Real Estate Practice Unit 13: Escrow and Title Insurance

Which of the following are exempt from licensing under the escrow law? (a)Banks (b)Attorneys (c)Savings associations (d)All of these

(d)All of these

The signed escrow instructions disagree with the purchase contract. As to the disagreement, which of the following is TRUE? (a)The true intent of the parties must first be discovered. (b)The courts would have to decide the matter. (c)The purchase contract prevails. (d)The escrow instructions prevail.

(d)The escrow instructions prevail. The escrow instructions are a more current and more accurate reflection of the true intent of both parties.

CLTA policy

A standard coverage title insurance policy protects real estate buyers in matters of record and specific risk

Demand Statement

The demand statement indicates amount due to the lender from escrow if the loan is to be paid off. It could include a prepayment penalty. (It is different from the beneficiary statement, which shows balance and condition of loan.)

An escrow would not prorate (a)title insurance costs. (b)taxes. (c)interest. (d)insurance.

(a)title insurance costs.

Escrow costs are prorated based on a (a)30-day month. (b)360-day year. (c)both A and B. (d)neither A nor B.

(c)both A and B.

Before closing, the escrow is a? After closing, the escrow has?

-dual agency -separate agency duties

Closing costs include...

//Origination fees//Property taxes//Title insurance//Escrow costs//Appraisal fees//Taxes//Fees owed to state and local government

A preliminary report...

1. A preliminary report is an offer. 2. It is not an abstract of title reporting a complete chain of title. 3. It is a statement of the terms and conditions of the offer to issue a title policy.

Deed of Reconveyance

A document that a trustee uses to transfer the title back to the trustor (borrower) when the note is repaid.

escrow agent/officer

An individual qualified to perform all the steps necessary to prepare and carry out escrow instructions. Tasks include obtaining title insurance; securing payoff demands; prorating taxes, interest, rents, etc.; and distributing the funds held in escrow.

Rents

Prepaid rents will be prorated in cases involving income-producing properties. Rents are generally prorated on an actual day basis (calendar year) using 365 or 366 days.

property taxes

Property taxes are levied annually (July 1 to June 30 is the tax year) and are paid in two installments. Taxes often require proration. If, for example, the seller had paid the first installment of a given year's taxes but completed the sale before that tax period was over, he or she would receive a credit for the remainder of that period's taxes. If, on the other hand, the seller retained the property through part of the second tax period but had not yet paid taxes for that period, the amount due would be prorated between seller and buyer, with the seller having to pay for the portion of the tax period during which he or she still owned the property.

beneficiary statement

The escrow agent obtains a beneficiary statement when an existing loan is to be paid or assumed by a buyer. The statement includes the balance due on the loan so the buyer receives the proper amount of credit.

what is on the seller's settlement sheet?

all the credits to the seller are added (selling price of the property, prorations, etc.). Any debits owed by the seller are then totaled and deducted from the credits. The difference is entered as a cash credit (usually) to the seller, and the escrow agent forwards a check for this amount at the close of escrow.

The preliminary title report does not provide

any insurance

Amendments to the escrow instructions must be?

signed by all parties to the escrow.

cash payments of over ______ must be reported to the IRS?

$10,000 (form 8300). (Gross proceeds to seller are reported on form 1099S)

Which of the following may NOT engage in the escrow business? (a)An individual who is not a real estate broker or attorney (b)Bank (c)Title and trust company (d)Savings associations

(a)An individual who is not a real estate broker or attorney

The extended coverage policy offers protection covering all of the following EXCEPT (a)eminent domain. (b)unrecorded loans. (c)rights of parties in possession. (d)claims that a correct survey would have revealed.

(a)eminent domain

A document that describes the property and any existing encumbrances is called a (a)preliminary report. (b)abstract of title. (c)title plant. (d)binder.

(a)preliminary report. The preliminary report describes the property and current owner of record, as well as any recorded liens or other encumbrances. The escrow holder reads the report to verify the legal description and to determine if there are any child support liens, taxes, or judgments for which a release will be required prior to the close of escrow.

The escrow agent disburses funds to the parties when (a)the deed is recorded. (b)the buyer's loan is funded. (c)the title insurance policy is issued. (d)all documents are received.

(a)the deed is recorded. On the day the deed is recorded, the escrow agent disburses funds to the parties, according to their signed instructions.

A standard policy of title insurance covers all of the following EXCEPT (a)unrecorded liens. (b)incorrectly given marital status. (c)incompetent grantor. (d)forged deed.

