California Land Title Association January 27, 2022

[Pages:9]CLTA Escrow Manual

California Land Title Association January 27, 2022

Contents

CLTA Escrow Manual...................................................................................................... 0 Definition of Escrow......................................................................................................... 2 Duties and Responsibilities ............................................................................................. 2 Types of Transactions Handled by Escrow ..................................................................... 2 Location of property that is subject of an Escrow ............................................................ 3 Necessity of mutual written escrow instructions and compliance therewith..................... 3 Regulatory oversight ....................................................................................................... 3 Unauthorized Practice of Law (UPL) ............................................................................... 4 Settlement Statement...................................................................................................... 4 Accounting/Good Funds.................................................................................................. 4 Disbursement of funds .................................................................................................... 5 Disbursement of lender funds and interest payment requirements ................................. 5 Limited or Sub Escrows................................................................................................... 5 Rate filings ...................................................................................................................... 5 Tax Reporting requirements ............................................................................................ 5 Remote online notarization (RON) and digital notarization.............................................. 6 Business email compromise ? wire fraud ........................................................................ 6 California Privacy Regulations (CCPA and CPRA) ......................................................... 7 FinCEN GTO ................................................................................................................... 7

This manual is intended to be a guide for title agents and escrow employees of title companies regulated by the California Department of Insurance.

Its purpose is to provide general information regarding escrow/settlement practices. It is not intended to be a comprehensive discourse or summary of escrow/settlement practices.

Employees should avail themselves of their company's management, training, and other resources in the subjects discussed herein.

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Definition of Escrow

The Settlement Agent, whose practitioners are commonly referred to as "Escrow Officers," is a neutral third party that holds documents and/or funds until such time as the terms and conditions of the written instructions from all principals have been satisfied. The term Settlement Agent is often used interchangeably with Escrow Officer. The Consumer Financial Protection Bureau (CFPB) and lenders often refer to the escrow agent or Escrow Officer as the Settlement Agent.

California Civil Code Section 1057: A grant may be deposited by the grantor with a third person, to be delivered on performance of a condition, and, on delivery by the depositary, it will take effect. While the grant is in the possession of the third person, and subject to condition, it is called an escrow.

Escrow impound accounts are held by lenders and are also referred to as "escrow" accounts. For purposes of this document, we are not referring to an impound account.

The word "escrow" is commonly used in many different ways. Throughout this document, it may be used to describe the transaction, person, or branch handling the transaction.

Duties and Responsibilities

The escrow employee of a title company has two main responsibilities:

- Fiduciary: Maintaining trust and neutrality in the real estate closing; closing the transaction when instructed by the principal(s).

- Risk mitigation: Avoiding or minimizing risk to the title insurance underwriter by addressing the exceptions to title to either show on the final title policy or be paid and/or released through the closing process.

Types of Transactions Handled by Escrow

There are several types of transactions that may require an escrow. In general, the Escrow Officer should handle transactions involving the issuance of a title insurance policy to limit the liability of the employer to the terms and conditions of the policy.

In addition to real estate transactions involving the issuance of a title insurance policy, other examples of escrow transactions may include:

- Bulk Sales - Mobile/Manufactured Homes - Personal Property - Stock Certificates

While all of the above are considered escrow transactions, some of the transaction types ? such as those involving personal property or stock certificates ? are generally

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not handled by title companies, or, as in the case of transactions involving bulk sales or mobile/manufactured homes, may require management approval.

Location of property that is subject of an Escrow

Section 12389 states that "(a) On and after July 1, 2016, an underwritten title company as defined in Section 12340.5 that is a stock corporation may, subject to subdivision (b), (1) engage in the business of preparing title searches, title reports, title examinations, or certificates or abstracts of title, upon the basis of which a title insurer writes title policies, and (2) conduct escrow services through business locations, as defined in Section 12340.13, in counties in which the underwritten title company is licensed to conduct escrow services regardless of the location of the real or personal property involved in the transaction."

Sister State Law Controls

The effect of Section 12389 Ins. Code, as so amended, may be negated by the laws of a state of these United States other than California wherein the subject property is located. It can be that an underwritten title company licensed by the State of California is prohibited by a sister state's law from escrowing property located in that state.

