Escrow
Encyclopedia
An escrow is:
The word derives from the Old French word escroue, meaning a scrap of paper or a roll of parchment; this indicated the deed that a third party held until a transaction was completed.
where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage). Escrow is an account separate from the mortgage account where deposit of funds occurs for payment of certain conditions that apply to the mortgage, usually property taxes and insurance. The escrow agent has the duty to properly account for the escrow funds and ensure that usage of funds is explicitly for the purpose intended. Since a mortgage lender is not willing to take the risk that a homeowner will not pay property tax, escrow is usually required under the mortgage terms. Escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in the completion of person-to-person remote auctions (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 completes. A purchaser of a complex system, such as bespoke process control software or a large industrial installation, may require the supplier to place the design into escrow, so that the purchaser remains in a position to maintain and modify the system in case of the demise of the supplier.
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 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 EU, 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 the perpetrator has actually created an escrow site that closely resembles a legitimate escrow service. The victim sends payment to the phony escrow company and receives nothing in return. Alternatively, the victim sends 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 it is advised that users should never use an online escrow service without first verifying that it is genuine, by independently viewing a Government online register.
s (ATMs), and is the function which allows the machine to hold the money deposited by the customer separately, and in case he or she challenges the counting result, the money is returned. Another example is a vending machine
, where the customer's money is held in a separate escrow area pending successful completion of the transaction. If a problem occurs and the customer presses the refund button, the coins are returned from escrow; if no problem occurs, they fall into the coin vault.
agents hold source code
of software in escrow just as other escrow companies hold cash. Normally you do not own or have any rights to the software (including source code) that you are accessing, under the terms of a regular SaaS or desktop software agreement. This does not usually become an issue until technical problems start to arise, i.e., unexpected service interruptions, downtime, loss of application functionality and loss of data. This can add significant costs to your business and you remain reliant upon the software supplier to resolve these issues, unless you have an escrow agreement in place. Escrow is when the software source code is held by a third party – an escrow agent – on behalf of the customer and the supplier. Information escrow agents hold in escrow intellectual property and other information. Examples include song music and lyrics, manufacturing designs and laboratory notebooks, and television and movie treatments and scripts. This is done to establish legal ownership rights, with the independent escrow agents attesting to the information's ownership, contents, and creation date.
or environmental enforcement action. This way the defendant is not responsible for distribution of judgment moneys to the individual plaintiffs or the court-determined use (such as environmental remediation or mitigation
). The defendant pays the total amount of the judgment (or settlement) to the court-administered or appointed escrow fund, and the fund distributes the money (often reimbursing its expenses from the judgment funds).
payment
that is designated to pay for real property taxes
and hazard insurance
. It is an amount "over and above" the principal
and interest
portion of a mortgage payment. Since the escrow payment is used to pay taxes and insurance, it is referred to as "T&I", while the mortgage payment consisting of principal and interest is called "P&I". The sum total of all elements is then referred to as "PITI
", for "Principal, Interest, Tax, and Insurance". Some mortgage companies require customers to maintain an escrow account that pays the property taxes and hazard insurance. Others offer it as an option for customers. Some types of loans, most notably Federal Housing Administration
(FHA) loans, require the lender to maintain an escrow account for the life of the loan.
The monthly escrow payment is calculated by taking the total of all anticipated tax and insurance disbursements for the coming year, and dividing that number by 12. In addition, if the mortgage company requires a minimum balance
in the escrow account (usually no more than double the monthly escrow payment), they may add on a shortage adjustment so that the balance never falls below the minimum balance requirement. If, even at its lowest point, the escrow account has a projected balance greater than the minimum balance requirement, federal
guidelines—the Real Estate Settlement Procedures Act of 1973 (RESPA)—require that the mortgage company refund the difference to the customer.
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 $120.00 per year, the escrow payment will need to increase by $10.00 per month to account for this difference (in addition to collection for the resulting escrow shortage when the mortgage company paid $120.00 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 validity of an online escrow company's license can be checked with the licensing authority. Usually this is supplemented by a database of companies provided by the licensing authority's and often accessible through their official website.
standard and benefit from indemnity
and hold harmless provisions.
If the escrow agent is licensed by governmental authority, then much higher legal standards may apply.
- an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of contractually-agreed conditions by the transacting parties, or
- an account established by a brokerBrokerA broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
, under the provisions of license law, for the purpose of 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 roll of parchment; this indicated the deed that a third party held until a transaction was completed.
