The Ramblings of a Title Man

?The Sweep Account

With higher interest rates, comes the return of the Repurchase Account or “Sweep” account.?Repurchase/Sweep accounts have been around for many years, but in the most recent time of low or even zero interest rates from bank depository accounts, the fees associated with these accounts exceeded the interest earned.

Here is how they work. An escrow account for the title agency is established in the normal way. Then, working with your bank, a “Repurchase Account” is established to sweep excess funds for higher overnight returns in the U.S. government bond market. Each day, the bank operating the account pays checks that have come in and credits deposits. Funds left over (sometimes called the float) are then moved into the Repurchase Account. The Repurchase Account is used to invest in U.S. Government Securities that earn a floating rate of return based on the bond market. The next day, when checks come into the escrow account, the bank sells those securities and moves the necessary amount of money to the escrow account.?

Setting up this arrangement may seem like a great deal of work, but the returns can be quite high. Let’s say your average overnight balance in your escrow account is $2,000,000. And let’s say you can find a bank willing to pay more than half of the U.S. 10-year Treasury bond rate of 3.594% (quoted 6/1/2023). For illustration purposes here we will use a rate of 2%. Your income for your escrow account being swept to a repurchase account nightly could yield as much as $40,000 per year in interest earned. For escrow accounts that have a higher daily overnight balance, those returns could even be higher.???

You may be saying: “sign me up,” but it is not that easy. The first hurdle to opening a Repurchase/Sweep account is to ensure your state department of insurance allows them. Many states have specific rules about earning interest on escrow accounts. Some states (like Ohio) require that all escrow accounts are held with interest benefits accruing to the state. In Ohio, those special accounts are called IOTA accounts, which stands for “Interest on Trust Accounts.” Several other states ban the use of Repurchase/Sweep accounts in their insurance rules. Be sure to check with your insurance commissioner before converting your escrow account to a Repurchase/Sweep account.

Another hurdle to operating a Repurchase/Sweep account is fees and the maintenance cost. Your bank should be able to do an analysis to see if you would earn more interest than would be generated in fees. With today’s interest rate environment, most banks will see you make a profit above the fees. But a slight dip in interest rates could cause the account to no longer make money.?

Additionally, most title insurance underwriters have rules for agents who deploy Repurchase/Sweep accounts. While not an exhaustive list, they often include:

• Disclosure to the customers that the funds held in escrow are not FDIC insured, but are instead invested in U.S. Government Treasury Bonds, and no interest is paid to the customer.?
• Investments in Repurchase/Sweep accounts can only be invested in U.S. Government Treasury Bonds. The logic behind this rule is that the U.S. government is legally liable to honor its bonds. So if you have money that is FDIC insured or money in U.S. bonds, the U.S. government is liable.?
• Escrow balancing must be a full 3-way balancing in keeping with ALTA Best Practices, with all appropriate protections such as positive pay, foreign wire blocks and ACH blocks. Daily balancing is sometimes required for these types of accounts, which creates more staff burden for title agencies.

Last but not least, as the third item indicates, balancing these types of accounts requires a great deal of skill and staff time. Automated balancing software does not always work correctly as it can identify monies moved to the Repurchase/Sweep account incorrectly. Check with your software vendor on how to deal with that issue.?

Is a Repurchase/Sweep account right for you? Maybe. Ask your underwriter for help in determining if such an account is appropriate for your state, your business and how you manage your escrow account. When I owned a title agency and had 16 offices all with escrow accounts, we had Repurchase/Sweep accounts on most of them. Our best year was 2002 when we made over $250,000 in interest, as bond rates that year were over 5%.?