There are many types of financial activities associated with real estate transactions that can ultimately result in unclaimed property. One type of activity is the use of earnest money, which is a good faith deposit often made by a buyer in connection with the purchase of real estate. Another type is where funds are escrowed by a title company until certain conditions are met under the Sales/Purchase Agreement. At closing, or once the conditions are met, the earnest money and/or escrowed funds are returned to the entitled parties. If the buyer backs out of the contract, the seller is usually entitled to the funds.
Once the sale has occurred, funds may be held in escrow by lenders or mortgage servicers for the payment of taxes and insurance and other monthly charges. Generally, mortgage companies require that borrowers contribute funds monthly, which are escrowed until payment is due. Accounts are reconciled annually and if there is an overage, the homeowner may be entitled to a refund.
What if the seller moved and did not leave a forwarding address? Or what if a homeowner was not aware that he was entitled to a refund for overpayment of taxes or insurance or other monthly charges? Or what if he misplaced or simply never cashed the refund check? What if the homeowner died, and his heirs are unaware of any refund owed?
These scenarios illustrate some of the ways that earnest money and escrowed funds can go unclaimed and uncashed. Lenders and mortgage servicers may also be holding other property types that may be reportable under the unclaimed property laws, such as payroll checks, commission checks, vendor checks, accounts payable checks, customer overpayments and/or customer credit account balances.
After a certain period of time without owner activity (the “dormancy period”), the company holding the uncashed funds (the “holder”) must report the property to the states as unclaimed property.
The unclaimed property laws, which differ by state, require holders to submit reports on an annual basis. Dormancy periods may also vary by state and property type but are typically three or five years. Prior to submitting the report, holders must send written notice to the owner (the “due diligence letter”), advising the owner that his funds are dormant and will be reported (escheated) to the state if the owner does not contact the holder within a certain timeframe. Due diligence letters serve as a last attempt to contact the owner before the property is escheated to the states.
It is important to note that noncompliance with the unclaimed property laws can subject the holder to interest and penalty assessments and can lead to a state audit.
Companies can take steps to reduce the population of reportable property, by maintaining up to date customer or owner information and reviewing the status of uncashed checks or escrowed account balances on a regular basis. Establishing best practices related to owner outreach will lead to fewer accounts that become dormant. Ensuring that the process for handling outstanding checks and escrowed funds is incorporated into the company’s unclaimed property procedures will also assist in staying compliant with the unclaimed property laws.
An important first step for the company is to perform an internal risk assessment to assess the potential for unclaimed property liability. Companies should be mindful of all property types that could be reportable as unclaimed property. In addition, regular monitoring of state legislative and regulatory activity will assist in maintaining compliance, as the states often make changes to provisions such as dormancy periods and even the types of property that are eligible for escheatment.
Contact MarketSphere for a no cost/no risk consultation to discuss the questions or concerns about your unclaimed property compliance program. Let our team be your go-to resource for implementing your Just Right Compliance® solutions.
*Content contained in this article is considered accurate as of the publish date.