On Nov 11, 2009, I attended the Real Property Section of the Essex County Bar Association (ECBA) New Jersey meeting on “2009 RESPA Changes.” Darcie Gore of Bank of America (BoA) was one of the guest speakers and John R. Dusinberre, Esq of ECBA was the moderator.
After giving 50 or so presentations myself about RESPA Rule implementation for settlement agents, it was nice to sit back and listen. It was also interesting to see a leading lender’s perspective, plans and guidance. Here’s my take from the meeting:
» BoA’s go-live date for new GFE is January 1, 2010.
• Talk about going down to the wire.
» BoA wants settlement agents to submit a draft HUD for approval one-week prior to closing, so they can
carefully review all fees prior to loan funding.
• Interestingly, a draft HUD prepared a week ahead may not even have closing figures. Settlement agents
typically don’t receive their final closing figures until the day of the closing.
» BoA will make list of “lender identified service providers” (for the purpose of tolerances computation) online.
• This seems problematic to me. First, RESPA rules require a list of service providers be given as an
attachment “along with” the Good Faith Estimate (GFE.)
• Secondly, an online list will continue to be refined/updated, surely a nightmare for settlement agents
preparing a HUD. So, this will need further clarification from BoA.
» If any last minute repair issues are discovered during the final walk-through, BoA will have to be notified as
they will need to determine if the repair charges result in changed circumstances.
• A final walk-through happens the day before the closing. It seems impractical to close an entire loop for
minor repair work just hours before the closing.
• Unless major issues are discovered, it seems like agreeing to a repair payment with a third party and
showing it on the HUD with the seller incurring charges, would be the most appropriate.
» BoA has set up a dedicated toll-free hot-line number and email to address any compliance related issues.
» Because New Jersey is an attorney closing state, there was lot of discussion about how to record attorneys’ fees. John Dusinbere presented an approach separating fees on 1102 (the portion pertaining to conducting closing) and 1109 (the portion pertaining to other legal services). His method is in close alignment with our position at Easy Soft, which we’ve been advocating for almost a year for our customers. (I’ll address “recording attorneys’ fees” in an up-coming blog post.)
» BoA considers the 1102 charge as one that affects the APR calculations, but they have not taken a position on the other legal services charge (likely on 1109) and whether it also affects the APR. Remember, the Mortgage Disclosure Improvement Act (MDIA) that went into effect July 30, 2009 requires a new Truth in Lending (TIL) disclosure statement be issued if the APR rises by more than 0.125% and starts a new 7-day waiting period. So, this can get tricky very quickly!
The Essex County Bar meeting was a strong indicator of the on-going issues residential real estate attorneys, title companies, closing companies and lenders still have to iron out before January 1, 2010.
In August, Easy Soft began offering webinars to help real estate industry professionals get ready for RESPA reform. We continue to offer our two popular RESPA webinars each week and invite you to attend. More details at: http://www.easysoft-usa.com/hud-software.html
Trust account rules vary from state to state, but one constant for attorneys or anyone working in a fiduciary capacity is the over-riding fear of running afoul of strict requirements. Take the following steps and you won’t lose sleep worrying about your responsibility to comply with complicated trust account regulations.
1. Migrate from Manual to Automated Record Keeping
Review your firm’s trust bookkeeping procedures and identify which procedures are managed manually. Often, law firms enter each client’s transactions separately and issue trust checks manually. Manual bookkeeping is the root of several problem areas. Not only are manual processes time-consuming, but also mistakes are difficult to detect and reports are next to impossible to prepare.
A good trust accounting software program can easily replace ALL your manual bookkeeping tasks and provide you with total control of your trust accounting. You will:
• Simplify transaction entries, trust check printing, bank reconciliations, and generating reports
• Readily detect errors
• Maintain an audit trail for any changes made in your trust books
• Make it easy for your accountant to review your trust data and make appropriate corrections without shuffling through stacks of paper
2. Choose Your Trust Accounting Program Wisely
Don’t rush to embrace the first accounting program you find to manage your trust books. Many accounting packages that work very well for general operating accounts often lack features that trust accounting requires. For example, general accounting packages typically do not produce client ledgers easily and do not prevent trust accounting mistakes from occurring. There is typically no audit trail log and one can even go back to reconciled months and edit prior transactions. That’s not proper trust accounting! When you evaluate your trust program choices, consider the following questions:
• Does the program make deposits and disbursements in each client account very easy to enter, track and reconcile?
