Tens, even hundreds, of millions of dollars pass through title company escrow accounts each month. The money technically belongs to consumers in the form of purchase money funds, seller proceeds, payoff funds, or refinance loan proceeds. The title company is simply the guardian of the funds. The questions at hand: Who is retaining the interest earned on escrow accounts? Is it the title company? Have buyers and sellers received a disclosure explaining that the title company is earning substantial additional fees? The interest retained by a single title company at the end of the year can be staggering as you will soon learn.
In a broader sense, I'm referring to any office, other than a law office, that routinely holds funds involved in a real estate transaction. The legal profession dealt with the issue years ago by creating ethical guidelines requiring that law offices direct the funds to trusts established to benefit impoverished classes. At the same time, the title industry has been somewhat successful in avoiding public scrutiny by keeping this matter a secret. The state of Maryland passed legislation nearly 20 years that created housing trusts funded solely by the interest on title company escrow accounts. Noncompliance means the loss of a license.
I recently learned that title agents in the states of Colorado, Michigan, and Illinois can legally retain escrow account interest amounts. There may be numerous other states as well. I just haven't had the chance to do the research and thought the issue important enough to immediately bring it to your attention.
Abuse is a very real possibility when title companies have a financial incentive to hold funds longer than necessary. Tim Killcoyne, the owner of Town & Country Title Services in Denver, CO, wrote a very informative article for Title-opoly. I encourage all of you to take the time to read it thoroughly. Tim raises the possibility of title companies intentionally adding excessive daily interest to seller's payoff amounts. In Maryland, we had the problem of title companies holding FHA payoffs until the very end of the month and then sending them in too late or not at all due to forgetfulness. It's a very real problem that needs to be addressed. As a practical reality, payoff funds can be wired shortly after closing.
Using testimony provided at legislative hearings in Colorado this year, Tim estimates that the largest title company in the state is earning 22.5 million dollars annually in interest earned on escrow accounts. That number isn't a typo and, worse still, isn't disclosed on any settlement statement.
Real estate agents need to analyze the payoff numbers presented by title companies at closing. It's not enough to trust someone that you do business with. You need to know the facts about any particular transaction.
My suggestions to avoid abuse:
- Ask for a copy of the payoff statement and determine if excessive interest was added.
- Question the closer if more than 1 or 2 days worth of interest is collected in the payoff. Special consideration has to be given to weekends and legal holidays. A special note: FHA policy requires that interest is collected in 30 day blocks on payoffs. Consider this fact when scheduling closings and don't allow the title company to hold the funds for the sole purpose of collecting undisclosed interest income.
- Request that the payoff funds be wired as quickly as possible to save money for your seller. To do anything other than wire funds in 2007 is absurd.
- Demand confirmation that the funds have been wired and received by the lender being paid off.
- Provide a copy of the confirmation to your seller and keep a copy in your file.
I'm not comfortable publicly questioning title industry practices. In this instance, it's matter of conscience because we're talking about undisclosed fees and abuse of money that belongs to others. I also don't typically use click thru's on Active Rain. Forgive me this one time by Clicking here to read Tim Killcoyne's post on Title-opoly. I'm not trying to drive traffic to the site. Tim's article is too lengthy to include in this post, but it's very well written and a must read. You might want to pay attention to the comment thread. Title agents are starting to weigh in.
FYI: My next post will be of a less serious nature. I was meme'd yesterday ... more than once.