(a)unrecorded liens. The CLTA standard policy of title insurance covers maters of record.

An escrow prorates based on a (a)300-day year. (b)360-day year. (c)365-day year. (d)none of these.

(b)360-day year. (and a 30 day month)

A standard policy of title insurance protects the purchaser from all EXCEPT (a)forgery in the chain of title. (b)changes in the zoning. (c)an unknown spousal interest. (d)lack of capacity of a grantor.

(b)changes in the zoning.

The Preliminary Title Report (a)provides insurance coverage until the title insurance policy is issued. (b)is merely an offer to insure. (c)provides extended coverage for lenders. (d)none of these.

(b)is merely an offer to insure.

The Closing Disclosure form must be in the hands of the borrower at least? A copy must also be provided to the seller no later than?

(buyer) three business days before closing. (seller) the day of closing.

An escrow licensee is prohibited from (a)paying a referral fee to anyone other than his or her own employees. (b)accepting escrow instructions having blanks that are to be filled in after the instructions are signed. (c)Both A and B. (d)Neither A nor B.

(c)Both A and B.

All of the following are true about escrow EXCEPT (a)Escrow is created on the conditional delivery of transfer instruments and monies to a third party. (b)Once the escrow instructions have been signed, the escrow acts in a dual-agency capacity. (c)Escrows are required by law. (d)Closings are primarily handled by either third-party escrows or title companies in California.

(c)Escrows are required by law. Although escrows are not generally required by law in California, they have become an almost indispensable mechanism to protect the parties involved.

When a change is required to escrow instructions, both buyer and seller must agree to (a)a codicil to the escrow. (b)an escrow rider. (c)amend the escrow instructions. (d)any of these.

(c)amend the escrow instructions

The purchase price would be (a)a debit on the buyer's closing statement. (b)a credit on the seller's closing statement. (c)both A and B. (d)a credit on the buyer's closing statement and a debit on the seller's statement.

(c)both A and B.

An ALTA policy of title insurance protects the (a)buyer. (b)seller. (c)lender. (d)all of these.

(c)lender. The ALTA policy is used to protect lenders and expands the standard policy.

The term impounds refers to (a)personal property. (b)clarity of title. (c)reserves. (d)trust funds.

(c)reserves. Impounds are monies set aside (reserves) to cover future payments of recurring costs such as taxes and insurance.

Given that mistakes can be made in escrow, it is the broker's duty to (a)meet with the buyers or sellers to explain the closing statement. (b)help the buyers and/or sellers understand all charges and credits on the closing statement. (c)verify that the buyers and sellers have received the correct amount from escrow or paid the correct amount into escrow. (d)all of the above.

(d)all of the above.

To obtain an escrow license, a corporation must (a)pass a background check. (b)set up a trust fund for all monies deposited in escrow. (c)furnish a surety bond for $25,000 to $59,000. (d)all of the above.

(d)all of the above.

A broker can, without being licensed as an escrow, handle the escrow on transactions where he or she (a)acts as a principal. (b)represents the buyer. (c)represents the seller. (d)any of the above.

(d)any of the above. A broker may act as an escrow on his or her own sales or on sales in which he/she acts as a principal.

Failed Escrow

- Escrow cannot be completed >> the parties must agree to release the funds (less costs and fees) - if a party refuses to agree to release the funds when there is not a good faith dispute as to who is entitled -- that party can be liable for treble damages - a buyer's deposit may be released only if the parties agree - the matter is settled in arbitration or a judgement is rendered regarding the dispute

Liability of an Escrow

- could be held liable for its negligence or breach of duty - escrow companies don't have any duty to warn a party of possible fraud or point out any detrimental fact or risk of a transaction - if the escrow agent is a broker - they would have these disclosure obligations

Closing the Escrow - Basic Steps

1. A statement showing the condition of the indebtedness and the unpaid balance of the current loan is requested from the beneficiary, the lender - they must respond w/in 21 days of receipt of the request 2. When the escrow agent has received all funds, docs, and instructions to close the escrow >> they make any necessary adjustments and prorations on a settlement sheet 3. All instructions pertinent to the transaction are then sent to the title insurance company for recording 4. The title search runs right up to the last minute of the escrow recording to ensure that nothing has been inserted in the record -- no changes occured >> the deed and other instructions are recorded on the next morning -- a title policy can be issued with the assurance that no intervening matters of record have occured since the last search 5. On the day the deed is modified - the escrow agent disburses funds to the parties, according to instructions 6. After recording, the escrow agent presents closing statements 7. The title insurance company goes to issue a policy of title insurance on the day of recordation 8. The recorded deed is sent from the county recorder to the customer

credit

1. Obligations that are due or are to become due to a person. 2. In closing statements, that which is due and payable to either the buyer or seller—the opposite of a charge or debit. The credit appears in the right-hand column of the accounting statement.

amendment to the escrow instructions

A change to escrow instructions requiring the agreement of both buyer and seller.

