Escrow license bonds (also known as escrow agency bonds) protect consumers from escrow companies that may act unethically. These consumers invest money and other assets into the escrow company, so it’s usually required that an escrow agency obtain an escrow agency license to help hold them accountable. One requirement for becoming licensed is typically to hold an escrow license bond.
Keep reading for more insight into what an escrow license bond is, how this type of surety bond works, and who needs one.
An escrow license bond is a type of surety bond that many escrow agencies and agents must have in order to operate in certain states. It’s very common to come across this requirement in order to become a licensed escrow professional. State authorities generally set this requirement and determine what the bonding capacity of the escrow license bond must be.
The purpose of escrow license bonds is to ensure that escrow professionals meet all of their legal obligations and don’t engage in any unlawful practices. For example, if an escrow agency hides escrow records or fails to deposit all monies, the consumer injured can file a claim against their escrow license bond to help be reimbursed for their losses.
There are three main parties involved in any surety bond, including an escrow license bond—the surety (the company that backs the bond and pays out valid claims), the obligee (the party who requires the bond such as a state agency), and the principal (the party who must hold that surety bond).
Because escrow agents have a fiduciary responsibility to their clients and manage a large amount of responsibility (by transferring property or assets to a second party like when someone buys a home), it’s really important that they act responsibly, professionally, and lawfully.
So, who exactly needs an escrow license bond? Escrow agents act as a neutral middleman when someone needs to transfer funds or assets in order to fulfill a contract (most consumers encounter this in real estate transactions when money needs to be transferred from the buyer to the seller to complete the sale of a home).
Escrow license bonds are only required in certain states and the bonding amounts they’re required to have can vary. Who requires the bond (the obligee) can also depend on the state you live in. Let’s look at a few examples of how this works:
Washington. Escrow agents must post a $10,000 surety bond in order to become licensed by the state licensing agency.
Arizona. A $100,000 escrow license bond is required by the state Department of Financial Institutions.
Oregon. Any escrow agents working in Oregon must post a $50,000 bond to the state Real Estate Agency.
California. Escrow licensees in California have to post a surety bond (in the $25,000 to $50,000 range) and present it to the Department of Business Oversight.
Idaho. In Idaho, the Idaho Department of Finance requires that escrow agents have a $20,000 surety bond.
Utah. The required escrow license bond capacity in Utah ranges between $10,000 to $40,000 and the final amount depends on the basis of monthly average escrow liability.
It’s best to always confirm with your state licensing agency what their surety bond requirements are to ensure you’re operating legally.
How much you will spend to secure an escrow license bond depends on a few different factors. The primary factor is the bonding capacity—which represents the highest amount anyone can claim against an escrow license bond. This means if your bond capacity is $30,000, then that’s the highest amount you’ll have to pay out on a claim.
Where you work can affect what your required bonding capacity is. For example, in the state of California, you have to obtain an escrow license bond worth $25,000 to $50,000 in order to become legally licensed as an escrow agent.
You will pay a certain percentage (aka the bond premium) of your bonding capacity and the lower this percentage is, the less you’ll pay. Generally, the higher your credit score is, the less you’ll spend to secure a surety bond. Other factors like years in business, industry experience, and business financials are also taken into consideration, but your personal credit score is the primary factor that impacts cost.
Usually, the bond premium rate is between 1% and 5%, but you want to aim to get the lowest rate possible. That’s why it’s a good idea to continuously strive to improve your credit score. That way, when you go to apply to renew your escrow license bond, you can potentially qualify for an even lower rate.