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DBO Action Against Brokers Denies In-House Escrow Exemption – Per DRE’s Real Estate Bulletin

The Department of Business Oversight, the California agency which regulates independent escrows, recently brought an action against two real estate brokers who attempted to claim the exemption for in-house escrows (also referred to as “broker-controlled” escrows) despite performing escrow services for 11 other brokers. The idea was that by being “broker-associates” and becoming “satellite offices” for these 11 other brokers, they would qualify for the in-house escrow exemption. The court which heard the case decided against the two real estate brokers on the basis that the in-house escrow exemption is personal to the real estate broker claiming it and cannot be extended or transferred to third parties. This case was reported by the Department of Real Estate in an article in their Real Estate Bulletin from Winter 2019.

The DRE article also recapped the in-house escrow exemption. To qualify for the exemption, the broker must meet four criteria:

  • The broker is licensed by the Real Estate Commissioner
  • The broker is performing escrow acts in the course of or incidental to a real estate transaction
  • The broker is an agent or party to that real estate transaction
  • The broker, with respect to that real estate transaction, is performing an act for which a real estate license is required

Additionally, the DRE cited the three legal limitations for the in-house escrow exemption:

  • The exemption is not available for any arrangement entered into for the purpose of performing escrows for more than one business.
  • The exemption is personal to the real estate broker claiming it.
  • The exemption is not available if the real estate broker fails to directly supervise delegated escrow duties.

The last limitation in particular can be confusing. A broker conducting an in-house escrow may delegate escrow duties; yet, they must still “directly supervise.” In deciding against the brokers, the court clarified that “direct supervision” means the real estate broker claiming the exemption must be “on the premises” and fully aware of the activities performed by those to whom escrow tasks have been delegated. A copy of this decision is available at here.

 

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