This bulletin advises you of recommended practices relating to the receipt and disbursement of funds. This bulletin also reminds you that the settlement provider is the party ultimately responsible for receiving funds sufficient to close a transaction. Compliance with your state's "good funds" laws or regulations is always required. However, compliance with "good funds" requirements may not be sufficient to protect you against loss.
"Good funds" laws provide a statutory definition of acceptable escrow deposit instruments. These laws generally regulate the types of funds that a title company or escrow agent can accept and/or the minimum length of time that such funds must remain on deposit in a bank before they can be disbursed. For example, "good funds" laws may require wired funds, cashier's check, certified check or teller's check to be deposited, and/or may limit the amount of personal checks that are permitted. "Good funds" requirements are the minimum state-imposed standards relating to escrow practices. They are not a safe harbor. They do not override banking procedures and collection practices. For example, certain types of checks may be deemed "good funds" under your laws, but such checks nevertheless may be subject to stop payment orders and be uncollectible or unavailable for withdrawal from the bank of deposit under certain circumstances.
Issuing offices sometimes assume that they can disburse funds immediately after they have received checks satisfying the "good funds" criteria in their jurisdiction, without regard to whether or not the funds are actually available for withdrawal and/or have been actually collected and finally settled into their escrow account. However, that assumption is incorrect. Compliance with "good funds" requirements may not protect you from loss in the event a check is dishonored and returned to you unpaid.
"Good funds" is primarily a title and escrow term. "Good funds" should be distinguished from "available funds" and "collected funds", which are banking terms.
Available Funds / Available Balance
"Available funds" (sometimes referred to as "funds available for withdrawal") refers to funds that a depositary bank (your bank) makes available to a depositor (you) when a deposit is made, based upon a schedule. However, the term "available" is potentially misleading.
Issuing offices sometimes assume that they can disburse funds immediately after such funds appear as "available" on their statement or online. However, that assumption is incorrect. The deposit of a check into your account at your bank does not mean that funds have actually been transferred to your bank or to your account. Deposited funds can be considered "available for withdrawal" from your bank well before a check has been presented for payment or paid by the paying bank (also known as the "drawee bank" - the bank upon which a check is drawn). Deposited funds are made conditionally available (e.g., for withdrawal) by your bank to you as a provisional credit to your account, based upon the likelihood that the funds will eventually be collected. If the paying bank ultimately declines to pay a check (for example, if the paying bank determines that a check is counterfeit or if there are insufficient funds in the drawer's account), your bank will eventually reverse the provisional credit, and the "available funds" will be debited - deducted - from your account. It may take several days, perhaps weeks, for this reversal to occur. Checks drawn on foreign banks can take even longer.
The term "available balance" refers to the total amount that your bank will make available to you. However, the "available balance" is not the amount of funds that have actually been collected.
Collected Funds / Collected Balance
"Collected funds"(sometimes referred to as "actually and finally collected funds") refers to funds that result from the process of "collection". "Collection" is the presentation of a check to a paying bank and the actual payment of the funds by the paying bank. Final collection from the paying bank and final settlement of the funds into your escrow account can take several days, or potentially weeks, to be completed. If a check is counterfeit, it may be quite some time before you become aware that the deposit cannot be "collected," and that the provisional credit to your account will be reversed.
The term "collected balance" refers to the depositor's (your) balance minus deposited checks in the process of collection (i. e., minus checks that have not been actually paid by the paying bank). "Collected funds" are actual funds, not provisionally "available" funds.
Concerns Relating to Counterfeit Bank Checks and Certified Checks
Check fraud schemes often involve counterfeit bank checks (e.g., cashier's checks or teller's checks) and/or certified checks. A cashier's check is a check drawn by a bank on its own funds and signed by a bank officer. A teller's check is a check drawn by a bank either on another bank or payable through or at another bank. A certified check is a check drawn by a depositor on his checking account carrying the signature of a drawee bank officer certifying the check to be genuine and guaranteeing its payment. Both bank checks and certified checks are generally considered "good funds" and are often readily accepted. A cashier's check is the industry preference over either a teller's check or certified check, because a cashier's check is generally easier to verify and more difficult to place a stop payment on.
Funds from bank checks or certified checks can be made "available" by your bank for provisional credit to your account on an expedited basis. However, such checks can be counterfeit, and it can be quite some time before they are discovered to be fake. Subtle alterations in the coding of the checks can slow the processing and discovery of the counterfeit. Perpetrators rely upon this gap to execute their schemes.
The following fact pattern is not uncommon: A perpetrator delivers a counterfeit bank check to a victim (e.g., an escrow office). The escrow office deposits the fake bank check into their account. The amount of the deposit is made "available" by the victim's bank shortly thereafter. While the counterfeit check is being processed by the banking system, and before the depositor/victim becomes aware of the fraud, the perpetrator requests the return of the funds by wire transfer or electronic funds transfer. There is frequently a feigned urgent need, and the perpetrator pressures the depositor/victim to wire the funds immediately, to the perpetrator or to an accomplice. Since the funds from the counterfeit check have been made provisionally "available" by their bank, the depositor/victim mistakenly assumes that they are collected funds, and sends the wire. At some point, the counterfeit check is presented for payment to the paying bank, and the paying bank declines to pay it. A notice of nonpayment returns through the banking system, and ultimately the depositor/victim learns that the check was fake. The depositor's bank reverses the provisional credit and deducts the amount of the deposit from the victim's account.
