An inside look at DRE broker-controlled escrows (2023)

Real Estate Compliance Consultant and former Department of Real Estate (DRE) Investigator, Summer Goralik, shares advice on complying with the California Escrow Law exemption. Visit the original post on her blog here.

The world of broker-controlled escrows is a niche area of Department of Real Estate (DRE) compliance that only a small subset of real estate brokers across the state regularly engage in as part of their brokerage services. To handle a “non-independent broker escrow” or offer “in-house” escrow services, a real estate broker is faced with certain regulatory requirements that must be adhered to correctly in order to properly exist and avoid compliance issues.

Despite some of the challenges that these requirements often present, many brokers claim that these auxiliary services are the most profitable source of their real estate business and without it, they would be out of business. This piece will focus on a variety of requirements enforced by the DRE and attendant challenges in the area of broker-controlled escrows.

When may a broker conduct in-house escrow activities?

First and foremost, a real estate broker may only engage in the handling of controlled escrows if their activities fall squarely under an exemption in the California Financial Code (CFC). The latter is the body of the law that contains the California Escrow Law which governs the activities of “independent” escrow holders regulated by the Department of Business Oversight (DBO). Thanks to a small carveout in the law (CFC 17006(a)(4)), however, a real estate broker licensed by the DRE may perform escrow activities as an adjunct to their licensed real estate services as long as the broker is an agent or a party to the real estate transaction and performing acts requiring a real estate license.

For example, if a DRE-licensed real estate broker is representing a seller and/or buyer in a real estate transaction and performing acts requiring a real estate license, then that same broker may also perform the activities of the escrow holder. Said activities would not fall under the jurisdiction of the DBO, but rather, are authorized pursuant to the California Escrow Law exemption and regulated by the Real Estate Commissioner.

As a consultant, I have found an array of non-compliance when it comes to the interpretation of this exemption. Some brokers have handled escrows in connection with for sale by owner (FSBO) transactions where the principals are representing themselves and no brokers are actually involved in the real estate transaction. Other brokers have handled in-house escrows for their salespeople who are selling or buying their own properties as principals and are not engaged in any acts requiring a real estate license.

A more blatant example of non-compliance are brokers who have unlawfully acted as independent escrow holders and handled the escrows for other “outside” brokers. Finally, some brokers, not licensed in this state as “mortgage loan originators”, have performed broker-controlled escrow activities in connection with their own personal refinances, or the personal refinances of their salespeople, involving residential one-to-four unit property. These types of escrow transactions could only be handled by the broker if they (and any licensee acting on their behalf) are a licensed MLO with the DRE and performing mortgage loan activities for or in expectation of compensation.

All of the above examples share one common denominator: the broker is not performing a service requiring a real estate license on the subject real estate transaction in which the broker is performing in-house escrow services. In other words, it is not enough for a real estate broker to just be a “party”, the broker must also be performing acts requiring a real estate license for or in expectation of compensation pursuant to the Real Estate Law.

It is important to understand that some of this non-compliance is not intentional, but rather just a plain misreading or misunderstanding of the law. However, it is true that others have willfully disregarded the law and misrepresented themselves as independent escrow holders in order to intentionally mislead the public about their authority to engage in escrow activities. Examples of this type of activity and the DRE’s related enforcement actions can be found on the Department’s website.

Bottom line, if a real estate broker incorrectly interprets the exemption or willfully violates the law, then the broker may not only be subject to regulatory discipline by the DRE, but also by the DBO for acting as an independent escrow holder without proper licensure.

Trust fund handling compliance

Whereas most real estate brokers and brokerage firms in California have actively chosen to “opt out” when it comes to handling trust funds, brokers engaged in controlled escrows have voluntarily signed up for the challenge. That said, it is often evident that some responsible brokers are not personally aware of the DRE’s specific trust fund handling requirements or fail to properly supervise the management of trust funds by staff working in the escrow division. As a consultant, I tend to see the whole gamut when it comes to non-compliance in the trust funds arena. Some fundamental DRE trust fund requirements which demand the attention of any broker engaged in controlled escrows are as follows:

