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LICENSED INDEPENDENT ESCROW COMPANIES
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REAL ESTATE BROKER-OWNED ESCROW DEPARTMENTS
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TITLE COMPANY ESCROW DEPARTMENTS
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STATE REGULATOR
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DEPARTMENT OF CORPORATION
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DEPARTMENT OF REAL ESTATE
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DEPARTMENT OF INSURANCE
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BONDING REQUIRED
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YES
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NO
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NO
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MANAGER ESCROW EXPERIENCE REQUIREMENT
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5 YEARS E.O. EXPERIENCE OR 4 YEARS E.O.
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NO
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NO
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REGULATOR AUDITS
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YES
EVERY 12 TO 24 MONTHS BY THE D.O.C. (WITH NO PRIOR NOTICE)
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NO
D.R.E. AUDITORS GO OUT BY APPOINTMENT ONLY
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INTERNAL AUDITS AT EMPLOYER'S DISCRETION
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ANNUAL CPA AUDIT REQUIRED
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YES
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NO
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NO
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YES
$5,000,000.00!
ESCROW AGENTS FIDELITY CORP.
(E.A.F.C.) COVERS ALL LICENSED ESCROW CORPORATIONS
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YES
D.R.E. RECOVERY FUND:
MAXIMUM $25,000.00 PER INDIVIDUAL
COLLECTIBLE ONLY AFTER A CONVICTION FOR FRAUD
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NO
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FINANCIAL LIQUIDITY REQUIREMENTS
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YES
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NO
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NO
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ESCROW LICENSE REQUIRED
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YES
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NO
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NO
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ASSUMED IMPARTIAL AS A THIRD PARTY
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YES
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ESCROW OFFICER IS AN EMPLOYEE OF BROKER, WHO HAS INFLUENCE OVER THE TRANSACTION
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TITLE DEPARTMENT HAS ACCESS/CONTROL OF ESCROW MONEY AND PROCEDURES
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DEPARTMENT OF JUSTICE CRIMINAL BACKGROUND CHECK OF ALL EMPLOYEES, OWNERS AND STOCKHOLDERS
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YES
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NO
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NO
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Consumer Alert!
Important Information For Sellers, Buyers And Real Estate Professionals
Though most consumers purchase or sell real estate a limited number of times, the process can often be complicated and stressful, even mysterious. One of the most important aspects involved in real estate transactions is the escrow, the legal process by which the property is actually transferred from one party to another. Unfortunately, consumers are often deprived of a choice based on the best services at the best price. What most consumers do not know is as the seller or buyer in the transaction, they actually have the choice of which escrow provider will be used. In the majority of real estate transactions, when represented by a real estate agent, buyers and sellers often delegate this decision to their agent. It is important, however, to understand that there is a significant difference between escrow services!
Why You Should Insist On An Independent, Licensed Escrow Company
Independent escrow corporations have been providing real estate closing services to consumers in California since the late 1940’s. California’s Escrow Law, which was enacted in 1947, defines escrow providers as neutral, third party agents for all principals in a real estate transaction.
The Escrow Law requires all corporations engaged in the escrow business as escrow agents to be licensed as independent escrow companies by the California Department of Corporations. However, certain entities are exempt from the Escrow Law including Real Estate Brokers, Title Insurance Companies, Banks, Attorneys, Trust Companies and Savings and Loan Associations. Their escrow operations are not regulated by the Department of Corporations, but by the various agencies that traditionally have regulated them on a limited basis.
What differentiates licensed, independent escrow corporations from these other entities is that Independent escrow companies are companies whose ONLY business is providing escrow services. The other entities generally provide escrow services as a secondary function incidental to or in conjunction with their primary business, generating an additional source of income. The escrows handled by companies that are not independent usually arise from their owner’s other businesses, which is why they are referred to as "Controlled" business arrangements. Consumer Advocate Ralph Nader has charged that the "mutually accommodating manner in which real estate brokers and agents work with lenders, title companies, attorneys and other professionals leads to enforced consumption, which is all part of an informal, but nonetheless anti-competitive cartel costing consumers billions of dollars each year."
Some Things You Didn’t Know About Escrow
If you are a real estate professional, or a consumer who frequently deals in real estate transactions, you have probably noticed over the last few years, the nature of the escrow business is changing. If you are an agent, the independent escrow offices with your favorite escrow officers are disappearing and are being replaced with an escrow officer who inhabits a small room just down the hall in the real estate office where you or your agent works. The broker is offering any number of inducements to the agents to use the "in-house" escrow services, and in some cases, has even suggested that those who "don’t get the escrow" aren’t considered "part of the team" and are "not supporting the broker". As an agent, maintaining your independent right to choose services and not succumbing to your broker’s pressure to use the "in-house" services may cause you to be subject to cuts in your commission split or become ineligible for the office "perks" of paid advertising, reduced office or desk fees, waived E&O transaction fees, etc. By legal definition, any form of consideration, whether cash, prizes or waived office fees, is considered an inducement to direct services or, in other words, an illegal "kickback". Inducements such as these are frequently offered by real estate brokers to their licensed agents, using alternative terminology in lieu of calling them what they actually are, in an effort to eliminate any perception of illegality. As a real estate licensee it is important, however, to remember that not only is it illegal to give "kickbacks" but also to accept them; actions which constitute a violation of California laws and regulations and also the Federal RESPA statutes.
