Colorado Contracts and Regulations

chapter2.docx

Home >Law homework help >Colorado Contracts and Regulations

A. Overview

The Real Estate Commission is delegated the authority to adopt rules governing the conduct of real estate licensees. The rules are all contained in Chapter 2 of the Colorado Real Estate Manual.

There are 5 rules, lettered from “A” through “E” and Rule I. Each of these lettered headings is broken down into numbered rules. For example, rules under A would be identified as Rule A-1, A-2, A-3, etc.

Some rules may not directly apply to you as a real estate broker. We will distill, paraphrase, and summarize the rules as we consider them individually. Some of the rules are self-explanatory. Others have some background or extension that requires further explanation.

The actual rule language is in Chapter 2 of the Colorado Real Estate Manual. The actual text is considerably longer than what we present here, although not necessarily more essential to your licensure or practice of real estate. A gap in the rule numbering herein simply means that the particular rule(s) has minimal effect on your licensure, has been repealed, or is internal to the workings of the Commission. As with the license law, outline numbering within a rule below may not match the outline numbering/lettering in the actual rule.

By the end of this unit, you will be able to:

· Recognize and list the Colorado Rules

· Explain license qualifications, application requirements, examinations and continuing education requirements

· Describe Errors and Omissions insurance purpose and requirements

End of Page

Unit 2-2 Rule A

COMMISSION RULE A - QUALIFICATIONS, APPLICATIONS AND EXAMINATIONS

A-2. Pre-license education must be completed before taking the state exam or applying for a license. The part about schools electronically reporting evidence of candidate's having successfully completed the course has not yet been implemented by the Commission.

A-5. The state broker-licensing exam has two parts, the national part and the state-specific part. You may pass the two parts on separate dates. If you fail one part, you only need to retake the failed part. You must submit passing grades for both parts dated less than one year prior to applying for your license.

A-9. The Commission is to issue you a license within 10 days of receipt of your complete application and satisfactory criminal background (fingerprint) results. They will notify you of an incomplete or unsatisfactory application. If a license is approved pending the Commission receiving specified compliance items, you have 20 days to submit or your license may be issued on inactive status.

A-12(b). You may apply to the Commission at any time for a "Preliminary Advisory Opinion." This commission form will require all of the same detailed information as for the application above, but does not require completion of pre-license education nor a license application fee. The Commission's opinion as to whether they would grant a license if applied for is not binding, but unless you lie or omit information that surfaces by other means, a favorable opinion is a reasonable assurance that a license will be granted.

(Instructor's Note: If this is of concern to you, we suggest you read the actual rule text in the Colorado Real Estate Manual and apply as early as possible. Depending on the time of submission and the level of investigation necessary, a PAO may take from 2-3 months to complete.)

A-15. For licenses issued prior to July 1, 2004, brokers intending to renew on active status or inactive salespersons or brokers intending to activate a license, must first submit fingerprints electronically or on an FD-258 Card Form to the Colorado Bureau of Investigation for a one-time-only criminal history record check. The rule provides for automatic license inactivation for failure to submit unless the applicant can prove a good-faith effort to comply and the fault lies with the readability of the fingerprints.

A-16. New license applicants must submit fingerprints to the Colorado Bureau of Investigation, who will then forward them to the FBI, for the purposes of state and national criminal history record checks.

A-17. The 72 hours of pre-license education other than Law and Practice (48 hours) and Colorado Contracts and Regulations (this 48 hour course) must be broken out in these specific courses.

a. 24 hours of Real Estate Closings

b. 8 hours of Trust Accounts and Recordkeeping

c. 8 hours of Current Legal Issues

d. 32 hours of Practical Applications

Unit 2-2 Rule A

A-20. If you are denied a license, you must be notified and given a reason.

A-23. Pre-License and Brokerage Administration courses must be based on education principles acceptable to the Commission.

A-25. If your application, renewal, or any other fee is paid for by a check that bounces, the application is cancelled. It may be reinstated at the Commission's discretion only if made good, plus payment of whatever penalty administrative fee that may be imposed.

A-26. In addition to the requirements of C.R.S. 12-10-211(7) for issuance of a temporary license to prevent hardship, the person to be appointed temporary employing broker must show two years of active licensed experience in the Commission records. Only a vote of the commissioners may approve issuance of more than two temporary 90-day licenses to any firm in any 18-month period.

COMMISSION RULE B - CONTINUING EDUCATION

B-1. Your initial license will be valid for 3 years from the date of issuance. Before renewing your license on active status every 3 years, you must complete 24 hours of continuing education. You must also have your continuing education current before activating an inactive license or reinstating an expired license on active status.

B-2. There are 4 ways of completing the 3-year continuing education requirement:

a. Complete 3 versions (1 per year) of the 4-hour "Annual Commission Update" course, plus 12 hours of elective continuing education courses during the 3-year license period. (Any additional versions of the Annual Commission Update taken within the license period will count towards the required elective hours.)

b. One-time-only, complete the 24-hour "Broker Reactivation" course in lieu of the entire renewal continuing education requirement.

c. Pass the Colorado state portion of the licensing exam.

d. Complete 72 total hours of pre-licensing education covering Contracts and Closings.

B-3. The Commission is required to furnish a new "Annual Commission Update" course each year.

This Rule B-3 requires a closed-book 70% passing score on the Annual Commission Update course exam developed by the commission.

B-5. Continuing education is not acceptable for license renewal, activation or reinstatement credit in the following subjects:

1. Sales or marketing meetings in your brokerage.

2. Orientation, personal growth, self-improvement, self-promotion or marketing courses.

3. Motivational meetings or seminars.

4. Examination preparation or exam technique courses.

B-8. Continuing education courses must be at least one hour in length and credit may not be earned for more than 8 hours in one day.

You may not repeat a course for credit in the same calendar year, nor may you carry any excess hours forward into the next license period. You may not "test out" of a course by taking a "challenge" exam in lieu of completing the course requirements. Courses taken under a disciplinary stipulation from the commission do not count toward any continuing education requirement.

B-10. YOU are responsible for obtaining proof of completion from your course provider. The document must show your licensed name, course title, course length, date(s) completed, and the provider's authentication/signature.

