Escrow accounts play a crucial role in real estate transactions, providing security and transparency by holding client funds while transactions are pending. The Federal Deposit Insurance Corporation, an independent agency of the U.S. government, regulates and oversees the protection of these accounts through a deposit insurance program when they are held at FDIC-insured banks. To make sure your escrow accounts get the maximum level of protection, there are specific rules and considerations that both brokers and financial institutions must adhere to.
The FDIC provides insurance coverage for deposits in member banks up to a certain limit. The standard insurance limit is $250,000 per depositor, per insured bank, for each account ownership category. Ownership categories include single accounts, joint accounts, certain retirement accounts, revocable trust accounts and more.
But when dealing with “fiduciary accounts” – those where a fiduciary is depositing funds that belong to one or more principals, like a real estate escrow account – the funds will be counted against the limit of each principal and not against the fiduciary. Or, to put that another way, the concern for a typical brokerage escrow account won’t be the total amount of money in the account at any one time, but how that money is divided up among the various parties in their transactions.
For example, let’s make the math easy and say that a broker is holding six different deposits, for $50,000 each. Every deposit is for a different buyer in a different transaction, and none of them have other accounts at that bank. In that instance, the entire account would be covered by FDIC insurance because each individual client is below the $250,000 threshold, even though the total amount is higher.
Now, let’s say that one of those buyers has $250,000 (or more) already on deposit with the bank where the escrow account is located. In that instance, the $50,000 deposit for that specific client would not be protected because that client is already over the aggregate limit for insurance. The other client deposits would still be insured, though. To take advantage of this rule, it is absolutely necessary to be sure that the accounts are properly set up as fiduciary accounts within the bank, so brokers should be careful to get them set up correctly the first time (and might want to double-check with your banks if you’re unsure of the status today). And of course, any time you’re holding substantial deposits for a client, it’s probably going to be a good idea to ask if they have large accounts at the bank where you hold your escrow account, just to be safe.
The NAR website also has additional FDIC insurance information and a resource brochure on insured deposits from the FDIC website.