Real Estate Law -UNIT FOURTEEN - ESCROW AND TITLE INSURANCE

To issue a standard title policy, the insurer must

(a) provide a survey. (b) determine whether title is good. (c) provide an abstract. (d) do none of these. answer is D

Which of the following is NOT covered under a standard policy of title insurance?

(a)lack of capacity of a grantor. (b)failure of delivery of a prior deed. (c)rights of parties in possession. (d)undisclosed spousal interests. answer is C. A standard policy does NOT cover rights of parties in possession (unrecorded deeds, options, leases, etc.) and matters that would be disclosed by making inquiry of persons on the property.

A broker may act as an escrow on transactions where the broker acted as a(n)

(a)principal to the transaction. (b)agent of the buyer. (c)agent of the seller. (d)Any of the above answer is D

Which of the following is CORRECT regarding an extended-coverage policy?

(a)provides coverage only until the loan is paid (b)offers decreasing coverage each year (c)covers unrecorded liens (d)all of the above answer is D.

A real estate broker can open an escrow department for their office, but CANNOT

(a)use a name for the escrow company containing the word "escrow." (b)advertise in a manner that would tend to be misleading to the public. (c)advertise that he/she conducts escrows outside of their real estate brokerage business. (d)all of the above. answer is D

A real estate broker can act as an escrow agent in transactions where

1. Broker represented the buyer, 2. Broker represented the seller, or 3. Broker acted as a principal to the transaction

termination of escrow

1. Full performance, by completion of the escrow, terminates the escrow. 2. Mutual agreement of both the buyer and the seller. 3. Impossibility of performance will terminate an escrow. 4. If only one party has signed the escrow instructions, that party can terminate the escrow before the other party's signing and forming a bilateral agreement. However, the person terminating the escrow still could be liable under the purchase contract. 5. Escrows customarily provide for time being "of the essence," failure to complete an escrow on time will terminate the escrow. 6. The parties then will have to agree to amend the escrow instructions if they want it to continue. In practice, however, most of escrow instructions provide that they will continue unless canceled by either party.

The homeowner standard policy of title insurance covers matters of record not specifically excluded from coverage, as well as matters not of record, such as

1. forgery, 2. lack of capacity of a grantor, 3. undisclosed spousal interest (a grantor who claimed to have been single could have a spouse with community property interests), 4. failure of delivery of a prior deed, 5. federal estate tax liens, 6. deeds of a corporation whose charter has expired, and 7. deeds of an agent whose capacity has terminated.

Not covered by either insurance

1.Defects and liens listed in policy 2.Defects known to buyer 3.Changes in land use brought about by zoning ordinances

Escrow entity and real estate developer relationship

A real estate developer is prohibited from requiring, as a condition precedent for a sale of a single-family dwelling, that escrow be provided by an escrow entity in which the developer has a financial interest.

Which actions of an escrow would be improper?

Accepting escrow instructions with blanks to be filled in by the escrow after the instructions are signed

abstract of title

An abstract of title is a history of title showing every recorded document.

amendments to the escrow instructions

Any changes in the escrow instructions (amendments to the escrow instructions) should be signed by both buyer and seller

Applicants for escrow licenses

Applicants for escrow licenses must furnish a $25,000 surety bond, and all directors, trustees, and employees of an escrow who have access to money or valuable securities must have a $125,000 fidelity bond. All money deposited in escrow must be placed in a trust account that is exempt from execution or attachment for any claim against the escrow agent.

Escrow is an agency that is a neutral holder purchase money and deed

Because an escrow is an agency, the escrow agent should not have any discretionary powers. An essential element of an escrow is the irrevocability of the deposit of both the deed and the purchase money. An escrow never acquires title; the escrow is always an agency.

HOMEOWNER EXTENDED-COVERAGE POLICY is offered by

Both the California Land Title Association (CLTA) and the American Land Title Association (ALTA) now offer extended coverage title policies for homeowners. Most California title insurers now issue extended policies to homebuyers similar to lender extended coverage unless the purchaser requests the CLTA standard policy, which offers less coverage at a slightly lower premium.

HOMEOWNER STANDARD COVERAGE POLICY is by

CALIFORNIA LAND TITLE ASSOCIATION—CLTA

Which behavior is proper for a broker who, while not licensed as an escrow, conducts escrows on the broker's sales?