  1. Designated Trust Account: The escrow bank account holding trust funds must be designated as a “trust account” in the name of the broker, or in a fictitious name if the broker is the holder of a license bearing such fictitious name, as trustee at a bank or other financial institution. Unfortunately, I have reviewed brokerage firms who thought their clients’ trust funds were held in a “trust account” when in actuality they were not. It is important to make sure a broker’s escrow bank account is in fact a true trust account;
  2. Trust Account Signatories: The sole proprietor broker, or designated officer of a licensed real estate corporation, must be a signatory on the escrow trust account. If the trust account has any other signatories, who may be a real estate salesperson or broker associate affiliated with the broker, or even a non-licensed person, these individuals must have the written authority of the sole proprietor broker or designated officer to be a signatory on the trust account. This requirement is often overlooked but an easy one to satisfy;
  3. Non-Licensed Signatory: A non-licensed employee (and I do mean, “employee,” as that is what the law stipulates) may be a signer on the escrow trust account as long as the broker has fidelity bond or insurance coverage equal to at least the maximum amount of the trust funds to which the unlicensed employee has access at any time.
    The law states that such bonds or insurance providing coverage shall protect the broker from intentional wrongful acts committed by an employee of that business, including theft, dishonest acts, or forgery. Brokers who are required to maintain a fidelity bond or insurance coverage should refer to the law for specific requirements regarding deductibles and evidence of financial responsibility;
  4. Control/Separate Records: A broker is required to maintain a “control” record of all trust funds received and disbursed, as well as “separate” records for each beneficiary or transaction, which must be complete, accurate and in compliant format. In my experience, the “format” of records, and the type of information they contain, are common problems for brokers. In fact, many brokers operating in the controlled escrow realm do not readily know which records they maintain that specifically fulfill the DRE’s record requirements;
  5. Withdrawal of Escrow Fees/Avoid Commingling: Any escrow fees earned by brokers in the course of their controlled escrow activities must be withdrawn within 25 days or else the broker may be charged with commingling. And although not as common in the escrow industry, a broker is allowed to maintain no more than $200 in the escrow trust account to cover bank service fees and other charges. However, any funds belonging to the broker in excess of $200 in the escrow trust account would also be commingling;
  6. Trust Funds Received and Deposited: When a broker-controlled escrow receives trust funds, said funds must be deposited into the trust account bank by the next working day. It is important that a broker retain copies of bank deposit receipts in order to evidence compliance in this area;
  7. Earnings Credits: Some financial institutions offer, and participating brokers receive, an earnings credit rate. As a result, in connection with the balance of funds deposited in the escrow trust account, many brokers receive earnings credits from their financial institutions which are used to offset bank service charges. These financial benefits must be disclosed by the broker to the principals, otherwise the broker may be found in violation of secret profit; and
  8. Trust Account Reconciliation: Finally, a broker must reconcile their trust account(s) on a monthly basis and maintain a record of that reconciliation in a complete, accurate and compliant format. This process requires that the balance of all separate beneficiary or transaction records maintained be reconciled with the record of all trust funds received and disbursed, at least once a month, except in those months when the trust account did not have any activities.

Please be aware, if reconciliation issues or exceptions are found, these items should be addressed right away and not allowed to carry over month after month without correction. More importantly, any shortage in the trust account must be cured and/or corrected immediately. According to the DRE, any trust account discrepancy is a serious violation of the Real Estate Law.

I have reviewed brokerage firms, large and small, and none of them are immune to violations in the above areas. Some of the trust fund violations that I have found stem from either not knowing the law, misinterpreting or misunderstanding the requirements, or simply put, lack of broker supervision by the responsible broker tasked with the review and supervision of trust fund activity.

For more information, please review the DRE’s website as it has multiple resources covering trust fund requirements, compliance, and guidance.

Broker supervision

Without broker supervision, the activities of a controlled escrow are unchecked and quite frankly, unaccountable. Put another way, a responsible broker has a legal duty to review, oversee, inspect, manage and monitor the activities of a broker-controlled escrow, and if they fail to do so, then the broker is clearly operating in violation of the law.

The only reason that a controlled escrow exists is because of the primary real estate brokerage services being performed. Hence, it should then follow that the responsible broker must not only be closely involved in the real estate operation, but in the escrow division as well. More than that, it is precisely the escrow division of a brokerage which is actively involved in the handling of trust funds and arguably subjects the broker to the highest liability, both on the regulatory and civil front.

According to CFC 17004(b), which seems to be the less talked about provision of the California Escrow Law carve-out, the real estate broker exemption is personal to the broker and the broker shall not delegate any duties other than duties performed under his or her direct supervision. In my opinion, this is strong language which denotes the fact that a responsible broker does not have a whole lot of latitude when delegating certain tasks to others. The responsible broker must be involved, aware, supervising all activities, monitoring compliance, and never relinquishing his or her overall duties as the responsible broker.

As a former DRE Investigator, I have come across many responsible brokers who were more absent than present in the day-to-day operation of their in-house escrows and handling of trust funds. Part of this absence may likely be the result of the broker not fully understanding how to conduct or administer escrows and/or handle trust funds (which is a world of compliance in itself), or not prioritizing the statutory duty that he or she is required to fulfill when it comes to the supervision of the real estate brokerage.

