By
L. Ted Gayle
Director of Audits
In recent years, many banks and savings and loan associations in North Carolina have begun to offer a variety of interest-bearing checking accounts in order to attract depositors. As a result, the Real Estate Commission has received numerous calls from bankers and real estate brokers concerning whether some of these new accounts can be used as trust or escrow accounts under the requirements of the Real Estate License Law and the Commission's Rules, Regulations and Guidelines.
Even after considerable study it is sometimes difficult to determine if an account would be acceptable since the accounts differ in so many respects. For example, some of these accounts may be used only by corporations while others can be used only by individuals or sole proprietorships. Some accounts restrict the number of checks that can be written without service charge, while others do not. Some accounts are demand accounts while others require that the funds remain on deposit for a specified minimum period of time before a withdrawal can be made; early withdrawals often reduce the principal (i.e., the amount of deposit). Nearly all accounts require that a minimum daily balance be maintained-usually $1500 to $2500 or even higher.
In view of the interest being shown in utilizing interest-bearing accounts and the dangers inherent in improperly using such accounts, perhaps it is time to restate the Commission's position regarding interestbearing trust accounts.
If you wish to place in an interestbearing account any funds which you are holding for others in a real estate transaction, then you must comply with the following requirements:
You must obtain written authorization from both the buyer and seller or landlord and tenant authorizing you to deposit the funds in an interestbearing account. This authorization must also name the beneficiary of the interest earned on the deposit.
If such authorization is incorporated in the Offer to Purchase and Contract, a lease, or a Property Management Contract, it must be set forth in a clear and conspicuous manner so as to distinguish it from other provisions of the instrument. (Audits indicate that clauses relating to interestbearing accounts are often "buried" in the instrument and are not at all conspicuous.)
The account must be a trust or escrow account. Your banker must be fully aware that funds deposited and disbursed through this account belong to others and that you are the fiduciary or trustee of these funds. Check stubs, deposit tickets, bank statements, and the authorized signature instrument must bear the words "trust" or "escrow" in the account title.
The account must be maintained in an insured bank or savings and loan institution in North Carolina. Insurance must provide the same protection afforded by the Federal Deposit Insurance Corporation (F.D.I.C.) in that each depositor is insured for up t-6 $100,000 ratfi& than $100,000 insurance for all depositors.
The account must be a demand account in that monies can be withdrawn at any time for closings, refunds, payments related to property management operations, and similar disbursements
The account cannot be one that risks loss of principal (some of the original deposit) if funds are withdrawn from the account before a specified period of time.
In addition, in order to create an audit trail which is easy to follow, the depository should furnish deposit tickets, checks, bank statements, etc. to report activity in the account in the same form as is normally provided for personal checking accounts. Drafts by telephone or plastic cards are harder to trace than conventional deposit tickets and checks
Interest-bearing trust or escrow accounts are not suitable for everyone. They can not only create a bookkeeping nightmare, but can also subject the broker to disciplinary action in the event the broker fails to strictly follow the requirements of the License Law and Co ission Rules.
However, in the event that a broker receives a substantial deposit which is to be held for an extended amount of time, then a separate interest-bearing account might be advisable for this deposit. But even then, the points outlined above must be fully complied with.