Product Code Database
An escrow is a Contract arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacting parties. Examples include an account established by a broker for holding funds on behalf of the broker's principal or some other person until the consummation or termination of a transaction; or, a trust account held in the borrower's name to pay obligations such as property taxes and insurance premiums. The word derives from the Old French word escroue, meaning a scrap of paper or a scroll of parchment; this indicated the deed that a third party held until a transaction was completed.
Escrow companies are also commonly used in the transfer of high value personal and business property such as and businesses and in the completion of person-to-person remote (such as eBay), although the advent of new low-cost online escrow services has meant that even low-cost transactions are now starting to benefit from use of escrow.
In the UK escrow accounts are often used during private property transactions to hold solicitors' clients' money, such as the deposit, until such time as the transaction is completed. Other examples include:
As with traditional escrow, Internet escrow works by placing money in the control of an independent and licensed third party in order to protect both the buyer and seller in a transaction. When both parties verify the transaction has been completed per terms set, the money is released. If at any point there is a dispute between the parties in the transaction, the process moves along to dispute resolution. The outcome of the dispute resolution process will decide what happens to money in escrow. With the growth of both business and individual commerce on the web, traditional escrow companies have been supplanted by new technologies.
In the US, the California Department of Business Oversight enacted Internet escrow companies as a licensed class effective 1 July 2001. The first Internet escrow company to be licensed was Escrow.com, founded by Fidelity National Financial in 1999.
In the European Union, the Payment Services Directive, which commenced on 1 November 2009, has for the first time allowed the introduction of very low-cost Internet escrow services that are properly licensed and government-regulated. The regulatory framework in the EU allows these web-based escrow services, which operate along the lines of expensive letter of credit service run by banks for international buyers and sellers but at a cost in cents rather than thousands of Euros, the ability to enhance security in commercial transactions.
Bogus escrow methods have been employed online. In an effort to persuade a wary Internet auction participant, the perpetrator will propose the use of a third-party escrow service. The victim is unaware that the perpetrator has actually created an escrow site that closely resembles a legitimate escrow service. The victim sends payment to the fraudulent escrow company and ends up receiving nothing in return. Alternatively, a victim may send merchandise to the subject and waits for his/her payment through the escrow site, which is never received because it is illegitimate. Genuine online escrow companies will be listed on a government register, and users are generally advised not to use an online escrow service without first verifying that it is genuine by independently viewing a government on-line register. Currently, the US Federal Government does not offer a license for online escrow services. However, certain states offer their own license for online escrow services; such as the California Department of Business and the Arizona Department of Financial Institutions.
Even with a fixed interest rate, monthly mortgage payments may change over the life of the loan due to changes in property taxes and insurance premiums. For instance, if a hazard insurance premium increases by $120 per year, the escrow payment will need to increase by $10 per month to account for this difference (in addition to collection for the resulting escrow shortage when the mortgage company paid $120 more for the hazard insurance premium than what was anticipated). By RESPA guidelines the escrow payment must be recomputed at least once every 12 months to account for increases in property taxes or insurance. This is called an escrow analysis.
The escrow payment used to pay taxes and insurance is a long-term escrow account that may last for years or for the life of the loan. Escrow can also refer to a shorter-term account used to facilitate the closing of a real estate transaction. In this type of escrow, the escrow company holds all documents and money related to closing the transaction, rather than having the buyer and the seller deal directly with each other. When and if the transaction is ready to close, the escrow company distributes all funds and documents to their rightful recipients, and records the deed with the appropriate authorities.
Courts sometimes act as stakeholders, holding property while litigation between the possible owners resolves the issue in which one is entitled to the property.
Unlike many other forms of escrow, escrow arrangements in corporate transactions are often designed to last for extended periods rather than simply to complete the transfer of an asset. There is also commonly the requirement for an escrow agent to adjudicate on the validity of a claim on the escrow funds, which can lead to the risk of the dispute between the parties.
Due to the length that the funds are held, the escrow arrangements need to take into account different considerations to those for other escrow arrangements, for example (i) information provision to the parties; (ii) application of interest earned on the funds; and (iii) credit risk of the financial institution.
If the escrow agent is licensed by governmental authority, then much higher legal standards may apply.
|
|
