Tip of the Month - August 2007

Understanding the "Good Funds" Law

This month's tip explains the "Good Funds" law and will help prepare you for making your final escrow deposit.

The State of California Insurance Code regulates the types of funds that a title company can accept and how long the funds must be on deposit in its escrow account before disbursement. This regulation is commonly referred to as the "Good Funds" law.

The State of California Insurance Code regulates the types of funds that a title company can accept and how long the funds must be on deposit in its escrow account before disbursement. This regulation is commonly referred to as the "Good Funds" law.

While an independent escrow company is not directly subject to this regulation, it typically depends on the services of the title company for purposes of accepting new loan proceeds and issuing the funds required to payoff the existing loans against a property in escrow. This processing of funds is known as the "sub-escrow" service. The escrow instructions which you give to your escrow officer authorize this cooperation with the title company.

The use of a sub-escrow account is a practical matter that allows the title company to directly manage and guarantee clear title to the property through the escrow closing. In such a role, the burden for managing the flow of significant portions of the closing funds falls upon the title company. It naturally follows that the escrow company will conform to the same State guidelines regarding closing funds to ensure that one set of policies is being used and that the funds are handled in the most efficient manner at closing.

The escrow officer can only authorize recording of the closing documents when all funds on deposit have been "collected" or cleared. Your escrow company can not accept the following types of deposits:

• Money orders - Stop payments can be placed on these after issuance.
  
• Cash - Your escrow company is not a bank and has no way to securely handle large sums of cash
  
• Foreign currency - Your escrow company can not be responsible for exchange rates
  
• Automatic Clearing House (ACH) transactions - Deposits into your escrow company's trust account must be associated with your specific escrow number and a specific branch's account. ACH transfers do not make this possible.

To help avoid delays at this important time in the escrow, your escrow officer will give you instructions for making your final deposit. Most escrow companies follow guidelines similar to these:

If your deposit for closing is less than $500,000.00:

• Payment may be made in the form of a Cashier's or Official Check drawn on a California Bank or Savings and Loan.
  
• These funds must be on deposit 24 hours before the escrow officer can authorize recording of the documents to close your escrow.
  
• If funds are not received in this form, your closing could be delayed at least one day and as many as ten days while the escrow company confirms that the funds are "good" or cleared.

If your deposit for closing is $500,000.00 or more:

• Your funds MUST be deposited by wire transfer. Wired funds are not subject to the clearance procedures that can delay a closing. This form of deposit is by far the most efficient for all parties involved in the transaction.
  
• Your escrow officer will provide you with proper wiring instructions.

Talk to your escrow officer if you have questions about your final deposit or any other matter concerning your escrow.

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