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ALTA Best Practice #2 – Escrow Account Controls

Best Practice 2 - Escrow Account Controls: Adopt and maintain appropriate written procedures and controls for Escrow Trust Accounts allowing for electronic verification of reconciliation. These controls help meet client and legal requirements for safeguarding client funds.

Purpose: Appropriate and effective escrow controls and staff training help title and settlement companies meet client and legal requirements for the safeguarding of client funds. These procedures ensure accuracy and minimize the exposure to loss of client funds.

Escrow Account Controls Procedures

Current procedures that meet or exceed this best practice. These Minimum Controls are taken from the list of MINIMUM ESCROW ACCOUNTING PROCEDURES AND INTERNAL CONTROLS, which are found in the TDI Basic Manual:

  1. A monthly escrow trial balance, which lists all open escrow balances for each individual escrow bank account, is prepared. Each month's escrow trial balance is completed no later than the end of the next month.

  2. A three-way reconciliation of bank balance, book balance and escrow trial balance for each individual escrow bank account is performed monthly. Each three-way reconciliation is completed within forty-five (45) days from the closing date of the bank statement of the account. The controller will perform these three-way reconciliations using RamQuest software as soon as statements are available, generally by the 15th of the following month.

  3. Each reconciliation is approved by a manager or supervisor, Michael A. Knudsen, Chief Financial Officer.

  4. Each reconciliation is prepared by someone not associated with the receipt and disbursement function.

  5. Two signatures are required on all escrow checks. One signature is that of a licensed escrow officer.

  6. Company records include copies of all checks, deposit slips, and receipt items.

  7. Interest-bearing (investment) escrow accounts meet the following criteria:

    1. The investment account must be styled in the name of the owner/beneficiary of the escrow funds, with the escrow agent named as trustee or escrow agent.

    2. The escrow agent maintains written instructions from the owner/beneficiary of the escrow funds to open an investment account. Such written instructions are maintained in the escrow agent's records.

    3. The Tax Identification number used to open the interest-bearing escrow account is that of the owner/beneficiary of the funds, not that of the escrow agent.

    4. The interest-bearing escrow account is included in a control ledger or record identifying all interest-bearing accounts. The interest is posted within seven business days after receipt of the statement or other documentation reporting the interest accrued.

  8. Each guaranty file is assigned a unique number. Veritas Title's numbering system includes the first two numbers representing the year the file was opened, the third and fourth number represent the office where the escrow file was opened, and the final four numbers represent the sequential number of the guaranty file.

  9. All bank accounts are styled as "Escrow" or "Trust". "Escrow account" or "trust account" appears on all bank statements, on the signed bank agreement, on disbursement checks and on deposit tickets.

  10. Accounts open for longer than six months are thoroughly investigated. Disbursements from these accounts are not allowed without management approval. Dormant accounts (accounts with balances older than six months) are investigated by the controller and the escrow officer assigned to the guaranty file. Multiple attempts are made to distribute dormant funds. Dormant accounts with balances longer than three years are escheated in accordance with state law.

  11. The signature blocks are removed by cutting off the lower right corner of the check from voided checks or otherwise rendered ineffective.

  12. Management approval is required for any transfers of funds between guaranty files or escrow accounts and transfers between guaranty files must be documented in both files.

  13. If after the escrow agent has received and deposited an earnest money check, and the check is returned to the escrow agent by a financial institution due to insufficient funds, the escrow agent notifies the seller by phone call and written notice deposited in the mail and addressed to the seller's address as shown in the escrow agent's file relating to the transaction within seven business days after the returned check is received by the escrow agent unless the check is replaced by collected funds within the seven-day time period. The escrow agent retains copies of written notices.

  14. All escrow checks and deposit tickets display related guaranty file numbers directly on the document to provide a clear and direct connection between the document and related guaranty file.