Never send your course completion certificates to the commission unless specifically requested. Retain course completion certificates for 4 years from the date of the course.

B-14. When you submit an application for license renewal, activation or reinstatement, you are automatically attesting that you are in compliance with any applicable continuing education requirement.

Unit 2-2 Rule C

COMMISSION RULE C - LICENSING - OFFICE

C-1. A broker licensed as an individual proprietorship must be the sole owner of the brokerage.

C-2. Every resident Colorado broker must maintain and supervise a brokerage practice available to the public, EXCEPT employed associate brokers or inactive brokers.

C-3. Every employing broker must be "reasonably" available to manage and supervise the brokerage practice during regular business hours.

C-16. A licensee may not lend his/her/its licensed name or license to anyone to circumvent the license law or commission rule.

C-17. The commission may refuse to issue a license that duplicates (or is similar to) the name on a license that has been suspended or revoked.

C-18. A broker's trade name, if any, will appear on the broker's license and the brokerage must do business only under the trade name, or under the full (firm name plus trade name) name appearing on the license.

Unit 2-2 Rule C

C-20. No brokerage may be licensed in a name identical to another brokerage name.

C-21. An individual proprietorship may not use a trade name containing any words that would appear to be corporate (e.g. Inc., LLC, etc.).

Unit 2-2 Rule C

C-22. The applicant employing broker for an entity license (Corp, LLC, or Partnership) must certify that:

a. The entity (and any assumed or trade name) is properly incorporated, filed or registered with the Colorado Secretary of State, or Colorado Department of Revenue, as appropriate to the type of business. Proof of the business establishment and proof of the trade name approval must accompany the application.

b. The applicant employing broker has been duly appointed to be the real estate broker for the entity by the entity's ownership.

C-23. A brokerage firm employing an unlicensed on-site manager who prepares leases or rental agreements must:

a. Require the on-site manager to be accountable to and report directly to the employing broker or a specifically delegated qualified employed broker associate who must actively and diligently supervise all on-site manager activities.

b. Engage the on-site manager as either a salaried employee or independent contractor paid through the real estate brokerage firm. Salary may include any non-commission value, such as rent.

c. Prevent the on-site manager from negotiating material terms of any lease or rental agreement. Duties may include filling in blanks on pre-printed brokerage lease forms, showing available units to prospects, and collecting rent and security deposits.

C-25. An employing broker must immediately notify the commission of termination of employment with the licensed entity or of any lapse in the qualifications (contained in C.R.S. 12-10-211) to act as employing broker. Upon such notification, the employing broker's license and all associate broker licenses shall be placed on inactive status.

C-26. A broker license may be issued on inactive status.

Unit 2-2 Rule D

COMMISSION RULE D - RENEWAL, TRANSFER, INACTIVE LICENSE, ERRORS AND OMISSIONS INSURANCE

D-2. A licensee may request inactive license status.

D-3. A license on inactive status must still be renewed every 3 years. The renewal fee is the same as for active license renewal.

D-4. Licenses may be renewed on-line or with the renewal application provided by the commission or other methods acceptable to the Real Estate Commission.

D-6. Renewal notices for employed licensees will be sent to the electronic mailing address on file with the Commission.

D-7. An employing broker may directly pay earned commissions to a previous associate who has transferred to another brokerage or changed to inactive license status.

D-11. Initial license will expire on December 31 of the year the initial license was issued. Thereafter, a licensee will renew a license on a calendar year cycle commencing on January 1 of year one and expiring on December 31 of year three.

D-12. License renewal fees are non-refundable.

Unit 2-2 Rule D

D-14. Errors and Omissions (E&O) Insurance is required for every active license, including real estate companies. (This means that a one-person incorporated brokerage firm requires two E&O policies, whereas a one-person sole proprietor requires only one E&O policy.)

The Commission will enter a competitive bid process for a group E&O policy from a Colorado-registered insurer having an A.M. Best (an insurance company rating organization) rating of "A" or better. The insurer will, at no expense to the State, collect all premiums, maintain records, and report names of insured and a record of claims to the Commission.

The group policy must cover all acts requiring a license EXCLUDING illegal or fraudulent acts. It must insure loss from a licensee's use of lockboxes to a minimum of $25,000 per occurrence. The policy is individual and license specific, and transfers without additional premium if a licensee transfers to a new employing broker. It may be cancelled only for non-payment of premiums or denial, revocation, suspension or inactivation of your broker license.

The policy must provide at least $100,000 coverage per license per covered claim, with a $300,000 annual aggregate limit per license. The policy may require a $1,000 deductible per claim, but no deductible is allowed for legal expense or defense. The insurer must defend all covered claims and the insured may select his or her own defense attorney subject to written permission of the carrier, which may not be unreasonably withheld. (Note: The current insurer relies heavily on in-house legal staff.)

Premium is pro-rated for policies purchased after the beginning of the policy year (Jan. 1 - Dec. 31), but there is no refund of premium for a policy cancelled before the end of the policy year. For additional premium, a licensee may purchase higher, excess or additional coverage, or may purchase an extended reporting period of not less than 365 days.

The policy must afford a "conformity endorsement" covering an active Colorado licensee with multiple licenses for licensed acts in another E&O group-mandated state(s) without having to purchase a separate policy for that state(s).

Licensees may purchase E&O insurance from any independent insurance carrier as long as the carrier and the policy conform to essentially the same requirements as stated above. Talk to your employing broker and consult the actual text of Rule D-14(c) and (d) for details. The state's group policy vendor automatically reports your coverage to the Commission; whereas you and any independent carrier may have to fill out and deliver a certificate to the commission at each policy renewal.

If your coverage lapses or certification of coverage is not maintained, the commission may change your license status to inactive.

(Instructor's note: If this happens, any E&O coverage you may have actually had may be cancelled, meaning an interruption of any tail [past] coverage for prior transactions prior to the next effective date of coverage.)

