Escrow Companies and Licensing

A real estate transaction has a lot of moving parts and escrow companies exist to be a neutral third party that handles closings, funds, pro-ration of taxes, ties in the loans and basically makes sure the transaction happens the way it is supposed too.  As we have started buying more properties from standard Sellers versus Banks

California can have two kinds of licensed escrow companies: the Department of Corporations (DOC) licenses escrow companies or the Department of Real Estate (DRE) can have its licensed agents/brokers handle escrow.

As a very big warning they are not created equal at all.

DOC Escrows have a laundry list of requirements. The most important ones are:

Fidelity bonding. Each applicant must file with the Department a fidelity bond if the transactions processed are of the type not listed in Section 17312(c) (i.e., the transactions listed in paragraph 2 above). The fidelity bond must provide fidelity coverage on each officer, director, trustee and employee of not less than $125,000 for the purpose of indemnifying the escrow agent (or the escrow agent’s successor in interest) for loss of trust obligations held by the escrow agent as a result of fraudulent or dishonest abstraction, misappropriation, or embezzlement of trust obligations by an officer, director, trustee, or employee of the escrow agent.

The fidelity bond may contain a deductible; however, the escrow shall deposit with the Commissioner a surety bond satisfactory to the Commissioner in the amount of the deductible. The amount of the surety bond shall always be maintained in the amount of the deductible of the fidelity bond. The surety bond shall run to the state for the use of the state to cover any loss of trust obligations that the escrow agent’s fidelity bond does not cover due to the fidelity bond’s deductible.

Minimum financial requirements. Financial requirements must be demonstrated through submission of audited financial statements that indicate that the company has liquid assets in excess of current liabilities of $25,000 and tangible assets in excess of total liabilities of $50,000. If branch offices are maintained by the escrow agent, the tangible net worth requirement increases by 50% of the requirement for the first branch office and 25% for each additional branch office. Any losses projected by the applicant during the first few months of operation as shown in the applicant’s proposed budget must be taken into consideration when calculating the tangible net worth and liquid assets.

Surety bonding. Each escrow agent must file with the Commissioner a surety bond of at least $25,000. The bond is intended to be used to pay to the state or any person any amount that is due to the state or such person under the provisions of the Escrow Law. The amount of the bond required may increase up to a maximum of $50,000 depending on the escrow liability of the company. The bond must be increased by $5,000 for each additional Licensed office.

In lieu of the surety bond a Licensee may deposit with the Commissioner a cash bond in the amount required. The cash bond may be represented by cash deposited in a bank, an industrial loan company or a savings and loan association. Such cash deposits or certificates must be assigned to the Commissioner and may not be included in the assets of the Licensee for purposes of the tangible net worth and liquid asset requirements.

Background checks. All stockholders, officers, directors, managers and employees must have background checks performed by the Department. These background checks include, among other things, obtaining criminal history information through the Department of Justice and conducting civil court checks for activities that would indicate previous involvement in fraud, embezzlement, fraudulent conversion, or misappropriation of property. Each stockholder, officer, director, manager and employee will be required to file fingerprints cards, which must be cleared through the Department of Justice. Applicants may use the Live Scan program to submit fingerprints electronically to the Department of Justice for clearance. The fee for each clearance is $10 plus any fee charged by the Department of Justice or the live scan operator.

Minimum experience. The Escrow Law requires a manager who possesses a minimum of five years of responsible escrow experience to be stationed at the Licensed location during open office hours.

Department of Real Estate Escrow Requires:

All you need to open a DRE escrow is a California licensed broker to back you.  The broker is liable for any trust account issues, but these are usually only called out if there is a big problem.

Banks typically use DOC escrows, but some big real estate offices have a DRE escrow setup.

Be very careful you can always send the money to title and they don’t release it until it is recorded.

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