As an agent, you go out into the real estate world armed with your broker’s instructions to come back with the sale AND the escrow along with a glowing description of the abilities of the escrow officer. Upon either making or receiving an offer, you start making plans as to how you will counter the demands for the escrow by the other agent who, as fate would have it, has been armed with much the same ammunition by his or her broker, who also happens to have an "in-house escrow". After several hours of negotiating the transaction, you find that the other agent has managed to wrestle the escrow services designation away from you, probably in exchange for something really important like placing the title order with a particular title company, perhaps the one your broker has also suggested. In any event, you are forced to go back to your broker and tell him of your perceived "defeat". You know that, after hours of arguing, thinly veiled threats, or dealing with a listing agent who insists that their "seller reserves services" (though the seller likely doesn’t even know they have) the only way the deal would work was to give up the escrow to the other agent and that broker’s "in-house escrow". Regardless of this minor disappointment, you have put a sale on the board. Not bad for a day’s work!
Not Necessarily
In all that discussion over where the escrow would be placed, did anyone tell the principals (the sellers and buyers) that in the event of embezzlement or fraud involving the funds in the escrow, that either their money or property may be at risk…gone forever? Of course not! Perhaps you weren’t even aware that there are different types of escrow entities and that the type and degree of protection of the client funds and property varies substantially between them. While we all know that it is a mortal sin to give advice that may constitute the "practice of law", it is a pretty safe assumption that in the event the buyer or seller in your transaction lose their funds or property in an escrow that has inadequate means of protection for the client you, as the agent, will be left holding the bag for not having disclosed those limitations and that, even if you weren’t aware of them, you should have been. After all, you are a real estate professional and are responsible for everything that goes wrong. The courts have upheld that assumption time and again.
So what is the big deal? A few thousand dollars in earnest money deposited for a few clients? Most people could come up with that if they had to. Would it surprise you to know that even a small escrow company closing approximately 20 transactions a month probably has an average trust account balance of around $500,000.00 and may have a daily high balance of over $1,000,000.00? If you have been in the business for a while, try making a list of all those brokers and escrow personnel you have met that you would entrust with a million dollars based on their personal ability to pay it back if it disappeared. Having some difficulty? If you are an agent, ask your broker to help, may be he or she can give you a list of all those he would vouch for under the same circumstances. The point here is, if you are going to entrust someone with hundreds of thousands of dollars it would be prudent to ask what safeguards are in place to insure that it is not stolen and, in the event it does disappear, it can be recovered. Can you imagine this scenario? The buyer’s new loan has funded, the needed funds deposited into escrow and the deed recorded when suddenly it is discovered that the sellers proceeds check is returned NSF because it appears that the escrow trust account has been embezzled or "borrowed" by someone who has had what they perceived as a life or death emergency, or possibly just an uncontrollable desire for the "good life". If you were a seller, would you expect that your agent would have made the effort to educate themselves concerning the best protection for your money and property?
As A Real Estate Professional, What Do You Tell The Buyer And Seller?
The truth would be a good place to begin. If you give them as much accurate information as you can, then allow them to decide for themselves, you will have taken some steps necessary to protect yourself and, more importantly, the client. What is the "truth"? You will need to do some research and ask some pointed questions but, for a start, try showing your client the following comparisons between escrow providers.
The chart at the beginning of this article makes the comparisons clear and easy to understand.
Real Estate Broker "In-House Escrows"
The Escrow Law, Division 6, California Financial Code provides that the Commissioner of Corporations must license escrow agents. Exemptions from the requirements of this law are granted to, among others, real estate brokers and title companies. Exemptions granted to these entities are limited and the entities are regulated by their respective regulatory agencies. This exemption limits any broker licensed by the Real Estate Commissioner to handle escrow transactions only while performing acts in the course of or incidental to real estate transaction in which the broker is a party or in which the broker is an agent performing an act for which a real estate license is required.
