Frustrated by the risks associated with wire transfers of buyer cash to close? What about the hassle of disbursing to realtors, HOAs, tax collectors and others? Are there options under Florida’s “good fund rules” for other forms of payment?
Melissa Jay Murphy 0:00
Welcome to The Fund’s Title Now Pop-up webinar. I'm Melissa Murphy with The Fund and I have the pleasure to host these webinars from time to time on topics of interest to the real estate transaction world. We push this content out to our podcast also. So that way you have continuing access to the conversation. You can share it with interesting colleagues or friends. And coincidentally, our podcast is called Title Now also, and it's available wherever you get your podcasts, so please subscribe. We would love to share information with you, and I would love to get feedback about the topics that we talked about. So, one housekeeping item before we get started, you have the opportunity to pose questions to us in the chat function. Just pose your question there. And I have Bob Rohan from our Legal Education department who will be monitoring the chat and toward the end of our presentation. I'll ask Bob if there are any questions out there that you would like for us to answer.
So, let's talk about money. Dealing with the funds in a real estate transaction is one of the most important responsibilities of a closing agent. It's your job to disperse the funds to cover closing costs, seller proceeds, real estate commissions mortgage payoffs, and it's obvious that the parties to the transaction rely on you to do that properly without a hitch. We also must consider what rules have to be followed. Both lawyers and licensed title agents are governed by what we commonly call the Good Funds Rule. Lawyers must adhere to the Good Funds Rule promulgated by the Florida Bar and licensed title agents have to comply with the Good Funds Rule. It's in our Florida Administrative Code.
Now these rules are pretty similar, but they're not identical. But the similarity is pretty simple and is around that basic concept. You need to have money in the bank that you're pretty darn sure is real, secure, and irrevocable before you disperse that money. In the language of both the Florida Bar rule and the Florida Administrative Code refers to “collected funds” and they define that as deposited finally settled and credited to the trust account. Otherwise, you're using someone else's money (another client) to cover the check you've written and that's not good. So, the challenge is knowing when the money, however it's been delivered to you, is finally collected. It seems to me that banks have different rules around when monies are going to be available to you.
Now, there are also exceptions, there's always an exception, to every rule right. Both title agents and attorneys are allowed to make exceptions for these strict rules. But the exception is based on an intangible thing. If they have a reasonable or prudent belief, that deposit will become collected funds within a reasonable time they can disperse. You know you might be uncomfortable taking that risk.
So, is there a solution to this? Is there a better way for money to be sent to a closing agent? Is there a better way for a closing agent to be able to disperse the money that's been sent to them? There is some form of payment coming our way that many think is a great solution to these challenges, real time payments and with me today is Rick Bruhn from the US Bank to talk with us about real time payments. Rick is a senior vice president at US Bank, and he is head of commercial deposits and payments solutions there. So welcome Rick. Thanks for being here. And helping us understand this new form.
Rick Bruhn 4:56
Thanks, Melissa. Happy to be here and love talking about RTP and payment innovations.
Melissa Jay Murphy 4:58
Let’s start with what I hope is a softball question to you. Give us some high-level definition of a real time payment.
Rick Bruhn 5:12
Yeah, great, great question. Right so real time payments are the very first payment rail lot new payment rail launched in the last 40 years within the United States. You know RTP while it's still new in the US it's not super new, right it launched in 2017, with the first payment actually being sent earlier that year between us, US Bank, and Bank of New York Mellon. Over time, you know that the participation within the RTP network has certainly expanded, and the utilization of that network has also expanded. You know there are a lot of positive things around real time payments. It's currently managed by the clearing house which is a consortium of 23 of the largest banks in the United States and internationally. It operates different payment infrastructures within the financial institution sector. And you know, RTP was built to compete with some real time payments platforms that are available and have been actually for as long as 20 plus years and other foreign countries such as Japan, China, other parts of the world. So, you know, our RTP is certainly a game changer. I've been involved in the Title and Escrow industry in the banking side for 15 plus years now and a multitude of different capacities within US Bank. Since the day it was launched in 2017 really thought and still believe you know RTP has the ability to really be a game changer for the title and escrow and settlement services industries.
Melissa Jay Murphy 6:52
How is it different from a wire? How is it different from an ACH payment?