• Is the program designed to prevent common trust accounting errors, such as duplicate check numbers, client ledger overdrafts etc.? These are examples of problems that must be stopped at the transaction entry itself.
• Are required monthly reports such as ledger card balances, transactions, reconciliation and three-way reconciliation, etc. easily produced?
• Is there an option to print trust checks and/or deposit slips?
3. Avoid Commingled Bank Trust Accounts
A client trust bank account is a special kind of account. Today, many banks offer a particular type of trust account with separate sub-accounts for each client.
A bank account that allows you to manage individual client funds separately provides a double layer of protection for your firm because a bank can also alert you to any client ledger overdraft situation. Additionally, you will receive monthly client ledger trial balances from the bank, which you can then match with your office client ledger records.
4. Archive Closed Client Accounts
When a client matter has been completed, the balance on the client’s ledger is zero, and all transactions have been reconciled with the bank statement, you should “close” or archive that client ledger. Otherwise, over a period of time, you will be dealing with hundreds or even thousands of “open” client ledgers.
5. Protect Your Trust Software Data File
While a computer or software can be replaced, lost data is not easy to re-create. For trust accounts, always maintain a hard copy of each client ledger on a monthly basis. Make regular backup copies of your trust database files and store them at a remote location.
Automate Today and Put a Stop to Trust Fund Account Worries
Managing trust accounts is easier than you think. Start with a careful review of your firm’s trust accounting processes. Begin using trust account software designed to help you comply with state regulations. Remember, a client A’s money has nothing to do with client B’s money. Your trust books should only contain open accounts. And, make an iron clad rule to backup copies of data files and store them in a secure and separate place. Follow these tips and you will bring order to your trust bookkeeping, tighten controls and no longer worry whether or not you are in full compliance with state regulations.
Reaching a mutually acceptable divorce settlement between two parties is never easy. Add a third party, the IRS, and the process is further complicated.
How is the IRS a Third Party in Divorce Settlements?
In the event of a divorce, applicable IRS and state tax code along with tax-related case rulings must be carefully weighed. The IRS becomes a third party in divorce financial settlements to the extent that property division, alimony, and child support affect taxes and disposable income.
Tax Code Affects Alimony and Child Support Settlements
A prime example of IRS influence during divorce settlements is seen through alimony and child support calculations. The IRS treats alimony and child support differently. Alimony is taxable as income for the party receiving and deductible for the party paying. In contrast, child support payment is neither reportable income nor a deductible expense. Even so, child support payments still impact gross and net income.
Alimony and Child Support Tax Optimized Scenarios
Based on how child support and alimony payments are allocated, a lawyer can achieve a tax-optimized divorce financial settlement that often produces higher disposal income for both parties. Use a software program that instantly prepares a variety of alimony-child support scenarios, and you can quickly show your client available options.
Alimony and Child Support Examples
Here’s how a child support and alimony settlement may or may not be optimized. Using a hypothetical example, with “John” as one spouse and “Mary” as the other, consider the following divorce and income situation:
• New Jersey residents, John and Mary are getting divorced and have two children.
• John’s 2009 income is $135K/year
• Mary’s 2009 income is $40K/year.
• Prior to divorce, John’s after tax income was $91K.
• Prior to divorce, Mary’s after tax income was $34K.
Out of many settlement options, consider the difference between the following two.
• John pays Mary $5K/year in alimony (deductible).
• John pays Mary $20K/year in child support (non-deductible).
• John’s after-tax income is $68K
• Mary’s after-tax income is $58K.
Combined after-tax money available between John and Mary is $126K.
• John pays Mary $18K/year in alimony (deductible).
• John pays Mary $7K/year in child support (non-deductible).
• John’s after-tax income is $72K.
• Mary’s after-tax income is $56K.
Combined after-tax money available between John and Mary is $128K.
Option 2 provides $2,000 more after-tax income than option 1.
Divorce Financial Planning Software to the Rescue
In the past, understanding numerous alimony versus child support combinations, while factoring in state and federal codes was impractical – if not impossible. Not anymore. Now attorneys can create and evaluate divorce financial settlement scenarios in minutes:
With the right divorce settlement planning software, you can:
• Simultaneously show the after-tax impact on the income of both parents for up to five alimony vs child support payment schedules
• Easily compute required spousal support payments based on the custodial parent’s after-tax budget requirement
• Assemble distributable assets and liabilities
• Propose various distribution scenarios
• Quickly produce customized, professional reports and charts, suitable for clients, opposing counsel and the judges
• Provide divorce planning that is applicable in all 50-states
• Offer high-quality solutions in a timely manner, and expand your firm’s client base
Affordable and effective software cuts through the tax maze and helps you provide financially optimized settlement proposals during the initial consultation. Even with the IRS as a third party, you can convert prospects to clients and reach quick divorce settlements.