Unit 2-2 Rule E

COMMISSION RULE E - SEPARATE ACCOUNTS - RECORDS - ACCOUNTINGS - INVESTIGATIONS

(This E Rule is more likely than the preceding rules to have a direct impact on your day-to-day real estate practice. The previous rules focused on getting and keeping your license. Rule E is the rule that deals with administration of your real estate brokerage and the actual practice of real estate.)

Unit 2-2 Rule E-1

Rule E-1. Other people's money, e.g. earnest money, rent due to a landlord or tenant security deposits, must be held in an account labeled "trust" or "escrow", and labeled by the type of money held in the account. This means you may deposit earnest money for all different sales in a "sales trust account," but must keep homeowners' association dues (for example) in a separate, appropriately labeled trust account.

Rule E-1(a). Trust accounts must be in the name of the licensed individual broker, or if the brokerage is licensed as an entity, in the name of the individual employing broker AND the entity. The individual broker must always be able to withdraw money from the account, and may authorize any other person (with or without a license) to co-sign on the account. In spite of such co-signers, the individual broker always remains responsible for trust account management.

Rule E-1(c). Trust accounts may not restrict withdrawals to a fixed maturity date, or impose penalties for early withdrawal unless all parties to the transaction consent in advance in writing. This typically makes it difficult to use CD's or other sophisticated financial instruments as trust account depositories.

End of Page

Unit 2-2 Rule E-1(f)

Rule E-1(f). Trust account funds (other people's money) may not be commingled (mixed) with money belonging to the broker or company, except that a small amount of broker funds may be deposited to keep the account from ever reaching a negative balance and to keep from using any other people's money to cover any incidental bank charges (such as purchasing checks).

· When money in a trust account may be earned by the broker, it must be withdrawn promptly from the trust account (and moved to the company operating account).

· Money owed to, or held for, employed licensees, including for payment of insurance premiums or potential IRS withholding, must not be held in a trust account (except that portion of earnest money which may become earned commissions upon closing).

· A broker may advance his or her own money for the benefit of another and keep it in the trust account. However, once advanced, the broker has no right to withdraw the money for other than the original purpose for which it was identified and advanced.

· If a broker owns an interest in a partnership, joint venture or syndication, any funds connected to such an enterprise where the broker may also earn a commission, must be maintained in a discrete trust account.

· Trust fund moneys are "earned" only after all contracted services are performed and no person holds any right of recall on the money. Brokers must maintain an accounting system consisting of a journal and individual property/client ledgers and account for moneys deposited into, and withdrawn from, trust accounts.

End of Page

Unit 2-2 Rule E-1

· Rule E-1(g) A broker/builder must hold earnest money deposits for new construction in a trust account and may not use the deposit for construction purposes.

· Rule E-1(h) A brokerage dealing primarily in sales may deposit/disburse property management rent and security funds into/out of the company sales escrow account until 7 or more properties are under management.

· Rule E-1(j) Money received under an installment land contract must be held in an escrow account until the land contract is signed by the seller and a copy of the signed contract is delivered to the buyer.

· Rule E-1(k). If a buyer borrows money using the property as collateral before the seller delivers the deed to the buyer, all payments received by the broker must be held in an escrow account until the deed is delivered, unless all parties agree otherwise in writing.

· Rule E-1(l). The form of earnest money (e.g. check, cash, promissory note, gold bullion, etc.) must be identified in the contract. If it is a promissory note, the broker must specify in the contract the due date of the note or attach a copy of the note to the contract. The broker must present any promissory note for payment when due, and if not paid, must immediately inform the seller.

· Unit 2-2 Rule E-1

· A picture containing text Description automatically generated

· Rule E-1(m). Property management funds must be deposited within 5 business days following receipt.

· Rule E-1(n). Earnest money in any form must be payable to or assigned/endorsed to and delivered to the listing broker who must hold it until due in the case of a promissory note, or deposit it into the broker's escrow account within 3 business days of the broker receiving notice of contract acceptance.

· The parties may instruct the broker in writing (usually via the contract) to deliver the earnest money to a third party (e.g. title company). If so, the broker must retain a copy of the earnest money instrument along with the endorsement to the third party, and obtain and keep a dated and signed receipt upon delivery to the third party.

Rule E-1(o). Recordkeeping Requirements.

Brokers must maintain a recordkeeping system consisting of:

1. Journal, ( similar to a checkbook register) a chronological log of all deposits into, or disbursements from, the account.

Each journal entry must include:
For Funds Received:	For Funds Disbursed:
Name of payer and property ID	Name of payee
Date of receipt AND deposit	Date of payment and Check Number
Purpose of receipt	Vendor invoice or document proving purpose of payment
Amount	Check number and Amount
Resulting cash balance in account	Resulting cash balance in account

1. Ledger, a chronological log of all deposits/disbursements made on behalf of each beneficiary (seller, buyer, tenant or landlord) to a transaction. Each ledger entry must contain the same information as above for journal entries. No individual ledger may EVER have a negative (less than zero dollars) balance.

2. Bank Reconciliation Worksheet, Brokers must reconcile each escrow account monthly (unless no banking activity occurred in the account). Reconciliation is satisfactory when the journal cash balance exactly matches the sum of all ledgers and then exactly matches the balance on the monthly statement from the bank.

Sample forms for journal, ledger and bank reconciliation worksheets, as well as sample accounting transactions are available in Chapter 19 of the CREM.

Even if the broker reports only summary amounts for managed property, each ledger entry must be linked to supporting detailed documentation for every cash receipt/payment. Property managers must account to each owner for each property within 30 days after the end of any month in which funds were either received or disbursed, unless otherwise agreed to in the written management agreement.

We mentioned that a broker could deposit a small amount of personal funds in each escrow account as a protection from entering a negative balance because of bank charges or similar. If this is the case ( and it is a good practice) then the money must be entered on a separate “ Broker’s Ledger,” and must also be entered in the account journal.

Documentation of deposits and disbursements also includes electronic funds transfers, and telephone transfers, etc. Detailed notes with information similar to the journal entries shown previously are required. All such confirmations, front/back copies of checks, etc. must be available for Commission inspection upon request.

Escrow accounting must be on a cash basis. A beneficiary of an escrow account may request “accrual basis” accounting in writing, which, if agreed to, requires the broker to maintain a separate recordkeeping system (journal, ledgers and bank account) for each beneficiary.

