The California Bureau of Real Estate (CalBRE) is increasing scrutiny on the activities of employees of broker-controlled escrows. The CalBRE’s recent licensee advisory warns brokers against employing individuals who have been prohibited from working in the independent, licensed escrow industry due to:
- theft of funds;
- misappropriation or misuse of funds; or
- embezzlement of escrow funds.
Brokers who hire individuals as escrow officers, assistants or bookkeepers for escrows owned by the broker are legally responsible for all misconduct and unlawful activities undertaken by their employees.
The CalBRE’s notice comes as a sternly worded response to recent incidents involving employees of broker-controlled escrows with criminal records who misappropriate escrow funds. These bad actors don’t just create problems for themselves, but also impose liability on their employing broker.
Independent vs. broker-controlled escrow
Escrow activities in California are regulated under the Escrow Law and administered by the California Department of Business Oversight (DBO). [Calif. Financial Code §17000, et seq.]
To operate in the independent escrow industry, escrow companies are to:
- obtain a license through the DBO;
- be members of the Escrow Agents’ Fidelity Corporation; and
- file a fidelity bond of at least $125,000 with the DBO.
However, real estate brokers are exempt from escrow licensing rules when they (and their employees) perform escrow activities incidental to a real estate transaction in which the broker or their sales agents are agents or participants. Escrows that are owned and operated by a broker are referred to as broker-controlled escrows.
While broker-controlled escrows provide more convenience and ease when assisting real estate clients with settlement services, they also impose additional responsibilities on the broker to carefully manage all escrow employees and ensure the proper handling of escrow funds.
Employee oversight and screening
Real estate brokers incur liability for the improper handling, maintenance and disbursement of funds from escrows they own. Thus, to ensure lawful escrow practices, brokers need to oversee all escrow fund handling and recordkeeping by their existing escrow employees.
Further, the CalBRE recommends brokers carefully vet new escrow officers and assistants who will have access to escrow funds. Brokers can lower their exposure risk by:
- checking the DBO website for enforcement actions against any prospective escrow employee or escrow company the employee has worked for; and
- performing additional background checks, including communicating with former escrow companies which the prospective employee worked with.
Brokers who own escrows may further protect themselves by obtaining a fidelity bond which guards them against unlawful or fraudulent activities of employees who engage in escrow fund handling.
Brokers who do not take precautions to prevent employee misconduct face significant penalties, such as legal action against the broker.
Improper activities undertaken by the broker or their employees which subject the broker to legal action include:
- any misappropriation or embezzlement of controlled escrow monies delivered to the broker; and
- the unintentional shortage in escrow accounting.