Trusted Partner or Common Thief?

Trusted Partner or Common Thief?

The front page article that caught my attention this morning in our local newspaper read "Three indicted in escrow fraud scheme".  The article by Scott Daugherty of The Capital Newspaper announced that the owner and two employees of Troese Title Services (which had an office here in Annapolis, Maryland) had been indicted on charges stemming from their misuse of escrow funds.

Title companies - sometimes called settlement agents - should be trusted partners in every real estate transaction.  They represent the buyers' interests in the purchase of real property.  And, the title company should be there to ensure a worry free transfer of ownership between sellers and buyers of homes and land.

Title companies in Maryland (and elsewhere) are responsible for accounting for all the funds in the real estate transaction on the HUD-1, from the net proceeds payable to the seller to the real estate commission paid to the agents, from holding earnest money deposits to receiving money from the bank to fund the transaction.  A great deal of money passes through title company escrow accounts during any given day.  Millions of dollars go in, millions of dollars go out.  In the end, the only retained money should be the title company's own fees.  Maryland Real Property Code Section 7-109 defines our state as a "wet settlement" state - meaning that all the funds and the loan conditions must be satisfied on the date and time of transfer.  A "dry settlement" means there are no funds available at the time of settlement for disbursement.  For wet-dry regulations in other states check out this Wet-Dry Settlement Matrix.

Misuse of escrow funds is a common abuse of clients' trust by service providers - right up there with providing real estate services without a license.  Title companies, real estate brokers, attorneys all handle extremely large sums of money entrusted to them by their clients as part of the real estate transaction.  Nearly all these companies do the right thing and properly manager their escrow accounts and the funds entrusted to them.  But, it takes just one bad apple to spoil the bunch and cast a shadow over an entire industry.

It's amazing that these abuses went on for as long as it did - but - consider how long Bernie Madoff pulled off his ponzi scheme.  Privately held companies have little or no external oversight on matters such as accounting for escrow funds.  When selecting a title company or settlement agent, their reputation is as important as that of the real estate agent/broker and lender you work with.