WSR 04-19-158




[ Filed September 22, 2004, 11:14 a.m. ]

     Original Notice.

     Preproposal statement of inquiry was filed as WSR 03-23-120.

     Title of Rule and Other Identifying Information: Escrow Agents: Chapter 18.44 RCW, new rule WAC 208-680E-025, regarding periodic reports; amending WAC 208-680F-020, concerning permissible securities for purposes of RCW 18.44.201 and WAC 208-680A-040 Definitions.

     Hearing Location(s): Department of Financial Institutions, 150 Israel Road S.W., Room 220, Olympia, WA 98501, on October 26, 2004, at 9:00 a.m.

     Date of Intended Adoption: October 27, 2004.

     Submit Written Comments to: Andrew Ledbetter, Securities Division, P.O. Box 9033, Olympia WA 98507-9033, fax (360) 704-6970, e-mail, by October 19, 2004.

     Assistance for Persons with Disabilities: Contact Darlene Christianson by October 21, 2004, TDD (360) 664-8126 or (360) 902-8760.

     Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: A new rule concerning periodic reporting will help the division monitor compliance with chapter 18.44 RCW and the regulations adopted thereunder. Amendments to WAC 208-680F-020 and 208-680A-040 are needed to clarify the types of securities that may be substituted for the errors and omissions policy required by RCW 18.44.201.

     The legislature intended that chapter 18.44 RCW be interpreted and administered to protect escrow agent clients. "When read in its entirety, the act reflects a legislative intent to protect clients of escrow agents." Estate of Jordan v. Hartford Accident & Indem. Co., 120 Wn.2d 490, 497 (1993). To that end, under RCW 18.44.410 the director "has the power and broad administrative discretion to administer and interpret this chapter to facilitate the delivery of services to citizens of this state by escrow agents." The director believes adoption of these rules is consistent with that intent and within the power and discretion granted to her.

     WAC 208-680E-025 Quarterly reports: This new rule would mandate that escrow agents prepare and file quarterly reports. The reports would be due within thirty days following the end of each fiscal quarter. Failure to comply would be grounds for taking action to deny, suspend, decline to renew, or revoke an escrow agent's license.

•     Quarterly reports will allow DFI to monitor escrow agents more effectively and efficiently.

•     Under RCW 18.44.121, the director is required to efficiently administer the statute such that the fees collected from licensees pay for the costs of administration. There are approximately two hundred escrow agents, most of which are small businesses. Mandatory reports, while not a substitute for on-site inspections, will allow the director to better monitor the industry at a minor cost to the industry and DFI.

•     Many escrow agents have been voluntarily submitting quarterly reports for several years. The old reports are cumbersome to complete and review and they require a great deal of supporting documentation. This rule would make reporting mandatory, but the new required report will be simple and much easier to complete.

•     A draft copy of the new report form was shared with the attendees of the February 10, 2004, and April 6, 2004, Escrow Commission meetings, who commented that it appeared to be a much easier form to complete. Several agents have commented on the draft form. Those comments have been considered and incorporated as appropriate in the new form.

•     The new report includes sections concerning trust account administration and reconciliation, operations (including changes in financial condition, legal proceedings, changes in ownership, locations of offices and records, and insurance coverage), and certain results of operations. In response to privacy concerns, the response to certain questions is optional.

•     The new report does not require escrow agents to keep any records beyond those already required by statute and existing regulations.

•     The new form has been implemented on a voluntary basis for the quarter-ended March 31, 2004. Several escrow agents have commented to the division that the revised form is much easier to use.

     WAC 208-680F-020 Errors and omissions policy -- Securities alternative and 208-680A-040 Definitions: The proposed amendments to these sections would clarify the types of securities that may used in lieu of the errors and omission ("E&O") policy required by RCW 18.44.201. Under that section, an escrow agent must maintain a $50,000 E&O policy or deposit $50,000 in cash or securities in an approved depository. The current definition of "securities" in WAC 208-680A-040 allows "any stock, treasury bill, bond, debenture or collateral trust certificate tendered in lieu of an errors or omissions policy." In addition to being overly broad, neither this definition nor WAC 460-680F-020 [208-680F-020] explicitly prohibits depositing securities issued by affiliates of the escrow agent.

