A Tale of Short Sale Smoke and Mirrors

Short Sale Smoke and Mirrors

What do you do when the first lien holder’s statement requires no more than $1,000 to be paid at closing to the second lien holder on a short sale and the real estate brokers offer to pitch in?

Chasing Down the Loan Servicers

Short Sale Smoke and MirrorsMalou G., an escrow officer at one of our sister branches, opened a short sale on April 5. The listing agent had started negotiating with both the first and second lenders on the property. The first lender, Chase, had accepted a short sale payoff in the amount of $604,908.42, per their demand dated April 16, which was only valid until April 25. Chase had a payoff deadline of April 25, as the servicing of the loan was to be transferred to Litton on April 28. According to a Chase representative, there was no assurance Litton would accept the same short sale terms the sellers had made with Chase. If the escrow had not closed by the deadline, the sellers would have to re-negotiate the short sale with Litton.

At the same time, the listing agent was negotiating with the second lender, HSBC, to accept $1,000 as a short sale payoff. According to the listing agent, HSBC had verbally accepted the offer. However, they had not faxed a demand to escrow despite diligent follow ups by the listing agent and escrow officer. By April 26 the listing agent informed Malou he had spoken to someone at HSBC and they would NOT accept the $1,000 short sale offer after all. Instead they demanded $10,000!

Negotiating and Re-Negotiating

At this point, Chase had withdrawn their offer as the first loan and it was being transferred to Litton. On April 30, Malou finally received a fax from HSBC agreeing to the short pay for $10,000. The listing agent started re-negotiating the offer of the short sale with Litton.

It took a while for the listing agent to get Litton to accept the short sale. Finally on June 6, Litton faxed Malou a short sale statement for $604,323.74. The statement called for HSBC to receive only $1,000 at closing. The listing agent continued to negotiate with both lenders and kept reassuring Malou there was a way to satisfy all parties. Malou’s response was to have everyone agree to the terms of the short sale, including both payoff lenders.

Payment to the Lender Outside of Closing?

To make matters worse, Malou received another short sale statement from HSBC, this time requiring $15,000 as payment in full. Malou forwarded the information to the listing agent who immediately called HSBC for clarification. According to the listing agent, he spoke to HSBC and they agreed to adjust the short sale statement to $1,000 at closing, with an additional $14,000 to be paid by the listing broker directly to HSBC outside of closing.

The listing agent e-mailed Malou the HSBC demand, which agreed to $1,000, but on the cover letter it stipulated HSBC was to receive $1,000 at closing and $14,000 from the listing broker. This additional stipulation was NOT noted on the actual short sale statement, but only on a fax cover page. The actual short sale statement still called for payment of $15,000.

The listing agent insisted the escrow could close on the $1,000 fax cover letter from HSBC and that he would handle the $14,000 payment after closing.

Malou suggested showing a credit to the seller of $14,000 from the listing agent and escrow sending the entire $15,000 to HSBC at closing. He stated that Litton would NOT accept the final settlement statement reflecting a credit from the listing broker and a higher payment to the second lien holder.

Malou decided to call HSBC to see if they really had agreed to accept the balance of $14,000 post-closing from the listing agent. The agent Malou spoke to said they would have to investigate and call her back.

In the meantime, Malou contacted Litton to find out if they would amend their statement to allow for the listing agent to credit the $14,000 to the seller and for HSBC to ultimately receive $15,000. Litton flat-out refused. They would not agree for HSBC to get any funds in an amount more than $1,000, and stated that if there were more funds in the transaction they should be paid toward their shortage.

A Request for Two Settlement Statements…

The listing agent asked Malou to prepare two settlement statements – one showing HSBC getting $1,000 to fax to Litton and another showing HSBC getting $15,000 for all other parties. Malou was appalled and told the listing agent that she could only prepare one settlement statement reflecting the actual terms of the transaction. She patiently reiterated to the listing agent that ALL PARTIES will have to provide escrow a mutually agreed acceptance of short sale before we can close.

