For candidates preparing for the Maryland real estate salesperson or broker exam, few topics carry as much regulatory weight—and liability—as the handling of client funds. Understanding the strict rules surrounding earnest money and escrow accounts is non-negotiable. The Maryland Real Estate Commission (MREC) rigorously enforces Title 17 of the Maryland Code regarding trust money, and exam questions will test your knowledge of exact timelines, authorized disbursement methods, and account requirements. This guide breaks down the essential escrow concepts you need to pass your exam and protect your future license.
For a broader overview of the topics you will encounter on test day, be sure to review our Complete Maryland Exam Guide.
What is Trust Money in Maryland?
In Maryland, the legal term for any funds entrusted to a real estate broker in connection with a real estate transaction is trust money. The most common form of trust money is an earnest money deposit (EMD).
Earnest money is a deposit made to a seller representing a buyer's good faith intention to purchase a property. Escrow refers to the neutral, third-party holding of these funds until the transaction is consummated or terminated. In Maryland, while title companies often hold earnest money, real estate brokers are also legally permitted to hold these funds, provided they follow strict MREC regulations.
MREC Escrow Account Regulations
When a real estate broker chooses to hold trust money, they must maintain a dedicated escrow account. The Maryland Code (Business Occupations and Professions Article, Title 17) outlines several non-negotiable requirements for these accounts.
The 7-Business-Day Deposit Rule
This is one of the most frequently tested numbers on the Maryland state exam. By law, a broker must deposit trust money into an approved escrow account within seven (7) business days after the acceptance of a contract of sale by both parties.
As a real estate salesperson, your duty is to submit the earnest money check to your broker immediately upon contract acceptance so the broker can meet this 7-day statutory deadline.
Account Specifications
Maryland law dictates exactly how and where an escrow account must be maintained:
- Location: The account must be held in a financial institution located within the State of Maryland.
- Non-Interest Bearing: By default, trust accounts must be non-interest bearing. Funds can only be placed in an interest-bearing account if there is a written agreement between the buyer and seller specifying exactly who will receive the accrued interest.
- Separate from Operating Funds: Escrow funds must be kept entirely separate from the broker’s personal or business operating funds. Mixing these funds is known as commingling, which is strictly prohibited.
- No Conversion: Using trust money for any purpose other than its intended use is called conversion. This is a severe criminal offense and grounds for immediate license revocation.
Maintaining the integrity of a trust account is a fundamental cornerstone of Maryland real estate ethics and standards. Just as you must adhere to strict Maryland advertising regulations, your handling of client funds must be flawless and completely transparent.
Lawful Disbursement of Escrow Funds
A broker cannot simply release earnest money because a buyer or seller demands it. Under Section 17-505 of the Maryland Code, trust money can only be disbursed under one of the following specific conditions:
- Consummation of the Transaction: The transaction closes, and the funds are applied to the purchase price at settlement.
- Mutual Agreement: Both the buyer and seller sign a written agreement instructing the broker on how to disburse the funds.
- Court Order: A court of competent jurisdiction orders the release of the funds to a specific party.
- Broker's Notice of Intent to Distribute: If a transaction fails to close and the parties cannot agree on who gets the EMD, the broker can use a specific statutory procedure to disburse the funds (detailed below).
The "Notice of Intent to Distribute" Process
If a dispute arises, Maryland law allows the broker to make a good-faith determination of who is entitled to the funds. The broker must send a certified letter (return receipt requested) to both the buyer and seller, stating their intent to distribute the funds to a specific party.
Once the notice is sent, the opposing party has 30 days to file a formal protest. If no protest is received within 30 days, the broker is legally protected to disburse the funds as stated in the notice. If a protest is received, the broker must hold the funds until a mutual agreement is reached or a court issues an order.
Typical Resolution of Earnest Money Disputes in Maryland (%)
Record-Keeping Requirements
The MREC requires brokers to retain all records related to real estate transactions, including escrow account records, deposit slips, canceled checks, and ledgers, for a minimum of five (5) years. This timeline generally starts from the date of the closing or, if the transaction did not close, the date the transaction was officially terminated.
Practical Exam Scenario
Scenario: Buyer Bob and Seller Sue enter into a valid contract of sale on a property in Annapolis on a Tuesday. Bob gives his agent, Alice, an earnest money check for $5,000. Alice gives the check to her broker on Wednesday. Suddenly, on Thursday, Sue refuses to sell because she feels the market is going up. Bob demands his $5,000 back immediately. Can the broker hand the check back to Bob?
Answer: No. Even though Sue is breaching the contract, the broker cannot unilaterally return the funds simply because Bob asked. The contract has been accepted, meaning the funds are now officially trust money. The broker must deposit the funds into the escrow account within 7 business days of the Tuesday acceptance. To disburse the funds back to Bob, the broker needs either a signed release from both Bob and Sue, a court order, or the broker must initiate the 30-day "Notice of Intent to Distribute" process via certified mail.
Frequently Asked Questions (Maryland Escrow Laws)
Can a salesperson open their own escrow account in Maryland?
No. Only a licensed real estate broker can open and maintain a real estate trust/escrow account. Salespersons and associate brokers must promptly submit all trust funds to their employing broker or the designated title company.
What is the difference between commingling and conversion?
Commingling is the act of mixing client trust funds with the broker's personal or business funds. Conversion is the actual theft or unauthorized use of those trust funds (e.g., a broker using earnest money to pay their office rent). Both are illegal, but conversion is generally treated as a more severe criminal act.
Does all earnest money have to be held by a real estate broker?
No. In Maryland, it is very common for a title company or an attorney to hold the earnest money deposit. If a title company holds the funds, the real estate broker's liability regarding the 7-day deposit rule shifts, but the contract must clearly state who is holding the funds.
What happens if an earnest money check bounces?
If an earnest money deposit check is returned for insufficient funds, the broker must immediately notify all parties involved in the transaction (the seller and the buyer). Failing to notify the seller that the buyer's check bounced is a violation of the broker's fiduciary duties.
How do special assessments affect escrow at closing?
Unpaid special assessments may require a portion of escrowed funds to be disbursed to a municipality or HOA at closing to clear title. For more details on how these specific charges are handled, read our guide on Maryland special assessments explained.
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