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Safe Escrow- A Managed and Secure Disbursement Process
A Value Proposition for all Transaction Partners
The PCN/Safe Escrow solution (www.pcnsafeescrow.com) (“SES”) substantially reduces
the risk of defalcation or misappropriation of funds by removing the need for title or
settlement agents (“Agents”) to maintain an escrow operation for funding purposes. SES is
fully transparent to Agents as orders are processed, and complements current Agent
workflows. Likewise, SES provides title underwriters with the ability to view every file,
every day, of every participating agent from the underwriter home office or other audit
location. The same transparency can be afforded to lenders (or warehouse lenders) to allow
for superior levels of file management and added security for funding. Title underwriters’
decision to implement the SES process with moderate to small Agents will support and
assist Agents with their ability to meet best practices. Further, with all lenders being
pressured by CFPB regulations, SES will allow title underwriters to better meet lender
demands for more stringent control of Agent functions. Finally, the cost of using SES is
comparable to the cost of operating an internal escrow department.
Agents have articulated concern over loss of control over process and reduced profit as a
result of using SES. However, a full analysis of the accounting of a standard transaction
(discussed below) demonstrates that such fears are unfounded, and that outsourcing the
disbursement function to a qualified third-party business partner, such as SES actually
results in no reduction of margin, even as it eliminates the risks associated with
disbursement.
OVERVIEW
The mortgage marketplace continues to experience uncertainty: The January 2014
implementation of the CFPB regulations for lenders has resulted in a lack of clarity within
the title underwriter community concerning the scope of lenders’ requirements of the title
industry going forward. This lack of clarity is especially true for regional underwriters.
Lenders are making decisions concerning the new closing disclosure and other
corresponding duties. Since the CFPB puts all the accountability on lenders, the
marketplace anticipates more conservative lender guidelines for future operations. It is
rumored that lenders will refuse to fund certain categories of title agents. Details as to how
lenders intend to categorize Agents remain unclear at this time.
CFPB requires lenders to fully investigate and maintain control of all of their outsource
partners. Risk, and/or the mitigation of risk, is an essential consideration for all lender
initiated dialogue with all business partners, and it is anticipated that investors will demand
unprecedented levels of risk management. The title insurance industry is no exception to
these requirements and the rules will certainly apply to the manner in which independent
Agents deal with escrow management.
Agents and title underwriters, are but two of the numerous participants in every mortgage
transaction, though the roles assumed by Agents and their underwriters may involve the
greatest degrees of risk in a given transaction because they are the issuers of insurance and
the stewards of the escrow accounts; consequently, risk mitigation through enhanced
security of escrow money will be a focal point.
Specific to the problem facing title underwriters and their Agents who are disbursing funds
is the lack of a controlled, insured process with audit transparency. Employing individuals
with limited-to-no experience in accounting practices and who are not always bonded or
insured invites risk. Smaller Agents generally do not have adequate separation of duties
practices and agency owners often actually disburse loans, which voids most fidelity
insurance policies. To date, title underwriters, who carry most of the risk, have relied on
their audit processes to detect Agent escrow fund mismanagement or misappropriation,
and to take corrective action (including terminating agency relationships) before incurring
significant losses. However, despite efforts, title underwriters have sustained hundreds of
millions of dollars in losses in past years; the audit processes currently in place have
proven to be insufficient and/or ineffective.
Small and moderately sized Agents pose the greatest risk for errors, misappropriation, or
even defalcation. These Agents do not employ the most current operating tools (e.g.,
positive pay, electronic bank reconciliations, etc.); neither have they implemented sound
accounting and cash management controls, primarily due to inexperienced staff or capital
restrictions. Similarly, as a result of limited resources, title underwriters have scarce
ability to audit these Agents frequently enough. Currently, there is no universal method of
providing a title underwriter with possible irregularity alerts, and underwriters have no
transparency with specific transactions. Software programs are available that provide
information about transactions after they are completed, which is useful for only
experienced Agents; inexperienced agents tend to not have sufficient knowledge or
expertise to utilize the information provided by such software programs.
From the Agents' prospective, the outsourcing of time consuming and costly escrow
management responsibilities to a secure service partner should permit more time and
money to promote their services and develop business.
As a result of all of these concerns, the title industry is in need of a controlled operational
process that provides experienced accounting management, sophisticated technology, and
verifiable checks and balances regarding the disbursement of escrow funds, all while
minimizing the risk of title agents in the funding of mortgage transactions.