Necessity of mutual written escrow instructions and compliance therewith

The opening, processing and closing of escrow must be documented with mutual and agreed upon written instructions from the parties (principals and any new lender), and evidence of compliance must be retained in the written record of the transaction. The Escrow Officer should resolve ambiguous or conflicting instructions prior to closing escrow. The scope of duties of escrow is defined by written instructions of the principals. A request by a party or third party for escrow to perform an act not otherwise authorized or provided for in the instructions of the principal(s), or that impose undue liability or exposure to escrow, the title company or underwriter, must either be withdrawn by the submitting party, or approved by company management.

Regulatory oversight

Escrow must comply with laws established by the Federal Government, the State of California, and municipalities that regulate the subject property and escrow process.

The Consumer Financial Protection Bureau (CFPB) has created regulatory requirements for both escrow and residential lenders. The American Land Title Association (ALTA) created a body of standards for the title insurance industry to allow title agents the opportunity to upgrade their policies, procedures, and internal controls for the purpose of mitigating business risk, referred to as the 7 Pillars of ALTA Best Practices. For more information visit .

The California State agency that regulates the title insurance industry, including escrow, is the Department of Insurance.

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Unauthorized Practice of Law (UPL)

There is no requirement for the Escrow Officer to be licensed individually in the State of California and the Escrow Officer may close escrows as an employee of the title company. The escrow employee must work within the confines as established by the company and must not provide legal advice on any matters, including but not limited to taxes, loan programs, real estate law and title insurance policies. An escrow employee may not prepare legal documents and can only act as a scrivener of documents approved by the company's legal department.

Settlement Statement

An escrow settlement statement must reflect all costs and charges for the escrow transaction and follow the written instructions from all principals and lenders. Disbursements should only include title and property related matters and include items related to clearing title, meeting contractual requirements related to the transfer of the property, lender charges and title, escrow and recording charges. Proceeds should be disbursed to named principals in the transaction and not to third parties designated by the principals without company management approval.

The use of either the ALTA Settlement Statement or escrow software system closing settlement statement is acceptable.

Accounting/Good Funds

California's good funds law as set forth in Section 12413.1 of the California Insurance Code (hereinafter referred to as Good Funds Law) requires that a title insurance company, controlled escrow company or underwritten title company have in possession sufficient good funds in order to close transactions. All funds for escrow transactions must be deposited and have cleared in an escrow trust account insured by the Federal Deposit Insurance Corporation.

Although the Good Funds Law states that cash and funds deposited by electronic payment are considered good funds, not all electronic payments are acceptable as good funds to title companies. Contact your bank and/or accounting administrator regarding recourse that payors may have with different forms of electronic payments, such as ACH transfers or payments using digital and/or electronic funds vendors. Today the most common accepted form of good funds electronic payment is wires. Typically, title and escrow companies do not accept cash deposits.

All other forms of payment must be confirmed as having been collected by the financial institution from which the funds have been received. This includes personal checks, cashier's checks, money orders and bank checks.

All funds received by escrow must be deposited in the escrow trust account no later than one business day from receipt.

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Disbursement of funds

Customary practice is to disburse after funds have been unconditionally collected and the recordation of documents has taken place. Funds should be disbursed at closing unless written holdback instructions from the principals and/or lender are obtained. Funds held for title matters must be approved by management and underwriting, as appropriate, and supported with written documentation (indemnity agreement and instructions).

If funds are requested to be disbursed prior to recordation of documents, written instructions from the principals (seller and buyer) and lender, if any, must be obtained prior to disbursement of funds. Company management approval may be required.

Disbursement of lender funds and interest payment requirements

CA Civil Code 2948.5 provides that a lender may only charge interest beginning on the day prior to disbursement of loan funds unless borrower consents in writing to a different disbursement day. Escrow is responsible to follow the borrower's and lender's instructions regarding per diem interest.

Limited or Sub Escrows

Limited or Sub Escrow is a service provided by a title company performed at the direction of a primary settlement agent in connection with the issuance of a policy of title insurance. The service is limited to the acceptance of documents and funds to pay off or release encumbrances or charges against the land, or to transfer funds from one party to another based upon instructions from the settlement agent and lender's instructions, if applicable.

Rate filings

It is required that all fees be charged in accordance with rates filed with the California Department of Insurance.

Tax Reporting requirements

FIRPTA Affidavit and withholding requirements

The transfer of a U.S. real property interest by foreign seller(s) is subject to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) and as amended by Protecting Americans from Tax Hikes Act of 2015 (PATH) for income tax withholding. The buyer of U.S. real property interests from foreign persons is responsible for withholding a percentage of the sales price from the seller(s) at close of escrow, subject to certain exemptions. The buyer will be held liable by IRS for any failure to comply and withhold funds.

