BILL ANALYSIS Ó
AB 1169
Page 1
Date of Hearing: April 22, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AB 1169 (Daly) - As Amended: April 1, 2013
SUBJECT : Consumer credit reports: escrow agents: real estate.
SUMMARY : Revises the definition of a consumer credit report to
include information regarding a proprietary database and rating
evaluation. Specifically, this bill :
1)Provides that a "consumer credit report" includes specified
information that would be used in establishing a consumer's
eligibility for a proprietary database and rating evaluation.
2)Defines "proprietary database and rating evaluation" as a
report prepared for a fee and provided to a furnishing of
credit for the purpose of evaluating a consumer in the
consumer's capacity as an escrow agent, or as a person
performing in the business of title insurance, or as a real
estate broker, or his or her employees.
3)Specifies that information stored or retained that is used to
prepare a proprietary data base and rating evaluation
constitutes a "file" under existing law, which is defined as
all information on that consumer recorded and retained by a
consumer reporting agency, regardless of how the information
is stored.
EXISTING LAW
1)Regulates consumer credit reporting agencies via the Consumer
Credit Reporting Agencies Act. [Civil Code, Section 1785.1 et
seq. All further references are to the Civil Code].
2)Defines consumer credit report as any written, oral, or other
communication of any information by a consumer credit
reporting agency (CRA) bearing on a consumer's credit
worthiness, credit standing, or credit capacity, which is used
or is expected to be used, or collected in whole or in part,
for the purpose of serving as a factor in establishing the
consumer's eligibility for: (1) credit to be used primarily
for personal, family, or household purposes, or (2) employment
purposes, or (3) hiring of a dwelling unit, as defined in
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subdivision (c) of Section 1940, or (4) other purposes
authorized in Section 1785.11. [Section 1785.3].
3)Requires that every (CRA) shall, upon request and proper
identification of any consumer, allow the consumer to visually
inspect all files maintained regarding that consumer at the
time of the request. [Section 1785.10]
4)Specifies the circumstances under which a CRA shall furnish a
consumer credit report. [Section 1785.11]
FISCAL EFFECT : None
COMMENTS :
On April 13, 2012 the Consumer Financial Protection Bureau
(CFPB) issued Bulletin 2012-03 (Bulletin) designed to clarify
provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) relating to appropriate third
party vendor risk management by supervised banks and nonbank
entities. In California these non-bank entities would include
mortgage lenders consumer finance lenders, credit unions,
warehouse lenders, and other entities licensed to originate
loans securing real property.
The provision of the Dodd-Frank Act inspiring clarification in
section 1002(26) concerning the definition of "service provider"
which is defined as "any person that provides a material service
to a covered person in connection with the offering or provision
of such covered person of a consumer financial product or
service." The CFPB Bulletin acknowledges that supervised
entities may need to use the services of third party service
providers, but that such use, does not absolve the covered
entities from their responsibility for complying with Federal
consumer protection laws. Furthermore, CFPB urged supervised
banks and nonbanks to have effective procedures for managing the
risk of service provider relationships. The Bulletin provides
several steps that could be taken to minimize risks, including,
but not limited to,
a) Conducting thorough due diligence to verify that a
service provider understands and can comply with Federal
consumer financial law;
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b) Request and review the service providers policies,
procedures, controls and training materials;
c) Include in contracts with service providers clear
compliance expectations;
d) Establish internal controls and ongoing monitoring; and
e) Taking prompt action to address any problems discovered
from the monitoring process.
Subsequent to the release of the Bulletin a new type of entity
emerged to handle the due diligence review process. Companies
describing themselves as risk management providers (RMPs)
emerged to provide a layer of protection for supervised entities
when they use third parties for settlement services such as
escrow agents.