SES provides the marketplace with such a solution. SES combines proven processes and
sophisticated available banking capabilities with a customized proprietary web portal to
provide a unique and transparent funding system. SES delivers its services in a seamless
fashion, ensuring that title agents retain control over their customer relationships and that
all parties (including the title underwriter and the lender) have opportunity at continual
visibility of relevant data. Additionally, SES provides the operational flexibility required
by the Agent community, including the ability to print checks locally, even at the closing
table.
SES’s mission is to provide centralized control of the funding process with a unique value
proposition that: 1) reduces risk for title underwriters and Agents; 2) decreases the internal
cost Agents currently incur and transfers a portion of the risk to an outsourced service
partner, with costs that potentially can be “passed through” on the HUD; and 3)
dramatically condenses audit obligations for title underwriters, while providing file-by-file
transparency. SES empowers Agents with technology that allows local execution of
transactions, while centralizing escrow management, which satisfies Best Practices
standards.
SES provides specialized value to the various participants in a real estate transaction.
The Title Underwriter
The risk title underwriters face of Agent defalcation or misuse of escrow funds is not new,
and underwriter executives have verified and reaffirmed in discussions the absolute need
to better control the risk of defalcation. The forced consolidation of Ticor Title Insurance
Company and Fidelity National Title (in the late-1980s) and the sale of Chicago Title in
the mid-1990s were influenced, in part, by large Agent defalcations. More recently,
Attorney’s Title of Florida was required to enter into a joint venture with Old Republic due
to a large number of Agent defalcations. Additionally, regional title underwriters such as
Southern Title and New Jersey Title were required to cease operations due, in part, to
sizeable Agent defalcations. Lastly, just this year, a title agency operating in sixteen states
and owned by a law firm perpetrated a fraud scheme that reportedly exceeded $40M and
forced Fidelity National Title to assume control of the operation.
SES provides the industry with an independent solution that meets its needs in sharply
reducing the risk of defalcation. Smaller regional title underwriters may have the most
need for SES, simply because they maintain smaller reserves than the four major title
companies, and it is more difficult for a regional underwriter to sustain a major
defalcation.
Title underwriter considerations are as follows:

Risk Mitigation –By assigning the disbursement of loan proceeds to SES, an insured
independent processing manager, title underwriters dramatically reduce the risk of escrow
manipulation or theft. SES escrow accounts are managed independently and files are
segregated by Agent. The use of superior technology allows title underwriters and Agents
to audit balanced escrow accounts in any customized fashion. The major thread of
defalcation is all but eliminated with the adoption of the SES process. Also, SES allows
for Agents to comply with Best Practices, thereby helping Agents to remain viable
participants in the mortgage marketplace. The security of knowing a payoff will be made
timely, with no exception, is invaluable to underwriters. SES has a systemic permissions
process that assures only approved personnel can handle funds and that there is managed
separation of duties in compliance with Best Practice standards.

Cost Shifting – SES converts the cost of managing the disbursement process from
fixed to variable, giving both title underwriters and Agents a more flexible model. SES
eliminates the need for title underwriters to undertake costly development and capital
investment to create their own centralized funding solution to support lender demands.
Further, because SES can provide title underwriters with their remittance at the time of
funding, underwriters enjoy an immediate improvement in cash flow.

Reduced Audit Costs and Increased Audit Coverage – Title underwriters are able to
perform desk audits of individual Agent activity through the system online and perform
centralized audits of SES, thereby avoiding the cost of auditing individual Agents. Desk
audits can include pre-set alerts for unusual activity such as: 1) payments to related parties
2) delays in clearing of recording fees; and 3) repeated payments to the same party. Title
underwriters are able to quickly identify problems and focus audit resources on files and
Agents with the highest potential for such problems. SES allows for a series of approved
“permissions” and “notifications,” which enables underwriter participation and input into
viewing Agent activity.
Title Agents
Title agents are under pressure currently to meet new standards per Best Practices and
CFPB regulations, which are being forced on their lender partners.
Some title underwriters are terminating contracts of smaller Agents, as the costs associated
with managing these relationships are exceeding the premiums generated. The major title
underwriters are also driving business to direct operations for greater profits, making
smaller Agents less profitable and/or forcing small and moderate sized Agents out of
business.
Loan production estimates for 2015 indicate modest increases over 2014. SES allows
Agents to move a fixed cost (internal personnel, banking, and insurance fees) to a variable
cost, a sensible way to address uncertain, inconsistent business cycles. Likewise, charges
for escrow account reconciliation are eliminated from Agents’ business expenses. Finally,
because the disbursement service fee can often be placed on the “HUD,” or its successor,
the “Closing Disclosure,” as a pass-through cost (state specific), Agents’ funding expenses
may be reduced.