A comprehensive review of broker supervision, as required and enforced by the DRE, could comprise a much longer discussion. For any responsible brokers who are interested in more guidance in this area, please refer to the Department’s website for more information. Additionally, I wrote a piece earlier this year that covered broker supervision which may be helpful.

No kickbacks for referrals

Admittedly, I would be remiss if I did not cover this topic as it is arguably a hot one that seems to spark a lot of conversation and debate amongst individuals involved in both the independent and controlled escrow industries. In fact, I have been confronted by many individuals and organizations who seem to believe that there are a lot of broker-controlled escrows engaging in unlawful kickback arrangements. And while these are only allegations, unfortunately, I have also witnessed unlawful activity committed by real estate licensees in this area. Before providing you with some instructive examples, let’s quickly explore what the law actually prohibits.

Pursuant to California Business and Professions Code (B&P) 10177.4, enforced by the DRE, a real estate licensee may not claim, demand, or receive a commission, fee or other consideration, as compensation or inducement, for referral of customers to any escrow agent, structural pest control firm, home protection company, title insurer, controlled escrow company, or underwritten title company. While there are certain exemptions that do not qualify as “other consideration” under this statute, due to the issues that I am seeing in the industry, I would rather present a straight line on this issue and focus on those activities which are not compliant.

One example of an illegal kickback would be a broker who utilizes more favorable commission splits when their salespeople refer business to the broker’s in-house escrow division as opposed to the enforcement of less favorable commission splits when licensees use “outside” escrow services.

Another common violation that I have come across is when a broker waives certain fees (e.g., transaction coordination fee) which are normally part of the commission split between broker and salesperson, and/or when a broker pays for, or defrays, certain marketing costs on behalf of their licensees, as long as the broker’s in-house escrow services are used.

An illegal kickback may also occur when a licensee, who is buying or selling real property as a principal, receives a discounted escrow fee, or even a “free” escrow, from the broker in exchange for the use of the in-house escrow division. As I mentioned earlier, with these types of transactions, a review of the acts being performed by the licensee are warranted in order to determine if licensed acts are being performed in accordance with the California Escrow Law exemption requirements.

It is important to point out that the above prohibition enforced by the DRE essentially covers California’s anti-kickback rule which applies to all real estate licensees, all types of transactions (e.g., all-cash, purchase loan, refinance), and all types of properties (e.g., vacant land, residential, commercial). It’s broad in the types of transactions it covers, but more limited with respect to the actual players that it regulates when it comes to referral fee activities.

Equally important, if the transaction involves a residential one-to-four unit property and a federally related mortgage loan, the aforementioned examples of unlawful activity are not just prohibited under California Real Estate Law, but may also run afoul of the federal Real Estate Settlement Procedures Act (RESPA) enforced by the Consumer Financial Protection Bureau.

Moreover, the takeaway here is hopefully that a licensee may not receive compensation or other consideration in exchange for the referral of customers to a broker-controlled escrow division. This also indirectly means that a broker should not offer and/or promote such benefits, financial or otherwise, to its salespeople as a way to illegally “steer” business to the in-house escrow. I will admit that the examples that I have seen or learned about are myriad, but in an effort to keep this discussion regarding the prohibition simple, any real estate licensee would be wise to not engage in such activities which could result in disciplinary action by the DRE and/or be subject to more costly penalties under the CFPB if RESPA is also violated.

Final Thoughts

Unlike the Escrow Law which contains a number of requirements that must be satisfied in order to conduct escrows, the Real Estate Law, notwithstanding its trust fund handling requirements, generally does not. The truth is, there are very little statutory or regulatory provisions specifically dedicated to the operation of broker-controlled escrows.

Because the broker-controlled escrow industry has less regulatory requirements to contend with, I have found this often sets the stage for lack of education, fewer or lenient controls, ineffective or insufficient broker supervision, and in turn, non-compliance. And while non-compliance can always vary in degree, the more serious kind usually culminates in significant trust fund handling violations and harm to the public.

According to Wayne S. Bell, the former Real Estate Commissioner of the DRE, “Escrows that are performed by real estate brokers under an exemption from the California Escrow Law must follow strict requirements. Failure to follow those requirements expose the relevant brokers to administrative, civil, and criminal exposure, and could be grounds for those who received the escrow services to argue the broker cannot – and should not – be paid for the same.”

In closing, this article has only scraped the surface on issues concerning broker-controlled escrows. That said, one message should hopefully be clear; a broker who is engaged in controlled escrows must correctly adhere to the California Escrow Law exemption, strictly comply with trust fund handling requirements enforced by the DRE, perform requisite broker supervision over the escrow operation, and avoid any activities which illegally steer customers and business to the in-house escrow division.


