What is an escrow? - Windy City Summit

Banking on Escrow:
Best Practices for Offering an Escrow
Sub-Account Solution to Your Customers
Windy City Summit
June 7, 2012
Session Objectives
Obtain knowledge in what escrow sub-accounting is, who uses
it, and how it works
 Gain a better understanding of the current trends in escrow
 Learn what financial institutions are doing to offer escrow
accounting solutions
 Review common best practices to implement escrow
accounting solutions
Situation Analysis and Current Trends
Joseph Vitale
Vice President
Senior Product Manager
Situation Analysis – Escrows
What is an escrow?
 An arrangement to help parties perform contracts and avoid
What parties are involved in an escrow arrangement?
 A depositor, an escrow agent, a beneficiary
How does an escrow work?
 The depositor is required to entrust money or property with an
escrow agent
 The escrow agent holds the deposit until it can be released to the
beneficiary upon some future event
There are many uses for escrows of all which have contractual or legal obligations
Situation Analysis – Escrows
What types of funds are held in escrow?
 Down payment for the purchase and sale of real property
 Legal settlements, rent security deposits, new home construction,
advance fees paid to brokers, membership fees, assisted care
Who needs escrows?
 Law Firms: client trusts, IOLTAs
 Real Estate: property management, title companies, 1031
 Pre-Need: nursing homes, funeral homes, cemeteries, crematories
 State Government: local bond funded projects
 Federal Government: federal projects, EB-5
Situation Analysis – Escrow Rules and Regulations
Every industry that uses escrow accounts has unique and specific
rules and regulations to follow based on several factors,
including, but not limited to:
Interest payments
Financial reporting
Oversight and disclosure
Agreements and contracts
Funds management and disbursement
State and federal mandates
Each escrow application has unique rules and regulations
Situation Analysis – Escrow Accounting Products
Escrow accounting products have been increasing in demand and
usage over the last few years. Businesses require more visibility
into and control over accounts and can no longer wait for month end
statements or rely on bank custodial management. Industry solutions
typically have the following characteristics:
Web-based online reporting and account administration
Unlimited sub-accounts
Interest allocation and apportionment
Deposit and funds segregation
Reconcilement and adjustment identification
Statement and activity reporting
Document storage and retrieval
1099 reporting
Financial institutions have seen an increase in demand and adoption for escrow products
Situation Analysis – Escrow Accounting Products
Financial institutions are now developing escrow accounting products and services to
meet the increasing demands of businesses. These products have a typical workflow in
terms of how they are setup and used.
Customer is setup on an escrow accounting product with master or main escrow
Customer creates subaccounts in the product off of the main interest bearing or noninterest-bearing account structures
As deposits come into the main account(s), they are posted to the product on a prior
day or same day basis
If the subaccount is identified on the incoming deposit, the subaccount is
automatically updated with the deposit, or if not identified, unallocated funds will
need to be reconciled
As the bank calculates and posts interest to the main account, all subaccounts that
accrue interest are automatically updated
Customer can generate reports to verify transaction activity and reconcilement
When it comes time to disburse the funds, customer can initiate payments or write a
check to the account holder and then close the sub-account
Escrow accounting products bring reporting and administration tasks online
Situation Analysis – Escrow Accounting Products
Typical escrow account structure hierarchy:
Sub-account 1
Account Holder
Master Account 1
(Interest Bearing)
Sub-account 2
Account Holder
Escrow Account
Master Account 2
Sub-account 1
(Non-interest Bearing)
Account Holder
This structure allows organizations to build unlimited subaccount hierarchies
Industry Trends – Risk and Compliance
Financial institutions and businesses are experiencing a shift in oversight, risk
management, regulatory changes, and enhanced compliance standards.
Risk Management
 Direct, industry specific
 Indirect, banking
 Direct, industry specific (SOX, SSAE 16)
 Indirect, banking
Business Resumption and Continuity
 Natural disasters are no longer a once or
twice in a lifetime occurrence
 Pandemic, operational or process
Asset allocation
The business community is dealing with an onslaught of risk and regulatory challenges
Industry Trends – Technology
Technology is changing rapidly and organizations are dealing with when to
begin to upgrade, change, and use new systems to run the business.
