Advance fees and advance fee agreements

Identify the advance fee

In California, an advance fee is a fee, regardless of form, claimed, demanded, charged, received, or collected by a licensee for a service requiring a license or for a listing before fully completing the contracted or represented service. Calling it a retainer does not change the test. Neither fees nor services may be divided to evade the law.

A commission payable after full performance is not an advance fee agreement. Exclusions include rental security, screening fees, qualifying advertising in publications or comparable electronic media outside the broker's ownership or control, and fees earned under qualifying written limited service contracts. Those contracts offer stand-alone services task by task, with compensation as each separate contracted task is completed. Exclusion does not remove other applicable regulation.

Prepare the agreement and materials

California requires submission to the Real Estate Commissioner of all advance fee advertising, promotion, solicitation, and negotiation materials, including the agreement form, at least 10 calendar days before use. Materials must specify the complete services, total fee, due date, and definite full-performance date. Agreements require at least 10-point type.

Materials cannot be misleading, guarantee a purchase, lease, exchange, or loan, or disclaim responsibility for representatives' verbal commitments. Under Business and Professions Code section 10085, the Commissioner may order misleading materials not to be used within 10 calendar days after receipt.

Collect into trust and account

The broker deposits advance fees when collected into a trust account with a bank or other recognized depository. The money belongs to the trust, not the agent. Withdrawals for the agent's benefit are permitted only when amounts are actually expended for the principal's benefit or five days after verified accounts have been mailed to the principal.

Verified accountings are due to the principal at each calendar quarter's end and upon complete performance; the Commissioner receives them on demand. Identify the parties, services, trust account, fee collected, and amounts allocated or disbursed for each service, representative commissions, overhead, and profit. Advertising disbursements require a copy of the advertisement, publication name, number published, and publication dates. Loan arrangement accountings identify recipients of loan information, their addresses, and submission dates.

Check whether the charge is permitted

Trust handling does not legalize a prohibited fee. California bars advance fees for borrower loan services before the borrower becomes obligated to complete the loan, unless the person is a licensed broker who has complied with the advance fee rules; banks and other specified lenders are also excepted. Mortgage modification or forbearance compensation cannot be claimed, demanded, charged, collected, or received before every promised service is fully performed. Misapplied advance fees can support recovery of treble damages and reasonable attorney's fees.