Minimum Standards, Specific Instructions and Report Forms for Audit of Trust Funds Required of Texas Title Insurance Agents, Direct Operations, Title Attorneys and Attorneys Licensed as Escrow Officers
The purpose of the auditing requirements of Chapter Nine of the Texas Insurance Code of all trust funds is for the protection of parties to transactions depositing funds with Title Insurance Agents, Title Attorneys, Direct Operations, or attorneys licensed as Escrow Officers, hereinafter collectively referred to as "escrow agents". The objective of such audit is to determine that the escrow agent maintains adequate trust fund accounting records and that the financial statements contain no material misrepresentations. This audit should be conducted in accordance with generally accepted auditing standards of the accounting profession. Because of the high degree of risk involved due to the nature of these funds, strong emphasis should be placed on the work undertaken on the cash transactions for the year in an attempt to uncover any misapplication of funds or other discrepancies that might exist.
For purposes of these standards, requirements and instructions, a title insurance company doing business in its own name shall be considered a title insurance agent.
In connection with this audit, the Department realizes that the auditor's duty shall include the examination of the contents of certain of the guaranty files. The Department further realizes that a detailed analysis of each file may be out of the practicability range of an audit; consequently, sampling procedures may be used. The auditor shall select files to be examined as a test of procedures followed. Results of the findings of this examination shall determine the number of files to be examined and the degree to which this examination should extend. The auditor shall report the number of files actually examined on Exhibit E.
Confirmations shall be made of individual guaranty file accounts, accounts where funds have not been fully disbursed, and escrow bank accounts. Confirmation of all escrow bank accounts is mandatory. However, because it is recognized that a complete confirmation of all guaranty file accounts would be impractical, it is permissible for the auditor to adopt a spot-check system of confirmations, to consider internal type audit evidence, and to use judgment in accordance with sound auditing practices as to the extent confirmations are requested. The degree to which confirmation is made should be dependent upon the findings. Although a positive confirmation asking for a specific reply is desirable, it is permissible to use negative confirmations if in the auditor's judgment, the circumstances warrant such.
SPECIFIC AREAS AND PROCEDURES
Several areas require particular attention and thorough investigation on the part of the auditor. Some of these areas are discussed below.
Determine that good funds for a transaction are received and deposited before any disbursements are made in accordance with Article 9.39A and related Procedural Rule P-27.
Funds which remain in an account in a dormant condition for a long period of time need to be closely scrutinized. Funds that are being misappropriated often find their way to these accounts in some manner, so appropriate auditing procedures shall be performed on these accounts. Current state law specifies certain criteria that may require dormant funds held longer than three years to escheat to the state treasurer. All credit balances open three years or longer must be explained in detail on Exhibit E-1.
Checks written out of an escrow account to the agency's operating account or to another escrow account shall be examined carefully, especially if the checks appear to be disbursements for anything other than normal charges to a specific guaranty file. Transfer of funds from one account to another is permissible providing both files contain proper authorization. As a part of the case work of this audit, a certain number of cancelled checks shall be examined to determine properly authorized signatures, payees and endorsements.
Escrow receivables are the responsibility of the escrow agent and constitute shortages in the account which are deemed to be violations of Article 9.39. Restitution of every shortage shall be made within forty-five (45) days from the closing date of the bank statement of the account which reflects the transaction creating the escrow receivable. All escrow receivables in excess of $200 shall be itemized and thoroughly explained on Exhibit E-2. Any irregularities such as bank overdrafts shall be thoroughly explained on Exhibit E-3.
Some support for each disbursement must be in the guaranty file, and it shall be determined that the disbursements were to logical payees. If there are charges shown on the closing statement for overnight mail service, messenger service, copies of documents, recording fees or tax certificates, whether purchased from a governmental or non-governmental entity, it must be determined that these charges are actual expenses or reasonable estimates of charges that must be made prior to closing and not arbitrary or uniformly charged amounts for these items on all closing statements. Charges for general overhead expenses such as in-house labor, utilities, taxes, business supplies and equipment are already covered by the title insurance premium and are prohibited. If actual charges for products or services provided by third party vendors are known at or prior to closing, the charges may not be marked up. If actual charges for such products or services are not known by the time of closing, only reasonable estimates of such charges should be shown on closing statements and charged. The actual charge for an absentee notary sign-up fee may be passed through, if the notary is a third party and that licensee, prior to closing the transaction, receives a written request signed by the borrower, buyer or seller making the request and agreeing to pay for an absentee sign up by a notary as an accommodation to the requester after the licensee provides the requester with written notice of the amount of the notary fee or a reasonable estimate of the fee, if not known by the licensee. If the third party notary is affiliated with the licensee, the licensee will provide notice of the affiliated relationship to the requester prior to the absentee notary sign-up service being provided. If there is evidence of a prior lien in the file, such as a payoff statement from a lending institution, it must be determined that a check or other written evidence such as a wire transfer confirmation, reflects the payoff of said loan and a release was received or a written demand for a release was made. There must be a closing statement in the file, and entries on the closing statement should be traced to the escrow accounting records. Company records must also include copies of all invoices, receipt items , and disbursement checks.