 Budgeting
 New products and services
 Risk and compliance
 Core Systems
 Accounting, Billing/Purchasing
 Treasury Management Workstations, ERP
 DDA, Analysis, Payment systems
 Platforms
 Online banking
 Software as a Service (SaaS)/Cloud
 mCommerce (mobile)
 Go Green/Eco-friendly initiatives
Businesses have been on the same system platform for an average of 7-10 years
Industry Trends – Fraud and Security
Fraud prevention and overall transaction security is a primary concern
for all organizations.
 Online Banking
 Secure payments and account/transaction data
 Protected browser sessions
 Timely alert notifications
 Fraud Mitigation
 Check and ACH Positive Pay, blocks, filters
 Dual control, out of band, security tools
 User access permissions, transaction limits
 Risk Management
 Enterprise risk
 Predictive analysis and scoring
 Back office system detection
The expectation is we all must do more to assist in fraud education and prevention
Best Practices in Partnering with a Bank
Judy Hill
Senior Vice President
Sales Advisory
Determining the Need for an Escrow Partner
Do you have a need to segregate accounts and keep funds separate
for tracking and reporting?
Would you like the convenience of opening and closing escrow
accounts quickly online?
Would you like the ability to attach relevant account documents
such as W9s, legal agreements, and service contracts directly to
online accounts?
Do you require visibility and transparency into all main and
subaccounts to meet audit and compliance policies?
Is FDIC insurance important to your customers?
Would you like to offer your clients interest on the earnest money
or escrow funds you manage and administer for them?
Are you required to create and distribute 1099s?
Case Study: Real Estate Brokerage Company
Company Overview
 40 offices across the county
 In excess of 1,500 active brokers
Current Environment
 150 escrow deposits per month
Average deposit amount $13,000
 Average deposit time 90 days
 75% non-interest bearing deposits
 25% interest bearing deposits
 150 distributions per month
 Escrow deposits tracked manually via spreadsheet
 Interest calculated manually at time of disbursement
 Manual bank reconciliation
 Mission Impossible – accurate production of 1099s
Challenge with Manual Process
Challenges with Manual Process
It takes too long and it’s too expensive
to open separate accounts at the bank.
You can administer the sub accounts online without contacting the
bank. Your bank should allow for an umbrella agreement that covers
all of the OFAC and KYC procedures.
I need to keep funds segregated for
tracking and management.
These solutions maintain a logical hierarchy for Master and Sub
Accounts - allowing you to maintain and view each account
separately or you can group accounts uniquely to provide
information the way you need it.
I am required to pay interest on some
of the accounts and can’t easily
calculate it.
Interest can be allocated at both the Master and Sub Account level
and can be applied using different rates for each account.
Issuing 1099’s at year end is a
significant task.
1099 reporting is facilitated to work within your current reporting
process and will provide more efficiency. Helping you to meet IRS
reporting requirements.
My customers demand FDIC coverage
on their deposits.
Accounts can be set-up so that all funds have full FDIC coverage.
I have separate systems to access
important client documents of escrow
These solutions have a document upload function so you can attach
all relevant documents like escrow agreements and invoices directly
to online profiles.
Value Proposition for Businesses
Online system access
Users manage all accounts and administration online in a
separate product module in a safe and secure environment
Escrow sub-accounting
Main accounts can be broken down into subaccounts for
individual tracking and reporting and store related documents
like W9s and agreements
Interest accrual
Interest can be allocated at both the main and sub-account level
and can be different for each account
Risk and compliance
Complete audit trails, visibility and transparency into all account
activity to meet risk and compliance standards
Statement reports, charts, graphs, analytics, and 1099 reporting
There are several benefits businesses can take advantage of from day one
Best Practices in Implementing Escrow Solutions
Analyze your current process and escrow needs
 What are your challenges
 Where are your risks
Outline all legal and compliance requirements
Work with your financial institution to:
 Understand the options for the account structure to best meet
your needs
 Identify operational efficiencies based on the features of your
banking partner’s product offering
 Understand the value proposition for your customers
 Create business case to sell internally
Use the IPDE method – Identify, Predict, Decide, and Execute
There is an increase in demand in the industry for online escrow
subaccount solutions
State, federal, and industry regulations and compliance standards
are driving adoption of escrow subaccount products
The primary market segments with escrow accounting needs are
law firms, real estate, pre-need, and government
Escrow accounting solutions offer several key benefits to both
businesses and financial institutions
Follow best practices when marketing and implementing escrow
accounting products and services
Understanding your escrow needs and requirements is key to an
effective program built to meet revenue goals, reduce costs, and
satisfy compliance standards

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