Did you know there’s something called the Residential Closing Funds Distribution Act of 2005 (a.k.a. the “Good Funds” Law)?
The Residential Closing Funds Distribution Act of 2005 (“the Act”) ensures that checks disbursed at the closing table are backed by good funds at the time of issuance and will not be dishonored when presented to the financial institution upon which they are drawn.
Effective September 1, 2005, the Act requires a mortgage lender, mortgage loan broker, mortgage loan servicer, or other person, at or before loan closing, to cause disbursement of loan funds to the settlement agent in one of the following forms:
- Wired funds
- Checks issued by the state or one of its political subdivisions
- Cashier’s check
- Teller’s check or other official check issued by a financial institution and drawn on or payable through a financial institution within the same Federal Reserve check processing region as the location of the settlement agent, or
- Checks issued by a federal government instrumentality organized under the Farm Credit Act of 1971 (i.e., credit unions).
The Act prohibits settlement agents from disbursing any funds from an escrow or settlement account in connection with a mortgage loan transaction until the settlement agent receives the disbursement of loan funds and such additional funds provided by the borrower or other third party to fully fund the transaction. Additional funds in excess of $1,000 must be provided in one of the forms outlined above.
Real estate licensees will still be able to write checks on their escrow or trust account, so long as the check is drawn on or payable through a financial institution within the same Federal Reserve check processing region as the location of the settlement agent.
The Act charges closing agents, such as Melrose Title Company, with the responsibility of holding disbursement until it has been determined that funds have been delivered by one of the permitted means.
Checks received at closing will be virtually guaranteed for payment, much like a cashier’s check, and payees will not have to go through the trouble and expense of dealing with a dishonored check.
So why all the fuss over “good funds?” Title companies are fiduciaries trusted to handle other people’s money and property. If a fraudulent check bounces or a wire is not posted to a trust account, it could jeopardize the entire escrow account.
Mortgages may not be paid in full, homeowner’s insurance policies could lapse, commission checks could bounce and sellers’ may not receive their proceeds.
Remember, the Good Funds Law is not intended to protect title companies- it’s intended to protect the public.
Below you will find legal information regarding the Residential Closing Funds Distribution Act “Good Funds” Law.
Residential Closing Funds Distribution Act of 2005
Effective September 1, 2005
Good Funds Law (TCA § 47-32-101)
Section: 47-32-105 – Disbursement of funds by settlement agent from escrow or settlement account:
(a) No settlement agent shall disburse any funds from an escrow or settlement account in connection with a mortgage loan transaction identified in § 47-32-103(a) until:
(1) Disbursement of loan funds, designated for said mortgage loan, has been received by the settlement agent; and
(2) Such additional funds necessary to be provided by the borrower or other third party to fully fund the transaction. All additional funds required by this subdivision (2) in excess of one thousand dollars ($1,000), shall be provided to the settlement agent in the one of the forms identified in § 47-32-102(2); and
All documents required to complete the transaction have been executed and are deemed suitable for recording.
(b) In any transaction in which the borrower may exercise a right of rescission under the federal Truth-in-Lending Act (15 U.S.C., § 1601 et seq.), and the settlement agent has received loan funds prior to or on the first business day after the time the rescission right has expired, the settlement agent shall not disburse any settlement proceeds earlier than the first day after the expiration of the rescission period, and the settlement agent has determined that the borrower has not exercised the right of rescission.
Section: 47-32-106 – Noncompliance
Failure to comply with the provisions of this chapter shall not affect the validity or enforceability of any loan documents.
Section: 47-32-107 – Violations — Liability — Penalties — Frivolous actions
(a) Any party violating this chapter is liable to any other party suffering a
loss due to such violation, for any actual damages sustained, plus reasonable attorneys’ fees. In addition, any party in violation of this chapter shall pay to the other party or parties suffering a loss an amount equal to one thousand dollars ($1,000), or double the amount of interest payable on the mortgage loan for the first sixty (60) days after the loan closing, whichever amount is greater.
(b) Any party may bring an action in chancery court for declaratory or injunctive relief to prevent any violations of this chapter.
(c) In any private action commenced under this chapter, upon finding that the action is frivolous, without legal or factual merit, or brought for the purpose of harassment, the court may require the person instituting the action to indemnify the defendant for any damages incurred, including reasonable attorneys’ fees and costs.
For a full copy of this law, please contact us at firstname.lastname@example.org