Rick Bruhn 7:00
Yeah, I mean, fantastic question. Right. So, you know, today in the in the title world, right settlement world, we deal a lot with wire transfers, you know, there you have finality of payment, the revocable ultimately which you know, satisfies the Good Funds Rules that you're talking about at the top of the call Melissa. And, you know, with RTP you get those same features, right, you get irrevocability, finality of payment. It can't be called back. One of the main primary differentiators of RTP to wires are with wires, you're limited by the timeframe you can send them. So, you have from when the Fed window opens 8am to 5:30-5:45pm depending on your financial institution and how long they give you to complete that wire transfer process with them, with RTP it's open 24/7 365 days a year. You want to settle a transaction on Christmas Day at 5pm. Guess what you can do that? You know and then with ACH as most people probably on the call know, depending on the type of ACH payment it is who it's between whether, it's business to business, business to consumer, or consumer to business. There are different callback rules that apply to all those different payment types and the receiver or, if it's debiting funds for a consumer account, they can have up to 60-90 days in order to dispute that transaction. Whereas with RTP, like wires, you don't have that ability. I mean, it really takes an act of God and way to get those funds back. And so, there's that.
Melissa Jay Murphy 8:39
I've also heard that ACH payments are not even real time. They can be called that but they're not even real time. There's some way that the bank kind of waits to send ACH payments out. Can you elaborate a little bit on that?
Rick Bruhn 8:53
Yeah, absolutely. So you're exactly right. When you're sending or when you're debiting or crediting within the ACH network, you can either push a credit, in essence you're sending money to somebody, or you can initiate a debit transaction where you're actually pulling money from someone else's account. And then those types of transactions are ultimately batched and then each bank has different processing windows for their ACH batches, in which those operate. They generally are every hour, every two hours, something along those lines, but they certainly are not real time. So, if you initiate one now, you won't technically have funds. That process won't even start until maybe one or two o'clock somewhere depending on your institution. Depending on the type of ACH payment you initiate it could be same day which means you get the money at some point today but there's no guarantee as to timing. It can be a one day or two-day settlement as well. So, you may not even see the funds for another day or two and then you still have the dispute window as well to navigate.
Melissa Jay Murphy 10:02
I thought there was a kind of quirky thing about ACH. So how does real time payment actually work? So, what are sort of the logistics?
Rick Bruhn 10:17
Yeah, fantastic question. So, it works. RTP (real time payments) has a number of different functionalities that a wire transfer has and doesn't have. Ultimately, so like a wire transfer, you can initiate a payment outgoing with an RTP payment much like you would initiate a wire transfer today through your financial institution. So you're probably logging into your online banking system software through your financial institution putting in a name, account number routing number, dollar amounts and maybe additional information etc. in initiating that payment and then you have somebody else probably within your organization that approves that payment before it goes out. Then there's also another functionality of real time payments. It's called request for payment or RFP, which works kind of in reverse, so it's similar to ACH debit in the sense that you are in a way requesting funds from somebody but it's not it doesn't operate like ACH debit where it automatically debits their account. So an RFP within the RTP network, so yourself as a title agent would request payments from me so say “I'm purchasing a house” or “I have signed a contract” and you're trying to collect the earnest money deposit $10,000. So, the title agent could go into their banking software, initiate a request for payment, that will come to me and it's not an email. It's not a text message that I receive or any of that stuff will actually be a notification that I received on my banking app, on my telephone on my cell phone, iPhone, whatever Android. So, it will pop up on the home a US Bank app you have a “Request for Payment” from ABC title company. I open my app, go through the authentication process with my bank to access the app and review the details of the “Request for Payment”. If I accept that and agree to pay it, within the app, it'll automatically then send those funds from my account (Obviously, assuming they are there and available. It won't allow me to overdraft my account to send the money.) to be able to send those funds over to the title agent in real time. As soon as I click Accept or Approve those funds, immediately leave my account, and then would credit the Title Agency account.
Melissa Jay Murphy 12:45
So, the only delay in payment would be if you're not paying attention to your phone and you don't get the notification that the request for payment has come to you.
Rick Bruhn 12:55
Exactly, exactly. You're exactly right.
Rick Bruhn 13:04
Yeah, and we are seeing use cases today within the industry space where it is being utilized to collect earnest money right now today in real time.
Melissa Jay Murphy 13:16
So, when the closing agent since the RFP, the request for payment, to the buyer, do they need any information other than just the buyers name and cell phone number?
