Unit 3 Escrows
Escrow Agent
An escrow agent is any person engaged in the business of receiving escrows for deposit or delivery.
Who is exempt from the licensing requirements of Escrow Law?
Banks, savings and loan associations, title insurance companies, trust companies, attorneys, and real estate brokers are exempt from the licensing requirements of the Escrow Law.
Who governs the actions of title insurance companies?
California Department of Insurance
Independent Escrow Company Services
Independent escrow companies may provide services other than traditional escrow services, including mobile-home transactions, bulk sales, liquor license transfers, and can also act as corporate trustees on outstanding deeds of trust.
Unlawful Escrow Practices
It is illegal for an escrow holder to pay a real estate agent fees for the referral of services and for the real estate agent to receive such fees. Escrow agents may not compensate individuals for referring, soliciting, or servicing escrow customers or accounts.
Issues with Early America Title Services
Land transfers at the time had many weaknesses, such as fraudulent parties and errors in land descriptions. This called for a system to overcome the weaknesses inherent in land transfers. The abstract of title was the first step in providing the land buyer protection.
Escrow Manager
Management of the escrow office calls for an experience level that includes most types of transactions, including bulk sales, business opportunities, transfer of liquor license, and builder services. The manager should possess people skills and the ability to teach and train employees and has met the experience requirement of five years in the industry.
California Escrow Association
Members have access to modern training methods, services, benefits, and online education programs for students. To earn a designation (credential), the escrow practitioner must be a CEA member and pass a comprehensive examination.
Joint Control Agent
A joint control agent, another term for an escrow agent, is any person engaging in the business of receiving money or property for payment of the cost of labor, material, services, permits, fees, or other items of expense in improvements of real property.
Licensed Escrow Companies
A licensed escrow company, or independent escrow company, is licensed by the Department of Corporations. This license can only be obtained after the escrow company has met all the licensing requirements set forth by the Escrow Law enforced by the Department of Corporations. The commissioner of Corporations licenses Independent escrow agents.
Can brokers use fictitious names?
A broker may not use a fictitious name or corporate name containing the word "escrow" or advertise in any way that would be misleading to the public.
Escrow and Title Services in Early America
After the discovery of gold in California, many fled to CA to obtain land grants or purchase properties to farm or raise livestock. This real estate boom led to escalating land transfers, which required professional services to accommodate buyers and sellers. At the time, real estate was transferred directly from the seller to the buyer without escrow services to facilitate the process. The seller simply gave the buyer the deed in exchange for the buyer's check or cash payment
Regulators of Escrow Entities
All companies that provide escrow services are regulated whether it is a title company, independent escrow company, mortgage lender, or commercial bank.
Background Checks
All employees must have background checks performed by the department which include obtaining criminal history information through the Department of Justice (DOJ) and conducting civil court checks for involvement in fraud, embezzlement, or misappropriation of property. It also requires filing fingerprint cards, which must be cleared through the DOJ.
Escrow Agents in CA
All escrow agents in California are either "licensed" or "controlled" escrow companies.
Surety Bonding
An escrow agent must file a surety bond of at least $25,000 with the commissioner, intended to pay to the state or any person due. The amount of the bond required may increase up to a maximum of $50,000, depending on the escrow liability of the company, and must be increased by $5,000 for each additional licensed branch office. In lieu of the surety bond, a licensee may deposit a cash bond in the amount required with the commissioner.
Escrow matters are always __________ between the escrow holder and the principals.
Confidential The escrow holder may not give out any information provided by one principal to the other principal or to any third party concerning an escrow matter without the approval of the principal(s).
Accounting and Accountability
Escrow provides an accounting of all monies received from and delivered to all principals.
History of Title Insurance Companies
One of the earliest title insurance companies was established in 1848 in San Francisco. Title insurance companies were among the first to establish escrow services as a logical addition to their business.
Escrow Personnel
Responsibilities of various personnel may vary based on whether the escrow agent is a title company or an independent escrow company.
Abstract of Title
Similar to today's preliminary title report, which provides the buyer with a written history of all recorded documents concerning property, the abstract of title carries with it an attorney's legal opinion. The issue was that the abstract of title still offered no protection for damages from a defective title.
Who governs the practice of broker-owned escrow companies?