Effective January 3, 2014 (Order 2806)
POLICY GUARANTY FEE AND GUARANTY ASSESSMENT RECOUPMENT CHARGE
The escrow agent's policy guaranty fee escrow account and the guaranty assessment recoupment charge escrow account, if agent opts to maintain these accounts separate from agent's standard audited escrow account maintained in the ordinary course of business, should be audited annually. The scope of these minimum requirements should be expanded accordingly to include these accounts. These fees must be retained in or deposited directly into an escrow or trust account and remitted quarterly to the Texas Title Insurance Guaranty Association. Appropriate procedures must be utilized to determine that amounts collected and remitted are reasonable and that funds are maintained properly in an escrow or trust account.
Exhibit A. The form of opinion should be set forth in Exhibit A unless circumstances dictate otherwise. The opinion letter must be signed by an independent certified public accountant or an independent licensed public accountant or by a firm composed of either. The firm name and address must be provided on the Exhibit.
Exhibit B. Amounts should agree to other exhibits as indicated. If one or more permanent balances from the escrow agent's operating account (imprest funds) are kept in an escrow bank account or accounts, the amount(s) must be shown on Line 9 "Other".
Exhibit C. Every escrow bank account must be included on this exhibit even if the balance at the end of the year was zero. The balances shown on the exhibit must be "reconciled balances" not actual "cash balances". The auditor shall verify that each account number, name, and designation is listed correctly. Each account must be styled as an "escrow" or "trust" account on the bank statement. If any accounts are not styled in this manner on the bank statements, arrangements must be made immediately to do so.
Exhibit D. This exhibit requires the following information for each interest-bearing account open at fiscal year end:
- Name of depository or securities held and bank account number;
- Type of account - should indicate what type of investment is held, i.e. money market, certificate of deposit, etc.;
- Guaranty file number and beneficiary;
- Balance - should be the amount (including both principal and interest) held in escrow on open accounts as of the fiscal year end.
Although accounts closed before the fiscal year end are not required on Exhibit D, their activity must be reported on the "Investment Summary Exhibit F." Each guaranty file shall contain written instructions authorizing the investment of the escrow funds. These instructions must be signed by the beneficial owner and disclose the beneficial owner's taxpayer ID number.
The total credit balances as of the end of the fiscal year shall be segregated into the following categories:
- Credit balances open three years or longer (must be explained in detail on Exhibit E-1);
- Credit balances open 1 year to 3 years;
- Credit balances open less than 1 year.
The dollar amounts and the related number of guaranty files shall be reported in the spaces provided.
The amount of the "total credit balances" listed shall not include the policy guaranty fees and guaranty assessment recoupment charges and must equal the "total escrow deposits" reported on Line 6 of Exhibit B.
The total number of and dollar amount of debit balances not cleared as of the end of the fiscal year shall be reported in the following categories:
- Debit balances up to and including $200;
- Debit balances over $200;
(must be explained in detail on Exhibit E-2).
Debit balances over $200 which were cleared during the year must also be explained on Exhibit E-2.
The number of guaranty files the auditor actually examines shall be reported in the space provided.
Exhibit E-1. This exhibit requires detailed information regarding guaranty files which have been open for three years or longer. This information must include the reason the file is still open, such as "disputed earnest money," "funds escrowed for repairs," "error at closing," etc.
The information must indicate if a file is active or inactive. If a file is inactive or has been dormant for more than three years, the escrow agent should consider clearing the file via escheat or through the interpleading process.
Individual guaranty files with dormant balances of $200 or less may be reported in the aggregate for each specific reason the balances remain in the files.
