Escrow fund security is one of the most important issues for title and settlement services companies in Arkansas to understand and follow. It’s imperative not only because it’s a good, ethical practice to maintain, but also because it’s state law. An escrow fund is the earnest money or deposit paid by the consumer to the property seller in case the buyer does not follow through with the full payment. Once the closing is complete, the escrow funds should go to the seller. If one or more of the contingencies of the contract are not met, the escrow fund goes back to the buyer.
Since escrow funds belong to the consumer, the utmost care must be used to protect those funds. To keep those funds secure, one procedure Capstone Pioneer uses is a daily three-way reconciliation of all escrow funds. One area relative to fund security often overlooked by real estate professionals — including title and settlement companies, real estate agents and lenders — is the requirement to disclose only “good funds.”
Arkansas law requires that funds associated with real estate transactions be “good funds.” At the time of disbursal, the funds must be either certified or collected. Here’s a common example of how this law and good practice is often violated at closing: the consumer or real estate agent brings a regular check to closing. The violation occurs if the check is handed over and is then immediately disbursed during or after closing to pay off loans, taxes or even the real estate agent’s commission. Since these are not certified or previously collected, they should not have been disbursed.
This law applies not only to title and settlement companies, but to real estate agents and lenders as well. In this age when the Consumer Financial Protection Bureau is holding lenders responsible for the actions of third-party providers, it is important that title and settlement services companies have an auditable procedure to show they are compliant with the Arkansas Good Funds law. Does your company have a compliant process?