BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 1169 (Daly)
As Amended June 25, 2013
Hearing Date: July 2, 2013
Fiscal: No
Urgency: No
BCP
SUBJECT
Escrow agent rating service: escrow agents
DESCRIPTION
This bill would, until January 1, 2017, require an escrow agent
rating service to comply with specified portions of the
California Consumer Credit Reporting Agencies Act, and establish
policies and procedures reasonably intended to safeguard from
theft or misuse any personally identifiable information it
obtains from an escrow agent.
BACKGROUND
The federal Consumer Financial Protection Bureau (CFPB),
established by the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act), supervises 111
depository institutions and their affiliates. On April 13,
2012, the CFPB released a bulletin to clarify that institutions
under CFPB supervision may be held responsible for the actions
of the companies with which they contract. The CFPB further
noted that:
Using outside vendors can pose additional risks. A service
provider that is unfamiliar with consumer financial
protection laws or has weak internal controls can harm
consumers. The CFPB wants to ensure that consumers are
protected from irresponsible service providers and that
banks and nonbanks are contracting with honest third
parties.
Today's bulletin states the Bureau's expectation that
(more)
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supervised financial institutions have an effective process
for managing the risks of service provider relationships.
The CFPB recommends that supervised financial institutions
take steps to ensure that business arrangements with service
providers do not present unwarranted risks to consumers.
(CFPB, Consumer Financial Protection Bureau to hold
financial institutions and their service providers
accountable (Apr. 13, 2012)
[as of June 26, 2013].)
In response to that bulletin, some companies (self described as
"risk management providers") now offer to vet service providers
(such as escrow agents) for supervised financial institutions.
Some of those companies reportedly charge fees to the service
provider for inclusion (or preferential treatment) in their
database and prepare reports using a combination of public and
private data.
This bill seeks to respond to concerns about those companies by
enacting safeguards to ensure that escrow agents are able to
obtain access to information that these third party vetting
companies have collected about them, and allow escrow agents to
challenge that information if they believe it is incorrect or
misleading.
CHANGES TO EXISTING LAW
Existing law , the Escrow Law, is administered by the Department
of Corporations, and includes the following definitions:
"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 (Fin. Code Sec. 17003); and
an escrow agent is any person engaged in the business of
receiving escrows for deposit or delivery (Fin. Code Sec.
17004).
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Existing law exempts the following from the Escrow Law:
any person doing business under any state or federal law
relating to banks, trust companies, building and loan or
savings and loan associations, or insurance companies;
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;
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; and
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. (Fin. Code Sec. 17006).
Existing law , the Consumer Credit Reporting Agencies Act
(CCRAA), establishes obligations of consumer credit reporting
agencies, requirements for users of consumer credit reports,
obligations of furnishers of credit information, and provides
for remedies available to persons harmed through violations of
the CCRAA, as specified. (Civ. Code Sec. 1785.1 et seq.)
This bill would require an escrow agent rating service to comply
with and be subject to the following provisions of the CCRAA:
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;
inform a consumer of their right to request a decoded written
version of the file a consumer credit reporting agency has on
that consumer;
disclose the recipients of any consumer credit report on the
consumer which the consumer credit reporting agency has
furnished within two-years preceding the consumer's request;
only furnish a consumer credit report in accordance with the
written instructions of the consumer to who it relates;
prohibit a consumer credit report containing bankruptcies that
antedate the report by more than 10 years, suits and judgments
that antedate the report by more than seven years; unlawful
detainer actions, unless the lessor was the prevailing party;
paid tax liens that antedate the report by more than seven
years; accounts placed for collection or charged to profit or
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loss that antedate the report by more than seven years; and
records of arrest or other adverse information that antedates
the report by more than seven years;
maintain reasonable procedures to ensure that consumer credit
reports are furnished only to persons entitled to receive
them;
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;
allow a consumer to dispute the completeness or accuracy of
any item of information in his or her credit file, require the
consumer credit reporting agency to reinvestigate information
that is disputed, allow a consumer to include a note in
his/her file disputing certain information, and require 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; and
specify the source of any public records they include in their
credit reports.
