Authored By: Ryan Featherstone, Esq.
rfeatherstone@dunlapmoran.com
As a closing agent, we are in control of funds for the transaction, both in and out. Therefore, as should be expected, we determine when and how deposits and disbursements are made.
Often, we are asked to accept incoming funds by means other than by wire transfer. If this is an initial deposit for a transaction that isn’t closing for three weeks or so, this is likely not an issue. But when it comes to funds needing to be deposited on the day of closing or just prior, the funds must be by wire transfer. But why, you may ask?
First, reviewing the FAR-BAR contracts typically used, paragraph 2(e) states that the balance to close must be by “wire transfer or other ‘Collected’ funds”. Further, Paragraph 18(S) defines the term “Collected” as “any checks tendered or received, including Deposits, having become actually and finally collected and deposited in the account of Escrow Agent or Closing Agent.”
In 2022, FinCEN reported over 680,000 Suspicious Activity Reports (SARs) related to check fraud, which was a record high. According to the U.S. Treasury Department, check fraud has increased by 385% since the pandemic. Additionally, all checks, including personal checks, certified checks and cashier’s checks will have a hold on the funds. The length of the hold depends on the type of check, location where it originated, and the banking institution receiving the check for deposit.
ACH deposits can be reversed for up to 5 business days and can be disputed for up to 90 or even 120 days, depending upon the bank. Therefore, these types of deposits are not reliable and generally all closing agent trust accounts will have blocks on these types of deposits. This includes Zelle, Venmo, CashApp, etc.
Secondly, there are both legal and ethical considerations regarding how money is provided for use in closings. Florida Administrative Code Rule 69O-186.008 states, in pertinent part, “a title insurance agent or title insurer may not disburse funds unless the funds are collected funds. For purposes of this provision, ‘collected funds’ means funds deposited, finally settled and credited to the title insurance agent’s or title insurer’s trust account.”
Additionally, per Florida’s Rules Regulating the Florida Bar, Rule 5-1.1(j), states, “a lawyer generally may not use, endanger, or encumber money held in trust for a client for purposes of carrying out the business of another client without the permission of the owner given after full disclosure of the circumstances…a lawyer may not disburse funds held for a client or on behalf of that client unless the funds held for that client are collected funds. For purposes of this provision, ‘collected funds’ means funds deposited, finally settled, and credited to the lawyer's trust account…a lawyer's disbursement of funds from a trust account in reliance on deposits that are not yet collected funds in any circumstances…when it results in funds of other clients being used, endangered, or encumbered without authorization, may be grounds for a finding of professional misconduct.”
Long story short, unless funds are “collected,” they are not available to use in the transaction and are not secure to be legitimate funds, or incapable of being reversed or clawed back. The only form of funding a transaction that ensures the funds are immediately “collected” upon deposit is by wire transfer. In any other form, the closing agent woule be taking on enormous risk that the funds could be reversed or dishonored, or the closing agent could be violating Florida Bar ethics rules for utilizing other clients’ funds pending the deposit becoming “collected”.
For these reasons, be mindful to guide your clients correctly by setting expectations early on in the transaction that they will need to wire their funds for closing. Of course, we are always available to assist in walking them through the process of wiring funds, and working through our security protocols regarding the delivery of wiring instructions.
This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion. The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.
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