1. 1 Banking on Escrow: Best Practices for Offering an Escrow Sub-Account Solution to Your Customers Windy City Summit June 7, 2012

2. 2 Session Objectives  Obtain knowledge in what escrow sub-accounting is, who uses it, and how it works  Gain a better understanding of the current trends in escrow sub-accounting  Learn what financial institutions are doing to offer escrow accounting solutions  Review common best practices to implement escrow accounting solutions

3. 3 Situation Analysis and Current Trends Joseph Vitale Vice President Senior Product Manager

4. 4 Situation Analysis – Escrows What is an escrow?  An arrangement to help parties perform contracts and avoid disagreements What parties are involved in an escrow arrangement?  A depositor, an escrow agent, a beneficiary How does an escrow work?  The depositor is required to entrust money or property with an escrow agent  The escrow agent holds the deposit until it can be released to the beneficiary upon some future event There are many uses for escrows of all which have contractual or legal obligations

5. 5 Situation Analysis – Escrows What types of funds are held in escrow?  Down payment for the purchase and sale of real property  Legal settlements, rent security deposits, new home construction, advance fees paid to brokers, membership fees, assisted care deposits Who needs escrows?  Law Firms: client trusts, IOLTAs  Real Estate: property management, title companies, 1031 exchanges  Pre-Need: nursing homes, funeral homes, cemeteries, crematories  State Government: local bond funded projects  Federal Government: federal projects, EB-5

6. 6 Situation Analysis – Escrow Rules and Regulations Every industry that uses escrow accounts has unique and specific rules and regulations to follow based on several factors, including, but not limited to:  Interest payments  Taxes  Financial reporting  Oversight and disclosure  Agreements and contracts  Funds management and disbursement  State and federal mandates Each escrow application has unique rules and regulations

7. 7 Situation Analysis – Escrow Accounting Products Escrow accounting products have been increasing in demand and usage over the last few years. Businesses require more visibility into and control over accounts and can no longer wait for month end statements or rely on bank custodial management. Industry solutions typically have the following characteristics:  Web-based online reporting and account administration  Unlimited sub-accounts  Interest allocation and apportionment  Deposit and funds segregation  Reconcilement and adjustment identification  Statement and activity reporting  Document storage and retrieval  1099 reporting Financial institutions have seen an increase in demand and adoption for escrow products

8. 8 Situation Analysis – Escrow Accounting Products Financial institutions are now developing escrow accounting products and services to meet the increasing demands of businesses. These products have a typical workflow in terms of how they are setup and used. 1. Customer is setup on an escrow accounting product with master or main escrow account(s) 2. Customer creates subaccounts in the product off of the main interest bearing or non- interest-bearing account structures 3. As deposits come into the main account(s), they are posted to the product on a prior day or same day basis 4. If the subaccount is identified on the incoming deposit, the subaccount is automatically updated with the deposit, or if not identified, unallocated funds will need to be reconciled 5. As the bank calculates and posts interest to the main account, all subaccounts that accrue interest are automatically updated 6. Customer can generate reports to verify transaction activity and reconcilement 7. When it comes time to disburse the funds, customer can initiate payments or write a check to the account holder and then close the sub-account Escrow accounting products bring reporting and administration tasks online

9. 9 Situation Analysis – Escrow Accounting Products Typical escrow account structure hierarchy: This structure allows organizations to build unlimited subaccount hierarchies Escrow Account Master Account 1 (Interest Bearing) Sub-account 1 Account Holder Sub-account 2 Account Holder Master Account 2 (Non-interest Bearing) Sub-account 1 Account Holder

10. 10 Industry Trends – Risk and Compliance Financial institutions and businesses are experiencing a shift in oversight, risk management, regulatory changes, and enhanced compliance standards. The business community is dealing with an onslaught of risk and regulatory challenges RISK CATEGORYRISK Risk Management  Asset allocation  Counterparty  Currency  Economic Regulatory  Direct, industry specific  Indirect, banking Compliance  Direct, industry specific (SOX, SSAE 16)  Indirect, banking Business Resumption and Continuity  Natural disasters are no longer a once or twice in a lifetime occurrence  Pandemic, operational or process breakdown

