Demotech's report on defalcation aka escrow theft

Several years ago I went to Harrisburg and met with representatives of the insurance department.  There were a few things on the agenda.  High on my list was a warning about a potential tsunami of defalcations as the mortgage credit crisis, then just beginning, evolved.

I knew from my experience in continuing education classes and that full reconciliation of escrow and other important controls were being ignored by agencies.  It was obvious to me that things looked normal to the outside world only because so much money ran through the accounts. Deficits by theft or mismanagement were covered by the constant flow of new money.  Once the flow of funds slowed or stopped with the expected steep decline in business, we would see widespread defalcations.

This is a problem in the title insurance industry.  It's one more thing for real estate agents, lenders, and consumers to keep in mind when choosing to work with a title insurance agency.  With that in mind I tried to come up with some observations that could be made from the outside looking in to try to determine if you are working with a title agent who responsibly manages their escrow funds.  This is pretty hard because from the outside I think you can only observe a philosophy or structure controlling the collection and disbursement of funds.

So, you want to be working with a title agency who requires "good funds" coming into escrow.  That means they want a cashiers check or wire for all but nominal amounts.  You also want to be working with a title agency who verifies that they have all funds in hand before disbursing a transaction.  For instance, let's say a buyer's mortgage company hasn't yet funded the transaction and the parties are sitting at the closing table.  The pressure is high, they want to move, the real estate agent wants their commission.  All eyes are on the title agent.  Does the title agent hold their ground and say they cannot disburse until they have the lender's funds or do they take a chance and disburse?

The "easy" title agency, the one who takes a check that isn't "good funds" or goes ahead with a disbursement when they do not have funds in hand, is the title agency who also probably doesn't fully reconcile their escrow account.  They don't take the responsibility of guarding other people's money seriously.  They may even be living off of the escrow.  So be careful.

Here's the Demotech report.

I'd like to know who did the underwriter audits.

In the following press release Acting United States Attorney Terrence Berg announced that a 45 year-old Macomb man who embezzled over $2.2 million while working as a bookkeeper for a now-defunct Michigan title company was sentenced to 37 months in federal prison on 9/18/2008. Joined in the announcement was FBI Special Agent in Charge Andrew G. Arena.

Eric McAlpine was an independent contractor performing bookkeeping functions for American Title Works, a title agency with offices in Clinton Township, Livonia and Southfield. Over the course of five years, McAlpine stole checks totaling over $800,000 that were made payable to American Title Works and funded by buyers and sellers of real estate, and/or from lending institutions that granted loans to buyers. McAlpine also stole checks totaling almost $1.5 million that were drafted from American Title Works escrow accounts. As a result of McAlpine’s embezzlement from its escrow accounts, American Title Works went out of business resulting in the loss of employment for its almost 30 employees.

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