BILL ANALYSIS
AB 957
Page 1
Date of Hearing: May 5, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 957 (Galgiani) - As Amended: April 22, 2009
As Proposed to Be Amended
SUBJECT : Residential Real Estate Transfers: title AND escrow
companies
KEY ISSUE : Should a seller (I.E. BANKER) who acquires property
in a foreclosURe sale be allowed to force a (NEW) buyer of that
property to use the seller's (I.E. BANKER'S) choice of title or
escrow company?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill passed out of the Assembly Banking & Finance Committee
on a 10-1 vote. AB 957 would prohibit any seller who acquires
property as the result of a foreclosure sale from requiring a
buyer, as a condition of the sale, to use the seller's choice of
title insurer or escrow company. The federal Real Estate
Settlement Procedures Act (RESPA) already prohibits a seller
from requiring the buyer, as a condition of selling the
property, to purchase title insurance from a particular company.
Although partly duplicative of RESPA, this bill differs from
federal law in two ways: first, it would apply to both title
insurers and escrow agents, whereas federal law only applies to
the former; and second, it only applies to properties acquired
as a result of a foreclosure, which is not true of RESPA.
According to the author, the bill is needed at this time because
record numbers of foreclosures in the state means that banks are
acquiring and selling foreclosed properties in greater numbers
and, according to the author, unfairly using their leverage to
demand that the buyer use title insurers and escrow agents with
whom the bank has an established relationship. In many cases,
the author contends, this often has the effect of pushing local
companies out of the title and escrow market and, more to the
point, takes choice away from the party that is actually buying
the title or escrow service: the buyer. The bill is supported
by the Escrow Institute of California, Property ID, and several
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independent escrow agents, realtors, and real estate agencies.
Opponents of the bill, including the California Association of
Realtors, argue that this measure will eliminate what
customarily has always been negotiated as part of the sale.
This analysis reflects amendments that the author has proposed
in response to questions raised in the first Committee that
heard this bill.
SUMMARY : Enacts the Buyer's Choice Act, to generally prohibit a
lender, or other party that acquires title to, and seeks to
sell, a foreclosed residential property, from requiring a buyer
to purchase title insurance or escrow services from a particular
company chosen by the seller. Specifically, this bill :
1)Provides that a seller, as defined, shall not directly or
indirectly, as a condition of selling residential real
property to a buyer, require the buyer to purchase title
insurance or escrow services in connection with the sale of
that property from a company chosen by the seller.
2)Provides that, in addition to any penalty provided under
specified federal law, a violation of this bill shall be
treated as a violation of the terms of the seller's license or
charter by the appropriate regulatory agency.
3)Provides that no transaction subject to the provisions of this
bill shall be invalidated solely because of the failure of any
person to comply with any provision of this bill. Specifies,
however, that a seller who violates the provisions of this
bill shall be liable to the buyer in an amount equal to three
times all charges made for such title insurance or escrow
service.
4)Defines "seller" for purposes of this bill to mean a
mortgagee, beneficiary under deed of trust, or other person
who acquired title to residential real property at a
foreclosure sale, including a trustee, agency, officer, or
other employee of any such mortgagee, beneficiary, or other
person.
EXISTING LAW :
1)Regulates, under the federal Real Estate Settlement Procedures
Act (RESPA), transactions between buyers, sellers, and
mortgagees involving "settlement services" (including title
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insurance and escrow services). Generally requires that
borrowers receive certain timely disclosures relating to the
costs of those settlement services, and prohibits certain
practices on the part of a mortgagee that increases the costs
of settlement services. (12 USC Section 2601 et seq.)
2)Provides, under RESPA, that no seller of property that will be
purchased with the assistance of a federally related mortgage
loan shall require directly or indirectly, as a condition to
selling the property, that title insurance covering the
property be purchased by the buyer from any particular title
company. Specifies that any seller who violates this
provision shall be liable to the buyer in an amount equal to
three times all charges made for such title insurance. (12
USC Section 2608.)
3)Requires title insurers, controlled escrow companies, and
underwritten title companies who operate in this state to
obtain a certificate of authority or license, as specified.
(Insurance Code Sections 1621 and 1634.)
4)Makes it unlawful for any title insurer, underwritten title
company, or controlled escrow company to directly or
indirectly pay any commission, compensation, or other
consideration to any person as an inducement for the placement
or referral of title business. (Insurance Code Section
12404.)
5)Provides for the licensing and regulation of escrow agents who
operate in this state and expressly provides that any person
who violates any provision of RESPA, or any regulation
promulgated thereunder, also violates the corresponding
provisions in state law. (Financial Code Section 17425.)
COMMENTS : AB 957 seeks to address one of the many adverse
consequences of California's rising number of home foreclosures.
One consequence of the foreclosure crisis has been that banks
or other lending institutions increasingly are entering the
residential real estate market as sellers and, according to the
author, use their institutional leverage to require that the
buyers use the bank's favored services providers, especially
title insurance and escrow services, even though the buyer is
generally the one who pays for the service. (Although who
typically pays, as noted below, is a disputed matter.)
