Not so long ago, escrow controls were largely a matter of personal preference. If you produced a monthly reconciliation of your accounts, you were more than doing your job. Those days are fading – very rapidly – but not all companies are keeping up with the pace of change.
Many companies still perform reconciliations on a monthly basis. Owners and executives don’t always sign off, and those who do sign off don’t always perform a thorough review. As a result, mistakes aren’t caught immediately for correction. Instead, they linger in the accounts and become increasingly difficult to fix. As a result, fradulent activity and intentional mistakes are equally unlikely to be caught before they do irreparable harm.
The days of the relaxed approach to escrow controls are numbered, especially in light of what other parties involved in the settlement process are doing.
First, there’s the American Land Title Association (ALTA) and its best practices. Pillar Number 2, escrow controls, lays out an entire escrow regime, including readiness assessment, recommended policies and procedures and monitoring and documenting escrow practices. ALTA provides a list of approved vendors, including companies like RamQuest and RynohLive, which are able to automate the escrow process and put escrow reconciliation on an almost real-time footing.
Note that ALTA's Best Practices, including Pillar No. 2, are only recommendations. ALTA standards don’t have the force of law, but failing to comply can have serious consequences. For one, it can certainly be argued that failing to live up to Best Practices is a failure to follow industry standards, and that in turn, could be seen as evidence of negligence. Even if a company’s practices are never called into question, following the ALTA standards certainly decreases the chance of fraud or mistake. In other words, the best practices are standards that a careful company should follow even though they are not mandatory.
The second player in the settlement process, the lender, may well remove the element of choice completely, making compliance mandatory. Lenders dictate the terms of doing business, and many of them are insisting that title companies do more than comply with ALTA standards. Lenders have begun to require third-party certification of compliance, and that requirement is likely to become universal. As we’ve seen before, changes tend to proliferate once a few big lenders make the first move.