On July 9 Malou received cancellation instructions. She cancelled her transaction, but kept track of the property address and parties’ names only to find out the transaction was closed by a competitor company on July 18.

The Moral of the Story

Four years ago the FBI announced its launch of a Mortgage Fraud Task Force. The government task force is charged with the research and discovery of impropriety during a short sale. Anyone involved in deception is investigated and prosecuted.

Beware! When lenders negotiate short sales on government-backed loans, the lender looks to the loan sponsor (FHA, VA, FNMA, GNMA) for full or partial reimbursement of their losses. The government reviews the transaction before issuing the reimbursement funds to the lender. However, they have the right to refuse payment if during the government’s investigation they uncover any of the following items:

  • More paid to the underlying lien holders than called for in the original payoff statement.
  • Property flipping when the original payoff statement prohibited the property from being sold in a double-escrow or assignment escrow.
  • Broker or buyer contributions toward the seller’s prohibited costs – such as moving allowances.

We all know how important it is that we adhere to the new lender’s closing instructions. It is equally important that we adhere to the short sale lender’s payoff instructions.

Questions or comments?  Please share below!

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Refi drama and the importance of document execution guidelines

Refinance Drama and the importance of document execution guidelines

It is amazing how a divorce can affect a closing. Many people believe their domestic problems become the settlement agent’s problem and often look to the settlement agent to be the tie–breaker for them. It is important for a settlement agent to take a step back, stay out of the drama and never lose sight of the proper escrow procedures and underwriting requirements.

Refinance Drama and the importance of document execution guidelinesThis story illustrates how a simple refinance turned into a whole lot of drama — other people’s drama — and our Company was continually asked to take on unnecessary risks. Read on to find out why it is crucial settlement agents do not abandon policy and procedures.

It all started as a refinance

The transaction was opened as a refinance. The new loan amount was approximately $5,500,000. Per the title report there were two existing deed of trusts recorded against the property. The first lien was for the benefit of Chase and the original loan amount of $5,230,000. The second lien was for the benefit of a private beneficiary.

Per the deed of trust the beneficiary was two individuals, Jim Smith and John Smith, with an original loan amount of $2,000,000. The loan officer told the settlement agent she would receive a zero demand for payment from the second lien holder and fully executed release.

The settlement agent requested the contact information for the Smiths and sent them a request for a payoff demand, the original note and a Substitution of Trustee and Full Reconveyance (Recon). Shortly after the request, she received a payoff demand and the original Promissory Note.

Who should the funds go to?

Unlike the deed of trust, the promissory note indicated Jim Smith or John Smith or XYZ Books were the payees. The payoff demand instructed the settlement agent to pay all funds to XYZ Books and was signed only by Jim Smith.

A few days later, the Company received a Notice of Motion and Court Order stating our Company must hold all funds due John “Jim” Smith and/or ABC Novels, Inc. DBA XYZ Books pending further order of the court. It was then the settlement agent realized Jim and John were one in the same. The Order was issued because Mr. Smith was in the process of getting divorced.

Mrs. Smith claimed the funds due to payoff the Note were community funds. Mr. Smith claimed the funds belonged to XYZ Books. Since the funds were in dispute, the court ordered the Company to hold the funds until it was determined who the funds belonged to. The Order did not prohibit the borrower from closing on her refinance, but the payoff funds for the second lien would have to be escrowed post–closing.

A change was requested

The Company was still in need of an executed Recon. Originally, the settlement agent completed the document listing only the beneficiaries named on the Deed of Trust; Jim Smith and John Smith. Mr. Smith did not want to sign anything which could be construed as his admittance the funds were due him individually. His attorney called asking if the Company would be willing to modify the Recon. They requested the following change:

The undersigned, Jim Smith or John Smith, present Beneficiary as owner and holder of the Note secured by Deed of Trust dated June 15, 2009 made by Roberta Jones.