A broker must secure and maintain written client approval prior to charging or receiving markups, service fees, oversight fees or any compensation above amounts charged by any third party vendor or affiliated business entity. The broker must also keep record showing the amount or percentages of each such receipt of funds.

Unit 2-2 Rule E-1

Rule E-1(p). Money belonging to one beneficiary of an escrow account may never be used for the benefit of another beneficiary. (Such a "borrowing," even accidentally, is a likely cause of a negative ledger balance.)

Rule E-1(q). Anything of value received in lieu of cash shall be held by the broker unless otherwise agreed. (So try not to accept a sailboat as earnest money. It's not only costly to store, but frustrating to not be able to enjoy it on the water.)

Rule E-1(r). If a firm has branch office(s), each branch may either use the main office escrow account and recordkeeping system or set up a separate account(s) and system(s) for the branch. An escrow account must always be linked to a recordkeeping system in the same office.

Rule E-1(t). There is no limit to the number of escrow accounts a broker may maintain. If a broker doesn't maintain other people's money (e.g. uses a title company for all earnest money), there is no need to even maintain an escrow account.

Unit 2-2 Rule E

Rule E-2. When a client pays for some repair or advertising or service ordered by the broker before the service is completed, the broker must deposit the money in an escrow account until it is earned by full performance. Brokers must account to each beneficiary within 30 days of any withdrawal(s) from an escrow account. (NOTE: This is important to remember when a closing will not take place for an extended time. An interim accounting may be necessary.) Money agreed to in writing by the payer and broker as being a nonrefundable retainer may be received and spent as the broker determines, and is not subject to escrow accounting.

Rule E-3. Every licensee must produce documents or records as requested for audit or investigation by the real estate commission. Homeowners Association (HOA) records and documentation belong to the HOA, must be delivered to them by the broker upon terminating any HOA management contract. A broker may retain copies of these original records at the broker's expense.

Rule E-4. A broker must deliver a duplicate of any broker-prepared document that pertains to the employment agreement or property transaction, and must retain a copy of such duplicate for inspection by the real estate commission.

If such documents are finance-related (e.g. note, deed of trust, etc.) they should be unsigned or prominently marked “Copy”, as the originals are negotiable as real money.

Brokers working with buyers have the same duplicate delivery and record retention requirements as above. A buyer broker is not required to maintain a copy of the listing contract nor of the seller’s settlement statement.

A broker is not required to maintain copies of:

· Public records

· Title commitments

· Loan applications

· Lender required disclosures

· Third-party affirmations after settlement

There is a useful index of required sales and management transaction file contents in Chapter 19 of the real estate manual for reference when building your first real-world transaction files. Many brokers will also have transaction file checklists available, and some may require file inventory before paying associate commission splits.

Rule E-5. A broker must sign and provide an accurate, complete and detailed settlement statement at the time of closing to his or her client or customer. If signed by the employed licensee, settlement statements must be delivered to the employing broker immediately after closing. This rule places the closing responsibility on the designated broker, but does not relieve the employing broker's supervisory responsibilities.

The employing or independent broker must retain a signed copy of all settlement statements for future use or inspection by the real estate commission.

Settlement statement(s) must show:

· Date of closing.

· Purchase price.

· Itemization of adjustments, money or things of value debited or credited to the pertinent party.

· Date of adjustments, if not the same as closing date.

· Balance(s) due from respective parties to the contract.

· Payees, Makers and Assignees of any notes paid, made or assumed.

· Debit and Credit of any pre-owned home warranty service contract.

The seller and buyer need only receive their respective debit/credit itemization on their settlement statement - not debits and credits of the other party.

Settlement statements shall be delivered at the time of delivery and acceptance of title, whether by bill of sale, deed or installment land contract for a later deed.

If the employing or independent broker's company prepares the settlement statements and documents and conducts the closing, such broker is primarily responsible for the accuracy and completeness of the statements and documents.

If the designated broker is unable to attend a closing, or review closing documents, another licensee may agree, or the employing broker may designate another licensee to review and sign a closing statement and will assume joint responsibility with the absent licensee for its accuracy, completeness and delivery.

(Instructor's note: Even though the substitute licensee was blindsided and knows nothing of the parties or transaction! My free risk reduction advice: if offered this substitute "opportunity," go back home and call in sick until after the closing.)

A broker may transfer closing funds from the escrow account to the closing entity "at or before" closing, must obtain a dated/signed receipt therefore in the transaction file, and the settlement statement must contain the names of both the licensee who signs the statement and the employing broker, if applicable.

If the buyer obtains a new loan and the lender deducts costs from the total loan amount before disbursing loan proceeds prior to closing, the loan proceeds must be reconciled with buyer and seller settlement totals. A copy of this reconciliation must be retained in the transaction file and be made available for future real estate commission audit.

Rule E-6. Electronic or paperless transactions are permitted, provided the record may be produced upon request by the commission in a format capable of retrieval, or being legibly printed. Either principal in a transaction may request, and must be provided, print copies of closing documents.

Rule E-8. Advertising must be done in the name of the employing broker unless it is property owned by the licensee and not listed with the employing broker (Note: most brokers will require you to list through them.)

Advertising of general sales activity must cite the source of the data, must disclaim that all advertised sales intend only to show trends and were not necessarily sold by the advertising licensee, or shall separately identify the sales for which the advertising licensee was directly responsible.

Rule E-10. Licenses are non-transferable, and an employed licensee may never represent him- or herself as an independent or employing broker.

Rule E-11. Every listing agreement must contain a definite termination date.

Rule E-12. When a listing or right-to-buy agreement contains a "holdover agreement" the right to a commission applies only to those persons or properties actually negotiated during the agreement and for which the broker submitted names or addresses to the principal in writing at the end of the agreement.

(Instructor's note: All Commission-approved employment agreements contain a pre-printed holdover agreement - whereby the broker has the right to an earned commission if the seller sells to that buyer [or the buyer purchases that particular property] after the expiration of the employment. This is to prevent the seller or buyer from end-running the broker in an attempt to avoid paying a commission. It is a good practice to submit the name of everyone who views your listed property [or every property the buyer client viewed] during the term of the employment.)

