4.1 Rhode Island Escrow/Trust Account Requirements

The Escrow Duty Under 5-20.5-26

When a buyer hands over earnest money, a tenant pays a security deposit, or a landlord's rent is collected, that money belongs to someone else. Rhode Island law treats it as a sacred trust. Under R.I. Gen. Laws 5-20.5-26 (Escrows), the principal broker must maintain that money in an escrow account (also called a trust account) at a recognized, federally insured financial institution located in Rhode Island, kept entirely separate from the broker's personal or business operating funds.

The controlling principle the exam tests is the money is never the broker's. The broker is a custodian, not an owner. A firm may keep one central escrow account for the whole company, or a separate account per office, but in every case the money of others stays segregated.

What goes into escrow

Who may hold the funds

This is a classic trap. A salesperson can never personally hold or bank a client's deposit. The salesperson must promptly turn the deposit over to the principal broker, or, at the broker's direction, deposit it straight into the broker's escrow account. The principal broker remains personally accountable for every dollar and every disbursement in that account.

• Principal broker: maintains the account, authorizes all disbursements.
• Salesperson: a conduit only — receives and delivers, never warehouses.
• The signature authority and audit liability sit with the principal broker.

Timing, Designation, and the Commingling Bar

Deposit promptly

The statute and DBR regulation require deposit promptly upon execution of the purchase-and-sales agreement for sale transactions, and promptly upon receipt for rental funds. "Promptly" is not a fixed number of hours; it means without unreasonable delay — practically, within a few business days and never held to gain float. Failing to deposit money received upon execution of the P&S agreement is itself an enumerated violation under R.I. Gen. Laws 5-20.5-14, so late deposits invite discipline.

Account designation

The account and its paper trail must announce that the money is held in trust. The words "Trust Account" or "Escrow Account" must appear on:

Commingling is prohibited

Commingling is mixing client money with the broker's own money. It is flatly barred by 5-20.5-26. The danger is that if client funds sit in an operating account, a creditor garnishment or an overdraft can sweep money that was never the broker's.

Worked example: A buyer's $5,000 earnest check clears on Monday. The broker uses $1,500 of it Tuesday to cover office payroll, planning to refund it after closing. Even though no one is ultimately shorted, the moment broker reached into client money for a personal/business use, it became unlawful appropriation — a criminal act under R.I. Gen. Laws 5-20.5-26 and 11-41-11.1, separate from any DBR fine.

Unlawful appropriation includes using client funds for personal purposes, moving escrow to a personal or company account before the transaction closes, and failing to return funds that are owed. Because it is criminal, intent and prosecution run through the courts, not just an administrative hearing.

Records, DBR Audits, and the Three-Year Rule

The escrow trust is only as good as its paper trail. The principal broker must keep a complete set of records and make them available whenever the Department of Business Regulation (DBR) asks.

Required records

Retention and location

The three-year escrow retention is the number most likely to appear as a multiple-choice distractor against "1 year," "2 years," and "5 years." Memorize three years.

What auditors find

Interest on escrow funds

Unlike some states, 5-20.5-26 itself does not direct who earns interest on routine escrow balances; whether an account bears interest and to whom it belongs is governed by the parties' written agreement and the type of account. Do not assume interest automatically belongs to the broker. The exam-safe answer: the parties may agree in writing how interest is handled, and a small nominal broker balance to cover bank service charges is acceptable and is not treated as commingling.

Releasing and Disputing Escrow Funds

Money does not leave escrow on a hunch. There are two clean paths out, plus one for fights.

Release after a written authorization

When a transaction closes or falls through and the parties agree on who gets the deposit, they sign a written release. Once the escrow agent receives a release signed by all parties, the broker must disburse the funds within 10 days.

1. Obtain a written release signed by all parties to the transaction.
2. Confirm the release is clear and unambiguous about who receives what.
3. Disburse within 10 days of receiving the release.
4. Record the disbursement in the ledger and transaction file.

When the parties fight: the General Treasurer

If the buyer and seller cannot agree on who is entitled to the deposit, the broker must not pick a side, hold the money forever, or split it. Instead, under 5-20.5-26 the broker deposits the disputed monies with the Rhode Island General Treasurer within 180 days of the date of the original deposit. The Treasurer holds the funds in trust until the dispute is mediated, arbitrated, litigated, or otherwise resolved. The parties may agree in writing to extend the 180-day deadline under DBR regulations.

Worked example: A deal collapses over a failed inspection. The buyer demands the $8,000 back; the seller claims it as liquidated damages. No release is signed. The broker counts 180 days from the original deposit date and, with no resolution in sight, transmits the $8,000 to the RI General Treasurer. The broker is now safely out of the crossfire — neither party can claim the broker wrongfully withheld or wrongfully released their money.

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