My guess is the PM is holding the funds to ensure all expenses are paid in the event the tenant further defaults and they have to cover utilities, etc. 

Ideally you should discuss it with your tax accountant to ensure you receive proper guidance. 

I just found the site and am trying to gain some knowledge and experience to help ensure my success with my properties 

I suspect we would have all ended up there anyway, so some of the irony is the non-payment of rent just gave me a faster way to get there and ensure they're out around the end of the month. 

It is also likely illegal, but I don't think anyone will get charged anytime soon (none that I know of yet) - as prosecutors are too busy putting dope smokers in jail, rather than seeking to ensure our system of money and lending are sound. 

I joined it to invest in my education and also since I am starting out in my R.E.I journey I liked the idea of having a structure based on communication to ensure I have some resources to fall back on incase I get stuck during a specific process.

That being said alot of times they'll want some money down to ensure if you don't pay the mortgage they get something out of the deal besides the property they're trying to sell back. 

As investors, we manage property like we own them to ensure that our interests are aligned with the property owner's.

Are there any special hoops you have to do owner financing to ensure you dont violate any dodd frank rules?   

I have heard a lot of information regarding FHA appraisers requiring several things done to ensure there will be no one in the in-law units.