Charging for the escrow services

Title and deed recording

During the escrow period, the legal title remains with the seller, even though the escrow holder has the deed. The buyer has an equitable title when all monies and documents have been deposited into escrow. The parties normally agree that title passes when the deed is recorded, or on a particular date. In the absence of such agreement, the title could pass when all conditions are met.

Escrow agents potential liability

Escrow agents who violate their instructions are liable to their principals for losses suffered, but they are not liable if the principals do not suffer a loss

Escrows

Escrows are neutral third-party depositories that are limited in authority to the instructions given by the principals.

For an escrow involving one to four residential units where the buyer indicated an intention to occupy a unit

For an escrow involving one to four residential units where the buyer indicated an intention to occupy a unit, Civil Code Section 1057.3 provides for a penalty for the wrongful refusal of a party to execute documents required by the escrow holder to release funds. The aggrieved party is entitled to the amount of the funds deposited in escrow, treble the amount of escrow funds (but not less than $100 or more than $1,000), and reasonable attorney fees.

Which is TRUE of the preliminary title report?

It provides no insurance.

escrow money deposits

Money deposited by the buyer into escrow is given conditionally because it is to be paid to the seller only when title is transferred. The deposit ordinarily remains the property of the buyer until the closing, even though the buyer has given up control of the deposit.

Failure to perform will not be used as termination basis for escrow

Nevertheless, a person whose failure to perform was the reason for a delay cannot use the delay as the basis for terminating the escrow. Court decisions have shown some inconsistency relating to "time is of the essence" clauses. Several courts have allowed a reasonable period beyond the date specified.

Lender-extended coverage

Standard coverage plus defects discoverable through 1.property inspection, including unrecorded rights of people in possession; 2.examination of survey; and 3.unrecorded liens not known of by policyholder

Who regulates title insurance companies

The California insurance commissioner regulates California title insurance companies.

Which would NOT terminate an escrow?

The broker's order to terminate

designation of the escrow holder

The designation of the escrow holder is the responsibility of the buyer and seller. Real estate brokers may recommend an escrow holder

Disclosure and escrow agent

The escrow agent has a duty to both parties to keep the escrow matters confidential.

Penalty for violation of escrow/developer relationship

The penalty for a violation is the greater of $250 or three times the escrow charge, plus attorney fees and costs.

The problem with opinions of title based on abstracts

The problem with opinions of title based on abstracts is that abstracts do not show hidden items, such as the contractual capacity of a grantor, a forged or altered document in the chain of title, an unknown spousal interest, failure of delivery, or unrecorded documents. The abstractor is liable only for negligence in failing to report a recorded document, and the attorney is liable only for failing to discover problems that were evident in the abstract.

rebate law

The rebate law extends the anticommission provisions of the Insurance Code to prohibit direct or indirect payments by a title insurer to principals in a transaction as a consideration for business. The rebate prohibition extends to any title business, including escrows

Title insurer risk

The title insurer has no actual duty to ascertain whether the title is good. Any records search it performs is for its own protection in deciding if it wants to take the risk of insuring title.

CAR form California Purchase Agreement and Joint Escrow Instructions

The widely used CAR form California Purchase Agreement and Joint Escrow Instructions makes the escrow instructions part of the purchase agreement, so separate escrow instructions are not required (see Unit 6).

which party generally pays for each closing cost:

Title insurance costs are paid by the buyer or the seller according to their agreement. Taxes, insurance, interest, rents, et cetera, are prorated, with the seller usually responsible up to and including the day of closing and the buyer usually responsible after the date of closing. Proration is usually based on a 360-day year and a 30-day month. Parties may, however, make other payment or prorating agreements.

POLICY INTERPRETATION

Title policies should be interpreted in accordance with the reasonable expectations of the insured. Any questions about ambiguities in a policy normally will be resolved against the insurer.

Escrow charges and prorating

Who pays for the escrow services is determined by agreement of the parties to the escrow (buyers and sellers). Normally, escrow charges are split between the parties

A history of title showing every recorded document is called a(n)

abstract of title.

Who pays for the escrow services is determined by

agreement between buyer and seller.

A change in escrow instructions is known as a(n)

amendment. Any changes in the escrow instructions are called "amendments" and should be signed by both buyer and seller.