Rule E-13. (Known as the “sign-crossing rule”) A licensee may not initiate communication if a seller or buyer is party to an exclusive right or exclusive agency contract with another brokerage. However, if the seller or buyer initiates the contact, the licensee may negotiate terms on which a future employment contract might be based, or actually enter into an employment agreement to be effective after the current agreement expires.

(Instructor’s note: These situations are extremely dangerous. The seller is usually upset that the property didn’t sell. The buyer is usually upset at not finding the right property. Either way, you may be jumping into the middle of a nasty situation. Remember that if the current employment failure upset the client, just think how upset he/she will be if/when yours expires without a sale! Be especially careful to never speak badly of the previous licensee or agree with the seller/buyer on complaints about which you have no first-hand knowledge.)

Unit 2-2 Rule E

Rule E-14. In every transaction, before closing the licensee must recommend a.) Examination of title and b.) Use of legal counsel.

(Instructor's Note: Every Commission-approved real estate employment agreement and buy/sell contract has these advisories pre-printed. This rule would seem to require verbal counsel as well. Remember that in Colorado we are privileged to conduct real estate transactions without having an attorney at law involved. But advising the client of the right to consult legal experts is prudent and indeed absolutely necessary when matters are beyond your level of expertise.)

Rule E-15. A broker may not claim any portion of earnest money if the seller fails to close for whatever reason and the failure is not due to the buyer. While it is true that you will have earned your commission upon performing your part of the employment agreement (finding a ready, willing and able buyer), the earnest money must be returned to the buyer and you must demand from, or sue, the seller for your commission.

Rule E-16. Security deposits may not be turned over to the owner unless the tenant agrees, knows where the money will be, and how to get it returned. If given over to the owner, the management agreement must clearly make the owner responsible for its return and authorize the release of the owner's name and address to the tenant in the event of a dispute. A broker may never contract to use a tenant security deposit for the broker's own benefit.

Rule E-18. In a transaction in which a licensee will earn a commission, informed, written consent from the client/customer must be obtained prior to receiving any fee or incentive from a mortgage lender. The federal Real Estate Settlement and Procedures Act (RESPA), however, may be stronger than this and prohibits payment of any money to a settlement service provider (e.g. real estate broker) for services not actually provided.

Rule E-19. In a transaction in which a licensee will earn a commission, a licensee may never accept a fee or incentive of any kind from a title insurance company.

Rule E-20. Only the seller sets or changes the asking price for a property. (Never undertake this on your own without written or witnessed seller authorization.)

Rule E-21. If the commission sends written notice of a complaint against you, or that you have been selected for an audit, or that recordkeeping problems were discovered in an audit, you must respond in writing within the time allowed, including:

· Full response to the allegation or complaint.

· Full response to any additional questions in the notice.

· Any requested documents or records.

· Any additional pertinent explanation or material.

Unit 2-2 Rule E

Rule E-22. This rule passed in 2006, is nearly six pages long! It incorporates, by reference, the federal Real Estate Settlement and Procedures (RESPA) law. Although far too complex to summarize, Rule E-22 may be reduced ad absurdum to the single premise that a broker may not pay or receive anything of value to or from anybody in connection with transaction except for "services actually rendered."

Rule E-23. A Colorado broker may pay a finder's fee or share a commission with an out-of-state broker if:

· The out-of-state licensed broker must have a domicile and office elsewhere.

· All advertising, negotiating, contracting and conveyance done in Colorado must be in the name of the Colorado broker.

All pre-closing funds are deposited in the Colorado broker's name according to Colorado Commission rules.

Unit 2-2 Rule E

A picture containing text Description automatically generated

Rule E-24. If you lie or misstate fact on your broker application, you are subject to discipline.

Rule E-25. A licensee must always disclose personal conflicts of interest to clients/customers. A licensee must always disclose that he/she is licensed when selling, buying or leasing for self.

Rule E-27. A licensee must never predict future availability or cost of services, utilities, or the character or possible future use of a property or any nearby property.

Rule E-29. An employing broker has authority, direction and control over licensee conformance with licensee law and Commission rule. In every complaint against a licensee, the Commission shall look at whether proper supervision was in place. Broker supervision applies to licensees and all broker employees including secretaries, bookkeepers and unlicensed assistants.

Unit 2-2 Rule E

Rule E-30. Employing Broker Duties are:

a. Maintain all trust accounts and trust account records.

b. Maintain all transaction records.

c. Develop office policy manual and review it periodically with all employees.

d. Provide a HIGH level of supervision for all licensees with less than 2 years active licensed experience.

e. Provide REASONABLE supervision for experienced licensees.

f. Try to prevent and preclude recurrence of violations of license law, rule and office policy.

g. Adequately supervise main and branch offices, regardless of delegation to licensed/unlicensed managers.

Rule E-31. REASONABLE Supervision of experienced licensees means:

a. Maintain written office policy detailing licensed employee duties and responsibilities. Such policies shall be given to, read and signed by each licensee and be available for Commission inspection.

b. Review all executed contracts to ensure competent preparation.

c. Review transaction files to ensure inclusion of all pertinent documents.

d. Employed broker may delegate supervisory authority to other experienced licensees provided:

a. Delegated licensee bears joint responsibility with Employing Broker for compliance.

b. Delegation must be in writing, signed by the delegate and available for Commission inspection.

c. Employing broker may never contract to delegate responsibility for broker supervision.

Rule E-32. HIGH Level of Supervision for licensees with less than 2 years of active licensed experience, in addition to the above, means:

a. Provide specific training in office policy and procedures.

b. Be reasonable and available for consultation.

c. Provide assistance in preparing contracts.

d. Monitor transactions from contract to closing.

e. Review documents in preparation for closing.

f. Ensure employing broker or experienced licensee attends closings or is available for assistance.

g. Employed broker may delegate supervisory authority to other experienced licensees provided:

a. Delegated licensee bears joint responsibility with Employing Broker for compliance.

b. Delegation must be in writing, signed by the delegate and available for Commission inspection.

