Key Takeaways
- Principal brokers must maintain a separate escrow (trust) account at a federally insured financial institution
- All client funds must be deposited immediately and cannot be commingled with personal or business funds
- Escrow account records must be maintained for at least 3 years with specific documentation requirements
- TREC has authority to audit escrow accounts at any time
- Beginning January 1, 2025, noncompliant firms are subject to enforcement actions
Tennessee Escrow Account Requirements
Tennessee principal brokers must maintain escrow accounts to hold client funds separate from their operating funds under T.C.A. Section 62-13-321.
Escrow Account Basics
What is an Escrow Account?
An escrow account (also called a trust account) is a bank account where 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 |
Where to Open
Escrow accounts must be at:
- A federally insured financial institution
- Account must be in the name of the firm
- Designated as an escrow or trust account
Principal Broker Responsibilities
Under T.C.A. Section 62-13-321 and TREC Rule 1260-02-09, each principal broker must:
| Requirement | Details |
|---|---|
| Maintain separate account | Escrow account separate from operating funds |
| Federally insured | Must be at federally insured institution |
| Proper designation | Account must be identified as escrow/trust |
| Keep accurate records | Detailed documentation required |
Deposit Requirements
Timeline
| Requirement | Deadline |
|---|---|
| Earnest money | Immediately upon acceptance |
| Cannot hold checks/cash | Must deposit right away |
| Security deposits | Per lease agreement |
Critical Rule: You cannot hold a check or cash in your office for a week or two. It must be protected in the broker's escrow account immediately.
Prohibited Practices
Commingling (Rule 1260-02-09(13))
Commingling is mixing client funds with broker's personal or business funds. It is expressly prohibited under TREC Rules.
| Allowed | NOT Allowed |
|---|---|
| Client funds in escrow account | Client funds in operating account |
| Small amount to avoid fees/maintain account | Large broker funds in escrow account |
| Funds as designated | Using client funds for business expenses |
What You CAN Put in Escrow
You cannot put your own funds into the escrow account except:
- Minimum amount to maintain the account
- Amount needed to avoid bank fees
Conversion
Conversion is using client funds for unauthorized purposes. It is a serious violation that can result in:
- License revocation
- Criminal charges
- Civil liability
- Claims against Recovery Account
Record Keeping Requirements
Required Documentation (T.C.A. 62-13-321)
Brokers must maintain records showing:
| Record Element | Description |
|---|---|
| Depositor | Who deposited the funds |
| Date of deposit | When funds were received |
| Date of withdrawal | When funds were disbursed |
| Payee | Who received the funds |
Retention Period
| Requirement | Duration |
|---|---|
| Escrow account records | 3 years minimum |
| Transaction files | 7 years (recommended) |
Escrow Account Waiver
Tennessee allows firms to request a waiver from maintaining an escrow account:
Waiver Process
| Step | Requirement |
|---|---|
| Form | Request for Waiver of Escrow Account form |
| Submit | Through CORE or email to TREC.info@tn.gov |
| Condition | If accepting funds, must open escrow account within 1 business day |
Note: Even with a waiver, if the firm accepts funds belonging to others, they must open an escrow account within one business day.
TREC Audits and Enforcement
Audit Authority
TREC has authority to:
- Audit escrow accounts at any time
- Review records during investigations
- Take disciplinary action for violations
2025 Enforcement Update
Beginning January 1, 2025, noncompliant firms discovered during the audit process will be subject to enforcement actions.
| Requirement | Status |
|---|---|
| Keep escrow info on file with TREC | Required |
| Update information when changes occur | Required |
| Compliance during audits | Subject to enforcement |
Common Audit Findings
| Issue | Consequence |
|---|---|
| Shortage of funds | Serious violation - potential revocation |
| Poor record keeping | Warning to suspension |
| Late deposits | Warning to fine |
| Commingling | Fine to revocation |
| Discrepancies | Must be corrected immediately |
Escrow Disputes
When parties dispute who should receive escrow funds:
Options
| Option | Description |
|---|---|
| Mutual agreement | Parties agree on disbursement |
| Court decision | Let court determine |
| Interpleader | Broker deposits funds with court |
| TREC guidance | Follow TREC rules and seek guidance |
Warning: Never disburse disputed funds without proper authorization. When in doubt, seek legal counsel or file an interpleader action.
Who is authorized to maintain an escrow account for client funds in Tennessee?
How long must Tennessee brokers maintain escrow account records?
Under TREC Rule 1260-02-09(13), which practice is EXPRESSLY PROHIBITED?