CHICAGO TITLE INSURANCE COMPANY Nuts & Bolts of Title Insurance

2008

What are “Good Funds” Anyway?

(WARNING: Check your Malpractice Policy – Are You Sure You’re Covered???)

I.

Definitions and Statutory References Page 2

II.

Expedited Funds Availability Act (12 U.S.C. 4001) 12 CFR, PART 229–AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS

(REGULATION CC) http://www.fdic.gov/regulations/laws/rules/Index.html#

Page 12

III. Relevant opinions of the North Carolina State Bar regarding “Good Funds”

RPC 86, RPC 191, RPC 232, 2006 FEO 8 (Available directly from their web site at www.ncbar.gov)

Page 28

IV. North Carolina General Statutes, Chapter 45A

Good Funds Settlement Act Page 36

TOPIC: Good Funds Page 1 of 39

Last Revised January 20, 2008

Definitions and Statutory References

Type of Funds Uniform Commercial Code (See North Carolina General Statutes, Chapter 25, Article 3)

Federal Statutes & Regulations (See web site: http://www.fdic.gov/regulations/laws/rules/Index.html#)

Cashier’s Checks

§ 25-3-104(g) "Cashier's check" means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank

12 C.F.R. § 229.2 (i) 12 U.S.C. 4001, Section 602 (5) "Cashier's check" means a check that is-- (1) Drawn on a bank; (2) Signed by an officer or employee of the bank on behalf of the bank as drawer; (3) A direct obligation of the bank; and (4) Provided to a customer of the bank or acquired from the bank for remittance purposes.

Teller’s Check § 25-3-104 (h) "Teller's check" means a draft drawn by a bank (i) on another bank, or (ii) payable at or through a bank.

12 C.F.R. § 229.2 (gg) 12 U.S.C. 4001, Section 602 (22) (gg) Teller's check means a check provided to a customer of a bank or acquired from a bank for remittance purposes, that is drawn on the bank, and drawn on another bank or payable through or at a bank.

Certified Check § 25-3-409(d) "Certified check" means a check accepted by the bank on which it is drawn. Acceptance may be made as stated in subsection (a) of this section or by a writing on the check which indicates that the check is certified. The drawee of a check has no obligation to certify the check, and refusal to certify is not dishonor of the check.

12 C.F.R. § 229.2 (j) 12 U.S.C. 4001, Section 602 (6) "Certified check" means a check with respect to which the drawee bank certifies by signature on the check of an officer or other authorized employee of the bank that-- (1)(i) The signature of the drawer on the check is genuine; and (ii) The bank has set aside funds that-- (A) Are equal to the amount of the check, and (B) Will be used to pay the check; or (2) The bank will pay the check upon presentment.

TOPIC: Good Funds Page 2 of 39

Last Revised January 20, 2008

Wire Transfer § 25-4A-211. Cancellation and amendment

of payment order. § 25-4A-404. Obligation of beneficiary's bank to pay and give notice to beneficiary. § 25-4A-405. Payment by beneficiary's bank to beneficiary. (Absent specific agreement, at midnight of next funds-transfer day, or per applicable law)

12 CFR 229.2(ll) Wire transfer means an unconditional order to a bank to pay a fixed or determinable amount of money to a beneficiary upon receipt or on a day stated in the order, that is transmitted by electronic or other means through Fedwire, the Clearing House Interbank Payments System, other similar network, between banks, or on the books of a bank. Wire transfer does not include an electronic fund transfer as defined in section 903(6) of the Electronic Fund Transfer Act (15 U.S.C. 1693a(6)).

HUD-Approved lender

See web site to check on particular lender: http://www.hud.gov./ll/code/llslcrit.html Check must be from that lender, not an affiliate or assignee or mortgage broker

FDIC Law, Regulations and Related Acts – Index http://www.fdic.gov/regulations/laws/rules/10000-1.html "Expedited Funds Availability Act," 12 U.S.C. 4001

TOPIC: Good Funds Page 3 of 39

Last Revised January 20, 2008

§ § 25-3-104. Negotiable instrument (a) Except as provided in subsections (c) and (d) of this section, "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) Is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) Is payable on demand or at a definite time; and (3) Does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor. (b) "Instrument" means a negotiable instrument. (c) An order that meets all of the requirements of subsection (a) of this section, except subdivision (1), and otherwise falls within the definition of "check" in subsection (f) is a negotiable instrument and a check. (d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this Article. (e) An instrument is a "note" if it is a promise and is a "draft" if it is an order. If an instrument falls within the definition of both "note" and "draft", a person entitled to enforce the instrument may treat it as either. (f) "Check" means (i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier's check or teller's check. An instrument may be a check even though it is described on its face by another term, such as "money order". (g) "Cashier's check" means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank. (h) "Teller's check" means a draft drawn by a bank (i) on another bank, or (ii) payable at or through a bank. (i) "Traveler's check" means an instrument that (i) is payable on demand, (ii) is drawn on or payable at or through a bank, (iii) is designated by the term "traveler's check" or by a substantially similar term, and (iv) requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument.

TOPIC: Good Funds Page 4 of 39

Last Revised January 20, 2008

(j) "Certificate of deposit" means an instrument containing an acknowledgment by a bank that a sum of money has been received by the bank and a promise by the bank to repay the sum of money. A certificate of deposit is a note of the bank. § 25-3-201. Negotiation (a) "Negotiation" means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder. (b) Except for negotiation by a remitter, if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone. § 25-3-302. Holder in due course (a) Subject to subsection (c) of this section and G.S. 25-3-106(d), "holder in due course" means the holder of an instrument if:

(1) The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and (2) The holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in G.S. 25-3-306, and (vi) without notice that any party has a defense or claim in recoupment described in G.S. 25-3-305(a).

§ 25-3-409. Acceptance of draft; certified check (a) "Acceptance" means the drawee's signed agreement to pay a draft as presented. It must be written on the draft and may consist of the drawee's signature alone. Acceptance may be made at any time and becomes effective when notification pursuant to instructions is given or the accepted draft is delivered for the purpose of giving rights on the acceptance to any person. (b) A draft may be accepted although it has not been signed by the drawer, is otherwise incomplete, is overdue, or has been dishonored.

TOPIC: Good Funds Page 5 of 39

Last Revised January 20, 2008

(c) If a draft is payable at a fixed period after sight and the acceptor fails to date the acceptance, the holder may complete the acceptance by supplying a date in good faith. (d) "Certified check" means a check accepted by the bank on which it is drawn. Acceptance may be made as stated in subsection (a) of this section or by a writing on the check which indicates that the check is certified. The drawee of a check has no obligation to certify the check, and refusal to certify is not dishonor of the check. § 25-3-411. Refusal to pay cashier's checks, teller's checks, and certified checks. (a)In this section, "obligated bank" means the acceptor of a certified check or the issuer of a cashier's check or teller's check bought from the issuer. (b) If the obligated bank wrongfully (i) refuses to pay a cashier's check or certified check, (ii) stops payment of a teller's check, or (iii) refuses to pay a dishonored teller's check, the person asserting the right to enforce the check is entitled to compensation for expenses and loss of interest resulting from the nonpayment and may recover consequential damages if the obligated bank refuses to pay after receiving notice of particular circumstances giving rise to the damages. (c) Expenses or consequential damages under subsection (b) of this section are not recoverable if the refusal of the obligated bank to pay occurs because (i) the bank suspends payments, (ii) the obligated bank asserts a claim or defense of the bank that it has reasonable grounds to believe is available against the person entitled to enforce the instrument, (iii) the obligated bank has a reasonable doubt whether the person demanding payment is the person entitled to enforce the instrument, or (iv) payment is prohibited by law. (1995, c. 232, s. 1.) § 25-3-412. Obligation of issuer of note or cashier's check. The issuer of a note or cashier's check or other draft drawn on the drawer is obliged to pay the instrument (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or (ii) if the issuer signed an incomplete instrument, according to its terms when completed, to the extent stated in G.S. 25-3-115 and G.S. 25-3-407. The obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the instrument under G.S. 25-3-415. (1899, c. 733, ss. 60 to 62; Rev., ss. 2209 to 2211; C.S., ss. 3041 to 3043; 1965, c. 700, s. 1; 1995, c. 232, s. 1.) For definition of “provisional credit”: § 25-4-201. Status of collecting bank as agent and provisional status of credits; applicability of Article; item indorsed "pay any bank" (a) Unless a contrary intent clearly appears and before the time that a settlement given by a collecting bank for an item is or becomes final, the bank, with respect to the item, is an agent or subagent of the owner of the item and any settlement given for the item is provisional. This provision applies regardless of the form of indorsement or lack or indorsement and even though credit given for the item is subject to immediate withdrawal as of right or is in fact withdrawn; but the continuance of ownership of an item by its owner and any rights of the owner to proceeds of the item are subject to rights of a collecting bank, such as those resulting from outstanding advances on the item and rights of recoupment or setoff. If an item is handled by banks for purposes of presentment, payment, collection, or return, the relevant provisions of this Article apply even though

TOPIC: Good Funds Page 6 of 39

Last Revised January 20, 2008

action of the parties clearly establishes that a particular bank has purchased the item and is the owner of it. (b) After an item has been indorsed with the words "pay any bank" or the like, only a bank may acquire the rights of a holder until the item has been: (1) Returned to the customer initiating collection; or (2) Specially indorsed by a bank to a person who is not a bank. § 25-4-211. Medium and time of settlement by bank. (a) With respect to settlement by a bank, the medium and time of settlement may be prescribed by federal reserve regulations or circulars, clearing-house rules, and the like, or agreement. In the absence of such prescription: (1) The medium of settlement is cash or credit to an account in a Federal Reserve Bank of or specified by the person to receive settlement; and (2) The time of settlement is: (i) With respect to tender of settlement by cash, a cashier's check, or teller's check, when the cash or check is sent or delivered; (ii) With respect to tender of settlement by credit in an account in a Federal Reserve Bank, when the credit is made; (iii) With respect to tender of settlement by a credit or debit to an account in a bank, when the credit or debit is made or, in the case of tender of settlement by authority to charge an account, when the authority is sent or delivered; or (iv) With respect to tender of settlement by a funds transfer, when payment is made pursuant to G.S. 25-4A-406(a) to the person receiving settlement. (b) If the tender of settlement is not by a medium authorized by subsection (a) of this section or the time of settlement is not fixed by subsection (a), no settlement occurs until the tender of settlement is accepted by the person receiving settlement. (c) If settlement for an item is made by cashier's check or teller's check and the person receiving settlement, before its midnight deadline: (1) Presents or forwards the check for collection, settlement is final when the check is finally paid; or (2) Fails to present or forward the check for collection, settlement is final at the midnight deadline of the person receiving