The Department of Corporations interpretation (17006(d) of this exemption is as follows:
- The exemption to transact escrow is available only to the real estate broker;
- The exemption to transact escrow is personal to the broker and the duties, other than administrative functions, cannot be delegated by the broker;
- In a purchase or sale transaction, if the broker is not a party to the transaction he must be the selling or listing broker;
- The exemption is not available for use in association with other brokers for the purpose of conducting escrow transactions;
- When the broker’s escrow business is a substantial factor in the operation of the business, the broker may not delegate or "contract out" any escrow services that may be provided pursuant to the exemption.
Under the real estate broker’s exemption allowing them to conduct escrow services, a broker cannot advertise that he or she offers escrow services without specifying in the advertisement that such services are offered only in conjunction with the broker’s real estate brokerage business. This disclosure is rarely, if ever, seen in real estate advertisements, particularly those promoting their company’s benefit to consumers by virtue of offering "one stop shopping". The broker "in-house escrow" divisions are not required to be bonded, insured or independently audited and are backed only by the assets of the broker and consumer’s ability to file a claim against the Real Estate Recovery Fund for a maximum of $25,000.00 per claimant. It should be noted that making such a claim for recovery requires that a conviction for fraud be obtained and judgment filed. Anyone familiar with the regulatory and enforcement procedures of the Department of Real Estate is aware that rarely are real estate brokers actually restricted from continuing to do business or penalized sufficiently when found to have committed any wrongdoing due to the DRE’s purported lack of funding and audit staff available for enforcement actions, even when those "misdeeds" concern misappropriation or commingling of trust funds (i.e. money belonging to the consumers).
Further, real estate brokers are restricted from using a fictitious name or a corporate name containing the word "escrow" or advertise in any other manner which would tend to be misleading to the public, giving the consumer the impression that their "in-house" escrow is an independent, licensed escrow corporation. In the past several years, this particular regulation has become one that is widely ignored by the real estate industry providing "in-house" escrow services; leading one to believe that legal loopholes have been found in order to skirt this rule. In the past, when this ruling was observed, ABC-123 Realty’s "in-house escrow" division would have been called ABC-123 Realty-Escrow Division. Now it may very well go by "123 Escrow" or some other derivative of the broker’s company name or another corporation owned by the broker, in direct violation of the regulations, falsely giving the impression that the escrow services are provided by an independent, licensed company and not the broker’s own escrow officer operating under the real estate exemption.
Another notable difference between the broker "in-house escrows" and independent, licensed escrow corporations is that there are no minimum experience requirements, background criminal checks and other investigations or registration for escrow personnel employed by brokers.
Title Company Escrow
Formerly licensed by the Department of Insurance to handle only those real estate transactions in which they anticipated issuing a policy of title insurance, title companies may now handle any type of real estate transactions regardless of the insuring title company. They need only to post a relatively small, mandated deposit for each county in which they provide escrow services and provide only limited protections against loss of funds due to fraud or embezzlement. They are backed only by the assets of the title company itself. (Note: Ask your title representative about the difference between a title company and a title insurance company and the availability of assets to cover large claims for losses — you might mention Union Land Title and Mortgage Link or Universal Title Escrow). They also have no minimum experience requirements, background investigations or registration of escrow personnel.
Independent Public Escrow Companies
Independent escrow corporations are licensed by the California Department of Corporation (DOC) in accordance with the Escrow Law and thereby are authorized to handle any and all transactions, real estate or personal property escrows. They are required to post a surety bond or cash in the amount of up to $50,000.00 per location AND belong to the state mandated Escrow Agents Fidelity Corporation, which insures and bonds these companies to a current maximum of $5,000.000.00 per loss occurrence against fraud and embezzlement. All independent escrow companies are required by law to be audited by a CPA at least once every year and are subject to surprise, regulatory audits by the DOC, at the escrow company’s expense, at least once every 24 months, or more often in the event of complaints or an indication of problems occurring. Independent escrow managers are required to have a minimum of 5 years verifiable escrow experience and all branch managers a minimum of 4 years experience. All independent escrow personnel are fingerprinted and must have background checks completed by the Department of Justice. Further, escrow personnel are subject to being barred from employment and management or ownership of a licensed escrow company for just cause. These barred individuals can, however, continue to conduct escrow services for companies operating under the exempted licenses, such as broker "in-house escrows" and title company escrow departments.
In conclusion, the basic definition of "escrow providers" is a neutral third party who is responsible for seeing that funds are held in trust until such time as all the conditions of the purchase contract have been met. Whether you are a buyer, seller or a real estate professional, a good question to ask yourself when selecting an escrow provider is: "If, for some unforeseen reason, this transaction ended up in court, would the escrow officer truly be able to represent themselves as a neutral third party when the escrow officer and one of the real estate representatives involved were both being paid or employed by the same broker?" In the case of broker "in-house escrow" divisions, the answer is clearly "no".
As a consumer, the final and most important question to ask when selecting an escrow provider is: "In the sale or purchase of my property, am I getting the best value and service available and will my money be safe?"
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