Chapter 3 - Escrow Regulations

California Financial Code — §§ 17400-17425

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Sections (33)

Amended by Stats. 1999, Ch. 441, Sec. 8. Effective January 1, 2000.

The commissioner may from time to time make, amend, and rescind the rules, forms, and orders that are necessary to carry out the provisions of this division, and define any terms, whether or not used in this division, insofar as the definitions are not inconsistent with the provisions of this division. For the purpose of rules and forms, the commissioner may, among other things, classify persons and matters within the commissioner’s jurisdiction and may prescribe different requirements for different classes. The commissioner may, in the commissioner’s discretion,

waive any requirement of any rule or form in situations where in his or her opinion the requirement is not necessary in the public interest or for the protection of the public.

§ 17402

Amended by Stats. 1961, Ch. 475.

No person subject to this division or any officer thereof shall advertise in any manner or publish any statement of its capital, other than amounts fully paid in and accumulated surplus.

§ 17403

Amended by Stats. 1987, Ch. 564, Sec. 1.

(a)No person subject to this division shall issue, circulate, or publish any advertisement by any means of communication, or make use of or circulate any letterheads, billheads, blank notes, blank receipts, blank escrow instructions, certificates, circulars, or any written, printed, partially written or printed paper containing any fictitious or corporate name or other words indicating that the person is in the escrow business, unless the person is a licensed escrow agent.

(b)If, in the opinion of the commissioner, any person has violated this section, the commissioner

may order that person to desist and refrain from that violation. If, within 30 days after the order is served, a request for hearing is filed in writing and the hearing is not held within 60 days thereafter, the order is rescinded.

§ 17403.1

Amended by Stats. 1999, Ch. 441, Sec. 10. Effective January 1, 2000.

No person subject to this division shall describe as an escrow, whether orally, in writing, or electronically, any transaction that is not defined as such in Section 17003.

§ 17403.2

Amended by Stats. 1999, Ch. 441, Sec. 11. Effective January 1, 2000.

(a)No person subject to this division shall solicit or accept an escrow instruction or amended or supplemental escrow instruction containing any blank to be filled in after signing or initialing of the escrow instruction or amended or supplemental escrow instruction, nor permit any person to make any addition to, deletion from, or alteration of an escrow instruction or amended or supplemental escrow instruction, unless the addition, deletion or alteration is signed or initialed by all persons who had signed or initialed the escrow

instruction or amended or supplemental escrow instruction prior to the addition, deletion or alteration.

(b)In addition to subdivision (a), no Internet escrow agent subject to this division shall solicit or accept electronically over the Internet an escrow instruction or amended or supplemental escrow instruction containing any blank to be filled in after executing that escrow instruction or amended or supplemental escrow instruction, nor permit any person to electronically, over the Internet, make any addition to, deletion from, or alteration of an escrow instruction or amended or supplemental escrow instruction, unless that addition, deletion or alteration is executed by all persons who had executed the escrow instruction or amended or supplemental escrow instruction prior to the addition, deletion, or alteration.

§ 17403.3

Amended by Stats. 1999, Ch. 441, Sec. 12. Effective January 1, 2000.

(a)At the time of execution a copy of each escrow instruction or amended or supplemental escrow instruction shall be delivered to all persons executing the same.

(b)Internet escrow agents shall deliver electronically over the Internet a copy of each executed escrow instruction or amended or supplemental escrow instruction to all persons executing the same. In the event a person is not able to electronically receive the instructions, the Internet escrow agent shall mail a

true and correct copy of the instructions to the person within 24 hours of execution.

§ 17403.4

Amended by Stats. 1999, Ch. 441, Sec. 13. Effective January 1, 2000.

All written escrow instructions and all escrow instructions transmitted electronically over the Internet executed by a buyer or seller, whether prepared by a person subject to this division or by a person exempt from this division under Section 17006, shall contain a statement in not less than 10-point type which shall include the license name and the name of the department issuing the license or authority under which the person is operating. This section shall not apply to supplemental escrow instructions or modifications to escrow instructions.

