Escrow Rules

| March 25, 2009

Escrow accounts have always been a hot button for owner-operators. Carriers’ negligence in disclosing items escrow money was intended to pay for has led to disputes upon lease termination. Occasional lawsuits challenged carrier practices, sometimes with positive outcomes for the owner-operators.

One result has been more fair and consistent escrow practices. Another outcome is that carriers have been more willing to establish voluntary financial relationships with owner-operators to facilitate savings for maintenance, taxes and other large bills that can handicap a budding trucking business.

Under federal law, however, any fund held by an owner-operator in cooperation with an interstate carrier is governed by the escrow regulations in leasing. Full disclosure of all items secured in the escrow is the carrier’s responsibility. It’s incumbent on the owner-operator to know what he or she is getting into before signing the lease.

Security escrows
Independent owner-operator Robert Harsell’s experience with the most common type of escrow account, the security escrow (or bond), is common. About seven years ago, the Virginia-based owner-operator was leased to a company with a hefty $3,500 escrow requirement, he says, “which they dropped to $2,500.” Its main purpose was to pay any cargo insurance claim deductible. “I got my money back when I left the company,” he says.

Escrows of this size are the exception unless you’re leasing the truck or in a lease-purchase situation. For instance, the much smaller $700 escrow required of Dart Transit contractors acts “as a sort of guarantee for contractor advances, various expenses and other things” the carrier takes on, says Steve Gundale, company spokesman. At Mercer Transportation, an initial $350 covers base plates for contractors. “When they terminate the lease, we give the money back,” says company Controller Tim Pike.

Problems arise, says Sheri Aaberg of leasing company ATBS Leaseco, when the carrier fails to adequately communicate the escrow account’s purpose. The sudden appearance of “miscellaneous” or “unspecified” escrow deductions on settlements often leads to a sour end to the lease – if not legal action.

When a trucker enters into a lease-purchase arrangement facilitated by ATBS Leaseco, Aaberg says, “we’re very careful about sitting down and going through all of it with them.”

One area to watch, says CRST Malone Vice President Bill Trotter, is a requirement for advance notice of contract termination for return of escrow monies. While Malone doesn’t require a certain time period for its owner-operators to get escrow money back, Trotter says he’s seen 30-day notification periods elsewhere.

Some carriers operate on simple trust when leasing owner-operators. “Just before I got my authority,” says owner-operator Harsell, “I was about to lease on to another company. They did not have an escrow requirement.”

Lease-purchase maintenance escrows

CRST Malone’s lease-purchase operators, similar to those in other lease-purchase arrangements, are required to have a $1,500 initial security escrow. Along with that is a maintenance contract and additional maintenance escrow “that will cover most everything that goes wrong with the truck,” Trotter says.

Maintenance escrow accounts in lease-purchase situations are typically mandatory, often funded from settlements on a per-mile basis to account for variability in weekly mileage.

These escrows are meant to protect both the carrier’s and the owner-operator’s investments in the truck. Lease-purchase operators must abide by the maintenance contract; if they don’t, the carrier can use the maintenance escrow to “help” them abide.

Jeremia Soriano, leased to Am-Can Transport (now part of the Greatwide companies) with his wife as team driver of a 2003 Freightliner Columbia, has only a couple months left in his lease period. After making a balloon payment of about $8,000 on the remaining value, he will own it. Working with ATBS Leaseco for financing, Soriano says his weekly settlement shows a lump-sum deduction of $225 that is placed in his maintenance escrow. For a solo driver, it’s $125, he says.

Though some might view it as just another payment, Soriano looks at the account as a fallback in case he’s unable to afford a large repair item not still under warranty. “So far I’ve been doing the PMs and the other repairs I can out of my pocket,” he says. He’s used the escrow sparingly. “I’ve paid out for three repairs on that truck – $2,000 for the radiator, two new tires and rotors, a few small repairs – and after that, I just let it build up. One thing that they told me is that I can use it to pay off my truck at the end of the lease. So far I’ve been saving that money to do that.” At press time, the available balance in his reserve was upwards of $11,000, more than enough to make the balloon payment.

Optional maintenance and other escrows

More and more carriers are offering maintenance escrows apart from lease-purchase contracts. These are optional, though still governed by the federal truth in leasing regulations.

“It’s really the contractor escrowing for the potential of mechanical failure,” says Dart’s Gundale.

A disciplined owner-operator could do something similar apart from the carrier, Gundale adds, but “how likely is he going to be to put money away into that savings account? We’re making it easy for you to have the savings program.”

Dart owner-operator Clark Lett, of Peterman, Ala., appreciates that ease. Lett’s contributed 10 cents a mile to a maintenance account almost since Dart began offering the program, at least 12 years ago. Practices such as this helped make Lett a finalist for this year’s Truckload Carriers Association’s Owner-Operator of the Year Award.

When Lett purchased his current truck, a 1996 International 9400, in the late 1990s, he doubled his maintenance escrow contribution from 5 cents a mile to 10 cents to fully cover future maintenance expenses and to assist saving for his truck payment. Ease of use, for Lett, is critical, and by eliminating the need to use credit cards at repair shops, he feels more secure.

“When you’re out on the highway needing some work done, you’re not waiting to get a purchase order or to get money,” he says. “I tell my dispatcher what I need, give them my account ID number and my Social Security number,” and they help make the service arrangements and set up the payment.

When his escrow account gets high enough, Lett says, “I pull some of it off and put it in my regular account.”

Dallas-based FFE Transportation Services provides a similar accounting for contractors participating in its maintenance program, including a road service team. When an owner-operator needs service, says Brian Etchison, director of contractor relations, “the fleet manager will advise the road service team how much funds [the owner-operator has] and they’ll select a vendor based on that information.”

As with Dart, settlements reflect all expenditures from maintenance escrow accounts, which helps in tax preparation.

The bottom line on maintenance escrows, says Etchison, is to make a breakdown less of a headache. “When a guy breaks down and has to fix his truck, it should be an annoyance, not a catastrophe.”

Other optional escrow accounts at FFE are a tire and licensing-fee account and a tax account. “Many of our contractors work with business services to plan with those particular accounts,” Etchison says. FFE offers ATBS’ business service to all of its contractors, and includes it for “all of our lease drivers,” he says.

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