Do Not Accept An Assignment Of Proceeds

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 we should not accept assignment of proceeds instructions.

The 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.

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 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. 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.

I cannot help but wonder if the escrow officer had stuck to Company Policy and Procedure would she have closed this fraudulent deal? 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.

Settlement Agent Assists Investor In Defrauding The IRS

Foreclosures are just one of many challenges facing our country in this economic crisis. People are not only failing to pay their mortgages, but they have also fallen short on many other obligations. Paying taxes is one of them. It has become common for an IRS lien to appear on a title report. The IRS, however, is not in the business of owning real estate so they regularly work with taxpayers to release the property from the lien. They do not discharge the lien altogether, but examine the transaction and often release the property when they can determine there will be no proceeds because the property is over–encumbered. Read on to find out how one settlement agent was duped into assisting a real estate investor trying to defraud the IRS.

One of our Las Vegas offices opened a sale transaction. The seller was a real estate investor who purchased the property only a few months earlier. Title was held as John Doe, an unmarried man. When the title report came in it showed the property was encumbered by only one deed of trust along with a tax lien. The tax lien was against a limited liability company (LLC) and its members, one of whom was our seller Doe. The settlement agent, Betty, contacted Doe to inform him she needed to order a demand from the IRS.

He explained the lien was against the LLC, was not his personal obligation and should therefore not affect his sale. Betty explained she could not close without a release of lien for this property from the IRS. She asked Doe if she should proceed with ordering a demand from the IRS or if he would be contacting them to negotiate a release of the property only. Doe told her he would take care of it.

A couple of weeks later Doe asked Betty to update the title report, as there should be a second deed of trust of record. He also requested a HUD–1 Settlement Statement showing a payoff of both loans resulting in no proceeds to him. He planned on submitting the HUD–1 to the IRS to induce them to release the property from the tax lien. Betty thought this was odd and contacted management.

Unbeknownst to Betty – Jane, another settlement agent within the Company, handled the initial purchase of this property for Doe. Jane contacted management about the IRS lien, as she had heard the property was under contract and now in escrow with another settlement agent within the Company. Jane was curious about the IRS lien since it was against the LLC and not Doe individually, and did not appear on her title report when Doe acquired the property.

Since both calls came at the same time, management reviewed the updated title report and documents. The second deed of trust had been prepared by someone in the Company and notarized by Jane. Management noticed the document was dated two months earlier, when Doe purchased the property, yet it was recorded only a few days ago. When management inquired about the document, Jane explained Doe had come into her office and said he forgot to have her prepare and record a deed of trust in favor of his investor on the purchase. He asked her to help him out, and she allowed Doe to back–date the deed of trust and she back–dated the notarial certificate. Jane gave the original to Doe who promptly recorded it.

Doe was contacted by management who told him they would not be providing him with an updated title report reflecting this fraudulent deed of trust. They made it clear to Doe Our Company would not assist in defrauding the IRS. Fortunately they were able to convince Doe he was headed down the wrong course and he did not proceed.

Settlement agents are considered the last honest people in a real estate transaction. The IRS certainly counts on it. When the IRS agrees to provide a release in order to allow a taxpayer to sell their over–encumbered property, their approval is conditional. It is conditioned upon receipt of a HUD–1 Settlement Statement confirming the seller received no proceeds. The IRS knows, per Title 18 U.S. Code Section 1001 and 1010, "It is a crime to knowingly make false statements to the United States on this or any other similar form. Penalties upon conviction can include a fine and imprisonment." Upon confirmation from the settlement agent the IRS prepares and records their release.

Moral Of The Story
Jane's behavior is inexcusable. Settlement agents should never allow a document to be back–dated in their presence. Settlement agents who are also commissioned notaries should never participate in back–dating a notarial certificate. Lastly, settlement agents should never prepare courtesy documents.

The Devil Is In the Details

An investor opened several short sale transactions, acting as the buyer in each. One–by–one the short sale transactions began to cancel for one reason or another, leaving the escrow branch disgusted with the amount of work they put into each one without remuneration. The next deal in line came extremely close to closing – until the assistant escrow officer discovered the "devil in the details."

After preparing numerous estimated settlement statements and providing a preliminary report, Chicago Title's New Communities office in Riverside, Calif. finally received a short pay letter from Bank of America. Bank of America was the short pay lender on the first and second loans. They included the shortage amounts they would be willing to accept on a single short pay letter. The bank was due almost $490,000 but they were willing to accept $260,000. The transaction was an all–cash short sale in the amount of $280,000. The closing documents were drawn and executed by the buyer and seller. All that remained for the transaction to be complete was the buyer's down payment and closing costs.

The buyer was an entity by the name of Willowbrook Financial, Inc. and the buyer assured a wire would be forthcoming. The seller was a Ronald and Michelle Aksland. Maggie Vega, an assistant escrow officer, was leery due to all the previous transactions that had fallen apart just prior to closing with Willowbrook but, 'lo–and–behold, the wire transfer arrived at the bank! Maggie received notification from the accounting center of funds wired in the amount of $280,000. Maggie reviewed the incoming wire and noticed the funds came from an account in the name of Gary Aksland. She called the investor/buyer to find out who Gary Aksland was and why he was depositing the funds to close. The investor told her Gary was the current owner's father.

Maggie reviewed the short pay agreement issued by Bank of America and found the following condition, "#2. The approved buyer(s) is/are WILLOWBROOK FINANCIAL, INC. RICHARD MERCADO…" – not Gary Aksland. Maggie escalated the file to her escrow officer, Elvia Salaz. Elvia contacted the short sale negotiator at Bank of America, because there was no arm's length transaction affidavit attached to the short pay agreement and there was no condition for an arm's length transaction contained in the agreement. Elvia explained the wire was received from Gary Aksland, and the short sale negotiator said, "Don't close!" The short sale negotiator stated the arm's length affidavit was not attached to the short pay letter because it had been signed in advance by the buyer and seller, and submitted with the short sale negotiation package. Clearly the principals had lied.

Elvia contacted National Escrow Administration, who also insisted the transaction could not be considered arm's length if the owner's father was putting up the funds to purchase. The national escrow administrator insisted on either (1) Bank of America approving the owner's father as the new buyer; or (2) we resign as escrow holder and not close.

Elvia elected to resign. As a result, the calls started pouring into the office. The listing broker was the first to call. When he insisted his real estate firm would never be a party to any fraudulent transaction and demanded to know why we were resigning, he was informed the wire transfer came from the owner's father. He was silent for a moment, then he apologized and hung up.

The investor/buyer also called and when we explained our reason for resignation, he only asked that the wire transfer be returned to the father, which we promptly did.

Maggie's attention to detail and recognizing the wire was received from a third party saved the Company from closing on a transaction that was clearly not arm's length. For her heroic performance, she has been rewarded $1,000 and given a letter of recognition from the Company.

Moral Of The Story
Since the buyer in this transaction did not put up the money to close, the transaction is not arm's length. Had we closed, the short pay lender could have realized this and rescinded their short pay letter – then kept their lien in full force and effect to foreclose. By not closing on this transaction, Maggie saved the Company from a potential claim of $280,000 from the insured owner and/or the hassle of having to unwind this transaction.