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HUD Earnest Money Deposit Notice to Licensees

March 17, 2016

Last year, a licensee alerted the Commission to the fact that it had received notification from HUD, through its vendor, that an earnest money deposit was due immediately after the real estate transaction failed to close. HUD’s request, and similar requests, presents a conundrum for licensees, who are forced to choose between either complying with the Real Estate Brokers Act and losing their status as a HUD-qualified real estate broker, or complying with HUD’s request and risking disciplinary action by the Commission.

The Commission recently engaged HUD to highlight the conflict between HUD’s Earnest Money Policy and Maryland law. As a result, HUD has agreed to change its policies to give Maryland buyers additional time to submit documentation as to why a refund of the deposit is warranted. This change will allow licensees to immediately notify the buyer and direct the buyer to submit any documentation regarding the failure to close to HUD within 30 days of such a failure.

HUD has also stated that it retains the ultimate discretion to approve or deny the request for a refund according to the terms of HUD’s policy, which the buyer must agree to as a condition of entering into a contract of sale for a HUD-owned property. The Commission has been advised by counsel that HUD’s policy preempts Business Occupations and Professions §17-505 to the extent that the statute requires the broker, prior to distributing the trust money, to either (1) obtain the written agreement of both parties or (2) follow the procedures in BOP §17-505(3) or (4). The practical result of this determination is that the Commission will not bring a disciplinary action against brokers who distribute a deposit to HUD without the written agreement of the buyer who has failed to close. In the event of a dispute, the ultimate determination as to whether a refund is warranted will be made by HUD, rather than by the broker or a circuit court.

The Commission also recommends that brokers have policies and procedures in place to ensure that licensees advise clients or potential clients of the risk associated with entering into a contract of sale on a HUD-owned property. More specifically, it is recommended that licensees advise clients or potential clients of the fact that, except under limited circumstances, the buyer will lose the earnest money deposit for failure to close on the HUD-owned property. It is recommended that this advice be separate and apart from the borrower’s written execution of HUD’s earnest money policy. It is in the buyer’s best interest to receive this notice from the licensee prior to entering into a contract of sale on a HUD-owned property.