     The current rules virtually allow any security, regardless of quality, volatility, or liquidity, to be substituted for an E&O policy. This compromises the protection of escrow agent clients. Under the proposal, the definition of "securities" in WAC 208-680A-040 would [be] stricken and WAC 208-680F-020 would be amended to require that any securities deposited in lieu of an E&O policy meet the definition of "investment securities" under chapter 208-512 WAC. Those regulations, which pertain to the type of securities in which banks and trust companies may invest, define "investment securities" to generally include certain government obligations and certain investment grade corporate securities. By similarly limiting the securities that may be used by an escrow agent to satisfy RCW 18.44.201 to such high-quality obligations, escrow agent clients will be better protected.

     To the division's knowledge, only one currently licensed escrow agent relies on WAC 208-680F-020. That agent, which maintains a $50,000 cash deposit in an approved depository, would not be impacted by the proposed changes to the rule.

     Statutory Authority for Adoption: RCW 18.44.410.

     Statute Being Implemented: Chapter 18.44 RCW.

     Rule is not necessitated by federal law, federal or state court decision.

     Name of Proponent: Department of Financial Institutions, Securities Division, governmental.

     Name of Agency Personnel Responsible for Drafting: Andrew Ledbetter, 150 Israel Road S.W., Olympia, WA 98501, (360) 902-8760; Implementation: Helen P. Howell, 150 Israel Road S.W., Olympia, WA 98501, (360) 902-8760; and Enforcement: Martin Cordell, 150 Israel Road S.W., Olympia, WA 98501, (360) 902-8760.

     No small business economic impact statement has been prepared under chapter 19.85 RCW. The proposal does not impose more than minor costs on business.

     RCW 34.05.328 does not apply to this rule adoption. The Department of Financial Institutions is not one of the agencies listed in RCW 34.05.328.

September 20, 2004

Helen P. Howell



WAC 208-680E-025   Quarterly reports.   (1) Each escrow agent shall file with the director, within thirty days following the end of each fiscal quarter, a report concerning its operations and trust account administration and reconciliation. The report shall be on a form provided by the director and shall include exhibits as specified therein.

     (2) As to trust account matters, the designated escrow officer of the escrow agent shall certify under penalty of perjury, in a manner consistent with RCW 9A.72.085, that he or she has reviewed the report and any exhibits filed with it and that the information contained in the report and in any exhibits is true and correct. The chief executive officer or chief financial officer of the escrow agent, or other knowledgeable person acceptable to the director, may certify the information on the report not related to trust account matters.

     (3) Failure to file the report within the time period specified in this rule shall be considered a violation of RCW 18.44.430.



AMENDATORY SECTION(Amending WSR 01-08-055, filed 4/2/01, effective 5/3/01)

WAC 208-680F-020   Errors and omissions policy -- Securities alternative.   ((Each licensed escrow agent shall obtain and keep in effect an errors and omissions policy providing coverage in the minimum aggregate amount of $50,000 or, alternatively, cash deposit or securities in the principal amount of $50,000.)) (1) Securities used as an alternative to an errors and omissions policy shall be effectively delivered to the director((. For the purpose of fulfilling the requirements of chapter 18.44 RCW and these rules,)) and the escrow agent shall execute an irrevocable assignment and any supporting documentation as required by the director.

     (2) Only those securities that meet the definition of "investment securities" under chapter 208-512 WAC may be used to satisfy RCW 18.44.201. Securities ((which are stocks or other interest in)) issued by the registered escrow ((agency)) agent or its affiliates are not acceptable securities for the purposes of fulfilling the requirements of ((chapter 18.44 RCW and these rules)) RCW 18.44.201.

[Statutory Authority: RCW 18.44.410. 01-08-055, § 208-680F-020, filed 4/2/01, effective 5/3/01. 96-05-018, recodified as § 208-680F-020, filed 2/12/96, effective 4/1/96. Statutory Authority: RCW 18.44.320. 94-04-050, § 308-128F-020, filed 1/31/94, effective 3/3/94; 88-19-016 (Order PM 763), § 308-128F-020, filed 9/9/88; 79-07-009 (Order RE 126), § 308-128F-020, filed 6/7/79. Statutory Authority: RCW 18.44.360. 78-08-027 (Order RE 124, Resolution No. RE 124), § 308-128F-020, filed 7/14/78; Order RE 122, § 308-128F-020, filed 9/21/77.]


AMENDATORY SECTION(Amending WSR 01-08-055, filed 4/2/01, effective 5/3/01)

WAC 208-680A-040   Definitions.   The terms and definitions used in chapter 18.44 RCW have the same meanings given therein when used in these rules.