11. 11 Industry Trends – Technology Technology is changing rapidly and organizations are dealing with when to begin to upgrade, change, and use new systems to run the business.  Budgeting  New products and services  Risk and compliance  Core Systems  Accounting, Billing/Purchasing  Treasury Management Workstations, ERP  DDA, Analysis, Payment systems  Platforms  Online banking  Software as a Service (SaaS)/Cloud  mCommerce (mobile)  Go Green/Eco-friendly initiatives Businesses have been on the same system platform for an average of 7-10 years

12. 12 Industry Trends – Fraud and Security Fraud prevention and overall transaction security is a primary concern for all organizations.  Online Banking  Secure payments and account/transaction data  Protected browser sessions  Timely alert notifications  Fraud Mitigation  Check and ACH Positive Pay, blocks, filters  Dual control, out of band, security tools  User access permissions, transaction limits  Risk Management  Enterprise risk  Predictive analysis and scoring  Back office system detection The expectation is we all must do more to assist in fraud education and prevention

13. 13 Best Practices in Partnering with a Bank Judy Hill Senior Vice President Sales Advisory

14. 14 Determining the Need for an Escrow Partner  Do you have a need to segregate accounts and keep funds separate for tracking and reporting?  Would you like the convenience of opening and closing escrow accounts quickly online?  Would you like the ability to attach relevant account documents such as W9s, legal agreements, and service contracts directly to online accounts?  Do you require visibility and transparency into all main and subaccounts to meet audit and compliance policies?  Is FDIC insurance important to your customers?  Would you like to offer your clients interest on the earnest money or escrow funds you manage and administer for them?  Are you required to create and distribute 1099s?

15. 15 Case Study: Real Estate Brokerage Company Company Overview  40 offices across the county  In excess of 1,500 active brokers Current Environment  150 escrow deposits per month  Average deposit amount $13,000  Average deposit time 90 days  75% non-interest bearing deposits  25% interest bearing deposits  150 distributions per month  Escrow deposits tracked manually via spreadsheet  Interest calculated manually at time of disbursement  Manual bank reconciliation  Mission Impossible – accurate production of 1099s

16. 16 Challenge with Manual Process

17. 17 Challenges with Manual Process ChallengeSolution It takes too long and it’s too expensive to open separate accounts at the bank. You can administer the sub accounts online without contacting the bank. Your bank should allow for an umbrella agreement that covers all of the OFAC and KYC procedures. I need to keep funds segregated for tracking and management. These solutions maintain a logical hierarchy for Master and Sub Accounts - allowing you to maintain and view each account separately or you can group accounts uniquely to provide information the way you need it. I am required to pay interest on some of the accounts and can’t easily calculate it. Interest can be allocated at both the Master and Sub Account level and can be applied using different rates for each account. Issuing 1099’s at year end is a significant task. 1099 reporting is facilitated to work within your current reporting process and will provide more efficiency. Helping you to meet IRS reporting requirements. My customers demand FDIC coverage on their deposits. Accounts can be set-up so that all funds have full FDIC coverage. I have separate systems to access important client documents of escrow accountholders. These solutions have a document upload function so you can attach all relevant documents like escrow agreements and invoices directly to online profiles.

18. 18 Value Proposition for Businesses There are several benefits businesses can take advantage of from day one FeatureBenefit Online system accessUsers manage all accounts and administration online in a separate product module in a safe and secure environment Escrow sub-accountingMain accounts can be broken down into subaccounts for individual tracking and reporting and store related documents like W9s and agreements Interest accrualInterest can be allocated at both the main and sub-account level and can be different for each account Risk and complianceComplete audit trails, visibility and transparency into all account activity to meet risk and compliance standards ReportingStatement reports, charts, graphs, analytics, and 1099 reporting

19. 19 Best Practices in Implementing Escrow Solutions  Analyze your current process and escrow needs  What are your challenges  Where are your risks  Outline all legal and compliance requirements  Work with your financial institution to:  Understand the options for the account structure to best meet your needs  Identify operational efficiencies based on the features of your banking partner’s product offering  Understand the value proposition for your customers  Create business case to sell internally Use the IPDE method – Identify, Predict, Decide, and Execute

20. 20 Summary  There is an increase in demand in the industry for online escrow subaccount solutions  State, federal, and industry regulations and compliance standards are driving adoption of escrow subaccount products  The primary market segments with escrow accounting needs are law firms, real estate, pre-need, and government  Escrow accounting solutions offer several key benefits to both businesses and financial institutions  Follow best practices when marketing and implementing escrow accounting products and services  Understanding your escrow needs and requirements is key to an effective program built to meet revenue goals, reduce costs, and satisfy compliance standards