The following article was originally published in Capital One Bank’s Capital Perspectives newsletter
Managing client escrow funds creates an operational burden for an organization. It’s a task that doesn’t add to the bottom line but, for some, is a required part of doing business. Automation, however, can ease the pain.
To help organizations improve upon inefficient manual escrow management practices, some banks now offer online sub-accounting platforms for escrow agents and other entities that manage Third-party funds or require separate accounting for escrow funds. This paper will explain the advantages of using an online solution and review key features and functionality that organizations should look for when shopping for one.
FULFILLING A BUSINESS REQUIREMENT
Many different types of organizations are required to manage escrow funds for their clients. Property management companies and law offices head a list that includes — among others — title companies, courts, municipalities, and companies in the pre-need market, such as funeral homes, cemeteries, crematories and nursing homes.
Such organizations receive no monetary incentive for managing escrow funds or tenant security deposits. They don’t receive a portion of the interest or any earnings credit on the accounts they manage. For many, holding escrow funds is just a time-consuming chore.
Even so, these organizations are held to high standards when executing their escrow funds management duties. Some organizations tasked with escrow management duties must comply with various laws, rules and guidelines. For example, property management companies are governed by state (and sometimes local) tenant security laws, and law offices must follow state-specific escrow management rules and guidelines.
If organizations with these duties fail to meet applicable standards, they run the risk of being accused of mismanaging their clients’ money. Not only can such accusations tarnish an organization’s reputation, but they can also subject it to other damaging consequences, including monetary penalties and, in the case of a law office, the loss of a license to practice.
Typically, applicable laws and guidelines require that escrow and tenant security balances be held in an account separate from an organization’s operating funds. However, such laws and guidelines generally do not require the use of a bank’s escrow funds sub-accounting services.
Why use those sub-accounting services then? Simply put, it’s a best practice. Organizations generally are more efficient and perform better when they focus on their core competencies — and, for property managers, law offices, title companies and the like, escrow funds management may not be one of those. Banks have escrow funds management specialists who understand the unique nuances of the different business segments and can help them meet many of the applicable requirements. Banks also assist with interest calculation, disbursement and IRS tax reporting on these accounts, significantly lessening the burden felt by the organization. Many banks today have invested in technology that automates the tedious duties of opening, maintaining and closing client escrow and tenant security deposit accounts.
CHALLENGES IN A MANUAL ENVIRONMENT
Escrow funds management has been particularly burdensome because it has traditionally involved manual, paper-based processing.
KEY FEATURES OF AN ONLINE ESCROW SUB-ACCOUNTING PLATFORM
- Around-the-clock access and visibility to funds
- Automatic calculation and credit of interest payments
- Convenience of making final payout via a variety of payment methods, such as check or wire
- Detailed, up-to-date reporting plus account summaries and statements
- System-generated 1099 statements at year end
- Ability to guard access to funds through unique permission levels
From the day an organization gets a new client, and must hold certain funds in escrow for that client, administering those funds requires communication with a bank. Opening an escrow account requires completing and delivering an application and funding the account. Later, the organization may need to update account information, such as changing a name or, in the case of a property manager, an apartment number and security deposit amount if a tenant changes apartments.
Finally, someday each escrow account will need to be closed, at which time the bank must be told what to do with the funds, whether that’s moving them to another account or issuing a cashier’s check.
All of these requests and instructions have traditionally been communicated to the bank by fax or a paper package, and in some cases have required trips to a bank branch. Considering that most organizations administering escrow funds and tenant security deposits manage multiple accounts — and some even must manage hundreds or thousands of such accounts — the time spent on manual processes can be amplified greatly.
What’s more, in a traditional manual environment, reporting on escrow accounts is typically off line and provides no real-time visibility into account balances or activity. The organization managing the escrow funds only receives reports from the bank that allow for reconciliation on a monthly basis.