Rather than modify the language (and in light of the new information she had received) it was agreed the settlement agent would add XYZ Books, since she had a demand instructing her to pay the full amount to XYZ Books and was informed the note had been assigned to XYZ Books. The settlement agent agreed to add the other beneficiary, pending the corporate documents to ensure she was accepting the Recon from the authorized person. The Recon was changed to:

The undersigned, Jim Smith AKA John Smith or XYZ Books, present Beneficiary as owner and holder of the Note secured by Deed of Trust dated June 15, 2009 made by Roberta Jones.

Mr. Smith’s attorney agreed this modification would work. The settlement agent sent the revised Recon along with an AKA statement to be signed by Mr. Smith and requested the corporate documents and a Corporate Resolution from XYZ Books as she was told it was a corporation.

The attorneys representing Mr. and Mrs. Smith in their divorce went back into court to ask the judge to issue an Order allowing the Clerk of the Court to sign the Recon, since Mr. Smith did not want to sign it and imply in any way the funds were his personally. The settlement agent received a fax of an Order allowing the Clerk to sign the Recon and copy of the executed Recon.

Reconstructed recon

Unfortunately, the Recon signed was not the proper Recon as it did not include a signature line for XYZ Books, which the settlement agent later found out is actually ABC Novels, Inc. DBA XYZ Books. Since the Company had been put on notice the note was assigned to XYZ Books, they explained the Recon would have to be executed by an authorized officer of ABC Novels, Inc. DBA XYZ Books.

A few days later an executed Recon, along with an amended demand for payment, was delivered via messenger to the settlement agent. The revised demand was conditional. It stated the Recon could only be recorded if the funds were paid in accordance with the original demand stating all funds were to be paid to XYZ Books. Clearly the settlement agent would not be able to comply because the previously issued Court Order required the Company to hold all funds.

Mr. Smith had been notified of these requirements and that the Recon was not executed in a manner which complied with the Company’s Document Execution Guidelines. Escrow notified Mr. Smith’s attorney the document would have to be re–executed to meet the Company’s underwriting requirements — and they were still in need of the AKA statement and corporate resolution.

Then the IRS showed up

What happened next? Only one week later the IRS issued a Notice of Levy to the Company and one to the borrower, Ms. Jones. The levy covered any funds due Mr. Smith and had a copy of the Promissory Note attached indicating the IRS was aware Mr. Smith may have been due a payment of $2,000,000. The full amount of the Levy exceeded this amount.

Then, Ms. Jones’ attorney contacted the settlement agent to find out what could be done to enable the transaction to close. The attorney was informed the deal could not close until they received the outstanding Recon, the AKA statement and corporate resolution from Mr. Smith. Upon receipt of those items the funds would have to remain in escrow until it was determined who the funds belonged to and how they would be disbursed. The attorney contacted Mr. Smith’s attorney and the IRS.

The Moral of the Story

In 2005 our Company implemented Document Execution Guidelines as a result of a dramatic rise in fraud and forgery claims. Since then fraud and forgery claims have dropped from the number one reason down to number three. The policy works — which only reinforces why settlement agents should not veer from, or make exception to, the policy.

Our Company has the right to implement policy, procedure and sound underwriting requirements even though statutory requirements are stronger. We owe this to our shareholders. We are never afraid to stand by Company policies. Abandoning these only opens the Company to additional liability.

Ms. Jones’ attorney called the settlement agent almost daily with a new scenario inquiring as to whether the Company would be willing to insure based on the different scenarios. He asked the Company if they would close and insure without receiving any of the documents due from Mr. Smith and send the funds to the court to decide. He then asked the Company to close and file an action to interplead the funds without receiving the pending documents. He even asked if the Company would close and insure if the IRS issued a Notice of Seizure, taking possession of the Note and requiring all funds be paid to the IRS.

And in the end…

The answer was always the same. The Company could close and hold the funds, send the funds to the court, file an action to interplead the funds — but not until it received the required documents from Mr. Smith.

In the end the Company received word the new lender decided to withdraw their loan and not proceed with the refinance. It was at this point the settlement agent resigned from the transaction and returned the original documents to Mr. Smith.

