The following information comes courtesy of Stewart Title. There is sometimes confusion at a real estate closing about whether there are funds to close. Unfortunately, unless you are a banker, it can get quite confusing as different terms are bandied back and forth. The following provides good insight into the information the title agent must take into account relating to the receipt and the disbursement of funds at closing.
Good Funds"Good funds" laws provide a statutory definition of acceptable escrow deposit instruments. These laws generally regulate the types of funds that a title company or escrow agent can accept and/or the minimum length of time that such funds must remain on deposit in a bank before they can be disbursed. For example, "good funds" laws may require wired funds, cashier's check, certified check or teller's check to be deposited, and/or may limit the amount of personal checks that are permitted. "Good funds" requirements are the minimum state-imposed standards relating to escrow practices. They are not a safe harbor. They do not override banking procedures and collection practices. For example, certain types of checks may be deemed "good funds" under your laws, but such checks nevertheless may be subject to stop payment orders and be uncollectable or unavailable for withdrawal from the bank of deposit under certain circumstances.
Issuing offices sometimes assume that they can disburse funds immediately after they have received checks satisfying the "good funds" criteria in their jurisdiction, without regard to whether or not the funds are actually available for withdrawal and/or have been actually collected and finally settled into their escrow account. However, that assumption is incorrect. Compliance with "good funds" requirements may not protect you from loss in the event a check is dishonored and returned to you unpaid.
"Good funds" is primarily a title and escrow term. "Good funds" should be distinguished from "available funds" and "collected funds", which are banking terms.
Available Funds / Available Balance
"Available funds" (sometimes referred to as "funds available for withdrawal") refers to funds that a depositary bank (your bank) makes available to a depositor (you) when a deposit is made, based upon a schedule. However, the term "available" is potentially misleading.
Issuing offices sometimes assume that they can disburse funds immediately after such funds appear as "available" on their statement or online. However, that assumption is incorrect. The deposit of a check into your account at your bank does not mean that funds have actually been transferred to your bank or to your account. Deposited funds can be considered "available for withdrawal" from your bank well before a check has been presented for payment or paid by the paying bank (also known as the "drawee bank" - the bank upon which a check is drawn). Deposited funds are made conditionally available (e.g., for withdrawal) by your bank to you as a provisional credit to your account, based upon the likelihood that the funds will eventually be collected. If the paying bank ultimately declines to pay a check (for example, if the paying bank determines that a check is counterfeit or if there are insufficient funds in the drawer's account), your bank will eventually reverse the provisional credit, and the "available funds" will be debited - deducted - from your account. It may take several days, perhaps weeks, for this reversal to occur. Checks drawn on foreign banks can take even longer.
The term "available balance" refers to the total amount that your bank will make available to you. However, the "available balance" is not the amount of funds that have actually been collected.
Collected Funds / Collected Balance "Collected funds"(sometimes referred to as "actually and finally collected funds") refers to funds that result from the process of "collection". "Collection" is the presentation of a check to a paying bank and the actual payment of the funds by the paying bank. Final collection from the paying bank and final settlement of the funds into your escrow account can take several days, or potentially weeks, to be completed. If a check is counterfeit, it may be quite some time before you become aware that the deposit cannot be "collected," and that the provisional credit to your account will be reversed.
The term "collected balance" refers to the depositor's (your) balance minus deposited checks in the process of collection (i. e., minus checks that have not been actually paid by the paying bank). "Collected funds" are actual funds, not provisionally "available" funds.
Concerns Relating to Counterfeit Bank Checks and Certified ChecksCheck fraud schemes often involve counterfeit bank checks (e.g., cashier's checks or teller's checks) and/or certified checks. A cashier's check is a check drawn by a bank on its own funds and signed by a bank officer. A teller's check is a check drawn by a bank either on another bank or payable through or at another bank. A certified check is a check drawn by a depositor on his checking account carrying the signature of a drawee bank officer certifying the check to be genuine and guaranteeing its payment. Both bank checks and certified checks are generally considered "good funds" and are often readily accepted. A cashier's check is the industry preference over either a teller's check or certified check, because a cashier's check is generally easier to verify and more difficult to place a stop payment on.
Funds from bank checks or certified checks can be made "available" by your bank for provisional credit to your account on an expedited basis. However, such checks can be counterfeit, and it can be quite some time before they are discovered to be fake. Subtle alterations in the coding of the checks can slow the processing and discovery of the counterfeit. Perpetrators rely upon this gap to execute their schemes.
The following fact pattern is not uncommon: A perpetrator delivers a counterfeit bank check to a victim (e.g., an escrow office). The escrow office deposits the fake bank check into their account. The amount of the deposit is made "available" by the victim's bank shortly thereafter. While the counterfeit check is being processed by the banking system, and before the depositor/victim becomes aware of the fraud, the perpetrator requests the return of the funds by wire transfer or electronic funds transfer . There is frequently a feigned urgent need, and the perpetrator pressures the depositor/victim to wire the funds immediately, to the perpetrator or to an accomplice. Since the funds from the counterfeit check have been made provisionally "available" by their bank, the depositor/victim mistakenly assumes that they are collected funds, and sends the wire. At some point, the counterfeit check is presented for payment to the paying bank, and the paying bank declines to pay it. A notice of nonpayment returns through the banking system, and ultimately the depositor/victim learns that the check was fake. The depositor's bank reverses the provisional credit and deducts the amount of the deposit from the victim's account.
The only way to assure that funds are immediately collected and irrevocable is to require deposits to be made to your account by federal wire.
Electronic Funds Transfers
An electronic funds transfer ("EFT") through the Automated Clearing House ("ACH") poses special concerns. Funds deposited through ACH are subject to an extended time for settlement: 3 - 60 days, depending upon the nature of the credit. During that time, the ACH credit is subject to reversal by the originator. An "ACH debit block" will not protect against such reversal. Therefore, you should not accept deposits to escrow by ACH unless you implement special procedures, as described below.
