ESCROW PROCEDURES ESCROW

Transcription

1 ESCROW PROCEDURES ESCROW Escrow procedures are required by the Texas Department of Insurance to protect consumer s funds in real estate transactions. Pursuant to Section V of the Basic Manual of Title Insurance, these bank accounts will be audited by an outside accounting firm for state compliance. During the independent audit, the trust accounts are examined and reported to insurance underwriters and the Department of Insurance. The examination has 21 minimum standards as prescribed in the section. These standards known as the Minimum Escrow Accounting Procedures and Internal Controls (MEAP&IC) will be covered during this session. Also, these standards are the focal point of any audit, either by the independent auditor or the Texas Department of Insurance auditor. Escrow procedures in Title are required by the Department of Insurance to assure consumers that money and documents will be safe during the transfer of real estate between parties. Definition of 'Escrow' A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. Securities, funds and other assets can be held in escrow. By holding this instrument in Escrow there is a fiduciary duty to the customer/client to follow written instructions of the contact. FIDUCIARY The term fiduciary is used to describe a legal or ethical relationship of trust and confidence between two or more parties. Typically, a fiduciary prudently takes care of property or money for another person. Often, the fiduciary has greater knowledge or expertise about the matters being handled. The fiduciary must avoid conflicts of interest and self dealing. A fiduciary duty is the highest standard of care at either equity or at law. In a fiduciary relationship, one or more persons bestow confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. For example, a Trustee is a fiduciary acting on behalf of the beneficiaries of the trust. An officer of a corporation acts in a fiduciary capacity when executing documents on behalf of the corporation. And so on... In the case of a title insuring transaction, the escrow officer or closer acts in a fiduciary capacity with regard to the parties to the transaction, who have entrusted important documents and funds to the escrow agent for safekeeping or investment. As a fiduciary, the escrow agent must remain objective and neutral and act at all times for the benefit and interest of all parties to the transaction. Since escrow officers are responsible for the "closing of the transaction," they have fiduciary responsibility for prudent processing, safeguarding, and accounting for funds and documents Webinar Series Escrow Procedures Page 1

2 entrusted to them by escrow customers, as well as fiduciary responsibility for seeing that all title requirements are met and all instructions are followed. The scope of the escrow agent s fiduciary duties are governed by the earnest money contract, the lender's closing instructions and the title commitment. If any instructions are vague or require something that is prohibited by law or our Texas regulatory structure, the escrow agent must go to the parties to require the instructions to be amended. For vague provisions, written clarification from all parties to the transaction must be obtained. For something prohibited by law or regulation, the escrow agent should explain that the instructions cannot be followed as written and the instructions must either be amended or the escrow agent will decline to handle the transaction. ACCEPTED ESCROW PRINCIPLES Escrow funds are not funds available to the operations of the business and are not to be comingled with the operating bank accounts of the company (agency). Guaranty Fee and Guaranty Assessment Recoupment Fee bank accounts are considered Trust accounts. These trust accounts must maintain separate bank accounts. An overdraft of an escrow account creates an escrow receivable, which is prohibited by State law. Following the Minimum Escrow Accounting Procedures and Internal Controls (MEAPIC) is mandatory for proper escrow account management. MINIMUM ESCROW ACCOUNTING PROCDURES IN TEXAS At a minimum, a monthly escrow trail balance for each escrow bank account must be prepared before the end of the next month (MEAPIC #1). Each month the 3 Way Reconciliation must be completed within 45 days from the closing date of the bank statement to be considered timely (MEAPIC #2). At a minimum the trial balance must be completed by the end of the month. The 3 Way Reconciliation consists of: 1. The reconciled bank balance 2. A checkbook balance or cash ledger 3. Trial balance listing all open individual escrow ledger record balances. See separate attachment of a sample excel 3 way. Reconciliations should be prepared by someone not associated with the receipts and disbursement functions. The must be approved by manager or owner. Copies of these items must in the company records (MEAPIC #6). If the financial institution does not provide a copy of cancelled check (paper or electronic) with the month end bank statement, a signed acknowledgment from the bank stating it will be provided up request (MEAPIC #20). Webinar Series Escrow Procedures Page 2

