PUBLIC Page 1 of 8 Pillar 2 Escrow Trust Account 2.01 Escrow Trust Accounting The Company maintains appropriate written controls for open (active and inactive; escrow and non-escrow) bank accounts and such escrow accounts shall not be comingled with the company s operating accounts. 2.01(a) Escrow Accounting Authorization Controls The Company maintains Escrow Account Controls in a single location using the Bank Account Checklist. These controls are reviewed, updated, and approved by management annually and upon an employee new hire or termination. Funding checks are restrictively endorsed "for deposit only" to the escrow trust account immediately upon receipt. All Escrow Accounts and Operating Accounts are reconciled monthly and reviewed and approved by management. Copies of reconciliations available upon written request. Evidence: Escrow Accounting Policy, Minimum Escrow Accounting Procedures and Internal Controls Applicable parties: Management, Escrow Accounting and Operating Accounting 2.02 Escrow Trust Procedures The Company maintains appropriate written procedures for open (active and inactive; escrow and non-escrow) bank accounts 2.02 (a) Escrow Accounting Authorization Procedures Minimum Standards, Specific Instructions and Report Forms for Audit of Trust Funds Required of Texas Title Insurance Agents, Direct Operations, Title Attorneys and Attorneys Licensed as Escrow Officers The purpose of the auditing requirements of Chapter Nine of the Texas Insurance Code of all trust funds is for the protection of parties to transactions depositing funds with Title Insurance Agents, Title Attorneys, Direct Operations, or attorneys licensed as Escrow Officers, hereinafter collectively referred to as "escrow agents". The objective of such audit is to determine that the escrow agent maintains adequate trust fund accounting records and that the financial statements contain no material misrepresentations. This
PUBLIC Page 2 of 8 audit should be conducted in accordance with generally accepted auditing standards of the accounting profession. Because of the high degree of risk involved due to the nature of these funds, strong emphasis should be placed on the work undertaken on the cash transactions for the year in an attempt to uncover any misapplication of funds or other discrepancies that might exist. For purposes of these standards, requirements and instructions, a title insurance company doing business in its own name shall be considered a title insurance agent. MINIMUM REQUIREMENTS In connection with this audit, the Department realizes that the auditor's duty shall include the examination of the contents of certain of the guaranty files. The Department further realizes that a detailed analysis of each file may be out of the practicability range of an audit; consequently, sampling procedures may be used. The auditor shall select files to be examined as a test of procedures followed. Results of the findings of this examination shall determine the number of files to be examined and the degree to which this examination should extend. The auditor shall report the number of files actually examined on Exhibit E. Confirmations shall be made of individual guaranty file accounts, accounts where funds have not been fully disbursed, and escrow bank accounts. Confirmation of all escrow bank accounts is mandatory. However, because it is recognized that a complete confirmation of all guaranty file accounts would be impractical, it is permissible for the auditor to adopt a spot-check system of confirmations, to consider internal type audit evidence, and to use judgment in accordance with sound auditing practices as to the extent confirmations are requested. The degree to which confirmation is made should be dependent upon the findings. Although a positive confirmation asking for a specific reply is desirable, it is permissible to use negative confirmations if in the auditor's judgment, the circumstances warrant such. All Escrow Accounts are reviewed by an outside accounting firm to certify that all minimum escrow accounting procedures are being met. Annual Escrow Review by outside Accounting Firm Start, Garcia & Stanley, LLC. In addition to the above requirement, the company does not allow the use of signature stamps on any Escrow or Operating accounts and all transactions will be handled by authorized personnel only. Evidence: 2015/2016 Escrow Audit. (Available upon written request) Applicable parties: Escrow Accounting, Management and Start, Garcia & Stanley, LLC.