Escrow needs to follow the real estate contract as to the requirements delegated to escrow in connection with FIRPTA requirements.

Federal 1099-S reporting

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The Internal Revenue Code Section 1445 requires escrow to report the sale or exchange of a real estate transaction to the Internal Revenue Service. Escrow must submit IRS Form 1099-S including the seller's social security number or taxpayer identification number and the gross consideration. The reporting may be eliminated if the seller qualifies for an exemption which will be determined by completing all questions on a Real Estate Certification for Information Reporting. At close of escrow, title or escrow company must provide seller(s) with a copy of the filed 1099-S Form.

CA 593 reporting

In addition to federal withholding requirements, state withholding requirements apply when California real estate is sold or transferred under R&TC Section 18662. The real estate escrow person (REEP) is required to notify the principals of withholding requirements. Escrow must send the appropriate forms to seller for completion (currently 593 Form) and submit said form at close of escrow either with or without funds, as required.

Remote online notarization (RON) and digital notarization

Remote Online Notarization (RON) is the act of notarization with the use of audio-visual technology, which allows for the signer and notary to be in separate locations. Not all states have enacted RON legislation. Some states, like California, have not enacted RON legislation. California law, however, recognizes out of state notary laws and allows documents executed and notarized out of state to record, but it is unclear whether RON executed and notarized documents are allowed to be recorded and/or whether the recordation meets legal standards for property conveyance. Even though a county recorder may accept a RON document for recordation, there is a risk that the validity of the document may be challenged at a later date. Escrow must understand and follow the title insurer's requirements or restrictions regarding the use of RON.

Digital notarization includes Remote Online Notary (RON), Paper Remote Online Notarization (PRON), Remote Ink Notarization (RIN), and In Person Electronic Notarization (IPEN). See ALTA Link for more information.

The technology and different state laws relating to RON and Digital Notarization are complicated. The Mortgage Industry Standards Maintenance Organization (MISMO) has created a compliance program to assure that RON technology providers will meet a common set of MISMO standards. Their press release states: "Released in 2019, MISMO's RON standards provide a common set of requirements, including credential analysis, borrower identification, capturing and maintaining a recording of the notary process electronically, audio and video requirements, record storage, and audit trails."

Business email compromise ? wire fraud

Real estate wire fraud is a scam targeting individuals performing wire transfer payments. A cybercriminal monitoring a compromised email account of someone involved in a real estate transaction will hijack the identity of a party in the transaction and create an email account using the party's signature block, and if a company,

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possibly the logo. They often will use an email that is similar to the real party's or a generic email like closing.settlement.agent@. The cybercriminal will then request a wire transfer to the cybercriminal's account. Unknowingly, targets will then send wire transfers to the cybercriminal's account.

See ALTA's website Coalition to Stop Real Estate Wire Fraud () for more information.

California Privacy Regulations (CCPA and CPRA)

The California Consumer Privacy Act of 2018 (CCPA) gives consumers more control over the personal information that businesses collect about them and the CCPA regulations provide guidance on how to implement the law.

Certain businesses are required to give consumers certain notices explaining their privacy practices.

The CPRA (California Privacy Rights Act) is an expansion of the CCPA (California Consumer Privacy Act) implemented Jan 1, 2020. CPRA seeks to protect more types of privacy information, provide additional rights for consumers, establish an oversight entity, and detail rights specific to minors.

If a customer makes an inquiry about their rights under CCPA, escrow must understand and follow the company's protocols if the company is subject to the law.

FinCEN GTO

The Financial Crime Enforcement Network (FinCEN) has issued an order to title insurance companies to comply with a Geographic Targeting Order to collect and report information about persons involved in certain residential real estate transactions.

The order requires that certain information be reported via a Currency Transaction Report (CTR) on residential properties purchased by a Legal Entity in the amount of $300,000 or more without a bank loan or similar form of external financing, with any amount or type of currency (a Covered Transaction). The CTR must be filed within 30 days of the closing of a Covered Transaction.

Escrow Officers, who are typically the employees communicating with customers, must have required documentation from purchasers prior to closing to ensure that the CTR can be filed on time.

A generic copy of the current order can be found on the United States Department of the Treasury Financial Crimes Enforcement Network | page by searching for "GTO."

Document History

Date

Owner

Notes

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