When we have a construction loan where the draw schedule is not complete but the construction period has expired, we advance the full amount of the loan on the system and hold the funds in a savings account that draws interest until construction is complete. The savings account is opened in the name of the customer and the bank with no customer access to the account and a hold placed on the funds. Is it a regulatory requirement to hold the funds in an interest-bearing account since we are charging interest on the loan? Any feedback or insight as to how this is handled at other banks is appreciated.

Is it a regulatory requirement to hold the funds in an interest-bearing account since we are charging interest on the loan?

This would be a State law issue.