There is a substantial reduction in risk for the agency owner/operator by removing the
escrow function from the agency’s internal operation. This value proposition applies to all
Agents, but it is more important for the small-to-modest sized entities. Many defalcations
occur when the honest owner is absent from the business for a short time; employees in
charge of escrow accounts are a major risk for the agent/owner and title underwriter. Title
agency owners bear the first line of liability for any misappropriation (intentional or
unintentional) in their operation. SES eliminates this concern, and provides the smaller
Agent and its title underwriter with a secure, flexible, transparent, and well-managed
disbursement solution. Costs for fidelity bonds, escrow bonds, and errors/omission
coverage may be positively impacted or even eliminated with a transition to SES. More
importantly, because SES has superior accounting controls and separation of duties, the
participating Agents will meet Best Practice escrow requirements. Finally, Agents can
print checks locally to meet any custom and practice, or effect last minute changes at the
table—Agents should embrace SES and all of its innovative concepts.
SES utilizes the best banking tools available and is managed by certified public
accountants (CPAs) and their experienced team of associates. SES provides Agents with
the ability to manage their transactions through permission-based processes built into
proprietary patent-pending technology. SES safeguards the transaction and prohibits
agency personnel from accessing segments of the file not intend for them, providing
protection from the threat “from within” that agency owners face.
SES has been flexibly designed to support a variety of agency workflows, thereby helping
to reduce overall agency costs, help Agents remain a viable and important resource to the
mortgage marketplace, and most importantly, reduce the risk associated with escrow
management for all parties.
Agents will embrace SES because it is easy to use, it provides a controlled mechanism for
Agents to manage agreed upon performance standards with clients, and it is cost effective.
Best of all, SES has been engineered to allow Agents to remain in control of their
transactions.
Lenders
Lenders want their customers to enjoy a pleasant and easy mortgage closing experience,
while simultaneously mandating a secure disbursement environment and quality levels of
performance. In light of the CFPB Bulletin (April 2012) demanding that lenders have
appropriate oversight ensuring compliance with Dodd-Frank and Federal consumer
financial protection laws, lenders will be extremely reluctant to fund unknown Agents. In
fact, Lenders are contemplating directly funding title underwriters and not individual
Agents in order to better control process and reduce liability.
Although lenders hold title underwriters responsible for funds via CPLs, many lenders are
concerned about relying solely on them: CPLs only protect lender funds, not borrower
funds. And any defalcation claim against a title underwriter involves a long and expensive
process for lender, underwriter and consumer. Since SES substantially reduces the risk of
defalcation, and the reputational risk associated with defalcation, lenders will embrace
SES and the added transactional security it provides, as well as the sophisticated levels of
reporting, auditing and encrypted technology used by SES, including its high levels of
Crime, Dishonesty and bonded coverages, not typically available to smaller Agents.
Finally, lenders will experience no operational impact.
Average Transaction
Cost vs. Profit Analysis
SES’s fee is $115 per disbursement transaction. The cost of outsourcing escrow
transactions to SES for a small to moderate sized title agent (example below is based on
thirty transactions per month) is roughly equivalent to the cost of operating an escrow
department.
Below are examples of the typical functions performed / cost incurred by a small to
moderate sized title agent’s escrow department per escrow file, items which can be
eliminated when using SES:
 3 wires (2 inbound – 1 outbound) per transaction-- $55
 1 employee @ $40,000 salary plus benefits-- $35 (Estimated time spent
per loan = 1.3 hour)
 Outside service to perform reconciliation function-- $6.66 (at $200 per
month)
 Underwriter mandated Escrow Bond -- $10 ($3,600 per annum)
 Monthly banking charges (excluding wire fees)-- $7
 Typical software provider click charge-- $2
 Total cost-- $115.66
The above calculation does not quantify the cost of the defalcation risk associated with
Agent management of its own internal escrow operation, which is obviously difficult to
determine, but IS a real cost. Additionally, some agents have enjoyed an Errors and
Omissions premium reduction upon relinquishing the responsibility of operating an
internal escrow department.
Agents generally charge a settlement fee of $300.00 to $400.00, which includes the
funding or disbursement fee. Accordingly, the charges above may be included in this
settlement fee, or in some cases, may be itemized separately (itemization of settlement fees
is subject to state specific rules).
In short, average Agents of small to moderate size will reduce risk and workload, while
remaining profit neutral by using SES. And if Agents pass through some or the entire SES
fee to the transaction, Agents can actually improve profitability by using SES.
Thomas M. Frunzi
Senior Vice President,
Business Development
PCN Network / Safe Escrow
200 Fleet Street, Suite 6000
Pittsburgh, PA 15220
Cell:
412-491-3405
Office: 412-444-1560
www.pcnsafeescrow.com