A Wrap-Around Mortgage Gone Bad…

HUD Seal

Early on in Allen Clussive’s career he agreed to close a transaction wrapping around an existing loan. The sale price on the transaction was $185,000. The buyer could not qualify for new financing and asked the seller to carryback a new loan in the amount of $180,000. The seller agreed, with the understanding that without the buyer obtaining a new loan he would not have the financial means to pay off his existing first loan in the amount of $157,000. The buyer and seller agreed to wrap the existing $157,000 loan with the new seller carryback loan. The underlying loan was an FHA loan originated after 1989.

Then the payments stopped

HUD SealAt closing, the buyer brought in $5,000 for his down payment plus his closing costs. Allen closed the transaction. After closing, the buyer paid the seller and the seller paid the FHA loan on time every month. Upon receipt of the buyer’s payment the seller paid the monthly principal, interest, taxes and insurance (PITI) payments to the lender servicing his FHA loan, and pocketed the balance. Everything was working perfectly until the 13th month when the buyer suddenly stopped making his monthly payments and abandoned the property.

The seller panicked and started to look for an attorney to start foreclosure in order to take the property back and put a renter in the house. In the meantime, the seller kept fronting the payments to the FHA loan to keep the payments current. The seller was making two house payments — one on his old home and one on his new home. Eventually the seller ran out of money and stopped making payments on the FHA loan.

The lender servicing the FHA loan started foreclosure and took the property back. The lender listed the property as an REO — bank–owned property – and resold it. They resold the property for $107,000, which was $50,000 less than they were owed. The lender filed a claim with FHA to be reimbursed the loss of $50,000. FHA sent the lender the $50,000 to cover their claim and the loan file was turned over to an investigator at the U.S. Department of Housing and Urban Development (HUD), the agency who regulates FHA loans.

An unlawful act was found

The new owner was not qualified

The HUD investigator discovered Clussive had facilitated a closing where title was transferred – yet the new owner’s credit did not qualify for the existing FHA loan. The investigator deemed the act unlawful and debarred Clussive from closing another FHA or VA insured loan transaction.

The HUD investigator discovered the property was transferred to a new buyer, but the buyer’s funds were not used to pay off the FHA loan. The investigator was curious how that could happen and sent a subpoena for Clussive’s file.

The HUD investigator discovered Clussive had facilitated a closing where title was transferred – yet the new owner’s credit did not qualify for the existing FHA loan. The investigator deemed the act unlawful and debarred Clussive from closing another FHA or VA insured loan transaction.

Now, to be honest with you, the action by HUD did not damage Clussive’s career. He lived and worked in an affluent community where FHA and VA loans were not prevalent due to their low loan limits. Sure, every once in a while one of Clussive’s customers would present a contract reflecting new FHA or VA financing and he would have to steer the customer to one of his associates to close the transaction, but for the most part it had little to no effect on his career. However, Clussive would be the first to tell you it definitely had a psychological effect on him.

Never again

Had Clussive known HUD issued a directive in 1990 (see below) banning the wrap of an FHA loan by any means — a land contract, a deed of trust, mortgage — he would have never accepted the transaction and agreed to close it. Unfortunately Clussive’s ignorance of the HUD rules did not exempt him from action by HUD.

In order to ensure Clussive never closed another FHA or VA loan, they placed his name on the Excluded Parties List System (EPLS) and Limited Denial Participation list. By placing his name on the list it ensured Clussive would never be able to close another FHA or VA loan or any other transaction involving the Federal Government, such as a HUD or VA REO sale.

Below is a letter from the U.S. Department of Urban Development issued back in 1990 addressing the ramifications of circumventing the credit qualifying process.

HUD letter


Questions or comments?  Please share below.

Referral Fees to the Borrower? Not Without Lender Approval!

referral fee to borrower? Not without approval

referral fee to borrower?  Not without approvalTeresa V., REO escrow department manager for one of our sister branches, was working on a purchase transaction for another escrow officer who was out on vacation. The sale price was $325,000 with a new loan in the amount of $292,500. The buyer’s loan package had arrived and Teresa was inputting the lender fees — which was not an easy task given the lender redrew the loan documents five times!