TOPIC: Good Funds Page 7 of 39

Last Revised January 20, 2008

settlement. (d) If settlement for an item is made by giving authority to charge the account of the bank giving settlement in the bank receiving settlement, settlement is final when the charge is made by the bank receiving settlement if there are funds available in the account for the amount of the item. § 25-4-212. Right of charge-back or refund; liability of collecting bank; return of item. (a) If a collecting bank has made provisional settlement with its customer for an item and itself fails by reason of dishonor, suspension of payments by a bank or otherwise to receive a settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer's account, or obtain refund from its customer, whether or not it is able to return the item, if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts. If the return or notice is delayed beyond the bank's midnight deadline or a longer reasonable time after it learns the facts, the bank may revoke the settlement, charge back the credit, or obtain refund from its customer, but it is liable for any loss resulting from the delay. These rights to revoke, charge back, and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final. (b) A collecting bank returns an item when it is sent or delivered to the bank's customer or transferor or pursuant to its instructions. (c) A depositary bank that is also the payor may charge back the amount of an item to its customer's account or obtain refund in accordance with the section governing return of an item received by a payor bank for credit on its books (G.S. 25-4-301). (d) The right to charge back is not affected by: (1) Previous use of a credit given for the item; or (2) Failure by any bank to exercise ordinary care with respect to the item, but a bank so failing remains liable. (e) A failure to charge back or claim refund does not affect other rights of the bank against the customer or any other party. (f) If credit is given in dollars as the equivalent of the value of an item payable in foreign money, the dollar amount of any charge-back or refund must be calculated on the basis of the bank-offered spot rate for the foreign money prevailing on the day when the person entitled to the charge-back or refund learns that it will not receive payment in ordinary course.

TOPIC: Good Funds Page 8 of 39

Last Revised January 20, 2008

§ 25-4-213. Final payment of item by payor bank; when provisional debits and credits become final; when certain credits become available for withdrawal. (a)An item is finally paid by a payor bank when the bank has first done any of the following: (1) Paid the item in cash; (2) Settled for the item without having a right to revoke the settlement under statute, clearing-house rule, or agreement; or (3) Made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute, clearing-house rule, or agreement. § 25-4-213. Final payment of item by payor bank; when provisional debits and credits become final; when certain credits become available for withdrawal (a) An item is finally paid by a payor bank when the bank has first done any of the following: (1) Paid the item in cash; (2) Settled for the item without having a right to revoke the settlement under statute, clearing-house rule, or agreement; or (3) Made a provisional settlement for the item and failed to revoke the settlement in the time and manner permitted by statute, clearing-house rule, or agreement. (b) If provisional settlement for an item does not become final, the item is not finally paid. (c) If provisional settlement for an item between the presenting and payor banks is made through a clearing house or by debits or credits in an account between them, then to the extent that provisional debits or credits for the item are entered in accounts between the presenting and payor banks or between the presenting and successive prior collecting banks seriatim, they become final upon final payment of the item by the payor bank. (d) If a collecting bank receives a settlement for an item which is or becomes final, the bank is accountable to its customer for the amount of the item and any provisional credit given for the item in an account with its customer becomes final. (e) Subject to (i) applicable law stating a time for availability of funds, and (ii) any right of the bank to apply the credit to an obligation of the customer, credit given by a bank for an item in a customer's account becomes available for withdrawal as of right: (1) If the bank has received a provisional settlement for the item, when the settlement becomes final and the bank has had a reasonable time to receive return of the item and the item has not been received within that time. (2) If the bank is both the depositary bank and the payor bank, and the item is finally paid, -- at the opening of the bank's second banking day following receipt of the item. (f) Subject to applicable law stating a time for availability of funds and any right of a bank to apply a deposit to an obligation of the depositor, a deposit of money becomes available for withdrawal as of right at the opening of the bank's next banking day after receipt of the deposit.

TOPIC: Good Funds Page 9 of 39

Last Revised January 20, 2008

§ 25-4A-211. Cancellation and amendment of payment order (a) A communication of the sender of a payment order cancelling or amending the order may be transmitted to the receiving bank orally, electronically, or in writing. If a security procedure is in effect between the sender and the receiving bank, the communication is not effective to cancel or amend the order unless the communication is verified pursuant to the security procedure or the bank agrees to the cancellation or amendment. (b) Subject to subsection (a), a communication by the sender cancelling or amending a payment order is effective to cancel or amend the order if notice of the communication is received at a time and in a manner affording the receiving bank a reasonable opportunity to act on the communication before the bank accepts the payment order. (c) After a payment order has been accepted, cancellation or amendment of the order is not effective unless the receiving bank agrees or a funds-transfer system rule allows cancellation or amendment without agreement of the bank. (1) With respect to a payment order accepted by a receiving bank other than the beneficiary's bank, cancellation or amendment is not effective unless a conforming cancellation or amendment of the payment order issued by the receiving bank is also made. (2) With respect to a payment order accepted by the beneficiary's bank, cancellation or amendment is not effective unless the order was issued in execution of an unauthorized payment order, or because of a mistake by a sender in the funds transfer which resulted in the issuance of a payment order (i) that is a duplicate of a payment order previously issued by the sender, (ii) that orders payment to a beneficiary not entitled to receive payment from the originator, or (iii) that orders payment in an amount greater than the amount the beneficiary was entitled to receive from the originator. If the payment order is cancelled or amended, the beneficiary's bank is entitled to recover from the beneficiary any amount paid to the beneficiary to the extent allowed by the law governing mistake and restitution. (d) An unaccepted payment order is cancelled by operation of law at the close of the fifth funds-transfer business day of the receiving bank after the execution date or payment date of the order. (e) A cancelled payment order cannot be accepted. If an accepted payment order is cancelled, the acceptance is nullified and no person has any right or obligation based on the acceptance. Amendment of a payment order is deemed to be cancellation of the original order at the time of amendment and issue of a new payment order in the amended form at the same time. (f) Unless otherwise provided in an agreement of the parties or in a funds-transfer system rule, if the receiving bank, after accepting a payment order, agrees to cancellation or amendment of the order by the sender or is bound by a funds-transfer system rule allowing cancellation or amendment without the bank's agreement, the sender, whether or not cancellation or amendment is effective, is liable to the bank for any loss and expenses, including reasonable attorneys' fees, incurred by the bank as a result of the cancellation or amendment or attempted cancellation or amendment.

TOPIC: Good Funds Page 10 of 39

Last Revised January 20, 2008

TOPIC: Good Funds Page 11 of 39

Last Revised January 20, 2008

(g) A payment order is not revoked by the death or legal incapacity of the sender unless the receiving bank knows of the death or of an adjudication of incapacity by a court of competent jurisdiction and has reasonable opportunity to act before acceptance of the order. (h) A funds-transfer system rule is not effective to the extent it conflicts with subsection (c)(2). HISTORY: 1993, c. 157, s. 1.

CODE OF FEDERAL REGULATIONS TITLE 12 -- BANKS AND BANKING

CHAPTER II -- FEDERAL RESERVE SYSTEM SUBCHAPTER A -- BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

PART 229 -- AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS (REGULATION CC) SUBPART A -- GENERAL

12 CFR 229.2 Definitions. As used in this part, and unless the context requires otherwise, the following terms have the meanings set forth in this section, and the terms not defined in this section have the meanings set forth in the Uniform Commercial Code: (a) Account. (1) Except as provided in paragraphs (a)(2) and (a)(3) of this section, account means a deposit as defined in 12 CFR 204.2(a)(1)(i) that is a transaction account as described in 12 CFR 204.2(e). As defined in these sections, account generally includes accounts at a bank from which the account holder is permitted to make transfers or withdrawals by negotiable or transferable instrument, payment order of withdrawal, telephone transfer, electronic payment, or other similar means for the purpose of making payments or transfers to third persons or others. Account also includes accounts at a bank from which the account holder may make third party payments at an ATM, remote service unit, or other electronic device, including by debit card, but the term does not include savings deposits or accounts described in 12 CFR 204.2(d)(2) even though such accounts permit third party transfers. An account may be in the form of -- (i) A demand deposit account, (ii) A negotiable order of withdrawal account, (iii) A share draft account, (iv) An automatic transfer account, or (v) Any other transaction account described in 12 CFR 204.2(e). (2) For purposes of subpart B of this part and, in connection therewith, this subpart A, account does not include an account where the account holder is a bank, where the account holder is an office of an institution described in paragraphs (e)(1) through (e)(6) of this section or an office of a "foreign bank" as defined in section 1(b) of the International Banking Act (12 U.S.C. 3101) that is located outside the United States, or where the direct or indirect account holder is the Treasury of the United States. (3) For purposes of subpart D of this part and, in connection therewith, this subpart A, account means any deposit, as defined in 12 CFR 204.2(a)(1)(i), at a bank, including a demand deposit or other transaction account and a savings deposit or other time deposit, as those terms are defined in 12 CFR 204.2. (b) Automated clearinghouse or ACH means a facility that processes debit and credit transfers under rules established by a Federal Reserve Bank operating circular on automated clearinghouse items or under rules of an automated clearinghouse association. (c) Automated teller machine or ATM means an electronic device at which a natural person may make deposits to an account by cash or check and perform other account transactions.