This section shall become operative on July 1, 1993.

§ 17403.5

Added by Stats. 2000, Ch. 437, Sec. 5. Effective January 1, 2001.

(a)All records required by this chapter may be retained by an Internet escrow agent and provided to the commissioner in electronic format.

(b)All transfers by an Internet escrow agent between trust accounts and interest-bearing accounts, and between escrow accounts, may be made electronically.

(c)A statement of account may be delivered by an Internet escrow agent to a customer by electronic mail or via the

Internet, unless otherwise requested by the customer.

§ 17404

Amended by Stats. 1973, Ch. 705.

Every person subject to this division shall keep and use in its business, books, accounts, and records which will properly enable the commissioner to determine whether the escrow functions performed by such person comply with the provisions of this division and with all rules made by the commissioner under this division.

§ 17405

Amended by Stats. 2001, Ch. 499, Sec. 3. Effective January 1, 2002.

(a)The business, accounts and records of every person performing as an escrow agent, whether required to be licensed under this division or not, are subject to inspection and examination by the commissioner at any time without prior notice. The provisions of this section shall not apply to persons specified in Section 17006.

(b)Any person subject to this division shall, upon request, exhibit and allow inspection and copying of any books and records by the commissioner or his or

her authorized representative.

(c)(1) The commissioner shall conduct an examination of each licensed escrow agent as described in subdivision (a) as often as the commissioner deems necessary and appropriate, but not less than once every 48 months.

(2)The examination shall be conducted for the 12-month period immediately preceding the date that the examination is commenced unless the commissioner finds, based on information uncovered in the examination or in the most recent independent audit report, that the examination should be extended beyond the 12-month period.

(3)In determining how often an examination shall be conducted, the commissioner may consider each licensed escrow agent’s compliance with the requirements set forth in this division and other factors the commissioner may by rule or

order designate.

(4)This subdivision shall apply only to examinations commenced after the effective date established by the rule or order of the commissioner for the factors described in paragraph (3).

(d)Notwithstanding subdivision (c), the commissioner may conduct an indoctrination or preliminary examination, or both, under this section of any new licensee within one year of the issuance of the license under this division, and an examination described in subdivision (a) within two years of the issuance of the license under this division.

§ 17405.1

Amended by Stats. 1981, Ch. 946, Sec. 3.

The cost of every inspection and examination of a licensee or other person subject to this division shall be paid to the commissioner by the licensee or person examined, and the commissioner may maintain an action for the recovery of these costs in any court of competent jurisdiction. In determining the cost of an inspection or examination, the commissioner may use the estimated average hourly cost for all persons performing inspections or examinations of licensees or other persons subject to this division for the fiscal year.

For the purposes of this section only, no person other than a licensee shall be deemed

to be a person subject to this division unless and until the person is determined to be a person subject to this division by an administrative hearing in accordance with Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code or by a judicial hearing in any court of competent jurisdiction.

§ 17406

Amended by Stats. 2008, Ch. 285, Sec. 3. Effective January 1, 2009.

(a)Each licensee shall submit to the commissioner, at the licensee’s own expense, an audit report containing audited financial statements covering the calendar year or, if the licensee has an established fiscal year, then for that fiscal year, within 105 days after the close of the calendar or fiscal year, as applicable. At that time, each licensee shall also file additional relevant information as the commissioner may require.

(b)Within 30 days after receipt of a request from

the commissioner, a licensee or other person subject to this division shall submit to the commissioner, at the person’s own expense, an audit report containing audited financial statements covering the 12 calendar months next preceding the month of receipt of the request, or for another period as the commissioner may require. Unless the public interest shall otherwise require, the commissioner shall exempt a licensee from the provisions of subdivision (a) in whole or in part if the licensee has complied with a request pursuant to this subdivision as of a date within the calendar or fiscal year for which the exemption is granted.

