BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
AB 1169 (Daly) Hearing Date: June 19,
2013
As Amended: June 10, 2013
Fiscal: No
Urgency: No
SUMMARY Would define the term "escrow agent rating service"
and would, until January 1, 2017, require escrow agent rating
services to comply with specified portions of the California
Consumer Credit Reporting Agencies Act (CCRAA), and establish
policies and procedures reasonably intended to safeguard from
theft or misuse any personally identifiable information it
obtains from an escrow agent.
DESCRIPTION Until January 1, 2017:
1. Would define an escrow agent rating service as a person or
entity that prepares a report for compensation, or in
expectation of compensation, for use by a creditor in
evaluating the capacity of an escrow agent to perform
settlement services in connection with an extension of
credit.
2. Would define an escrow agent as a person described in
Section 17004 of the Financial Code, who performs escrow
services pursuant to the Escrow Law (Chapter 1 of Division 6
of the Financial Code); a person performing escrow services
for a title insurer or underwritten title company licensed
pursuant to Article 3.7 of Chapter 1 of Part 6 of Division 2
of the Insurance Code; a person performing escrow services
for a controlled escrow company, as defined in Insurance
Code Section 12340.6; or a person licensed pursuant to
Division 4 of the Business and Professions Code, who
performs escrow services as described in Section 17006 of
the Financial Code.
3. Would provide that an escrow agent shall be considered a
consumer for purposes of the bill.
4. Would require an escrow agent rating service to comply with
AB 1169 (Daly), Page 2
and be subject to all of the following portions of the
Consumer Credit Reporting Agencies Act:
a. Subdivision (a) of Section 1785.10 (requirement to
allow a consumer, who presents proper identification, to
visually inspect all files maintained by a credit
reporting agency regarding that consumer at the time of
the consumer's request).
b. Subdivision (b) of Section 1785.10, limited to the
obligation to inform a consumer of his or her right to a
decoded written version of a file (requirement to inform
a consumer of their right to request a decoded written
version of the file a consumer reporting agency has on
that consumer).
c. Subdivision (d) of Section 1785.10 (requirement that
a consumer credit reporting agency disclose the
recipients of any consumer credit report on the consumer
that it furnishes for employment purposes, within the
two-year period preceding a consumer's request for such
information).
d. Paragraph (2) of subdivision (a) of Section 1785.11
(requirement that a consumer credit reporting agency
furnish a consumer credit report only in accordance with
the written instructions of the consumer to whom it
relates).
e. Section 1785.13 (prohibition against including
certain types of adverse information [such as
bankruptcies, accounts sent to collection, records of
arrest, etc.] that exceed a certain age [seven years in
some cases; ten years in other cases] in a consumer's
credit report).
f. Paragraph (1) of subdivision (a) of Section 1785.15
(requirement to allow a consumer to request and receive
either a decoded written version of their file or a
written copy of their file, including all information in
the file at the time of the request, with an explanation
of any code used).
g. Section 1785.16 (requirement to allow a consumer to
dispute the completeness or accuracy of any item of
information in his or her credit file, requirement of the
AB 1169 (Daly), Page 3
consumer credit reporting agency to reinvestigate
information that is disputed, requirement to allow a
consumer to include a note in his/her file disputing
certain information, and requirement for the consumer
credit reporting agency to include a consumer's note in
any consumer credit report it provides that includes
information being disputed by that consumer).
h. Section 1785.18 (requirement for consumer credit
reporting agencies to specify the source of any public
records they include in their credit reports).
5. Would require an escrow agent rating service to establish
policies and procedures reasonably intended to safeguard
from theft or misuse any personally identifiable information
it obtains from an escrow agent.
6. Would provide that an escrow agent rating service is a
reseller of credit information if it assembles and merges
information contained in the database or databases of a
consumer credit reporting agency. Would require an escrow
agent rating service that acts as a reseller of credit
information to comply with Civil Code Section 1785.22, which
states both of the following:
a. No person may procure a consumer credit report for
the purpose of reselling it or any information contained
in it unless it discloses to the consumer credit
reporting agency that issues the report the identity of
the ultimate end user and each permissible purpose for
which the report is furnished to the end user.
b. A person that procures a consumer credit report for
the purpose of reselling the report or any information in
the report must establish and comply with reasonable
procedures designed to ensure that the report or
information is resold by the person only for a purpose
for which the report may legally be furnished.
