Escrow Law – Frequently Asked Questions

Escrow agents, internet escrow agents and joint control agents licensed pursuant to the Escrow Law are required to be corporations whose main purpose is to provide escrow services. The articles of incorporation must include a clause that states the sole purpose of the corporation is “to engage” in business as an escrow agent. The securities of the escrow applicant must also be qualified for issuance pursuant to the Corporate Securities Law or be exempt. The securities issued by a corporation licensed as an escrow agent must be placed in escrow, and the Commissioner of the Department of Financial Protection and Innovation must approve any transfer or issuance of stock of the escrow company

1. Payment of the application fee. Fees for filing an application are $625 for the first office or location and $425 for each additional office or location along with an investigation fee of $100 for each location. The fees are non-refundable.
2. Membership in Escrow Agents’ Fidelity Corporation (EAFC)*. An escrow agent must be a member of EAFC if the escrow agent will be engaging in the following types of escrows as specified in Section 17312(c) of the California Financial Code:
   1. Real property escrows, including, but not limited to, the sale, lease, exchange, or transfer of title, and loans or other obligations to be secured by a lien upon real property.
   2. Bulk sale escrows, including, but not limited to, the sale or transfer of title to a business entity and the transfer of liquor licenses or other types of business licenses or permits.
   3. Fund or joint control escrows, including, but not limited to, transactions specified in 17005.1 of the California Financial Code and contracts specified in Section 10263 of the Public Contract Code.
   4. The sale, transfer of title, or refinance escrows for manufactured homes or mobile homes.
   5. Reservation deposits required under Article 2 (commencing with Section 11010) of Chapter 1 or Part 2 of Division 4 of the Business and Professions Code or by regulation of the Bureau of Real Estate to be held in an escrow account.
   6. Escrows for sale, transfer, modification, assignment, or hypothecation of promissory notes secured by deeds of trust.

   *EAFC was organized for the purpose of indemnifying the members against losses sustained as a result of fraud, theft or embezzlement by officers, directors, stockholders and employees of the escrow agent (Chapter 2.5 of Division 6 of the California Financial Code). Each applicant is required to pay EAFC a membership fee of $3,000 and comply with the certificate requirements.

3. 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 must contain a rider as set forth in Section 1723 of the California Code of Regulations which:

   1. Provides that the coverage of the bond extends to all officers, directors, trustees and employees of the insured whether or not such officers, directors trustees, and employees are compensated by the insured; and
   2. Provides that “employee” includes:
      1. The Commissioner of the Department of Financial Protection and Innovation during the time the Commissioner, including his or her authorized representative, has possession of the property and business of the insured as provided in Chapter 6 (commencing with Section 17621) of Division 6 of the California Financial Code.
      2. Any individual or individuals assigned to perform employee duties for the insured within any premises of the insured by any agency furnishing temporary personnel on a contingent or part-time basis; provided however that the policy is not required to cover any loss caused by such individual if such loss is also covered by any insurance or suretyship held by the agency furnishing such temporary personnel to the insured.
      3. An independent contractor working in any office of the insured. Independent contractor means any natural person while performing escrow duties in the service of the insured, and whose performance in such service, the insured has a right to govern and direct, but whom the insured compensates by other than salary or wages.
   3. Contains a provision that the bond shall not be cancelled by the insurer in whole or in part without 30 days prior written notice to the Commissioner. The amount of the fidelity bond required will be increased depending on the monthly average escrow liability of the licensee

   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.

4. 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.
5. 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.

6. 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.
7. 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.
8. Signed affidavit. An applicant must provide a signed affidavit certifying that the applicant has read and is familiar with the Escrow Law and regulations.
9. Branch offices. An applicant must file a branch office application to establish additional business office locations.

Forms

Yes. The Escrow Law requires that any person engaged in the escrow business as an escrow agent, Internet escrow agent or joint control agent within California may do so only as a corporation organized for that purpose licensed by the Commissioner as an escrow agent or joint control agent. “Within California” is defined in Section 17005.5 of the California Financial Code as follows:

“Within this state” means any activity of a person relating to receiving escrows for deposit or delivery that originates from this state and is directed to persons outside this state, or that originate from outside this state and is directed to persons inside this state, or that originates inside this state and is directed to persons inside this state, or that leads to the formation of a contract and the offer or acceptance thereof is directed to a person in this state, whether from inside or outside this state and whether the offer was made inside or outside this state.

Yes. Those escrow agents licensed by the Department of Financial Protection and Innovation that process the following types of escrows are required to be members of Escrow Agents’ Fidelity Corporation (EAFC).