3 ESCROW ACCOUNT MANAGEMENT Pursuant to Minimum Escrow Accounting Procedures and Internal Controls #10: Accounts (gf files) open for longer than six months should be thoroughly investigated. No disbursements should be allowed without manager/owner approval. Pursuant to Minimum Escrow Accounting Procedures and Internal Controls #12: Transfers between guaranty files or escrow bank accounts require manager approval. Documents gf files and bank records for these transfers. TYPES OF ESCROW ACCOUNTS General escrow accounts: These accounts consist of monies deposited to a file pending satisfaction of the accompanying instructions. These funds belong to the parties to the transaction and are held by the title company subject to the parties' direction. The title company is not entitled to any benefit deriving from the custody of these funds. Escrow accounts should be established in a federally insured institution. Escrow accounts must be styled in the name of the title agent as "Escrow" or "Trust" account. Pursuant to Minimum Escrow Accounting Procedures and Internal Controls #9: All accounts must be styled as "Escrow" or "Trust". "Escrow account" "trust account" must appear on the bank statement, the signed bank agreement, disbursement checks and deposit tickets. Pursuant to Minimum Escrow Accounting Procedures and Internal Controls #21: All escrow or trust accounts maintained by licensed Texas title insurance companies, title insurance agents or direct operations shall be in financial institutions or branches of financial institutions located within the geographic bounds of the State of Texas. Interest bearing accounts: An interest bearing account may be opened by the title company when so instructed in writing by the relevant party to the transaction. The interest accrues strictly for the benefit of the party or parties to the transaction. A signed Form W 9 Request for Taxpayer Identification Number and Certification should be obtained and retained in the file for the party for whose benefit the interest will accrue. An Escrow Agreement signed by the parties to the transaction that specifies a date when the account is to be closed and how the funds are to be disbursed should be contained in the file and with the investment account records. Pursuant to Minimum Escrow Accounting Procedures and Internal Controls #7: An interest bearing (investment) escrow account must meet the following criteria: o 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. o The escrow agent must receive written instructions from the owner/beneficiary of the escrow funds to open an investment account. Such written instructions must be maintained in the escrow agent's records. o The Tax Identification number used to open the interest bearing escrow account must be that of the owner/beneficiary of the funds, not that of the escrow agent. Webinar Series Escrow Procedures Page 3

4 o The interest bearing escrow account must be included in a control ledger or record identifying all interest bearing accounts. The interest must be posted within seven business days after receipt of the statement or other documentation reporting the interest accrued. GF NUMBER REQUIREMENTS Each guaranty file must be assigned a unique number. Name identification is not acceptable. (See MEAP&IC #8) All escrow checks and deposit tickets must display related guaranty file numbers directly on the document to provide a clear and direct connection between the document and related guaranty file. (See MEAP&IC #14). CHECK REQUIREMENTS Two signatures are required on all escrow checks, but this requirement is waived if the escrow agent has four or fewer employees. Only one signature must be that of a licensed escrow officer, but this requirement is waived if the escrow agent is a sole proprietorship or partnership and the owner or individual partner signs the escrow checks. (See MEAP&IC #5). Voided checks should have their signature blocks removed or otherwise rendered ineffective. (See MEAP&IC #11). GUARANTY FILE REQUIREMENTS Each guaranty file must contain 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 shall be shown on the disbursement sheet. (See MEAP&IC #15) Invoices substantiating or sufficient evidence to support all disbursements shall be kept in the guaranty files. (See MEAP&IC #16) If a settlement statement requires changes: a new statement must be prepared or pen and ink changes must be initialed by all parties affected by the changes, or sufficient evidence to support the changes must be maintained in the guaranty file. A copy of the revised, final settlement statement must be provided to the lender and borrower. (See MEAP&IC #18). Webinar Series Escrow Procedures Page 4