PUBLIC Page 3 of 8 2.02(b) Wire Procedures (1) Wiring instructions are received in writing including but not limited to the Name and Address of bank receiving the wire transfer and the ABA/Transit Routing number of receiving bank. (2) All Wire Transfer Orders require two Escrow personnel signatures prior to being initiated by an authorized user from a secure system (Initiators). (3) Wire is approved by an authorized user from a secure system (authorized user must be different than authorized user in step 2) (Authorized Approver). (An authorized approver may not initiate a wire). (4) Federal Reference Number verified and imaged into file. Applicable parties: Escrow Personnel, Escrow Accounting, Operating Accounting, Corporate Administrator, Management 2.02(c) Check Maintenance Procedure 1) Escrow account checks are all generated from blank check stock that is kept in a secure location at each branch location. (2) Operating and Guaranty Fee account checks are all kept in a secure location at the administration building. Evidence: Blank Check Stock (Available upon written request) Applicable parties: Escrow Personnel and Escrow Accounting, Operating Accounting, Corporate Administrator, Management 2.02(d) Check Signing Procedures Only authorized signers are permitted to sign and issue checks on behalf of the Company. All checks require two authorized signatures, with at least one signature being from a licensed escrow officer from the branch for which the check is being issued. If an escrow officer is not available, the signature of a corporate officer is acceptable. A segregation of duties is maintained to minimize the ability to tamper with checks for both preparers and signers. Evidence: Bank Information Worksheet (Available upon written request) Applicable parties: Escrow Personnel, Management
PUBLIC Page 4 of 8 2.02(e) Check Voiding Procedure (1) Identify checks to be voided due to misprint or incorrect information. (2) Mark "Void" across face of check. (3) Remove signature block from check. (4) Either Escrow Accounting, Operating Accounting or Corporate Administrator will place a stop payment in the event the physical check was ever outside of company control (e.g. check was sent to vendor). (5) Copies of Escrow Voided checks are scanned into the FAST Document Repository under Misc. Escrow. Operating checks will be kept in a secure location at the Corporate Office. (6) Only authorized individuals are permitted to void checks. Evidence: Copies of Voided Checks in Guaranty Files (Available upon written request) Applicable parties: Escrow Personnel, Escrow Accounting, Operating Accounting, Corporate Administrator 2.02(f) Background Checks At hire, a background check will be performed for all employees who have access to escrow trust accounts or funds, unless prohibited by law. (1) Order background check. (2) Background check results are reviewed and then approved or denied by management. (3) At least every three years the Company obtains background checks going back five years which are reviewed and then approved or denied by management. (4) Place evidence (invoice/documentation) in a single location such as the employee file. Evidence: Employee Tracking Log, Company Tracking Log (Available upon written request) Applicable parties: Management, HR Manager, Corporate Administrator 2.03(a) - Segregation of Duties for Reconciliations Reconciliations are not performed by an employee with rights to issue or sign checks, initiate wires, issue receipts or approve positive pay exceptions. Applicable parties: Management
PUBLIC Page 5 of 8 2.03(b) Management Review of Reconciliation Reconciliation(s) are reviewed by management and are accessible by the Company s contracted underwriter(s). Review of reconciliation(s) includes the review of bank statement activity noting bank charges, insufficient funds charges and any negative daily balances for each account. Such charges are to be investigated and resolved within 30 days from reconciliation. Applicable parties: Management 2.03(c) Two Way Reconciliation Procedure The Company performs a Two-Way Reconciliation daily on the next business day using the steps below: (1) Transactional information is processed at close of business. (2) Reports are created and book balance is updated. (3) Electronic daily banking is imported and available. (4) If reconciliation software is utilized, authorized employees access by secure login. (5) Bank and book transactions are matched. (6) Outstanding check balance is updated with paid and adjustments applied. (7) All check numbers are in sequential order. Voided checks are maintained with signature blocks removed. (8) Exception items are identified (including deposits in transit) (9) Verify that adjusted book and bank balances are equal. (10) In the event that adjusted book and bank balances reveal a shortage, the account is funded from an operating account within 5 business days of the earlier of discovery or completion of reconciliation. (11) In the event the adjusted book and bank balances reveal bank fees or charges assessed, the account is funded from an operating account within 5 business days of the earlier of discovery or completion of reconciliation. (12) Reconciliation and exception page(s) are reviewed by Escrow Accounting Manager once approved. (13) Exception page items are resolved immediately after being identified. (14) Bank information, reconciliation, transaction reports, outstanding check list, and all other supporting documents are imaged and stored for electronic verification. Evidence: Minimum Escrow Accounting and Procedures and Internal Controls Applicable parties: Escrow Accounting, Operating Accounting, Management
