Office Inspections and the Disciplinary Process in Florida
Intended Learning Outcomes
Describe the office inspection process and what information and records must be made available to the inspector during a routine office inspection and escrow account audit
Describe the steps involved in the complaint process
Explain the use and purpose of a notice of noncompliance
Describe the grounds and penalties for denial, suspension, and revocation of a real estate license
Explain the various types of administrative penalties
Distinguish between a first degree and second-degree misdemeanor and know what real estate violations are misdemeanors of the first degree
Describe the purpose and requirements associated with the Real Estate Recovery Fund, including payment limits for claims and assessment of fees
List persons not qualified to make a claim
Office Inspections and Audits
Broker’s Office: Every active Florida real estate broker must have an office. An office is defined as one enclosed room of stationary construction where records are kept and negotiations take place. The office does not have to be in Florida but is subject to routine audits to make sure the broker is complying with all laws and rules.
On a routine inspection, there are minimum office requirements for which the inspector will be looking. Those requirements include but are not limited to:
Office entrance sign: The broker’s office must have an official sign on or about the entrance of the main office and any branch office. The sign must be readily visible to anyone entering the office. The sign must contain the name of the brokerage firm (if any), the name of the broker or brokers (as stated in the Division of Real Estate records), and the words “licensed real estate broker.”
License and registration: The broker must maintain all appropriate licenses and registrations as they apply to the brokerage business. This includes copies of all associate licenses, registration of the brokerage, city and county occupation licenses, and the license of the broker. The inspector wants to make sure that all licenses and registrations are current and valid.
Agency Disclosure: The broker must be able to provide to the inspector the type of agency policy the broker offers and the method in which the disclosure forms are delivered. The broker’s policy and procedures manual is a good place to describe the company’s policy on the agency. That along with the method of delivery should be sufficient. Some brokers like to keep a copy of the disclosure forms in the client’s file.
The Audit: A broker should expect an escrow account audit at least once after opening an office. From that time forward, there is no exact time frame that the Department of Business and Professional Regulation uses for future audits. The initial contact for an audit is usually made with the broker who is ultimately responsible for the maintenance and safekeeping of the escrow account. A telephone call is the most common method of contact, although letters are sometimes used. An appointment will be made by the investigator to set up a time for the escrow audit. The bookkeeper or any other person authorized by the broker may be present.
The following are documents that the auditor will be looking for during the audit process:
List of Liabilities: important information needed include parties to the transaction, dates of the deposit, amounts of the deposits, and dates and amounts of disbursements.
Bank statements – a six-month period prior to the audit.
Lease/Rental agreements: for rental audits
Canceled checks: six-month period
Reconciliation: Bank statement reconciliation for a six month period
Signed monthly broker statement: Rule 61J2- 14.012
Checkbook and deposit receipts
Current bank activity report
Interest bearing escrow agreements: all parties to a contract must know about and agree to the disposition of any interest earned
Authorization: In conducting the audit, the investigator will use a worksheet to record the certain necessary information. Once the audit begins, the investigator will conduct the following tasks:
Review the bank statement: specific items to note are negative balances, non-sufficient funds, and bank charges
Review bank statement reconciliation
Review canceled checks
Review deposit slips
Review monthly reconciliation
Choose the date for review of liability/reconciliation
Determine liability as of the date used for reconciliation, defined as “the sum total of all deposits received, pending, and being held by the broker at any point in time”
Determine the bank balance as of the date used for the audit
Compare the trust liability to the reconciled bank balance
Interest-bearing accounts: brokers are allowed to place trust funds in an interest-bearing account. However, the disposition of the interest earned requires written permission from all parties to the transaction.
Investigative Findings: Upon completion of the audit, the results will be discussed with the broker. Any serious discrepancies must be reported to the Division of Real Estate in the form of a complaint. If minor discrepancies were found and the accounts were in balance, either a citation (fine) or a notice of noncompliance would be issued to the broker.
