HOUSING - FINANCE;

You asked for information on the Colorado Realtors Association’s use of escrow account interest to support low-to moderate income housing initiatives.

SUMMARY

The Colorado Realtors Association set up the Colorado Association of Realtors Housing Opportunity Foundation (CARHOF), a 501(c)(3) charitable foundation created in 1990 for the purpose of promoting safe, decent, and affordable housing in Colorado. CARHOF collects interest on escrow accounts and donates the money to nonprofit and public agencies that help low to moderate-income families with their housing needs.

REGULATORY AGENCY DETERMINATION

The foundation came about because the Colorado Real Estate Commission took the position that while state law permits brokers to place entrusted money in an interest bearing account, in the absence of a contract signed by the parties to the contrary, any interest accumulating in a trust account does not belong to the broker acting as escrow agent. Interest accrued on money entrusted under an executory sales contract belongs to the seller if the contract is consummated or if the seller is successful in declaring forfeiture. The entrusted money belongs to the purchaser if the contract fails unless the contract specifies otherwise. The commission concluded that nothing in state law precluded a real estate broker from voluntarily transferring interest earned on a trust account to a fund established for the purpose of providing affordable housing to Colorado resident. It recommended that brokers post a notice in their office stating that the broker participates in such a program and that interest earned will be so transferred.

CARHOF and the Real Estate Commission agreed that the following disclosure language be added to the real estate buy and sell contract:

“Seller and Buyer acknowledge and agree that any interest accruing on earnest money escrowed with the Broker or Closing Company in this transaction shall be transferred to a fund established for the purpose of providing affordable housing to Colorado residents. ”

The Division of Insurance in the Department of Regulatory Agencies concurred with the Real Estate Commission’s view that escrow agent have fiduciary duties and may not retain interest from escrow accounts, noting that title insurance entities often act as escrow agent in real estate transactions.

The division determined that title entities acting as escrow agents may voluntarily establish interest-bearing escrow accounts where interest is transferred to CARHOF. The people providing the escrow funds and the person who is entitled to the escrow funds (i. e. , the buyer and the seller) are entitled to actual knowledge that the escrow account interest will be transferred to CARHOF. The agent must also provide notice at the time the funds are entrusted to it.

PROGRAM PARTICIPANTS

To qualify, both the realtor or title company who own the trust account and the bank where the account is maintained must agree to participate in the program by filling out the appropriate enrollment forms. The name of the account at the bank must be changed to indicate that CARHOF is an “interest beneficiary only’” and CARHOF’s federal tax identification number must be used on the account for interest reporting purposes. Headings for signature cards and any other customer account agreement must also be changed. The bank may require a letter from the broker stating that the bank can charge the account for interest earned to the benefit of CARHOF. These charges are deducted from the interest earned on the account. Finally, a new notice of trustee or escrow account must be issued for the changed accounts, which must be signed by the broker and then delivered to and acknowledged by the bank.

FUNDING RESTRICTIONS

The interest that accrues on each earnest money deposit in escrow is pooled together with other interest and generates $ 300,000-$ 500,000 annually. All but 15% (which is used for administrative costs) goes to help support homeless shelters, down payment assistance programs and other housing-related services.

CARHOF’s board of directors screens all applications for funds to ensure compliance with guidelines established by the Internal Revenue Service and the Colorado real estate commission. The enabling regulation by the Colorado Real Estate Commissioner that led to the creation of CARHOF stipulates that moneys must be spent on “community-based, affordable housing initiatives. ” Additionally, any programs that are funded through CARHOF must comply with Internal Revenue Service guidelines for tax-exempt organizations.

The following activities will be considered for funding:

1. predevelopment costs for the acquisition, rehabilitation, or construction of renter or owner-occupied housing, which is committed to the target income level of individuals and families;

2. land acquisition as part of an affordable housing project;

3. costs of new construction, rehabilitation, or conversion for affordable housing units;

4. administrative and operating costs of qualified organizations actively pursuing the provision of affordable housing for moderate, low, and very low-income individuals and families; and

5. assistance to moderate, low, and very low-income individuals who are in danger of becoming homeless or otherwise in need of housing.

ALLOCATION OF FUNDS

CARHOF was established primarily to fund local affordable housing programs. Accordingly, the board of director of the Colorado Association of Realtors approved the following guidelines for the allocation of funds collected.

1. At least 70% of the funds collected from any member board or association of realtors must be reinvested in a community within the member board’s jurisdiction. In the event 70% is not used in a given year, the unused amount may be carried forward for use in the following years, provided that all funds not used within three years may then be used for any project approved by CARHOF’s Board of Directors.

2. Not more than 15% of the funds collected from any member board or association of realtors may be allocated for programs offering statewide or regional benefit or disaster relief.

3. Consideration of these requests is at the discretion of the board.

4. Not more than 15% of the funds collected may be used for the administration of CARHOF.

JH: eh