In which one of the following ways may a broker notify the DRE of the removal of a salesperson from their real estate license? ›

A broker may add or remove a real estate licensee from an affiliation by completing a Salesperson Change Application (RE 214) if a salesperson, a Broker-Associate Affiliation Notification (RE 215) if a broker, or by completing the transaction online through the eLicensing System.

What are the two types of escrow process? ›

In California, there are two forms of escrow instructions generally employed: bilateral (i.e., executed by and binding on both buyer and seller) and unilateral (i.e., separate instructions executed by the buyer and seller, binding on each).

What are the three requirements of a valid escrow? ›

Essential elements of a valid escrow arrangement are:
  • A contract between the grantor and the grantee agreeing to the conditions of a deposit;
  • Delivery of the deposited item to a depositary; and.
  • Communication of the agreed conditions to the depositary.

What is a non independent broker escrow? ›

A non-independent broker controlled escrow is licensed by the Department of Real Estate (DRE). However, there isn't a special escrow license issued by the DRE. The license needed to conduct escrow is just a real estate broker license.

What steps must a broker take when he has made the decision to terminate the employment of an affiliate broker? ›

Notify the affiliate broker in writing and return her license to the TREC immediately. When a broker decides to terminate the employment of an affiliate broker, he must immediately return their license to the TREC and notify the agent in writing of the termination.

How does the DRE pursue an licensee for DRE violations? ›

The Department of Real Estate is a licensing and regulatory agency empowered to seek disciplinary action through the State Office of Administrative Hearings against licensees who violate specific sections of the State Business and Professions Code.

What 2 things are normally part of your escrow account? ›

Part goes toward your mortgage to pay your principal and interest. The other part goes into your escrow account for property taxes and insurance premiums (like homeowners insurance, mortgage insurance, or flood insurance).

Which of the following is a way in which an escrow may be terminated? ›

An escrow is terminated by the death or incapacity of either party. An escrow can only be terminated when the transaction closes, on the termination date itself (or after a reasonable period of time, if no termination date is specified), or by mutual agreement of the parties.

Who is primarily liable for escrow violations? ›

In conclusion, in a breach of an escrow agreement, the buyer, the seller, and the escrow agent may all be held liable for their actions. The escrow agent has a fiduciary duty to handle the transaction in an honest and impartial manner and if they breach this duty, they may be liable for damages to both parties.

What are the obligations of escrow? ›

How Escrow Agreements Work. In an escrow agreement, one party—usually a depositor—deposits funds or an asset with the escrow agent until the time that the contract is fulfilled. Once the contractual conditions are met, the escrow agent will deliver the funds or other assets to the beneficiary.

What are conflicting instructions in your escrow? ›

The Escrow Company has a duty to comply precisely with the written instructions. Sometimes both parties to an escrow give conflicting instructions to the Escrow Company. If this happens, the Escrow company can not follow the instructions of one party without the permission of the other party.

Is an escrow agent the same as a broker? ›

A broker acts as a representative for a buyer or seller, while an escrow agent is a neutral party. While a broker may facilitate a contract, the escrow agent is responsible for ensuring all the terms are met to close.

Who Cannot act as an escrow agent? ›

Additionally, the escrow agent cannot be associated with the transaction. For example, the buyer's real estate agent or the seller's attorney cannot hold the escrow account. They may, however, recommend escrow agents whom they have used.

How can a real estate agent lose their license in California? ›

Mortgage fraud – Fraud of any kind can result in the loss of a license and criminal charges. Failing to cooperate with a regulatory investigation – A failure to appropriately cooperate with the California Board of Real Estate during an investigation can result in license sanction and loss.

How can a realtor lose their license in CA? ›

  1. Breaching Client Confidentiality. When you're working with a client on a purchase or sale, what they tell you is confidential. ...
  2. Failing to Disclose Information. ...
  3. Mishandling or Stealing Client Money. ...
  4. Certain Criminal Convictions. ...
  5. Mortgage Fraud. ...
  6. Violating the Fair Housing Laws. ...
  7. Failing to Meet Licensing Requirements.

How do I deactivate my real estate license in California? ›

To deactivate your license with the California Bureau of Real Estate (CalBRE) you need to login to their eLicensing online system to update your license record. Similar to procedures in Florida, your broker can also remove you from their license using their online system login.

What happens to the listing agreement if the broker loses his her license quizlet? ›

The listing agreement terminates and the seller must start over with a new broker. The state real estate licensing agency may choose another broker to close any pending transaction.


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