     "Third party to the transaction" means those persons providing professional services necessary for the closing of the escrow. "Third party to the transaction" includes, but is not limited to: Real estate brokers, lenders, mortgage brokers, attorneys engaged to review the escrow, tax facilitators or underlying lien holders.

     "Applicant" means any person applying for an escrow officer license or any person or group of persons applying for an escrow agent license. The term "applicant" includes the officers and controlling persons of the applicant, as well as any escrow officer seeking to become an escrow agent's designated escrow officer or designated branch escrow officer.

     "Cash deposit" means funds deposited, in lieu of an errors and omissions policy, in an account in a recognized Washington state depository which account is maintained separate and apart from the escrow agent's own funds. The funds shall be deposited in such a manner to permit only the director to withdraw from the principal amount. The escrow agent may withdraw any interest accumulated to the account.

     "Closing" means the transfer of title of real or personal property or execution of a real estate contract whichever event occurs first.

     "Completed escrow" means a transaction in which the escrow agent has fully discharged its duties to the principal parties to the transaction. This includes obtaining all necessary documents, obtaining required signatures, completing reconveyance or title elimination, and disbursing funds to the principal parties to the transaction, the agents to the transaction, and to third parties to the transaction as agreed by the principal parties in the escrow instructions or on the settlement form (such as HUD1 or HUD1A).

     "Conversion" means an unauthorized assumption and exercise of the right of ownership over moneys, property, or things of value belonging to another, to the alteration of the condition of, or the exclusion of the owner's rights to such moneys, property, or things of value. It includes any unauthorized act which deprives an owner of his/her property permanently or for an indefinite time, including but not limited to theft, embezzlement, forgery, swindling, and unauthorized control.

     "Escrow instructions" are the instructions, signed by the principal parties to the transaction that identify the duties and responsibilities of the escrow agent in carrying out the escrow, that identify the thing or things of value held by the escrow agent and the specified condition or set of conditions under which the thing or things of value are to be transferred.

     "Investigation" means an examination undertaken for the purpose of detection of violations of chapter 18.44 RCW, and these rules or securing information lawfully required under chapter 18.44 RCW, and these rules. The director or his or her designee may make private or public investigations.

     "Officers" of the escrow agent shall include the president, secretary, treasurer, vice-president, and any other persons with control over management decisions of the escrow agent.

     "Overdue instrument" means a negotiable instrument that is overdue as defined in RCW 62A.3-304.

     "Permanent record" means any record required to be kept under RCW 18.44.400 for a period of six years from the completion of the escrow transaction.

     "Principal parties" means the buyers and sellers in a purchase transaction, and the borrower in a refinance transaction.

     "Reconveyance" means an instrument used to transfer title from an individual holding such title in trust to the equitable owner of real estate, when title is held as collateral security for a debt.

     (("Securities" means any stock, treasury bill, bond, debenture or collateral-trust certificate tendered in lieu of an errors and omissions policy. It does not mean or include any insurance or endowment policy, annuity contract or letter of credit.))

     "Split escrow" means a transaction in which two or more escrow agents act to effect and close an escrow transaction.

     "Transfer of title" occurs at the time the seller executes a deed or bill of sale and such is delivered to the purchaser or recorded.

     "Trust" means a fiduciary relationship whereby a thing of value is delivered to an escrow agent with the intention that such thing of value be administered by the escrow agent for the benefit of the principal parties to the transaction.

     "Trust account" or "trust bank account" means a bank account holding funds of any party to the transaction.

     "Unclaimed funds" means any funds that are abandoned under the Uniform Unclaimed Property Act, chapter 63.29 RCW.

[Statutory Authority: RCW 18.44.410. 01-08-055, § 208-680A-040, filed 4/2/01, effective 5/3/01. Statutory Authority: RCW 42.320.040 [43.320.040] and 18.44.320. 96-21-082, § 208-680A-040, filed 10/16/96, effective 11/16/96. 96-05-018, recodified as § 208-680A-040, filed 2/12/96, effective 4/1/96. Statutory Authority: RCW 18.44.320. 94-04-050, § 308-128A-040, filed 1/31/94, effective 3/3/94; 88-19-016 (Order PM 763), § 308-128A-040, filed 9/9/88; 79-07-009 (Order RE 126), § 308-128A-040, filed 6/7/79; Order RE 122, § 308-128A-040, filed 9/21/77.]

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