Whenever an audit reveals an overage or a shortage the matter will be reported to the Division of Real Estate in the form of a complaint. The investigative report would be submitted with the following information:
Office information and audit worksheet
Records to show how trust liability was derived
Bank statements and reconciliation’s for a period of review
Monthly statement prepared and signed by the broker for a period of review (if available)
Checks reflecting inappropriate disbursements from escrow account (if applicable)
Proof of corrective action taken
Written statements/response to the complaint prepared by the broker (if desired)
Any other documents, data, or records that might support legal actions
Overview: License law violations are based on the principle that a person is innocent until proven guilty through the legal process that is afforded each applicant and licensee. Disciplinary actions are considered to be quasi-judicial and are governed by Florida statutes and the rules of the Florida Administrative Code. (F.A.C.).
Those Florida statutes include:
Chapter 120: Administrative Hearing Rules and Procedures
Chapter 455: Division of Professions and Occupations
Chapter 475: Real Estate License Law
In addition, sections of the Florida Administrative Code (F.A.C.) that apply:
Rule 61J2: FREC Rules and regulations
Rule 60Q: Division of Administrative Hearings
Sometimes people feel that they have been mistreated in a real estate transaction and desire to attain some level of satisfaction regarding the person who has allegedly injured them. The complaint process is the vehicle that the public can pursue in an attempt to rectify injustices committed by licensees. It must be understood that the FREC only has administrative authority, not criminal authority. Remember, criminal prosecution can only be prosecuted by the State Attorney’s office, not the Florida Real Estate Commission. FREC only has the power to issue an administrative fine, take action against a license, or take action against a license application (see Chapter 5).
The Process: Every license is entitled to due process and the opportunity to be heard and respond to a complaint. The disciplinary process contains seven steps:
Probable Cause Panel
Informal Conference or Formal Hearing
STEP ONE: The Complaint
The process begins when a signed, written COMPLAINT is submitted to the Department of Business and Professional Regulation, Division of Real Estate (DRE). The complaint is LEGALLY SUFFICIENT if it alleges that a violation of any Florida law, FREC rule, or DBPR rule has been committed. The allegations in the complaint do not have to be real estate-related. For example, a person could file a complaint against a licensee because he or she believes that the licensee is dealing in narcotics.
First-time minor violations may result in the issuance of a NOTICE OF NON-COMPLIANCE if the violation does not endanger the health, safety, or welfare of the public. Failure to abide by a notice of non-compliance will result in additional disciplinary procedures.
STEP TWO: The Investigation
Once a complaint is determined to be legally sufficient, the DBPR will investigate the complaint. The investigators will typically speak with all the parties involved and collect as much evidence and information as possible. At the conclusion of the investigation, a report will be prepared to indicate the likelihood of Probable Cause (whether there are sufficient facts and evidence warranting further proceedings). The investigative report will be submitted to the Florida Real Estate Commission at which time the Chairperson of FREC will appoint a Probable Cause Panel for further review.
STEP THREE: FREC Appoints Probable Cause Panel
The PROBABLE CAUSE Panel is assigned the task of determining if there exists probable cause in the subject case. The panel consists of two current members of FREC. It can also consist of one current member of FREC and one former member of FREC with an active real estate license. The probable cause panel must decide if probable cause exists which will warrant a continuation of the complaint process. If the panel decides that probable cause does not exist, it may elect to draft a “Letter of Guidance” informing the licensee that, although no technical violation may have occurred, the licensee may want to handle this type of situation with more care in the future.
STEP FOUR: The Formal Complaint
If probable cause is found to exist, the next step is the drafting, filing, and service of a FORMAL COMPLAINT that specifies the alleged violation. The Formal Complaint is drafted by the DBPR and is served on the licensee who has 20 days to file a written response that either admits or denies each allegation. In the event a written response is not filed, a default (legal forfeit) will be entered against the licensee and his or her license will usually be revoked. In response to the complaint, the licensee will request either an informal conference or a formal hearing.
STEP FIVE: Informal Conference or Formal Hearing
If the licensee’s response indicates that all parties agree on the facts, the licensee can ask for an INFORMAL CONFERENCE (informal hearing) to be heard directly by the FREC. All evidence is admitted by STIPULATION since there is no disagreement about the facts. At the conclusion of the informal conference, the FREC will issue a Final Order.
If the facts are in dispute, a FORMAL HEARING is appropriate. A formal hearing is similar to a trial. All parties must be given reasonable prior notice of the date, time, and place of the hearing. The parties can make an opening statement, present evidence, elicit testimony from witnesses, conduct cross-examination, and present closing arguments.
