If you have purchased or sold a home in California, then you’ve probably been through escrow. But, if you’re like tens of thousands of other Buyers and Sellers (and even many real estate agents), you probably didn’t realize that there are major differences in the consumer safeguards offered by the various escrow providers.
Most Buyers and Sellers don’t know that they have a choice when it comes to their Escrow Provider and that each has vastly different safeguards to protect the consumer against the loss of Escrow Trust Account funds due to theft or embezzlement.
The three most commonly-found types of escrow providers are: Title Company Escrow Operations, Real Estate Broker Escrow Departments and licensed, Independent Escrow Corporations. While the three perform the same escrow functions, the highest level of state-mandated requirements, regulations and consumer safeguards are in the licensed, Independent Escrow Industry.
The regulatory agencies for the three escrow providers are each different state agencies – the Department of Corporations (DOC) for licensed, Independent Corporations, the Department of Real Estate (DRE) for Real Estate Broker Escrow Departments and the Department of Insurance (DOI) for Title Company Escrow Operations.
In most cases, the Buyer and Seller aren’t even aware of their right to choose their Escrow Company. Sometimes, even the agent is not aware of the differences in Safeguards between companies and the wide disparity in the regulations and requirements mandated by each one’s regulatory agency. Oftentimes, the real estate agent will package escrow into the offer with a company with whom the agent has had a prior relationship without the Buyer or Seller realizing that this is their choice.
While price is often foremost on the minds of Buyers and Sellers, consumers need to know whether or not they are dealing with a reputable Escrow Company. Two important questions the consumer (and their realtor) should ask are, “What happens to the escrow funds if they are embezzled? Is there some sort of insurance or fidelity bond to protect the money?”
Escrow Departments of Real Estate Brokers or Title Insurance Operations are not required to be members of the “Escrow Agents’ Fidelity Corporation” as are Independent Escrow Agents licensed by the California Department of Corporations. The EAFC is a non-profit, mutual benefit corporation whose key purpose is to reimburse its member escrow companies for embezzlement of their trust funds.
The Department of Corporations requires each of its licensed Escrow Companies to carry a $5 million fidelity bond provided by the EAFC. The Department of Real Estate says it “has no similar requirement” for escrow departments affiliated with Real Estate and Mortgage Brokerages. The Department of Insurance says the decision to hold a fidelity bond for Title Insurance Operations is up to the individual company.
There have been several occurrences in which escrow companies were seized after hundreds of thousands, and even millions, of dollars were found missing from their trust accounts. These include: California Escrow Systems in Sacramento, Mortgage Link in Ontario, Country Oaks Escrow, Inc. in Santa Clarita and Crystal Mortgage in Walnut Creek. In the case of Country Oaks Escrow, Inc., the eventual losses topped $2.75 million.
Fortunately for clients of Country Oaks Escrow Inc. and California Escrow Systems, the companies were licensed by the Department of Corporations and were required by law to be backed by insurance from the EAFC. Others were not so fortunate.
One important distinction the Department of Corporations holds is that it requires the Escrow Corporations it licenses be companies whose sole business is escrow. Other escrow companies are owned by a variety of Real Estate-related entities (sometimes referred as “controlled”). For these companies, escrow is often secondary to their other Real Estate activities.
The escrow department in a Real Estate Broker’s Office or Title Insurance ooperation could, for example, simply be an agent or title officer working with mail-order escrow computer software and with little or no formal training. The Department of Corporations requires that licensed, Independent Escrow Companies have an on-site manager with a minimum of five years experience as an Escrow Officer.
Other consumer safeguards mandated by the Department of Corporations include: requirements that the Escrow Company have certified independent financial audits each year, the company meet minimum Worth and Liquidity requirements and that all of the Escrow Company’s employees submit to Department of Justice background and fingerprint checks for possible criminal history. The Department of Corporations is legally able to shut down companies that they find to be in violation of their requirements.
Neither the Department of Real Estate nor the Department of Insurance has similar requirements of its licensed escrow providers.
Today, it makes sense for the consumer to ask questions and learn their rights when it comes to choosing their Escrow Company. The answers could save them frustration and money.
Allan Erdy Escrow is in full compliance with Department of Corporation’s regulations and is looking forward to providing you with a safe and courteous escrow.
Information provided by the Escrow Institute of California.
© Allan Erdy Escrow Rev 8/11