Rick Bruhn 13:31
Great, a great question Melissa. So you know today much like with the existing process, they will need the clients name, full name, account number routing number in order to initiate an RFP today. So when you're collecting if you're putting that money outside of the client being in your office, right so you know, you still have to have a secure method for which to collect that data. ultimately. And then be able to populate that into your banking software. A future state, you could look at a situation in the future where you could actually be collecting that information at the closing table without ever having to request that information upfront if you're dispersing closing funds to a seller or like a cash out refinance.
Melissa Jay Murphy 14:19
So that's the earnest money deposit scenario, but I'm kind of getting the impression that this could be a very cool tool to use at the closing table. So, I think you've given some thought to how great this could be at the closing table. So, tell us about that.
Rick Bruhn 14:38
Absolutely. I've been sitting around thinking about this for a while and for a lot of the people on the call probably don't realize but the there's a limit for RTP payments today. It's a million dollars. When it was first launched in 2017, it was $10,000. So, there wasn't really a wide applicability for the real estate settlement services space at $10,000. Then it went to $100,000 and even then, for cash out refi or to pay brokers, real estate agents, stuff like that there was some common sense uses to be able to utilize RTP. At a $1,000,000, you cover 95% probably of residential resales nationwide, somewhere in that ballpark. Obviously, wire fraud is pertinent and on the top of everybody's minds within the industry space without a doubt. We see instances where business email compromise or other avenues are utilized to gain access to escrow accounts or to dupe consumers into sending information to a fraudster or sending wires to a fraudster inadvertently. In an RTP world in the future state, you can imagine a situation whereas a title agent you can articulate to your real estate agents, consumers, builders, whomever you're working with, “no, we will never send wiring instructions to a consumer, ever, period.” You're never gonna have to do that. So, there's no business email to compromise ultimately, at the end of the day, right. In that scenario, you show up to the closing table, your consumer comes to the closing table, whether it's a refinance or a purchase sale etc. So, I know your documents and know if there's cash to collect for closing from the buyer. Your escrow agent, or closer or whomever and you would designate in your agency and initiate a request for payment to the consumer. They're at the closing table, from an iPad, from a laptop, whatever that notification shows up on the consumers’ phone. The consumer is able to go in and respond to that RFP, “ABC title agency needs $50,000 for cash to close on a transaction 1234 for XYZ property”, they accept/approve that transaction. The funds immediately leave their checking account, savings account, money market account, whichever and automatically populate into the title companies escrow account. Right there at the closing table, all done, with all parties present.
Melissa Jay Murphy 17:35
And that money is finally so. Right then and there.
Rick Bruhn 17:37
Absolutely, can't be called back just like a wire transfer.
Melissa Jay Murphy 17:42
And I think that this just brings up a really cool images in my mind of how great this would be sitting at a closing table. All the documents are signed, closing agent says “Okay, buyer, are you happy?” “Yes.” “Okay, seller are you happy?” “Yes.” You send the request for payment to the buyer and in a minute or two they get that request for payment on their phone. They open it up. They hit Accept, boom, the money is there. And it sounds like the closing agent could turn to the seller and say “I'm sending you your net proceeds. Boom, here they go.” And they could also do that with the real estate commission?
Rick Bruhn 18:34
Yeah, you're exactly right.
Melissa Jay Murphy 18:41
How much would a Realtor like that!
Rick Bruhn 18:43
We can even go back to the dates when the real time payment transaction limits were $10,000 per payment. We had clients within our Title and Escrow industry vertical portfolio that were actually utilizing that five years to go to pay real estate agents and brokers because for their purposes, it was a competitive advantage because they can pay realtors in real time. There was no fee for the realtor to receive a real time payment unlike with a wire transfer where they get dinged by their bank for $20, $30, $40 fee, depending on the institution, right. The realtor did want to come to the closing and collect the check and then have to go to their bank and deposit the check. They don't have to to get the funds in real time immediately, available to them, and free of charge to receive.
Melissa Jay Murphy 19:34
All right this sounds too good to be true, Rick. So, what are the challenges? What are the challenges that we're facing right now?