The California Department of Real Estate
Monies that Belong to Principles
The monies that belong to principles are called trust funds. They are not to be deposited into the bank account of the escrow holder but into a trust fund bank account. Escrow holders cannot deposit any of their own monies into the trust fund account.
What should an escrow holder do if they are receiving conflicting ideals from the principles?
They must do nothing except notify the principals that escrow will not proceed until the parties resolve the conflict.
Following the closing of escrow, who must check the closing statements?
The US Department of Housing and Urban Development (HUD)
Bilateral Escrow Agreement
The bilateral escrow agreement, used almost exclusively in Southern California was the best process because both buyer and seller were usually present. The bilateral escrow agreement is an arrangement in which both buyer and seller execute and bind together.
Who does the law exempt?
1. Banks, trust companies, building and loan or savings and loan associations, or insurance companies 2. Those with a client-attorney relationship and principal in a real estate or personal property transaction who is not actively engaged in the business of an escrow agent 3. Any person whose principal business is abstract or used as a basis business relating to insurance companies 4. Any real estate broker licensed by the real estate commissioner where the broker is an agent or party to the transaction and where the broker is performing an act for which a real estate license is required
Controlled Escrow Companies
According to the Department of Corporations, a controlled escrow, or nonindependent escrow, is not licensed by the department. A controlled escrow might be owned and operated by an attorney, a real estate broker, or a title insurance company. The licensing and regulation of controlled escrows depend on the jurisdiction of the licensing authority and vary widely.
Surety Bond with Fidelity bonds
Although the fidelity bond may contain a deductible, the escrow must deposit a surety bond with the commissioner of the DOC in the amount of the deductible. The amount of the surety bond is maintained in the amount of the deductible of the fidelity bond for any loss of trust monies incurred that exceed the amount of the fidelity bond's deductible.
Obtaining Escrow License Fees
An application and filing fee are required, plus $625 for the first office or location and $425 for each additional office or location, along with an investigation fee of $100 for each location. The fees are non-refundable.
Membership in Escrow Agent's Fidelity Corporation (EAFC)
An escrow agent must be a member of EAFC if engaging in the following types of escrows: 1. Real property escrows, including the sale, lease, exchange, or transfer of title and loans secured by a lien on real property 2. Bulk sale escrows, including the sale or transfer of title to a business entity and the transfer of liquor licenses or other types of business licenses or permits 3. Fund or joint control escrows, including funds held for contractors 4. Sales pertaining to manufactured homes or mobile homes 5. Deposits for new home sales under the Subdivided Lands Act as required by the Business and Professions Code or by the Department of Real Estate 6. Escrows for sale, transfer, or hypothecation of promissory notes secured by deeds of trust
Escrow Holder
An escrow holder works to ensure all parties involved in a transaction comply with the conditions and terms of the agreement
What is true of independent escrow companies?
An individual cannot be licensed as an escrow agent. A corporation organized for the purpose of escrow business must hold the license. Applicants must finance a surety bond in the amount of $25,000 or more, based on their yearly average trust fund obligations. All money deposited in escrow must be placed in a trust account, exempt from execution or attachment. DOC regulations require that one or more persons possess a minimum of five years of responsible escrow experience. Independent escrow agents are required to possess liquid assets in the amount of $25,000 and have a tangible net worth of $50,000.
Loan Escrow Officer
An interesting practice of some title insurance companies is to assign a specially trained title officer to perform title and escrow functions as a loan title-escrow officer. Especially in larger companies, an escrow company may assign one or more officers for loan refinance escrows.
Brokers Limitations in Conducting Escrows
Brokers cannot advertise that they conduct escrows without specifying that such services are only in connection with the broker's real estate brokerage business.
Two Primary Professional Associations for Escrow Professionals
CA has two primary professional associations in which membership is offered to all escrow professionals The American Escrow Association (AEA) California Escrow Association (CEA)
California Requirements for Escrow Managers
California law requires the escrow manager to possess at least five years of responsible escrow experience and be "stationed" at the licensed location during open office hours. An affidavit that the applicant has read pertaining to Escrow Law must be signed.
Limitations of the Escrow Agent
Escrow agents (officers) are limited to what they may do under the law. Escrow agents cannot resolve disputes. Conflicting instructions would require that the escrow holder do nothing until all parties agree to a course of action. Escrow agents are not allowed to eliminate or correct title deficiencies that prevent the transfer of title to another party. They are to prepare documentation based solely on the information provided by the principals and those involved in the transaction.
