ALTA Develops Principles for Amending Good Funds Laws
February 23, 2021
Good funds laws came into fruition in 1994 after Abbey Financial Corp. declared bankruptcy leaving nearly 1,000 customers with unfunded mortgages.
While requirements for good funds vary by state, the overall goal is to protect against fraud and preserve the integrity of the consumer funds that are held and disbursed in real estate transactions. Over the years, many states have passed legislation requiring funds over a certain dollar amount originating from a single party to a real estate transaction be wired funds as opposed to personal or cashier`s checks.
The title and title insurance and settlement services industries have long supported efforts to modernize the process for the handling of funds at the closing table, however, the emergence of transfers involving digital funds has added a new wrinkle to what constitutes good funds.
Payment services such as Venmo, Zelle and PayPal have emerged as new alternatives to automated clearing house (ACH) transactions and wire transfers. Coupled with the rise of the acceptance of cybercurrencies, updates to good funds laws should ensure new transfer methods have the same level of security, stability, payment assurance and consumer protection as the ones the industry currently relies upon.
ALTA believes new transfer methods that do not provide the same features as existing methods run the risk of funds being rescinded. This could lead to the loss of consumer funds, and title company defaults or bankruptcies. The ability to reverse funds for up to 90 days under current federal consumer financial protection laws may cause closing delays due to the risk of fraud or dispute, which is the case for ACH and credit card transactions. Widespread use of reversals could cause instability of liquidity for title companies, title underwriters and banks.
ALTA developed the following principles that should be considered when amending or modernizing good funds laws:
- Bank-to-Bank Transfer: Each transaction should be considered a bank-to-bank transfer or deposit of funds and not treated as a consumer payment that includes protections allowing for reversals or is governed by the federal Electronic Funds Transfer Act and its implementing regulations. Transfers should not be considered as a consumer to business payment for goods or services (e.g. ACH or credit card).
- Linked to Consumer’s Funds: Funds should be directly linked to and transferred from the consumer’s demand deposit account. Funds may not be sourced from a consumer’s credit card, cryptocurrency bitcoin or any other non-depository source.
- Backed by U.S. Dollar: Funds should be transferred in USD or converted to USD prior to transfer.
- Escrow Account Destination: Funds should be transferred from a consumer’s account at a depository institution directly into the settlement service provider’s escrow account. Funds shouldn’t move through other bank accounts or be transferred to cybercurrency payment ledgers before deposit in an escrow account.
- Finality of Transfer: All funds transfer methods must be final with no ability to claw back or reverse the transaction.
ALTA developed several best practices title and settlement agents should consider when accepting digital funds from consumers. The procedures address the security, transfer and source of funds.
Contact ALTA at 202-296-3671 or email@example.com.