Disreputable lawyers can be devastating. That is why The Lawyers Fund for Client Protection issued an unprecedented 114 payments last year alone to victims of dishonest attorneys.
What is Escrow?
Escrow is a legal mechanism in which a neutral third party acts as the custodian for funds or property between transacting parties until their terms have been fulfilled, such as when purchasing real estate or paying your mortgage payment in full. Escrow can also refer to an account set aside specifically to hold earnest money prior to selling real estate, or purchasing specific items online such as art or jewelry.
As part of your homebuying experience, escrow may have come up during earnest money deposits to show a seller that you are serious about purchasing their home. But it can also be used for other transactions involving online sales or transfers of securities among banking industry partners.
Attorneys typically maintain non-interest bearing IOLTA accounts to safely store unearned fees from clients until they are earned. It is vital that attorneys do not link their IOLTA with an escrow account as this could allow for misuse of funds that would violate IOLTA rules and make for difficult compliance management.
Why Do Lawyers Need Escrow Accounts?
Every year, many lawyers are disbarred for violating the rules governing attorney trust and escrow accounts, which are extremely detailed, stringent and stringent in enforcement; yet despite strict enforcement and serious sanctions being applied to those who fail to abide by them.
No matter how careful a lawyer or law firm may be, mistakes happen with escrow accounts. Deposits may be made into the wrong account or checks may bounce and third parties stop payment altogether. New York banks frequently mishandle escrow deposits and breach laws and rules associated with these accounts.
Banks are required by law to report any time an attorney draws a check from an escrow account against insufficient funds, regardless of whether their checking account can cover it or not. Furthermore, banks cannot link operating accounts with escrow accounts so attorneys can use personal funds from outside sources to cover misused escrow funds which violates commingling prohibition.
How Do Escrow Accounts Work?
Escrow accounts are part of your mortgage payment that are designed to cover property taxes and homeowner’s insurance. They’re an effective way of mitigating risk that annual property tax or insurance premium payments might go uncollected, which could cause significant value to be lost from your home.
An escrow account acts similarly to a good faith deposit that homebuyers make with sellers as part of a purchase agreement; it holds onto this deposit until either closing day or in case a deal falls apart.
As homeowners, lenders will annually review your escrow account to make sure that enough money has been accumulated for mortgage, insurance and tax costs. If they determine that they are collecting too much, they may provide you with a refund or increase monthly loan payments accordingly if applicable; otherwise they’ll just adjust it going forward.
What Can You Do to Protect Your Escrow Accounts?
Lawyers and law firms should adhere to escrow account rules designed to safeguard client interests. Unfortunately, however, many attorneys either don’t understand these regulations or mismanage escrow accounts despite having ample experience managing escrow accounts.
Clients can protect themselves by carefully monitoring escrow activity and being wary of suspicious signs such as delays in releasing money. A vigilant consumer will also check their escrow agreement to see which bank must be used and any restrictions placed upon it.
Banks should act swiftly to address what is widely acknowledged to be an early indicator of escrow violations – bounced checks. Furthermore, they should not permit attorneys to deviate from IOLA interest payments, as doing so can encourage misappropriation of funds by attorneys and create liability for banks. Since 1982, New York State Lawyers’ Fund for Client Protection has reimbursed over $20 Million to clients harmed by attorneys stealing escrow down payments in real estate transactions, inheritance assets or personal injury settlements from clients due to attorneys stealing from clients IOLA interest payments IOLA payments.