Under a new Indiana law title companies will no longer be allowed to accept cashiers, corporate, or personal checks for their real estate closings after July 1, 2009. Mortgage lenders and many real estate buyers will need to wire transfer their funds to the title company or closing agent in most situations.
The law (House Bill 1374) requires that any party to a closing that must deposit more than $10,000 must wire transfer those funds into the closing agent's escrow account. Certified or cashier's checks or cash may accepted from any single party that needs to deposit less than $10,000. Corporate checks under $10,000 from Realtor's® trust accounts for earnest money will be acceptable in most situations.
I've been asked why such a law is necessary. One reason is that we live in a financial environment now where the previously unthinkable is happening all too often. Another reason is to ensure that funds from one closing are not used to cover checks written for another closing.
Title companies use the same bank account for many closings. If we accept a bad check--yes, lenders have gone out of business in the middle of our transactions--it may be a week or more before the bank knows and then notifies us. The reversal of the deposit may not result in a shortage in our checking account until days or weeks later because we are constantly making deposits from other closings. When the float disappears and if we don't immediately make up the shortage, checks from completely unrelated transactions will bounce. When checks from a closing bounce, the resulting carnage is not pretty. The law helps to protect all parties to the real estate closing from the effects of this happening.
The fact that cashier's checks are no longer considered good enough has more to do with bank rules about collected funds rather than the risk that a cashier's check will be dishonored. When you deposit a check in a bank--even a cashier's check--the bank will not let you draw against that deposit until the bank considers that the check is collected funds (meaning that in the bank's opinion the likelihood of the check bouncing is remote). Wire transfers are generally considered collected immediately upon receipt. Some banks treat cashier's checks as collected funds the next day; other banks take longer. Personal and corporate checks may not be treated as collected for more than a week. If the collected funds balance in an account is not sufficient to cover all the checks presented for payment that day, the bank may withhold clearing those checks or may even bounce them. Every bank has some leeway in determining when funds can be considered collected. Characteristics of the check, the check maker and the bank that it is drawn on are part of the usual criteria.
Lenders who currently fund their loans with wire transfers should like the new law. Your competitors who insisted on providing corporate checks, drafts and forms of positive pay, held a competitive advantage over you. Their costs of funds were lower since they didn't have to actually let go of the loan proceeds until their check was presented for payment several days after the closing.
The essence of the new law is that title companies are no longer allowed to disburse closings until they are certain that the specific funds associated with that closing are collected. Everyone should feel more comfortable about that.
There are some practical and logistical implications of the new law, especially with daisy chain closings. I'll be posting about them in the coming week so check back.
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Yes, I've been a little absent lately with blog posts. Business is crazy busy and so is my non-business life. But I've restructured my time and will be posting again on a regular basis. Thanks to all my friends who've been asking where I was. Well, I'm back.