7. Would authorize an escrow agent who suffers damages as a
result of the failure of an escrow agent rating service to
comply with the provisions of the bill to bring an action in
a court of competent jurisdiction in accordance with the
provisions of Section 1785.31, which provides for all of the
following:
AB 1169 (Daly), Page 4
a. In the case of a negligent violation: actual
damages, including court costs, loss of wages, attorney's
fees and costs, and, when applicable, pain and suffering.
b. In the case of a willful violation: actual damages,
including court costs, loss of wages, attorney's fees and
costs, plus punitive damages between $100 and $5,000 per
violation, as the court deems proper, plus any other
relief the court deems proper.
c. In the case of a class action alleging a willful
violation: punitive damages in an amount that the court
may allow, plus attorney's fees and costs.
d. In the case of injunctive relief to compel
compliance with the bill: court costs and attorney's
fees.
EXISTING LAW
8. Provides for the Escrow Law (Financial Code Sections 17000
et seq.), administered by the Department of Corporations
(DOC). The Escrow Law includes the following among its
definitions:
a. Escrow is any transaction in which one person, for
the purpose of effecting the sale, transfer, encumbering,
or leasing of real or personal property to another
person, delivers any written instrument, money, evidence
of title to real or personal property, or other thing of
value to a third person to be held by that third person
until the happening of a specified event or the
performance of a prescribed condition, when it is then to
be delivered by that third person to a grantee, grantor,
promisee, promisor, obligee, obligor, bailee, bailor, or
any agent or employee of any of the latter (Financial
Code Section 17003).
b. An escrow agent is any person engaged in the
business of receiving escrows for deposit or delivery
(Financial Code Section 17004).
9. Exempts from the Escrow Law all of the following (Financial
Code Section 17006):
a. Any person doing business under any law of
AB 1169 (Daly), Page 5
California or the United States relating to banks, trust
companies, building and loan or savings and loan
associations, or insurance companies.
b. Any person licensed to practice law in California
who has a bona fide client relationship with a principal
in a real estate or personal property transaction and who
is not actively engaged in the business of an escrow
agent.
c. Any person whose principal business is that of
preparing abstracts or making searches of title that are
used as a basis for the issuance of a policy of title
insurance by a company doing business under any law of
this state relating to insurance companies. This
exemption allows for the performance of escrow services
by title insurers and underwritten title companies
licensed under the Insurance Code (see below)
d. Any broker licensed by the Real Estate Commissioner
while performing acts in the course of or incidental to a
real estate transaction in which the broker is an agent
or a party to the transaction and in which the broker is
performing an act for which a real estate license is
required. This exemption allows real estate brokers
licensed by the Department of Real Estate to perform
escrow services, as specified.
10. Pursuant to Insurance Code (Section 12340.3), provides that
the "business of title insurance" includes, among other
things, the performance by a title insurer, an underwritten
title company or a controlled escrow company of any service
in conjunction with the issuance or contemplated issuance of
a title policy, including but not limited to the handling of
any escrow.
11. Defines a controlled escrow company as any person, other
than a title insurer or underwritten title company, whose
principal business is the handling of escrows of real
property transactions in connection with which title
policies are issued, which person, if an artificial person,
directly or indirectly, is controlled by or controls or is
under common control with a title insurer, or controls or is
controlled by or is under common control with an
underwritten title company, or if a natural person, is
employed by or controlled by a title insurer or by an
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underwritten title company (Insurance Code Section 12340.6).
12. Provides for the Consumer Credit Reporting Agencies Act
(CCRAA; Civil Code Sections 1785.1 et seq.), which
establishes obligations of consumer credit reporting
agencies (1785.1 through 1785.19.5), requirements for users
of consumer credit reports (1785.20 through 1785.22),
obligations of furnishers of credit information (1785.25
through 1785.26), and which provides for remedies available
to persons harmed through violations of the CCRAA, as
specified (1785.30 through 1785.36).
COMMENTS
1. Purpose: This bill is sponsored by the California Escrow
Association, to help escrow agents obtain access to
information that third party vetting companies have
collected about them, and allow escrow agents to challenge
that information, if they believe that the information is
incorrect or misleading.
2. Background: Escrow services may legally be performed in
California under a variety of different laws, administered
by a variety of different regulators. As summarized above,
escrow may be performed by persons licensed under the Escrow
Law, administered by DOC; under the Real Estate Law,
administered by DRE; under the Insurance Law, administered
by the Department of Insurance (CDI); and may also be
performed by attorneys and depository institutions.