Escrow Companies Owned by Real Estate Brokers Limitations
Escrow companies owned by real estate brokers are limited to handling escrow transactions involving only the broker (unless the company is operated as a DOC-licensed independent escrow company).
Limited Agency
Escrow is a "limited agency" relationship governed by the provisions of the escrow. The escrow holder acts as an agent for both parties during the escrow and the written instructions of the principals. Upon closing escrow, the escrow holder becomes the agent for each principal relating to the promises to which each is entitled. Only when all parties have signed mutual instructions does the escrow become effective.
Purpose of Escrow
Escrow refers to the neutral or disinterested third-party holder of documents and funds to facilitate a transfer of title between a buyer and a seller of real property or business opportunity. It also refers to the processing of a loan for a property owner on behalf of the lender originating the loan The escrow holder, while representing all principals in the transaction, does not have a fiduciary relationship with them as do real estate agents and their principals.
Real Estate Brokers as Escrow Agents
Exempt from the licensing requirements are escrow agents or any broker licensed by the Real Estate Commissioner performing acts in a real estate transaction in which the broker is a party or agent for which a real estate license is required. This exemption is limited and applies only to transactions in which the broker is personally involved as a principal or as the selling or listing broker of a principal in the transaction. A real estate broker who conducts an escrow under the exemption must maintain all escrowed funds in a trust account and keep proper records.
Good Funds
Good funds are negotiable and readily available
Federal or State Tax Liens
If a buyer or seller has a federal or state tax lien, it is up to them to resolve it, not the escrow holder or the title officer.
Commercial Banks - bilateral vs unilateral escrow instruction
In the 20th century, commercial banks began providing buyers and sellers of real property a logical location to conduct real estate closing services.
Title Insurance Companies vs Escrow Companies
Independent escrow companies must have sufficient financial resources to offer protection, something not explicitly required of title insurance companies.
Fidelity Bonds
Insurance protection that pays for losses to principals and is provided to compensate escrow agents for loss of trust funds as a result of fraudulent or dishonest actions. A fidelity bond must be filed with the DOC and must provide coverage for each officer, director, trustee, and employee of not less than $125,000.
What happens if only one party signs escrow?
That party may terminate the proposed escrow at any time before the other party signs (however the lack of a valid escrow does not in itself cancel the contract).
Who governs the practice of attorneys acting as escrow holders?
The California State Bar
Consumer Protection
The California laws that govern escrow holders are designed to protect the consumer from unethical, fraudulent, and negligent practices by third-party service providers
Escrow Law Advisory Committee for California Department of Corporations
The Committee is comprised of 11 members, including the commissioner, who appoints its members. Its members serve for a period of two years without compensation or reimbursement for expenses. The Committee also consists of representatives from a medium-sized licensed escrow company that handles a different type of business, and an attorney specializing in escrow matters.
Controlled Escrow Holders
The DRE does not limit the illegality prohibition to controlled escrow holders: real estate brokers and title insurance companies
Escrow Institute of California (EIC)
The Escrow Institute of California (EIC) limits membership to independent escrow practitioners. Membership in these organizations is accompanied by the escrow officer's pledge to adopt professional standards and ethics to principals and other real estate industry professionals.
License Required for Escrow Holders
The Escrow Law requires any person engaged in the escrow business or joint control business in California to be an organized corporation and to be licensed by the commissioner of the Department of Corporations.
What is the goal of the escrow law?
The Escrow Law under the California Financial Code is intended to protect members of the public who entrust their money to independent escrow agents in California. People or companies performing escrow services over the Internet in California are also subject to the licensing requirements of the Escrow Law.
Certification of Title
The certificate of title was intended to assure a buyer that the title to the property was valid and the transfer legitimate. However, the assurance was meaningless because the courts declared that in the event of mistakes or errors, there was no form of insurance to protect consumers.
Minimum Financial Requirements for Escrow Companies
The company must document that it has liquid assets beyond current liabilities by $25,000 and tangible assets beyond total liabilities by $50,000. If the escrow agent maintains offices, the tangible net worth requirement increases by 50% of the requirement for the first branch office and 25% for each additional branch office.
Independent Escrow Companies
The demands and volume of California's growing real estate industry and its expanding market led to the development and growth of independent escrow companies Several entities provide escrow services, including title companies. Independent escrow companies, banks, attorneys, and real estate brokers also play a role.
