Closing funds: is a Wire Really Safer Than a Check?

Obviously wire fraud has been an issue in our industry for quite some time, and it something that we, and our various stakeholders (clients, realtors, lenders, title companies, etc.) MUST remain extremely vigilant on.

 

 

It became common to require wire transfers several years ago because check fraud was so rampant.  Both are a serious risk, but the advantage of requiring wires is that the fraud is detected much more quickly.  If someone gives our office a fraudulent check, we are generally not going to be able to detect that it is fraudulent until it runs through our bank and then the bank that purportedly “issued” it and then gets returned for insufficient funds (NSF), which can often take 7-10 days or more. In the real estate context, if we have recorded and disbursed on that check before it gets returned for insufficient funds (NSF),then our firm would be responsible for transferring the property without making sure the funds were “good”, which causes problems for the attorney, the lender, the client, the seller, the title insurance company, the malpractice insurance carrier, etc.  Contrast that with a wire transfer, which, because they pass directly through the Federal Reserve system are “good” funds immediately and aren’t going to be “sucked back out” of the firm’s trust account.

 

The danger with wire transfers is if all of the parties involved (the closing attorney, real estate agent, buyer, lender, etc.) do not follow the appropriate protocols with regard to the transmission of information (either by encrypted email or a secure portal), or if a bank initiating the wire transfer fails to verify the wiring instructions prior to initiating the wire.  From the horror stories you have likely heard, the major risk area is realtors and clients who use inferior email accounts that do not involve appropriate safeguards (Hotmail, yahoo, gmail, etc.), which allow their email to be compromised, the wiring instructions intercepted and replaced, etc.  You would be surprised how many real estate agents I run across that still use “free” gmail or yahoo email addresses!

 

We have numerous safeguards in place at Coltrane Grubbs Orenstein to mitigate the risk involved, including use of encrypted email to transmit wire instructions and other sensitive information, two-factor authentication for all our email accounts, early communication (via our Buyer and Seller information sheets and other materials) warning about the dangers of wire fraud, instructions to always confirm wiring instructions prior to initiating a wire, explanation that we will NEVER change our wiring instructions in the middle of a transaction, etc. We are also continuing to look at ways we can handle wire information and other sensitive communications with our stakeholders more securely.  We are hard at work on some major, innovative changes to our closing process which will enable us to offer our stakeholders even better and more secure ways to interact with our firm, which we will be excited to share publicly, soon.

 

Title insurance companies, malpractice carriers, and other key players in this industry will all vouch that wire transfers are the safest means by which to handle the transfer of large sums of money. I’d imagine that the NC State Bar, NC Bar Association, NC Land Title Association, etc. would all push back pretty hard on the proposal to move toward checks instead of wires. Look at it this way: if checks were so much safer, then why aren’t the lenders overnighting a certified check for the loan proceeds to the attorney instead of wiring them?

 

I think if our market ever sees a shift back to checks, it will be because some mechanism is developed to prevent check fraud that is more reliable than a wire transfer, and from what I understand, that technology isn’t out there yet (there’s a billion dollar opportunity for someone!).  Either that, or we’ll go to a system where we can only record and disburse after the funds have been deposited in our trust account for a lengthy period of time (again, 7-10 days), which is going to be a major inconvenience for the buyer.

Safeguarding our clients’ funds is a critical role we play in the transaction, something I’m passionate about, and something we take very seriously. We are so excited to share some big changes to make that even easier – coming soon!