This bill is a reaction to the business practices of companies
that have sprung up to help mortgage lenders comply with
their requirements to exercise oversight over the third
party settlement providers they use. Financial service
providers are not required to use third parties to help them
oversee the actions of their service providers, but some
have chosen to do so, in hopes of minimizing the possibility
that the federal Consumer Financial Protection Bureau (CFPB)
or other federal regulators will sanction them for
inadequate supervision of third party providers.
One of the largest service provider vetting services (Secure
Settlements, Inc; www.securesettlements.com ), describes the
need for its services as follows: "Since at least 2005,
FNMA [Fannie Mae] and other regulators have strongly
recommended that lenders establish processes to verify the
AB 1169 (Daly), Page 7
credentials and risk status of third-party service
providers, including closing professionals. The past
several years, many warehouse banks and lenders have
established an approval process for agents, and have refused
to wire funds and send closing documents to non-approved
agents. The process varied between lenders and banks and
was confusing, required repetitive submission of trust and
insurance information, and was largely ineffective in
managing risk because it rarely involved updating
information or monitoring for changes in risk status. For
the past decade, Secure Settlements' founder has been
developing a process to strengthen risk management in this
area, which eventually coincided with Dodd-Frank and CFPB
regulations in 2012 mandating greater risk management in
this area. Secure Settlements is not the only company which
offers professional vetting services for closing
professionals. There are several others nationwide."
The CFPB regulations to which Secure Settlements refers on its
web page are not technically regulations. In April 2012,
the CFPB issued a bulletin (Bulletin 2012-03, dated April
13, 2012), which reminded the entities it supervises (both
banks and non-banks) that existing law requires them to
supervise their business relationships with service
providers in a manner that ensures compliance with federal
consumer financial law. That bulletin states, "The CFPB
recognizes that the use of service providers is often an
appropriate business decision for supervised banks and
nonbanks. Supervised banks and nonbanks may outsource
certain functions to service providers due to resource
constraints, use service providers to develop and market
additional products or services, or rely on expertise from
service providers that would not otherwise be available
without significant investment.
"To limit the potential for statutory or regulatory violations
and related consumer harm, supervised banks and nonbanks
should take steps to ensure that their business arrangements
with service providers do not present unwarranted risks to
consumers. These steps should include, but are not limited
to: 1) Conducting thorough due diligence to verify that the
service provider understands and is capable of complying
with federal consumer financial law; 2) Requesting and
reviewing the service provider's policies, procedures,
internal controls, and training materials to ensure that the
service provider conducts appropriate training and oversight
AB 1169 (Daly), Page 8
of employees or agents that have consumer contact or
compliance responsibilities; 3) Including in the contract
with the service provider clear expectations about
compliance, as well as appropriate and enforceable
consequences for violating any compliance-related
responsibilities, including engaging in unfair, deceptive,
or abusive acts or practices; 4) Establishing internal
controls and on-going monitoring to determine whether the
service provider is complying with federal consumer
financial law; and 5) Taking prompt action to address fully
any problems identified through the monitoring process,
including terminating the relationship where appropriate."
The CFPB's Bulletin was not the only recent action taken by
federal regulators to remind banks and non-banks of their
responsibilities to adequately supervise the third parties
they use in connection with their mortgage operations. In
April 2011, the three primary federal regulators of the
nation's 14 largest mortgage servicers issued enforcement
orders in which, among other things, they found inadequate
oversight of attorneys and other third parties involved in
the foreclosure process.
3. Who Is Doing The Vetting? No one is entirely sure. Several
trade groups with members who are among those being vetted
by third parties agree that Secure Settlements is the
largest, but not the only company offering these services,
but no one has developed a list of the other third party
vetting services, nor a comparison of what information each
of the third party vetting services is seeking from the
professionals they vet. These third party vetting service
providers are not regulated, so there is no single regulator
with information that could be used to help characterize the
industry.
4. What Information Is Being Requested? This, too, is unclear,
in large part because it is unclear who to ask. Other than
Secure Settlements, whose web site does not list the
information it collects during its vetting process, the
identities of the third parties doing the vetting are
largely unknown. Neither the sponsor nor supporters of this
bill identified any escrow professionals who agreed to be
vetted, who could shed light on the information requested
from them. Third party accounts (escrow professionals who
know of others who were vetted) are vague, at best,
regarding what is being requested, but seem to suggest that
AB 1169 (Daly), Page 9
requests involve personally identifiable information and
information about trust accounts managed by escrow agents.