(c)A licensee whose license has been revoked shall submit to the commissioner, at its own expense, on or before 105 days after the effective date of the revocation, a closing audit report as of that effective date, or for another period as the commissioner may specify. The report shall include the information specified

by the commissioner. A licensee who has complied with this subdivision is exempt from subdivision (a) of this section.

(d)The reports and financial statements referred to in subdivisions (a) and (b) shall include at least a balance sheet and a statement of income for the year ended on the balance sheet date together with other relevant information as the commissioner may require. The reports and financial statements referred to in subdivisions (a), (b), and (c) shall be prepared in accordance with generally accepted accounting principles, and shall be accompanied by a report, certificate, or opinion of, an independent certified public accountant or independent public accountant. The audits shall be conducted in accordance with generally accepted auditing standards and the rules of the commissioner.

(e)A licensee shall make other special reports to the commissioner as the

commissioner may from time to time require.

(f)For good cause and upon written request, the commissioner may extend the time for compliance with subdivisions (a) and (b).

(g)A licensee shall, when requested by the commissioner, submit its unaudited financial statements, prepared in accordance with generally accepted accounting principles and consisting of at least a balance sheet and statement of income and expense as of the date and for the period specified by the commissioner. The commissioner may require the submission of these reports on a monthly or other periodic basis.

(h)If the report, certificate, or opinion of the independent accountant referred to in subdivision (d) is in any way qualified, the commissioner may require the licensee to take action as he or she deems appropriate to permit an independent

accountant to remove the qualifications from the report, certificate, or opinion.

(i)The commissioner may reject any financial statement, report, certificate, or opinion by notifying the licensee or other person required to make the filing of its rejection and the cause of the rejection. Within 30 days after the receipt of the notice, the licensee or other person shall correct the deficiency and the failure so to do shall be deemed a violation of this division. The commissioner shall retain a copy of all rejected filings.

(j)The commissioner may make rules specifying the form and content of the reports and financial statements referred to in this section, and may require that those reports and financial statements be verified by the licensee in the manner as he or she may prescribe.

(k)Upon completion of the

reports and financial statements referred to in subdivisions (a), (b), and (c), the independent accountant shall submit to the commissioner complete copies of the reports and financial statements at the same time that copies of the reports and financial statements are submitted to the licensee.

(l)A licensee who engages an independent accountant or other third-party contractor to reconcile trust account records shall request the independent accountant or third-party contractor, at a minimum, to immediately notify the commissioner and Fidelity Corporation in the event of any of the following:

(1)The termination or voluntary withdrawal of the independent accountant or third-party contractor from the engagement.

(2)The discovery by the independent accountant or third-party contractor of an unreconcilable trust

account debit balance. A debit balance exists if an escrow agent withdraws, pays out, or transfers money from an escrow account in excess of the amount to the credit of that account at the time of the withdrawal, payment, or transfer.

(3)The discovery by the independent accountant or third-party contractor that trust account reconciliations have not been performed for two months after the end of any calendar month.

(4)The discovery by the independent accountant or third-party contractor of exception items in trust account exception reports, that remain uncorrected for two months after the end of any calendar month.

Notification pursuant to this subdivision may be accomplished by transmitting to the commissioner and Fidelity Corporation, in either electronic or paper form, copies of trust account reconciliation exception reports. Nothing

in this subdivision imposes any duty or obligation on an independent accountant or third-party contractor to Fidelity Corporation, members of Fidelity Corporation, or the commissioner.

(m)Nothing in this section shall be deemed to require a licensee to contract with a third party to reconcile trust account records.

§ 17406.1

Added by Stats. 1994, Ch. 496, Sec. 3. Effective January 1, 1995.

