Auditors target brokers' escrow accounts


Maryland's Department of Licensing and Regulation has conducted unannounced "blitz audits" of 200 to 300 licensed real estate brokers in Maryland over the past two weeks to make sure no one is dipping into escrow accounts set up for homebuyers.

Harry Loleas, deputy commissioner of the Division of Occupational and Professional Licensing, and George Rayburn, assistant commissioner of consumer credit, said the spot audits were ordered by Licensing and Regulation Secretary William A. Fogle Jr. to make sure brokers aren't taking funds intended for home purchases and using them to cover operating expenses for their office or pay off personal debts.

Mr. Loleas and Mr. Rayburn said the state has one auditor who inspects real estate brokers' books on a random basis throughout the year and that Mr. Fogle assigned another nine auditors from the state's financial audit services team to work on the real estate audit. They said the statewide effort was prompted not by specific irregularities that the agency has uncovered, but because Mr. Fogle wanted to make sure no one has "a hand in the cookie jar."

"With the economy on the downswing and the real estate situation very slow, he thought it would be a good idea to audit escrow accounts to make sure that there are no people fooling around with them," Mr. Loleas said. "If there was a time in the economic cycle when somebody might be tempted to play around with other people's money, this is it."

"We feel that there is a deterrent factor" to the special audits, said Mr. Rayburn, the administrator in charge of the effort. "It's kind of like the police setting up a radar trap. You don't catch everybody, but at least people slow down."

According to Mr. Rayburn, the state currently has more than 4,500 active brokers, who work with several times that many agents and associate agents. In all, he said, the brokers maintain about 3,000 escrow accounts.

Some companies, such as Grempler Realty and Long & Foster, maintain one escrow account for all of their agents, while independently owned franchise operations such as Century 21 and Coldwell Banker maintain separate escrow accounts for each broker, he said.

Mr. Rayburn explained that brokers maintain escrow accounts as a place where buyers can deposit the "earnest money" needed to make a sale contract binding prior to the settlement date. The amount of money in an escrow account at any given time may range from nothing to $9 million or more, depending on the company and the number of sales it has pending, he said.

Homebuyers typically deposit anywhere from several hundred to several thousand dollars in a broker's escrow account, and it could stay there for 60 days or more, depending on the amount of time it takes from the signing of a sales contract to settlement.

Mr. Rayburn said the audited brokers were selected at random )) from the state's list of licensed brokers. He said the auditors have tried to contact brokers from every jurisdiction in the state.

As part of the process, he said, auditors attempt to reconcile the accounts with the sales contracts a broker has pending and the deposit slips for the account.

"We've tried to get to as many as we can," Mr. Rayburn said. "In most cases, we've had excellent cooperation."

Mr. Rayburn said his office is authorized to inspect broker's audits under the real estate law contained in the Business, Occupations and Professions article in the Annotated Code of Maryland, Article 16.

He said any broker who refuses to participate in an audit can have his or her license suspended immediately, and that any broker who is found to have misused funds could be prosecuted for "defalcation" or theft.

Mr. Rayburn said the auditors have had no real surprises except that they are discovering some escrow accounts have not been audited for 10 years or more. He said he believes it would be preferable for the state to audit accounts at least every three years.

In the past two months, two brokers have been had their licenses suspended based on auditors' findings -- one in the Washington area and one in Hagerstown, Mr. Rayburn said.

He said he could not release more information about the brokers because their cases are still under investigation and "not a matter of public record."

The state of Maryland maintains a fund of about $2.5 million to pay "hurt parties" in the event an unscrupulous real estate broker runs off with their money, he added.

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