Posting for

Wednesday, July 8, 1998

by: Bert Rush

brush@firstam.com

AGENTS/TRUST ACCOUNTS/INTEREST

Here's an inquiry just received from Larry Usignol, in-house counsel in Iselin, NJ. Let's hear from some of you on this:

Do you have any bulletins, memos, white papers, etc., on the issue whether agents can earn and keep the interest on their trust/settlement accounts? I am aware of the recent US Supreme Court decision re the Texas IOLTA issue. Thanks for your time.

Reply to Larry: If the agent has a written agreement with the trustor/depositor, I think they can do whatever they want. This is also an issue in 1031 exchange practice. Under the terms of their written agreements, many intermediaries take some or all of the interest earned on deposited funds representing proceeds from sale of relinquished properties, until the exchange is completed by acquisition of replacement property.

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Following our posting Wednesday, Jay Dobson (Portland) writes:

This at one time was an issue with the Oregon Real Estate Commissioner (which regulates escrow activities in this state). State regs now allow an escrow company to get the benefit of interest earned if the matter is disclosed in writing to the principal and the principal consents. As a result, our standard escrow instructions disclose that we get a benefit from the interest/float (and also point out that this helps keep down escrow fees) and gives us authority so to do. So far, no one has objected. Those large deposits placed into escrow in advance of closing, where the principal wants the interest, are handled differently.

(PS Why are ya'll still there at this hour?)

Reply to Jay: Was traveling Tuesday--couldn't get my computer connected anywhere (dammit) til I checked into the hotel--late at night.

Meanwhile, Jim Dondero (Grand Rapids, MI) writes:

I researched this issue about 4 years ago. In the absence of express agreement OR TRADE USAGE to the contrary, one who has the use of money "justly owing to another" MAY be required to pay interest on the funds, although this is generally confined to cases where the money is wrongfully obtained or withheld, or statutorily required (e.g. public agency construction contracts). Accordingly, there appears to be no duty imposed by Michigan law to pay interest on legally escrowed funds. There also seems to be an ABSENCE of Michigan law one way or another as to whether an escrow agent, lawfully in control of funds, may use the funds to earn interest for its OWN benefit. Without an agreement, I think we would be hard pressed to justify such practice in court. However, we might be alright with disclosure and a written waiver from our seller/purchaser/borrower.

Palma Collins (DC) writes:

The Virginia legislature passed the Consumer Real Estate Settlement Protection Act last year that, among other things, stated that a settlement agent may not retain any interest received on funds deposited in connection with any settlement or closing. The Act also states that the funds shall be applied only in accordance with the terms of the individual instructions or agreements under which the funds were accepted. We have interpreted this as meaning that interest may only be retained if each client individually makes an agreement with the settlement agent that provides that the agent apply the interest earned to his own closing fees. Because this law is so new and has not yet been tested in the courts, we encourage the agents to exercise extreme caution if they want to try and keep the interest earned on escrow funds.

And, Teresa McQueen (FL) writes:

Reply to Larry:

In Florida funds received by a licensed title insurance agent pursuant to a real estate closing cannot be deposited to an interest bearing trust account without the written consent of the buyer and seller. Rule 4-186.008(3) of the Florida Administrative code. Therefore, written consent is obtained prior to deposit.

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Following up on the posting last Wednesday, Lillian Eyrich (New Orleans) writes:

We're researching this in Louisiana now and so far have not found anything specifically addressing it. I would love to have samples of the disclosure statements and client agreements, because our auditors keep begging the legal dept. to draft one. Please email to leyrich@firstam.com or fax to Lillie Eyrich at (504) 539-5906. Thanks!