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Brokerage Operations term

Conversion

The illegal, unauthorized use of client trust funds for the broker's own purposes.

Why Conversion matters on the exam

This term belongs to Brokerage Operations. The questions below are real items from Freehold's bank that use it - each one cites its source.

Exam questions using Conversion

Every Freehold question shows why the right answer is right — and cites its source.

A broker deposits a client's earnest money into the brokerage's operating account. This violation is called:

  1. Conversion to personal use
  2. Commingling
  3. Novation
  4. Subordination
Show answer & explanation

Commingling — Commingling is mixing client trust funds with the brokerage's own operating funds. It is a license-law violation even if no client money is ever spent, because it puts trust funds at risk.

Source: PSI National Real Estate Exam Content Outline — Broker Supplement

A broker uses funds from the trust account to cover the brokerage's payroll, intending to repay them next week. This is:

  1. Permitted if repaid within 30 days
  2. Commingling, a minor bookkeeping issue
  3. Acceptable with the owner's verbal consent
  4. Conversion, the unauthorized use of client funds
Show answer & explanation

Conversion, the unauthorized use of client funds — Conversion is using client trust funds for the broker's own purposes, which is more serious than commingling. Intent to repay does not cure the violation, and it commonly results in license revocation.

Source: PSI National Real Estate Exam Content Outline — Broker Supplement

How does 'conversion' differ from 'commingling' in trust account violations?

  1. Conversion applies only to cash, while commingling applies only to checks
  2. Conversion is the unauthorized use of client trust funds for the broker's own benefit, while commingling is merely mixing funds together
  3. Conversion is always handled as a civil matter between the parties, while commingling is prosecuted as a criminal offence in every jurisdiction
  4. Conversion involves two brokers, while commingling involves only one
Show answer & explanation

Conversion is the unauthorized use of client trust funds for the broker's own benefit, while commingling is merely mixing funds together — Conversion means actually using or spending client trust money for unauthorized purposes, which is more severe than commingling, the mere mixing of funds without necessarily using them.

Source: PSI National Real Estate Exam Content Outline — Broker Supplement

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