Escrow Accounts

An escrow account is an account established in a borrower’s name to accumulate and disburse funds over time to pay for items such as taxes, assessments, and insurance premiums on purchased property. Typically, credit unions use escrow accounts in combination with a first mortgage, but escrow accounts may also be used for the transfer of assets, legal settlement distributions, and mergers and acquisitions. Depending on a credit union’s loan program and policies, members may be required to maintain an escrow account.

An escrow account can only be opened by a member, but it may receive funds from a nonmember. For example, a lawyer or real estate agent who is a credit union member may open an escrow account to receive funds from a client who is not a member of the credit union. An IOLTA, as outlined in NCUA regulation § 745.14, Interest on lawyers trust accounts and other similar escrow accounts, would also qualify as an escrow account.

Escrow accounts will be insured on a pass-through basis on behalf of the individuals who own the funds, whether they are members or not.

For the Benefit Of Accounts

Complying with federal and state money transmission laws as a payment facilitator can be challenging for fintechs. Federally insured credit unions are usually exempt from state money transmission licensing requirements because of NCUA regulation and supervision. This exemption makes credit unions an attractive partner for fintechs when opening FBO accounts on behalf of their customers. These third-party relationships allow fintechs to provide banking-like services without a money transmission license. Thus, funds flow through an account owned and controlled by the credit union. The credit union is responsible for moving the funds at the direction of the fintech, and all funds are in the custody and control of the credit union.

Risks may increase if the credit union does not have necessary access to specific information about the fintech’s customers, including FOM eligibility and information obtained to comply with KYC requirements. In addition, if the fintech and credit union recordkeeping policies and procedures are not aligned, there is a risk of potential confusion regarding NCUA share insurance coverage, identifying and managing high-risk account holders, and complying with statutes, such as BSA. The credit union could also be exposed to potential reputation risk if the fintech partner engages in unethical or fraudulent practices or ceases operations.

In these partnerships, credit unions rely on fintechs’ accounting systems and reconciliation processes to avoid blind spots and ensure proper management of funds and transactions. These blind spots can make it difficult for a credit union to monitor transactions and mitigate fraud.

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