(a)Whenever the reports and financial statements required pursuant to subdivision (a), (b), or (c) of Section 17406 are to be reported upon or certified by an accountant other than the accountant reporting upon or certifying the licensee’s most recent reports or financial statements, the licensee shall furnish the commissioner with a written notice stating whether there was any disagreement with the former accountant on any matter in connection with the preparation of the most recent reports or financial statements reported upon or certified

by that former accountant. If there was any disagreement, the licensee’s written notice shall describe the reasons for the disagreement. The written notice shall be signed by the chief executive officer of the licensee. The licensee shall also request, in writing, that the former accountant furnish the licensee with a letter addressed to the commissioner stating whether the former accountant agrees with the statements contained in the licensee’s written notice. If the former accountant disagrees with any of the licensee’s statements, the former accountant’s letter shall explain the reasons for disagreeing with the licensee’s statements. The written notice of the licensee, along with the former accountant’s letter shall be filed with the commissioner no later than 30 days from the date of engagement of the new accountant.

(b)The written notice of the licensee required by subdivision (a) shall be considered a notice for purposes of Section

17702.

§ 17408

Amended by Stats. 2005, Ch. 257, second Sec. 2. Effective January 1, 2006.

(a)If any person subject to this division fails to make any report required by law or by the commissioner, the commissioner may immediately cause the books, records, papers, and affairs of said person to be thoroughly examined.

(b)The commissioner may

impose, by order, a penalty on any person who fails, within the time specified in any written demand of the commissioner, (1) to make and file with the commissioner any report required by law or requested by the commissioner, or (2) to furnish any material information required by the commissioner to be included in the report. The amount of the penalty may not exceed one hundred dollars ($100) for each day for the first five days the report or information is overdue, and thereafter may not exceed five hundred dollars ($500) for each day the report or information is overdue.

(c)If, after an order has been made under subdivision (b), a request for hearing is filed in writing within 30 days of the date of service of the order by the person to whom the order was directed, a hearing shall be held in accordance with the Administrative Procedure Act, Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code,

and the commissioner shall have all the powers granted under that chapter.

(d)If the person fails to file a written request for a hearing within 30 days of the date of service of the order, the order imposing the penalty shall be deemed a final order of the commissioner, and the penalty shall be paid within five business days.

(e)If a hearing is requested, the penalty shall be paid within five business days after the effective date of any decision in the case ordering payment to be made.

§ 17409

Amended by Stats. 2009, Ch. 140, Sec. 72. (AB 1164) Effective January 1, 2010.

(a)All moneys deposited in escrow to be delivered upon the close of the escrow or upon any other contingency shall be deposited and maintained in a noninterest-bearing demand or checking account in a bank, a state or federal savings bank, or a state or federal savings association or in a noninterest-bearing account subject to immediate withdrawal in an industrial loan company insured by the Federal Deposit

Insurance Corporation and approved to receive those moneys by the commissioner. Thereafter, these moneys may be deposited in an interest-bearing account in a bank, a state or federal savings bank, a state or federal savings association, an industrial loan company approved to receive those moneys by the commissioner, or a state or federal credit union, if the depositor is qualified for membership under the bylaws of that credit union, and the moneys are maintained separate, distinct, and apart from funds belonging to the escrow agent. Those funds, when deposited, are to be designated as “trust funds,” “escrow accounts,” or under some other appropriate name indicating that the funds are not the funds of the escrow agent.

Upon request of the commissioner, a licensee shall furnish to the commissioner an authorization for examination of financial records of any trust funds or escrow accounts, maintained in a financial institution, in accordance with the procedures set

forth in Section 7473 of the Government Code.

(b)A licensee engaged in the business of receiving escrows for deposit or delivery of the types specified in subdivision (c) of Section 17312 and of the types not specified therein shall maintain separate escrow trust accounts, for both types of escrow business in the same manner as provided in subdivision (a) of this section and Sections 17409.1, 17410, 17411, and 17411.1.

(c)Any agreement with a financial institution to establish a trust account pursuant to this section shall be accompanied by a letter from the licensee authorizing and requesting that the financial institution immediately notify the commissioner and Fidelity Corporation, in either electronic or paper form, when it becomes aware of either of the following:

(1)The closure of any account subject to this

section, other than to transfer the funds to another designated trust account at the same financial institution in the name of the escrow agent or the remittance of the funds to the Controller’s office for escheat purposes.

