Managing an escrow account for a real estate transaction has always been a meticulous and time-consuming process. However, the proliferation of electronic fund transfer modalities has sped up the process, and title insurance agencies have readily adopted this more streamlined process of receiving and disbursing funds.
Electronic transfers, unfortunately, are not without their challenges and from the launch of credit cards and other forms of electronic transfers through various iterations of modern-day fund transfer options, the Federal government has attempted to keep pace through the vehicle of the Electronic Funds Transfer Act (EFTA).
EFTA
Passed in 1978, Electronic Fund Transfer Act is intended to protect individual consumers engaging in electronic fund transfers (EFTs) from errors or fraudulent transfers. EFT services include transfers through automated teller machines, point-of-sale terminals, automated clearinghouse systems, telephone bill-payment plans in which periodic or recurring transfers are contemplated, and remote banking programs.
The Dodd-Frank Wall Street Reform and Consumer Protection Act transferred rulemaking authority under EFTA from the Board of Governors of the Federal Reserve to the Consumer Financial Protection Bureau.
While electronic transfers make life easier, they are easy targets for fraud. This year, the FTC reported that consumers lost more than $10 billion to fraud in 2023, marking the first time that fraud losses have reached that benchmark. That tsunami of fraud flows through electronic channels.
Why is this law important to escrow providers?
Agents managing escrow accounts for real estate transactions are required to accept only “good funds,” that is funds that cannot be clawed back and are available for disbursement at the closing of the transaction.
EFTA provides a mechanism for consumers to challenge transfers and recall them under various scenarios, which would not meet the standard of good funds laws across the country.
One of the reasons escrow providers insist upon wire transfers is because it is one type of transfer that is not subject to EFTA, and so closing agents can be assured that the funds attained through a wire transfer are available for disbursement.
Today, in addition to wire transfers, escrow officers may receive funds through third-party transfer systems such as earnest money applications or P2P platforms such as Venmo and Zelle.
While these new systems provide a great mechanism for transferring funds, the American Land Title Association in its most recent Best Practices Updates has warned agents not to be cavalier about using these systems, advising, “When utilizing a third-party earnest money deposit or disbursement platform that facilitates the digital transfer of Escrow Trust Account receipts and disbursements, ensure that the platform meets any good funds law requirements and is not subject to the Electronic Funds Transfer Act (EFTA) which allows for reversal of consumer payments.”
For every type of payment received into an escrow department, there must be a process of due diligence to ensure the funds are secured to the account. As new fund transfer systems come into popular use, agency owners should ascertain if they are subject to the EFTA and review with their staff protocols and procedures for accepting funds through these systems.
At Positively Balanced, we are dedicated to being your most important ally in managing the escrow accounts and reconciliation processes that are the bedrock of your agency. Call us today to learn more!
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