Doctrine of relation back

an amended pleading may relate back, for purposes of the statute of limitations, to the time when the original pleading was filed.

If escrow instructions fail to provide for the date of possession, possession will be given

at close of escrow.

Escrow contracts are signed by

both parties

An amendment to the escrow instructions requires the agreement of

buyer and seller

When both buyer and seller make demands on escrow for the buyer's deposit after the escrow failed to close, the escrow holder should

file an interpleader action.

If a dispute arises during an escrow and both buyer and seller make demands on the buyer's deposit, the escrow should

file an interpleader action. If both buyer and seller claim a deposit when an escrow has terminated, the escrow agent should file an interpleader action asking the courts to determine who has valid claim to the funds held.

A standard policy of title insurance protects against

forgery

Before issuing a title insurance policy, the title company will indicate exceptions to its coverage by issuing a(n)

preliminary title report

After escrow instructions have been signed, the escrow agent may

refuse to obey instructions received from the broker.

While an escrow has duties to parties to the escrow, it has no duties to other parties.

true

Which of the following is exempt from the licensing requirements of the escrow law?

(a)Commercial banks. (b)Title insurance companies. (c)Real estate broker where the broker was either a principal or the listing or selling agent. (d)All of the above. answer is (d) ALL

Escrows must be licensed by the commissioner of corporations, with the exception of

(a)banks. (b)title insurance companies. (c)attorneys. (d)all of the above. Your answer: (D) is correct. Escrows must be licensed by the commissioner of corporations, with the exception of banks and savings associations, title insurance companies, attorneys, and real estate brokers. Real estate brokers can serve as escrows on transactions in which they represented either the buyer or the seller, or were a principal.

An extended coverage policy of title insurance covers all of the following EXCEPT

(a)defects covered by a standard policy. (b)zoning restrictions. (c)forged documents. (d)defects that would be revealed by a survey. answer is B. An ALTA extended-coverage policy of title insurance does NOT cover government regulations such as zoning restrictions.

In addition to the coverage offered by the standard policy, an ALTA extended-coverage policy of title insurance includes

1. unrecorded liens; 2. off-record easements; 3. rights of parties in physical possession, including tenants and buyers under unrecorded instruments; 4. rights and claims that a correct survey or physical inspection of the land would show; 5. mining claims; 6. reservations in patents; 7. water rights; and 8. lack of access.

LENDER EXTENDED-COVERAGE POLICY

American Land Title Association (ALTA) policy was developed to meet lender needs. Besides offering greater protection to the lenders, the extended-coverage policy of title insurance allowed assignment because loans frequently are transferred between lenders. The lender's policy provides coverage only until the loan is paid. It actually offers decreasing coverage each year.

POSSESSION AND RISK OF LOSS

Unless agreed otherwise, the seller retains possession until the close of escrow.

Buyer's deposit when escrow is terminated

When an escrow is terminated, the escrow agent ordinarily requests that the parties sign a termination or cancellation agreement that specifies how to dispose of funds being held. Returning funds to the buyer, or paying funds to the seller as liquidated damages, could subject the escrow holder to liability should the court later determine the action to have been improper.

Escrow process

While the escrow is the process, the escrow agent is the individual holder of the funds (usually an employee of the escrow company). An escrow agent is not an arbitrator or a mediator of disputes. Before the fulfillment of the escrow conditions, the escrow is the dual agent of the buyer and the seller. After the fulfillment of the conditions, the escrow agent is the agent of each of the parties, with separate obligations to deliver the deed to the buyer and to deliver the consideration paid to the seller.

The elder abuse law

requires that escrow holders, realty agents, and others report elder financial abuse, fraud, or undue influence. The county public guardian is authorized to take control of the elder's assets to prevent such abuse.

Who would normally be responsible for any material damage to the property by fire or vandalism before close of escrow?

seller

A title insurer will NOT be liable for a loss if

the person suffering the loss was not the insured or the insured's estate or heirs.

title insurance also covers

title insurance also covers the executor, administrator, and heirs of the insured, it does not directly cover other successors in interest. New buyers must obtain their own insurance protection.

Title insurance

title insurance is used to prove marketable title. For a single premium, title insurance companies insure a purchaser as to the marketability of title. Title insurance is a contract to indemnify the insured against loss through defects in the title or against liens and encumbrances that may affect the title at the time the policy is issued.

