To Deposit the EMD or not Deposit…That is the Question: A Practical Answer

Earnest Money Deposit

Recently, the Maryland Insurance Administration issued a Bulletin to all Maryland Title Insurance Producers in February of 2018 on Ernest Money Deposits held by settlement agents which produced more questions than answers. At least one underwriter issued a Bulletin to address the issue, but again offering little practical advice on this newly resurfacing topic. The goal of this article to too attempt to explain why this is an issue for title agents now and to provide at least in my view some practical guidance for title agents dealing with earnest money deposits. But, first, a little background.

Long ago in a land far away, it was unheard of for title agents to hold earnest money deposits in residential closings; that responsibility being the almost exclusive role of the brokerage involved in the sale. Title agents at settlement reflected the earnest money deposit as a credit to the buyer and deducted the amount of the earnest money amount from the commission due to the broker holding the deposit thus reconciling their settlement sheet.  It was rare in this land far away to require an escrow agreement by the broker and disputes regarding the entitlement to the deposit if the contract failed were rare. So, what occurred to disrupt this uniform and long-standing process.

The answer lay in the Board of Realtors contract provision that attempted to address both the issue of default and resulting entitlement to the deposit. If a buyer fails to close within the terms of the agreement, that buyer forfeits the deposit in recognition of that default. Right? What if the seller wrongfully interfered with the buyer’s ability to perform which resulted in the default? Same answer?

The problem has always been that the concept of default and resulting penalty to the breaching party has always been a mixed question of law and fact; a consideration of both the factual occurrence of non-performance by a party as well as a consideration of the legal issues of whether the party’s failure to perform should be “forgiven” by the actions of the non-defaulting party. Unfortunately, those considerations are beyond the scope of responsibility of the title agent and are properly resolved by courts of law whose role is to analyze the contract, the conduct of the parties, and disposition of the deposit.

Unfortunately access to the court system is expensive and small earnest money disputes rarely reached the courthouse, resolved chaotically by the parties with often ill-will resulting to the brokerages and title agents and sometimes litigation against both realtors and settlement companies.

The Maryland Association of Realtors sponsored Maryland HB 1608 in this current legislative session which essentially detailed specific requirements to be imposed on title agents holding earnest money deposit similarly to those now imposed on brokers holding such deposits. Neither the current law or HB 1608 required title agents to hold earnest money deposits; it only regulated the terms and requirements to be imposed on the title agent IF they elected to voluntarily hold the earnest money deposit. The MLTA opposed the bill in its current form and the bill was defeated. But what was the motivation for the bill in the first place? I suspect that brokers desire a world where “problem” parties under uncertain contracts of sale deposit their earnest money deposit with title agents to insulate the broker from the headaches and expense that unhappy and litigious parties will trigger under a failed contract. So, in this brave new world, what is the prudent title agent to do?

  • Make a point to ask the broker why they desire the title agent to hold the deposit instead of the brokerage. We ask, or should ask, why are we using a POA and title agents should do the same with the earnest money deposit. While realtors provide the vast bulk of income to title agents by contract referrals, title agents should not be fearful of asking for as much information as may be necessary to protect their firm.

  • ALWAYS use an escrow deposit agreement that provides, at a minimum, whether the deposit will be in a separate account or the trust account, whether you will charge a fee for setting up a separate deposit account (you should), define clearly your responsibilities under the agreement as an agent of the parties, explain what will occur if a depute arises, include an insulation of liability for your firm, and a joint agreement by the parties that they will reimburse your counsel fees from the deposit if you are named in litigation.

The moral to this parable? In my opinion, although HB 1608 failed to pass, there will be increasing pressure on title agents by brokers to hold earnest money deposits. Because in my estimation the title industry will only be asked to hold the “problem” deposits, a prudent practitioner should follow, at a minimum, the provisions implemented by failed HB 1608, as some version of this bill is likely to pass in the future.


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