5. Which Closing Professionals Are Being Vetted? That, too, is
unclear. Independent escrow professionals operating in
California pursuant to licenses issued by DOC are definitely
impacted. Real estate licensees performing escrows, and
employees of small title companies who perform escrows, may
also be affected. Employees of the largest title companies
may not be affected. According to the Frequently Asked
Questions section of Secure Settlements' web site, "SSI
supports the vetting of all individuals who handle funds and
interact with consumers at the closing table. However, we
also realize that those employees who work directly under
the supervision of major title insurers such as First
American Title, Steward Title, Old Republic Title, and
Fidelity National Title, have long-standing, trusted
relationships with many warehouse banks and lenders. These
insurers have adopted internal processes to verify and
monitor their own employees that are consistent with good
risk management. Therefore, anyone who is a direct employee
(as opposed to a contract partner, such as an abstract
agency or title agency where the employees are not directly
managed by the insurer) does not have to be vetted through
the SSI system at this time."
Because no one is entirely sure which other companies offer
services similar to those being offered by Secure
Settlements, staff has been unable to determine whether
those other companies share the view of Secure Settlements
that employees of large title companies need not be vetted
using their services.
6. Why The Concern? California law generally prohibits persons
who provide services in connection with real property
transactions from paying money or offering other items of
value in exchange for referrals. Secure Settlements
requires escrow agents to pay a fee of up to $299 per
employee, to cover the costs of their screening. The
company claims that individuals who appear on its list of
approved, vetted closing professionals will be eligible to
obtain business from the lenders who use its vetting
services.
In December 2012, the Department of Corporations issued a
bulletin (Commissioner's Bulletin 001-12) stating that,
AB 1169 (Daly), Page 10
"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." DOC went on to cite
Financial Code Section 17420 (part of the Escrow Law):
"Except for the normal compensation of his own employees, it
shall be a violation of this division to pay over to any
other person any commission, fee, or other consideration as
compensation for referring, soliciting, handling, or
servicing escrow customers or accounts." DOC stated that
the payment of fees to appear on a referral list maintained
by a service provider vetting service appears to fall within
the Section 17420 prohibition, and consequently may be a
violation of the Escrow Law.
Several escrow professionals are also concerned that third party
vetters appear to be requesting personally identifiable
information, without providing any assurances that the
information will be protected. These escrow agents are also
concerned that vetters may be requesting information about
the trust accounts these agents manage - information they do
not believe should be released to anyone who is not legally
entitled to it.
To date, neither DRE nor CDI have issued guidance similar to the
bulletin issued by DOC. When contacted by Committee staff
in May, 2013, representatives of both departments indicated
that they had no plans to do so. DRE has not heard from its
licensees about the problem, and CDI prefers to wait until
after the National Association of Insurance Companies weighs
in on the topic (something CDI believes that NAIC is in the
process of doing, albeit on a longer timeline than is
necessary to address what some escrow professionals see as
an urgent problem).
7. How This Bill Addresses The Problem: This bill would not
prohibit the payment of a fee by an escrow agent to a third
party vetter, nor would it prohibit third party vetters from
requesting information from escrow agents about their trust
accounts. Instead, the bill would require third party
vetters to establish policies and procedures designed to
safeguard personally identifiable information collected from
escrow agents, and would subject third party vetters to some
of the provisions of the CCRAA.
Provisions of the CCRAA that this bill would apply to third
AB 1169 (Daly), Page 11
party vetters include the following:
a. Requirement to allow a consumer, who presents proper
identification, to visually inspect all files maintained
regarding that consumer at the time of the consumer's
request.
b. Requirement to inform a consumer of their right to
request a decoded written version of the file the
consumer reporting agency has on that consumer.
c. Requirement that a consumer credit reporting agency
disclose the recipients of any consumer credit report on
the consumer that it furnishes for employment purposes,
within the two-year period preceding a consumer's request
for such information.
d. Requirement that a consumer credit reporting agency
furnish a consumer credit report only in accordance with
the written instructions of the consumer to whom it
relates.
e. Prohibition against including certain types of
adverse information (such as bankruptcies, accounts sent
to collection, records of arrest, etc.) that exceed a
certain age (seven years in some cases; ten years in
other cases) in a consumer's credit report.
f. Requirement to allow a consumer to request and
receive either a decoded written version of their file or
a written copy of their file, including all information
in the file at the time of the request, with an
explanation of any code used.
