Under the current law, O.R.C. § 1349.21, escrow agents could accept funds in several ways: cash, certified check, cashier's checks, official checks, money orders, government checks, etc. It was even okay to accept a check from another title company's escrow account, so long as there was "reasonable and prudent cause to believe that sufficient funds are available for withdrawl in the account upon which the check is drawn at the time of disbursement." A personal check was okay, too, but only if it was $1,000 or less.
Under the new statute, effective April 6, 2017, all funds over $1,000 must be "electronically transferred funds via the real-time gross settlement system provided by the federal reserve banks," commonly referred to as a Fedwire. The only exceptions are for business checks drawn on the trust account of a real estate broker (used for earnest money), and funds from the United States government, the State of Ohio, or an agency, instrumentality, or political subdivision of either.
Why the change? Well, you don't have to look too hard to find stories about fake cashier's checks. Like the woman who tried to buy a $1.2 Million home with a forged cashier's check. Because escrow agents use the same escrow account for multiple closings, a fraudulent cashier's check accepted for one closing could effect parties involved in other transactions. To protect the public at large, it makes sense to regulate the funds disbursed from such accounts.
Other states have Good Funds laws that require wire transfers, so Ohio is not the first. For example, Indiana requires a wire transfer if the amount is over $10,000. And, Illinois generally requires a wire transfer for more than $50,000.
The change will mean higher costs in real estate transactions. Banks charge fees to send, and to receive wires. These fees will be passed along to consumers. Although the fees will vary from bank to bank, a $15 fee to receive a wire and a $25 fee to send a wire would not be out of the ordinary. So, each Fedwire could cost the consumer $40.
If the borrower is required to bring $1,050 cash-to-close, he'll have to pay his bank $25 to send the wire to the title company. The title company will be charged $15, which will get added to the borrower's charges. Then, the lender will have to wire the loan proceeds to the title company, and they will add the $25 cost to the fees they charge at closing. And, the title company will pass along another $15 charge. If the seller has to bring in more than $1,000 to cover payoffs and closing costs, the seller will incur $40 in costs.
For some loans, buyers are required to deposit their earnest money with the title company. Add another $40 (if the earnest money is paid to the real estate broker, if would be exempt from the requirement).
And, in some cases, the Fedwire requirement seems a little silly. Consider a local bank funding a mortgage for a closing at a local title company, that maintains its escrow account at that bank. Under current law, the bank could just deposit the loan proceeds directly into the title company's escrow account, and the title company could verify that the funds had been received prior to closing. Under the new law, the local bank will have to initiate a Fedwire transfer to an account held at its own institution.
Another problem will be same-day closings. If someone is selling their house in the morning, and buying a new house in the afternoon, they used to be able to take a title company check from the first closing to the next title company. Not anymore. Wire transfers take some time - the first title company will have to wire funds directly to the second title company (add $40 more), and it could delay the second closing.
The law probably needs some common sense exceptions. Allowing a bank to directly fund an escrow account held at the same bank seems reasonable. Also, why not allow an escrow agent to accept a title company check? We have an exception for checks from real estate brokers, so why not other title companies?
These days, the $1,000 threshold seems kind of low, and there are other ways to ensure the funds are available. In the past, I have required buyers to bring in a cashier's check from a local bank, and I called the issuing bank to verify the check was good.
I agree we need to protect the public. I'm not opposed to a stronger Good Funds Law. But, maybe we could leave some discretion to the escrow agent to determine what constitutes good funds. Maybe the dollar limit isn't the most important factor. Maybe an escrow agent should have discretion to accept deposited loan proceeds from a local bank they have worked with for decades.
Maybe we'll see an amendment soon to add a little flexibility to Ohio's Good Funds Law.