Lesson 12: Escrow and Title Insurance

Question 1

escrow instructions

Answer 1

The parties set forth the conditions referred to in the statute in a contract called escrow instructions.

The escrow instructions specify the conditions that must be fulfilled before each party’s deposits are released to the other party.

Question 2

escrow requirements

Answer 2

Now, we’ll discuss the legal requirements for an escrow. Every escrow must have four basic elements: an enforceable contract, an escrow agent, irrevocable deposits, and conditions imposed on those deposits.

Without these elements, a valid escrow isn’t created.

Question 3

interplead

Answer 3

If the parties can’t decide how to resolve the conflict, a lawsuit will result.

The escrow agent will interplead the funds in question by submitting them to the court where the lawsuit is being heard. The court will then decide who gets the money.

Question 4

The Risk Act

Answer 4

The Risk Act states that if real property subject to a sales agreement is destroyed or taken by eminent domain, the seller can’t enforce the contract, and the buyer gets any deposits back.

However, if title to the property or possession was transferred before the loss occurred, then the buyer remains liable for any of the purchase price not yet paid.

Question 5

relation back doctrine

Answer 5

Another way of saying this is that the date of title transfer “relates back” to the date of the deposit into escrow. As a result, this is known as the relation back doctrine. It applies in any of the following situations:
the seller becomes incompetent,
the seller dies, or
the buyer dies.

Question 6

Foreign Investment in Real Property Tax Act (FIRPTA)

Answer 6

The Foreign Investment in Real Property Tax Act (FIRPTA) is aimed at preventing foreign investors from selling property in the U.S. without paying income tax on their capital gains.

Under FIRPTA, a buyer is responsible for ascertaining whether the seller is a ‘foreign person’ (not a U.S. citizen nor a resident alien); if so, the buyer must withhold 15% of the amount realized by the seller (which is usually the sales price) and send that amount to the Internal Revenue Service.

Question 7

settlement service

Answer 7

If RESPA applies to a mortgage, then the act’s prohibitions apply to every settlement service provider in the transaction. A settlement service is any service provided in connection with closing—including lending, insuring title, performing legal work, preparing documents, making inspections, and representing the parties as a real estate agent.

So the act covers not only the escrow agent, but also the real estate agents, lender, title company, appraiser, and even the pest inspector.

Question 8

federally related loans

Answer 8

RESPA applies only to federally related loans. A loan is federally related if:

1. it’s secured by a mortgage or deed of trust against:

• property on which there is (or on which the loan will be used to build) a one- to four-unit dwelling,
• a condominium unit or cooperative apartment, or
• a lot with (or on which the loan will be used to place) a mobile home, and…

2. the lender is:
   - federally regulated,
   - has federally insured accounts,
   - makes loans in connection with a federal program,
   - is assisted by the federal government,
   - sells loans to Fannie Mae or Freddie Mac, or
   - makes more than $1 million in residential real estate loans per year.

Question 9

RESPA requirements

Answer 9

Required service provider disclosure
Affiliated business arrangement disclosure
No excessive impound deposits
No kickbacks or unearned fees
No required title company

Question 10

affiliated business arrangement disclosure

Answer 10

Second, any settlement service provider that refers a customer to an affiliated service provider must disclose that joint business relationship and the fact that the referral is optional.

(This is known as an affiliated business arrangement disclosure.)

The disclosure must also include fee estimates for the service that will be provided.

Question 11

kickback

Answer 11

The Real Estate Settlement Procedures Act prohibits kickbacks and unearned fees.

These are often called Section 8 violations, as they are prohibited in Section 8 of the act.

A kickback, under RESPA, doesn’t have to be monetary; it can be anything of value given in exchange for a referral, such as a gift, or services provided without charge or at a reduced rate.

Question 12

unearned fee

Answer 12

The phony processing fee in the previous case is an example of an unearned fee.

A payment is considered an unearned fee if the recipient has performed no significant services, or if the payment doesn’t bear a reasonable relationship to the services provided.

Question 13

abstract of title

Answer 13

The best a buyer could hope for was to hire a lawyer or a specialist called an abstractor to search the public records and prepare an abstract of title.

The abstractor would summarize the property’s chain of title (the series of deeds passed from seller to buyer over the years) and list any encumbrances found in the records.

Question 14

owner’s policy

Answer 14

Most transactions include two title insurance policies: one for the buyer (the owner’s policy), and one for the lender (the lender’s policy or mortgagee’s policy).

The owner’s policy protects the buyer’s title.

By custom, the buyer usually pays the premium in northern California, while the seller usually pays it in southern California.

Question 15

policy limits

Answer 15

The title insurance company’s liability will not exceed the maximum amount specified in the policy (known as the policy amount or policy limits), even if the policy holder’s losses exceed that amount.

However, if the losses are less than the policy amount, the insurer is liable for the entire amount of the losses.

Question 16

duty to defend

Answer 16

A title insurance company agrees to defend the insured’s title (or security interest) in any litigation brought by third parties. This is known as the insurer’s duty to defend.

Of course, if a third party brings a claim against the policy holder’s title, the insurer may decide it’s likely to lose in court, and attempt a settlement with the claimant instead.

Question 17

title search

Answer 17

Before agreeing to insure a property’s title, the title company investigates the condition of the title.

First, a company employee performs a title search.

The title searcher looks through recorded documents and other public records, tracing the property seller’s chain of title and looking for any liens or encumbrances.

Question 18

preliminary report

Answer 18

Based on what the title search reveals, the insurer issues a preliminary report (also called a preliminary commitment or binder).

Any liens or other encumbrances are listed on the preliminary report.

Everything listed will be an exception from coverage if the policy is issued.