Rule E-33. Ministerial Tasks. With proper disclosure, a licensee acting as agent may assist the other party (customer) without either violating the agency relationship or creating a new brokerage relationship with the customer. Such tasks include:

· Showing property.

· Preparing and delivering offers and counteroffers.

· Revealing available financing alternatives.

· Providing information on services contributing to a successful closing and fulfillment of the agency.

Rule E-34. All offers to buy or lease must be presented to the listing broker if the listing is current and exclusive.

Rule E-35. Written brokerage relationship disclosures must be made before a licensee elicits or accepts confidential information concerning a buyer or tenant's need, motivation or financial qualifications.

No disclosure is required for bona-fide open houses, preliminary conversations or "small talk" concerning price range, location or property styles, or responding to general factual questions concerning advertised properties.

Rule E-36. A broker who provides closing service may not disburse funds until they are available for immediate withdrawal from the institution holding the funds, either as a matter of right or under a contingency-free agreement with the financial institution.

Rule E-37. A licensee is not required to prepare any legal documents, but if a licensee (or his or her agent) does so, the licensee or agent may not charge the client or customer a separate fee. Attorneys for buyer or seller may charge document preparation fees to the public and these are not the responsibility of the broker. The buyer, seller, licensee or any other party, may pay any other closing costs. A broker who charges fees for conducting closings must specify the costs and obtain the written consent of the parties to be charged.

Rule E-38. Broker Designation. An employing broker must designate a broker in writing for every side of every transaction (C.R.S. 12-10-403(6)(a)). Instead of writing a separate letter or memo each time, a broker may write an office policy that ties automatic designation to the broker or team who signs any one of the six Commission-approved listing/employment contracts, or a Broker Disclosure to Buyer in the case of working as a transaction broker by disclosure. The employing broker has the right to substitute or add designated brokers and must disclose any such designation to the buyer or seller.

Unit 2-2 Rule E

Rule E-39. Every employing or independent broker (including single-broker practitioners) must write a policy identifying and describing the brokerage relationships that the firm and its employed licensees offer the public.

(Instructor's note: since there are only two brokerage relationships, agency and transaction, most firms allow both and leave it up to whatever the prospective client desires, or understands better.)

The policy must:

a. Apply to all licensees in the office.

b. Be read, agreed to, and signed by each licensee.

c. Identify the procedure for broker designation (in multiple licensee firms only).

d. Provide adequate protection of confidential client information such as:

a. Seller or landlord is willing to take less.

b. Buyer or tenant is willing to pay more.

c. Information about either party's motivating factors.

d. Information that either party may agree to other financing.

e. Material information about a party not required to be disclosed by law.

f. Facts or suspicions that may psychologically stigmatize a property.

g. Any other confidential information.

e. An office policy may authorize an employing broker acting as a designated broker to retain supervisory oversight of that transaction.

Rule E-40. A broker may work with buyer and seller in the same transaction as a transaction broker for both sides, or a single agent for one party treating the other as a customer. These options must be disclosed and made a part of each the listing/employment agreement.

(Instructor's Note: The options are pre-printed in the appropriate Commission-approved forms.)

A broker may never work as an agent for both sides. Remember dual agency is illegal in Colorado. A broker also may not act as an agent for one party and a transaction-broker for the other.

Rule E-41. A broker agent for either party, who then secures the other party, must switch to transaction broker for both parties (assuming the original party checked the appropriate box in the listing agreement allowing a future change to transaction broker to occur. If they did not, you must quit any brokerage relationship with the second party and treat them as a customer or advise them to get their own broker.) You must provide a "Change of Status (Transaction Broker Disclosure)" form to the party to whom the change applies as soon as you become a transaction broker. If such a situation arises at the time a written offer is imminent, you may use the notice at the end of the Commission-approved "Contract to Buy and Sell Real Estate" by checking the box marked "transaction broker" and the box that says "This is a Change of Status."

Unit 2-2 Rule E

Rule E-42. If a licensee prepares a competitive market analysis for any reason other than anticipated sale or purchase of a property (e.g. estate valuation, lender request, etc.) it must contain the disclaimer: "The preparer of this evaluation is not registered, licensed or certified as a real estate appraiser by the State of Colorado."

Rule E-43. Licensees are not responsible for measuring property, but they are responsible for the accurate representation of the source of any square footage measurement. A licensee who measures property must disclose the standard, methodology or manner used and advise the client that it is for marketing purposes only. If the client needs precise measurement, advise them to have an independent measurement done.

Unit 2-2 Rule E

Rule E-44. When a license is suspended, revoked, expired or inactivated, the licensee must immediately:

1. Cease any licensed activity.

2. Return the pocket card to the Commission.

3. Cease all advertising.

4. Inform all clients, and release all listings, management agreements or other contracts requiring a license.

5. Account for all trust funds and complete all pending closings (employing or independent brokers only).

6. Refuse any commission unless earned prior to the loss of license.

Rule E-45. Every listing/employment agreement gives the designated broker consent to share client confidential information with a supervising broker (Rules E-30, E-31 and E-32) without making the supervising broker a party to the brokerage relationship.

Unit 2-2 Rule E-46

Rule E-46.

(Instructor's note: This rule pertains to Affiliated Business Arrangements. Like Rule E-22 it was adopted in 2006. It is over two pages long. It is heavily abbreviated and paraphrased here to give its basic meaning. We believe this shortened version will suffice for earning your license.)

A licensee or employing broker must provide a written HUD Affiliated Business Arrangement Disclosure Statement to any buyer or seller prior to referring to any settlement service provider with whom an affiliated business arrangement exists (for example, a broker-owned title company). You must also keep a copy of the signed disclosure statement in the transaction file.

Sham business arrangements are forbidden. These type of scams exact junk fees from buyers and sellers charged by non-existent companies for settlement services existing only in “smoke and mirrors.”

Rule E-46 requires an individual licensee to disclose to the Commission the names and physical location of any affiliated business arrangements to which the licensee is a party upon:

· New application for active licensure.

· Re-activation of an inactive license.

