In the State of California, most real estate transactions utilize the services of an escrow company. One of the least understood elements of the real estate process ironically remains the escrow process. Buyers and sellers often place their faith in the real estate broker or lenders to recommend an escrow company due to the lack of understanding the escrow process. Many consumers don’t realize that they are entrusting the chosen escrow company to safeguard their funds being held in trust. The primary responsibility, in addition to holding funds, of the escrow holder is to ensure that all of the necessary instructions in the real estate agreement are executed.

The responsibility to protect the consumer’s interests should not be taken lightly. The escrow holder must remain impartial during the escrow period to ensure fair representation of all parties. It is crucial that the broker, lender or consumer make a knowledgeable and informed decision in choosing an escrow company.

Licensed vs. Controlled

All escrow companies in California can be classified into two basic categories: Licensed or Controlled. "Licensed" escrow companies are independent businesses licensed by the California Department of Corporations. This license regulates the procedures and practices of the companies and subjects them to stringent requirements designed to protect consumers.

"Controlled" escrow companies are non-licensed businesses that can be owned by a variety of entitles, including real estate brokers, mortgage brokers, banks, savings and loans, and title insurance companies. Such companies fall under the jurisdiction of a variety supervising agencies, with regulations and requirements that vary widely. One fact remains constant; none of the agencies have regulations as strict as those imposed on the escrow companies licensed by the Department of Corporations.

Better Protection

Although the majority of escrow companies are honest, the large sums of money handled by escrow companies can entice unscrupulous individuals to abscond with the funds they are holding in trust. Unless an escrow company is bonded there is often no safeguard assuring the return of the money to consumers.

Licensed escrow companies are consumers’ best be for safeguarding their funds. All licensed escrow companies are required to be members of the Escrow Agents’ Fidelity Corporation, which provides fidelity coverage for member, trust accounts in the amount of $5 million. This fidelity bond guarantees in the event of theft of trust account, the consumer funds are protected.

Higher Standards

The stringent requirements by the Department of Corporation assure that every licensed escrow company has net the highest standard of the industry. Consumer protection regulations unique to licensed escrow companies include:

• A Certification Program for all escrow officers in the company’s employ, including fingerprinting and background checks by the Department of Justice

• A requirement that an escrow officer with at least five years experience be on-site

• Financial stability requirement, including annual CPA audit

• Prohibiting employment of convicted felons or any who has been disbarred from the escrow industry

• Membership with the Escrow Agents’ Fidelity Corporation, which provides a $5 million fidelity bond

The bottom line is that a licensed escrow company is the best possible neutral third party to complete your real estate transaction. When searching for an escrow holder yourself, or looking to recommend one to a client, a licensed escrow company give piece of mind.