escrow

Definition of escrow

Etymology

From Middle English escrowl ("scroll"), from Old French escroue.

Noun

escrow (plural escrows)

1. (law) A written instrument, such as a deed, temporarily deposited with a neutral third party (the Escrow agent), by the agreement of two parties to a valid contract. The escrow agent will deliver the document to the benefited party when the conditions of the contract have been met. The depositor has no control over the instrument in escrow.
2. (law) In common law, escrow applied to the deposits only of instruments for conveyance of land, but it now applies to all instruments so deposited.
3. (law) Money or other property so deposited is also loosely referred to as escrow.

Verb

to escrow (third-person singular simple present escrows, present participle escrowing, simple past and past participle escrowed)

1. To place in escrow.
   
   * 2007 March 3, Vikas Bajaj, "U.S. Urges Lenders to Revise Standards on Granting Credit", New York Times:
   The regulators suggest that in underwriting these loans, lenders be required to take into account the ability of the borrowers to make monthly payments at the higher rates and also property taxes and homeowners insurance, which are often not escrowed monthly in subprime loans.

Further reading

An escrow account is

• an account established by a broker, under the provisions of license law, for the purpose of holding funds on behalf of the broker's principal or some other person until the consummation or termination of a transaction, or
• a trust account held in the borrower's name to pay obligations such as property taxes and insurance premiums.

Types of escrow

Escrow is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage). Escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in the completion of person-to-person remote auctions (such as eBay). In the UK escrow accounts are often used during private property transactions to hold solicitors' client's money, such as the deposit, until such time as the transaction completes.

Escrow is also known in the judicial context. So-called escrow funds are commonly used to distribute money from a cash settlement in a class action or environmental enforcement action. This way the defendant is not responsible for distribution of judgment monies to the individual plaintiffs or the court-determined use (such as environmental remediation or mitigation). The defendant pays the total amount of the judgment (or settlement) to the court-administered or appointed escrow fund, and the fund distributes the money (often reimbursing its expenses from the judgment funds).

In the EU, the Payment Services Directive which commences on 1 November 2009, has allowed the introduction, for the first time, of very low-cost internet escrow services that are properly licensed and Government regulated. The regulatory framework in the EU allows these web-based escrow services, which operate along the lines of expensive Letter of Credit service run by banks for international buyers and sellers, but at a cost in cents rather than thousands of Euros, the ability to enhance security in commercial transactions.

Escrow is also used in the field of automated banking and vending equipment. One example is automated teller machines (ATMs), and is the function which allows the machine to hold the money deposited by the customer separately, and in case he or she challenges the counting result, the money is returned. Another example is a vending machine, where the customer's money is held in a separate escrow area pending successful completion of the transaction. If a problem occurs and the customer presses the refund button, the coins are returned from escrow; if no problem occurs, they fall into the coin vault.

Legal implications

Not all escrow agreements impose the duties of a legal trustee on the escrow agent, and in many such agreements, escrow agents are held to a mere gross negligence standard and benefit from indemnity and hold harmless provisions.

If the escrow agent is licensed by Governmental authority, then much higher legal standards may apply.