Escrow under fire: When the playbook ignores the rulebook

By Summer Goralik

This article was originally published by Inman News on June 24, 2025 and can be read here.

“One lie … leads to another.” If you know the song, then you know Charles Wright (and the Watts 103rd Street Rhythm Band) weren’t singing about kickbacks, but they might as well have been.

I happened to be listening to that track when a new enforcement action landed in my lap. That was all it took to pull me off the creative writing streak I’d been riding and back onto the compliance path.

So, with that, we might as well start from the beginning.

Several years ago, I stood in front of a packed room of escrow professionals, most of whom worked at “independent” shops, meaning escrow companies licensed by the California Department of Financial Protection and Innovation (DFPI).

Instead of the straightforward compliance talk I had planned, the session quickly turned into a venting forum. Many attendees took the mic to voice frustration and outrage, sharing stories about real estate brokers steering business to their own escrow companies — allegedly offering illegal perks to secure it. Many were angry. Some felt hopeless. And more than a few had simply lost faith in regulators.

After listening, I countered with one simple question: “How many of you have actually filed a complaint with the California Department of Real Estate?”

Silence.

I quickly filled the void with something along the lines of, “Don’t assume they know. Regulators are busy. You have to bring these issues to their attention. Make it a big deal. Let them get to the bottom of it.”

In other words, you can’t claim that nothing is being done if no one’s shining a light on the problem.

Fast forward to the present, and before diving into this fresh regulatory filing that’s bound to turn a few licensed heads, we need to zoom out and take a look at the broader escrow landscape.

How brokers fit into the escrow equation

Ever wondered how a real estate broker can handle escrow in a California transaction? The Escrow Law provides an exemption outlined in California Financial Code §17006 that allows them to step into both roles, acting as broker and escrow holder in the same deal.

There are two primary types of escrow operations in the state:

• Independent escrow companies licensed and regulated by the DFPI may offer escrow services to the general public.

• Exempt entities, such as real estate brokers, title companies, banks and attorneys, may handle escrows as part of their regular services, as long as certain conditions are met.

  
  

Under this framework, a real estate broker may operate an in-house escrow division regulated by the Department of Real Estate (DRE). These broker-controlled escrows are limited in scope. They may only handle transactions in which the broker is acting as a party and performing licensed real estate activities.

That said, some brokers cross the line by handling escrows where they aren’t a party or fail to perform a licensed act. That’s considered third-party escrow activity, and it can trigger action from the DRE — or even DFPI.

Alternatively, a brokerage may own an independent escrow company or hold ownership in a title company that operates a title-controlled escrow division, offering both title and escrow services.

Regardless of the structure, the frustration I heard in that room years ago was the same: Brokers were allegedly offering their agents financial incentives to route transactions through escrow companies they controlled or owned. And for the escrow professionals in attendance, this raised serious concerns about fairness, legality and market manipulation.

One kickback (leads to another)

In my years as a compliance consultant, I’ve encountered my fair share of unlawful kickback arrangements. Some brokers simply didn’t know the law. A few were unapologetic and willing to risk it. But the majority of brokers I’ve worked with want no part of this. They’re careful, cautious and committed to doing the right thing.

Still, for those who cross the line, the red flags are all too familiar. As a former DRE investigator and now a consultant, I’ve seen the same patterns repeat:

• Brokers offering to reduce office fees (transaction coordinator fees are a common enticement) if agents use the in-house escrow. And by “use,” I mean steer.

• Promising better commission splits for agents who “keep it in the family.”

• Subsidizing agent marketing costs (flyers, 3D tours, staging) to capture escrow volume.

  
  

These patterns aren’t hard to trace: Just follow the closing statements, the escrow holders, the agents and the money. It’s not subtle. In fact, the paper trail often paints a pretty blunt picture.

Let’s just say, I have investigative mileage in this area. I’m not bluffing.

Listen, when you get into this kind of unlawful activity — just like Charles Wright warned about lying — a kickback is rarely a one-off. It almost always leads to another. The broker offers an incentive, the agent steers the client to the broker-owned or controlled escrow, the reward gets paid, and the cycle feeds itself.

It starts as a pattern and quickly becomes a business strategy, one that writes its own story for regulators. All they have to do is read it.

Escrow compliance has been a constant throughout my career, from my early days as an escrow officer to my time as a DRE investigator and now as a consultant. I’ve contributed articles on the subject that still appear on the Department’s website, and I regularly work with brokers on understanding prohibited referral fee arrangements.

In other words, when it comes to unlawful kickbacks, I’ve been on both sides: enforcing the rules and helping brokers avoid pitfalls through education and guidance.

And honestly, I want real estate brokers to get this right. Although I believe most of them do, I also don’t want to stand in another room full of frustrated escrow professionals, disheartened by what they’re seeing out on the street. In many ways, this goes beyond compliance. It’s a matter of credibility.

The legal lines are clear

In California, the rules are not ambiguous. The DRE, which regulates real estate brokers and agents, enforces the following anti-kickback statute:

Business and Professions Code §10177.4 prohibits real estate licensees from receiving any fees, commissions or other consideration as compensation or inducement for referring customers to specific settlement service providers, including any escrow agent or controlled escrow company.

The DFPI, responsible for the regulation of escrow agents, enforces a parallel restriction:

California Financial Code §17420 makes it illegal for escrow agents to pay any commission, fee or other consideration in exchange for referrals.