A referral fee to the buyer? Or was it mere coincidence…

After the borrower signed the documents, Teresa started preparing the file to be disbursed. Teresa reviewed the Commission Disbursement Authorization from the selling broker. On the form, it directed the settlement agent to send a referral fee to Sunset Real Estate Attn: C. Smith. The buyer’s name in the transaction was Cindy Smith. Teresa thought it could not be a coincidence the buyer’s name and the referral fee payee’s name matched.

Teresa reviewed the lender’s instructions to verify no credit was supposed to be paid by the selling broker to the buyer at closing. She then looked at the loan application to see where the buyer was employed. The buyer’s loan application indicated she was employed at JetCity. Whew! Smith was not employed at Sunset Real Estate after all. Smith is a common name, Teresa did not give it another thought. She continued working on the file without further questioning the payment of the referral fee.

A connection is discovered

Once the file was balanced and ready for disbursement, Teresa handed the file off to Shelley W., an escrow assistant. Shelley reviewed the file and brought it back to Teresa when she discovered the same likeness between the buyer’s name and the referral fee payee’s name at Sunset Real Estate.

Shelley found email correspondence in the file from the buyer. Most of the emails were generated from the buyer’s personal email account, but there was one email the buyer sent to Shelley months ago with a signature block that showed her as a real estate agent from Sunset Real Estate!

Was the disbursement approved?

Together Shelley and Teresa emailed the lender the Commission Disbursement Authorization reflecting a disbursement to Sunset Real Estate, to the attention of C. Smith in the amount of $5,875 and asked if the payment was approved by the lender.

The lender did not approve the payment and insisted Teresa close the loan and pay 100% of the commission to the selling broker without payment of the referral fee, which she did. Shelley notified the broker the referral fee would not be paid at closing.

Moral of the story

Funds paid to or on behalf of a borrower by the seller, real estate agent, mortgage broker or anyone else must all be reflected on the settlement statement and approved by the lender prior to closing.

Had the disbursement been made back to the borrower and later the loan went into default, the lender could have made a claim against the Company’s closing protection letter and/or title insurance policy for allowing funds to be paid to the borrower without their knowledge.

“Funds paid to or on behalf of a borrower by the seller, real estate agent, mortgage broker or anyone else must all be reflected on the settlement statement and approved by the lender prior to closing.”

Additionally, this same type of payment could invalidate a short pay approval letter. Had this transaction been a short sale, the Company could have been in double jeopardy by being responsible for any unpaid balance to the short pay lender and the new lender. If the short pay lender rescinds their short pay approval they can also refuse to release their lien. Since we would have insured the new lender in first lien position, they would have reason to file a claim against their policy as well.

Questions or comments?  Please share below!

Bank of America Short Sale Letter Verification Hotline

short pay letter verified

You might recall our post titled,  “FAKE Short Pay Letters? True Story...” which discussed how an alert settlement agent identified a fraudulent approval letter supposedly issued by Bank of America. She prevented the closing, saving the Company from potential future liability.

In an effort to prevent the reoccurrence of such fraud going forward, Bank of America will now give our representatives the ability to verify approval letters without a title–company–specific Third Party Authorization already in place.

Title & Escrow Officers and Original Borrowers May Use the Hotline

Bank of America Short Sale Customer Care Department

Phone 1.866.880.1232
The hours of operation are:
Monday through Friday:
8 a.m. to 10 p.m. EST
9 a.m. to 5:30 p.m. EST

Below is a telephone number settlement agents or title officers may call to verify certain key data points for approval letters where the original loan balance exceeded $500,000. This original loan cutoff amount was selected because, thus far, fraudsters have concentrated on large–balance loans.

If any of our title or escrow officers are suspicious of an approval letter provided by the Listing Agent, we may call to confirm its validity.

