Key Takeaways
- Principal brokers must maintain an escrow account for funds of others
- Escrow accounts must be designated as "Trust Account" or "Escrow Account" at the financial institution
- Funds must be deposited promptly after execution of the purchase and sales agreement
- Records must be maintained at the broker's fixed office for at least 3 years
- DBR has authority to audit trust accounts on demand
Rhode Island Escrow/Trust Account Requirements
Rhode Island principal brokers must maintain escrow accounts to hold client funds separate from their operating funds under R.I. Gen. Laws 5-20.5-26.
Escrow Account Basics
What is an Escrow Account?
An escrow account (also called a trust account) is a bank account where principal brokers hold funds belonging to others:
| Fund Type | Examples |
|---|---|
| Earnest money deposits | Buyer's good faith deposit |
| Security deposits | Tenant deposits on rentals |
| Rent collections | Collected on behalf of landlords |
| Other client funds | Closing proceeds pending disbursement |
Account Designation Requirements
The escrow account must be clearly identified as such:
| Requirement | Details |
|---|---|
| Bank designation | Account must be designated as escrow/trust |
| Deposit tickets | Must state "Trust Account" or "Escrow Account" |
| Checks | Must state "Trust Account" or "Escrow Account" |
| Bank statements | Must bear the words "Trust Account" or "Escrow Account" |
Principal Broker Responsibility
Per R.I. Gen. Laws 5-20.5-26, the principal broker shall:
- Maintain an escrow account for funds of others
- Ensure no funds are disbursed without their express authorization
- Have knowledge of all disbursements
Critical Rule: The principal broker is personally responsible for all escrow account activities.
Deposit Requirements
Where Funds Are Deposited
| Default Rule | Exception |
|---|---|
| Principal broker of seller/landlord | Unless otherwise agreed in writing |
Timing of Deposits
| Transaction Type | Deposit Timeline |
|---|---|
| Purchase/Sale | Promptly after execution of agreement |
| Rental | Promptly after receipt of funds |
Key Term: "Promptly" means without unreasonable delay - typically within a few business days.
Salesperson Handling of Funds
| Rule | Details |
|---|---|
| Salespersons cannot hold funds | Must turn over to principal broker |
| Direction allowed | May deposit at broker's direction |
| Destination | Always to principal broker's escrow account |
Prohibited Practices
Commingling
Commingling is mixing client funds with broker's personal or business funds. It is prohibited.
| Allowed | NOT Allowed |
|---|---|
| Client funds in escrow account | Client funds in operating account |
| Nominal broker funds to maintain account | Large broker funds in escrow account |
Unlawful Appropriation
Per R.I. Gen. Laws 11-41-11.1, a licensee who intentionally appropriates escrow funds to their own use is guilty of unlawful appropriation.
This includes:
- Using client funds for personal purposes
- Transferring escrow funds to personal/company account before closing
- Failing to return funds as required
Warning: Unlawful appropriation is a criminal offense in Rhode Island, not just an administrative violation.
Record Keeping Requirements
Required Records
Principal brokers must maintain:
| Record | Description |
|---|---|
| Ledger | Details of all deposits and withdrawals |
| Bank statements | Monthly statements from institution |
| Deposit records | Documentation of each deposit |
| Disbursement records | Documentation of each withdrawal |
| Transaction files | Supporting documentation |
Retention Period
| Requirement | Duration |
|---|---|
| Escrow records | Minimum 3 years from date funds received |
| Location | At broker's fixed office |
| Availability | Must be available for audit |
DBR Audits
The Department of Business Regulation has authority to:
- Audit escrow accounts on demand
- Inspect records without prior notice
- Take disciplinary action for violations
Common Audit Findings
| Issue | Consequence |
|---|---|
| Shortage of funds | Serious violation - suspension/revocation |
| Commingling | Fine to revocation |
| Poor records | Warning to suspension |
| Late deposits | Warning to fine |
| Improper designation | Warning to fine |
Interest on Escrow Accounts
| Situation | Rule |
|---|---|
| Default (no agreement) | Interest accrues to licensee |
| Written agreement | Interest paid per agreement |
| Maintenance funds | Nominal broker funds to cover bank charges allowed |
Key Point: Unless there's an agreement to the contrary, interest on escrow account funds belongs to the licensee, not the parties.
Disputed Funds
When ownership of deposit funds is in dispute:
| Timeline | Action Required |
|---|---|
| Within 180 days | Deposit funds with General Treasurer |
| Resolution | Funds held until dispute resolved |
Important: If the parties cannot agree on release of disputed funds, the broker must deposit them with the Rhode Island General Treasurer within 180 days.
Release of Escrow Funds
From Failed Transactions
When a transaction fails:
| Requirement | Details |
|---|---|
| Written release | Must be signed by all parties |
| Timeline | Escrow agent must pay within 10 days of receipt |
| Instructions | Follow instructions in the release |
Proper Release Procedure
- Obtain written release signed by all parties
- Verify release is clear and unambiguous
- Disburse funds within 10 days of receipt
- Document the disbursement
Summary: Escrow Account Requirements
| Requirement | Details |
|---|---|
| Who maintains | Principal broker only |
| Account name | Must include "Trust" or "Escrow" |
| Deposits | Prompt, per agreement terms |
| Records | 3 years minimum, at fixed office |
| Audit | DBR can audit on demand |
| Commingling | Prohibited |
| Disputed funds | To General Treasurer within 180 days |
| Release | Within 10 days of written release |
Who is authorized to maintain an escrow account for client funds in Rhode Island?
How long must Rhode Island brokers maintain escrow account records?
What must a Rhode Island broker do if escrow funds are disputed by the parties?