Rick Bruhn 19:38
Like with all new technology, right, it's adoption ultimately is the number one challenge. So roughly 60-65% of all DDA accounts nationwide are covered by RTP participating banks. So, a bank has to be a participating institution on the RTP network in order to initiate or receive a payment and they can participate in a lot of different ways. They can participate in the clearing house and the RTP network can just be a receiving bank where they can receive RTP payments or RFPs, etc. Or they can be an initiation bank. So, you know, smaller institutions will participate in receiving payments where a lot of larger banks like US Bank are full participants within the RTP network. All the major banks are a lot of the regional banks if not all of them are today, I know and talking directly with the clearing house, you know, they could add the next 10 largest banks that are not participants, and it really would not move the dial more than one or two percentage points, ultimately. So it's mostly smaller institutions today that are not participating on the RTP network. And then on the RFP side, that's a new functionality within the RTP network. That's really only been up and running for gosh, basically 2022. All participants within the RTP network today, all of their clients can read all their commercial or corporate banking clients, business clients can respond to an RFP. However, the limitation really right now on that aspect is only two banks, US Bank and City, currently allow consumers to receive and process an RFP request. By the end of this year. We anticipate a couple of the other larger banks Wells Fargo, Bank of America to also be included in that and we anticipate you know, a much larger amount to onboard in 2023 as well.
Melissa Jay Murphy 21:44
So, it sounds like the big challenge right now is that only a very few banks allow consumer clients, consumers when they encounter that bank to receive an RFP. So that clearly is a limitation on the population that can take advantage of this currently. So is the resistance because there's a huge cost to obey to build a technology environment that will support this? Is that the reason why the smaller regionals are lagging?
Rick Bruhn 22:24
Yeah, I mean, there's certainly a technological cost to it. So I mean, being in a very brand new payment rail, they have to code their systems to that that payment infrastructure and FedNow is coming as well, and a lot of people think that FedNow will jumpstart adoption around RTP and more banks will be on FedNow. Like RTP any bank that currently obviously is tied to the Fed network directly, will have the option to utilize FedNow and a lot of banks will use both FedNow and the RTP networks. What people don't realize is there's still going to be a coding infrastructure challenge with FedNow when it comes out because it as well as a new is a new payment rail, ultimately from the Fed so it's not going to run over the old wire fed wire rails. So, there's still going to be some uplift on institutions to code to that. We would anticipate that institutions would ultimately code the Fed Now will probably (that are not on RTP today) will probably go to both at the same time, as opposed to picking one or the other. It's new There certainly is a lift on cost associated with that. Even with smaller institutions today, what a lot of people may or may not realize, smaller financial institutions in a lot of ways will use the balance sheets or infrastructure of larger institutions like a US Bank, Bank of America or Wells through their correspondent banking groups that ultimately utilize some of the payment infrastructures that they have in place they are to credit accounts for those smaller institutions. So, we've seen you know even some smaller institutions come through us and like to utilize RTP through US Bank’s channels on the network versus coding themselves.
Melissa Jay Murphy 24:14
So, they just kind of lease space on your network?
Rick Bruhn 24:17
They give it like a click fee. Right. Like from a technology company.
Melissa Jay Murphy 24:20
Well, one of the goals I have of hosting this webinar and pushing this out on the podcast is that it'll reach a whole lot of consumers that have consumer accounts that will start pressuring their banks to make this a reality. Certainly, attorneys and title agents have business accounts with their lenders and hopefully this will drive awareness which will put some pressure on banks to get on this train so that we can make payments a lot more efficient. What's the cost of sending and receiving payments through RTP? Are they comparable to wire transfer fees?
Rick Bruhn 25:08
Actually, they're a lot cheaper than sending a wire transfer. So, I can't speak for all institutions, I can tell you from US Bank’s perspective, for title companies wires started for dollars incoming and or outgoing for wire transfers. For RTP based on volume, they start at roughly 50 cents and go down from there depending on the amount that you initiate. And it's for real time payment transactions they're free to receive, like an ACH. So, if you're a title company receiving an RTP from another title company, it's free for you to receive that. And if you're initiating it, you'll probably pay somewhere in the neighborhood of it should be roughly be pennies compared to what you're paying for wires today. And interestingly enough to a consumer or as we talked about earlier, a real estate agent or broker, it's free for them to receive those funds.
Melissa Jay Murphy 26:04
Another benefit now the reason why we need to lobby our banks to make this happen. So, my last question is really around those darn fraudsters. Fraudsters are the thing that keep closing agents up at night and wire instructions sending receiving wire instructions, you know, is just right for fraudsters to intervention. So, how could a fraudster infiltrate this RTP system? Are there some weak links in there that we need to be aware of?