A microfilm or computer system showing every document that has been recorded within the county is called a

title plant

Conflict between purchase agreements and escrow instructions

Escrow instructions are actually independent of any purchase agreement between the parties. If a difference exists between the instructions and the purchase agreement, the escrow instructions generally will prevail because, signed at a later date, they more clearly show the final agreement of the parties.

Escrow licensing

Escrows must be licensed by the commissioner of corporations. Individuals cannot be licensed, only corporations

ambiguity of purchase date agreement

However, escrow instructions might state that the purchase contract will govern in the event of an ambiguity. In such a case, the purchase contract would prevail. If the escrow instructions and a later amendment by the parties are in conflict, the later amendment will govern.

Which BEST describes an abstract of title?

A recorded history of title

When the buyer of one to four residential units indicates an intention to occupy a unit and then defaults

When the buyer of one to four residential units indicates an intention to occupy a unit and then defaults, the liquidated damages cannot exceed 3 percent of the sales price.

final selling price within 1 month

Within one month of closing, brokers must inform the buyer and the seller of the final selling price. In actual practice, the broker does not do so, because the escrow provides this information in the closing statement.

purpose of a preliminary title report

preliminary title report indicates exceptions to its title insurance coverage. The preliminary title report is not insurance. A separate fee is charged for the title insurance policy, which is usually issued at close of escrow. Preliminary title reports are offers to issue a title policy subject to stated conditions. The reports are not abstracts, nor are there any rights, duties, or responsibilities applicable to the issuance of the preliminary report. The report will not be construed as, or constitute a representation of, the condition of title, but will constitute a statement of the terms and conditions on which the issuer is willing to issue its title policy, if such offer is accepted.

A buyer given possession by the seller one week before close of escrow should be MOST concerned about

risk of loss

Within one month of closing, brokers must inform the buyer and the seller of the final selling price. In actual practice this is usually not necessary because

the escrow provides this information in the closing statement.

The real estate commissioner's regulations prohibits the following acts by a broker/escrow. The following acts are considered to be grounds for disciplinary action:

1. Soliciting or accepting an escrow instruction or amendment containing blanks to be filled in after signing or initialing 2. Permitting any person to make an addition, a deletion, or an alteration to escrow instructions or amendments unless signed or initialed by all the parties to the escrow instructions 3. Failing to provide a copy, at the time of signing, to people executing escrow instructions or amendments 4. Failing to maintain books, records, and accounts in accordance with accepted principles of accounting and good business practice 5. Failing to maintain all records relating to escrows freely accessible for audits, inspections, and examination by the commissioner 6. Failing to deposit all money received, as an escrow agent and as part of an escrow transaction, in a bank trust account or an escrow account on or before the close of the next full working day after receipt thereof 7. Withdrawing or paying out any money deposited in such trust account or escrow account without the written instructions of the party or parties paying the money into escrow 8. Failing to advise all parties, in writing, that any licensee, acting as such in the transaction, has any interest in the escrow agency—stockholder, partner, officer, owner, et cetera. (prohibits a broker from having any undisclosed interest in the escrow) 9. Failing to provide a written closing statement to the principals showing all receipts and disbursements and to whom they were made

The Division of Corporations has interpreted Section 17006(d) of the Financial Code (broker's exemption) as follows:

1. The exemption is available only to the real estate broker. 2. The exemption is personal to the broker and cannot be delegated to others (other than ministerial functions). 3. In a purchase and sale agreement, the broker must be either a party to the transaction or the listing or selling broker. 4. The exemption is not available for any association of brokers for the purpose of conducting escrows. 5. The broker escrow function must only be an ancillary part of the broker's business. 6. When the broker's escrow business is a substantial factor in the utilization of the broker's services, the broker may not delegate or contract out any services that may be provided pursuant to the exemption. (This apparently covers the ministerial functions.)

Exempt from the licensing requirements of the escrow law are

1. banks and savings associations; 2. title insurance companies; 3. attorneys (attorneys essentially are unregulated unless they operate an escrow company); however, they must have had a bona fide client relationship with one of the parties; and 4. real estate brokers. (This exemption applies only to transactions where the broker was either a principal or the listing or selling agent.)

