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Escrow Fact Sheet: What Is Escrow?
Most real estate transactions in the state of California utilize the services of an escrow company, yet escrow remains one of the least understood elements of the real estate process.
Escrow: What is it?
Very simply defined, an escrow is a deposit of funds, a deed, or other instrument by one party for the delivery to another party upon completion of a particular condition or event. The California Escrow Law Section 17003 of the Financial Code provides the legal definition.
Why Do I Need An Escrow?
Whether you are the buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed.
The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.
Escrow: How Does It Work?
The principals to the escrow buyer, seller, lender, borrower cause escrow instructions, most usually in writing, to be created, signed and delivered to the escrow officer. If a broker is involved, he will normally provide the escrow officer with the information necessary for the preparation of your escrow instructions and documents.
The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required in the escrow can be met or achieved, the escrow will be closed. Each escrow, although following a similar pattern, will be different in some respects, as it deals with your property and the transaction at hand.
The duties of an escrow holder include:
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Following the instructions given by the principals and parties to the transaction in a timely manner
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Handling the funds and/or documents in accordance with the instruction
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Paying all bills as authorized
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Responding to authorized requests from the principals
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Closing the escrow only when all terms funds in accordance with instructions
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Provide an accounting for the Closing or Settlement Statement.
Who Chooses the Escrow?
The selection of the escrow holder is normally done by agreement between the principals.
If a real estate broker is involved in the transaction, the broker may recommend an escrow holder. However, it is the right of the principals to use an escrow holder who is competent and who is experienced in handling the type of escrow at hand. There are laws that prohibit the payment of referral fees; this affords the consumer the best possible escrow services without any compromise caused by a person receiving a referral fee.
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10 Tips to Avoid Online Escrow Fraud
Tip #1
The easiest and best way to avoid becoming a victim of an online escrow scam is to call the California Department of Financial Protection and Innovation toll-free at 1-866-ASK-CORP (1-866-275- 2677) to make sure the escrow company you plan to use is properly licensed.
Tip #2
Never disclose financial or personal information like your Social Security number, credit card number, or bank account information until you have verified that the online escrow company you are using is properly licensed.
Tip #3
A buyer or seller who insists on using a particular online escrow company is probably trying to steer you towards a fraudulent escrow services site.
Tip #4
Watch out for escrow company sites that don’t have an address and phone number listed. If the site does list a phone number, call the number and be sure you speak to a live person. A generic voice mail is a sign that the company may be fraudulent.
Tip #5
Send the escrow company an email question. If you don’t receive a response, don’t do business with them.
Tip #6
Sometimes a phony escrow company Web site can be detected by its sloppy content, with spelling and grammar errors and inconsistent information. Other times, the site’s information may have been copied from legitimate escrow company sites.
Tip #7
Find out how the online escrow service processes transactions. Steer clear of sites that don’t process their own, but require users to set up accounts with online payment services instead. Legitimate escrow companies don’t use person-to-person money transfers like Western Union or MoneyGram or direct you to send your payment to an individual rather than a corporate entity.
Tip #8
Fake escrow company sites often display logos from the Better Business Bureau, VeriSign Secure, TRUSTe, and even the Internet Fraud Complaint Center. Check to make sure the escrow company really is endorsed by these organizations.
Tip #9
Avoid escrow company sites with domain names ending in .org, .biz, .cc, .info., or .US.
Tip #10
Be wary of a seemingly terrific deal. Scammers post online classified ads and offer items via online auction with very low prices. Remember, these so-called “deals” are just the hook to get you to use a phony escrow company site.
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Consumer Tips
Independent, licensed escrow companies are the first line of defense for homebuyers and property owners. Savvy real estate consumers know that buying or selling property doesn't stop with finding the right buyer or the right investment. And yet, escrow remains one of the least understood elements of the real estate process.
Attention Consumers!
Trust your investment by hiring a licensed escrow company. The Department of Financial Protection and Innovation Consumer Alerts lists unlicensed, internet escrow companies that may be operating in violation of the law. Check this list before you hire an escrow company!
Licensed escrow companies are consumers' best bet for safeguarding their funds. That is why it is so important to work with an escrow officer who has met strict licensing requirements of the California Department of Financial Protection and Innovation and has undergone a background check and fingerprinting by the Department of Justice.
Accountability
Licensed escrow companies are required to complete a financial audit every year to ensure compliance with California regulations, and all licensees are subject to random, surprise examinations by the Dept. of Financial Protection and Innovation.
Security
The Department of Financial Protection and Innovation scrupulously regulates licensed escrow companies. Each licensee is required by law to be a member of the Escrow Agents Fidelity Corporation (EAFC), which provides fidelity coverage for member trust accounts.
EAFC indemnifies member escrow companies against loss of trust funds caused by employee embezzlement, subject to the limitations contained in the California Escrow Law.
Safety
All employees must submit to California Department of Justice fingerprinting and criminal background checks.