Both title officers and original borrowers can use the same telephone number included in the following standard disclosure on the approval letter below:

“Bank of America appreciates all of your efforts and cooperation in this matter. If you have any further questions, please contact our Short Sale Customer Care Department at 1.866.880.1232.”

To verify an approval letter, select Option 1

The hours of operation are:
Monday through Friday: 8 a.m. to 10 p.m. EST
Saturday: 9 a.m. to 5:30 p.m. EST

Bank of America will verify the following information with title officers when they call the number:

  1. The original borrower’s name
  2. The property address
  3. The loan number
  4. The agreed–to short sale payoff amount
  5. Amount approved to junior lien holders specified on letter
  6. The date by which this amount must be received by the bank

When title officers call Bank of America, they will access the approval letter provided to them by the listing agent, as it will be needed to complete the verification process.  Also, an approval letter that does not direct the borrower to contact the Customer Care Department, is likely fraudulent.  At a meeting between Our Company and Bank of America representatives, they stated, “We look forward to partnering with you in this effort and thank you for your cooperation.”

Questions or comments?  Please share below!

Accommodation Signing Protects Against Elder Abuse

Escrow prevents Elder Abuse

An unknown investor walked into our escrow branch to open an escrow for the purchase of residential property. The investor presented a handwritten contract that contained highly unusual terms. Sheri Davidson, the escrow officer, opened the escrow, but was suspicious based on the terms of the contract, which were as follows:

The Sketchy Contract Terms

Sale Price $256,580
Earnest Money Deposit $500 (POC)
New 1st Loan with Private Lender $58,000
Seller Carryback 2nd $256,580

Note Terms:

  • Principal-only payments for seven years
  • Payments commencing 90 days after closing
  • Borrower has the right to sell the property on a wraparound financing whereas borrower continues to pay seller directly and remain fully responsible for repayment of the note
  • Borrower has the right to substitute other real property with equal or greater equity to secure the remaining balance due of this note

This transaction was not a short sale; the seller owned the property free and clear. Sheri called the seller who was the trustee of a survivor’s trust. She quickly discovered the seller was a widow who lived out of the area and would not be able to come to Sheri’s office to sign the closing documents. Even though Sheri verified the sale price was in line with the current market value of the property based on assessor’s tax roll information and comparable sales, she did not feel comfortable sending out a mobile signing agent. She wanted to be sure the seller knew exactly what kind of deal she was getting.

A Local Escrow Officer is Chosen for the Mobile Signing

Sheri located an office near the seller and contacted Elizabeth Stoops, an escrow officer. Sheri asked Elizabeth if she would be willing to perform the signing and Elizabeth agreed. Elizabeth received the closing documents and reviewed them. She felt equally uncomfortable with the terms.

Elizabeth made the appointment and when the seller arrived, Elizabeth asked for her identification and realized the seller was 74 years old. Elizabeth began to review the closing documents with her and quickly discovered the seller did not know her carryback lien for 100 percent of the sale price was in second position. The seller was aware she would be receiving monthly payments, but was not necessarily aware the payments were principal-only payments. The seller mentioned she was so stressed that she had suffered a stroke over the subject property. One of the most menacing predicaments that brought on the stroke, was that her stepson lived in the property and paid just $200 a month for rent.

Legal Council is Recommended

Elizabeth asked if the seller had an attorney or tax accountant she could confer with over this deal. The seller gave her the name and phone number of her tax accountant, and asked Elizabeth to fax the closing documents to him for his review. The seller spoke with her tax accountant who advised her not to close until she met with an attorney. The accountant sent the closing documents to the seller’s attorney and she scheduled an appointment to meet him the following day. Since the seller had signed the closing documents during her appointment with Elizabeth, Elizabeth felt compelled to hold them until after the attorney reviewed them. Elizabeth informed Sheri of what happened during the signing appointment.


Even though the seller was desperate to change her circumstances and rid herself of a property that had become an albatross, this transaction, according to her attorney, was not her best option.

