Duty of a Settlement Agent Under the Good Funds Settlement Act

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 Honorable Frank Mitchell The Honorable Charles W. Albertson Page 2 July 5, 2001

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. 2^nd 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 The Honorable Frank Mitchell The Honorable Charles W. Albertson Page 3 July 5, 2001

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

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