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Bulletin No. 2004-05-CF

Mortgage Lenders use of Escrow Companies to perform mortgage closing and disbursement of proceeds

Issued and entered this 16th day of August 2004
By Linda A. Watters, Commissioner

The Michigan Office of Financial and Insurance Services (OFIS) is aware that mortgage lenders licensed or registered pursuant to the mortgage brokers, lenders, and servicers licensing act (MBLSLA), 1987 PA 173, MCL 445.1651 et seq., the secondary mortgage loan act (SMLA), 1981 PA 125, MCL 493.51 et seq., and the consumer financial services act (CFSA), 1988 PA 161 of 1988, MCL 487.2051 et seq. occasionally use the services of "escrow companies" to close mortgage loans and disburse loan proceeds. The term "escrow company" is an industry term and does not denote a title insurance company licensed and regulated pursuant to the Insurance Code of 1956, 1956 PA 218, MCL 500.100 et seq.

These escrow companies, however, perform services typically associated with mortgage loan closings performed by title insurance companies including the retaining of mortgage loan funds in escrow, the preparation of mortgage loan closing documents, conducting the closing of mortgage loans, and the disbursement of mortgage loan proceeds in accordance with a loan agreement.

There is no licensing requirement in Michigan for escrow companies that perform typical mortgage closing and loan proceeds disbursement functions. And there is no statutory requirement in Michigan for mortgage lenders to use licensed entities, such as title insurance companies, to close mortgage loans.

OFIS is aware of several recent instances in which escrow companies have 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. Consumers can suffer severe and nearly immediate financial difficulties when mortgage loan proceeds are not disbursed in accordance with loan agreements including multiple loan commitments when one or more loans should have been paid with loan proceeds. Mortgage lenders can also suffer significant financial difficulties when loan closings are not completed but funds have been transferred to an escrow company.

Section 22(k) of the MBLSLA, MCL 445.1672, provides that it is a violation of the statute to:

Fail to make a mortgage loan in accordance with a written commitment to make a mortgage loan issued to, and accepted by, a person when the person has timely and completely satisfied all the conditions of the commitment before the expiration of the commitment.

Section 24(2)(h) of the SMLA, MCL 493.74, contains a substantively identical provision.

For these reasons and others, it is the position of OFIS that:

  • Mortgage loans are not "made" until the loan proceeds are disbursed in accordance with the applicable loan agreements.
  • Mortgage lenders are responsible to ensure that mortgage loan proceeds are disbursed in accordance with applicable mortgage loan agreements.

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

  • Mortgage lenders should perform reasonable due diligence to ensure 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.

Any questions regarding this bulletin should be directed to:

Office of Financial and Insurance Services
Market Conduct Division
611 West Ottawa Street
P.O. Box 30220
Lansing, Michigan 48909-7720

Phone: (517) -373-7240
Toll Free: (877) 999-6442