3.3 Pennsylvania Escrow and Trust Account Requirements

Escrow Basics Under RELRA and the Code

Handling money belonging to another is governed by the Real Estate Licensing and Registration Act (RELRA) and 49 Pa. Code Chapter 35. A broker holds client funds in fiduciary trust, so violations here are among the most frequent and most severe disciplinary cases the Pennsylvania Real Estate Commission (the Commission) hears.

Deposit timing — 49 Pa. Code Sec. 35.324

The rule the exam loves: a broker must deposit money belonging to another into the escrow account by the end of the next business day after it is received in the office where the escrow records are maintained.

• A salesperson who receives hand money must turn it over so it reaches escrow within that window.
• Exception: if the deposit is a check tendered with an offer, the broker may, with the written permission of both buyer and seller, hold the check uncashed pending acceptance — then must deposit it within one business day of acceptance.

Worked example: A salesperson collects a $10,000 hand-money check Friday afternoon, and the seller had already accepted. With escrow records kept at the main office, the broker must deposit it by the end of the next business day, normally Monday. Cashing it 'next week when things slow down' violates Sec. 35.324.

Prohibited Practices

A broker may not disburse escrow funds until one of these occurs:

1. The transaction settles and disbursement follows the settlement sheet;
2. All parties sign a written release agreeing how to split the deposit; or
3. A court order (or interpleader) directs distribution.

Disputed deposits

When buyer and seller fight over hand money, the broker is a neutral stakeholder. The broker must hold the funds and may not unilaterally pay either party — doing so is the conversion/premature-disbursement trap the exam sets. The proper route is a signed release or a court resolution (often interpleader).

Maintenance, Records, and Oversight

Interest-bearing escrow

Escrow may be placed in an interest-bearing account only with the written agreement of all parties specifying who receives the interest. Absent that agreement, escrow stays non-interest-bearing, and the broker may never keep escrow interest as a hidden fee.

Trap: A broker who 'borrows' from escrow intending to repay it has already committed conversion — intent to repay is not a defense. Likewise, depositing on the third day instead of the next business day is a timing violation even if no client is harmed.

Who Holds the Deposit, and Salesperson Duties

Hand money does not have to sit in the broker's escrow account. The agreement may name a title company or an attorney as the escrow holder. Whoever holds it is bound by the same fiduciary standards. The exam tests the chain of custody: a salesperson who receives funds is acting for the broker and must turn them over promptly so the broker can meet the next-business-day deposit deadline.

A salesperson must never hold client money personally, deposit it into a personal account, or 'hold a check in a desk drawer' to do the seller a favor. All client funds flow to the designated escrow holder.

Penalties and the Recovery Fund

Escrow violations are among the most common reasons the Pennsylvania Real Estate Commission suspends or revokes licenses. Sanctions can include fines, suspension, revocation, and restitution, plus possible criminal prosecution for conversion (theft of client funds).

Pennsylvania also maintains the Real Estate Recovery Fund. If a consumer wins a court judgment against a licensee for fraud, misrepresentation, or conversion of trust funds and cannot collect, the consumer may petition the fund for payment, subject to statutory caps. When the fund pays a claim, the licensee's license is automatically suspended until the fund is reimbursed with interest.

Worked scenario

A property manager collects $1,200 monthly rent and the tenants' security deposits, then deposits everything into the brokerage's operating account to 'simplify bookkeeping.' This is textbook commingling of client funds with business funds. Even if every owner is eventually paid in full, the broker has violated the escrow rules and faces discipline. The fix is a separate, properly titled escrow account, reconciled monthly, with records kept three years.

Exam tip: Distinguish the three violations precisely. Commingling = mixing funds together. Conversion = using client funds for the broker. Premature disbursement = releasing escrow before settlement, written release, or court order.