A large percentage of disbarments and disciplinary actions arise out of client trust fund mismanagement. With the key concepts of trust accounting in mind and a few practical tips that you can put into practice immediately, you’ll be in compliance and be prepared even for a random audit.
Which Funds Belong in Client Trust Accounts?
In general, deposit only these client funds into a trust account:
• Real estate transaction funds
• Personal injury settlements
• Other settlements or judgments
• Retainers and advances for fees until actually earned
Which funds do not belong in a trust account?
• Earned fees when the client pays
• Personal funds
• Operating or other business funds
Remember, any funds for which you have fiduciary responsibility should always be held in separate properly entitled accounts.
All Client Funds Must Be Kept Separate
“Client A’s” money has nothing to do with “Client B’s” money. Even when you keep funds in a pooled client trust bank account, each client’s funds are completely separate entities which means a separate balance and transaction report for each client must be maintained at ALL times.
Your Client Ledger Must Never Have a Negative Balance
If there is an instance where you unintentionally spend more than a client has on deposit, the overdraft amount must be paid back from your personal funds.
Verify Funds before Disbursement
Don’t disburse until the deposited funds have cleared the trust account. Be diligent, but don’t let a client rush you. After you have written the trust check(s), take a moment to add them up and reconcile the client’s account.
Match your Books with Bank Statements
You must keep a record showing that you reconciled or balanced each trust bank account every month. The balance in the bank must agree with the total of the client balance listed on your books. Most trust account mistakes are identified during reconciliation. Firms that do not reconcile monthly are waiting for disaster to strike.
Keep Paper Records In Addition To Bank Statements
Establish a good audit (paper) trail. In addition to the bank account statement and any canceled checks, keep a monthly folder with the following:
• Copies/stubs of all checks deposited to or written on the account
• Copies of all deposit slips (copies you made – don’t rely on the bank)
• A copy of your receipts and disbursements journal (or reports from your trust software) showing the account transactions for the month.
Know Your State’s Trust Account Requirements
Each state has its own set of rules and regulations for client trust account management. Always keep a current Rule Book in your office and consult it as your first source of information.
Don’t lose sleep over trust fund accounting. Follow these simple rules and you’ll always be prepared for an audit.
Find out how HUD templates boost profitability
HUD Settlement Statement Required
Most residential real estate transactions whether they are a purchase, sale or refinancing, call for preparation of a HUD Settlement Statement. The Real Estate Settlement Procedures Act (RESPA) mandates a document generally referred to as the HUD Settlement Statement, which requires multiple parties’ approval (e.g. the lender and the other party’s attorney) before a closing can take place. For the purpose of easier disclosure and compliance, information must be entered in a specific HUD Settlement Statement format and style.
Simplify the Documentation Process
Real estate closing transactions involve multiple calculations and a stack of documents. Typically, HUD preparation alone takes several hours due to all the revisions the settlement statement goes through. The key to lessening the complexity of correctly preparing and assembling required documents is automation.
Reduce Real Estate Closing Preparation Time
To efficiently prepare and assemble real estate closing documents, you need to automate. Instead of entering real estate closing data over and over, what if you entered it just once? What if calculations were automatically performed and always accurate? What if closings were always balanced?
Create Templates for Efficiency
Most lenders and title agencies have fixed amount charges and require the HUD in a certain format. Because real estate firms routinely work with same lenders and title agencies, here is how you can streamline your HUD preparation:
• Create templates for each lender and title agency that you commonly use.
• Even better, you can make a template with lender A and title agency B combination.
• Pre-enter all common charges and text labels. Leave amounts blank or annotate with a large number such as 99999999.99, as a reminder that the value needs to be filled in.
• When you get a new client, check to see if a template exists for the lender/title company combination you need. If you expect to work with the combination again, consider making a template.
Increase Productivity and Profitability
By using real estate closing software applications and creating templates, law firms, and title and escrow companies can:
• Standardize (an entire workgroup can use the same starting templates for a closing).
• Minimize errors (as templates have already been used or reviewed earlier).
• Save time (no need to figure out required format again and again).
Streamline workflow, develop templates and automate repetitive tasks. You’ll increase productivity and improve profit margins.