The buyer had no down payment and no equity, so the chances of him walking away from the property were high! Had this transaction closed and the buyer defaulted on the first loan, the lender would have started foreclosure leaving the elderly seller with one of two options: One, lose her $256,580 nest egg to the first lienholder in a foreclosure action, or two, pay to bring the first loan current. Then she would have had to start foreclosure on her second deed of trust in order to regain ownership to her property.

The Investor Tries to Escalate the Process

Sheri contacted the investor to tell him the deal would not close until the seller’s attorney reviewed the closing documents. The investor decided to escalate his disapproval of her stance not to close. He called the National Escrow Administrator, Lisa Tyler, and demanded Sheri continue the transaction. He claimed the attorney was not on retainer and should not dictate whether or not the transaction closes.

Lisa told the investor the seller was not aware of a number of transaction terms, including:

  • Her carryback deed of trust would be in second position behind the $58,000 first loan
  • She would be receiving principal-only installments against her loan
  • The loan could be wrapped or the collateral could be substituted

The investor denied the allegations and swore she was aware of all the terms but was just, “…confused.” Lisa said, “Therein lies the problem. If she is confused would you want her signing the closing documents? As the notary and as the title insurer, I would not want her signing any documents she did not completely and thoroughly understand.” The investor hung up the phone stating, “It was no use talking to you!”

The Transaction is Halted

After one look at the contract and other closing documents, the attorney called Sheri and put a halt to the transaction. He also issued a letter to the investor demanding he no longer contact his client and insisted that if the investor wanted a refund of his $500 deposit he contact him directly. Elizabeth destroyed the signed documents and Sheri cancelled her file.

Questions or Comments? Please Share Below.

Payments to Entities vs. Payments to Individual Partners

Our Sister branch in Cerritos, Calif. was handling a sale of property wherein the seller was a partnership. The partnership was receiving almost $2 million in proceeds. The managing partner was concerned about depositing all the proceeds into one bank since the FDIC only insures deposits up to $250,000 per depositor, per insured bank.

Can Proceeds be Disbursed to Partners of an Entity?

Disbursements to entities vs disbursements to partnersThe managing partner asked our settlement agent handling the transaction to disburse the proceeds to the individual partners instead of the partnership. Our Company took a firm stance on this issue years ago: Seller proceeds are only made payable to the seller.

The escrow officer, Rodil San Diego, knew Company policy required the proceeds be disbursed to the partnership and explained to the managing partner he was unable to honor his request. The managing partner explained to Rodil his concerns about the stability of our nation’s banks. He was concerned the bank the funds would be deposited into could fail and be taken over by the FDIC.

Proceeds May be Paid Only to the Partnership

As the managing partner, he felt he had to take every step to ensure protection of the partnership’s proceeds. He was even considering opening seven different accounts at seven different banks in order to deposit funds which would not exceed the FDIC-insured limits. Rodil told the customer he would escalate the request. Rodil emailed the National Escrow Administration Department at settlement@fnf.com. Corporate Escrow Administrator, Diana Williams, responded by confirming that Rodil was correct and Company policy requires proceeds be paid only to the partnership. National Escrow Administration did recommend Rodil wire the proceeds to the seller so the funds could be accessed by the managing partner without delay and disbursed to the individual partners.

Seller proceeds are only made payable to the seller.

The managing partner received Diana’s contact information and called to ask her to reconsider. She responded by confirming these types of payments are beyond the services Our Company has the ability to offer as the settlement agent. Paying the individual partners could impose additional reporting and/or withholding requirements the Company is not equipped to handle.

Moral of the Story

One of Our Company Precepts is “Customer- Oriented and Motivated.” The Company stands behind this precept but it is important to keep in mind the exact services we offer. Our Company’s policies and procedures are not implemented without careful consideration – which includes the effect they might have on the customer. In this story, the customer simply needed a clear explanation to understand why the Company was unable to honor his request.

The Difference Between Paying the Partnership and Paying the Partners

He asked what the difference was between paying the partnership and the individual partners as all the payments would just be disbursements. Diana explained when the settlement agent pays the partnership, they are disbursing the proceeds from the sale of real property.