The only way to assure that funds are immediately collected and irrevocable is to require deposits to be made to your account by federal wire.
Electronic Funds Transfers
An electronic funds transfer ("EFT") through the Automated Clearing House ("ACH") poses special concerns. Funds deposited through ACH are subject to an extended time for settlement: 3 - 60 days, depending upon the nature of the credit. During that time, the ACH credit is subject to reversal by the originator. An "ACH debit block" will not protect against such reversal. Therefore, you should not accept deposits to escrow by ACH unless you implement special procedures, as described below.
You can reduce the chances of an escrow loss by implementing certain practices regarding the receipt and disbursement of funds. The following practices are recommended to the extent that they are more rigorous than applicable "good funds" requirements in your jurisdiction:
- Encourage all customers to deposit funds to escrow by federal wire. When receiving wires, do not rely solely upon the sender's Federal Reference Number to confirm the transfer. Confirm with your own bank that the funds have been received and actually credited to your account.
- Establish a practice of requiring that all deposits greater than a certain amount (e.g., $250,000) must be sent to you by Federal wire. Establish a practice of requiring that all deposits less than your Federal wire threshold but greater than a specific amount (e.g., $10,000) must be in the form of a cashier's check (as opposed to a certified check or a teller's check). Advise customers that any other form of payment (including, for example, certified checks, teller's checks or ACH transfers) may experience delays before funds can be disbursed. Permit deviations from your check acceptance policy only for known customers in situations where you can contact the paying bank and confirm the authenticity and collectability of the check, or where there is sufficient time for the check to be collected and finally settled to your account.
- Establish a practice, where feasible, of verifying the authenticity of checks received from unfamiliar or out-of-town financial institutions, and any checks that appear suspicious. Where possible, it is suggested that you or your bank contact the issuing (paying) bank and verify that the check is genuine before depositing it. Do not rely upon the address and telephone number printed on the check. If the check is fake, the contact information may also be fake. Obtain the paying bank's contact information from an independent public source. A starting point is the FDIC's website [http://www2.fdic.gov/idasp/main_bankfind.asp]. Where feasible, request written confirmation (by fax or email) from the paying bank confirming that the check is authentic and that the person requesting the check is a customer in good standing. If you are unable to confirm relevant information about a check before depositing it, you may encounter similar obstacles in confirming that the check has been presented for payment and has actually been paid.
- If you are accepting electronic fund transfers via ACH, you should create a separate account whose sole purpose is to receive ACH transfers. After receipt of an electronic funds transfer into this special ACH-receiving account, you should transfer these funds to your customary escrow account, for subsequent disbursement. This transfer should leave the ACH-receiving account with a zero balance. An ACH reversal request by the originator should be rejected by your bank because there would no longer be any funds in the ACH-receiving account.
- Where feasible, arrange with your bank to provide automatic (expedited) notice of returned items.
- Do not disburse funds based upon provisional settlement (i.e., do not disburse based upon your "available balance" or "available funds"). Do not rely upon assurances that the funds are "available".
- Strongly discourage the use of checks drawn on foreign banks. Such checks take much longer to clear or to be dishonored, i.e., to be detected as counterfeit. As a result, checks drawn on foreign banks are frequently involved in check fraud schemes. If a foreign check is accepted, it should be sent for formal collection. This is an expensive, lengthy process, taking 4 to 8 weeks to complete. The customer should bear all applicable bank service charges. No transfers out should be permitted until the collection process is complete. The best practice is to require that deposits coming from foreign banks be made by wire transfer.
- Do not yield to pressure to disburse funds (particularly by wire or electronic funds transfer) unless you are confident that you have collected funds on hand from that check. The best practice is "check in, check out", "wire in, wire out".
- Become familiar with your bank's practices regarding the availability of funds and the collection of funds. Ascertain the type of assurances that your bank can provide to confirm that funds have been collected for a particular check. A good practice is to call the issuing bank to verify authenticity of a questioned item. Where possible, ask your bank to provide written confirmation (by fax or email) that the funds have been collected and that final settlement has been made to your account.
- Implement procedures to make certain escrow paper check deposits are delivered to your bank prior to deposit cutoff time and/or implement remote Check 21 deposit services (permitting you to deposit a check into your bank account remotely by scanning it and transmitting it to your bank).
Questions regarding issues discussed herein should be directed to the following:
Sal Sammartino, VP - Banking; 312-857-7224
Ken Anderson, VP, Treasurer; 713-625-8029
David Stutts, SVP - Finance; 713-892-8835
If you have any questions relating to this or other bulletins, please contact Stewart Legal Services or your local underwriting personnel.
For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.