Title Insurance

A comprehensive indemnity contract under which a title insurance company warrants to make good a loss arising through defects in title to real estate or any liens or encumbrances thereon. Unlike other types of insurance, which protect a policyholder against loss from some future occurrence (such as a fire or auto accident), title insurance in effect protects a policyholder against loss from some occurrence that has already happened, such as a forged deed somewhere in the chain of title. Needless to say, a title company will not insure a bad title any more than a fire insurance company would insure a burning building. However, if upon investigation of the public records and all other material facts, the title company feels that it has an insurable title, it will issue a policy.

abstract of title

A full summary of all consecutive grants, conveyances, wills, records and judicial proceedings affecting title to a specific parcel of real estate, together with a statement of all recorded liens and encumbrances affecting the property and their present status. The abstract of title does not guarantee or ensure the validity of the title of the property. Rather, it is a condensed history that merely discloses those items about the property that are of public record; thus, it does not reveal such things as encroachments and forgeries

Standard coverage policy

A standard coverage policy normally insures the title as it is known from the public records. In addition, the standard policy insures against such hidden defects as forged documents, conveyances by incompetent grantors, incorrect marital statements and improperly delivered deeds.

extended coverage policy

A title insurance policy that covers risks normally excluded by most standard coverage policies. The standard policy normally insures the title only as shown by the public records. It does not cover unrecorded matters that might be discovered during an inspection of the premises. Most lenders require extended coverage mortgage title insurance policies. Extended coverage indemnifies the insured against such things as mechanic's liens, tax liens, miscellaneous liens, encumbrances, easements, rights of parties in possession and encroachments, which may not be disclosed by the public records

American Land Title Association (ALTA) policy

A title insurance policy that protects the interest in a collateral property of a mortgage lender who originates a new real estate loan.

preliminary report

A title report that is made before a title insurance policy is issued or when escrow is opened. A preliminary report or policy of title insurance reports only on those documents having an affect on the title and should not be relied on as being an abstract. An abstract of title, on the other hand, reflects all instruments affecting title from the time of the original grant and also includes a memorandum of each instrument, and makes no attempt to determine which of the documents currently affects record title. The "preliminary" is not a binder or commitment that the title company will insure the title to the property, although this commitment may be obtained at an added cost.

Impound Account

A trust account established to set aside funds for future needs relating to a parcel of real property. Many mortgage lenders require an impound account to cover future payments for taxes, assessments, private mortgage insurance and insurance in order to protect their security from defaults and tax liens. In the case of FHA loans, many lenders require a tax reserve of six months and an insurance reserve of one year. When the property is sold and the buyer assumes the seller's mortgage, the lender does not usually return the escrow account balance to the owner. The sum remains with the lender, and it is the responsibility of the buyer and seller to prorate the balance between them. Impound accounts are required for FHA loans, and although VA regulations do not require an impound account for taxes and insurance premiums on GI loans, many lenders customarily require that such accounts be established and maintained. Under RESPA, the amount of reserves in the impound account is limited to one-sixth of the estimated amount of taxes and insurance that will become due in the 12-month period beginning at settlement. Sometimes, part of the purchase price due the seller may be impounded or put aside by escrow to meet the post-closing expense of clearing title or repairing the structure. The issue of use of interest earned on reserve funds is frequently debated. Typically, lenders do not pay interest to borrowers on money held as reserves.

The policy generally purchased for the benefit of the lender is the?

ALTA extended policy The buyer pays for this lender protection. It insures that the lender has a valid and enforceable lien, subject to only the exclusions from coverage noted in the exception schedule of the policy. It insures the lender for the amount of the loan, not the purchase price of the property. There are three basic ALTA policies-one deals with homes described by lot, block, and tract; one deals with homes described by either the metes-and-bounds or government survey system; and one deals with construction loans. The extended coverage lender policy protects the lender only, not the purchaser, from the risks covered. Buyers who desire extended protection must pay for that protection. An owner's policy is available that offers this extended protection. (Both CLTA and ALTA have homeowner extended coverage policies.) In addition to the coverage offered by the standard policy, the extended coverage policy of title insurance includes the following: -Unrecorded liens -Off-record easements -Rights of parties in physical possession, including tenants and buyers under unrecorded instruments -Rights and claims that a correct survey or physical inspection would disclose -Mining claims -Water rights -Lack of access Insurers might require a survey before they issue an extended coverage policy of title insurance. The extended coverage policy does not cover the following: -Matters known by the insured - but not conveyed to the insurer -Government regulations such as zoning -Liens placed by the insured -Eminent domain -Violations of the map act