5 Sec TRUST FUND ACCOUNT DISBURSEMENTS. (a) A title insurance company, title insurance agent, or direct operation may not disburse funds from a trust fund account until good funds related to the transaction have been received and deposited in the account in amounts sufficient to fund any disbursements from the transaction. (b) A title insurance company, title insurance agent, or direct operation is not liable for a violation of this section if the violation: (1) was not intentional; and (2) resulted from a bona fide error despite the maintenance of procedures reasonably adopted to avoid the error. (c) The commissioner shall adopt rules and definitions to implement this section. P 27. Disbursement From Escrow or Trust Fund Accounts This Rule shall implement Art. 9.39A, Texas Insurance Code. (n/k/a Section ) A. Definitions 1. "Good funds" means: a. Cash or wire transfers; b. Cashier's check. For purposes of this Rule, a cashier's check is defined to mean a check that is (1) drawn on a financial institution; (2) signed by an officer or employee of the financial institution on behalf of the financial institution as drawer; (3) a direct obligation of the financial institution; and (4) provided to a customer of the financial institution or acquired from the financial institution for remittance purposes. c. Certified check. For purposes of this Rule, a certified check is defined to mean a check with respect to which the drawee financial institution certifies by signature on the check of an officer or other authorized employee of the financial institution that: (1) the signature of the drawer on the check is genuine; (2) the financial institution has set aside funds that are equal to the amount of the check and will be used to pay the check; or (3) the financial institution will pay the check upon presentment. d. Teller's check. For purposes of this Rule, a teller's check is defined to mean a check (1) provided to a customer of a financial institution or acquired from a financial institution for remittance purposes, (2) that is drawn by the financial institution, and (3) is drawn on another financial institution or payable through or at a financial institution. e. Any other instrument that has been determined by the Board of Governors of the Federal Reserve System to be the functional equivalent of a cashier's, certified or teller's check. f. Uncertified funds in amounts less than $1,500, including checks, traveler's checks, money orders, and negotiable orders of withdrawal; provided multiple items shall not be used to avoid the $1,500 limitation; g. Uncertified funds in amounts of $1,500 or more, drafts, and any other items when collected by the financial institution; h. State of Texas Warrants; i. United States Treasury Checks; j. Checks drawn on an insured financial institution and for which a transaction code has been issued pursuant to, and in compliance with, a fully executed Immediately Available Funds Procedure Agreement (Form T 37) or a fully executed Immediately Webinar Series Escrow Procedures Page 5

6 Available Funds Procedure Agreement (Agent Designation for Federally insured Lender) (Form T 37A) with such financial institution; k. Checks by city and county governments located in the State of Texas. 2. "Received and deposited" means: a. Good funds are in the possession of an employee or representative of the trustee, and b. A record of the actual date of receipt has been entered on the books of the trustee, and c. The funds are actually delivered for deposit to the financial institution in a timely manner, which shall not exceed three business days as defined in Federal Reserve Board Regulation CC, 12 C.F.R., Part 229, after the funds are received. d. In the case of a wire transfer, good funds shall be considered to be "received and deposited" when the financial institution notifies the trustee that the funds have been received. 3. "Trust account" or "escrow account" means an account maintained at a financial institution for holding and disbursing funds to be paid to and on behalf of parties to a transaction and which are subject to annual audit pursuant to Art. 9.39, Texas Insurance Code. 4. "Transaction" means the purchase and sale, mortgage, or other act for which a trustee receives trust funds and a guaranty file is opened. 5. "Trustee" as used in this rule means a title insurance company, title insurance agent, direct operation, or escrow officer that maintains a trust fund account. 6. "Financial institution" as used in this Rule has the meaning given to "depository institution" in 12 USC Sec. 461(b)(1)(A), which includes (1) any insured bank, mutual savings bank, savings bank, or savings association as defined in the Federal Deposit Insurance Act or (2) any insured credit union. 7. "Insured" as used in this Rule means that a financial institution is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF). Any cashier's check, certified check, teller's check or other instrument as used in this Rule must be drawn upon a financial institution insured by the FDIC or NCUSIF. In addition, for teller's checks, both the drawer and drawee financial institutions must be insured. B. General Provisions 1. Good funds in an amount equal to all disbursements must be received and deposited before any disbursement may be made. Partial disbursements, prior to the receipt and deposit of good funds, are not permitted. If a party to the transaction submits too much money, that overage which will not ultimately be a part of the transaction may be refunded at or prior to settlement. 2. A record of all receipts reflecting the date on which the funds are actually received must be entered on the books of the trustee before any disbursements are made. 3. The financial institution or branch of a financial institution in which the trust fund account is maintained must be located within the geographic bounds of the State of Texas. 4. Even though funds are defined as good funds in this Rule, a trustee is not required to disburse if reasonable business judgment would indicate that the funds may not be collected. 5. An Immediately Available Funds Procedure Agreement (Form T 37) must be fully executed by the Financial Institution, the Federally insured Lender and the Title Company prior to issuance of checks intended to qualify pursuant to subparagraph A.1.j. of this rule. If the Federally insured Lender has appointed an Agent and delegated to the Agent some of the Webinar Series Escrow Procedures Page 6

