Unit 8 Flashcards
General requirement
Requirement to maintain an account
Brokers are required to maintain a separate escrow account for the purpose of holding funds they receive relating to a real estate transaction– deposits, earnest money, and the like.
Escrow accounts for funds deposited with vacation lodging service firms must be established in a Commission-approved federally insured financial institution located in the State of Tennessee. Real estate firms may place their escrow accounts in state banks.
Waiver of requirement
The Commission may waive this requirement in the case of a principal broker of a firm that does not receive or handle the funds of others in its business.
Under such a waiver, the principal broker of a firm may receive funds belonging to others provided:
The broker opens an escrow account within one day of receiving the funds and deposits the funds in the account the same day.
The broker notifies the Commission within one day of opening the account and supplies:
the name and address of the bank
the identifying number of the escrow account
The principal broker acknowledges responsibility to operate under all the requirements for escrow accounts.
A waiver of the escrow requirement will only be granted for a real estate firm once during a license renewal period.
Depository requirements
The contract authorizing a broker to place funds in an escrow or trustee account must clearly specify:
the terms and conditions for disbursement of funds
the name and address of the person who will actually hold the funds
A postdated check or non-cash item is not acceptable for payment of a deposit or earnest money unless otherwise provided in the offer.
Earnest money must be deposited into an escrow or trustee account promptly upon acceptance of an offer, unless the offer contains a statement such as ‘‘Earnest money to be deposited by:’’ In practice, “promptly” is usually interpreted to mean 72 hours or three business days.
Affiliate brokers must immediately pay over all deposits and earnest money to the broker with whom they are under contract.
Brokers are responsible at all times for deposits and earnest money accepted by them or their affiliate brokers, regardless of whether such funds are actually held by some other person or firm.
Interest
Interest-bearing accounts are neither required nor prohibited. If used, licensees must:
disclose to the payor that the deposit (or to the vacation lodging services unit owner the advance deposits and rental income) will be placed in an interest-bearing escrow account
disclose that the licensee does not own the funds or the interest until properly disbursed to the licensee
execute with the payor (or the vacation lodging services unit owner) a written agreement indicating how the interest earned will be disbursed
keep a detailed and accurate accounting of the precise sum of interest earned by each account
Record-keeping requirements
The broker must maintain accurate records of an escrow account showing:
the depositor of the funds
the date of deposit
the date of withdrawal
the payee of the funds
other pertinent information as the commission may require
These records must be maintained for a period of at least (3) years.
All records of escrow or trustee accounts of monies deposited with a vacation lodging services firm must be kept on file at the firm’s registered office location.
Improper use of trust/escrow funds
Brokers must be careful to avoid misuse of escrow funds.
The two primary kinds of misuse are mixing escrow with non-escrow funds (commingling), say by depositing them in the same account; and using escrow funds for the wrong purposes (conversion).
Commingling:
The act of mixing the broker’s personal or business funds with escrow funds. A broader definition includes failure to deposit earnest money into escrow in a timely manner.
May be cause for license suspension or revocation.
The broker may, however, deposit properly documented non-escrow funds necessary to maintain the account and avoid service charges.
Conversion:
The act of misappropriating escrow funds for the broker’s business or personal use.
More serious than mere commingling, conversion is effectively an act of theft: using monies which do not belong to the broker.
Carries serious consequences, including license revocation.
Disbursements
Funds in escrow or trustee accounts must be properly disbursed without unreasonable delay.
A broker may properly disburse funds from an escrow or trustee account:
upon a reasonable interpretation of the contract which authorizes him to hold such funds
upon securing a written agreement which is signed by all parties having an interest in
such funds, and is separate from the contract which authorizes him to hold such funds
at the closing of the transaction
upon the rejection of an offer to purchase, sell, rent, lease, exchange, or option real estate
upon the withdrawal of an offer not yet accepted to purchase, sell, rent, lease, exchange or option real estate
upon filing an interpleader action in a court of competent jurisdiction
upon the order of a court of competent jurisdiction
Disputed funds
A dispute may arise as to how and when escrow funds may be disbursed. Proper disbursement should be addressed in the contract that authorized a broker to place funds in an escrow or trustee account.
If a dispute arises anyway, the broker may file a “Petition to Interplead Funds” with the appropriate court and request the court to resolve the dispute.
The broker, in effect, turns over control of the escrow fund to the court and the court decides how to disburse.
