A payment direction letter is a written instruction telling a payer to send funds somewhere other than the default account on file. You’ll see them most often at real estate closings, where sale proceeds have to satisfy liens and get split among several parties, and in legal settlements, where part of an award goes straight to the claimant’s attorney. The letter locks in exactly where money should go and who authorized the routing. Get a digit wrong and the funds can land in a stranger’s account with almost no legal recourse against the bank that sent them there.
What the Letter Has to Contain
A workable direction letter carries a short list of details, and every one of them has to be exact. Start with the full legal names of the paying entity and the receiving party. Add the recipient’s bank name, the bank’s nine-digit ABA routing number, and the recipient’s account number. The ABA routing number identifies the specific U.S. financial institution and appears on checks and bank statements.
If the payment relates to a mortgage payoff, an escrow, or a legal settlement, include the loan number, escrow number, or internal file reference so the receiving institution can apply the funds to the correct sub-account. State the exact dollar amount and the currency. Most title companies and lenders maintain their own templates with fields for each required element, and using the institution’s form reduces the risk of leaving something out.
Verify every number against a voided check or an official bank verification letter. This matters more than it sounds. Under UCC Article 4A, a bank that receives a payment order identifying the beneficiary by both name and account number is entitled to rely on the account number alone, even if the name and number point to different people.1eCFR. 12 CFR Part 210 Subpart B – Funds Transfers Through the Fedwire Funds Service – Section: 210.27 The bank has no duty to confirm they match. A transposed digit can route the full payment to the wrong person, and the bank bears no liability for following the number you supplied.2Legal Information Institute. U.C.C. 4A-207 – Misdescription of Beneficiary The sender owns that risk.
Extra Fields for International Transfers
A domestic routing number does not work for a payment leaving the United States. International wires need a SWIFT/BIC code, an 8-to-11-character identifier that tells the global banking network which institution should receive the funds. Depending on the destination, you may also need an IBAN (standard across Europe and parts of the Middle East) or a country-specific identifier such as Mexico’s CLABE or India’s IFSC.
State the transfer currency, because conversion rates and intermediary bank fees can reduce what actually arrives. Also specify who pays intermediary bank fees. Three fee codes govern that allocation: “OUR” means the sender covers all fees, “BEN” means the recipient absorbs them, and “SHA” splits the cost. Naming the code in the letter prevents a smaller-than-expected deposit on the other end.
Who Has Authority to Sign
The letter is only valid if the signer has legal authority over the funds. For an individual directing their own money, that part is simple. The complications start with corporate entities and agents acting on someone else’s behalf.
Corporate Signers
When a business issues the letter, the signer must be an officer authorized under the company’s bylaws or by a board resolution. Banks typically keep the resolution on file and will reject instructions signed by anyone not named in it. The resolution should identify authorized signers by name and title and reference the relevant account.
Powers of Attorney
An agent acting for another person, such as an aging parent, must present a valid power of attorney alongside the direction letter. The document has to specifically grant authority over financial transactions. Institutions routinely require the original or a certified copy and will reject the letter if the power of attorney is too narrow or has expired.3American Bar Association. Power of Attorney
Medallion Guarantees and Notarization
Transfers involving physical securities require a medallion signature guarantee before the transfer agent will process them. This is not the same as notarization. A medallion guarantee is issued by a financial institution participating in a recognized guarantee program, and it makes the guarantor financially liable if the signature turns out to be forged.4Investor.gov. Medallion Signature Guarantees: Preventing the Unauthorized Transfer of Securities SEC rules require transfer agents to establish written standards for accepting these guarantees and to treat all eligible guarantor institutions equitably.5eCFR. 17 CFR 240.17Ad-15 – Signature Guarantees
Many financial institutions also require notarization for high-value direction letters as an anti-fraud measure. The threshold varies by institution and transaction. Print your name, title, and the date beneath your signature on every letter. Missing or deficient documentation is a common reason instructions get rejected outright.
How to Submit the Letter
Most lenders, escrow agents, and title companies accept direction letters through secure document portals. These usually require non-editable PDF format to prevent tampering after upload, and many add multi-factor authentication at submission. If a title company is involved in a real estate closing, ask whether it has its own direction form that integrates with its escrow file system before you draft your own.
For high-value transactions where a delivery record matters, certified mail with return receipt gives you proof of receipt and the date. Hand delivery to a local branch or title office works when you want immediate confirmation, and some institutions will stamp a copy for your records.
Cutoffs That Control When the Money Moves
When the direction letter triggers a wire, the transfer can only process during banking system operating hours. The Fedwire Funds Service, which handles domestic wires, runs from 9:00 p.m. ET the prior calendar day through 7:00 p.m. ET on business days. Customer transfers, which cover most payments to an individual or business, must be initiated by 6:45 p.m. ET.6Federal Reserve Financial Services. Wholesale Services Operating Hours and FedPayments Manager Anything received after that rolls to the next business day.
