4.1 Tennessee Escrow Account Requirements

Client money never belongs to the broker. Tennessee requires it to be segregated in a trust (escrow) account controlled by the principal broker.

What Goes Into Escrow

Account Requirements (TREC Rule 1260-02-.09)

Exam note: The detailed account rules (separate account, federally insured, no commingling) come from TREC Rule 1260-02-.09, while the three-year record retention is in the statute, T.C.A. 62-13-321. The exam may test which authority applies.

Deposit Timing

Trust money must be deposited promptly upon acceptance of the offer (Rule 1260-02-.09(11)). An affiliate broker who receives funds must promptly turn them over to the principal broker.

Critical: A licensee may not park a buyer's check in a desk for a week. Late deposit is an escrow violation even if no money is lost.

Prohibited Practices

Commingling

Commingling is mixing client trust funds with the broker's personal or business funds. It is prohibited.

The only broker money permitted in escrow is the minimum needed to open or maintain the account or cover bank service charges.

Conversion

Conversion is using client funds for an unauthorized purpose - effectively theft. It is among the most serious violations and can lead to license revocation, criminal charges, civil liability, and a claim against the Recovery Account.

Recordkeeping (T.C.A. 62-13-321)

Brokers must keep records showing, for each transaction, the depositor, date received, date disbursed, and payee. Escrow records must be retained at least three years and made available for TREC inspection.

Escrow Account Waiver (T.C.A. 62-13-323)

A firm that does not hold client funds (for example, a firm whose closings are handled entirely by a title/closing company) may request a waiver of the escrow-account requirement.

Exam trap: The 'one business day' rule applies specifically to a waived firm that later receives funds - it is not the general deposit deadline. Ordinary trust money is deposited promptly upon acceptance of the offer.

TREC Audits and Enforcement

TREC may audit a broker's escrow account at any time and review records during a complaint investigation. Common findings and their typical consequences:

Handling Disputed Escrow Funds

When buyer and seller both claim the earnest money, the broker must not simply choose a side.

Warning: Releasing disputed funds to one party without authorization exposes the broker to liability and discipline. When in doubt, hold the funds and use an interpleader.

Reconciliation and the Three-Way Balance

Good escrow practice is more than 'don't steal.' Principal brokers are expected to perform a regular reconciliation so that three numbers always agree: the bank balance, the book/ledger balance, and the sum of the individual ledgers for each pending transaction. When TREC audits, examiners look for this three-way match. A shortage - the bank balance being less than what is owed to clients - is among the most serious findings because it usually signals conversion or sloppy disbursement.

An unexplained overage is also a problem, because it can hide commingled broker funds beyond the small amount allowed to maintain the account.

The exam likes to test timing and documentation together: trust money in promptly upon acceptance, every deposit and disbursement documented with depositor, date in, date out, and payee, and records retained at least three years. A broker who cannot reconstruct who owns each dollar in the account has violated the recordkeeping rule even if no money is actually missing.

Why the Principal Broker Bears the Risk

Tennessee places the escrow duty squarely on the principal broker because the broker controls the account and supervises the affiliates who collect funds. An affiliate who receives a check is a courier - their job is to deliver it to the principal broker promptly - but if that check sits in a car or a drawer, the resulting late deposit is charged against the firm. This is why the escrow rules and the supervision rules are tested together: the right answer to 'who is responsible for the trust account?' is always the principal broker.

The waiver option exists for firms that genuinely never touch client money, such as a brokerage whose closings are handled entirely by outside title companies. The waiver is not a loophole to avoid recordkeeping; the moment a waived firm accepts any trust money, it must open a compliant escrow account within one business day and follow every rule. Treat the waiver as a narrow exception that snaps shut the instant funds arrive, and you will avoid the distractor that lets a waived firm hold funds informally.