Washington State Department of Financial Institutions

Escrow Agent Memorandum No. 97-07ES

TO: All Escrow Agent Licensees

FROM: Mark Thomson, Assistant Director

SUBJECT: Fidelity Bonds and the Escrow Agent Registration Act.

Recent events have raised everyone’s awareness of, and concern with, the bonding requirements of the Escrow Agent Registration Act, chapter 18.44 RCW. Given this increased concern, I felt it was appropriate to write this memorandum clarifying the Department’s position.

First, I wish to emphasize that the Department does not endorse any particular product. We are often asked to provide an opinion as to whether a particular product or service meets the requirements of a statute, and we do offer such opinions.We never endorse a product.

Second, while the department has several concerns regarding the current bonding requirement and the way companies are trying to comply with it, no decision has been made to stop accepting bonds. Our desire is to work through these issues in a business-like way and avoid a circumstance where companies are unable to purchase a bond to meet the requirements of the law. In the event that a decision is made to stop accepting certain types of bonds, you will be given ample notice of this change in policy, in writing and on Department letterhead.

At the current time, the Department is requesting a copy of your bond during the audit so we can include it in your licensing file. This will allow us to understand the scope of our concerns. At the same time, we are initiating contacts with the insurance industry to determine what products are available and at what price.

Our main concern with the current bonding requirement is that it is not operating to protect consumers in the way intended by the Act. The law requires that the fidelity bond cover "each corporate officer, partner, escrow officer, and employee of the applicant…" It is our understanding that some companies currently have bonds which have riders explicitly denying coverage to owners, even if the owner is a corporate officer. Such a bond would not be in compliance with the statute.

In addition, it is our understanding that some bonds have deductibles, which is common for fidelity bonds. There is no statutory provision which would allow a deductible. In the event a company becomes insolvent and conversion from the trust account occurs, (the most likely scenario), a deductible inevitably leaves consumers without compensation in the amount of the deductible. This is unacceptable, since the whole purpose of the bond is to protect consumers in the event of conversion from the trust account.

It is apparent that a fidelity bond is not the appropriate instrument to protect consumers from conversion of trust funds by the owner of a company. A surety bond would provide the appropriate protection, but may not be feasible economically. For these reasons, the Department is working with a task force of the escrow commission and insurance industry representatives to identify possible alternatives.

Our comments on these matters, both in public and in private, are intended to let licensees know that the status quo cannot continue, but that we are actively working to find a solution that will work for all. I encourage your participation in meetings of the Escrow Commission and within the Escrow Association of Washington to help us identify such a solution. I am optimistic that we can work together to find a solution which improves consumer protection yet remains affordable for the escrow licensee.