Exhibit E-2. The auditor shall provide a detailed explanation of every debit balance or receivable in excess of $200 occurring throughout the year, even if cleared before the year's end. The explanation should include the date the shortages were created, the cause of the shortages, the date the shortages were cleared, and the method of clearance.
Columns are provided for the debit balances to be carried forward under each month they remained open. Debit balances up to and including $200 should be included as a lump sum, without separate explanations. The columns for each bank account must be subtotaled, and the subtotals on Exhibit E-2 must equal the corresponding month's "total receivables" as reported on summary Exhibit F for that specific account. The totals of each column of Exhibit E-2 must equal the corresponding month's "total receivables" as reported on summary Exhibit F.
Section A. The auditor shall provide detailed information regarding any overdrafts occurring during the fiscal year. The information should include the following: bank name and account number, related guaranty file number, amount of overdraft, dates of origin and clearance, and an explanation which includes the method of disposition. If an overdraft situation was caused by an escrow receivable which has already been reported in Exhibit E-2, make reference to this explanation.
Section B. The auditor shall provide a complete explanation of any irregularity discovered during the course of the audit which has not been explained elsewhere in the report.
Exhibit F. This exhibit reports information concerning the monthly activity of the agency's escrow accounts, as discussed below.
Column A - Monthly Beginning Balance.
This column represents the reconciled bank balance for the account as of the beginning of the month, and shall equal the ending reconciled bank balance of the prior month (Column D). An overdraft must be shown as a negative amount.
Column B - Escrow Receipts
This column represents the amount of escrow funds received during the month. It must include a total for all months at the bottom of the column.
Column C - Escrow Disbursements
This column represents the amount of escrow funds disbursed during the months. It must include a total for all months at the bottom of the column.
Column D - Monthly ending Balance
The reconciled bank balance as of the end of the month shall be reported in this column. An overdraft must be shown as a negative amount. Because this exhibit is designed to be self-balancing, Column A plus column B less Column C should equal Column D. The ending balance (Column D) for a given month then becomes the beginning balance (Column A) for the subsequent month.
Column E - Escrow Receivables
Any escrow receivables existing at the end of the month shall be reported in this column, as well as on Exhibit E-2.
Column F - Escrow Liability
This column is the sum of Columns D and E, and represents the total escrow liability of the account.
Each escrow bank account existing during the audit year must be reported on a separate exhibit, whether or not the account is open at year-end. If the escrow agent maintains investment, interest-bearing, or specific accounts as disclosed on Exhibit D, these must be reported on Exhibit F in the aggregate. Also required is a "Summary Exhibit F" which combines the activity from all of the escrow accounts, including accounts reported on Exhibit D, if any.
Exhibit G. Only Title Attorneys as authorized by Article 9.56 shall complete and file this exhibit. They shall use this form in addition to each of the other forms herein listed in filing their audit reports. Title insurance agents and direct operations do not file this exhibit.
Exhibit H. The escrow agent should complete and answer all questions and submit the signed and dated affidavit to the auditor prior to the completion of the audit. Question 3 applies to any interest earned on escrow funds. Whenever interest is earned there must be a specific written escrow agreement providing for the disposition of that interest.
Negative Reports. All reports and/or exhibits reflecting no activity shall be filed and noted as "none".
Filing Audit Reports. The auditor shall provide the escrow agent with an adequate number of reports in sufficient time to allow the escrow agent to review them and mail copies with cover letters to the Texas Department of Insurance (by certified mail) within 90 days of the fiscal year end and to each Title Insurance Company which the escrow agent represents. The Texas Department of Insurance has no authority under the Texas Insurance Code to grant extensions of the 90-day time period.
Note: These instructions and standards are not in lieu of, but are in addition to generally accepted auditing standards.
USE OF REQUIRED FORMS
Escrow agents shall utilize the forms attached to these minimum standards designed as Exhibits A through H when filing their annual audit reports in compliance with articles 9.39 or 9.56 of the Texas Title Insurance Act. Facsimiles of the forms may be used, but the formats must be identical to that promulgated by the Texas Department of Insurance.
MINIMUM ESCROW ACCOUNTING PROCEDURES AND INTERNAL CONTROLS
A monthly escrow trial balance for each individual escrow bank account must be prepared which, at a minimum, lists all open escrow balances. Each month's escrow trial balance must be completed no later than the end of next month.
A three-way reconciliation of bank balance, book balance and escrow trial balance for each individual escrow bank account shall be performed monthly. Each three-way reconciliation must be completed within forty-five (45) days from the closing date of the bank statement of the account.