• Real property escrows, including, but not limited to, the sale, lease, exchange, or transfer of title, and loans or other obligations to be secured by a lien upon real property.
• Bulk sale escrows, including, but not limited to, the sale or transfer of title to a business entity and the transfer of liquor licenses or other types of business licenses or permits.
• Fund or joint control escrows, including, but not limited to, transactions specified in Section 17005.1 of the California Financial Code and contracts specified in Section 10263 of the Public Contract Code.
• The sale, transfer of title, or refinance escrows for manufactured homes or mobile homes.
• Reservation deposits required under Article 2 (commencing with Section 11010) of Chapter 1 or Part 2 of Division 4 of the Business and Professions Code or by regulation of the California Department of Real Estate to be held in an escrow account.
• Escrows for sale, transfer, modification, assignment, or hypothecation of promissory notes secured by deeds of trust.

  EAFC was organized for the purpose of indemnifying escrow agents against losses sustained as a result of fraud, theft or embezzlement by officers, directors, stockholders and employees of the escrow agent (Chapter 2.5 of Division 6 of the California Financial Code). EAFC is not an agency or instrumentality of, and there is no guarantee of payment of any claim by, the State of California.

  Each escrow agent is required to file a fidelity bond with the Department if the transactions processed are of the type not listed in subdivision (c) of Section 17312 of the California Financial Code (see A-F 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.

In addition, each escrow agent is required to file a surety bond in the amount of $25,000, $35,000 or $50,000, depending on the size of the company. An additional $5,000 is required for each additional location.

Yes. Title 10, California Code of Regulations, Section (hereinafter “Section”) 1737.3 allows an escrow company to preserve specified records in electronic format such as the following records in connection with the trust account or escrow account: bank statements, canceled checks, bank deposit slips, receipts for transferred funds, statement of account, escrow instructions, and any other records pertinent to the escrow transactions.

Escrow companies should review Title 10, California Code of Regulations, Section 1737.3, in its entirety, to fully understand their records-retention responsibilities. Of course, escrow companies should also rely on advice of private legal counsel to help them comply with any other federal or state laws governing electronic records that are not administered by, and not within the scope of responsibility of, the Department of Financial Protection and Innovation.

As with records in printed form, the escrow company must preserve its electronic records for at least five years from the close of escrow. See Section 1737.3 (a). The “close of escrow” should be construed broadly to ensure adequate preservation of records including, but not limited to, an entry of a final disbursement of funds (e.g., the date of the final transaction in connection with an escrow). Of course, records preserved for at least five years from the date of the final transaction in connection with an escrow must also comply with all other requirements of the Escrow Law including Section 1737.3.

The records must be preserved and provided in a format that allows the Commissioner (including the Commissioner’s representatives) complete access to all of the books, accounts, and records. The records must be preserved and provided in a software format that enables the Commissioner to determine if the escrow company is complying with the Escrow Law and regulations. The Commissioner must have the ability to download and print the records that are preserved and provided electronically. See Section 1737.3(b).

Yes. If the records are not preserved and provided in an electronically acceptable format, in accordance with the Escrow law and regulations, then records must be preserved and provided in paper form. See Section 1737.3(b).

Yes. The electronic records must be preserved in a media that is non-erasable “write once, read many” (“WORM”) that does not allow changes to the stored document. The media must also be consistent with the minimum standards of quality approved by either the National Institute of Standards and Technology or the Association for Information and Image Management. Finally, the media must contain written authentication identifying the electronic record as an exact unaltered copy of the document. See Section 1737.3(b).

No. The Escrow Law does not prohibit destruction of paper records if they are electronically preserved as required by the Escrow Law including, but not limited, to Section 1737.3. Of course, escrow companies should rely on advice of private legal counsel to help them comply with any other federal or state laws governing destruction of records that are not administered by, and not within the scope of responsibility of, the Department of Financial Protection and Innovation.

Yes. The Escrow Institute of California and the California Escrow Association, through its regional associations, offer various types of training and educational seminars for escrow personnel at all levels.

For additional information, contact California Escrow Association or Escrow Institute of California

Yes. Please refer to the Department of Financial Protection and Innovation Press Release 00-13 on the results of a sweep of online escrow companies offering their services over the Internet.

The activities of an escrow agent are highly regulated for the protection of members of the public who entrust their funds to these companies. The escrow agent’s operations are subject to the provisions of the California Financial Code and the California Code of Regulations. Failure to comply with these laws and rules can result in administrative action being taken that can range from a cease and desist order to the Department taking possession of the company. The Department may assess penalties for late filing of reports. The Department can bar an individual from any position of employment or other association with a licensed escrow agent, subject to appropriate administrative procedures. The Department can also pursue criminal and civil sanctions where it is appropriate. The owners of a company are responsible for the actions of the managers and employees.

The Escrow Law does not restrict the fees that escrow agents may charge for services. The amounts escrow agents charge for their services vary depending on the location of the escrow agent, type of transaction and the competition in the area. The escrow agent is required to disclose all fees on the closing statement that is prepared after the transaction is completed. It is recommended that you request that the escrow agent provide you with a fee schedule that shows the charges for their services.