7 duties and responsibilities of the Federally insured Lender, the Title Company must use an Immediately Available Funds Procedure Agreement (Agent Designation for Federally insured Lender) (Form T 37A) which must be fully executed by each of the four parties to the Agreement including the Agent for the Federally insured Lender. Form 8300 CASH REPORTING IRS Publication 1544 (included at the end of this material) explains why, when, and where to report these cash payments. It also discusses the penalties for not reporting them). Who must file Form 8300? Any person(s) who receive more than $10,000 in one transaction or a series of related transactions, while conducting their trade or business. Why Report These Payments? Drug dealers and smugglers often launder money from illegal activities. Laundered money can often be traced through the payments reported. Compliance with the cash reporting laws provides valuable information that can stop o Tax evasion o Profiting from drug trafficking o Profiting from other criminal activities The USA Patriot Act of 2001 increased the scope of the cash reporting requirements to help trace funds used for terrorism. Section 6050I (26 USC) and 31 USC 5331 require certain information be reported to the IRS and the FinCEN (Financial Crimes Enforcement Network) What payments must be reported? A business must file Form 8300 to report cash paid to it if the cash payment is: Over $10,000, Received as: One lump sum of over $10,000, Two or more related payments that total in excess of $10,000, or Payments received as part of a single transaction (or two or more related transactions) that cause the total cash received within a 12 month period to total more than $10,000. Received in the course of trade or business, Received from the same payer (or agent), and Received in a single transaction or in two or more related transactions. What is the definition of a transaction? A transaction is the underlying event resulting in the transfer of cash. Examples include: Goods, services, or property are sold; Property is rented; Cash is exchanged for other cash; A contribution is made to a trust or escrow account; A loan is made or repaid; or Cash is converted to a negotiable instrument, such as a check or a bond What is a related transaction? There are two types of related transactions: Transactions between a buyer, or agent of the buyer, and a seller that occur within a 24 hour period are related transactions. Webinar Series Escrow Procedures Page 7

8 In addition, transactions more than 24 hours apart are related if the recipient of the cash knows, or has reason to know, that each transaction is one of a series of connected transactions. Does the 24 hour period mean one day such as all day Tuesday or does it mean literally 24 hours such as from 11 am on Tuesday to 11 am on Wednesday? A 24 hour period is 24 hours, not necessarily a calendar day or banking day. What does cash mean for the purposes of Form 8300? For purposes of Form 8300: Cash is money. It is currency and coins of the United States and any other country. Cash is also certain monetary instruments a cashier s check, bank draft, traveler s check, or money order if it has a face amount of $10,000 or less and the business receives it in: A designated reporting transaction as defined in Treas. Reg. section I 1(c)(iii) (generally, a retail sale of a consumer durable, a collectible, a travel or entertainment activity) or Any transaction in which the recipient knows the payer is trying to avoid the reporting of the transaction on Form What is a designated reporting transaction? Generally, a designated reporting transaction is the retail sale of any of the following: A consumer durable, such as an automobile or boat. Property is generally a consumer durable if it is tangible personal property (not real or intangible property) that: Is generally suited for personal use, Is expected to last at least one year under ordinary use, and Has a sale price of more than $10,000. A collectible (such as a work of art, rug, antique, metal, gem, stamp, or coin) An item of travel and entertainment (if the total sales price of all items for the same trip or entertainment event is more than $10,000). What is NOT cash? Personal checks are not considered cash. A cashier's check, bank draft, traveler's check, or money order with a face amount of more than $10,000 is not treated as cash. These items are not defined as cash and you do not have to file Form 8300 when you receive them because, if they were bought with currency, the bank or other financial institution that issued them must file a report on FinCEN Form 104 Currency Transaction Report. What About Suspicious Transactions? If you receive $10,000 or less in cash, you may voluntarily file Form 8300 if the transaction appears to be suspicious. A transaction is suspicious if it appears that a person is trying to cause you not to file Form 8300 or is trying to cause you to file a false or incomplete Form 8300, or if there is a sign of possible illegal activity. If you are suspicious, you are encouraged to call the local IRS Criminal Investigation Division as soon as possible. Or, you can call the FinCEN Financial Institution Hotline toll free at When is the Form 8300 due? A business must file Form 8300 within 15 days after the date the cash was received. If there are subsequent payments that are made with respect to a single transaction (or two or more related transactions), the business should file the form 8300 when the total amount paid exceeds $10,000. Webinar Series Escrow Procedures Page 8