Each reconciliation should be approved by a manager or supervisor. If this is not possible or practical, each reconciliation shall be reviewed by another employee.
Each reconciliation should be prepared by someone not associated with the receipt and disbursement function. Where size does not permit this, each reconciliation shall be reviewed by the manager or owner.
Two signatures are required on all escrow checks, but this requirement is waived if the escrow agent has four or fewer employees. Only one signature must be that of a licensed escrow officer, but this requirement is waived if the escrow agent is a sole proprietorship or partnership and the owner or individual partner signs the escrow checks.
Company records must include copies of all checks, deposit slips, and receipt items.
An interest-bearing (investment) escrow account must meet the following criteria:
The investment account must be styled in the name of the owner/beneficiary of the escrow funds, with the escrow agent named as trustee or escrow agent.
The escrow agent must receive written instructions from the owner/beneficiary of the escrow funds to open an investment account. Such written instructions must be maintained in the escrow agent's records.
The Tax Identification number used to open the interest-bearing escrow account must be that of the owner/beneficiary of the funds, not that of the escrow agent.
The interest-bearing escrow account must be included in a control ledger or record identifying all interest-bearing accounts. The interest must be posted within seven business days after receipt of the statement or other documentation reporting the interest accrued.
Each guaranty file must be assigned a unique number. Name identification is not acceptable.
All accounts must be styled as "Escrow" or "Trust". "Escrow account" "trust account" must appear on the bank statement, the signed bank agreement, disbursement checks and deposit tickets.
Accounts open for longer than six months should be thoroughly investigated. Disbursements from these accounts should not be allowed without management approval.
Voided checks should have their signature blocks removed or otherwise rendered ineffective.
Management approval should be required for any transfers of funds between guaranty files or escrow accounts and transfers between guaranty files must be documented in both files.
If after the escrow agent has received and deposited an earnest money check, and the check is returned to the escrow agent by a financial institution due to insufficient funds, the escrow agent shall notify the seller by written notice deposited in the mail and addressed to the seller's address as shown in the escrow agent's file relating to the transaction within seven business days after the returned check is received by the escrow agent unless the check is replaced by collected funds within the seven-day time period. The escrow agent shall retain copies of written notices.
All escrow checks and deposit tickets must display related guaranty file numbers directly on the document to provide a clear and direct connection between the document and related guaranty file.
Each guaranty file must contain a complete, current disbursement sheet which lists the date, source and type of all receipts; date, check number, item description, payee and amount of all checks; date, amount and type of any other disbursements (i.e.: outgoing wire-transfers) and any remaining balance. Voided checks which have been canceled where funds have been credited back to the account shall be shown on the disbursement sheet.
Invoices substantiating or sufficient evidence to support all disbursements shall be kept in the guaranty files.
Reimbursement of all escrow receivables and other escrow shortages shall be made by the appropriate party(ies) or from the escrow agent's operating account within forty-five (45) days from the closing date of the bank statement of the account which reflects therein the transaction(s) creating the escrow receivable(s) or shortage(s).
If a settlement statement requires changes, a new statement must be prepared or pen-and-ink changes must be initialed by all parties affected by the changes, or sufficient evidence to support the changes must be maintained in the guaranty file. A copy of the revised, final settlement statement must be provided to the lender and borrower.
A signed, pre-numbered receipt must be issued for any escrow funds received in cash.
If a bank does not return actual canceled checks with bank statements, then copies of all checks must be available in agency records, or the agency must obtain a signed acknowledgement from the bank that they will be provided upon request, and must meet the following criteria:
- The copies of checks must be clearly legible.
- There must be a copy of both sides of every check so that endorsements can be verified; and
- It must be unmistakable which front and back images belong together.
All escrow or trust accounts maintained by licensed Texas title insurance companies, title insurance agents or direct operations shall be in financial institutions or branches of financial institutions located within the geographic bounds of the State of Texas.
If an escrow agent as defined herein detects a defalcation regarding its trust or escrow funds, the agent must file the following notice with the Title Division Examinations Section of the Department within forty-five (45) days of the end of the month in which the defalcation is believed to have occurred: "We have detected circumstances regarding our escrow or trust funds that may warrant an investigation by the Title Division of the Department. The amount of funds involved is believed to be $____________." If the agent comes into possession of an indictment or conviction concerning the defalcation, a copy of that document should be forwarded to the Department within 10 business days of the date the agent comes into possession of same.