting information about a particular regulation astounds him. "I'll ask brokers who are inquiring about escrow accounts, 'How long have you had one?' And they'll say something like, 'Oh, four years.' So for four years they had no idea whether they were in compliance with the regulations."

One excuse that officials don't buy is that regulations are too complex or change too frequently. "If you can't figure out the rules," says Stein, "you shouldn't take on the responsibility of being a broker."

Penalties Depend on Culpability
Under the rules of most real estate commissions, "those who act negligently or incompetently face disciplinary action," says Acevedo. But the penalties usually aren't as severe as for intentional violators.

In many states, minor violators receive a corrective action letter, which explains the wrongdoing and asks them to inform the state of the steps they've taken to prevent future violations. When states can prove intent, on the other hand, violators face fines, license revocation, and possible criminal charges.

Fines can cost companies dearly. For instance, during its 1993--94 fiscal year, Florida fined 172 salespeople and brokers a total of $205,750.

More of the Same
Despite the seemingly constant fluctuation of real estate regulations, all the officials say that the types of violations committed have remained steady for the past decade and that they don't expect changes in the near future. "Even the total number of complaints is pretty consistent," says Guffey.

"As long as there are laws to obey," he says, "and reasons not to--whether it's not wanting to bone up on regulations or trying to get away with something---complaints will keep pouring in. And we'll be here to set things straight."


How to Handle Escrow Safely
The key to avoiding escrow-related problems, according to Clifford Stein, chairman of the Florida Real Estate Commission, lies in remembering two points:

1. "The money isn't yours until it's yours," he says. Don't disburse money or use "your share," and keep it separate from operating funds, until closing.

2."Don't try to settle disputes yourself," Stein says. He notes that Florida has explicit steps for settling contractual disputes between brokers and other parties, which involve informing the state of a dispute within 15 days and referring it to an appointed third party.

Better yet, Stein suggests, contract with title companies or law firms to handle escrows, as an increasing number of brokers are doing. "It eliminates paperwork hassles and prevents brokers from tripping over the regulations," he says.


Know the Rules and Make Them Known
"Real estate is more a profession than a trade," says Clifford Stein, chairman of the Florida Real Estate Commission. "Just like attorneys and CPAs, brokers are expected to know the regulations thoroughly---and abide by them."

To get that knowledge, says Stein, "start with a base of knowledge that covers all the requirements of conducting business in your state. But don't stop there; there are changing regulations, unusual situations, and salespeople to consider."

If you want to make sure you have up-to-date knowledge, Ellen Acevedo, director of enforcement for the Texas Real Estate Commission, suggests taking advantage of all channels of information open to you. In Texas, for instance, that includes a state-run Web site on the Internet and a monthly newsletter. Check with your state commission, attorney, and local association of REALTORS® to learn about ways of staying on top of regulations.

To keep your salespeople on track, make sure they understand their legal obligations to customers and clients by giving them the same information you use to stay current. Also, don't be so inaccessible that winging it becomes easier for them than getting a question answered.

Finally, "don't assume anything," says Mary Stark-Hood, the NATIONAL ASSOCIATION OFREALTORS®' managing senior counsel. "The Association of Real Estate License Law Officials and reciprocity agreements help keep regulations somewhat similar from state to state, but nothing takes the place of studying your state's regulations."
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