Browse Proptionary encyclopedia

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Escrow Agent

DEFINITION

Neutral third party tasked with managing a transaction. Roles include collecting and disbursing funds and documents.

EXPLANATION

In order to understand what an escrow agent is, one must first recognize the role of escrow and what they do. An escrow account serves as a depositary for all consideration in a transaction, primarily a buyer’s/lender’s funds (i.e. deposit, down payment) and the title/deed to a seller’s property.

An escrow prepares and distributes all necessary escrow paperwork and accepts and holds all required funds in a transaction. Unless given authorization by the principals, an escrow agent may only accept claims, funds, or documents that are laid out in the escrow instructions.

Only after all terms and conditions of a purchase agreement have been met does an escrow release a buyer’s funds to a seller and the seller’s property deed to the buyer.

Escrow Agent’s Role in Escrow

Escrows are managed by natural third parties and are confidential in nature. An escrow agent must maintain the privacy of all principals and never disclose information to third parties without a principal’s approval. An escrow must also remain a neutral third party on behalf of a buyer and a seller.

An escrow agent must communicate all acquired knowledge relating to the escrow process to the principals. This includes any detrimental or new material information that might affect a principal’s decision regarding the pending transaction.

Escrow agents must retain copies of all vital documents from current and previous transactions.

An escrow agent may not do the following:

Act or negotiate on behalf of one principal to the detriment of the other

Allow parties to make amendments to escrow instructions without the signed approval of the other parties

Get involved in the financial details of the transaction

Send or accept signed blank documents. All fields must be filled in before principals or their agents/brokers sign.

Use deceptive language in escrow documents that prevents a principal’s understanding of fees or conditions.

Send, release, or execute the transfer of documents or consideration in a manner that delay or prevents the escrow process.

Work on behalf of another escrow agent or pay another escrow agent to perform work on its behalf. An employee of the selected escrow company must perform all work.

Implement escrow instructions that are illegal

Licensing

Escrow agents are licensed as companies, not individuals. These companies are either licensed or non-licensed (controlled).

In California, licensed escrow agents handle the overwhelming majority of real estate transactions. To become a licensed escrow agent, an applicant must:

Pay an application fee. In California, this is $625 per location and $425 for every additional location.

Create an escrow account for client deposits

Pass an extensive background check

Have fidelity and surety bonding. Licensed escrow companies must have a $10,000 surety bond and must purchase a minimum $125,000 bond for each employee.

Meet minimum financial requirements

Meet minimum experience requirements. Each licensed escrow company must have at least one agent with a minimum of five years of responsible escrow practice at the primary branch. Each additional location must have an escrow agent with a minimum of four years experience.

Have a signed affidavit from the applicant. This states that the applicant understands the laws and regulations that guide the escrow industry.

File a branch location application.

Non-licensed escrow agents are not required to have as much experience as licensed escrow agents. Non-licensed escrow agents include:

Title Insurance Companies

Banks

Attorneys

Brokers

Trust Companies

An agent/broker can only act as an escrow agent in a transaction where the agent/broker is already representing a buyer or a seller.

An agent/broker cannot claim that he or she is an escrow agent or advertise escrow services except if it’s in addition to his or her primary real estate business. An agent/broker is also prohibited from paying referral fees to other businesses for referring clients who need escrow services to the agent/broker.

Liability

It is not an escrow’s responsibility to determine whether a buyer or a seller is engaging in fraud or other wrongdoings. However, an escrow can be held liable if its negligence led to an unfavorable circumstance for a buyer or a seller. If an escrow agent is found to be liable, its license may be revoked.

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