9 Each time the payments aggregate in excess of $10,000 the business must file another Form 8300 within 15 days of the payment that causes the additional payments to total more than $10,000. Form 8300 requires providing the Taxpayer Identification Number (TIN) of the person providing the cash. The business should request the TIN at the time of the transaction. If the person providing the cash refuses to provide the TIN, the business should inform the person required to provide the TIN that he or she is subject to a $50 penalty imposed by the Internal Revenue Service under section 6723 [26 USCS 6723] if he or she fails to furnish his or her TIN; Maintain contemporaneous records showing the solicitation was properly made and provide such contemporaneous records to IRS upon request, Accompany the incomplete filed Form by a statement explaining why the TIN is not included. If a TIN is not received as a result of the initial solicitation (at the time of the transaction) the first annual solicitation must be made on or before December 31 of the year in which the account was opened (transaction occurred) or January 31 of the following year for accounts opened in the preceding December following the same procedures. Where does a business file Form 8300? Form 8300 can be mailed to: Internal Revenue Service Detroit Computing Center P.O. Box Detroit, MI Can Form 8300 be filed electronically? Yes. On Sept 19, 2012, FinCEN announced that businesses are now able to electronically file their Form 8300 using the Bank Secrecy Act (BSA) Electronic Filing (E Filing) System. E filing is free, and is a quick and secure way for individuals to file their Form 8300s. Filers will receive an electronic acknowledgement of each submission. For more information about Form 8300 e filing, read the FinCEN news release. Does the IRS have an address to send questions regarding Form 8300? Questions concerning Form 8300 may be submitted to 8300QUESTIONS@IRS.GOV. This system will not accept actual Forms Written Statement to Customer: Must a business notify its customer that the business has filed a Form 8300 regarding the cash transaction with the customer? Yes, a business must notify its customer, in writing, by January 31 of the subsequent calendar year. There is nothing in the code or regulations mandating a specific format for the customer statement. The regulations, however, establish certain minimum requirements: The name and address of the person making the return; The aggregate amount of reportable cash, received by the person who filed the Form 8300 during the calendar year, in all related cash transactions; and A legend stating that the information contained in the statement is being reported to the Internal Revenue Service. Penalties There are civil penalties for failure to: File a correct Form 8300 by the date it is due, and Webinar Series Escrow Procedures Page 9

10 Provide the required statement to those named in the Form There are criminal penalties for: Willful failure to file Form 8300 Willfully filing a false or fraudulent Form 8300 Stopping or trying to stop Form 8300 from being filed, and Setting up, helping to set up, or trying to set up a transaction in a way that would make it seem unnecessary to file Form UNCLAIMED PROPERTY Dormant defined In a state of rest or inactivity; inoperative, in abeyance Dormant escrow accounts can be a target of employee misappropriation. These accounts should be reviewed by management and management should approve/authorize any decisions regarding these funds. Accounts opened over 3 years are reportable to the TDI by your annual independent escrow auditor. They are reportable on form E 1 shown on the next page. Escrow funds are to be transferred to the state after three years of dormancy. A strong effort should be made to find the rightful owner of these funds. The file must be well documented that certain requirements have been met by the state comptroller s office. Due diligent letters must be sent. Complete instructions on filing Unclaimed Property can be found on the Texas state website below. Webinar Series Escrow Procedures Page 10

11 Reporting is due July 1 st of each year, and there are NO extension granted. REPORTING PERIOD *Date of last contact REPORT DUE DATE July 1 of March 2, 2010 March 1, March 2, 2011 March 1, March 2, 2012 March 1, March 2, 2013 March 1, March 2, 2014 March 1, *Date of last contact definition "When examining your records, use the last entry or activity generated by the owner or the date of documentable contact with the owner to commence the abandonment period." pg 45 Webinar Series Escrow Procedures Page 11