TOPIC: Good Funds Page 13 of 39

Last Revised January 20, 2008

(d) Available for withdrawal with respect to funds deposited means available for all uses generally permitted to the customer for actually and finally collected funds under the bank's account agreement or policies, such as for payment of checks drawn on the account, certification of checks drawn on the account, electronic payments, withdrawals by cash, and transfers between accounts. (e) Bank means -- (1) An insured bank as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 18I3) or a bank that is eligible to apply to become an insured bank under section 5 of that Act (12 U.S.C. 1815); (2) A mutual savings bank as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813); (3) A savings bank" as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813); (4) An insured credit union as defined in section 101 of the Federal Credit Union Act (12 U.S.C. 1752) or a credit union that is eligible to make application to become an insured credit union under section 201 of that Act (12 U.S.C. 1781); (5) A member as defined in section 2 of the Federal Home Loan Bank Act (12 U.S.C. 1422); (6) A savings association as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813) that is an insured depository institution as defined in section 3 of that Act (12 U.S.C. 1813(c)(2)) or that is eligible to apply to become an insured depository institution under section 5 of that Act (12 U.S.C. 1815); or (7) An agency or a branch of a foreign bank as defined in section l(b) of the International Banking Act (12 U.S.C. 3101). For purposes of subparts C and D of this part and, in connection therewith, this subpart A, the term bank also includes any person engaged in the business of banking, as well as a Federal Reserve Bank, a Federal Home Loan Bank, and a state or unit of general local government to the extent that the state or unit of general local government acts as a paying bank. Unless otherwise specified, the term bank includes all of a bank's offices in the United States, but not offices located outside the United States. Note: For purposes of subpart D of this part and, in connection therewith, this subpart A, bank also includes the Treasury of the United States or the United States Postal Service to the extent that the Treasury or the Postal Service acts as a paying bank. (f) Banking day means that part of any business day on which an office of a bank is open to the public for carrying on substantially all of its banking functions. (g) Business day means a calendar day other than a Saturday or a Sunday, January 1, the third Monday in January, the third Monday in February, the last Monday in May, July 4, the first Monday in September, the second Monday in October, November 11, the fourth Thursday in November, or December 25. If January 1, July 4, November 11, or December 25 fall on a Sunday, the next Monday is not a business day.

TOPIC: Good Funds Page 14 of 39

Last Revised January 20, 2008

(h) Cash means United States coins and currency. (i) Cashier's check means a check that is -- (1) Drawn on a bank; (2) Signed by an officer or employee of the bank on behalf of the bank as drawer; (3) A direct obligation of the bank; and (4) Provided to a customer of the bank or acquired from the bank for remittance purposes. (j) Certified check means a check with respect to which the drawee bank certifies by signature on the check of an officer or other authorized employee of the bank that -- (1)(i) The signature of the drawer on the check is genuine; and (ii) The bank has set aside funds that -- (A) Are equal to the amount of the check, and (B) Will be used to pay the check; or (2) The bank will pay the check upon presentment. (k) Check means -- (1) A negotiable demand draft drawn on or payable through or at an office of a bank; (2) A negotiable demand draft drawn on a Federal Reserve Bank or a Federal Home Loan Bank; (3) A negotiable demand draft drawn on the Treasury of the United States; (4) A demand draft drawn on a state government or unit of general local government that is not payable through or at a bank; (5) A United States Postal Service money order; or (6) A traveler's check drawn on or payable through or at a bank. (7) The term check includes an original check and a substitute check. Note: The term check does not include a noncash item or an item payable in a medium other than United States money. A draft may be a check even though it is described on its face by another term, such as money order. For purposes of subparts C and D, and in connection therewith, subpart A, of this part, the term check also includes a demand draft of the type described above that is nonnegotiable. (l) [Reserved] (m) Check processing region means the geographical area served by an office of a Federal Reserve Bank for purposes of its check processing activities.

TOPIC: Good Funds Page 15 of 39

Last Revised January 20, 2008

(n) Consumer account means any account used primarily for personal, family, or household purposes. (o) Depositary bank means the first bank to which a check is transferred even though it is also the paying bank or the payee. A check deposited in an account is deemed to be transferred to the bank holding the account into which the check is deposited, even though the check is physically received and indorsed first by another bank. (p) Electronic payment means a wire transfer or an ACH credit transfer. (q) Forward collection means the process by which a bank sends a check on a cash basis to a collecting bank for settlement or to the paying bank for payment. (r) Local check means a check payable by or at a local paying bank, or a check payable by a nonbank payor and payable through a local paying bank. (s) Local paying bank means a paying bank that is located in the same check-processing region as the physical location of the branch, contractual branch, or proprietary ATM of the depositary bank in which that check was deposited. (t) Merger transaction means -- (1) A merger or consolidation of two or more banks; or (2) The transfer of substantially all of the assets of one or more banks or branches to another bank in consideration of the assumption by the acquiring bank of substantially all of the liabilities of the transferring banks, including the deposit liabilities. (u) Noncash item means an item that would otherwise be a check, except that -- (1) A passbook, certificate, or other document is attached; (2) It is accompanied by special instructions, such as a request for special advice of payment or dishonor; (3) It consists of more than a single thickness of paper, except a check that qualifies for handling by automated check processing equipment; or (4) It has not been preprinted or post-encoded in magnetic ink with the routing number of the paying bank. (v) Nonlocal check means a check payable by, through, or at a nonlocal paying bank. (w) Nonlocal paying bank means a paying bank that is not a local paying bank with respect to the depositary bank. (x) Nonproprietary ATM means an ATM that is not a proprietary ATM. (y) [Reserved] (z) Paying bank means --

TOPIC: Good Funds Page 16 of 39

Last Revised January 20, 2008

(1) The bank by which a check is payable, unless the check is payable at another bank and is sent to the other bank for payment or collection; (2) The bank at which a check is payable and to which it is sent for payment or collection; (3) The Federal Reserve Bank or Federal Home Loan Bank by which a check is payable; (4) The bank through which a check is payable and to which it is sent for payment or collection, if the check is not payable by a bank; or (5) The state or unit of general local government on which a check is drawn and to which it is sent for payment or collection. For purposes of subparts C and D, and in connection therewith, subpart A, paying bank includes the bank through which a check is payable and to which the check is sent for payment or collection, regardless of whether the check is payable by another bank, and the bank whose routing number appears on a check in fractional or magnetic form and to which the check is sent for payment or collection. Note: For purposes of subpart D of this part and, in connection therewith, this subpart A, paying bank also includes the Treasury of the United States or the United States Postal Service for a check that is payable by that entity and that is sent to that entity for payment or collection. (aa) Proprietary ATM means an ATM that is -- (1) Owned or operated by, or operated exclusively for, the depositary bank; (2) Located on the premises (including the outside wall) of the depositary bank; or (3) Located within 50 feet of the premises of the depositary bank, and not identified as being owned or operated by another entity. If more than one bank meets the owned or operated criterion of paragraph (aa)(1) of this section, the ATM is considered proprietary to the bank that operates it. (bb) Qualified returned check means a returned check that is prepared for automated return to the depositary bank by placing the check in a carrier envelope or placing a strip on the check and encoding the strip or envelope in magnetic ink. A qualified returned check need not contain other elements of a check drawn on the depositary bank, such as the name of the depositary bank. (cc) Returning bank means a bank (other than the paying or depositary bank) handling a returned check or notice in lieu of return. A returning bank is also a collecting bank for purposes of UCC 4-202(b). (dd) Routing number means -- (1) The number printed on the face of a check in fractional form on in nine-digit form; or (2) The number in a bank's indorsement in fractional or nine-digit form. (ee) Similarly situated bank means a bank of similar size, located in the same community,

TOPIC: Good Funds Page 17 of 39

Last Revised January 20, 2008

and with similar check handling activities as the paying bank or returning bank. (ff) State means a state, the District of Columbia, Puerto Rico, or the U.S. Virgin Islands. For purposes of subpart D of this part and, in connection therewith, this subpart A, state also means Guam, American Samoa, the Trust Territory of the Pacific Islands, the Northern Mariana Islands, and any other territory of the United States. (gg) Teller's check means a check provided to a customer of a bank or acquired from a bank for remittance purposes, that is drawn by the bank, and drawn on another bank or payable through or at a bank. (hh) Traveler's check means an instrument for the payment of money that -- (1) Is drawn on or payable through or at a bank; (2) Is designated on its face by the term traveler's check or by any substantially similar term or is commonly known and marketed as a traveler's check by a corporation or bank that is an issuer of traveler's checks; (3) Provides for a specimen signature of the purchaser to be completed at the time of purchase; and (4) Provides for a countersignature of the purchaser to be completed at the time of negotiation. (ii) Uniform Commercial Code, Code, or U.C.C. means the Uniform Commercial Code as adopted in a state. (jj) United States means the states, including the District of Columbia, the U.S. Virgin Islands, and Puerto Rico. (kk) Unit of general local government means any city, county, parish, town, township, village, or other general purpose political subdivision of a state. The term does not include special purpose units of government, such as school districts or water districts. (ll) Wire transfer means an unconditional order to a bank to pay a fixed or determinable amount of money to a beneficiary upon receipt or on a day stated in the order, that is transmitted by electronic or other means through Fedwire, the Clearing House Interbank Payments System, other similar network, between banks, or on the books of a bank. Wire transfer does not include an electronic fund transfer as defined in section 903(6) of the Electronic Fund Transfer Act (15 U.S.C. 1693a(6)). (mm) Fedwire has the same meaning as that set forth in § 210.26(e) of this chapter. (nn) Good faith means honesty in fact and observance of reasonable commercial standards of fair dealing. (oo) Interest compensation means an amount of money calculated at the average of the Federal Funds rate published by the Federal Reserve Bank of New York for each of the days for which interest compensation is payable, divided by 360. The Federal Funds rate for any day on which a published rate is not available is the same as the published rate for the last preceding day for which there is a published rate.

