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
Representative Frank Mitchell and Senator Charles Albertson asked the AG to weigh in on a problem facing North Carolina real estate closing attorneys. Under the 1996 Good Funds Settlement Act, a settlement agent cannot disburse loan proceeds from a trust or escrow account until the deposit is "collected" (irrevocably credited). There are exceptions for checks drawn on certain reliable issuers, including "the State of North Carolina, the United States, or a political subdivision of the State of North Carolina or the United States." The question was whether checks from federally chartered agricultural credit associations, like Carolina Farm Credit and Cape Fear Farm Credit, qualified for that exception so closing attorneys could safely disburse on the same day.
Senior Deputy AG Ann Reed and Assistant AG L. McNeil Chestnut answered that the statute was ambiguous and suggested the General Assembly fix it.
Agricultural credit associations are federally chartered corporate bodies and "instrumentalities of the United States" organized to do agricultural credit business under 12 U.S.C. § 2071. They have broad investment and loan authority and are regulated by the Federal Farm Credit Bank in their district. They can distribute net earnings to "patrons" (the credit-association equivalent of shareholders) as stock, certificates, or cash. While the associations themselves are not taxable, earnings on their obligations are taxable in the holder's hands. Structurally they look much like national banks (chartered under 12 U.S.C. § 21) or federal savings banks (chartered under 12 U.S.C. § 1464).
The ambiguity sits in the phrase "political subdivision of the United States." On the state-government side, the meaning is settled: "political subdivision" means a county, city, or town. The General Assembly uses it that way roughly 497 times across the General Statutes. So "political subdivision of the State of North Carolina" in § 45A-4(2) clearly means NC counties and municipalities.
But "political subdivision of the United States" is a strange phrase. It does not appear often in either federal or state statutes. If it is meant to parallel "political subdivision of the State of North Carolina," the only clear analog at the federal level would be the fifty states themselves. Critically, Congress did not classify agricultural credit associations as political subdivisions; it classified them as "agencies and instrumentalities of the United States." That is a different legal category.
The AG concluded that whether agricultural credit associations are "political subdivisions of the United States" within the meaning of § 45A-7(2) (the AG's text reference at this point cites § 45A-7(2)) was unclear enough to warrant legislative clarification. The proposed fix: amend the section to read "political subdivisions of the State of North Carolina or agencies and instrumentalities of the federal government, including agricultural credit associations."
The practical effect of the ambiguity in 2001 was that settlement agents were behaving conservatively. They typically did not treat agricultural credit association checks as eligible for the immediate-disbursement exception, meaning rural land closings funded through Farm Credit could face delays while funds cleared the trust account through ordinary collection processes. A clarifying amendment would let settlement agents disburse on the same day.
Currency note
This opinion was issued in 2001. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. The General Assembly has amended Chapter 45A multiple times since 2001. Anyone closing a transaction funded by an agricultural credit association today should consult the current text of N.C. Gen. Stat. § 45A-4 and check whether subsequent amendments addressed the ambiguity this opinion identified.
Background and statutory framework
The Good Funds Settlement Act's basic rule. Section 45A-4 was enacted in 1996 (1996 N.C. Sess. Laws ch. 714) to protect parties to residential real estate closings from a familiar fraud and float pattern: a buyer or lender deposits a bad check into the closing attorney's trust account, the attorney disburses proceeds to the seller and to lien holders the same day, and by the time the bad check bounces the proceeds are gone and the attorney is on the hook. The Act stops this by requiring "collected funds" (deposits irrevocably credited) before disbursement. Exceptions exist for checks where the issuer's solvency is so certain that the float risk is acceptable.
The § 45A-4(2) exception. This exception lets a settlement agent disburse in reliance on a deposit drawn on the State of North Carolina, the United States, or a political subdivision of either. Government checks from these issuers do not bounce in any practical sense, and the policy supporting the rule (loss avoidance) is met.
Why agricultural credit associations are different. Carolina Farm Credit, Cape Fear Farm Credit, and similar lenders are organized under Title 12 of the U.S. Code as federally chartered cooperatives. Congress called them "agencies and instrumentalities of the United States" in 12 U.S.C. § 2071, not "political subdivisions." That terminology choice matters. The Farm Credit System is supervised by the Federal Farm Credit Bank in each district, and the associations themselves have taxing exemption only for the corporate body, not for their obligations' yield in the hands of holders.
The phrase "political subdivision of the United States." This phrase is rare. Section 45A-4(2) borrowed a state-law concept (political subdivision = county, city, town) and tried to apply it to the federal sovereign. The AG noted that, taken literally, the only "political subdivisions of the United States" would be the fifty states. Agricultural credit associations are not states. They are federally chartered cooperative corporations. So the literal reading would exclude them.
The legislative fix the AG suggested. Replacing the phrase "political subdivision of the United States" with "agencies and instrumentalities of the federal government, including agricultural credit associations" would resolve the ambiguity. The new language would track the federal classification (12 U.S.C. § 2071) and would explicitly name the disputed entities. Settlement agents could then rely on Farm Credit checks the same day.
Why settlement agents had been conservative. The AG observed that, in practice, settlement agents were not treating ag credit association checks as eligible for the exception. The conservative reading is reasonable: if the agent disburses in reliance on an ag credit association check and a court later holds those checks were not within the exception, the agent has trust-account liability. Better to wait for collection than to gamble on an ambiguous statute.
The role of advisory opinions in legislative drafting. This opinion is a clean example of the AG using an advisory opinion to recommend a specific legislative amendment. Both sponsors (Rep. Mitchell and Sen. Albertson) had asked the AG whether legislation would help; the AG said yes and supplied draft text.
Common questions
Q: Did the opinion address checks from the Farm Credit Bank itself, rather than from a district credit association?
A: No. The opinion focused on agricultural credit associations like Carolina Farm Credit. The Farm Credit Bank's status as a federal instrumentality is established, but the AG's analysis turned on the term "political subdivision," not "federal instrumentality." A separate question would arise for Federal Reserve Banks, Federal Home Loan Banks, and similar federally chartered entities.
Q: Was the AG saying agricultural credit association checks would bounce?
A: No. The AG made no comment on creditworthiness. The point was purely textual: whether the Good Funds Settlement Act's specific exception language covered them.
Q: Could a settlement agent rely on a wire from an agricultural credit association?
A: The opinion did not address wires. The Act distinguishes between checks and wires, and wired funds typically arrive as collected funds (because the irrevocable transfer happens before crediting). Most ag credit association settlements probably moved to wires anyway after the ambiguity surfaced.
Q: What happens if the General Assembly never clarified the language?
A: The settlement agent's conservative response would have continued: hold disbursement until funds clear, or insist on a wire. The cost of the ambiguity is borne by rural borrowers and sellers who experience closing delays.
Citations from the opinion
- N.C. Gen. Stat. § 45A-3(7)
- N.C. Gen. Stat. § 45A-4
- N.C. Gen. Stat. § 45A-4(2)
- 12 U.S.C. § 2071
- 12 U.S.C. § 2073
- 12 U.S.C. § 2074
- 12 U.S.C. § 2077
- 12 U.S.C. § 21
- 12 U.S.C. § 1464
- 1996 N.C. Sess. Laws ch. 714
- 56 Am. Jur. 2d p. 101 (cited for the standard definition of "political subdivision")
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