August 16, 2004

Office of Financial and Insurance Services (OFIS) Commissioner Linda A. Watters has issued a bulletin advising mortgage brokers, lenders and servicers that they are responsible for ensuring that any escrow companies they hire to handle mortgage closings disburse the loan proceeds in accordance with applicable loan agreements.

“It also is OFIS’ position that mortgage loans are not ‘made’ until the loan proceeds are disbursed according to the loan agreements,” Watters said. “I am taking this action to protect consumers,” she added.

Watters issued the bulletin after OFIS was made aware of several recent incidents in which escrow companies failed to disburse mortgage loan proceeds in accordance with a mortgage loan agreement resulting in significant financial difficulties for both the consumer and the lender.
The term “escrow company” is an industry term. There is no licensing requirement in Michigan for escrow companies that perform typical mortgage closing and loan proceeds disbursement functions. In addition, mortgage lenders are not required by state law to use licensed entities, such as title insurance companies, to close mortgage loans.

“OFIS does not object to licensed or registered mortgage lenders contracting with escrow companies to provide typical mortgage loan closing services,” Watters said. However, to protect mortgage lenders and their customers, it also is the position of OFIS that:

• Mortgage lenders should perform reasonable due diligence to ensure that escrow companies with which they seek to do business are reputable, have sufficient and experienced staff, and can be expected to perform their responsibilities in accordance with applicable law and contractual agreements.
  
• Mortgage lenders should enter into a written contract with the escrow company to delineate the duties and responsibilities of the respective parties.
  
• Mortgage lenders should maintain adequate reserves or appropriate insurance to be used as proceeds for disbursement in the event an escrow company does not properly disburse loan proceeds or, in the alternative, assist affected consumers with the consumer’s rescission of the loan agreement.

Bulletin 2004-05-CF can be accessed online at the OFIS web site, www.michigan.gov/ofis, by clicking on Bulletins on the left side of the page. Any questions regarding the bulletin should be directed to:

Office of Financial and Insurance Services
Market Conduct Division
611 W. Ottawa Street
P.O. Box 30220
Lansing, MI 48909-7720
Phone (517) 373-7240
Toll-free (877) 999-6442