  15. Each guaranty file contains a complete, current disbursement sheet which lists the date, source and type of all receipts; date, check number, item description, payee and amount of all checks; date, amount and type of any other disbursements (i.e.: outgoing wire-transfers) and any remaining balance. Voided checks which have been canceled where funds have been credited back to the account are shown on the disbursement sheet.

  16. Invoices substantiating or sufficient evidence to support all disbursements are matched up to the disbursements and maintained in the guaranty files.

  17. Reimbursement of all escrow receivables and other escrow shortages are made by the appropriate party(ies) or from the escrow agent's operating account as soon as possible but not later than forty-five (45) days from the closing date of the bank statement of the account which reflects therein the transaction(s) creating the escrow receivable(s) or shortage(s).

  18. If a settlement statement requires changes, a new statement is prepared or pen-and-ink changes are initialed by all parties affected by the changes, or sufficient evidence to support the changes is maintained in the guaranty file. A copy of the revised, final settlement statement is provided to the lender and borrower.

  19. A signed, pre-numbered receipt is issued for any escrow funds received in cash.

  20. Copies of all checks are available in agency records, and must meet the following criteria:

    1. The copies of the checks are clearly legible;

    2. There are 2 copies of both sides of every check so that endorsements can be verified; and

    3. It is unmistakable which front and back images belong together.

  21. All escrow or trust accounts maintained by the agent are in financial institutions or branches of financial institutions located within the geographic bounds of the State of Texas, in compliance with state regulations.

  22. If an escrow agent as defined herein detects a defalcation regarding its trust or escrow funds, the agent will file the following notice with the Title Division Examinations Section of the Department in accordance with Texas Department of Insurance regulations, within forty-five (45) days of the end of the month in which the defalcation is believed to have occurred:

    “We have detected circumstances regarding our escrow or trust funds that may warrant an investigation by the Title Division of the Department. The amount of funds involved is believed to be $_________.”

    If the agent comes into possession of an indictment or conviction concerning the defalcation, a copy of that document should be forwarded to the Department within 10 business days of the date the agent comes into possession of same. No defalcation or indictment has ever been detected or issued against the agent.
  23. The company uses positive pay and ACH block on all escrow accounts to safeguard escrow funds. All checks when issued on an escrow account are reported to the bank on which they are drawn. Only those checks reported are cleared by the bank. All ACH transactions are blocked on escrow accounts.

  24. Certain types of transactions are conducted by authorized employees only.

    • Only those employees whose authority has been defined to authorize bank transactions may do so.

    • Appropriate authorization levels are set by the company and reviewed for updates annually.

    • Former employees are immediately deleted as listed signatories on all bank accounts.

  25. The agent segregates duties to make it difficult for someone to both create and approve/sign their own checks. Accounts are reconciled by the controller who has no signature authority to minimize the ability to tamper with the reconciliation process.

  26. Outstanding file balances are documented. Files with balances older than six months are investigated and if funds are held under an escrow agreement, a copy of the escrow agreement is maintained with the accounting files and escrow/GF file.

  27. Trial Balances for escrow trust accounts are reviewed at least three times during the current month to detect, investigate and resolve any negative balances.

  28. When hiring employees, the agent performs credit and background checks. The goal is to avoid people who are in financial difficulty and may be tempted to illegally access our escrow account funds. Credit checks are run annually, while background checks (public records, arrest records) are run every three years - see below.

  29. At least every three years, the agent obtains Background Checks going back five years for all employees who have access to customer funds.

  30. In accordance with Texas Department of Insurance regulations the agent conducts ongoing training for employees in proper management of escrow funds and escrow accounting.

  31. In accordance with Texas Department of Insurance regulations an annual audit of escrow funds is performed by the accounting firm of Ed Hill and Company, CPAs, LLC. The audit report is sent to the Texas Department of Insurance and each of the agent’s underwriters. Additionally each underwriter performs an annual audit of escrow accounts resulting in an additional 3 escrow audits each year.

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