And then there’s the elephant in the room: the federal government.

The Consumer Financial Protection Bureau (CFPB), whose waning authority and power have been a hot topic in the industry lately, regulates illegal referral activity under federal law:

RESPA (12 U.S.C. §2607) prohibits the payment or receipt of kickbacks for referrals of settlement services on a broader, national scale.

Even marketing perks and reimbursements may raise compliance concerns when tied to referral arrangements. While certain statutes — particularly RESPA — do allow for limited exceptions or safe harbors, those carve-outs are narrowly construed. Regulators often pay close attention to how these exceptions are applied in practice, especially when the line between legitimate collaboration and inducement becomes blurred. 

Enter a newly filed case drawing attention.

A new DFPI case pulls back the curtain

I’ve always said that one of the most valuable and free forms of education for any practitioner is reading enforcement actions issued by regulatory agencies.

Earlier this month, the DFPI filed an Accusation to revoke the escrow license of a company it alleges offered unlawful consideration for referrals. According to the Accusation, the escrow company paid over $44,000 to cover photography and videography services used by real estate agents to market their listings. Roughly 82 percent of those listings ended up closing escrow with the same company.

In addition to the Accusation, DFPI issued an Order to Discontinue Violations and a supporting Statement of Facts, both of which provide further context for the agency’s concerns.

DFPI alleges this wasn’t a coincidence. It was a calculated effort to steer business by subsidizing agent marketing costs, which is a clear violation of the escrow law. The company is also accused of sponsoring broker preview events that led to escrow referrals, misrepresenting office locations without proper licensure and misleading DFPI about service contracts with affiliated marketing vendors.

These aren’t minor clerical oversights. On the compliance scale, they’re serious — and potentially costly. Notably, the Accusation outlines an alleged systematic effort to generate business through impermissible means. 

While the allegations are significant, it’s important to note that the case remains pending, and the escrow company has the opportunity to file a notice of defense in accordance with due process.

Why this matters now

Public enforcement actions like this are not rampant in the escrow space. In fact, part of the reason I was put on the spot so many years ago is likely because there weren’t many public enforcement actions — or at least not enough of them — taking place against alleged bad actors.

DFPI’s action sends a clear message: Regulators are watching, and the tolerance for pay-to-play practices is fading. After all, that’s their job: to protect consumers, maintain a level playing field, and uphold both compliance and the integrity of settlement services.

Putting aside this particular enforcement action, which is far from final, I think it’s important for brokers to hear the following: When escrow is treated like a commodity to be traded for perks, trust suffers. I’ve seen it firsthand.

At their core, illegal referral fees can limit consumer choice, quietly drive up transaction costs and operate in ways that lack transparency. And let’s not forget, this kind of activity is not just a California issue. It can also create exposure under federal RESPA.

When the government bites

Most real estate professionals aim to do the right thing, and I can still say that — even after seeing some of the most egregious violations over the course of my career. But aiming isn’t enough if it’s paired with poor practices. Not knowing the law, or not meaning to break it, isn’t a defense either.

And regulators can’t take action without complaints, audits or evidence. Years ago, I told that room full of escrow professionals: “Change doesn’t happen in silence.” I still believe that.

This case is one to watch. It serves as a warning shot for those actually engaging in similar conduct, and a timely confirmation for others who consistently speak out against unlawful kickback arrangements. It’s worth noting that illegal referral fee activity almost always involves a network of players, including brokers, agents and affiliated businesses. And of course, participating in these schemes often comes with the assumption that no one is watching.

Well, I think it’s safe to say they’re watching. Where this goes, we’ll have to wait and see.

And while this action focuses on one company, similar investigations may follow, whether by the DRE for potential broker or agent misconduct or under RESPA at the federal level.

Here’s the deal: Whether or not the allegations in this DFPI case are ultimately proven, they underscore ongoing challenges in the industry that need cleaning up. With class-action litigation now etched into its résumé, real estate doesn’t have the luxury of looking the other way.

Unethical and unlawful practices, alleged or not, have to be put to rest. If we’re going to champion the value that licensees bring (and they absolutely do), we need to face the problems, no matter how uncomfortable and commit to fixing the cracks that weaken the foundation.

NOTE: The opinions, suggestions, and recommendations contained in this discussion are based on Summer Goralik’s experience working for the California Department of Real Estate and as a real estate compliance consultant. They should not be considered legal advice or relied upon as such. You should consult with your brokerage and/or appropriate legal counsel in your jurisdiction for further clarification.

About the Author

Summer Goralik is a Real Estate Compliance Consultant and licensed Real Estate Broker (#02022805). Summer offers real estate brokers a variety of consulting services including assistance with California Department of Real Estate investigations and audit preparation, mock audits, brokerage compliance guidance, advertising review, and training. She helps licensees evaluate their regulatory compliance and correct any non-compliant activities. Summer has an extensive background in real estate which includes private sector, regulatory and law enforcement experience. Prior to opening her consulting business in 2016, she worked for the Orange County District Attorney's Office as a Civilian Economic Crimes Investigator in their Real Estate Fraud Unit. Before that, Summer was employed as a Special Investigator for the DRE for six years. Among many achievements, she wrote several articles for the DRE, four of which were co-authored with former Real Estate Commissioner Wayne Bell. Prior to her career in government and law enforcement, Summer also worked in the escrow industry for nearly five years. For more information about Summer's background and services, please visit her website.