An Administrative Law Judge (ALJ) presides over the hearing. The ALJ has the authority to issue a SUBPOENA which commands a witness to appear at the hearing in person for the purpose of giving testimony, presenting documents, or both. Failure to obey a subpoena could subject the individual to contempt of court proceedings and ultimately be fined or imprisoned.
The Administrative Law Judge will prepare a RECOMMENDED ORDER that will contain findings of fact, conclusions, and a recommended penalty if any. The Recommended Order is submitted to FREC for its consideration.
STEP SIX: Final Order
After the hearing process, the matter is submitted to FREC for final review and disposition. Members of the FREC (excluding the probable cause panel members in the subject case) will review the matter and issue a FINAL ORDER ending the quasi-judicial process. The Final Order is considered to be FREC’s final decision as to the guilt or innocence of the licensee. The Final Order becomes effective 30 days after it has been entered.
A licensee has the right to practice real estate through the complaint process and 30 days after the final order has been issued. If, however, the DBPR or the FREC believes the licensee could be of danger to the public, a SUMMARY SUSPENSION can be issued temporarily preventing the licensee from practicing real estate until the complaint process has ended.
STEP SEVEN: Appeal
A licensee has the right to challenge a Final Order by filing a NOTICE OF APPEAL with the District Court of Appeals within 30 days. In order for a licensee to continue practicing real estate during the appeal process, a request to stay the enforcement of the final order should be considered. Otherwise, the final order will take effect in 30 days. To obtain a stay of the final order, a court must issue a Writ of Supercedes until the appeal process is concluded.
Violations and Penalties
The Florida Real Estate Commission is authorized to do a number of tasks:
Deny a license.
Suspend a license.
Revoke a license.
Grounds for Denial
When a license is denied by the FREC, a copy of the order is mailed to the applicant by registered or certified mail, setting forth the reasons for the denial and advising the applicant he has 21 days from the date of receipt to request a hearing.
Any of the following may be the basis for denial of a license:
Did not file an application in the proper form or pay the correct fee
Did not correct an error or omission on an application
Did not take the examination within one year from the date of application
Did not pass the state exam or cheated on the exam
Did not prove qualifications for licensure
Has a reputation for bad business dealings or incompetence
Is being investigated by another state for an act that would be a violation of Florida law
Has committed an act in the previous year that could have resulted in discipline had the applicant been licensed at the time
Grounds for Suspension
A suspension of a license is considered a short-term, temporary penalty that can last up to 10 years. Generally, a suspension is the penalty for an illegal act that was less serious in its violation than the revocation of license would demand. The Commission has the flexibility to determine what punishment it will give, from the least penalty to the most, based on the Discipline Guidelines. A second suspension for the same or a different violation may result in revocation of the license, registration, certification, or permit.
An example is listed in the guidelines is 475.42(1) (j), which states: No broker or sales associate shall place upon the public records any false, void, or unauthorized information that affects the title or encumbers any real property. The penalty guideline states: The usual action of the Commission shall be to impose a penalty of a five-year suspension or revocation.
No licensee can act in a real estate capacity with a suspended license until the suspension is lifted. When a broker’s license is suspended or revoked, the salespeople who are licensed to that broker have their licenses involuntarily inactive automatically.
Grounds for Revocation
Revocation of a real estate license is permanent and, as such, it is a very serious punishment. The only exceptions to this rule: When a licensee has filed for renewal without completing his continuing education or post-licensure course by the expiration date; or if he filed an application that contained fraudulent or false information. In these cases, the individual cannot apply for a sales associate’s license for a period of five years after the filing of the Final Order revoking the license unless the Commission specifies a lesser period of time in the Final Order. The lesser period of time is based upon mitigating factors presented by the individual. The Commission may refuse to issue a license or renew a license if they feel that the individual does not meet qualification standards of honesty and integrity. When the active broker’s license is revoked, all sales associates’ and broker associates’ licenses are placed on involuntarily inactive status. If it is a partnership or corporation, the partnership or corporation must re-qualify with a new partner.
Types of Penalties
Three types of penalties may be imposed for violations of real estate license law: administrative, civil, and criminal.
In case of violations of the law or regulations, the FREC may issue an administrative penalty.
The administrative remedies under FREC are:
Deny a license application: Applications can be denied because the application is deficient in some way such as failing to completely fill out the application, failing to submit the proper fee, failing to correct an application after it has been returned by the DPBR, failing to pass the state exam within two years after a completed application is received, or failing to pass the state exam within two years of completing FREC course I.