Rick Bruhn 26:45
No, I mean, nothing different than what you would have with the existing wire network today. In the sense if you are just pushing payments out to consumers as you are with wire transfers today and you're having to collect the consumer information, right you're not utilizing RFP or any of that you're still going to have you're still gonna have to have ways to securely communicate with the consumer, educate the consumer and receive that information back from the consumer right related to their account number and routing number to be able to push those payments out. For a fraudster to gain access to the RTP network and initiates RFPs to consumer accounts fraudulently would be highly difficult. Ultimately, they would have to get through a bank's KYC (Know Your Customer) process. They would all they have to go through the challenges of setting up the accounts then opening, gaining access to a commercial banking software system, which is vastly different than online banking systems that consumers use, and go through the process of setting up users and verifying their identity so on and so forth, and then initiate RFPs. So the ability to do that is very low. Ultimately, I think there's a higher risk of rogue actors within institutions utilizing RFP to gain access to consumer accounts, but even then the money would have to would come out of the consumer account back into the title company's account and then they would have to move the money out of the title company into another account to get access to the funds.
Melissa Jay Murphy 28:21
So there is some risks there but that sounds like a lot more trouble than just monitoring social media and hacking into somebody's Yahoo email phished out. So it'd be harder. Yeah, this has been great information. We're getting close to the end of our allotted 30 minutes. So Bob can you turn on your mic and let us know we have any questions.
Bob Rohan 28:48
Quite a few of them came in. I'm trying to digest them right now. But the first one is how does this compare to Venmo? And Zelle?
Rick Bruhn 28:49
Yeah, great question. So Venmo, and Zelle, are primarily P2P platforms, or could be called peer-to-peer, right? So we're consumer-to-consumer consumer-to-business. You're seeing some use cases for Zelle that are business-to-business or business-to-consumer but on a smaller scale. Venmo and Zelle also have much lower transaction limits associated with them. And those while it was Zelle you have finality of payment there you technically don't have real settled funds ultimately into your account. At the time that you received this Zelle payment while there's some funds may show there. That's your bank just showing that you know, you have funds that have shown up that those funds haven't technically been settled, most of that's been done overseeing ACH platforms, etc. In addition to that, you know, Zelle is starting to utilize RTP to move money, but that's not necessarily the consumer using RTP to send you funds, that's the bank that they're banking with RTPing and those funds from their institution to your depository institution, and then your institution in essence taking them out of their house account and putting them into your account.
Bob Rohan 30:23
One of the questions is they get a lot of clients in Canada. What about foreign transaction issues?
Rick Bruhn 30:29
RPT is just a domestic payment rail. There’s been talks of opening it up to some other countries but those are still in their infancy at this point.
Melissa Jay Murphy 30:42
Let’s get consumers more involved in it first then we can deal with other countries.
Bob Rohan 30:49
Next question, does the bank have to honor real time payments?
Rick Bruhn 30:54
I will answer the question in the sense that if you are initiating the payment to a financial, I am assuming that you are meaning… You are sending a payment to a bank do they have to receive, accept, and deposit those funds? They have to be a RTP participating bank to be able to receive those funds. If they are not then that payment would be rejected by your financial institution. It would never actually leave.
Bob Rohan 31:20
Is the only ability to initiate this electronically? They are used to calling in their wire instructions. Is that possible with RTP?
Rick Bruhn 31:29
It is not possible with RTP. It is all done through digital rails with all participating banks to my knowledge.
Bob Rohan 31:44
What are the bad actors impersonating a title company with an RFP?
Rick Bruhn 31:52
They would have to gain access to the title companies online commercial banking software. They would have to initiate the RFP which would have dual authority so technically they would need two logins to be able to enable that. So, an initiator and an approver to create a RFP to go out to the consumer. Even if they pulled that off the funds would still come back into the title company account. They could change the account number that that would credit for the account which would request the RFP, ultimately. So, it would come back into your escrow account. Then the bad actors would have to turnaround and initiate an approval payment going out of the escrow account to in essence a third account to be able to move the funds outside the company.
Melissa Jay Murph 32:46
Well Rick, we are out of time, and I want to thank you again for taking the time out of your schedule to share all of this information with us. Even though it is not something that is ubiquitous today in a perfect world it will be, and we can invite you back. We can celebrate with me about announcing new banks and new consumers and new rules that are available for RTPs.
Here is a link to a summary of the many questions asked, with some answers! https://www.thefund.com/real-time-payments-faqs.pdf