This bill would additionally provide that an escrow agent rating
service that acts as a reseller of credit information shall
comply with the following:
only procure a consumer credit report for the purpose of
reselling the report or any information therein if the person
discloses to the consumer credit reporting agency which issues
the report the identity of the ultimate end user and each
permissible purpose for which the report is furnished to the
end user of the consumer credit report or information therein;
and
if the report is procured for the purpose of reselling the
report or any information in the report, the service 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.
This bill would require an escrow agent rating service to
establish policies and procedures reasonably intended to
safeguard from theft or misuse and personally identifiable
information it obtains from the escrow agent.
This bill would provide that an escrow agent who suffers damages
as a result of the failure of an escrow agent rating service to
comply with the above requirements may bring an action and
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recover the following:
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;
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;
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; and
in the case of injunctive relief to compel compliance with the
bill: court costs and attorney's fees.
This bill would provide that if an escrow agent rating service
is also a consumer credit reporting agency, as specified,
nothing in this bill shall be construed to suggest that an
escrow agent reporting service that is also a consumer credit
reporting agency is not otherwise required to comply with other
provisions of the CCRAA.
This bill would provide that nothing shall be construed to
authorize a person who was not otherwise legally authorized to
perform escrow services prior to the effective date of this bill
to legally perform escrow services.
This bill would provide that an escrow agent rating service is 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, as specified. An
escrow agent is a reseller of credit information if it assembles
and merges information contained in the database maintained by a
consumer credit reporting agency
This bill would also define "escrow agent," and define
"consumer" to also mean escrow agent.
This bill would sunset on January 1, 2017.
COMMENT
1. Stated need for the bill
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According to the author:
In April, 2012, the Consumer Financial Protection Bureau
("CFPB") issued CFPB Bulletin 2012-031 ("Bulletin"),
clarifying certain provisions of the Dodd-Frank Act
regarding federal consumer financial guidelines for certain
bank and nonbank financial services providers supervised by
the CFPB ("supervised entities"). In California, supervised
entities include mortgage lenders, consumer finance lenders,
credit unions, warehouse lenders, and other entities
originating loans secured by real property. The Bulletin
acknowledged the allowable use by supervised entities of
related or unrelated service providers ("service providers")
for ancillary services. The Bulletin emphasized that
outsourcing to a service provider did not absolve the
supervised entity of its responsibility for complying with
Federal consumer financial law to avoid consumer harm. The
Bulletin stated the CFPB's expectation that supervised
entities have an effective process to ensure that their
business arrangements with service providers, such as escrow
companies, do not present unwarranted risks to consumer.
Examples in the Bulletin include conducting due diligence to
ensure the service provider can comply with financial laws,
and reviewing the service provider policies and procedures
to ensure appropriate training and oversight of employees
who have consumer contact or compliance responsibilities.
The Bulletin did not suggest that a supervised entity's due
diligence review was delegable to another party. However,
certain companies describing their services as "risk
management providers" (and herein, referred to as
preparers/providers of proprietary database and rating
evaluations) claim that, based on the Bulletin's guidance,
individual escrow services employees should be evaluated for
risks by a third party, and have represented to supervised
entities that absent a separate and exhaustive review of
those individuals, lenders may suffer severe and costly
administrative actions by the CFPB. The suggested
additional level of review includes collection of sensitive
personal information, including Social Security Numbers from
individual employees of service providers (escrow
agents/consumers), as well as rating of those individuals
using data from both public and private sources, including
but not limited to credit reports, civil cases including
suits and judgments, records of arrest, misdemeanor
complaints, or conviction of a crime, bankruptcy, unlawful
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detainer actions, and more.
. . .
The preparers/providers of proprietary database and rating
evaluations have stated that absent compliance using their
proprietary results, the supervised entity should not
proceed with a given transaction with a service provider.