Compliance with Agreement and Terms of Escrow
The escrow holder guarantees that all conditions required before a final closing are met. Until all documents have been approved and signed by the appropriate parties and other conditions have been met, including the deposit into escrow of the buyer's "good" funds (e.g., all checks have cleared), the escrow will not close.
Role of the Escrow Holder
The escrow holder is more reactive than proactive; the principals direct the transaction and its processing. The escrow holder takes orders and requests from principals, either directly or through their agents, and reacts.
Depository
The escrow holder serves as a neutral depository for documents and money received from transaction principals to hold on their behalf.
Escrow Officer
The escrow officer meets with clients, in person or electronically, to open escrow, prepare escrow instructions, prepare estimated settlement statements, and balance files. The escrow officer also handles telephone calls and customer interaction beyond the scope of junior employees. Partnering with the marketing staff is usually part of the escrow officer's client responsibilities.
Receptionist (Entry Level)
The receptionist answers the phone, opens and dates stamps, incoming mail, greets customers, etc. The receptionist may also perform in an administrative or assistant capacity, especially in smaller offices, assisting an escrow assistant or even a junior escrow officer.
Escrow Law
The grantor, with a third person, may deposit a grant. While in possession of the third person and subject to conditions, it is called an escrow. The "third parties" are escrow companies and are subject to Escrow Law.
Junior Escrow Officer
The junior escrow officer handles the escrow assistant duties with minimum of supervision, as well as the following additional tasks: 1. Preparing escrow instructions and amendments 2. Recognizing and resolving issues in the preliminary report 3. Maintaining a calendar of critical dates 4. Delegating completion of requirements 5. Preparing buyer and seller estimated statements 6. Balancing files for closing 7. Obtaining buyers' signatures on loan documents 8. Ordering funds on new loans 9. Authorizing recording and handling files independently
Duties of the Escrow Agent
They ensure that all documents required for the transaction are present and correctly completed. They are responsible for verifying that all funds specified in the transaction instructions are accounted for. If anything is missing or inaccurate, escrow agents cannot allow the transaction to close. It is not the escrow holders' responsibility to resolve the problem; it is their duty to inform the given party.
Northern California vs Central vs Southern California Escrow Companies
Title companies operating in Northern California were best suited to represent both buyers and sellers in real estate transactions and handled the processing of information and documents of buyers and sellers separately (unilateral) In Southern California, bilateral escrow was the best process as new competition entered the market in the form of independent companies, including law firms and, eventually, real estate brokers operating broker-owned escrow companies. In the cities of Central and Coastal California there is a combination: escrow is predominantly the business of title companies, but some customs and procedures may reflect a hybrid of north and south.
Trust
Trust is the right of property, real or personal, held by one party to benefit another. Simply put, trust monies are those that belong to someone else. Trust is placed in the escrow holder, who is the closing agent for all principals in the transaction... (which might be a buyer, seller, lender, borrower, lessee (tenant), lessor (landlord), bendee (a buyer under a land contract), or vendor (a seller under a land contract).
Escrow Assistant
Under the supervision of one or more escrow officers, an escrow assistant communicates by phone, obtains information for escrows, opens title orders and files, orders fire insurance policies, prepares documents, reviews preliminary reports, delivers settlement statements to principals for review, completes disbursements associated with closing, and manages post-closing issues and shipment of files to permanent storage. It is a growing practice for escrow companies to outsource notary duties to independent notaries, but notary responsibilities may be assigned to the escrow assistant as well.
Unilateral Escrow Instruction
Unilateral escrow instructions, frequently used in Northern California, consist of separate instructions executed by the buyer and seller, binding on each.
What do unlawful fees include?
Unlawful fees include gifts, merchandise, and other things of value. No escrow agent can enter into any arrangement permitting any fee, commission, or compensation contingent upon the performance of any ac or instruction set forth in escrow For example, an escrow officer who provides snacks, food, and beverages at a real estate agent's open house has violated the law. Escrow companies may not provide food or beverages at real estate agent's open houses. Escrow companies may not provide real estate agents with free gifts having a value of $10 or more in exchange for business. The same is true if an escrow officer offers tickets to a sporting event. Anything of value provided as a referral for a current or future transaction is illegal.