An application will also be denied if the applicant does not meet the necessary minimum qualifications, does not possess good character, was guilty of prior acts that would be grounds for revocation or suspension, or cheated on a final exam.
Refuse to renew a license: Renewal applications can be denied if the applicant has not completed his or her post-license or continuing education requirement or if the applicant is unable to demonstrate good character.
Revoke a license: The most severe penalty of all is a revocation of a license that is permanent. Although in some cases a licensee may be able to apply for reinstatement after five years, it is difficult to be reinstated after a revocation. Technically, any act that would result in suspension could also result in revocation, although usually, the act is quite serious if a revocation is imposed.
Suspend a license for up to ten years: License suspension is a temporary penalty. During the time of suspension, the licensee may not practice real estate. Any violation of Florida statute, FREC rule, or DBPR rule can be grounds for suspension, but, usually, a more serious offense or repeated offense is required.
Citation: Issue a CITATION for a minor infraction.
Fine: Impose a fine of up to $5,000 per violation of F.S. 475 (DBPR may impose a fine of up to $5,000 for a violation of F.S. 455).
Probation: Impose probation which allows the licensee to continue to practice real estate under the guidance of FREC.
Notice of Non-compliance: First-time minor violations may result in the issuance of a NOTICE OF NON-COMPLIANCE if the violation does not endanger the health, safety, or welfare of the public. Issue a Notice of Non-compliance within fifteen days to correct the infraction with no consequence. Failure to abide by a notice of non-compliance will result in additional disciplinary procedures.
Letter of Reprimand: This carries no discipline other than a letter that is placed in the licensee’s file for future reference.
- Civil penalties
Buyers, sellers, or tenants may seek legal action against brokers when they feel they have been victimized. The Commission has no authority to order any commission (compensation) paid to be returned. Civil courts can and do seek the recovery of compensation. The courts can also order the broker to pay damages if appropriate. The Commission can suspend a license and make as a condition of the suspension the repayment of commission to the seller. In this instance, the suspension order will not be removed until the terms of the suspension are met. Usually, the wronged party will be required to prove fraudulent acts on the part of the broker before compensation (or return of the sales commission) from the broker is required.
- Criminal penalties
The Department and the FREC do not issue criminal prison sentences. They only fine licensees with administrative fines. The courts, however, may issue criminal punishments to licensees.
First-degree criminal penalty.
Violations that will lead to a First Degree misdemeanor are:
Publishing false or misleading information;
Collecting unlawfully an advance fee for listing real property;
Failing to provide accurate and current rental information for a fee.
The penalty for a First Degree misdemeanor is not more than $1000 fine (for each offense) and/or not more than one year in jail.
Violations that lead to a Second Degree misdemeanor are all other licensee violations (Chapter 475) not listed above. Criminal violations include a fine of up to $500 and imprisonment for a period of not more than 60 days. Because a corporation is an entity rather than a person, it can be fined only. These fines are criminal, not administrative.
Other penalty actions
In case the violations of real estate law happened to be committed under other state statutes, these violations would be charged and will be included in all the investigations and punishments. Other costs might be evaluated by the commission under the investigation, except the attorney’s fees.
Unlicensed practice of real estate
Unlicensed real estate activity is a Third Degree felony. The criminal penalty for a third-degree felony is a fine of not more than $5,000 and/or up to five years in jail.
FREC Disciplinary Guidelines
A list that clearly defines the usual punishment for violations on each count during a formal or informal hearing.
An example of the Guidelines is: (g) 475.25 (1) (f) Convicted or found guilty of a crime related to real estate or involves moral turpitude or fraudulent or dishonest dealing. The usual punishment is: The usual action of the Commission shall be to impose a penalty from 7 years’ suspension to revocation and an administrative fine of $1000.
Real Estate Recovery Fund
The Real Estate Recovery Fund was designed to serve as consumer protection for those consumers who were harmed in a real estate transaction and who seek compensatory (compensation) damages. Punitive damages (punishment) are never awarded. To obtain the funds, a civil suit must be filed against a broker claiming a violation of Chapter 475. The individual who has brought the lawsuit must claim that by reason of an act committed, as part of a real estate transaction, he or she suffered monetary damages. The suit goes to the civil courts of any competent civil jurisdiction in the state. Three things must have been in place at the time of the transaction:
The broker or sales associate must have held a valid, active real estate license at that time.