How do these RMPs work? For a fee, a settlement provider, such
as an escrow agent, sign up to be included on a database managed
by the RMP that generates a low, medium or high risk index score
that is made available to lenders and others in the mortgage
industry. Settlement service providers are told that they will
receive preference by lenders for the use of their services
because of the special vetting process. The fee for each
settlement service provider is several hundred dollars per year
to maintain "accreditation." A failure to maintain
"accreditation" could lead a provider to lose business from
lenders as these RMPs use information on settlement providers to
create lists of vetted agents that is made available to
supervised entities. As one company advertises, "These lenders
and underwriters utilize the?list as their key source of closing
professionals?" The implication here appears to be that either
through a bad review or no review at all, a settlement service
provider runs the risk of being pushed out of their industry.
The reports done by RMPs are prepared using a combination of
public and private data, including credit reports, civil cases,
arrest records, bankruptcy, unlawful detainer actions and more.
On December 5th, 2012, the Commissioner of the Department of
Corporations issued Commissioner's Bulletin No: 001-12. The
Commissioner's Bulletin addressed the rise of concerns relating
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to RMPs. The Commissioner's Bulletin, among other things,
stated the following:
The Department has learned that some third-party risk
management companies are requiring that potential service
providers pay a fee in order to be screened by the
companies, and to appear on a list of "approved" service
providers. In addition, some supervised banks and nonbanks
have been advising potential service providers that the
service providers must be on the third -party risk
management company's "approved list" in order to receive
business.
Lenders subject to the Department's jurisdiction should be
cautious of delegating their responsibility to vet service
providers to third parties, and are reminded that they are
responsible for such companies' compliance with the law.
Escrow agents should be cautious of subscribing to the
vetting services of third party companies for a fee, in
order to get on a list provided to lenders, as these
actions may lead to violations of law. All parties should
take necessary precautions prior to sharing personal and
confidential information with third parties.
AB 1169 attempts to address the issue of RMPs by ensuring that
these entities must comply with California's credit reporting
laws. A major issue of concern raised by settlement service
providers is that the RMPs use credit information in addition to
other sources of information in order to evaluate the settlement
service provider for risk. Among the Frequently Asked Questions
on the website of Secure Settlements is the following,
"Attorneys and settlement agents must pass a list of
credentialing criteria that covers everything from E&E coverage,
proven industry experience, valid licensing and bonding where
required, clean credit, criminal and litigation backgrounds,
trust account safety, and other proprietary criteria." Clearly
this company is evaluating and reviewing credit information and
"other proprietary criteria."
AB 1169 does not propose to limit how these entities collect
data, or how they charge for membership to their data base.
Instead, AB 1169 ensures that proprietary databases and rating
evaluations prepared by RMPs are covered under California's
Consumer Credit Reporting Agencies Act, Civil Code section
1785.1 et seq. This inclusion would allow those persons subject
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to review by RMPs various remedies, including notice and
opportunity to be heard in response to an adverse report. This
would allow the settlement service provider to request the
correction of any errors that show up in their report with the
RMP. Effectively, a RMP that operates a proprietary database or
rating evaluation would be considered a CRA.
As evidenced by the Commissioner's Bulletin, the use of RMPs
raises many questions concerning the use of a pre-approved, or
pre-screened exclusive list, that requires payment of a fee, for
the purpose of choosing a mortgage settlement service provider.
Specifically, the Commissioner's Bulletin states:
Among other things, one purpose of this bulletin is to
remind escrow agents of the prohibition in Financial Code
section 17420 against the payment of referral fees for
soliciting escrow accounts?The payment of fees to be on a
referral list appears to fall within this prohibition, and
consequently may be a violation of the Escrow Law.
The author and sponsors may want to consider, moving forward,
additional clarifications in the Escrow law and other places
that will provide guidance for licensees on the use of RMPs. At
several hundred dollars per year to register with RMPs, mortgage
settlement service licensees should clearly know if they are
utilizing a service that is not prohibited under existing law.
The Commissioner's Bulletin raises the prospect that these
arrangements raise significant legal and regulatory issues.
While committee staff does conclude that these services and
arrangements are in violation of laws or regulations, this grey
area raises enough significant concern that additional efforts
may be necessary to provide further clarity for the sake of all
parties.
REGISTERED SUPPORT / OPPOSITION :
Support
California Escrow Association (CEA) - Sponsor
California Land Title Association
National Notary Association
Opposition
None on file.
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Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081