REQUIREMENTS FOR ESCROW LICENSURE

Any corporation applying for an escrow license under the Escrow Act must: -pay an application fee; -pass a background check; -meet minimum financial requirements; -meet minimum experience requirements (managers must have at least five years of responsible escrow experience); -furnish a surety bond for $25,000 to $59,000; -arrange for the fidelity bonding of responsible employees (minimum of $125,000 each); -be a member of the Escrow Agents' Fidelity Corporation (EAFC); -set up a trust fund for all monies deposited in escrow; -keep accurate records, subject to audit at any time by the Commissioner of Corporations and the Department of Real Estate; and -submit to an independent audit annually at its own expense.

The policy usually used by the buyer is the

CLTA policy. This policy is called a standard policy. The standard policy of title insurance covers matters of record, if not specifically excluded from coverage, as well as specified risks not of record, such as the following: -Forgery -Lack of capacity of a grantor -Undisclosed spousal interests (a grantor who claimed to be single had a spouse with community property interests) -Failure of delivery of a prior deed -Federal estate tax liens -Deeds of a corporation whose charter has expired -Deeds of an agent whose capacity has terminated Excluded from coverage by a standard policy of title insurance are the following: -Defects known by the insured and not disclosed to the title insurer -Zoning (although a special endorsement is possible that a current use is authorized by current zoning) -Mining claims (filed in mining districts; legal descriptions are not required) -Taxes and assessments that are not yet liens -Easements and liens not a matter of record (such as prescriptive easements and rights to a mechanic's lien) -Rights of parties in possession (unrecorded deeds, leases, options, etc.) -Matters not a matter of record that would be disclosed by checking the property (such as encroachment) -Matters that would be revealed by a correct survey -Water rights -Reservations in government patents

While ALTA covers the United States, CLTA only covers ________________. An ALTA lender policy provides extended coverage to the lender, not ____________________.

California the buyer

good funds

Cash, cashier's checks and personal checks that have cleared the bank.

closing costs

Expenses of the sale (or loan refinancing) that must be paid in addition to the purchase price (in the case of the buyer's expenses) or be deducted from the proceeds of the sale (in the case of the seller's expenses). Some closing costs result from legal requirements; others are a matter of local custom and practice.

prorations

Expenses, either prepaid or paid in arrears, that are divided between the buyer and seller at closing.

Insurance

Fire insurance is normally paid for one year in advance. If the buyer assumes a fire insurance policy that has not yet expired, the seller is entitled to a prorated refund of the unused premium. (Assumption may not be allowed since insurance is a personal contract.)

Marketable Title

Good or clear title, reasonably free from the risk of litigation over possible defects.

interest

If a loan of record is being taken over by the buyer, interest will be prorated between buyer and seller. Because interest is normally paid in arrears, if a closing is set for the 15th of the month and the buyer assumes a loan with payments due on the 1st of the month, the seller owes the buyer for one-half-month's interest.

Recurring costs

Impound account costs for taxes and insurance are referred to as recurring costs.

escrow instructions

In a sales transaction, a writing signed by buyer and seller that details the procedures necessary to close a transaction and directs the escrow agent how to proceed. Sometimes the buyer and seller execute separate instructions and sometimes the contract of sale itself serves as the escrow instructions.

rebate law

Law that prohibits escrow and title insurance companies from giving rebates or favorable treatment as consideration for the referral of business.

demand for payoff

Lender's statement of remaining indebtedness that will be paid at closing on transfer of the property securing the debt.

Escrow is a many-faceted procedure, and includes but is not limited to the following:

Order preliminary title report Conveying preliminary title report to buyer Ordering beneficiary statement or payout demands Handle receipt and disbursement of all funds Facilitate handling, preparation, and signing of all documents Comply with all government regulations Act as communicator with parties to the escrow, as well as broker and lender Ensure that all conditions of escrow are met Satisfy lender conditions and that a clear title will be conveyed to buyer Accept fire insurance policy Make all payments and fees

Escrow is complete when the following actions have been taken:

The escrow officer sends the deed and deeds of trust to the recorder's office to be recorded. This offers protection of the title to the buyer and of the lien to the lender. The broker's responsibility is to confirm the recordation and inform the clients. The escrow agent sends to the seller and buyer the closing statements showing the disbursement of funds. The escrow agent forwards the title policy, assuring the buyer of marketable title, except for certain items; the agent sends the original copy to the buyer.

