Have you heard of a non-independent broker escrow company, also known as a broker-controlled escrow? These are different from other escrow companies, and I’ll explain the difference. To conduct escrow business in the state of California, you must have a license. Interestingly, there are three different types of licenses that allow you to perform escrow. The reason there are three is because there are three different licensing bodies that oversee escrow activity.
- The Department of Insurance.
- The Department of Business Oversight.
- The Department of Real Estate.
Naturally, one license is harder than another to obtain. The Department of Insurance license is basically for title companies that have escrow divisions. This is an expensive and very regulated license to have and maintain. My personal opinion is that title companies are the safest places to have escrow conducted.
The Department of Business Oversight is for independent escrow companies. For example, let’s say an escrow officer that worked at a title company wanted to start her own escrow company. She could start an independent escrow company by obtaining a license through the dept. of business oversight. She would have to show 5 years of escrow experience for her escrow manager, maintain liquid asset reserves, pay into a surety bond to protect consumers, and have her financials audited, among many other screening mechanisms designed to maintain safety standards for the escrow company.
So where does the non-independent broker escrow fit in? A non-independent broker controlled escrow is licensed by the Department of Real Estate (DRE). However, there isn’t a special escrow license issued by the DRE. The license needed to conduct escrow is just a real estate broker license. This means that if you are a real estate broker you can open up an escrow trust account and, just like that, have an escrow company. While the the other types of licenses require all sorts of protections, assets, and audits, you can skip that as a non-independent escrow company. To be clear about how low the barrier of entry is, a real estate broker can file a “doing business as” (DBA) name i.e.. “Wild West Escrow – a non-independent broker escrow,” with the Department of Real Estate, then open an escrow trust account, and they are now ready to accept your wire transfers. This real estate broker is now in complete control of an account with people’s life savings swirling around in it.
What happens if an escrow officer makes a mistake at an non-independent escrow? Let’s say the escrow officer accidentially wires the seller’s equity money to a fraudulent account – it happens – then what? Does the non-independent escrow company have cash reserves to remiburse the seller- provided they would even be willing? Because there is no requirement to have reserves. Remember, a broker licensee started this company by registering the name and opening a business/trust bank account. However, there are zero guarantees that if something goes wrong they will have the means to fix it or even the obligation if they did.
A personal contact confided that she sold their home with a non-independent broker escrow and their sale proceeds were wired to a fraudulent account. She went after the escrow company and they settled for pennies on the dollar.
Additionally, escrow is supposed to be a neutral third-party. However, if one of the brokers in a real estate transaction controls the escrow and represents one of the parties, then that is a conflict of neutrality. The other party is supposed to trust that the other party’s broker will conduct escrow in a neutral manner.
A non-independent broker escrow company should always be avoided. Considering that credible, safe escrows are often cheaper and easily accessible, it’s extremely poor judgement to settle for a non-independent broker escrow company . We highly suggest using a title company for title/escrow because it’s safe and efficient. Second to that, an independent escrow company licensed through the Department of Business Oversight.