TOPIC: Good Funds Page 18 of 39

Last Revised January 20, 2008

(pp) Contractual branch, with respect to a bank, means a branch of another bank that accepts a deposit on behalf of the first bank. (qq) Claimant bank means a bank that submits a claim for a recredit for a substitute check to an indemnifying bank under § 229.55. (rr) Collecting bank means any bank handling a check for forward collection, except the paying bank. (ss) Consumer means a natural person who -- (1) With respect to a check handled for forward collection, draws the check on a consumer account; or (2) With respect to a check handled for return, deposits the check into or cashes the check against a consumer account. (tt) Customer means a person having an account with a bank. (uu) Indemnifying bank means a bank that provides an indemnity under § 229.53 with respect to a substitute check. (vv) Magnetic ink character recognition line and MICR line mean the numbers, which may include the routing number, account number, check number, check amount, and other information, that are printed near the bottom of a check in magnetic ink in accordance with American National Standard Specifications for Placement and Location of MICR Printing, X9.13 (hereinafter ANS X9.13) for an original check and American National Standard Specifications for an Image Replacement Document -- IRD, X9.100-140 (hereinafter ANS X9.100-140) for a substitute check (unless the Board by rule or order determines that different standards apply). (ww) Original check means the first paper check issued with respect to a particular payment transaction. (xx) Paper or electronic representation of a substitute check means any copy of or information related to a substitute check that a bank handles for forward collection or return, charges to a customer's account, or provides to a person as a record of a check payment made by the person. (yy) Person means a natural person, corporation, unincorporated company, partnership, government unit or instrumentality, trust, or any other entity or organization. (zz) Reconverting bank means -- (1) The bank that creates a substitute check; or (2) With respect to a substitute check that was created by a person that is not a bank, the first bank that transfers, presents, or returns that substitute check or, in lieu thereof, the first paper or electronic representation of that substitute check. (aaa) Substitute check means a paper reproduction of an original check that -- (1) Contains an image of the front and back of the original check;

TOPIC: Good Funds Page 19 of 39

Last Revised January 20, 2008

(2) Bears a MICR line that, except as provided under ANS X9.100-140 (unless the Board by rule or order determines that a different standard applies), contains all the information appearing on the MICR line of the original check at the time that the original check was issued and any additional information that was encoded on the original check's MICR line before an image of the original check was captured; (3) Conforms in paper stock, dimension, and otherwise with ANS X9.100-140 (unless the Board by rule or order determines that a different standard applies); and (4) Is suitable for automated processing in the same manner as the original check. (bbb) Sufficient copy and copy. (1) A sufficient copy is a copy of an original check that accurately represents all of the information on the front and back of the original check as of the time the original check was truncated or is otherwise sufficient to determine whether or not a claim is valid. (2) A copy of an original check means any paper reproduction of an original check, including a paper printout of an electronic image of the original check, a photocopy of the original check, or a substitute check. (ccc) Transfer and consideration. The terms transfer and consideration have the meanings set forth in the Uniform Commercial Code and in addition, for purposes of subpart D -- (1) The term transfer with respect to a substitute check or a paper or electronic representation of a substitute check means delivery of the substitute check or other representation of the substitute check by a bank to a person other than a bank; and (2) A bank that transfers a substitute check or a paper or electronic representation of a substitute check directly to a person other than a bank has received consideration for the substitute check or other paper or electronic representation of the substitute check if it has charged, or has the right to charge, the person's account or otherwise has received value for the original check, a substitute check, or a representation of the original check or substitute check. (ddd) Truncate means to remove an original check from the forward collection or return process and send to a recipient, in lieu of such original check, a substitute check or, by agreement, information relating to the original check (including data taken from the MICR line of the original check or an electronic image of the original check), whether with or without the subsequent delivery of the original check. (eee) Truncating bank means -- (1) The bank that truncates the original check; or (2) If a person other than a bank truncates the original check, the first bank that transfers, presents, or returns, in lieu of such original check, a substitute check or, by agreement with the recipient, information relating to the original check (including data taken from the MICR line of the original check or an electronic image of the original check), whether with or without the subsequent delivery of the original check. (fff) Remotely created check means a check that is not created by the paying bank and that does not bear a signature applied, or purported to be applied, by the person on whose

TOPIC: Good Funds Page 20 of 39

Last Revised January 20, 2008

account the check is drawn. For purposes of this definition, "account" means an account as defined in paragraph (a) of this section as well as a credit or other arrangement that allows a person to draw checks that are payable by, through, or at a bank. 12 CFR § 229.10 Next-day availability. (a) Cash deposits. (1) A bank shall make funds deposited in an account by cash available for withdrawal not later than the business day after the banking day on which the cash is deposited, if the deposit is made in person to an employee of the depositary bank. (2) A bank shall make funds deposited in an account by cash available for withdrawal not later than the second business day after the banking day on which the cash is deposited, if the deposit is not made in person to an employee of the depositary bank. (b) Electronic payments -- (1) In general. A bank shall make funds received for deposit in an account by an electronic payment available for withdrawal not later than the business day after the banking day on which the bank received the electronic payment. (2) When an electronic payment is received. An electronic payment is received when the bank receiving the payment has received both -- (i) Payment in actually and finally collected funds; and (ii) Information on the account and amount to be credited. A bank receives an electronic payment only to the extent that the bank has received payment in actually and finally collected funds. (c) Certain check deposits -- (1) General rule. A depositary bank shall make funds deposited in an account by check available for withdrawal not later than the business day after the banking day on which the funds are deposited, in the case of-- (i) A check drawn on the Treasury of the United States and deposited in an account held by a payee of the check; (ii) A U.S. Postal Service money order deposited -- (A) In an account held by a payee of the money order; and (B) In person to an employee of the depositary bank. (iii) A check drawn on a Federal Reserve Bank or Federal Home Loan Bank and deposited -- (A) In an account held by a payee of the check; and (B) In person to an employee of the depositary bank; (iv) A check drawn by a state or a unit of general local government and deposited -- (A) In an account held by a payee of the check; (B) In a depositary bank located in the state that issued the check, or the same state as the unit of general local government that issued the check;

TOPIC: Good Funds Page 21 of 39

Last Revised January 20, 2008

(C) In person to an employee of the depositary bank; and (D) With a special deposit slip or deposit envelope, if such slip or envelope is required by the depositary bank under paragraph (c)(3) of this section. (v) A cashier's, certified, or teller's check deposited -- (A) In an account held by a payee of the check; (B) In person to an employee of the depositary bank; and (C) With a special deposit slip or deposit envelope, if such slip or envelope is required by the depositary bank under paragraph (c)(3) of this section. (vi) A check deposited in a branch of the depositary bank and drawn on the same or another branch of the same bank if both branches are located in the same state or the same check processing region; and, (vii) The lesser of -- (A) $ 100, or (B) The aggregate amount deposited on any one banking day to all accounts of the customer by check or checks not subject to next-day availability under paragraphs (c)(1) (i) through (vi) of this section. (2) Checks not deposited in person. A depositary bank shall make funds deposited in an account by check or checks available for withdrawal not later than the second business day after the banking day on which funds are deposited, in the case of a check deposit described in and that meets the requirements of paragraphs (c)(1) (ii), (iii), (iv), and (v), of this section, except that it is not deposited in person to an employee of the depositary bank. (3) Special deposit slip. (i) As a condition to making the funds available for withdrawal in accordance with this section, a depositary bank may require that a state or local government check or a cashier's, certified, or teller's check be deposited with a special deposit slip or deposit envelope that identifies the type of check. (ii) If a depositary bank requires the use of a special deposit slip or deposit envelope, the bank must either provide the special deposit slip or deposit envelope to its customers or inform its customers how the slip or envelope may be prepared or obtained and make the slip or envelope reasonably available.

TOPIC: Good Funds Page 22 of 39

Last Revised January 20, 2008

12 CFR § 229.12 Availability schedule. (a) Effective date. The availability schedule contained in this section is effective September 1, 1990. (b) Local checks and certain other checks. Except as provided in paragraphs (d), (e), and (f) of this section, a depository bank shall make funds deposited in an account by a check available for withdrawal not later than the second business day following the banking day on which funds are deposited, in the case of -- (1) A local check; (2) A check drawn on the Treasury of the United States that is not governed by the availability requirements of § 229.10(c); (3) A U.S. Postal Service money order that is not governed by the availability requirements of § 229.10(c); and (4) A check drawn on a Federal Reserve Bank or Federal Home Loan Bank; a check drawn by a state or unit of general local government; or a cashier's, certified, or teller's check; if any check referred to in this paragraph (b)(4) is a local check that is not governed by the availability requirements of § 229.10(c). (c) Nonlocal checks -- (1) In general. Except as provided in paragraphs (d), (e), and (f) of this section, a depositary bank shall make funds deposited in an account by a check available for withdrawal not later than the fifth business day following the banking day on which funds are deposited, in the case of -- (i) A nonlocal check; and (ii) A check drawn on a Federal Reserve Bank or Federal Home Loan Bank; a check drawn by a state or unit of general local government; a cashier's, certified, or teller's check; or a check deposited in a branch of the depositary bank and drawn on the same or another branch of the same bank, if any check referred to in this paragraph (c)(1)(ii) is a nonlocal check that is not governed by the availability requirements of § 229.10(c). (2) Nonlocal checks specified in appendix B-2 to this part must be made available for withdrawal not later than the times prescribed in that Appendix. (d) Time period adjustment for withdrawal by cash or similar means. A depositary bank may extend by one business day the time that funds deposited in an account by one or more checks subject to paragraphs (b), (c), or (f) of this section are available for withdrawal by cash or similar means. Similar means include electronic payment, issuance of a cashier's or teller's check, or certification of a check, or other irrevocable commitment to pay, but do not include the granting of credit to a bank, a Federal Reserve Bank, or a Federal Home Loan Bank that presents a check to the depositary bank for payment. A depositary bank shall, however, make $ 400 of these funds available for withdrawal by cash or similar means not later than 5:00 p.m. on the business day on which the funds are available under paragraphs (b), (c), or (f) of this section. This $ 400 is in addition to the $ 100 available under § 229.10(c)(1)(vii). (e) Extension of schedule for certain deposits in Alaska, Hawaii, Puerto Rico, and the U.S. Virgin Islands. The depositary bank may extend the time periods set forth in this section by one business day in the case of any deposit, other than a deposit described in § 229.10,

