Overview

Many states have outlawed title and escrow companies from taking interest on trust accounts for their own use. The states that haven’t (and Colorado is one of them) have unwittingly created the an inducement for title companies to collect increased payoff per diem which allows for longer hold periods on funds deposited in their trust accounts. These increased hold periods result in interest which can be swept for the benefit of the title company. The result is the title company collects interest on its client’s funds while the client pays increased loan payoff fees.

The 2007 Legislative session in Colorado saw a bill run by the state’s largest title agency, which was to create a new regulatory framework for escrow and title companies. This framework would have been very expensive and was not required or supported by the state regulators or even the rest of the industry. As the bill (SB 249) was called by its proponents a “consumer” bill, without providing any real consumer benefits, a push was made to amend it with language that would have ended the use of trust fund interest taking by title companies. Doing so would have been a real benefit to consumers. The bill was passed in its final form without either the increased regulatory framework or the trust account amendment. However, I thought it prudent to write about this issue in a way that would be understandable when read outside of the pressure of a short legislative season. I am hoping that my article, titled “The Dirty Little Secret” will begin discussions on this abuse of the system by large title companies. Title insurance is a valuable asset to the real estate settlement process and should be held to the same high standard that any other organization (ie attorneys) is when handling consumer’s funds.

The Problem with Retaining Interest on Escrow Accounts 

Colorado is a “table funding” state, meaning that closings take place at the closing table with all parties present. A buyer is required to bring “good funds” for anything over $500.00. Sellers typically are asked to pay 2 or 3 days extra interest at closing to allow for the payoffs to not be made the same day. These two events (good funds pre-closing and extra days to payoff post-closing) create a float in the title company’s trust account.

Title companies can choose to hold the payoff funds a few extra days in order to create this float. They do so by making the payoffs a few days after closing by wire or by mailing out checks when they disburse. These checks may clear through non-local banks, leaving the consumer’s funds in the title company’s accounts a little longer.

What is interesting about this is that the title company could wire funds the day of receipt, saving the seller extra per diem loan interest, but then the whole reason for creating the float is negated. By having a float, a title company with significant overnight deposits can make a considerable amount of money.

For example, in testimony before the Colorado House Business Affairs and Labor Committee on April 30, the owner of the largest title agency in the state said his company typically has “in excess of $100million” on overnight deposit. He testified that if his company was not allowed to earn interest on the float he would have to raise title premiums and closing fees, as the interest “subsidizes” his operations.

If in fact his statements were true (he also stated that his company had an 18% market share) this would indicate overnight holdings by Colorado title agencies in excess of one-half billion dollars, resulting in interest of $22.5mm per year at the current rate of 4.5%. This is an extraordinary amount of money to be made by simply sweeping accounts. Because money is going to earn interest when left in an account for any amount of time, this would not be an issue except that the funds are handled in such a way as to ensure that they will not clear immediately.

What is interesting about the “subsidy” comment is that a customer never sees this charge. If the customer were to have to pay a reasonable cost for the title insurance and closing services provided, there would be no need for a subsidy. If the title company does not want the customer to know the true cost, then it makes sense to subsidize premiums and fees with the earned interest on trust accounts. The problem with this scenario is that premiums and fees are disclosed on settlement statements, while interest is not. Further, most commercial clients understand the use of overnight funds and will request to earn the interest on their own money while it is on deposit. Doing so makes the small residential customer subsidize the large commercial customer. And because title insurance is such a highly regulated business, most companies will file fees that are within a few dollars of each other, cost being one of the two major selling points. The second selling point, service, is based on location of the title company to the broker or lender requesting the service. This indicates that one of the two, cost, is not accurately disclosed. Further, service is also somewhat skewed because the real customer, the residential buyer and seller, never knows that his money is being used in a way that intentionally does not benefit him.

All of this is to ask the question “Should title companies be allowed to earn interest on their overnight accounts?” We recognize that interest is created on trust accounts, it is simply a question of who should own it.

There are three potential parties:

• The customer, whose money is on deposit
• The title company, who owns the account
• The bank, where the account is held

For the customer whose funds are on deposit, the amount earned and the problems in creating a specific interest bearing account for the short time could be expensive. The title company or the bank could charge enough to easily offset the potential benefits. One could envision a scenario where the charges are greater than the interest and result in a net cost to the customer.

Should the bank keep the interest? There is nothing to say no to this. But is a bank the proper place for a windfall when they are being paid interest on the loans that are being paid off in the first place? Probably not.

This leaves the title company. The title company is expected to be a “disinterested third party” to the buyer and seller. It has an equal fiduciary responsibility to all parties in a transaction. Yet to accept interest would mean that it is subsidizing one party’s cost at the expense of another. Further, the temptation to hold funds (resulting in additional interest on loans to be paid off) in order to increase the float time would be enormous.

Conclusion 

Perhaps a different way should be explored. The interest can be used in some fashion that benefits all consumers. Attorneys are required to donate interest on their trust accounts to a fund helping indigent persons in need of legal services. A similar program, say benefiting low income housing needs or homeless shelters would provide significant benefit to a whole community. Further, title companies would be forced to truly compete on price and service which would be more fully disclosed. Residential customers would no longer subsidize commercial customers. The community served by the title company would benefit by a new non-governmental source of funding for its housing needs. This is truly a win-win situation.

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Written by Tim Killcoyne
Town & Country Title Services, 303.486.8970