Common myths & misconceptions of Escrow. October 22, 2007
Please do not construe this as legal advice, it is not. The sampling below is general in nature and is referencing common escrow misconceptions we see in the course of conducting business.
Here are a few to get started.
1) Escrow firms produce and verify the validity of Legal Descriptions.
- Incorrect. In a sale it is the Seller’s responsibility to correctly identify the property that is being sold. The Buyer should verify that the legal description matches the property that they intend to purchase.
2) Escrow firms are bound by Northwest Multiple Listing Rules.
- No. Escrow is bound by the Escrow Agent Registration Act of Washington. Some managing real estate brokers erroneously believe otherwise. The Legislature also has determined that escrow officers are subject to the Consumer Protection Act.
3) Escrow firms never have conflicts of interest or problematic transactional issues.
- Untrue. Escrow firms commonly run into potential conflicts of interest, and problematic issues. The idea is to reduce the exposure of potential conflicts and issues as much as possible via a variety of means. For example, escrow commonly discloses those problems to the principals in the transaction so they can consult appropriate professionals and give escrow additional instructions on how to proceed.
4) Independent Escrow firms are sued more often than attorney-owned escrow firms.
- No. Ironically, Attorneys who own escrow firms have earned that privilege. (Source: Fred Phillips- Attorney, LPO Seminars).
5) Limited Practice Officers at escrow firms are tested & licensed by the Washington State Dept. of Licensing.
- No. The LPO exam is administered by the Washington State Bar Association twice a year. The pass rate has been under 30 % for quite a while, but has recently improved. LPOs are regulated by the Washington State Bar Association and Washington State Supreme Court. Independent Escrow Companies are regulated by the Washington State Dept. of Financial Institutions.
6) Escrow staff work at all hours of the day and evening.
- Traditionally, no. Most are open from 9-5pm. From a practical standpoint, ownership does work at all times (speaking only for our company). Escrow firms have banking hours for a reason. Escrow firms are closed when the there are Federal holidays and when the Federal Reserve is closed. The receipt of lender wires occurs up to specific times in a business day, typically until about 2 pm. This may depend upon the trust account banking policy the escrow firm has with its own bank.
7) Loan officers and real estate agents are principals in the escrow transaction.
- Incorrect. The buyer(s) and seller(s) are the principals and escrow can only be instructed by these parties. Loan officers and agents cannot instruct escrow or influence the escrow transaction in any manner.
- Example: a loan officer who calls escrow to request proceeds check mailed to their customer instead of being wired to the customer’s bank as the client previously instructed escrow in writing.
- Example: a real estate agent/Broker instructing escrow to refund an earnest money check to a borrower (buyer) without a rescission agreement.
Escrow staff can produce, prepare and/or instruct their clients (buyer or seller) on drafting purchase & sale addenda for common things such as extending a closing date.
- No. This is tantamount to practicing law and may be a conflict of interest. Only a licensed real estate agent, attorney or principal parties can draft addenda.
9) Loan documents are almost always perfect when submitted to escrow.
- No. Loan documents frequently and frustratingly have errors, such as incorrect fees, incorrect name spellings, incorrect vesting, among other errors.
- Loan documents take time to prepare after receiving them from the lender, particularly if docs are re-drawn several times. This is a reason many escrow firms refuse to set up signing appointments with clients (who sometimes have to take off work early or are inconvenienced in other ways) until the docs are at escrow, prepared and confirmed correct with the borrower, mortgage broker and real estate agent.
10) Escrow staff have no deadlines.
- Emphatically incorrect. Escrow staff are looking at the clock all day long. In our State, disbursing funds cannot take place until confirmation that the documents have been recorded.
- Escrow staff must get loan payoffs to Fed Ex or UPS on time. This is a prime reason our company is located just blocks away from the major UPS terminal for Snohomish Co. It allows just that much more flexibility in TIME. Time is precious in the escrow business.
- There are many other time-sensitive tasks as well.
11) Once escrow has been opened and is progressing towards closing, Escrow cannot refuse to close a transaction.
- Incorrect, and it does happen.
- Posted in : Agent Advice, Buyer Information, General Real Estate, Seller Information, Title and Escrow
- Author : Lynlee Kane
I recently closed a transaction where my client was buying a condo in the same building she all ready owned a unit in. The new condo...
Comments»
Lynlee,
What happens if a transaction is not officially rescinded because the buyer or seller will not sign the rescission due to a disagreement regarding the disposition of the Earnest Money, and the parties open a second escrow at a different company? Is there any way you can tell that the seller put the property back on market and is still not released from the previous escrow?
Lynlee,
This is a great list and could be saved and given to any new real estate agent, or presented to Realtors (new or experienced) in a class on the escrow process.
Question regarding this one:
“9) Escrow has no duty to protect the interests of the borrower or lender in a fiduciary capacity.
Incorrect. Generally, lenders have very specific closing instructions to escrow regarding the potential for fraud and what steps to take in the event fraud is suspected.”
Well, I understand having a fiduciary duty as having a relationship with a client where you must act in that client’s best interests, putting that client’s interests above your own. I thought escrow officers could not act this way on behalf of one of the parties, because in doing so, an escrow officer would compromise his/her neutrality.
Now I do understand that there are duties to the lender, and duties to the buyer and seller, which would include not participating in any kind of fraudulent activity. But that seems more like a legal duty under the Escrow Reg Act to not engage in any kind of fraud and not a fiduciary duty to the lender.
But you’re the escrow officer, not me, so please teach me something new today.
Thank you!
If parties cannot agree to rescind a transaction within a reasonable amount of time (30-60 days), then the funds will be interpleaded to the courts, less escrow fees and third party fees.
It is not an escrow concern whether or not the seller enters into another contract. I understand that there may be some NWMLS rules for brokers regarding this, but it is not an escrow concern.
We did have a transaction similar to your scenario in which we were holding disputed earnest money and the seller ended up placing their home back on the market. The selling broker demanded (understatement) that we refund the earnest money back to the buyer because the seller placed their home back on the market. The managing broker of the real estate office cited that we were in violation of NWMLS rules by holding the money. Obviously we had to re-educate the broker.
Very informative. Thank you for posting.
Lynlee, here’s another myth I remember from when I was in escrow, “it’s escrow’s responsibility to explain the loan documents to the borrowers”.
It’s not?
Then what does a homebuyer do when he/she has questions about any of the loan documents?
Surely the retail loan originator is not going to know the answer. I have yet to meet maybe five LOs in my entire career who have ever read a deed of trust all the way through.
So does the borrower call the lender? What if the lender is back east and the office is closed?
When I was in title/escrow and the borrower had questions that were beyond what escrow should answer, of course I would have them call the LO…right from the signing table. And, if one of my clients have a question during signing (it happens), I would want them to call me too.
What I was referring to in #5, is when a borrower does not understand what their mortgage program is or they did not have a clue there’s a prepay…etc. Jillayne, is it escrow’s job to explain this or shouldn’t the borrower all ready know from their mortgage provider?
Speaking only for our office, generally, we are very thorough in explaining the general terms of the Note (the important document in the 1 inch thick stack of disclosures). We do not just stick a form in front of them and say sign here, sign that, sign this, yadda yadda…
There are cases where questions come up that really are best answered by the LO or agent or something an Attorney should assist in and they are contacted right from the signing table.
Off topic, but important, Lynlee is passionate about her position that anyone that goes through the office knows what loan terms they have, therefore, does not buy into the notion that we hear out in the media regarding it’s LO’s fault for so many laon problems. We go back and forth about this.