TOPIC: Good Funds Page 23 of 39

Last Revised January 20, 2008

that is -- (1) Deposited in an account at a branch of a depositary bank if the branch is located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin Islands; and (2) Deposited by a check drawn on or payable at or through a paying bank not located in the same state as the depositary bank. (f) Deposits at nonproprietary ATMs. A depositary bank shall make funds deposited in an account at a nonproprietary ATM by cash or check available for withdrawal not later than the fifth business day following the banking day on which the funds are deposited. 12 CFR § 229.13 Exceptions. (a) New accounts. For purposes of this paragraph, checks subject to § 229.10(c)(1)(v) include traveler's checks. (1) A deposit in a new account -- (i) Is subject to the requirements of § 229.10 (a) and (b) to make funds from deposits by cash and electronic payments available for withdrawal on the business day following the banking day of deposit or receipt; (ii) Is subject to the requirements of § 229.10(c)(1) (i) through (v) and § 229.10(c)(2) only with respect to the first $ 5,000 of funds deposited on any one banking day; but the amount of the deposit in excess of $ 5,000 shall be available for withdrawal not later than the ninth business day following the banking day on which funds are deposited; and (iii) Is not subject to the availability requirements of §§ 229.10(c)(1)(vi) and (vii) and 229.12. (2) An account is considered a new account during the first 30 calendar days after the account is established. An account is not considered a new account if each customer on the account has had, within 30 calendar days before the account is established, another account at the depositary bank for at least 30 calendar days. (b) Large deposits. Sections 229.10(c) and 229.12 do not apply to the aggregate amount of deposits by one or more checks to the extent that the aggregate amount is in excess of $ 5,000 on any one banking. day. For customers that have multiple accounts at a depositary bank, the bank may apply this exception to the aggregate deposits to all accounts held by the customer, even if the customer is not the sole holder of the accounts and not all of the holders of the accounts are the same. (c) Redeposited checks. Sections 229.10(c) and 229.12 do not apply to a check that has been returned unpaid and redeposited by the customer or the depositary bank. This exception does not apply -- (1) To a check that has been returned due to a missing indorsement and redeposited after the missing indorsement has been obtained, if the reason for return indication on the check states that it was returned due to a missing indorsement; or (2) To a check that has been returned because it was post dated, if the reason for return indicated on the check states that it was returned because it was post dated, and if the

TOPIC: Good Funds Page 24 of 39

Last Revised January 20, 2008

check is no longer postdated when redeposited. (d) Repeated overdrafts. If any account or combination of accounts of a depositary bank's customer has been repeatedly overdrawn, then for a period of six months after the last such overdraft, §§ 229.10(c) and 229.12 do not apply to any of the accounts. A depositary bank may consider a customer's account to be repeatedly overdrawn if -- (1) On six or more banking days within the preceding six months, the account balance is negative, or the account balance would have become negative if checks or other charges to the account had been paid; or (2) On two or more banking days within the preceding six months, the account balance is negative, or the account balance would have become negative, in the amount of $ 5,000 or more, if checks or other charges to the account had been paid. (e) Reasonable cause to doubt collectibility -- (1) In general. Sections 229.10(c) and 229.12 do not apply to a check deposited in an account at a depositary bank if the depositary bank has reasonable cause to believe that the check is uncollectible from the paying bank. Reasonable cause to believe a check is uncollectible requires the existence of facts that would cause a well-grounded belief in the mind of a reasonable person. Such belief shall not be based on the fact that the check is of a particular class or is deposited by a particular class of persons. The reason for the bank's belief that the check is uncollectible shall be included in the notice required under paragraph (g) of this section. (2) Overdraft and returned check fees. A depositary bank that extends the time when funds will be available for withdrawal as described in paragraph (e)(1) of this section, and does not furnish the depositor with written notice at the time of deposit shall not assess any fees for any subsequent overdrafts (including use of a line of credit) or return of checks of other debits to the account, if -- (i) The overdraft or return of the check would not have occurred except for the fact that the deposited funds were delayed under paragraph (e)(1) of this section; and (ii) The deposited check was paid by the paying bank. Notwithstanding the foregoing, the depositary bank may assess an overdraft or returned check fee if it includes a notice concerning overdraft and returned check fees with the notice of exception required in paragraph (g) of this section and, when required, refunds any such fees upon the request of the customer. The notice must state that the customer may be entitled to a refund of overdraft or returned check fees that are assessed if the check subject to the exception is paid and how to obtain a refund. (f) Emergency conditions. Sections 229.10(c) and 229.12 do not apply to funds deposited by check in a depositary bank in the case of -- (1) An interruption of communications or computer or other equipment facilities; (2) A suspension of payments by another bank; (3) A war; or (4) An emergency condition beyond the control of the depositary bank,

TOPIC: Good Funds Page 25 of 39

Last Revised January 20, 2008

if the depositary bank exercises such diligence as the circumstances require. (g) Notice of exception -- (1) In general. Subject to paragraphs (g)(2) and (g)(3) of this section, when a depositary bank extends the time when funds will be available for withdrawal based on the application of an exception contained in paragraphs (b) through (e) of this section, it must provide the depositor with a written notice. (i) The notice shall include the following information -- (A) A number or code, which need not exceed four digits, that identifies the customer's account; (B) The date of the deposit; (C) The amount of the deposit that is being delayed; (D) The reason the exception was invoked; and (E) The time period within which the funds will be available for withdrawal. (ii) Timing of notice. The notice shall be provided to the depositor at the time of the deposit, unless the deposit is not made in person to an employee of the depositary bank, or, if the facts upon which a determination to invoke one of the exceptions in paragraphs (b) through (e) of this section to delay a deposit only become known to the depositary bank after the time of the deposit. If the notice is not given at the time of the deposit, the depositary bank shall mail or deliver the notice to the customer as soon as practicable, but no later than the first business day following the day the facts become known to the depositary bank, or the deposit is made, whichever is later. (2) One-time exception notice. In lieu of providing notice pursuant to paragraph (g)(1) of this section, a depositary bank that extends the time when the funds deposited in a nonconsumer account will be available for withdrawal based on an exception contained in paragraph (b) or (c) of this section may provide a single notice to the customer that includes the following information -- (i) The reason(s) the exception may be invoked; and (ii) The time period within which deposits subject to the exception generally will be available for withdrawal. This one-time notice shall be provided only if each type of exception cited in the notice will be invoked for most check deposits in the account to which the exception could apply. This notice shall be provided at or prior to the time notice must be provided under paragraph (g)(1)(ii) of this section. (3) Notice of repeated overdrafts exception. In lieu of providing notice pursuant to paragraph (g)(1) of this section, a depositary bank that extends the time when funds deposited in an account will be available for withdrawal based on the exception contained in paragraph (d) of this section may provide a notice to the customer for each time period during which the exception will be in effect. The notice shall include the following information -- (i) The account number of the customer;

TOPIC: Good Funds Page 26 of 39

Last Revised January 20, 2008

(ii) The fact that the availability of funds deposited in the customer's account will be delayed because the repeated overdrafts exception will be invoked; (iii) The time period within which deposits subject to the exception generally will be available for withdrawal; and (iv) The time period during which the exception will apply. This notice shall be provided at or prior to the time notice must be provided under paragraph (g)(1)(ii) of this section and only if the exception cited in the notice will be invoked for most check deposits in the account. (4) Emergency conditions exception notice. When a depositary bank extends the time when funds will be available for withdrawal based on the application of the emergency conditions exception contained in paragraph (f) of this section, it must provide the depositor with notice in a reasonable form and within a reasonable time given the circumstances. The notice shall include the reason the exception was invoked and the time period within which funds shall be made available for withdrawal, unless the depositary bank, in good faith, does not know at the time the notice is given the duration of the emergency and, consequently, when the funds must be made available. The depositary bank is not required to provide a notice if the funds subject to the exception become available before the notice must be sent. (5) Record retention. A depositary bank shall retain a record, in accordance with § 229.21(g), of each notice provided pursuant to its application of the reasonable cause exception under paragraph (e) of this section, together with a brief statement of the facts giving rise to the bank's reason to doubt the collectibility of the check. (h) Availability of deposits subject to exceptions. (1) If an exception contained in paragraphs (b) through (f) of this section applies, the depositary bank may extend the time periods established under §§ 229.10(c) and 229.12 by a reasonable period of time. (2) If a depositary bank invokes an exception contained in paragraphs (b) through (e) of this section with respect to a check described in § 229.10(c)(1) (i) through (v) or § 229.10(c)(2), it shall make the funds available for withdrawal not later than a reasonable period after the day the funds would have been required to be made available had the check been subject to 229.12. (3) If a depositary bank invokes an exception under paragraph (f) of this section based on an emergency condition, the depositary bank shall make the funds available for withdrawal not later than a reasonable period after the emergency has ceased or the period established in §§ 229.10(c) and 229.12, whichever is later. (4) For the purposes of this section, a "reasonable period" is an extension of up to one business day for checks described in § 229.10(c)(1)(vi), five business days for checks described in § 229.12(b) (1) through (4), and six business days for checks described in § 229.12(c) (1) and (2) or § 229.12(f). A longer extension may be reasonable, but the bank has the burden of so establishing.