You have the right to select your own escrow officer.
That's right, smart consumers can help in the selection of their escrow officer by investigating those companies themselves rather than leaving this important decision to their realty agent or lending institution.
Check
Here's a checklist to help you choose the right escrow officer for your real estate purchase:
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Ask your realty agent to make three recommendations for both escrow service and title insurance, and ask why the agent likes these companies.
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For escrow, determine whether a company is truly acting as a neutral party, or is under the control of a realty agent or mortgage broker.
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Remember that price is not the only consideration, attention to your specific needs and good service can and in most cases should be more important.
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Contact the state agency that regulates a company to determine if there are any pending complaints or disciplinary actions.
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Licensed vs Unlicensed Controlled
Licensed vs Unlicensed
All escrow companies in California can be classified into two basic categories: Licensed or Controlled. Licensed escrow companies are independent businesses licensed by the California Department of Financial Protection and Innovation. This license regulates the procedures and practices of the companies and subjects them to stringent requirements designed to protect consumers.
Controlled escrow companies are non-licensed businesses that can be owned by a variety of entities, including real estate brokers, mortgage brokers, banks, savings and loans, and title insurance companies. Such companies fall under the jurisdiction of a variety of supervising agencies, with regulations and requirements that vary widely. One fact remains constant, however. None of the agencies have regulations as strict as those imposed on the escrow companies licensed by the Department of Financial Protection and Innovation.
Better Protection
Although the majority of escrow companies are honest and above board, the large sums of money handled by escrow companies can entice unscrupulous individuals to abscond with the funds they are holding in trust. And unless the escrow company is bonded, there is often no safeguard assuring the return of the money to consumers.
Licensed escrow companies are consumers' best bet for safeguarding their funds. All licensed escrow companies are required to be members of the Escrow Agents Fidelity Corporation (EAFC), which provides fidelity coverage for member trust accounts.
Higher Standards
The stringent requirements by the Department of Financial Protection and Innovation assure that every licensed escrow company has met the highest standards in the industry. Consumer protection regulations unique to licensed escrow companies include:
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A Certification Program for all escrow officers in the company's employ, including fingerprinting and background checks by the Department of Justice
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A requirement that an escrow officer with at least five years experience be on-site
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Financial stability requirement, including at a minimum one CPA audit a year; and, frequent surprise examinations conducted by the Department of Financial Protection and Innovation.
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Prohibiting employment of convicted felons or anyone who has been disbarred from the real estate industry
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Membership with the Escrow Agents Fidelity Corporation (EAFC) which provides fidelity coverage for member trust accounts
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Company's sole business is doing escrow, which requires a higher level of state regulatory requirements and oversight.
The bottom line is that a licensed escrow company is the best possible neutral third party to complete your real estate transaction. Whether searching for an escrow holder yourself, or looking to recommend one to a client, a licensed escrow company gives you peace of mind.
Privacy Act Notice
Luxury Escrow, Inc. has prepared this Privacy Act Notice to comply with the Gramm-Leach Bliley Act. Public Law 106-102 and to inform you regarding its collections, storage and use of information that you and others give it during the processing of your escrow transaction. The information in this Privacy Act Notice applies to Escrow Holder's current and former clients.
1. Categories of Information Escrow Holder Collects. We collect nonpublic personal information about you from the following sources:
A. Information from you in letters and other communications as well as in escrow instructions and on forms including Statements of Identity, data collection regarding the financial status of the property or you and on other forms.
B. Information directly from third parties including real estate sales agents and brokers, mortgage companies and lenders, title companies, contractors, bookkeepers and accountants, attorneys, homeowners associations, insurance agents, federal, state or local tax or governmental authorities or from others who may give us information on forms or by other methods including but not limited to, telephone, e-mail, facsimile transmission.
2. Categories of Parties To Whom Escrow Holder Discloses. We may disclose nonpublic personal information about you to the following types of third parties:
A. Financial service providers such as title insurance and underwritten title companies, mortgage companies and lenders as well as insurance agents and companies associated with your escrow transaction.
B. Nonfinancial companies such as homeowners associations, attorney, bookkeepers and accountants, federal, state or local tax or governmental authorities, real estate agents and brokers associated with your escrow transaction.
C. Service Providers including contractors, structural pest control operators and others rendering services to you or the real property or business that is the subject of this escrow transaction.
We may also disclose nonpublic personal information about you to nonaffiliated third parties as permitted by law. Otherwise, we do not disclose personal or confidential information to anyone outside our company without your consent. We will adhere to the privacy policies and practices as described in this Privacy Act Notice.
We restrict access to your personal and escrow file information to those employees who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards that comply with federal regulations to guard your nonpublic personal information. Your information is stored in a secure place on a secure computer and in physical files. When we dispose of old physical paper files, we have it shredded and recycled by a bonded security company.
You may direct all questions regarding the policies set forth in this Privacy Act Notice to your escrow officer.