T.R.E.C. Audit Overview Presented By, Ahmad Lewis STATE OF TENNESSEE DEPARTMENT OF COMMERCE AND INSURANCE TENNESSEE REAL ESTATE COMMISSION 500 JAMES ROBERTSON PARKWAY NASHVILLE TN

AGENDA  BROKERS RESPONSIBILITIES  COMMON ISSUES  PROPERTY MANAGEMENT  RECORD KEEPING  TREC AUDIT  QUESTIONS

BROKERS RESPONSIBILITIES  Brokers owe a fiduciary duty to exercise reasonable care, skill, and diligence to their principal.  An important aspect of the broker’s fiduciary responsibility to the client is the maintenance of adequate records to account for trust funds received and disbursed.

BROKERS RESPONSIBILITIES  Pursuant to T.C.A. § a broker must maintain records showing the following for at least 3 years (1) The depositor of the funds; (2) The date of deposit; (3) The date of withdrawal; (4) The payee of the funds; and (5) Other pertinent information that the commission may require.

BROKERS RESPONSIBILITIES  Brokers are required to supervise the activities of affiliates and employees pursuant to TN Rule  TN Rule – Deposits and Earnest Money  an affiliate broker shall pay over to the broker with whom he is under contract all deposits and earnest money immediately upon receipt.

COMMON ISSUES  Days of delay in depositing/disbursing EM  Depositing/Disbursing EM funds far in advance of contract binding date/contract closing date  Co-mingling funds  Misuse of funds (Paying bills, payroll, etc.)

PROPERTY MANAGEMENT  Rental deposits must be held in a separate escrow  Maintain an individual ledger for each tenant  Maintain bank reconciliation for Rental deposits escrow

RECORD KEEPING  Keeping complete and accurate trust account records is easy when there are procedures in place.  The accuracy of the records is verified by reconciling them at least once a month.  Reconcile the bank account record with the bank statement

RECORD KEEPING  The purpose in reconciling the trust account is to obtain a level of assurance that the balance on the bank account record is correct.  Keeping complete and accurate trust account records is easier when specific procedures are regularly followed.

RECORD KEEPING  The following is a list of a few suggested procedures: 1. Record transactions daily in the trust/escrow bank account. 2. On a consistent basis use the same specific source documents as a basis for recording trust receipts and disbursements. 3. Calculate the account balances on all applicable records at the time entries are made.

RECORD KEEPING 4. Reconcile the records monthly to ascertain that transactions are properly recorded on both the bank account record and the applicable subsidiary account records (i.e. any account that flows in to the general ledger). 5. If more than one trust/escrow bank account is maintained, keep a different set of records for each account.

RECORD KEEPING ActivityDocuments Receiving trust funds Real Estate purchase/sales contract Collection receipts Depositing Trust monies Bank Deposit slips Disbursing trust monies Checks issued Supporting papers for the checks, such as invoices, escrow statements, billings, receipts, etc.

TREC AUDIT  The Commission has established an ongoing program of examining brokers trust/escrow records.  Pursuant to T.C.A. § (d), “The director of the division of regulatory boards or the director’s duly authorized representatives may, at all reasonable hours, examine and copy such books, accounts, documents, or records as are relevant to a determination of whether a licensee has properly maintained and disbursed funds from escrow or trustee accounts…”

TREC AUDIT  As necessary audited licensees will be made aware of deficiencies in trust fund handling and record keeping.  During the mail in audit process the information on the following slides will be requested and some or all documents may be applicable to your firm.

TREC AUDIT  Audits are randomly selected from our database of firms on a monthly basis  If you receive a mail in audit letter than you will have 30 days to respond and provide the following kinds of information

TREC AUDIT  Bank Statements  Copies of Bank Reconciliations  List of individual ledger balances or individual tenant security deposits  List of earnest money amounts held, disbursed and interpleaded  HUD-1 statements for selected closings  Copies of Purchase/Sales agreements

TREC AUDIT  Release of earnest money form  Lease agreements for selected leases  Copies of the journal or check registers, including a record of daily balances  List of outstanding checks and deposits by month  List of all licensees affiliated with your firm currently

CONTACT INFORMATION Ahmad Lewis – TREC Auditor Phone:(615) 741 – 7548

QUESTIONS