Types
Escrow generally refers to money held by a third-party on behalf of transacting parties. It is best known in the United States in the context of real estate (specifically in mortgagesMortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage). Escrow is an account separate from the mortgage account where deposit of funds occurs for payment of certain conditions that apply to the mortgage, usually property taxes and insurance. The escrow agent has the duty to properly account for the escrow funds and ensure that usage of funds is explicitly for the purpose intended. Since a mortgage lender is not willing to take the risk that a homeowner will not pay property tax, escrow is usually required under the mortgage terms. Escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in the completion of person-to-person remote auctions (such as eBay
EBay
eBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...
), 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 completes. A purchaser of a complex system, such as bespoke process control software or a large industrial installation, may require the supplier to place the design into escrow, so that the purchaser remains in a position to maintain and modify the system in case of the demise of the supplier.
Internet escrow
Internet Escrow has been around since the beginning of Internet auctions and commerce. It was one of the many developments that allowed for trust to be established in the online sphere.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 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 EU, 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
Letter of credit
A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking....
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
Bogus escrow
The bogus escrow scam is a straightforward confidence trick in which a scammer operates a bogus escrow service.Escrow services are intended to ensure security by acting as a middleman in transactions where the two parties do not trust each other...
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 the perpetrator has actually created an escrow site that closely resembles a legitimate escrow service. The victim sends payment to the phony escrow company and receives nothing in return. Alternatively, the victim sends 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 it is advised that users should never use an online escrow service without first verifying that it is genuine, by independently viewing a Government online register.
Banking
Escrow is used in the field of automated banking and vending equipment. One example is automated teller machineAutomated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
s (ATMs), and is the function which allows the machine to hold the money deposited by the customer separately, and in case he or she challenges the counting result, the money is returned. Another example is a vending machine
Vending machine
A vending machine is a machine which dispenses items such as snacks, beverages, alcohol, cigarettes, lottery tickets, consumer products and even gold and gems to customers automatically, after the customer inserts currency or credit into the machine....
, where the customer's money is held in a separate escrow area pending successful completion of the transaction. If a problem occurs and the customer presses the refund button, the coins are returned from escrow; if no problem occurs, they fall into the coin vault.
Intellectual Property
Source code escrowSource code escrow
Source code escrow or source code repository is the deposit of the source code of software with a third party escrow agent. Escrow is typically requested by a party licensing software , to ensure maintenance of the software...
agents hold source code
Source code
In computer science, source code is text written using the format and syntax of the programming language that it is being written in. Such a language is specially designed to facilitate the work of computer programmers, who specify the actions to be performed by a computer mostly by writing source...
of software in escrow just as other escrow companies hold cash. Normally you do not own or have any rights to the software (including source code) that you are accessing, under the terms of a regular SaaS or desktop software agreement. This does not usually become an issue until technical problems start to arise, i.e., unexpected service interruptions, downtime, loss of application functionality and loss of data. This can add significant costs to your business and you remain reliant upon the software supplier to resolve these issues, unless you have an escrow agreement in place. Escrow is when the software source code is held by a third party – an escrow agent – on behalf of the customer and the supplier. Information escrow agents hold in escrow intellectual property and other information. Examples include song music and lyrics, manufacturing designs and laboratory notebooks, and television and movie treatments and scripts. This is done to establish legal ownership rights, with the independent escrow agents attesting to the information's ownership, contents, and creation date.
Law
Escrow is also known in the judicial context. So-called escrow funds are commonly used to distribute money from a cash settlement in a class actionClass action
In law, a class action, a class suit, or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued...
or environmental enforcement action. This way the defendant is not responsible for distribution of judgment moneys to the individual plaintiffs or the court-determined use (such as environmental remediation or mitigation
Environmental mitigation
Environmental mitigation, compensatory mitigation, or mitigation banking, are terms used primarily by the United States government and the related environmental industry to describe projects or programs intended to offset known impacts to an existing historic or natural resource such as a stream,...
). The defendant pays the total amount of the judgment (or settlement) to the court-administered or appointed escrow fund, and the fund distributes the money (often reimbursing its expenses from the judgment funds).
Real estate
Escrow payment is the common term referring to the portion of a mortgageMortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
payment
Payment
A payment is the transfer of wealth from one party to another. A payment is usually made in exchange for the provision of goods, services or both, or to fulfill a legal obligation....
that is designated to pay for real property taxes
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
and hazard insurance
Home insurance
Home insurance, also commonly called hazard insurance or homeowner's insurance , is the type of property insurance that covers private homes...
