As a title insurance educator and having been in the title industry for 30 years, I am, unfortunately, quite familiar with theft of funds. I have had to remove good personnel from access to corporate accounts, just because of family illness. (When they ask for an advance on their paycheck, it is only prudent to take them off the corporate checking account. ) I once had a closer create a fictitious company, adding bogus charges to closing statements for that company, only to deposit the checks into her own personal fictitious company account. After I noticed that virtually all of her closings had an additional $350 payable to an unknown closing company, I looked at a copy of a canceled check only to see her signature. She was busted. I fired her. I was also involved with an employee for a Homeowners Association, who had a gambling problem, who diverted our checks to pay for her gambling disease. Access to significant escrow funds is truly a tempting devil. And title companies, because of the incredible dollars they handle in closing a transaction, and how quickly the funds move, are a prime target.
In that regard, title companies have been hit very hard over the last few years. Just Google “Title Insurance Fraud.” Defalcations have become prevalent across the U.S. Unlike a loss on a single policy, defalcations usually involve losses in the millions of dollars on a number of policies, and require hundreds if not thousands of man-hours to investigate and settle the resulting claims.
What is defalcation?
The most common defalcations occur as a result of an agent failing to pay off a preexisting lien, such as a mortgage, against the property. The agent instead “borrows” i. e. steals the funds intended for that closing and uses them for their own personal benefit. To cover the fraudulent act, the closer will then often continue to make monthly payments to a prior lender for a while to keep the loan current, and in order to avoid imminent detection. The fraud usually starts small, with the theft of funds from a single closing. It then balloons out of control as the closer is forced to use funds from other closings to make the payments on the mortgages that were not paid off.In other instances, the closer or title agency is negligent in reconciling their trust account. The shortage eventually comes to light when there are insufficient funds to cover outstanding checks. Another occurrence happens when monies to fund a loan or closing were never deposited into the account or the loan was never funded by the lender, or the lenders check out the camp was no good. While some states have good funds legislation, others do not, causing a risk to the settlement agent.
Common Red Flags for Defalcation: The following is a list of “Red Flags” for those involved in a real estate defalcation:
- Principal delegates too much responsibility to staff or paralegal without enough oversight
- Company shows little concern about closing issues or claims, “trusting” completely all employees
- Key personnel have chronic health problems, either themselves or immediate family members, and are frequently missing from work
- On the flip side, Staff who handle trust or corporate accounts, and refuse to take more than a couple of days off at a time may be hiding something
- Files and or office are poorly organized, making it hard to review files
- Specific files cannot be located when requested for audit or problem
- Staff or principals stretched too thin/always too busy to respond promptly
- Company is understaffed/ or has frequent responsible is staff changes
- Agent or staff difficult to reach/won’t return phone calls
- Monies held in escrow for pending assessments or other long term obligations are not regularly attended to
- Audits show sloppy work product and incomplete post closing work
- Extravagant lifestyle, major purchases by title agent, family member or key persons
- Family problems, particularly with expensive health issues
- Questionable reputation in the professional community
- Staff appear to be incompetent when asked specific questions
- Mistakes in files are common
- Addiction to alcohol, drugs, or gambling of principle or family members
- Poor business managers make theft of funds much easier
- Companies that fail to reconcile trust/ escrow account(s) each month
- Solo practitioners with control over all title functions
- A small family business with control over all functions
- High percentage of B&C paper lenders as clients
- High cancellation rates on files
- High Accounts Receivable, as a percentage of total work done shows poor management
- NSF Notices on trust or escrow account checks
- Multiple Escrow Accounts are fertile for check kiting
- Title Premiums paid from operating or personal checking account
- Handwritten HUD-1 statements or corrections on closing documents
- Multiple corrections on HUD-1 statements
- Staff evasive when asked about personal, title or financial matters
- Losses in the stock or real estate markets are key reasons for defalcation
- Operating cash flow or credit problems are key reasons for defalcation
- Closers or settlement agents with personal problems who have access to escrow accounts should be removed from the account
See also related blog article on Title Fraud.