(2)The occurrence of any overdraft balance in an account subject to this section.

This subdivision does not impose any duty or obligation on a financial institution to Fidelity Corporation, members of Fidelity Corporation, or the commissioner.

§ 17409.1

Amended by Stats. 2000, Ch. 437, Sec. 6. Effective January 1, 2001.

(a)Each person subject to this chapter shall maintain separate escrow trust accounts for each licensed location. Transfers between accounts are prohibited except by the actual writing of a check from one escrow to the other, and by depositing the check for the account of, and the writing of a receipt for the escrow to which the funds are being transferred. Each transfer shall be properly supported and documented in escrow files by inclusion of escrow instructions executed by the principals authorizing the transfer.

(b)With regard to Internet escrow companies, transfers to trust accounts by commercial banks and from operating accounts to cover losses may be made through wire transfer. Receipts for all these transactions may be maintained in electronic form.

§ 17410

Amended by Stats. 1982, Ch. 497, Sec. 93. Operative July 1, 1983, by Sec. 185 of Ch. 497.

(a)Escrow or trust funds are not subject to enforcement of a money judgment arising out of any claim against the licensee or person acting as escrow agent, and in no instance shall such escrow or trust funds be considered or treated as an asset of the licensee or person performing the functions of an escrow agent.

(b)Interest paid or payable on funds deposited in escrow by a licensee are not subject to enforcement of a money judgment arising out of any claim against the licensee or person acting as escrow agent.

§ 17411

Amended by Stats. 1979, Ch. 475.

No person shall knowingly keep or cause to be kept any funds or money in any bank or state or federal savings and loan association under the heading of “trust funds” or “escrow accounts” or any other name designating such funds or money as belonging to the clients of any escrow agency, except actual escrow or trust funds deposited with such agency.

§ 17411.1

Added by Stats. 1982, Ch. 663, Sec. 11.

“Trust funds” or “escrow accounts” as used in Sections 17409, 17410, and 17411 shall include all funds required to be held by an escrow agent pursuant to a federal or state law, or requirement of a governmental agency.

§ 17414

Amended by Stats. 1994, Ch. 423, Sec. 2. Effective January 1, 1995.

(a)It is a violation for any person subject to this division or any director, stockholder, trustee, officer, agent, or employee of any such person to do any of the following:

(1)Knowingly or recklessly disburse or cause the disbursal of escrow funds otherwise than in accordance with escrow instructions, or knowingly or recklessly to direct, participate in, or aid or abet in a material way, any activity which constitutes theft or fraud in connection with any escrow

transaction.

(2)Knowingly or recklessly make or cause to be made any misstatement or omission to state a material fact, orally or in writing, in escrow books, accounts, files, reports, exhibits, statements, or any other document pertaining to an escrow or escrow affairs.

(b)Any director, officer, stockholder, trustee, employee, or agent of an escrow agent, who abstracts or willfully misappropriates money, funds, trust obligations or property deposited with an escrow agent, is guilty of a felony. Upon conviction, of an offense under this section or similar offenses specified in Chapter 4 (commencing with Section 470), Chapter 5 (commencing with Section 484), or Chapter 6 (commencing with Section 503) of Title 13 of Part 1 of the Penal Code, the court shall, in addition to any other punishment imposed, order the person to make full restitution, first to the escrow agent and then

to Fidelity Corporation, to the extent it has indemnified the escrow agent. Nothing in this section shall be deemed or construed to repeal, amend, or impair any existing provision of law prescribing a punishment for such an offense.

(c)Any person subject to this division who knows of a person’s involvement in an abstraction or misappropriation of money, funds, trust obligations, or property deposited with a licensed escrow agent shall immediately report the abstraction or misappropriation in writing to the commissioner and to Fidelity Corporation. No person shall be civilly liable for reporting as required under this subdivision, unless the information provided in the report is false and the person providing false information does so with knowledge and malice. The reports filed under this section, including the identity of the person making the filing, shall remain confidential pursuant to state law.

§ 17414.1