There is no reason to tell you that our industry has changed, since we hear about it everyday through all types of media. The constant steady stream of negative news about the real estate industry has now pressed the Federal Government into action to stop this out of control train heading the US into a recession. On top of that, I am sure you have heard locally of a title agency closing their doors or rumors of a title insurance underwriter shutting an agency down.

The underwriters are fighting an uphill battle due to the overwhelming amount of claims, lack of remittance, fraud, and defalcations. Since the underwriters are now stating significant losses, they have turned their focus to your escrow / trust account in efforts to stop the bleeding.

The fact is that the majority of problems resulting in a loss to the underwriters are generated from the title agencies and law firms escrow / trust accounts.

Almost all of the agency / underwriter contracts require the agent to reconcile their escrow or trust account monthly, in a “3-way” manner. Additionally, most state bars and some state statutes require the same. Therefore, many underwriters are now taking the position of zero tolerance and suspending or canceling a title agent or law firm if their reconciliations do not tie -or- are invalid.

As an auditor for several title insurance underwriters, I can tell you I have seen many good agents suspended and canceled due to their lack of, or, invalid escrow / trust account reconciliations. To make matters worse, these types of situations, for the most part, could have been avoided if the agent knew or contracted with somebody who knew how to properly reconcile their escrow / trust account in a “3-way” manner.

A 3-way reconciliation brings the book balance, adjusted bank balance and trial balance into agreement. This is how we know each penny is accounted for in the escrow / trust account.

Conducting proper monthly 3-way reconciliations is the only way to ensure against possible defalcation, internal fraud, external fraud, negligence, mis-appropriations and bank errors.

From StarTribune.com (registration required):

A 50-year-old Chaska [Minnesota] woman who had owned Profile Title and Escrow Corp. pleaded guilty Wednesday in a federal fraud and money- laundering scheme that siphoned off more than $2.5 million.

Molly L. Heise violated the terms of an agreement with Chicago Title to deposit funds into a monitored escrow account by secretly maintaining a commingled account used by her to purchase luxury items.  

I have a suspicion that title company defalcation is a greater problem than we know because of greatly reduced business levels.     

Click here to find my thoughts about title company defalcation.  While defalcation is not uncommon among employees, title company owners are most commonly implicated when escrow funds are missing.

My strong advice to anyone who suspects that their company’s escrow accounts have been violated:  Call your underwriter immediately!

Even though I lecture primarily to the title industry, my audiences can be remarkably diverse.  Typically, I’m expected to present a single message to a room comprised of title company owners, managers, attorneys, the staff of national underwriters, marketing reps, etc. 

The list goes on, and on, and the mix doesn’t always work from my perspective as a speaker.

I’m now speaking specifically to those of you who work for title companies, but aren’t owners or managers.

The title business is in rough shape at this time.  I talk with title company owners almost every day and always ask about business levels.  Mostly, I hear that orders are off about 50% from last year.  Fierce competition has resulted in historically low price points in many regions making profitability impossible for most companies.    It’s not a good scenario and a lot of players in the industry are strapped for cash.

Recently, I’ve heard from a number of you concerning disturbing events taking place within your offices.  It could be that a conversation was overheard or something was inadvertently seen.  You might have a sense that something is wrong even though you can’t pinpoint the cause. 

Many in the industry established lavish live styles over the past decade due to a real estate boom that has come to a screeching halt.  Everyone knew that it had to end, but few would admit it to themselves or others.  There’s always someone with a need to maintain, at any cost, the payments on expensive homes, sport cars, vacation homes, plush office space, country clubs, and the other prestigious appendages of the not so distant past.

Defalcation is a simple concept to understand.   It occurs when money held in escrow accounts is spent inappropriately.  Let me explain, escrow accounts exist to temporarily hold funds belonging to others.  The money is intended to payoff mortgages and other liens.  It’s used for seller’s proceeds and to pay taxes or fees when recording documents.  Escrow money should never be used to benefit a title company or anyone working for a title company.  Defalcation takes place when escrow funds are diverted for any unintended use. 

Defalcation is illegal !!! 

Defalcation is always punished with jail time !!! 

Defalcation cannot be hidden forever !!!

For a recent examples of defalcation in the news see: Lexington lawyer pleads guilty …

You’re probably wondering why anyone would be foolish enough to tamper with escrow funds if the act is criminal.   A desperate title company owner, or anyone with the authority to sign checks, might decide to take the chance in hopes that new business will miraculously appear to replace the missing funds.   At first, escrow money might be used to partially cover payroll or pay the rent for your office.  But, in time, the situation will worsen as orders don’t arrive and there’s greater incentive to steal.  It’s a situation that feeds itself and takes on a life of its own.

There are signs and every title company employee must remain especially vigilant during these difficult times.  Something is very wrong when signed deeds and mortgages sit in files instead of being recorded.  Your company shouldn’t be late remitting title premiums to insurers.  Stacks of unrecorded releases are another telltale sign.  Sellers might be calling to ask if loans have been paid off.  

In other words, chaos prevails.  Sound familiar?

You can’t pretend that it’s not your concern or that nothing is wrong.

Remember: Defalcation equates to the theft of money belonging to innocent, trusting consumers.  It’s really no different than bank-robbery.  Escrow accounts are sometimes called trust accounts for obvious reasons.

CALL YOUR COMPANY’S UNDERWRITER the instant you know, or strongly suspect, that escrow integrity has been compromised.   Your underwriter will know what to do, regrettably similar situations arise all too often.  An audit team will be dispatched to identify the problem and contain the damage.  Yes, the company will be shut down and you will lose your job.   The authorities will get involved and  anyone  involved in the  defalcation will face prosecution.

A title company whose escrow accounts have been violated is horribly mismanaged and doomed to certain failure.  You are sure to lose your job in time anyway.

Send me an email if you want to talk.  I realize that it’s hard to turn someone in, especially someone that you know and work with.  Still, you have to do it.

The Springfield Business Journal reported yesterday about the failure of Guarantee Title.  Click here to read article.  The company had 9 offices in southwest Missouri before being shut down by it’s underwriter, LandAmerica Title.  The underwriter’s auditing team is piecing together the elements of a debacle that could cost the company as much as $4.5 million.   No fewer than 500 policies were issued by Guarantee Title without being reported.  

On his Active Rain blog, Rey Gallegos writes about a decision made by AmTrust Bank (formerly Ohio Savings), to cease doing business with LandAmerica and it’s subsidiaries, affiliates etc.  AmTrust is one of the 20 largest home mortgage lenders in the country.   Rey speculates that a nexus exists between Guarantee Title’s failure and AmTrust’s apparent lack of confidence in the underwriter.  Click here to read post.

I could start a litany about the ridiculous auditing standards that pervade the industry at this time.  Underwriters are frightened at the thought of losing a large agent in the same way title agents are frightened at the thought of losing a large source of business.  Of course, Guarantee Title deserves blame, but LandAmerica does as well. 

There are always signs when something is wrong with the management of a title company!

There are always signs and someone at LandAmerica either missed them or chose to retain an account through indifference!

My question:  How can we argue against increased regulatory control of the title industry?