g. Requirement to allow a consumer to dispute the
completeness or accuracy of any item of information in
his or her credit file, requirement of the consumer
credit reporting agency to reinvestigate information that
is disputed, requirement to allow a consumer to include a
note in his/her file in which they dispute certain
information, and the requirement that the consumer credit
reporting agency include that consumer's note in any
consumer credit report it provides that includes the
information being disputed.
h. Requirement for consumer credit reporting agencies
AB 1169 (Daly), Page 12
to specify the source of any public records they include
in their credit reports.
i. Requirement that persons who act as resellers of
consumer credit reports establish and comply with
reasonable procedures designed to ensure that the
consumer credit report or information is resold only for
an allowable purpose.
8. Summary of Arguments in Support:
a. The California Escrow Association is sponsoring this
bill to help protect its members. The issue of vetting
escrow agents is quite controversial, as is the issue of
who pays for the vetting services. AB 1169 does not
address the validity of vetting or the ability of escrow
agents to pay for this "service;" the bill merely
attempts to clarify that if credit information is part of
the vetting process, escrow agents are entitled to
appropriate protections under the existing credit
reporting law. Because an unfavorable rating of an
escrow agent by a rating service could literally put a
company or an individual out of business, it is only fair
that escrow agents be given the opportunity to see the
information and correct errors.
b. The Escrow Institute of California (EIC) observes
that, although AB 1169 does not deal with how risk
management providers collect data or charge settlement
service providers to be on a database, the legislation
does provide some level of protection and due process
under California's Consumer Credit Reporting Agencies
Act. EIC rhetorically questions why its members would
need to be vetted at all; the Escrow Law includes
requirements that are far more rigorous and protective of
consumers than any unregulated risk management provider
could match through a third-party vetting process.
c. The California Land Title Association (CLTA) offers
input similar to the input offered by EIC (i.e., CLTA
believes that those of its members who work for
underwritten title companies are already very well
screened by CDI; third-party risk management providers
are unnecessary to ensure their competency). However,
CLTA supports the bill, because without any and controls
on the risk management provider process, an error in
AB 1169 (Daly), Page 13
reporting could cause significant harm to an individual,
if it resulted in the denial of business to that person.
d. The National Notary Association supports the
consumer protections that AB 1169 will give to all who
must use third party risk management companies, including
notaries public.
9. Summary of Arguments in Opposition: None received.
10. Amendments:
a. Staff of CDI have suggested a clarifying
amendment to better describe the manner in which title
insurers are licensed.
Page 3, line 14, after insurer, insert: admitted
pursuant to Part 2 of Chapter 1 of Article 3 of the
Insurance Code
b. A clarifying amendment is also necessary to
better describe the manner in which real estate
licensees are authorized to engage in escrow
activities.
Page 3, line 22, strike "as described in" and insert:
in accordance with
c. An amendment is also necessary to clarify that
the escrow agents to which this bill applies its
provisions are individuals, not businesses. Although
both individuals and businesses can legally perform
escrow services in California, escrow agent rating
services are not offering to vet businesses; instead,
they are focusing on individuals. It is also
illogical to refer to businesses as "consumers" in the
context of consumer credit reporting.
Page 3, lines 10, 14, 18, and 20: After "a" insert:
natural
d. The following amendment will clarify that the
term escrow agent rating service is not construed to
include a creditor or employee of a creditor:
AB 1169 (Daly), Page 14
Page 3, line 28, after the period, insert: An escrow
agent rating service does not include a creditor or
employee of a creditor evaluating an escrow agent in
connection with an extension of credit by that
creditor.
e. Legislative Counsel unintentionally omitted a
section of the CCRAA that the author and sponsor would
like to see applied to escrow agent rating services.
That section (Civil Code Section 1785.14), requires
consumer credit reporting agencies to maintain
reasonable procedures to ensure that consumer credit
reports are furnished only to persons entitled to
receive them.
Page 4, between lines 10 and 11, insert: (6) 1785.14,
and renumber the remaining paragraphs.
f. A clarifying amendment is also suggested to
minimize the possibility that escrow professionals may
view this bill as changing the licensing requirements
applicable to escrow agents.
Page 4, between lines 32 and 33, insert: (g) Nothing in
this section shall authorize any person to legally
perform escrow services, who was not legally
authorized to perform escrow services prior to
enactment of this section.
AB 1169 (Daly), Page 15
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Escrow Association (sponsor)
Escrow Institute of California
California Land Title Association
National Notary Association
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102