Historically, residential and commercial real estate transactions have mainly relied on cashier’s checks or wire transfers to purchase and sell property. However, as technology advances, demand for more efficient and secure payment methods continues to grow. The introduction of modern payment rails, such as instant or real-time payment systems, are setting the stage for quicker and more secure payment methods.
In this blog, we’ll explore the limitations of traditional payment methods and the benefits that modern payment systems offer buyers and sellers. We’ll also review current regulatory hurdles that pose challenges to widespread adoption of modern payment methods in real estate closings, and how the title industry is working to integrate these options to enhance consumer experience and facilitate more secure, efficient transactions.
A Look at Traditional Payment Methods
Traditional payment options such as checks, wire transfers and Automated Clearing House (ACH) payments are becoming less desirable payment options due to their time limitations and inherent risks. Checks are slow to verify and can easily be forged or counterfeited. While faster, wire transfers are still susceptible to delays. They also carry the risk of irreversible errors, if wire instructions are written incorrectly, or wire fraud, if the instructions are intercepted by fraudsters. ACH payments are processed in batches and permit payment reversal or return, often making them unsuitable for closing residential and commercial real estate transactions.
The Adoption of Modern Payment Rails
In today’s fast-paced economy, switching to modern payment rails like instant or real-time payments is becoming increasingly essential. Real-time payments can be initiated, cleared and settled within seconds, unlike traditional payment methods, which can take days to process. This promptness can help reduce the risk of misdirected funds and fraudulent activity, leading to faster closings and a more streamlined process for all parties involved.
There are currently two major real-time payment systems in operation. In 2017, The Clearing House® created the RTP® network, the first widely adopted real-time payment system for all federally insured U.S. depository institutions. RTP® has a maximum transaction limit currently set at $1 million. Last year, the Federal Reserve followed suit and launched its real-time payment service, FedNow®, specifically for financial organizations that maintain a master account with the Federal Reserve Bank. Transactional limits for FedNow® are capped at $500K.
RTP® is a “credit push transfer,” which means the payer actively sends or pushes money to the payee through the payment rail, which is then forwarded to the payee’s financial institution. The payee’s financial institution then transfers the payment directly to the payee’s bank account. RTP® does not allow a “debit pull transfer,” wherein funds are requested or “pulled” from the payee’s bank account. FedNow® offers both credit and debit transfers, but it can also be configured to allow a credit-only profile. Although different in infrastructure, both systems are governed by complex laws and operational rules at both the state and federal levels.
Advantages of Real-Time Payment Systems
Real-time payment systems, like RTP® and FedNow®, include advanced features that help streamline the closing process and mitigate fraudulent activity. Some of the features include, but are not limited to, the following:
• Time: Traditional payment methods are generally only processed on banking business days within scheduled timeframes, excluding holidays, and can take one to two business days to process. With real-time payments, funds are processed within seconds.
• Fraud Mitigation: Real-time payments enable instant transfers directly between bank accounts, eliminating the need for wire instructions or other documentation to initiate the transfer. Real-time payments also offer the following fraud mitigation features:
· Prefunding requirements: RTP® requires participating financial institutions to prefund a joint account at the Federal Reserve Bank of New York and to maintain sufficient balances to meet liquidity needs. Although FedNow® does not require prefunding requirements, all financial institutions are obligated to make funds available to their customers immediately after receiving notification of settlement.
· Multifactor authentication (MFA): Unlike traditional payment methods, real-time payments provide an additional layer of security by requiring multifactor authentication. Users are only granted access to make transfers after successfully identifying more than one form of identification. This could include a password, one-time code, or token.
· Irrevocable transfers: Real-time payments are instant payments that are irrevocable, meaning the payer cannot reverse the payment once it has been initiated.
· Supports ISO 20022 standards: A global data-rich messaging standard, developed by the International Organization of Standardization (ISO), ISO 20022 allows interoperability between financial institutions. It supports the inclusion of more structured data in payment messaging, which provides an enhanced customer experience by reducing manual intervention, preventing errors and mitigating wire fraud.
· Legal recourse: Real-time payment systems provide legal protections for both consumers and businesses. The systems adhere to Regulation E standards that provide electronic payment protections to consumers, including error resolution and liability limits for unauthorized transactions. They also follow the Uniform Commercial Code (UCC) Article 4A, allocations of risk rules for errors and fraud, establishing rights and responsibilities for businesses in commercial transactions.
For an in-depth comparison review of RTP® and FedNow® with wire transfers and ACH payments prepared by the American Land Title Association (ALTA), click here.
Good Funds Law
The Good Funds Law is a set of requirements and state laws that regulate the type of funds that closing agents can accept for real estate transactions. These laws require funds used in real estate transactions to be verified and cleared before the transaction closes. What is accepted as “good funds” varies by state, but all laws are designed to help safeguard the financial stability of closing agents, deter fraudulent activity and provide protections to consumers.
The ALTA created a Good Funds Work Group to investigate and determine what modifications to current state good funds laws need to be made to accommodate real-time payments. According to its research, there are 29 states, plus Washington, D.C., with good funds laws currently in place, many of which were drafted decades ago. Additionally, there are 12 states that, although they do not have a good funds law in place, impose lender funding requirements for transactions with a mortgage loan. It appears that one or both payment rail systems are acceptable under these current good funds laws.
The Future of Payments in Real Estate Closings
Traditional payment methods have long been the standard in real estate transactions. Real-time payment systems like RTP® and FedNow®, which enable more efficient and secure transfers, present a promising alternative. To make real-time payments part of the standard, it’s essential for state good funds laws to allow the adoption of modern payment rails. To assist in these efforts, the ALTA created a Model Good Funds Law to serve as a universal, easy-to-use framework for acceptable closing funds, including real-time payments, and the conditions that must be satisfied before disbursement by an escrow holder or title agent.
The future of payment methods in real estate closings, both residential and commercial, is likely to shift towards more widespread adoption of real-time payment systems as laws and regulations evolve. At Old Republic Title, we are committed to supporting the transition towards faster and secure transactions. We take pride in facilitating a seamless and reliable closing experience for all parties involved. To learn more about the closing process and working with Old Republic Title, contact a representative near you.