THE RESIDENTIAL CLOSING FUNDS DISTRIBUTION

[ THE “GOOD FUNDS” LAW ]

What does the Residential Closing Funds Distribution Act do?

The Residential Closing Funds Distribution Act of 2005 (“the Act”) ensures that checks disbursed at the closing table are backed by good funds at the time of issuance and will not be dishonored when presented to the financial institution upon which they are drawn. 

Effective September 1, 2005, the Act requires a mortgage lender, mortgage loan broker, mortgage loan servicer, or other person, at or before loan closing, to cause disbursement of loan funds to the settlement agent in one of the following forms:

• Cash;
• Wired funds;
• Checks issued by the state or one of its political subdivisions;
• Cashier’s check;
• Teller’s check or other official check issued by a financial institution and drawn on or payable through a financial institution within the same Federal Reserve check processing region as the location of the settlement agent; or
• Checks issued by a federal government instrumentality organized under the Farm Credit Act of 1971 (i.e., credit unions).

The Act prohibits settlement agents from disbursing any funds from an escrow or settlement account in connection with a mortgage loan transaction until the settlement agent receives the disbursement of loan funds and such additional funds provided by the borrower or other third party to fully fund the transaction.  Additional funds in excess of $1,000 must be provided in one of the forms outlined above. 

Real estate licensees will still be able to write checks on their escrow or trust account, so long as the check is drawn on or payable through a financial institution within the same Federal Reserve check processing region as the location of the settlement agent.

What will closing agents do differently to comply with the Act?

The Act charges closing agents with the responsibility of holding disbursement until it has been determined that funds have been delivered by one of the permitted means.

How will the Act affect my clients and customers?

Checks received at closing will be virtually guaranteed for payment, much like a cashier’s check, and payees will not have to go through the trouble and expense of dealing with a dishonored check.

What do I need to do differently to comply with the Act?

Nothing; your duties to your clients and customers will not change.  A TAR-supported amendment to the Act allows checks issued from the escrow or trust account of a real estate licensee to be considered “good funds” for the purpose of distribution at closing.  You should remember that any check should be drawn on or payable through a financial institution within the same Federal Reserve check processing region as the location of the settlement agent. 

How do I know if my escrow account is with a financial institution within the same Federal Reserve check processing region as the location of the settlement agent?

If you do not know whether your escrow or trust account is with a financial institution within the same Federal Reserve check processing region as the location of the settlement agent, you should contact your financial institution for verification.  Please note that it is the opinion of legal counsel of TAR and the Tennessee Land Title Association that an escrow or trust account with a bank branch within the same Federal Reserve check processing region as the location of the settlement agent is in compliance with the Act.

How will the Act affect back-to-back closings and split transactions?

Back-to-back closings will be affected to the extent that the second closing may not be funded by a check drawn on the escrow or settlement account of the prior closing agent.  The Tennessee Land Title Association suggests that the settlement agent’s check be converted to a cashier’s check or wired funds for delivery at the second closing.