- Escrow companies are regulated by state law. Each state has a different governing body. For example, in California escrows are regulated by the California Department of Corporations. In Texas, escrows are regulated by the Texas Department of Insurance. However, the laws pertaining to disbursements are consistent in all 50 states. All escrows are required to set up, and maintain a separate trust account for the receipt of client funds and to disburse client expenses.
- Prior to closing a transaction, escrows prepare an estimate of settlement receipts and expenses and these are delivered to the buyers and sellers and their agents, if applicable. In a real estate transaction, this estimate is prepared on a HUD-1 statement, which is a federal form administered by the Department of Housing and Urban Development. This shows any disbursements that will be made by escrow at closing. Buyers and sellers must sign this estimate, which acknowledges the intended distribution of funds. At closing, escrow send out disbursements based on the HUD-1 statement.
- Escrow proceeds must be disbursed no later than 21 days after the receipt of funds. This is in accordance with Federal Law, which also administers certain real estate transactions. This refers to transactions that close escrow. This law allows escrows to reconcile the file and be certain that all expenses have been paid before disbursing the net proceeds to the seller. The law applies to the receipt of funds by escrow in a refinance transaction.
- Public escrows require an annual audit by a certified public accountant to verify the escrow's financial statements and trust account. The auditor will verify that all funds in the client accounts are accounted for and that all disbursements were properly recorded in the trust account.
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