An Express Article from the California Land Title Association
A bill to regulate 1031 exchange accommodators, SB 1007 (Machado), has won Senate approval on a 31-7 vote and will now be considered in the Assembly. The CLTA has been working with legislative staff as well as other groups on the details of the bill.
The definition of an exchange facilitator in the bill excludes a title insurance company or underwritten title company acting solely as a qualified escrow holder or qualified trustee, as defined under IRS regulations. The exemption only applies to the extent that a title company is not facilitating an exchange. Underwritten title companies were added to the exclusion before the bill passed out of the Senate Banking, Finance and Insurance Committee. The exemption in the prior version only applied to title insurance companies. To the extent title companies are operating as exchange facilitators they would be covered by the requirements of the legislation, as would companies affiliated with title companies.
The bill requires exchange facilitators to either (1) maintain at least a one million dollar fidelity bond or (2) deposit the same amount in an interest bearing deposit account with a financial institution or (3) deposit all exchange funds in a qualified escrow account or qualified trust and provide that any withdrawals from the account or trust require the client’s written authorization. A person claiming to be damaged due to the failure of an exchange facilitator to comply with the new law could file a claim on the bonds or deposits.
In addition, all exchange facilitators would have to have a $250,000 errors and omissions insurance policy or maintain a deposit of that amount in a financial institution. This requirement is in addition to the other requirements.
The bill prohibits several acts, including making material misrepresentations or false statements, failing to account for funds, engaging in fraudulent or dishonest dealings, and embezzling or misappropriating funds. SB 1007 requires facilitators to invest funds to meet the investment goals of liquidity and the preservation of principal. Exchange funds could not be commingled with operating accounts or loaned or transferred to any affiliated person or company.
The full bill text may be found at the following link: SB 1007 (PDF)