The broker or sales associate was not the seller, buyer, landlord nor tenant in the transaction nor an officer or member of a corporation or partnership, a member of a limited liability company, or a member of a limited liability partnership.
A broker or sales associate was acting solely in the capacity of a real estate licensee in the transaction.
If the injured party is awarded a judgment against the broker, the assets of the licensee are first used to satisfy the judgment. A search of the assets must be done to offset or satisfy the judgment. The maximum that can be claimed is $50,000 per single transaction or a maximum of $150,000 for multiple transactions or the unsatisfied portion of the judgment, whichever is less. Notice by certified mail must be sent by the injured party to the FREC of the intent to file a claim against the Recovery Fund.
Once payment has been made from the Real Estate Recovery Fund, the licensee’s license is automatically suspended until full repayment to the fund has been made.
The only exception to the licensee’s being suspended for a claim on the Recovery Fund is when the broker followed an Escrow Disbursement Order of the Commission and the order was overturned by the courts. The broker was exposed to civil damages and those damages can be paid by the Fund without the broker’s license being suspended.
When the claim is based on earnest money disbursement, the Commission shall pay the defendant’s reasonable attorney’s fees and court costs and, if the plaintiff wins in court, the plaintiff’s reasonable attorney’s fees and court costs.
Individuals who are not eligible for compensation from the Fund are:
A spouse of the judgment debtor;
A licensed broker or sales associate who acted as a single agent or transaction broker in the transaction;
A person whose claim is based on a real estate transaction where the licensee was an owner or controlled the property involved in the transaction or when the licensee was not acting as a broker or sales associate;
A person who makes a claim in a transaction in which the broker or sales associate did not have a valid, current active license;
When the judgment is against a real estate brokerage corporation, partnership, limited liability company, or limited liability partnership.
The fund is financed through money received from administrative fines and a surcharge on each new and renewing license. The maximum the fund can have is $1 million dollars and, when it reaches that level, surcharges on licenses are suspended until the fund drops to $500,000, when the charge will again be levied. The surcharges are $3.50 per year for new and renewing licenses for brokers and $1.50 for new and renewing sales associates. The FREC authorizes the funds to be disbursed by the State Treasurer.
The office inspection process will include inspecting the broker’s entrance sign, verifying any and all licenses and registration, and reviewing the office policy on the agency. Documents that the auditor will be looking for include:
List of liabilities
Six months bank statement reconciliation
Signed monthly broker statement
Current bank activity report.
The steps in the complaint process are:
Hearing (formal or informal)
Appeal to District Court of Appeals
The notice of non-compliance allows the broker to resolve a minor infraction within 15 days without a penalty.
If in the opinion of the FREC after a hearing, a licensee has violated a particular law, discipline can be imposed. The Florida Real Estate Commission has the administrative power to deny a license application, refuse to renew a license, suspend a license for up to 10 years, revoke a license, issue a citation, fine, place a license on probation, and issue a notice of non-compliance.
A first-degree misdemeanor carries a penalty of up to a $1,000 fine and/or up-to one year in a county facility whereas a second-degree misdemeanor carries a penalty of up to a $500 fine and/or up to sixty days in a county facility.
The Real Estate Recovery Fund is available to certain individuals who have been financially harmed by a Florida real estate licensee. The injured party must first obtain a judgment against a licensee and attempt to convert the judgment into cash. If the injured party is unable to be paid on his or her judgment, the fund will pay up to $50,000 of the uncollected portion per judgment, with a maximum payment of $150,000 for multiple judgments against the same licensee.
Certain categories of individuals are not eligible to receive payment from the Real Estate Recovery Fund, including a licensee who participated in the subject transaction as an agent, anyone who bases his or her claim against a licensee who was unlicensed at the time of the transaction, a spouse of the judgment debtor or the spouse’s personal representative, or anyone who did not get a judgment against an actual person.
Vocabulary List: appeal, citation, complaint, final order, formal complaint, formal hearing, informal hearing, judicial review, legally sufficient, a notice of noncompliance, probable cause, probable cause panel, recommended order, stipulation, subpoena, summary suspension