· Transfer of an active license to another brokerage firm.

Employing and independent brokers must annually disclose the name and physical location of any party with whom an affiliated business arrangement exists.

Unit 2-2 Rule E-47 & E-48

Rule E-47. On every occasion of engaging in the practice of real estate brokerage, a broker must determine whether he or she possesses the necessary experience, training, and knowledge to provide brokerage services and maintain compliance with the applicable federal, state and local laws, rules, regulations and ordinances. If the broker does not have the necessary experience, training, and knowledge, the broker must: decline to provide brokerage services; or obtain the necessary experience, training and knowledge; or obtain the assistance of their supervising broker or legal counsel, or co-list with another licensed broker who does have the necessary experience, training, and knowledge.

Rule E-48. No licensee shall file a lien, a lis pendens, or record a listing contract to secure the payment of a commission or other fee associated with real estate brokerage duties in a residential transaction. A licensee involved in a residential transaction shall not cause the title to a property to become clouded or otherwise interfere with the transfer of title when the licensee is not a principal in the transaction. A licensee involved in a commercial transaction, pursuant to 38-22.5-101, may file such a lien or lis pendens.

Note: This is limited to commercial leasing transactions.

Rule E-49. A licensee shall make written notification to the Commission within 30 calendar days of any of the following:

a. A plea of guilt, a plea of nolo contendere or a conviction of any crime identified by 12-10-217(1)(p), C.R.S.

b. A violation or aiding and abetting in the violation of the Colorado or federal fair housing laws.

c. Any disciplinary action taken against a licensee in any other jurisdiction, if the licensee's action(s) would constitute a violation of the real estate license law in Colorado.

d. A suspension or revocation of a license, registration, or certification by Colorado or another state, within the last five years, for fraud, deceit, material misrepresentation, theft, or the breach of a fiduciary duty that denied the licensee the authorization to practice as a mortgage broker, a real estate broker or salesperson, a real estate appraiser, an insurance producer, an attorney, a securities broker-dealer, a securities sales representative, an investment advisor, or an investment advisor representative.

End of Page

Unit 2-2 Rule G-2

A picture containing person, indoor, wall, person Description automatically generated

Commission Rule G is the implementation of the license law C.R.S. 12-10-207(2) for brokers dealing in Rental Referral business.

Rule G-2. Brokers must provide each prospective tenant a receipt for any advance fees. Such a receipt may be contained in a written contract. The receipt or contract must have the following verbatim warning in all capital letters and bold face:

IF THE INFORMATION CONCERNING RENTAL FURNISHED BY THE BROKER IS SHOWN TO BE NOT CURRENT OR ACCURATE IN REGARD TO THE TYPE OF RENTAL DESIRED, THE FULL FEE SHALL BE REPAID OR REFUNDED TO THE PROSPECTIVE TENANT UPON WRITTEN DEMAND. CURRENT RENTALS HAVE BEEN VERIFIED AS TO AVAILABILITY WITHIN THE LAST FOUR BUSINESS DAYS.

End of Page

Unit 2-2 Rule G, I, & K

Rule G3. A broker must retain the original (copy to the prospective tenant) of any rental referral list for 90 days.

Rule G-5. When referrals are made by any method other than in-person, the broker must retain for 1 year a copy of the addresses furnished, including the name of the broker or employee who provided the address(es).

Rule G-6. Broker shall make and post a written register of all advertised/ published properties. All advertised properties must have been verified as being for rent within four days before the advertisement appears. All properties advertised must be assigned a broker-developed unique identifying code, must be approved by the owner to be offered for rent (may be oral, but logged in writing by the broker), and all ads must be retained for 1 year.

Rule G-7. A broker violating any of these G rules may be found unworthy or incompetent in the license law. This includes:

· Property is not in the area represented.

· Rental price advertised is other than asked by the owner.

· Property is non-existent or unverifiable for rent.

· Advertised specifics differ from the actual property.

· Type of property is different than advertised (e.g. advertised single-family home is actually a duplex).

Rule I is entitled "Declaratory Orders" and deals with the process for petitioning the Commission for such an order to clarify or interpret any uncertainty as to the applicability to the petitioner of any statute, rule or order of the Commission. It is not germane to the issuance of a license.

Rule K was added in 2008. It pertains to administrative procedures and time limits for filing designations, requests, exceptions and pleadings in regard to disciplinary actions taken by the Commission. It is not germane to the issuance of a license.

End of Page

Summary

This concludes Chapter 2. Below is a brief summary which you can review before taking your quiz.

Rule A - Qualifications, Applications and Examinations

The Commission is to issue you a license within 10 days of receipt of your complete application and criminal background (fingerprint) results.

If you have been licensed in another state, you must submit a Certificate of License History.

If within the last 10 years you have a criminal background of any kind, not counting misdemeanor traffic violations, you must submit a:

· Written, signed statement explaining each violation in detail.

· Completed Real Estate Commission Application addendum (REC-BAA).

· Letter from the employing broker.

You may apply to the Commission at any time for a Preliminary Advisory Opinion.

If you are denied a license, you must be notified and given a reason.

Pre-License and Brokerage Administration courses must be based on education principles acceptable to the Commission.

If your application, renewal, or any other fee is paid for by a check that bounces, the application is cancelled.

The person to be appointed temporary employing broker must show two years of active licensed experience in the Commission records.

Rule B - Continuing Education

Your initial license will be valid for 3 years from the date of issuance.

· Before renewing your license, you must complete 24 hours of continuing education.

· You must also have your continuing education current before activating an inactive license.

The Commission is required to furnish a new Annual Commission Update course each year.

Continuing education courses must be at least one hour in length and credit may not be earned for more than 8 hours in one day.

You are responsible for obtaining proof of completion from your course provider.

Never send your course completion certificates to the commission unless specifically requested.

Rule C - Licensing - Office

A broker licensed as an individual proprietorship must be the sole owner of the brokerage.

Every employing broker must be reasonably available to manage and supervise the brokerage practice during regular business hours.

Associate brokers shall be licensed under the licensed brokerage, not the trade name.

A person may not be licensed under more than one name or practice real estate under other than the person or entity’s licensed name.

