Does the Good Funds Settlement Act let a North Carolina closing attorney disburse loan proceeds right away when the funds come in on a check from Carolina Farm Credit or another federally chartered agricultural credit association?

Plain-English summary

Two North Carolina legislators asked about agricultural credit associations such as Carolina Farm Credit and Cape Fear Farm Credit under the Good Funds Settlement Act, which generally prohibited a residential real-estate settlement agent from disbursing loan proceeds until the agent received collected funds, meaning deposits irrevocably credited to the trust or escrow account. One exception permitted disbursement in reliance on checks drawn on North Carolina, the United States, or a political subdivision of either.

The legislators said settlement agents frequently did not treat agricultural credit associations as "political subdivisions of the United States" and therefore did not immediately disburse in reliance on their checks. They asked whether legislation could clarify the status. The AG said the phrase was ambiguous as applied to these associations and suggested an amendment.

Federal law defined the associations as federally chartered instrumentalities of the United States. The opinion explains that "political subdivision" has a settled state-government sense encompassing counties, cities, and towns. The federal phrase was unusual; if it paralleled the state phrase, the fifty states were the clearest examples. Congress had called the credit associations agencies and instrumentalities, not political subdivisions.

The AG suggested changing the statutory wording to expressly cover "agencies and instrumentalities of the federal government, including agricultural credit associations." The opinion uses § 45A-4(2) when quoting the check exception but refers to § 45A-7(2) in its closing recommendation; this record preserves that source wording. It gives no final yes-or-no ruling that all association checks did or did not qualify under the then-current exception.

Currency note

This opinion was issued in 2001. Check the current Good Funds Settlement Act before applying its discussion to a closing today.

What this means for you

If you handle a real-estate settlement: The opinion flags ambiguity in the then-current check exception for agricultural credit associations. It does not declare that relying on such a check is unlawful or decide the collection status of any particular payment.

If you draft legislation: The AG proposed language that would explicitly include federal agencies and instrumentalities, including agricultural credit associations, rather than relying on the phrase "political subdivision of the United States."

Common questions

Did the AG decide whether Farm Credit association checks met the exception?
No. It identified ambiguity and recommended legislative clarification.

Are these associations federal instrumentalities?
The opinion says 12 U.S.C. § 2071 defines them as federally chartered bodies and instrumentalities of the United States. It distinguishes that description from "political subdivision."

Did the opinion discuss wire transfers?
No. The question and analysis concern checks and the quoted exception for checks drawn on certain entities.

Why are two section numbers used for the exception?
The opinion cites § 45A-4(2) when setting out the exception but cites § 45A-7(2) in the final paragraph suggesting an amendment. Check the statute itself for the provision at issue.

Citations

• N.C. Gen. Stat. § 45A-3(7): collected-funds definition quoted in the opinion.
• N.C. Gen. Stat. § 45A-4 and § 45A-4(2): disbursement rule and quoted check exception.
• 12 U.S.C. § 2071: federal characterization of agricultural credit associations.
• 1996 S.L. 714: enactment of the Good Funds Settlement Act cited by the AG.

Source

• Landing page: https://ncdoj.gov/opinions/duty-of-a-settlement-agent-under-the-good-funds-settlement-act/

Original opinion text

Re: Advisory Opinion; Duty of a Settlement Agent Under the Good Funds Settlement Act (N.C. Gen. Stat. § 45A-4); Status of Agricultural Credit Associations

Dear Representative Mitchell and Senator Albertson:

Thank you for your recent letters requesting our advice regarding the status of federally chartered agricultural credit associations, such as Carolina Farm Credit and Cape Fear Farm Credit, under the North Carolina Good Funds Settlement Act.

Agriculture credit associations are defined by federal law as federally chartered corporate bodies and instrumentalities of the United States organized to engage in an agricultural credit business. See 12 U.S.C. § 2071. They have substantial investment and loan authority, 12 U.S.C. § 2073, and operate under the regulatory jurisdiction of the Federal Farm Credit Bank in their district. 12 U.S.C. § 2073. Their net earnings, less any contributions to restore a capital deficiency, may be distributed to patrons (the equivalent of a shareholder) by way of stock, certificates of participation, or cash. 12 U.S.C. § 2074. While an agricultural credit association itself is not taxable, earnings on its obligations are taxable in the hands of the holder. 12 U.S.C. § 2077. From the standpoint of organization, they appear to be no different from national banks chartered by the Comptroller of the Currency, 12 U.S.C. § 21, or federal savings banks chartered by the Director of the Office of Thrift Supervision. 12 U.S.C. § 1464.

The Good Funds Settlement Act was enacted by the General Assembly in 1996 to ensure the financial integrity of residential real estate loan transactions. 1996 S.L. 714. As a general rule, the Act forbids a settlement agent in a residential real estate loan transaction from disbursing loan proceeds until the agent has received "collected funds." N.C. Gen. Stat. § 45A-4. "Collected funds" are defined as deposits to the trust or escrow account which have been irrevocably credited to the account. N.C. Gen. Stat. § 45A-3(7). There are several exceptions to this general rule. One of these exceptions permits a settlement agent to disburse settlement proceeds in reliance on deposits to a trust or escrow account from a check drawn on "the State of North Carolina, the United States, or a political subdivision of the State of North Carolina or the United States." N.C. Gen. Stat. § 45A-4(2).

We understand from your letters that settlement agents frequently do not treat agricultural credit associations as "political subdivisions of the United States" within the meaning of G.S. 45A-4(2) and thus do not immediately disburse settlement (loan) proceeds from their trust or escrow accounts in reliance on deposits to those accounts or checks drawn on those entities. You have requested our advice about whether clarifying legislation would be helpful to eliminate any uncertainty about whether agricultural credit associations are political subdivisions of the United States. Because the phrase "political subdivision of the United States" is ambiguous with respect to agricultural credit associations, we would suggest that the General Assembly may want to consider a clarifying amendment.

With respect to state government the meaning of the phrase "political subdivision" is clear and well established. It means the "political or civil subdivisions of the state created by general law to aid in the administration of government," 56 Am. Jur. 2nd p. 101, and encompasses counties, cities and towns. The General Assembly often uses this phrase in this sense (some 497 times according to a computer search) and it is undoubtedly the sense in which the phrase "political subdivision of the State of North Carolina" is used in G.S. § 45A-4(2).

While the meaning of the phrase "political subdivision of the State of North Carolina" is clear, the meaning of the phrase "political subdivisions of the United States" with respect to agricultural credit associations is, for several reasons, problematic. Initially, the phrase "political subdivision of the United States" is unusual; it is seldom used in our statutes and in federal laws. Second, assuming that "political subdivision of the United States" has a meaning parallel to "political subdivision of the State of North Carolina" the only entities clearly encompassed by the term would be the fifty states. Third, Congress has defined agricultural credit associations as "agencies and instrumentalities of the United States," and not as political subdivisions. 12 U.S.C. § 2071.

For these reasons we conclude that the statutes are ambiguous with respect to whether agricultural credit associations are "political subdivisions of the United States" as that term is used in G.S. § 45A-7(2). This ambiguity could be resolved by amending G.S. § 45A-7(2) to read: "political subdivisions of the State of North Carolina or agencies and instrumentalities of the federal government, including agricultural credit associations."

Sincerely,

Ann Reed Senior Deputy Attorney General

L. McNeil Chestnut Assistant Attorney General