Accordingly, the author has introduced this "Buyer's Choice Act"
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to generally prohibit any seller who has acquired title in a
foreclosed residential property - typically a bank or other
mortgagee - from requiring the buyer to purchase title insurance
or escrow services chosen by the seller.
According to the author, the practice of requiring buyers to use
the seller's service providers also has the adverse consequence
of excluding smaller, local businesses from the title insurance
and escrow market. For example, the author cites recent news
reports of buyers in Northern California forced by banks to use
title and escrow companies in Southern California, who allegedly
charge higher fees than Northern California companies tend to
charge. (See "Banks Benefit form Foreclosure Opportunity," at
www.kcra.com/print/18912614/detail.html )
If the reports are accurate, and the banks cited in the news
reports are in fact requiring buyers to use preferred services
providers as a condition of the sale, then they may be violating
federal law. Specifically, the federal Real Estate Settlement
Procedures Act or RESPA, already prohibits a seller from
requiring the buyer to purchase services from a particular
company as a condition of the sale - regardless of whether or
not the property was acquired by foreclosure. Federal law also
provides that a seller who violates this provision is liable to
the buyer for an amount equal to three times the amount of all
title insurance charges. (12 USC 2601 et seq.)
This measure differs from federal law in three ways: first, it
would apply to title insurers and escrow agents, whereas federal
law only applies to the former; second, this bill only applies
to properties acquired as a result of foreclosure; and third,
this measure would apply to both federally-backed and
non-federally-backed loans, whereas RESPA only applies to the
former.
It should be stressed that this bill, as proposed to be amended,
follows RESPA by only prohibiting a seller from requiring the
buyer to purchase title insurance or escrow services from a
company chosen by the seller. However, if the seller and buyer
agree that the seller, rather than the buyer, were to pay for
the title insurance or escrow services, then the seller could
choose a company or companies of his or her choice.
ARGUMENTS IN SUPPORT : The Escrow Institute of California (EIC),
an association of escrow agents and companies licensed by the
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Department of Corporations, supports this bill because it would
"address a very serious issue that has developed within the Real
Estate Owned (REO) foreclosure resale marketplace over the past
couple of years, and that is the practice of sellers of REO
properties (primarily banks) directing and requiring the
specific use of certain settlement service providers." EIC
claims that, not only are these practices of questionable
legality, they also create an "anti-competitive monopoly" in the
REO marketplace as banks direct the flow of foreclosure sales
"to pre-selected settlement service providers regardless of the
costs." EIC also argues that, because banks may rely primarily
on a single service provider located anywhere in the state,
instead of a local provider, the seller's provider may be
unfamiliar with the local practices and ordinances in the
jurisdiction where the REO property is located. EIC concludes
that AB 957 will "give buyers the 'choice' to negotiate with and
ultimately select their preferred settlement service providers,
and prohibit sellers from denying this basic right as provided
under state and federal laws."
Property ID, a leading natural hazard disclosure company in
California, "believes that AB 957 will restore to buyers their
traditional right to select the title insurance companies,
escrow services and other settlement services of their choice."
Several other independent escrow and realty companies support
this bill for substantially similar reasons as those already
noted.
The California Escrow Association (CEA) adopts a "support in
concept" position, but generally urges an "aye" vote. CEA
supports the ability of principals in a real estate transaction
to choose escrow and title service providers, and "to the extent
that buyers are given a 'take it or leave it' proposition, this
distorts the ability of principals to bargain fairly." CEA also
supports the ability of principals to choose local service
providers "who understand the nuances and special requirements
in their localities." On the other hand, CEA also recognizes
"that lenders handling REO property have a legitimate interest
in selling properties efficiently and economically, with
qualified and competent vendors of all types." Given these
competing but legitimate interests, the CEA urges an "aye" vote,
but hope that "the respective interests are evaluated and
addressed" as the bill moves along.
ARGUMENTS IN OPPOSITION : This bill is opposed by the California
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Association of Realtors (CAR). CAR agrees that lenders should
not steer buyers toward favored service providers if it is only
for their own benefit. CAR points, however, that existing
federal law, RESPA, already prohibits mandating that a buyer use
a particular service provider if the buyer is footing the bill.
However, CAR's more general objection lies in its "longstanding
policy of supporting the negotiability of all the terms of a
sale." In short, CAR insists both parties should be able to
freely negotiate as to what service providers will be used, and
which side shall pay for it. CAR believes that the correct
policy should not so much be "buyer's choice" as it should be
"payer's" choice. The parties can negotiate over who will pay
for the services, and it follows both logically and as a matter
of fairness that the payer should choose which service provider
to use. (It should be noted that the author does not dispute
this principle, especially in light of the proposed amendments
that will track the bill more closely to RESPA; rather, the
author's point is that at least some banks are allegedly using
their leverage to effectively require that the buyer both pay
for the service and use the seller's preferred company.)