Escrow

The process by which money and/or documents are held by a disinterested third person (a stakeholder) until satisfaction of the terms and conditions of the escrow instructions (as prepared by the parties to the escrow) have been achieved. Once these terms have been satisfied, delivery and transfer of the escrowed funds and documents takes place. Although in some states a real estate broker is authorized to handle escrow functions, the common practice is to employ the services of a licensed escrow company, title company or lending institution.

Closing costs

The sum that the seller and buyer have to pay beyond the purchase price is called the closing costs. Closing costs consist of fees charged for the mortgage loan, title insurance, escrow services, reconveyances, recording of documents, and transfer tax, among others. Amounts vary, depending on the particular locale involved and the price of the property. Figure 13.4 shows a sample of the customary seller's closing costs, but these costs vary regionally. Costs also vary, not only from area to area but also from institution to institution within an area. Some costs change with fluctuations in the economy. Figure 13.5 lists those items for which the buyer is responsible.

REBATE LAW (RESPA)

Title insurance companies are precluded by law from providing kickbacks to brokers for referral of business. They must charge brokers the same as other customers and make a sincere effort to collect any premiums due. The rebate law extends to escrows as well as to title insurers. Besides being grounds for disciplinary action, receiving a rebate from a title insurer is considered commercial bribery and could subject a licensee to up to one year in jail and a $10,000 fine for each transaction.

If information on the closing statement becomes inaccurate before closing what must happen?

a corrected statement must be provided at least one business day before closing. Material changes requiring corrections include: -change in loan type -difference in the APR -addition of a prepayment penalty

The term good funds refers to

cash, cashiers checks, checks that have cleared

In California, escrow companies licensed by the California Department of Corporations must be structured as?

corporations Escrows are corporations under the jurisdiction of the commissioner of Corporations. This includes companies conducting escrows using the Internet. Individuals cannot be licensed under the escrow law, but certain organizations and individuals are permitted to act as escrow agents without licensure. These include the following: -Banks -Attorneys (to act as an escrow, an attorney must have had a prior client relationship with a party to the escrow) -Real estate brokers -Title and trust companies -Savings associations

At a closing, separate statements are issued for the buyer and the seller. Each settlement sheet includes

debits (amounts owed) and credits (amounts entitled to receive)

LAWS GOVERNING ESCROW No escrow licensee may:

disseminate misleading or deceptive statements referring to its supervision by the State of California; describe either orally or in writing any transaction that is not included under the definition of escrow in the California Financial Code; pay referral fees to anyone except a regular employee of its own escrow company; solicit or accept escrow instructions or amended or supplemental instructions containing any blanks to be filled in after the instructions are signed; or permit any person to make additions to, deletions from, or alterations of an escrow instruction unless it is signed or initialed by all signers of the original instructions.

Both the lender and the buyer should benefit from and have title insurance-the buyer to _____________________, and the lender to _________________.

ensure clear title, and thus protect his or her investment, protect his or her interest in the property.

Is a broker a party to escrow?

no, the broker is not a party to an escrow. The parties are the buyers, sellers, and lenders.

how many times is title insurance paid for?

once, at the time title passes from one owner to another, and it remains in effect until the property is sold again, at which time title passes to the new owner. If a property owner dies, title insurance continues to protect the owner's heirs.

A standard CLTA policy protects the buyer as to matters of

record and specified risks.

If a buyer does not elect to buy title insurance protection?

that buyer is not protected, even though a prior owner had title insurance.

The two basic types of title insurance policies are?

the California Land Title Association (CLTA) policy and the American Land Title Association (ALTA) policy.

A broker can act as an unlicensed escrow only if?

the broker is a principal or represents the buyer or seller.

what is on the buyer's settlement sheet?

the buyer is charged (debited) with the purchase price of the property. The loans the buyer has obtained are credited to him or her. Cash is credited, prorations may be debited or credited (as the case warrants), and escrow fees and closing costs are debited. The difference between the total debits and credits usually is required in cash by the escrow agent. The cash payment into escrow becomes an additional credit and forces the account to balance. Because of the forced balances, the totals on the buyers' and sellers' statements will be different from each other and from the purchase price.