![]() Over the weekend, you earn interest for two days. ![]() This procedure happens every business day. Then, before the opening of business, the bank sweeps the investment account balance back into your escrow account. That account earns interest at the interbank lending rate. When you open a sweep account, every night, your bank will sweep the collected balance in your escrow account to the overnight investment account that’s in your name. The banks’ liquidity requirements are what makes the sweep account work so well. Even today, companies that hold other people’s money in bulk, like payroll services, make tons of money from using sweep accounts.Ī sweep account is an interest bearing, overnight investment account. The remainder goes toward each bank’s P&L unless a savvy settlement agent does something to maximize this return.Įnter the SWEEP ACCOUNT! For several years prior to the millennium, settlement agents made millions of dollars using a simple sweep account device. The earnings credit is usually a small fraction of the interbank lending interest the bank has generated. If your bank sends you a monthly analysis, you can see the amount the bank is crediting you, usually in a line item called earnings credit, along with which fees that amount covers. What does your bank do with these earnings? Among other things, it gives you credit against the fees it would otherwise charge you for handling your escrow account activity. The higher the interbank rate goes, the more money a bank is making off of escrow account balances that do not belong to them. At the current interbank rate of 5.64%, their bank makes or otherwise avoids paying interest in the amount of $56,400.00 per year. Suppose a firm maintains an average daily balance of $1M. Use Sweep Accounts in States that Permit Settlement Agents to Earn Interest on Escrow Accounts Some are in states that prohibit earning interest on escrow accounts, and others are not. Let’s begin by dividing settlement agents into two groups. Your expenses are ultimately paid by the bank using that interest, making focus on this a win-win for settlement agents in every state. Where prevented by law, an agent can nonetheless assign certain expenses to their bank, expenses directly related to maintaining that escrow account. Interest earned on your escrow account can either bolster the bank’s liquidity or bolster your own, where legal. True, while the cash in your escrow account is not yours, it is not the bank’s either. Settlement agents who’ve yet to realize this impact, receive no benefit. How might this impact a settlement agent? Settlement agents who know how to take advantage of this banking practice can keep or benefit from more of the money your bank earned on your escrow balances. ![]() By contrast, most of the fifteen-year period since, the interbank rate has remained near zero percent. ![]() has seen since a short period bridging 2006 to 2007. This is the highest interbank rate the U.S. The interbank rate is based on the Fed Funds Rate.Īs of August 21, 2023, the interbank rate rose to 5.64%. The interest rate charged on these daily bank-to-bank loans is called the interbank rate. Your escrow account balances reduce the amount your bank must borrow. Banks that have a liquidity shortage must borrow from other banks to make up the shortage. The interest earned goes to the bank, not you. Excess liquidity, including that contributed by your escrow balances, are loaned to banks without adequate liquidity. They calculate excess liquidity or shortfalls every night after close of business. banks are required to maintain a minimum dollar amount of liquidity for their immediate needs. Without getting too deep in the weeds here, simply put, U.S. Let’s talk about the hidden income derived from your escrow accounts. If you are like many of the settlement agents for whom we at G&A provide services, you are earning revenue that you never receive and, in most cases, do not even know about.
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