TOPIC: Good Funds Page 27 of 39

Last Revised January 20, 2008

RPC 86 April 13, 1990

E

ditor's Note: See RPC 191 for additional guidance on disbursing against provisional credit. D

isbursements Incident to Real Property Closings Opinion discusses disbursement against uncollected funds, accounting for earnest money

aid outside closing and representation of the seller. p quiry #1: In

Must the closing attorney collect earnest money held in the trust accounts of real estate agents or other attorneys in the form of certified funds?

O pinion #1:

No. While it is certainly the better practice for the closing attorney to issue trust account checks only against collected funds, CPR 358 recognized that under certain circumstances such checks may be drawn against funds which though uncollected have been provisionally credited to the attorney's trust account by the financial institution in which the trust account is maintained. A closing attorney should disburse against provisionally credited funds only when he or she reasonably believes that the underlying deposited instrument is virtually certain to be honored when presented for collection. In addition, an attorney should take care not to disburse against uncollected funds in situations where the attorney's assets or credit would be insufficient to fund the trust account checks in the event that a provisionally credited item is dishonored. quiry #2: In

Must the closing attorney request that all earnest money be entrusted to him or her prior to closing?

O

pinion #2: Again it would appear that the better practice, which would involve the closing attorney's receipt and disbursement of all funds involved in the transaction, is not absolutely compelled by the Rules of Professional Conduct. An attorney does have an absolute obligation under Rule 10.2(E) to follow his client's instructions relative to the money which is entrusted to him or her. If, as was the case in RPC 44, the lender conditions the disbursement of loan proceeds upon some clearly specified event, such as the deposit in the attorney's trust account of all earnest money, the attorney would be obliged to honor that instruction and to insist upon the entrustment prior to proceeding further with the closing. If, however, the closing attorney receives no such instruction, it is conceivable that a closing could be accomplished in which some funds pertaining to the transaction are never received or disbursed by the closing attorney. In such situations the attorney should certainly take care to advise the client that he or she cannot guarantee the appropriate handling of all the money and in particular should identify for the client the risk that the party holding the earnest money might disburse prior to the attorney's updating the title and recording the deed and deed of t ust. r quiry #3: In

And in relation to the above, if the closing attorney does not require that all earnest money come in at closing, is he or she making potentially false certifications on the HUD Settlement Statement if it shows the earnest money as a credit against the payment of commissions or

TOPIC: Good Funds Page 28 of 39

Last Revised January 20, 2008

sales proceeds?

O

pinion #3: An attorney must, of course, be scrupulous in documenting his or her handling of trust funds (Rule 10.2(d)). If an attorney does not handle all funds incident to a real estate transaction which he or she is closing, it would certainly be prudent to carefully qualify any statements appearing on the settlement statement relative to the attorney's responsibility for the discharge of certain obligations and the quality of the attorney's knowledge relative to matters set forth only upon information and belief. As a practical matter, the attorney should obtain receipts from any persons or entities to whom payments have been made outside of closing if such are to be reflected upon the closing statement. quiry #4: In

Can the closing attorney retained by the buyer charge the seller a fee for doing the closing and handling certain matters for the seller that are not included in deed preparation? For example, after agreeing to handle a closing for Buyer A, the closing attorney pays off the seller's loan and must spend several hours retrieving the "paid and satisfied" note and deed of trust from seller's former bank in order to clear the title and have title insurance issued on behalf of Buyer A. Can the closing attorney charge a "closing fee?" If the answer to this question is yes, what kind of notification to or agreement with seller (and buyer) would be r quired? e

O

pinion #4: In the typical residential transaction, it would not be inappropriate for the closing attorney who has been employed by the buyer to negotiate with the seller for the payment of a fee by the seller for legal services rendered on behalf of the seller incident to the closing. Any such contracts for legal services should be executed only where the provisions of Rule 5.1(a) can be satisfied relative to potential conflicts of interest and must be negotiated well in advance of closing.

TOPIC: Good Funds Page 29 of 39

Last Revised January 20, 2008

RPC 191 October 20, 1995, Revised January 24, 1997 Editor's Note: RPC 191 originally became a formal opinion of the State Bar on October 20, 1995. The opinion sets forth the duty of a closing lawyer to disburse from the trust account only in reliance upon the deposit of specified negotiable instruments which have a low risk of noncollectibility. On June 21, 1996, the North Carolina General Assembly ratified the Good Funds Settlement Act, G.S. Chapter 45A, which became effective October 1, 1996. The act sets forth the duty of a settlement agent for a residential real estate closing to disburse settlement proceeds from a trust or escrow account only in reliance upon the deposit of specified negotiable instruments. There was some inconsistency between the list of negotiable instruments against which disbursement was permitted in the Act and a similar list in RPC 191. To correct this, RPC 191was revised to reference the list of acceptable negotiable instruments found in the Act. Disbursements Upon Deposit of Funds Provisionally Credited to Trust Account Opinion rules that a lawyer may make disbursements from his or her trust account in reliance upon the deposit of funds provisionally credited to the account if the funds are deposited in the form of cash, wired funds, or by specified instruments which, although they are not irrevocably credited to the account upon deposit, are generally regarded as reliable. Introduction: In the wake of the financial failure of an out-of-state mortgage lender, the State Bar received numerous requests to reexamine prior ethics opinions CPR 358 and RPC 86 which permitted a lawyer to issue trust account checks against funds which, although uncollected, were provisionally credited to the lawyer's trust account by the financial institution with which the trust account was maintained. RPC 86 cautioned that the closing lawyer should disburse against provisionally credited funds only when the lawyer reasonably believed that the underlying deposited instrument was virtually certain to be honored when presented for collection. Nevertheless, lawyers did accept, deposit, and disburse against the residential loan proceeds checks of the out-of-state mortgage lender that failed. Some of these checks were ultimately dishonored and charged back against the trust accounts of the closing lawyers. In the meantime, some trust account checks issued for the closings were presented for collection and paid, resulting in the use of funds deposited by other clients to pay the closing checks presented for payment. Inquiry: In the typical residential real estate closing, the lending institution that finances the purchase of the property delivers the loan proceeds to the closing lawyer in the form of a check drawn upon a financial institution which may or may not be located in North Carolina. Loan proceeds are seldom delivered to the closing lawyer in the form of wired funds. Similarly, the real estate agent sometimes delivers the earnest money to the closing lawyer in the form of a check drawn on his or her trust account and the buyer sometimes delivers a personal check to the closing lawyer to cover the difference between the loan amount and the buyer's obligations. May a closing lawyer deposit such checks in his or her trust account and, if the depository bank will provisionally credit the lawyer's trust account, immediately disburse against the items before they have been collected? Opinion: Yes, but only upon the conditions set forth in this opinion. A lawyer (1) may disburse funds from a trust account only in reliance upon the deposit of a financial instrument specified in the Good Funds Settlement Act, G.S. Chap. 45A (the Act), which became effective on October 1, 1996, and the securing of provisional credit for the deposited item, and (2) as an affirmative duty, must immediately act to protect the property of the lawyer's other clients by personally paying the amount of any failed deposit or securing or arranging payment from other sources upon learning that a deposited instrument has been dishonored. It shall be unethical for a lawyer to disburse funds from a trust account in reliance upon the deposit of a financial instrument that is not specified in the Act, regardless of whether the item is ultimately honored or dishonored.

TOPIC: Good Funds Page 30 of 39

Last Revised January 20, 2008

In reliance on CPR 358 and RPC 86, many closing lawyers deposit the checks from the lender, the real estate agent, and the buyer into their trust accounts, receive provisional credit for the items from the depository bank and immediately disburse funds from their trust accounts in accordance with the schedule of receipts and disbursements prepared for the closing. There is typically some delay, generally three to four days but in some instances as much as fifteen days, between the time of the deposit of the checks of the lender, the buyer, and the real estate agent into the lawyer's trust account and the time when the funds are irrevocably credited to the lawyer's trust account by the depository institution. Because of the time lag between the deposit and the collection of the checks, the closing lawyer runs the risk that a check may be ultimately dishonored and charged back against the trust account of the closing lawyer, resulting in the use of the funds of other clients on deposit in the trust account to satisfy the disbursement checks from the closing. A lawyer who receives funds that belong to a client assumes the responsibilities of a fiduciary to safeguard those funds and to preserve the identity of the funds by depositing the funds into a designated trust account. Rule 10.1 of the Rules of Professional Conduct. It is a lawyer's fiduciary obligation to ensure that the funds of a particular client are used only to satisfy the obligations of that client and are not used to satisfy the claims of the lawyer's creditors. Rule 10.1 and comment. Furthermore, Rule 10.2 of the Rules of Professional Conduct requires a lawyer to maintain complete records of all funds or other property of a client received by the lawyer and to render to the client appropriate accountings of the receipt and disbursement of any of the client's funds or property held by the lawyer. Rule 10.2(e) recognizes a lawyer's obligation to pay promptly or deliver to the client, or to a third person as directed by the client, the funds in the possession of the lawyer to which the client is entitled. Strictly interpreted, these rules would appear to require a lawyer not to disburse upon items deposited in his or her trust account until the depository bank has irrevocably credited the items to the account. Requiring a closing lawyer to postpone disbursement until all items have been credited to the lawyer's trust account would result in inconvenience, delay, and could have an adverse effect on the economy. Nevertheless, there is some risk that certain instruments, such as ordinary commercial checks, may be uncollectible in any given transaction. Conversely, there are financial instruments that are generally regarded as extremely reliable. In fact, other state bars that have considered the issue have held that there are certain financial instruments for which the risk of noncollectibility is so slight as to make it unnecessary to prohibit a closing lawyer from disbursing immediately against such items before they are collected. See Virginia State Bar Legal Ethics Opinion 183 and Rule 5-1.1(g) of the Rules Regulating the Florida Bar. Similarly, the North Carolina Good Funds Settlement Act permits a "settlement agent," or person responsible for conducting the settlement and disbursement of the proceeds for a residential real estate closing, to disburse against uncollected funds but only if the deposited instrument is in one of the forms specified in the Act. Notwithstanding the fact that some of the forms of funds designated in the Act are not irrevocably credited to the lawyer's trust account at the time of deposit, the risk of noncollectibility is so slight that a lawyer's disbursement of funds from a trust account in reliance upon the deposit into the account of provisionally credited funds in these forms shall not be considered unethical. However, a closing lawyer should never disburse against any provisionally credited funds unless he or she reasonably believes that the underlying deposited instrument is virtually certain to be honored when presented for collection. A lawyer may immediately disburse against collected funds, such as cash or wired funds, and may immediately make disbursements from his or her trust account in reliance upon provisional credit extended by the depository institution for funds deposited into the trust account in one or more of the forms set forth in G.S. §45A-4. The disbursement of funds from a trust account by a lawyer in reliance upon provisional credit extended upon the deposit of an item into the trust account which does not take one of the forms prescribed in the Act constitutes professional misconduct, regardless of whether the item is ultimately honored or dishonored. However, a lawyer who disburses in reliance upon provisional credit extended upon the deposit of an item prescribed in the Act shall not be guilty of professional misconduct if that lawyer, upon learning that the item has been dishonored, immediately acts to protect the property of the lawyer's other clients by personally paying the amount of any failed deposit or securing or arranging payment from sources available to the lawyer other than trust account funds of other clients. An attorney should take care not to disburse against uncollected funds in situations where the attorney's assets or credit would be insufficient to fund the trust account checks in the event that a provisionally credited item is dishonored.