Paying the individual partners turns those disbursements into distributions, which are the responsibility of the partnership. Our Company does not keep specific details or status of each individual member that would allow us to know if withholding must be deducted or if their particular distribution must be reported to any state or federal agency. These are the duties of the managing partner.

The partner thanked Diana for taking the time to explain Our Company’s position and said he would make other arrangements for the proceeds.


Click the image below to download a printable version of this article.

payments to entities vs payments to individuals

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The REO Transaction Process [Infographic]

REO Transaction Process Infographic

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With the housing market continuing to show positive signs with home values and rent prices moving upward, foreclosures continuing to decline, and interest rates at record lows, home buyers are presented with a unique opportunity as they search for real estate in the Puget Sound market.

Because REO or Real Estate Owned Transactions still comprise a significant portion of the inventory in the Puget Sound region, we have created the illustration below that depicts the REO transaction process, breaking it into three general sections; The Beginning, the Middle, and The End.

Understanding the general process from the opening of escrow to closing can make the closing experience a better one for all parties involved.

REO Transaction Process Infographic

To download this infographic in a printable PDF format, click here.

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An Assignment of Proceeds Fraught with Fraud

Our Company decided years ago to take a stand and stop accepting assignments of proceeds to third parties. Our decision was spurred by too many bad experiences. This story provides yet another reason why we do not accept assignment of proceeds instructions.

Absentee Borrower

assignment of proceeds fraudThe transaction was a loan for a borrower who owned their property free and clear. The property was located in the state of Washington, but the borrower lived in California. The transaction was being handled by an escrow officer in Washington, who arranged for an approved notary to meet with the borrowers in California to execute the loan documents.

Proceeds Wired

Along with the executed loan documents, the borrower submitted instructions to the escrow officer regarding where he wanted her to wire his loan proceeds. The loan amount was $248,000 and the borrower’s proceeds were for just over $209,000. The wire instructions from the borrower instructed the escrow officer to wire almost $90,000 to a small business and the balance of $120,000 to another individual. The escrow officer complied with his request and the loan closed.

The owner contacted the lender stating he did not have a mortgage with them or anyone…

Surprise! No Loan Payments Are Made

The first payment date came and the borrower failed to pay. The lender sent a notice of late payment, but instead of sending it to the borrower’s mailing address in California, they sent the notice to the property address in Washington. The owner contacted the lender stating he did not have a mortgage with them or anyone, as his property was free and clear, and that he did not sign any loan papers with them. When the lender asked if he lived in California he said no, that he lives at the property address and had for years.

A Forgery is Revealed

The lender looked into the file and discovered the borrower was an imposter. The lender has now filed a claim under the title policy for forgery. Upon notification of the claim, we attempted to recall the outgoing wires and freeze the recipient’s two separate bank accounts – both located at Chase Bank. Chase Bank responded both accounts were drawn to a zero balance and closed upon receipt of the wire transfers.

What If?

If the escrow officer had stuck to Company Policy and Procedure would she have closed this fraudulent deal? We’ll never know. None of the loan proceeds were made payable to the actual borrower. If she had insisted on paying the proceeds to the borrower what would he have done? Would we still have the money? To add insult to injury, the signing was set up with an approved notary and not BancServ. The approved notary only carries $100,000 in errors and omissions insurance which is the minimum amount required by Our Company to be included on the approved notary list. If it is proven the notary did not properly identify the signer, the maximum amount which can be recouped from them is $100,000. BancServ carries $15 million in errors and omissions insurance. Had a BancServ notary been used, instead of an approved notary, we would stand a better chance of being reimbursed our losses.

Moral Of The Story

Company policy prohibits settlement agents from accepting assignments of proceeds to unrelated third parties. Company policy also prohibits splitting up proceeds. Instead, settlement agents should make one disbursement. To add insult to injury, neither of these disbursements appeared on the closing statement and the lender knew nothing about them. In this story, had the escrow officer followed policy she might have been able to avoid a very expensive claim for fraud and forgery.

Questions or comments? Please share below!