The California Residential Mortgage Lending Act (CRMLA) defines “trust funds” as funds that a licensee collects and holds on behalf of another while making or servicing a mortgage loan. Licensees must place the funds in a non-interest-bearing account with a federally-insured depository institution.
Licensees may not commingle trust account funds with any other funds that they hold or possess. Funds in a trust account may only be removed for the following reasons:
- Payments authorized by the borrower, allowed by the mortgage lending agreement, or required by state or federal law;
- Refunds to the borrower;
- Transfer of funds to a trust account with another depository institution;
- Forwarding of funds when there is a new loan servicer for the mortgage loan;
- Removal for any legal reason stated in the lending agreement; and
- Compliance with a regulatory or court order.
At the request of the owner of trust funds, a licensee may transfer funds initially placed in a non-interest-bearing account into an interest-bearing account in a federally-insured depository institution if the licensee:
- Establishes the account in the name of the licensee in trust for a specified beneficiary;
- Confirms that all funds are federally insured;
- Separates trust funds from the funds of the licensee and from funds belonging to any other trust account;
- Discloses the method of calculating and paying interest to the beneficiary and to the person from whom funds are received;
- Discloses whether there will be payment of service charges to the depository institution and who will pay them;
- Discloses whether there are penalties for the withdrawal of funds from the account; and
- Pays all interest earned from the account to the owner of the trust fund or the beneficiary.
CRMLA licensees must supply borrowers with statements of account that show the transactions and the borrower’s current position. Licensees may not withdraw funds from an account in excess of the amount in the account at the time of the withdrawal. Any payment made to a borrower’s account must be credited on the same day as the payment was received by the licensee, regardless of when it was processed.
A CRMLA licensee is generally required to process the payment to the borrower’s account within two business days from the day the payment was received. The trust funds held by a licensee are never treated as an asset of the licensee and are not subject to a claim or an enforcement action against the licensee.
The CRMLA is contained in Division 20 of the California Financial Code, commencing with Section 50000. The regulations are contained in Subchapter 11.5 of Chapter 3 of Title 10 of the California Code of Regulations, commencing with Section 1950.003 (10 C.C.R. §1950.003, et seq.).
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