TOPIC: Good Funds Page 31 of 39

Last Revised January 20, 2008

To the extent that CPR 358 and RPC 86 are inconsistent with this opinion, they are overruled. However, there are provisions in both opinions that remain operative. Specifically, the provision of CPR 358 that prohibits a lawyer from disbursing against the " in the trust account during the time lag between the deposit of the checks of the lender, the buyer, and the real estate agent and the time when these items are irrevocably credited to the account unless provisional credit for the items is extended by the depository institution remains in effect. If provisional credit is not extended by the depository institution, the disbursing lawyer is using the funds of other clients to cover the closing disbursements until the deposited items are collected in violation of Rule 10.1. It should be emphasized that this opinion shall apply to any disbursements from the trust account against items which are not irrevocably credited to the account upon deposit, whether such disbursements are for the purpose of closing a real estate transaction or for the purpose of concluding some other transaction or matter.

TOPIC: Good Funds Page 32 of 39

Last Revised January 20, 2008

RPC 232 October 17, 1996 Editor's Note: Opinion was originally adopted as RPC 232 (Revised). See RPC 191, as amended, for additional guidance. Disbursement Upon Deposit of Mortgage Company Check Pursuant to an Agreement Purporting to Make Check Certified Opinion concerns disbursements from a trust account in reliance upon the deposit of a mortgage company's check issued pursuant to an agreement with a mortgage company and the company's institutional lender purporting to render the check "certified" as that term is defined in the UCC. Inquiry: On October 20, 1995, RPC 191 was adopted by the Council of the North Carolina State Bar. The opinion allows a lawyer to make disbursements from his or her trust account in reliance upon the deposit of funds provisionally credited to the account provided the funds are deposited in the trust account in certain specified forms including certified checks. Several mortgage companies and financial institutions making mortgage loans, (the "mortgage companies") have prepared a form agreement called the "Immediately Available Funds Procedure Agreement" (the "Agreement") which contains a procedure that mortgage companies believe will render certain mortgage loan proceeds checks "certified checks" as defined in the Uniform Commercial Code ("UCC"). If so, the mortgage companies contend that a lawyer closing a residential real estate transaction may make disbursements from his or her trust account immediately upon the deposit of such a mortgage loan proceeds check provisionally credited to the trust account. The Agreement will be executed by the closing lawyer ("Attorney"), the mortgage company ("Financial Institution") for a particular borrower ("Borrower"), and an institutional lender legally authorized to make loans and receive deposits ("Federally-Insured Lender"). (All defined terms used herein are from the Agreement.) The procedure called for by the Agreement and some (but not all) of the terms of the Agreement are described below. The Financial Institution shall transmit mortgage documents (promissory note, deed of trust, etc.) and closing instructions to Attorney to close the loan to Borrower. Prior to the scheduled closing of the loan, Financial Institution shall deliver a check ("Net Proceeds Check") drawn by Financial Institution on Federally-Insured Lender and payable jointly to Attorney and Borrower. After the mortgage documents are executed, but before closing the loan, Attorney will contact a duly authorized employee of Federally-Insured Lender ("Employee Contact"). Attorney will provide certain information to Employee Contact including the amount of the mortgage loan, that the mortgage documents have been executed by Borrower, and the amount of the Net Proceeds Check and any account number thereon. Upon providing this information to Employee contact, Attorney "shall be deemed to have made the same warranties to Federally-Insured Lender as if Attorney had obtained an acceptance as to the Net Proceeds Check from Federally-Insured Lender pursuant to Section 3-417 of the UCC." Federally-Insured Lender, through its Employee Contact, then issues Attorney a transaction code for manual notation by Attorney on the face of the Net Proceeds Check. The agreement provides that the issuance of the transaction code constitutes (a) notice from Federally-Insured Lender to Attorney pursuant to Section 9-305 of the Uniform Commercial Code as in effect in the state that Federally-Insured Lender has a security interest in the mortgage documents; and (b) the warranty by and unconditional agreement of Federally-Insured Lender with Attorney that i) Federally-Insured Lender shall pay the Net Proceeds Check upon presentment without reference to amounts on deposit in any account. ii) such notation, when made on the face of the Net Proceeds Check, constitutes an acceptance or certification of the Net Proceeds Check by Federally-Insured Lender pursuant to Sections 3-409, 3-410, and/or 3-411 of the Uniform Commercial Code as in effect in the state.

TOPIC: Good Funds Page 33 of 39

Last Revised January 20, 2008

iii) Federally-Insured Lender undertakes the same obligations with respect to Net Proceeds Check as if certified or accepted in writing by Federally-Insured Lender. iv) funds represented by the Net Proceeds Check are not subject to offset by Federally-Insured Lender. The Agreement also states that no provision in this Agreement...shall be construed to expand the rights of Federally-Insured Lender to dishonor the Net Proceeds Check beyond those rights which Federally-Insured Lender has, by law, to dishonor any ordinary certified check which is not subject to this or any other special agreement. Likewise, no such provision shall limit Attorney's rights to collect on the Net Proceeds Check to less than that provided by law to a holder of an ordinary certified check which is not subject to this or any other special agreement. The Federally-Insured Lender agrees that the transaction code will have the same effect as the Federally-Insured Lender's signature pursuant to Section 3-401 of the Uniform Commercial Code as in effect in the state, and the issuance of the transaction code shall evidence Federally-Insured Lender's "then-present acceptance or certification of a particular Net Proceeds Check." The Agreement also contains representations of Financial Institution "to induce Attorney and Federally-Insured Lender to enter into this agreement." These include an agreement by Financial Institution not to issue a stop payment order or other direction with respect to the Net Proceeds Check after the transaction code is issued for the check; an agreement that Financial Institution shall remain liable on the Net Proceeds Check as drawer for payment to Attorney or any other holder of the Net Proceeds Check, even though a transaction code is issued on the check by Federally-Insured Lender; a recognition of an absolute and unconditional obligation by Financial Institution to repay Federally-Insured Lender on any check for which Federally-Insured Lender has issued a transaction code; and an indemnification agreement with Federally-Insured Lender. May a lawyer follow the procedure in the Agreement, deposit in his or her trust account a Net Proceeds Check, with the transaction code issued by the Federally-Insured Lender noted on the face of the check, and upon receiving provisional credit for the check from the lawyer's depository institution, immediately disburse against the provisionally credited funds? Opinion: See Good Funds Settlement Act, G.S. §45A-1 et seq . (effective October 1, 1996).

TOPIC: Good Funds Page 34 of 39

Last Revised January 20, 2008

2006 Formal Ethics Opinion 8 July 21, 2006

Disbursement of Trust Funds Opinion rules that a lawyer may disburse against deposited items in reliance upon a bank’s funding schedule under certain circumstances. Inquiry: Attorney receives insurance company checks for payment of workers’ compensation and personal injury settlements. Upon receipt, Attorney deposits these checks into her trust account. Because the insurance checks are not among the identified instruments in the Good Funds Settlement Act, G.S. A745A-4, she must wait until the funds have been “irrevocably credited” or collected before disbursing from the trust account to the client. RPC 191. Attorney has been unable to locate a bank that is willing to confirm when deposited funds have been collected. Attorney has consulted with other lawyers in her locality with similar practices. Rather than call the bank to confirm that the funds have been collected, the lawyers routinely disburse against items deposited in the trust account, based upon prior dealings with the banks, in accordance with the following funding schedule: 3 business days for an in-state check and 7 business days for an out-of-state check. Attorney would like to follow this funding or “float” schedule for disbursements, as it appears to be the standard in her community. May Attorney disburse funds from her trust account in reliance upon this schedule? Opinion: RPC 191 permits lawyers to disburse immediately from the trust account in reliance upon the deposit of funds provisionally credited to the account if the funds are in the form of cash, wired funds, or one of the enumerated instruments listed in the Good Funds Settlement Act. For all other instruments, a lawyer has an obligation to conduct reasonable due diligence to determine whether funds deposited into the trust account have been collected prior to disbursement. Initially, a lawyer always should consult with her bank to determine when a particular instrument has been collected or funded. Before disbursing, a lawyer should also consider the source of the funds, i.e., whether the payor is reputable and whether the instrument is likely to be honored. If a lawyer receives confirmation by the bank that the funds deposited are collected, then the lawyer may rely upon this information and disburse against the funds. A lawyer reasonably may rely upon her bank’s funding or “float” schedule or policy only when the lawyer is unable to confirm whether funds have been irrevocably credited to his account and he has no reason to believe a particular instrument will not be honored under the circumstances. In any case, if the lawyer subsequently learns that an instrument has been dishonored, the lawyer must act immediately to protect other trust account property by personally paying the amount of any failed deposit or arranging for payment from other sources. “An attorney should take care not to disburse against uncollected funds in situations where the attorney’s assets or credit would be insufficient to fund the trust account checks in the event that an... item is dishonored.” RPC 191. Therefore, if Attorney is unable to confirm that a particular insurance check has been collected, she may reasonably rely upon and disburse in accordance with her bank’s funding schedule as long as 1) she reasonably believes the trust account check will be honored, and 2) she is able to fund the check in the event it is ultimately dishonored.