PUBLIC Page 6 of 8 2.03(d) Three Way Reconciliation Procedure The Company performs monthly Three-Way Reconciliation within ten (10)* business days of the closing date of the bank statement using the steps below. (1) Transactional information is processed at close of business for the previous month. (2) Reports are created, book and trial balance is updated. (3) Electronic daily banking is imported and available. (4) If reconciliation software is utilized, authorized employees access by secure login. (5) Bank and book transactions are matched. (6) Outstanding check balance is updated with paid and adjustments applied. (7) All check numbers are in sequential order. Voided checks are maintained with signature blocks removed. (8) Exception items are identified (including deposits in transit) (9) Verify that adjusted book/bank balances and trial balances are equal. (10) In the event that adjusted book and bank balances reveal a shortage, the account is funded from an operating account within 5 business days of the earlier of discovery or completion of reconciliation. (11) In the event the adjusted book and bank balances reveal bank fees or charges assessed, the account is funded from an operating account within 5 business days of the earlier of discovery or completion of reconciliation. (12) Reconciliation and exception page(s) are signed by Management once approved. (13) Exception page items are resolved immediately after being identified. (14) Bank information, reconciliation, transaction reports, outstanding check list, trial balance and all other supporting documents are imaged and stored for electronic verification. Evidence: Minimum Escrow Accounting Procedures and Internal Controls Applicable parties: Escrow Accounting, Management 2.03(e) Cancelled Check and Disbursement Register Procedure The Company performs periodic reviews of checks going back into escrow, paid to cash or employees, transferred between accounts, suspicious payees, multiple checks to the same payees, and any other questionable disbursements. Applicable parties: Escrow Accounting, Operating Accounting, Management 2.04(a) - Outstanding Check Procedure (1) Identify all outstanding checks.
PUBLIC Page 7 of 8 (2) Identify high-risk outstanding checks a. Recording, tax, flood/hazard insurance premium checks over 30 days b. Underwriter premium payments that are outstanding over 60 days c. Any check over $5,000.00 Research to ensure check was disbursed properly; if yes, make immediate contact with the payee. If contact is unsuccessful, escalate to management for further direction. (3) Document the contact with the payee and result. (4) Research and update address information if required. (5) If response is received, request stop payment of check with Escrow Accounting Manager and Escrow Accounting Manager will inform Escrow Branch when they may reissue check to payee. Evidence: Outstanding Check Lists (Available upon written request) Applicable parties: Escrow Accounting, Operating Accounting, Escrow Personnel, Management 2.04(b) Unclaimed Property Procedure All Unclaimed Property processing is performed by an employee that does not have rights to issue, sign, and wire funds or issue receipts. (1) Review of the monthly trial balance for dormant funds that may be eligible for escheatment to ensure the Company is following its procedures. (2) If you are unable to identify or locate the owner of the funds, void check and hold the funds per state requirements. (3) As required, prepare state Unclaimed Property report and escheat to state per state requirements. Evidence: Outstanding Check List (Available upon written request), See State Requirements Applicable parties: Operating Accounting 2.04(c) Outstanding File Balance Procedure The Company identifies, researches, and resolves the following significant items as applicable: 1) Outstanding balances over $10,000 over 30 days old 2) Outstanding mortgage payoffs over 30 days old
PUBLIC Page 8 of 8 3) Escrow Trust Account with aggregate short over $1,000 The explanation for each outstanding file balance is documented and updated monthly. Report unresolved significant items to management Evidence: Outstanding Check List (Available upon written request) Applicable parties: Escrow Accounting, Operating Accounting, Escrow Personnel 2.05(a) - Escrow Account Employee Training Training is conducted for all applicable parties in the management of escrow funds and escrow accounting annually. At hire and annually all identified applicable parties are provided with a copy of the Pillar 2 Escrow Trust Accounting, Escrow Accounting Policy and Minimum Escrow Accounting Procedures and Internal Controls. Training completion and policy delivery is documented on the Employee Tracking Log. Evidence: Employee Acknowledgement Form and Employee Tracking Log (Available upon written request) Applicable parties: Escrow Personnel, Escrow Accounting, Operating Accounting, Corporate Administrator, Management * Three Way Reconciliation completions requirements (under entry number 2. of Minimum Escrow Accounting Procedures and Internal Controls outlined in Pillar 2) has been altered reflect the ALTA requirement of 10 days. Texas Department of Insurance, Minimum Escrow Accounting Procedures and Internal Controls actually states 45 days.