Not covered by a homeowner standard policy of title insurance are

1. defects known by the insured and not disclosed to the title insurer; 2. zoning (a special endorsement is available stating that property currently is zoned properly or that a current use is authorized by the zoning); 3. mining claims (these are filed in mining districts, and legal descriptions are not required); 4. taxes and assessments that are not yet liens; 5. easements and liens not a matter of public record (such as mechanic's lien rights); 6. rights of parties in possession (unrecorded deeds, options, leases, etc.) and matters that would be disclosed by making inquiry of people on the property; 7.matters not of record that would be disclosed by checking the property (such as encroachment); 8.matters that would be revealed by a correct survey; 9. water rights; and 10. reservations in government patents.

Lender extended-coverage policies do not cover

1. matters known by the insured but not conveyed to the insurer, 2. government regulations such as zoning, 3. liens placed by the insured, 4. eminent domain, 5. violations of the map act, or 6. the physical condition of the property.

Escrow duties might include

1. ordering preliminary title reports; 2. accepting structural pest control reports and other reports as required by escrow for delivery to the buyer; 3. obtaining beneficiary statements on existing loans so balances can be ascertained, as well as the actual payoff amount (demand statement); 4. accepting instructions for new loans and obtaining the buyer's signature to satisfy the lender; 5. ascertaining amounts in impound accounts; 6. arranging for the transfer of insurance; 7. obtaining deeds of reconveyance; 8. drafting grant deeds, trust deeds, notes, et cetera; 9. preparing closing statements showing all receipts, expenditures, costs, and prorations; 10. requesting necessary funds for closing; 11. recording all documents, disbursing funds, and issuing closing statements; and 12. reporting the sale to IRS on form 1099-S.

Licensed escrows are prohibited from

1. paying referral fees to anyone except for the normal employee compensation; 2. accepting escrow instructions or amendments containing any blanks to be filled in after the signing or initialing of the instructions; 3. turning over buyer funds to the seller without buyer authorization or before the seller has conveyed title (some of the creative financing arrangements with extremely long escrows providing for funds to be turned over to the seller before the close of escrow can be dangerous because intervening liens could attach to the property); and 4.permitting any party to unilaterally change or amend signed instructions.

Standard Coverage of title insurance

1.Defects found in public records 2.Forged documents 3.Incompetent grantors 4.Incorrect marital statements 5.Improperly delivered deeds

TITLE INSURANCE COMPANIES

A new title insurance company in California must have at least $500,000 paid-in capital and show a surplus of at least $500,000. Title insurance companies must set apart annually, as a title insurance surplus fund, a sum equal to 10 percent of premiums collected during the year until this fund equals the lesser of 25 percent of the paid-in capital of the company, or $1 million. This fund offers further security to the holders and beneficiaries of title insurance policies.

special policies for insurance

A number of special policies are available, including 1. construction lender policies (with endorsements protecting against prior mechanics' liens), 2. vendee policies for purchasers under real property sales contracts, 3. leasehold loan policies, 4. leasehold owners' policies, and 5. oil and gas interest policies. 6. Endorsements can be obtained for special additional coverage, or exclusion from coverage.

rebate law penalties

It is a criminal offense for an employee of a title company or controlled escrow company to pay a commission (directly or indirectly) to a real estate licensee as an inducement for placement or referral of title business. The criminal penalties apply to both giving and receiving the kickback. The penalty is up to one year in jail and a fine up to $10,000 for each offense (Penal Code 641.4).

Risk of Loss during owner transfer

The risk of loss, therefore, could be on a buyer before the buyer realizes title has transferred. The buyer's insurance usually will not take effect until the close of escrow, so a buyer who takes possession or title before the close of escrow will need to obtain earlier insurance coverage.

Signed escrow papers

The signed escrow instructions could meet the requirements of the statute of frauds and form the contract for sale. In fact, escrows frequently are opened without a prior buy-sell agreement. Escrow instructions often are prepared based on the oral instructions of the real estate agent.

Title insurance coverage and obligations

Title insurance offers indemnification against loss up to the amount of coverage purchased. Some policies have an inflation endorsement that provides increases in coverage. The title insurance company is obligated to defend the title in legal action, cure the defects, or pay for the loss up to the policy limits