TOPIC: Good Funds Page 35 of 39

Last Revised January 20, 2008

North Carolina General Statutes, Chapter 45A. Good Funds Settlement Act. § 45A-1. Short title. This Chapter shall be known as the Good Funds Settlement Act.(1995 (Reg. Sess., 1996), c. 714, s. 1.) § 45A-2. Applicability. This Chapter applies only to real estate transactions involving a one- to four-family residential dwelling or a lot restricted to residential use.(1995 (Reg. Sess., 1996), c. 714, s. 1.) § 45A-3. Definitions. As used in this Chapter, unless the context otherwise requires: (1) "Bank" means a financial institution, including but not limited to a national bank, state chartered bank savings bank, or credit union that is insured by the Federal Deposit Insurance Corporation or a comparable agency of the federal or state government. (2) "Borrower" means the maker of the promissory evidencing the loan to be delivered at the closing. (3) "Cashier's check" means a check that is drawn on bank, is signed by an officer or employee of the on behalf of the bank as drawer, is a direct obligation of the bank, and is provided to a customer of the bank or acquired from the bank for remittance purposes. (4) "Certified check" means a check with respect to which the drawee bank certifies by signature on the check of an officer or other authorized employee of the bank that (i) the signature of the drawer on the check is genuine and the bank has set aside funds that are equal to the amount of the check and will be used to pay the check or (ii) the bank will pay the check upon presentment. (5) "Closing" means the time agreed upon by the purchaser, seller, and lender (if applicable), when the execution and delivery of the documents necessary to consummate the transaction contemplated by the parties to the contract occurs, and includes a loan closing. (6) "Closing funds" means the gross or net proceeds of the real estate transaction, including any loan funds, to be disbursed by the settlement agent as part of the disbursement of settlement proceeds on behalf of the parties. (7) "Collected funds" means funds deposited and irrevocably credited to a settlement agent's account used to fund the disbursement of settlement proceeds which account is a trust account, escrow account, or an account held by a company or its subsidiary which is licensed and supervised by the North Carolina Commissioner of Banks. (8) "Disbursement of settlement proceeds" means the payment of all closing funds from the transaction by the settlement agent to the persons or entities entitled to that payment. (9) "Lender" means any person or entity engaged in making or originating loans secured by mortgages or deeds of trust on real estate. (10) "Loan closing" means the time agreed upon by the borrower and lender, as applicable, when the execution and delivery of loan documents by the borrower occurs. (11) "Loan documents" means the note evidencing the debt due to the lender, the deed of trust or mortgage to secure that debt to the lender, and any other documents required by the lender to be executed by the borrower as part of the loan closing transaction.

TOPIC: Good Funds Page 36 of 39

Last Revised January 20, 2008

(12) "Loan funds" means the gross or net proceeds of the loan to be disbursed by the settlement agent as part of the disbursement of settlement proceeds on behalf of the borrower and lender. (13) "Party" or "parties" means the seller, purchaser, borrower, lender, and settlement agent, as applicable to the subject transaction. (14) "Settlement" means the time when the settlement agent has received the duly executed deed, deed of trust or mortgage, and other loan documents and funds required to carry out the terms of the contracts between the parties. (15) "Settlement agent" means the person or persons responsible for conducting the settlement and disbursement of the settlement proceeds, and includes any individual, corporation, partnership, or other entity conducting the settlement and disbursement of the closing funds. (16) "Teller's check" means a check provided to a customer of a bank or acquired from a bank for remittance purposes, that is drawn by the bank, and drawn on another bank or payable through or at a bank.(1995 (Reg. Sess., 1996), c. 714, s. 1.) § 45A-4. Duty of settlement agent. (a) The settlement agent shall cause recordation of the deed, if any, the deed of trust or mortgage, or other loan documents required to be recorded at settlement. The settlement agent shall not disburse any of the closing funds prior to the recordation of any deeds or loan documents required to be filed by the lender, if applicable, and verification that the closing funds used to fund disbursement are deposited in the settlement agent's trust or escrow account in one or more forms prescribed by this Chapter. Unless otherwise provided in this Chapter, a settlement agent shall not cause a disbursement of settlement proceeds unless those settlement proceeds are collected funds. Notwithstanding that a deposit made by a settlement agent to its trust or escrow account does not constitute collected funds, the settlement agent may cause a disbursement of settlement proceeds from its trust or escrow account in reliance on that deposit if the deposit is in one or more of the following forms: (1) A certified check; (2) A check issued by the State, the United States, a political subdivision of the State, or an agency or instrumentality of the United States, including an agricultural credit association; (3) A cashier's check, teller's check, or official bank check drawn on or issued by a financial institution insured by the Federal Deposit Insurance Corporation or a comparable agency of the federal or state government; (4) A check drawn on the trust account of an attorney licensed to practice in the State of North Carolina; (5) A check or checks drawn on the trust or escrow account of a real estate broker licensed under Chapter 93A of the General Statutes; (6) A personal or commercial check or checks in an aggregate amount not exceeding five thousand dollars ($ 5,000) per closing if the settlement agent making the deposit has reasonable

TOPIC: Good Funds Page 37 of 39

Last Revised January 20, 2008

and prudent grounds to believe that the deposit will be irrevocably credited to the settlement agent's trust or escrow account; (7) A check drawn on the account of or issued by a mortgage banker licensed under Article 19A of Chapter 53 of the General Statutes that has posted with the Commissioner of Banks a surety bond in the amount of at least three hundred thousand dollars ($ 300,000). The surety bond shall be in a form satisfactory to the Commissioner and shall run to the State for the benefit of any settlement agent with a claim against the licensee for a dishonored check. (b) (For applicability date, see note) If the settlement agent receives information from the lender as provided in G.S. 45A-5(b) or otherwise has actual knowledge that a mortgage broker or other person acted as a mortgage broker in the origination of the loan, the settlement agent shall place an entry on page 1 of the deed of trust showing the name of the mortgage broker or other person who acted as a mortgage broker in the origination of the loan. Information pertaining to the identity of the mortgage broker or other person who acted as a mortgage broker in the origination of the loan shall not be considered confidential information. The terms "mortgage broker" and "act as a mortgage broker" shall have the same meaning as provided in G.S. 53-243.01. HISTORY: 1995 (Reg. Sess., 1996), c. 714, s. 1; 2001-420, ss. 1, 2; 2007-176, s. 1. NOTES: EFFECT OF AMENDMENTS. --Session Laws 2007-176, s. 1, effective July 5, 2007, and applicable to deeds of trust registered on or after April 1, 2008, inserted the subsection (a) designation and added subsection (b). § 45A-5. Duty of lender, purchaser, or seller. (a) The lender, purchaser, or seller shall, at or before closing, deliver closing funds, including the gross or net loan funds, if applicable, to the settlement agent either in the form of collected funds or in the form of a negotiable instrument described in G.S. 45A-4(a)(1) through (7), provided that the lender, purchaser, or seller, as applicable, shall cause that negotiable instrument to be honored upon presentment for payment to the bank or other depository institution upon which the instrument is drawn. However, in the case of a refinancing, or any other loan where a right of rescission applies, the lender shall, no later than the business day after the expiration of the rescission period required under the federal Truth-in-Lending Act, 15 U.S.C. § 1601, et seq., cause disbursement of loan funds to the settlement agent in one or more of the forms prescribed by provisions in this Chapter. (b) (For applicability date, see note) The lender shall include in the loan closing instructions to the settlement agent the name of the mortgage broker or other person, if any, who acted as a mortgage broker in the origination of the loan. HISTORY: 1995 (Reg. Sess., 1996), c. 714, s. 1; 2007-176, s. 2. NOTES: EFFECT OF AMENDMENTS. --Session Laws 2007-176, s. 2, effective July 5, 2007, and applicable to deeds of trust registered on or after April 1, 2008, inserted the subsection (a) designation and substituted "G.S. 45A-4(a)(1) through (7)" for "G.S. 45A-4(1) through (7)" in the first sentence; and added subsection (b).

TOPIC: Good Funds Page 38 of 39

Last Revised January 20, 2008

§ 45A-6. Validity of loan documents. Failure to comply with the provisions of this Chapter shall not govern the validity or enforceability of any document, including a deed or any loan document, executed and delivered at any settlement occurring after October 1, 1996.(1995 (Reg. Sess., 1996), c. 714, s. 1.) § 45A-7. Penalty. Any party violating this Chapter is liable to any other party suffering a loss due to that violation for that other party's actual damages plus reasonable attorneys' fees. In addition, any party violating this Chapter shall pay to the party or parties suffering a loss an amount equal to one thousand dollars ($1,000) or double the amount of interest payable on any loan for the first 60 days after the loan closing, whichever amount is greater. (1995 (Reg. Sess., 1996), c. 714, s. 1.) OPINIONS OF THE ATTORNEY GENERAL AGRICULTURAL CREDIT ASSOCIATION AS POLITICAL SUBDIVISION OF UNITED STATES. --Section 45A-7 is ambiguous as to whether an agricultural credit association is a political subdivision of the United States within the meaning of subdivision (2). See opinion of Attorney General to The Honorable Frank Mitchell, Member of the North Carolina House of Representatives, and The Honorable Charles W. Albertson, Member of the North Carolina Senate, 2001 N.C. AG LEXIS 31 (7/5/01).

TOPIC: Good Funds Page 39 of 39

Last Revised January 20, 2008