If the funds move through the ACH network instead, same-day processing has three daily submission windows. The final same-day ACH deadline is 4:45 p.m. ET, with settlement by 6:00 p.m. ET.7Federal Reserve Financial Services. FedACH Processing Schedule Standard ACH transfers that miss these windows settle the next business day. Submit the letter early enough that the institution can verify it and initiate the transfer before that day’s cutoff. For a real estate closing with a hard funding deadline, the timing is often the whole ballgame.
Verification After You Submit
Financial institutions typically begin verifying a new payment direction within 24 to 48 hours. The standard step is a callback to a phone number already on file for the account holder, confirming the letter is authentic. Once verified, the updated routing usually appears in the next disbursement cycle within one to three business days.
After the transfer executes, contact the receiving party and confirm the funds arrived in the right account for the right amount. Intermediary bank fees, internal holds, or wire issues can delay or reduce what actually lands. On an international wire sent with “SHA” fee allocation, the recipient will see a smaller deposit than expected after the receiving bank takes its cut. Confirming on both ends catches problems before they compound.
Wire Fraud Is the Main Risk
Most things that go badly wrong with a direction letter in the real estate context trace back to wire fraud, and the losses are large. In 2024, the FBI received over 9,300 real estate and rental fraud complaints with losses exceeding $173 million. The common scheme is a fraudster intercepting email between a buyer and a title company, then sending altered wire instructions that look legitimate but route closing funds to a criminal account.
The American Land Title Association recommends that title companies confirm the source of wiring instructions, independently verify any instructions received by email or from someone other than the payee, and verify delivery of wired funds after the transfer.8American Land Title Association. Wire Fraud As a buyer or seller, adopt the same habit. Never trust wire instructions received by email alone. Call the title company or attorney at a number you obtained independently, not one pulled from the email, and verbally confirm every digit.
The legal backdrop makes this vigilance mandatory, not optional. Wire transfer agreements place responsibility for the accuracy of payment instructions on the sender. Banks disclaim liability for following account numbers that do not match the named beneficiary, and the sender typically signs an indemnity clause holding the bank harmless for any loss caused by reliance on the information provided.1eCFR. 12 CFR Part 210 Subpart B – Funds Transfers Through the Fedwire Funds Service – Section: 210.27 Once money lands in the wrong account, recovering it is extremely difficult and often impossible.
Canceling or Changing a Payment Direction
Changing your mind after you send the letter is possible, but the window closes fast. Under UCC Article 4A, a cancellation or amendment is effective only if the bank receives it in time to act before accepting the payment order.9Legal Information Institute. U.C.C. 4A-211 – Cancellation and Amendment of Payment Order After acceptance, cancellation generally requires the bank’s agreement, and the bank has no obligation to agree.
There are narrow exceptions. If the order resulted from a mistake, such as a duplicate instruction, payment to someone not entitled to the funds, or an overpayment, the beneficiary’s bank may be required to cooperate with cancellation. Even then, the bank is entitled to recover from the beneficiary whatever it already paid, and success depends on whether the funds are still in the account.9Legal Information Institute. U.C.C. 4A-211 – Cancellation and Amendment of Payment Order An unaccepted payment order automatically cancels at the close of the fifth business day after its execution date. If you need to change or cancel, call the bank immediately and follow up in writing. Hours matter.
Taxes Don’t Follow the Money
Directing a payment to a third party does not shift your tax obligation. The IRS treats income received by an agent, or directed to a third party on your behalf, as constructively received by you in the year it was paid.10IRS. Publication 525 (2025), Taxable and Nontaxable Income If you instruct a settlement payer to send your attorney’s contingent fee directly to the attorney, you still owe tax on the full settlement amount, not just the portion you kept.
Settlements
When a payer directs settlement funds to a claimant’s attorney, the payer generally issues a Form 1099-MISC to both the claimant and the attorney. The claimant’s 1099-MISC reports the damages, typically in box 3, and the attorney’s separate 1099-MISC reports gross proceeds in box 10.11IRS. Instructions for Forms 1099-MISC and 1099-NEC (04/2025) The claimant cannot exclude the attorney’s fee from gross income just because the money went straight to the attorney.
Real Estate Proceeds
In real estate transactions, the person responsible for closing (usually the settlement agent on the Closing Disclosure) files Form 1099-S reporting gross proceeds to the IRS. With multiple sellers, the closing agent must file a separate 1099-S for each transferor and request an allocation of gross proceeds among them.12IRS. Instructions for Form 1099-S (12/2026) A direction letter that splits proceeds among lienholders, the seller, and other parties does not change who receives the 1099-S or the amount reported. Full gross proceeds are reported to the seller regardless of how the money was actually distributed at closing.
Keep copies of every direction letter with your tax records. If the IRS questions a gap between a 1099 amount and what you actually deposited, the direction letter is your documentation showing where the rest went.