Errors can creep into a manual account-opening process. A staff member of the bank will typically re-key information from a paper application into its system. The result is that the organization opening the account cannot confirm that all of the information was keyed in correctly until it receives its first monthly statement.
ONLINE MANAGEMENT: SIMPLY A BETTER WAY
Automating escrow account administration can help an organization manage its business more efficiently. An online escrow account administration solution allows an organization to establish an unlimited number of client sub-accounts and link them to a master escrow account. When an organization brings a new client on board, one of its authorized staff members, from the convenience of their own office, can go online and set up the subaccount, which tends to reduce re-keying errors.
The staff member can deposit escrow or tenant security deposit funds directly into the master account via check, wire transfer or Automated Clearing House (ACH) transaction. Funds are segregated for reporting purposes, making it easy to view balances and transactions at aggregate and individual account levels.
An online escrow account management solution can enable users to allocate funds to the appropriate sub-accounts for reconciliation and posting, and generate reports to verify account activity, document interest accrued and highlight unallocated funds. Having immediate access to these reports is extremely helpful in certain instances, such as when a property manager must close out an account when a tenant moves out before month end.
When it is time to close a sub-account, the organization’s staff member can close the account online. The system automatically calculates the payout amount and moves the interest to the master account. From there, the staff member can disburse the funds using multiple payment channels. All of these transactions can be performed by the staff member without requiring any intervention from the bank.
SOME KEY ADVANTAGES
Here are some key advantages afforded by automating escrow account management:
- Self-administration. Organizations can open and close subaccounts online, on their own, without involving the bank, which saves time.
- Interest management and IRS reporting. Online escrow management solutions simplify the process of allocating interest (when applicable) to sub-accounts. A distinct rate of interest can be applied to each sub-account, which is automatically calculated and posted to the sub-account on a monthly, quarterly or annual basis. These online solutions comply with IRS requirements relative to back-up withholding, generate a 1099 for the subaccount holders, and provide the necessary tax reporting.
- Visibility and transparency. An automated solution allows immediate visibility into all sub-account information and offers online access to a variety of reports across all accounts — including activity, reconciliation and interest reports — to help meet audit requirements and legal mandates.
AN INTEGRATED, SECURE EXPERIENCE
When shopping for an online escrow management solution, look for an integrated experience. In other words, seek the ability to handle all aspects of administering these accounts in a streamlined, automated fashion — so you don’t have to venture outside of your office or telephone a banker for help.
Creating an integrated experience can involve using complementary banking services. For example, once you have opened an escrow sub-account online, you must fund the account. In cases where that requires depositing a paper check, an organization can keep the process streamlined and efficient by using its bank’s remote deposit capture service. Without ever leaving the office, the financial manager can run the check through a desktop scanner and transmit the check image and related information to the bank for depositing.
Also, to address the potential for employee fraud related to these accounts, look for a solution that enables you to establish different permission levels for staff members. You want to be able to control which employees have access to which accounts, as well as their level of access. For instance, ideally the system’s administration function should enable your organization to grant employees permission to open and close escrow accounts, with the option of requiring a manager to allocate or transfer funds.
By assigning unique permission levels, organizations can ensure their escrow accounts receive sufficient oversight and that accounting controls are in place.
GREATER CONTROL AND EFFICIENCY
Automating escrow and tenant security deposit account management with an online solution allows an organization to execute a mundane but necessary requirement of doing business with greater efficiency. In essence, it makes a financial manager’s job a bit easier.
With an automated escrow funds management solution, an organization maintains full control over its escrow accounts and benefits from the convenience of online access and rarely having to have its staff travel to a branch or contact a service team.
To learn more about how the Capital One Bank team members will roll up their sleeves for your business, contact Terese Miletic at 973-439-7631 or John Sabates at 973-439-4148.
This white paper is for informational purposes only, does not constitute the rendering of legal, accounting or other professional services by Capital One, N.A., or any of its subsidiaries or affiliates, and is given without any warranty whatsoever.
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