. It is an amount "over and above" the principal
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
and interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
portion of a mortgage payment. Since the escrow payment is used to pay taxes and insurance, it is referred to as "T&I", while the mortgage payment consisting of principal and interest is called "P&I". The sum total of all elements is then referred to as "PITI
PITI
In relation to a mortgage, PITI is an acronym for a mortgage payment that is the sum of monthly principal, interest, taxes, and insurance. That is, PITI is the sum of the monthly loan service plus the monthly property tax payment, homeowners insurance premium, and, when applicable, mortgage...
", for "Principal, Interest, Tax, and Insurance". Some mortgage companies require customers to maintain an escrow account that pays the property taxes and hazard insurance. Others offer it as an option for customers. Some types of loans, most notably Federal Housing Administration
Federal Housing Administration
The Federal Housing Administration is a United States government agency created as part of the National Housing Act of 1934. It insured loans made by banks and other private lenders for home building and home buying...
(FHA) loans, require the lender to maintain an escrow account for the life of the loan.
The monthly escrow payment is calculated by taking the total of all anticipated tax and insurance disbursements for the coming year, and dividing that number by 12. In addition, if the mortgage company requires a minimum balance
Balance (accounting)
In banking and accountancy, the outstanding balance is the amount of money owed, , that remains in a deposit account at a given date, after all past remittances, payments and withdrawal have been accounted for. It can be positive or negative ....
in the escrow account (usually no more than double the monthly escrow payment), they may add on a shortage adjustment so that the balance never falls below the minimum balance requirement. If, even at its lowest point, the escrow account has a projected balance greater than the minimum balance requirement, federal
Federal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
guidelines—the Real Estate Settlement Procedures Act of 1973 (RESPA)—require that the mortgage company refund the difference to the customer.
Even with a fixed interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
, 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 $120.00 per year, the escrow payment will need to increase by $10.00 per month to account for this difference (in addition to collection for the resulting escrow shortage when the mortgage company paid $120.00 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.
Licensed escrow companies
One way to avoid escrow fraud is to use a licensed escrow company. These companies are regulated by national or state authorities and are required to have bonds that ensure customers can recoup money lost in the escrow process.The validity of an online escrow company's license can be checked with the licensing authority. Usually this is supplemented by a database of companies provided by the licensing authority's and often accessible through their official website.
Legal implications
Not all escrow agreements impose the duties of a legal trustee on the escrow agent, and in many such agreements, escrow agents are held to a mere gross negligenceGross negligence
Gross negligence is a legal concept which means serious carelessness. Negligence is the opposite of diligence, or being careful. The standard of ordinary negligence is what conduct one expects from the proverbial "reasonable person"...
standard and benefit from indemnity
Indemnity
An indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor may or may not be responsible for the loss suffered by the indemnitee...
and hold harmless provisions.
If the escrow agent is licensed by governmental authority, then much higher legal standards may apply.
See also
- ClosingClosing (real estate)Closing is the final step in executing a real estate transaction.The closing date is set during the negotiation phase, and is usually several weeks after the offer is formally accepted. On the closing date, the parties consummate the purchase contract, and ownership of the property is transferred...
- ComminglingComminglingCommingling literally means "mixing together". Used in a legal context it is a breach of trust in which a fiduciary mixes funds that he holds in the care of a client with his own funds, making it difficult to determine which funds belong to the fiduciary and which belong to the client...
- Custodian bankCustodian bankA Custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets and is not likely to engage in "traditional" commercial or consumer/retail banking such as mortgage or personal lending, branch banking, personal...
- Power of attorneyPower of attorneyA power of attorney or letter of attorney is a written authorization to represent or act on another's behalf in private affairs, business, or some other legal matter...
- Real estateReal estateIn general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
- StewardshipStewardshipStewardship is an ethic that embodies responsible planning and management of resources. The concept of stewardship has been applied in diverse realms, including with respect to environment, economics, health, property, information, and religion, and is linked to the concept of sustainability...
- Source Code EscrowSource code escrowSource code escrow or source code repository is the deposit of the source code of software with a third party escrow agent. Escrow is typically requested by a party licensing software , to ensure maintenance of the software...
External links
Samples
- For a sample form of escrow instructions, see: http://www.chicagotitle.com/BusinessSegments/EscrowServices/exhibit10.htm
- For a more detailed description of such forms, also see:http://www.desireerealestate.com/sellers/9.php
- For the California subdivider form, see http://www.dre.ca.gov/forms/re621.pdf (PDF required).
- Example Intellectual Property Information Escrow