A broker using a trade name owned by another must include the brokerage name as registered with the commission when advertising.

An individual proprietorship may not use a trade name containing any words that would appear to be corporate (e.g. Inc., LLC, etc.).

A brokerage firm employing an unlicensed on-site manager who prepares leases or rental agreements must require him to be accountable to and report directly to the employing broker.

A broker license may be issued on inactive status.

Rule D - Renewal, Transfer, Inactive License, Error and Omission Insurance

A license on inactive status must still be renewed every 3 years. The renewal fee is the same as for active license renewal.

An employing broker may directly pay earned commissions to a previous associate who has transferred to another brokerage or changed to inactive license status.

Initial license expires 3 years from the date of issuance.

License renewal fees are non-refundable.

Errors and Omissions Insurance is required for every active license, including real estate companies.

The policy is individual and license specific and transfers without additional premium if a licensee transfers to a new employing broker.

Rule E – Separate Accounts - Records - Accountings - Investigations

Unit 2-2 Rule E-1

End of Page

Unit 2-2 Rule E-1(f)

· When money in a trust account may be earned by the broker, it must be withdrawn promptly from the trust account (and moved to the company operating account).

End of Page

Unit 2-2 Rule E-1

· Rule E-1(g) A broker/builder must hold earnest money deposits for new construction in a trust account and may not use the deposit for construction purposes.

Unit 2-2 Rule E-1

A picture containing text Description automatically generated

Rule E-1(m). Property management funds must be deposited within 5 business days following receipt.

Rule E-1(n). Earnest money in any form must be payable to or assigned/endorsed to and delivered to the listing broker who must hold it until due in the case of a promissory note, or deposit it into the broker's escrow account within 3 business days of the broker receiving notice of contract acceptance.

The parties may instruct the broker in writing (usually via the contract) to deliver the earnest money to a third party (e.g. title company). If so, the broker must retain a copy of the earnest money instrument along with the endorsement to the third party, and obtain and keep a dated and signed receipt upon delivery to the third party.

End of Page

Unit 2-2 Rule E-1(p)

Rule E-1(o). Recordkeeping Requirements.

Brokers must maintain a recordkeeping system consisting of:

1. Journal, ( similar to a checkbook register) a chronological log of all deposits into, or disbursements from, the account.

Each journal entry must include:
For Funds Received:	For Funds Disbursed:
Name of payer and property ID	Name of payee
Date of receipt AND deposit	Date of payment and Check Number
Purpose of receipt	Vendor invoice or document proving purpose of payment
Amount	Check number and Amount
Resulting cash balance in account	Resulting cash balance in account

Sample forms for journal, ledger and bank reconciliation worksheets, as well as sample accounting transactions are available in Chapter 19 of the CREM.

End of Page

Unit 2-2 Rule E-1

Unit 2-2 Rule E

Unit 2-2 Rule E-4

If such documents are finance-related (e.g. note, deed of trust, etc.) they should be unsigned or prominently marked “Copy”, as the originals are negotiable as real money.

A broker is not required to maintain copies of:

· Public records

· Title commitments

· Loan applications

· Lender required disclosures

· Third-party affirmations after settlement

Unit 2-2 Rule E-5

The employing or independent broker must retain a signed copy of all settlement statements for future use or inspection by the real estate commission.

Settlement statement(s) must show:

· Date of closing.

· Purchase price.

· Itemization of adjustments, money or things of value debited or credited to the pertinent party.

· Date of adjustments, if not the same as closing date.

· Balance(s) due from respective parties to the contract.

· Payees, Makers and Assignees of any notes paid, made or assumed.

· Debit and Credit of any pre-owned home warranty service contract.

The seller and buyer need only receive their respective debit/credit itemization on their settlement statement - not debits and credits of the other party.

Settlement statements shall be delivered at the time of delivery and acceptance of title, whether by bill of sale, deed or installment land contract for a later deed.

Unit 2-2 Rule E

Text Description automatically generated

Rule E-6. Electronic or paperless transactions are permitted, provided the record may be produced upon request by the commission in a format capable of retrieval, or being legibly printed. Either principal in a transaction may request, and must be provided, print copies of closing documents.

Rule E-8. Advertising must be done in the name of the employing broker unless it is property owned by the licensee and not listed with the employing broker ( Note: most brokers will require you to list through them.)

Rule E-10. Licenses are non-transferable, and an employed licensee may never represent him- or herself as an independent or employing broker.

Rule E-11. Every listing agreement must contain a definite termination date.

End of Page

Unit 2-2 Rule E-12

Unit 2-2 Rule E-13

Rule E-13. (Known as the “sign-crossing rule”) A licensee may not initiate communication if a seller or buyer is party to an exclusive right or exclusive agency contract with another brokerage. However, if the seller or buyer initiates the contact, the licensee may negotiate terms on which a future employment contract might be based, or actually enter into an employment agreement to be effective after the current agreement expires.

(Instructor’s note: These situations are extremely dangerous. The seller is usually upset that the property didn’t sell. The buyer is usually upset at not finding the right property. Either way, you may be jumping into the middle of a nasty situation. Remember that if the current employment failure upset the client, just think how upset he/she will be if/when yours expires without a sale! Be especially careful to never speak badly of the previous licensee or agree with the seller/buyer on complaints about which you have no first-hand knowledge.)

End of Page

Unit 2-2 Rule E

Rule E-14. In every transaction, before closing the licensee must recommend a.) Examination of title and b.) Use of legal counsel.

Rule E-15. A broker may not claim any portion of earnest money if the seller fails to close for whatever reason and the failure is not due to the buyer. While it is true that you will have earned your commission upon performing your part of the employment agreement (finding a ready, willing and able buyer), the earnest money must be returned to the buyer and you must demand from, or sue, the seller for your commission.

Rule E-16. Security deposits may not be turned over to the owner unless the tenant agrees, knows where the money will be, and how to get it returned. If given over to the owner, the management agreement must clearly make the owner responsible for its return and authorize the release of the owner's name and address to the tenant in the event of a dispute. A broker may never contract to use a tenant security deposit for the broker's own benefit.