A $4500 EM check bounces because of insufficient funds. The first thing the broker should do is:

• A. Notify the bank
• B. Notify the principals
• C. Cancel the contract
• D. Seek a replacement EM

Answer: (B)

The essential idea here is that when earnest money is not honored, the broker must promptly alert the people who are party to the contract—the principals (the buyer and the seller). Dishonored funds can affect the contract’s status and deadlines, so quick, clear communication protects everyone’s rights and lays the groundwork for any necessary remedies. Informing the principals ensures they know there’s a potential breach and can decide how to proceed under the contract—whether to allow a cure, to terminate, or to pursue replacement funds. Notifying the bank isn’t the immediate step the broker takes first, since the contract and the parties’ interests drive the next actions. Canceling the contract or seeking a replacement earnest money are steps that follow after notifying the principals and reviewing the contract terms and any specified cure periods.