CAR's central argument is that, if in fact lenders are refusing
to negotiate in good faith, as the author and supporters allege,
then a better solution would be to compel the lenders to
negotiate in good faith, rather than eliminating the
negotiability of these terms entirely. Thus, as a substitute
for the bill's language tracking RESPA, CAR proposes the
following language:
1103.21. (a) A seller shall not refuse to negotiate in
good faith regarding the selection of title insurance or
escrow services in connection with the sale of real
property.
(b) A seller shall not, refuse the use of a title or
escrow company chosen by a buyer without enumerating the
business and economic factors that justify the seller's
choice of settlement services provider over that recommended
by the buyer.
(c) For the purpose of this section:
1. "Good Faith" means honesty in fact in the conduct of
the transaction, and compliance with the relevant
requirements of the Real Estate Settlement Procedures Act
(RESPA).
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2. "Negotiate" means to consider factors influencing
both buyer's and seller's choice, including total cost to
the transaction, cost to each party to the transaction,
convenience to each party, familiarity of the proposed
service provider with laws, custom and practice relevant to
the transaction, and whether the party seeking the selection
is paying some or all of the cost of the related part of the
transaction.
3. "Seller" means a mortgagee, or beneficiary under a
deed of trust, who acquired title to residential real
property improved by 1-4 units at a foreclosure sale.
"Seller" also includes any person that acquires title or
control of the real property as part of scheme or straw man
transaction intended to avoid the application of this Act.
4. "Buyer" means an individual purchaser of residential
real property improved by 1-4 dwelling units from a seller.
In addition, CAR also recommends that the bill sunset on
December 31, 2013, so that the policy may be reassessed and
revisited.
Phil Greer, of Greer & Associates, opposes this bill because he
believes it will have the unintended, and ironic, consequence of
actually increasing settlement costs for buyers of foreclosed
properties. First, Greer claims that in California the banks,
when acting as sellers of foreclosed properties, very often
willingly pay for the buyer's settlement services because, as
high volume users of those services, the banks get substantial
discounts on the costs. Greer claims that services that might
cost an individual buyer from $850 to $1000 only cost the bank
$500 due to a bulk rate discount. If this bill passes, Greer
claims, and the banks are forced to use the buyer's choice, then
the banks will simply stop paying for the services. The buyers
will get their choice of service provider, Greer warns, but they
will have to pay for it.
Proposed Amendments May Remove Most, if not all, of the
Opponents Concerns : As reflected in the author's amendments
listed below - and the analysis thus far has reflected these
author amendments - the author has attempted to address many of
the opponents concerns, as well as those raised in the Banking &
Finance Committee hearing. Most importantly, by removing a
provision that purported to prohibit a seller from disapproving
of a buyer's choice without showing "good cause," the author has
not only removed a vague and difficult term to define, but the
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author has also made the bill more closely conform to RESPA,
which only prohibits the seller from requiring the buyer "to
purchase" a settlement service from a company of the seller's
choice. Thus the bill is virtually the same as RESPA, except
that it will include both title insurers and escrow services, at
least for sales involving foreclosed property. Moreover, by
adopting language similar to RESPA, the bill makes clear the
author's intent that buyer and seller can still negotiate who
will pay for the services, and if the seller agrees to pay for
the services, then the seller can chose the service provider.
If the buyer insists on using their preferred provider, then the
buyer pays. The author has also agreed to strike a provision
from the bill that would have made a seller who violated the
provisions of the bill liable to the seller for an amount equal
to 6 percent of the properties sales price, which seemed to
opponents not only potentially high but somewhat arbitrary.
Proposed Author Amendments : In response to questions and
concerns raised in the Assembly Committee on Banking & Finance,
as well as some of the concerns raised by the opponents, the
author wishes to take the following amendments:
On page 2 line 11 delete the word "use"
On page 2, lines 14-18 strike subdivisions (b) and (c)
in their entirety.
On page 2 line 19 change (d) to (b)
On page 2 after line 23 insert new subdivisions (c) and
(d) to read as follows:
(c) In addition to any penalty provided under Section 9 of
the federal Real Estate Settlement Procedures Act, as
codified in 12 U.S.C. Section 2608 (b), any violation of
this Section shall be punished as a violation of the
seller's license law or charter by the appropriate
California regulator, including but not limited to, the
Departments of Corporations, Real Estate, Financial
Institutions, and Insurance.
(d) No transaction subject to this Act shall be invalidated
solely because of the failure of any person to comply with
any provision of this act. However, a seller who violates
this Act shall be liable in an amount equal to three times
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all charges made for such title insurance or escrow
service.
Possible Additional Author's Amendment : To address the request
of CAR, the Committee may wish to discuss with the author her
openness to adding a 5 year sunset to the legislation.
REGISTERED SUPPORT / OPPOSITION :
Support
California Escrow Association (support in concept)
Escrows for You, Inc.
Escrow Institute of California
Property ID
Several letters from individual realtors and realty businesses
Opposition
California Association of Realtors (to bill in print)
Phil Greer, Greer & Associations (to bill in print)
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334