By: Thomas R. Miller
Special Deputy Attorney General

Until recently, the possibility that anyone might lose money due to the failure or default of a bank or savings and loan seemed too remote to justify a study of deposit insurance rules. However, during the late 1980s and early 1990s, an unprecedented number of banks and savings institutions failed, and the Federal Savings and Loan Insurance Corporation (FSLIC) was swamped with claims from depositors.

As part of a complete overhaul of the federal banking and savings regulatory process, Congress transferred all insurance responsibilities from the FSLIC to the Federal Deposit Insurance Corporation (FDIC), which adopted strict regulations governing insurance eligibility and coverage limitations. In light of the savings and loan problems, proper insurance of client trust monies has taken on renewed importance for real estate brokers'.

The North Carolina Real Estate Commission has adopted rules governing the use and management of brokerage trust accounts designed to complement the FDIC regulations and maximize insurance coverage available to clients and customers of real estate brokers. The Real Estate License Law requires every broker to deposit and maintain ". . . in a trust or escrow account in an insured bank or savings and loan association in North Carolina all money received by him as a real estate broker acting in that capacity . . . . " Of course, the purpose of this requirement is to ensure that the money which citizens entrust to real estate brokers is protected by the FDIC against the possible failure or default of the depository institution.

The FDIC will insure funds up to $100,000 per individual at a single insured depository institution. 'If the individual has more than $100,000 on deposit at the same institution, insurance coverage is limited to $100,000, whether the funds are in one account or separate accounts. For example, if a person had on deposit in First National Bank $60,000 in a checking account and $75,000 in a savings account ($135,000 total), only $100,000 would be insured. But, if the person were to withdraw $35,000 from First National Bank and deposit it at another FDIC-insured bank, all of the $135,000 would be insured, because deposits at each bank are insured separately.

When a real estate broker deposits money belonging to a client or customer into a trust account, FDIC regulations permit the money to be insured to the same extent as if it had been deposited by the client/customer himself or herself in his or her own name. Therefore, if the trust account contains funds belonging to more than one client or customer, the FDIC will insure the funds for each client and customer up to $100,000.

For example, assume that a broker is holding in his trust account $85,000 in rents for one client and a $45,000 earnest money deposit from another customer. The broker keeps $100 of his own money in the account to cover occasional bank fees. How much insurance coverage will the FDIC permit for the broker's trust account? Even though the total in the account exceeds $100,000, all of the money is covered because FDIC regulations treat the money as though it were deposited individually in each person's own name.

Brokers should caution their customers and clients that if they have personal accounts at the same bank where brokers are holding their trust monies, the accounts will be subject to the $100,000 limit. As an example, assume that the client who has $85,000 in rents in the broker's trust account has a checking account containing $22,000 in the same bank (i.e., $107,000 total). Under FDIC regulations, the client would be insured for only $100,000 - the limit per individual per depository.

To obtain FDIC coverage for their trust accounts, brokers must strictly comply with FDIC and Real Estate Commission trust account recordkeeping requirements. To do so, the account records of the bank or depository institution must clearly indicate a fiduciary relationship between the broker who deposited the money and the broker's client who owns the money. By Commission rule, brokers must designate their trust accounts as "trust" or "escrow" - using one or the other of those terms on the official name of the account, as well as on checks, deposit slips, and bank statements. Compliance with the Commission rule will satisfy the disclosure requirement of the FDIC.

But mere disclosure of the broker's fiduciary capacity in the account designation is not enough to assure separate insurance for the owners of the funds in the account. FDIC regulations also require that the bank's records or broker's records contain details concerning the broker's relationship to clients and customers and the broker's interest in the funds in the trust account. Since it is impractical to expect banks or depository institutions to maintain detailed records of real estate brokers' fiduciary relationships with their clients and customers, the evidence necessary to satisfy this FDIC requirement must come directly from the brokers themselves. To satisfy the FDIC, the records must be accurate, kept in good faith and in the regular course of business.

Again, the broker who carefully complies with the Commission's trust account recordkeeping rules also will satisfy this FDIC requirement. When the broker's records are inadequate to distinguish trust account funds belonging to one customer or client from funds belonging to another, the FDIC will not separately insure the funds, which may result in considerable financial loss in the event of bank failure.

The recent national failure of the savings and loan industry will underscore the need for North Carolina real estate brokers to fulfill the obligations imposed by the License Law to safeguard the funds they hold for others, including the requirement to deposit trust monies in an insured bank or savings and loan association. Whether brokers properly discharge these obligations depends in significant measure upon the degree of care with which they comply with the Commission's trust account rules and guidelines