In many cases, the supervised entity is a residential
mortgage lender (or warehouse bank funding to a residential
lender) in a pending real estate purchase or refinance
transaction. The insertion of this new layer of unregulated
review, when used to eliminate able service providers,
significantly interferes with consumer choice provisions
found in both state and federal law. In addition, there are
no statutory, due process provisions under which an
individual escrow agent/consumer could dispute, object to,
or eliminate erroneous matters, or by which he or she might
recover damages from results that could ultimately harm his
or her professional livelihood.
The charge for the report by the preparer/provider of the
proprietary database and rating evaluation is generally
several hundreds of dollars per individual escrow
agent/consumer, paid by the individual, not the requesting
supervised entity. There appears to be an ongoing, annual
renewal charge as well. These costs are prohibitive for
individuals and companies alike, particularly where multiple
evaluation services may be required by the supervised
entity. . . . Further, the Commissioner of the California
Department of Corporations has indicated that the use of an
"approved list" by a supervised entity, and the payment by
any party for inclusion thereon may be a violation of both
state and federal anti-kickback and anti-steering
provisions. . . .
[To address these issues,] AB 1169 provides safeguards to
escrow agents that have been "vetted" by "escrow agent
rating services" and clarifies that credit information
collected during the process is within the purview of
certain sections of credit reporting law.
2. Protections for escrow agents
Under existing law, the Consumer Credit Reporting Agencies Act
(CCRAA) generally regulates consumer credit reporting agencies
in order to ensure that credit reports are fair, impartial and
respect the consumer's right to privacy. This bill seeks to
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apply relevant provisions of the CCRAA to escrow agent rating
services, thus, ensuring that escrow agents have similar
protection as would a consumer with respect to the information
held by the rating service. Notably, this bill would allow,
among other things, an agent to inspect files, receive a decoded
copy of their file, prohibit reports from containing certain
adverse events that are over seven or ten years old, and allow
an escrow agent to dispute the completeness or accuracy of any
item in his or her credit file. This bill would also require an
escrow agent rating service to establish policies and procedures
reasonably intended to safeguard from theft or misuse of any
personally identifiable information it obtains from an escrow
agent.
The California Escrow Association (CEA), sponsor, notes that:
"AB 1169 relates to 'escrow agent rating services,' a new class
of businesses purporting to assist banks and other lenders with
meeting their obligations under federal law and guidance from
the Consumer Financial Protection Bureau. . . . As part of the
vetting process, ratings services are apparently evaluating
credit information and information relating to liens, judgments
and bankruptcies. In this fashion, the rating services carry
some of the indicia of credit reporting agencies. The issue of
'vetting' of escrow agents is quite controversial, as is the
issue of who pays for the vetting services. AB 1169 does not
address the issue of vetting or the ability of escrow agents to
pay for this 'service'; rather 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." CEA further notes
that, as a practical matter, an unfavorable rating of an escrow
agent by a rating service could literally put a company or an
individual out of business.
It should be noted that this bill does not seek to address the
validity of "vetting" or whether those services should require
escrow agents to pay for the service. The bill simply applies
select provisions of existing law that otherwise apply to
consumer credit reports to, also, apply to information held by
an escrow agent rating service. From a policy standpoint, as
with any other consumer credit report, it appears reasonable to
allow escrow agents to view their files and have a chance to
correct any misinformation that could damage their professional
reputation
3. Department of Corporations Bulletin 001-12
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On December 5, 2012, the Department of Corporations issued
Bulletin No: 001-12 to warn licensed individuals and entities
about the emergence of third-party risk management companies.
That Bulletin stated:
The Department has learned that some third-party risk
management companies are requiring that potential service
providers pay a fee in order to be pre- 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.
That bulletin further reminded escrow agents that payment of
referral fees to be on a referral list may violate the Escrow
Law (Fin. Code Sec. 17000 et seq.), that mandating the use of a
service provider from a preapproved list may violate the Buyers
Choice Act (Civ. Code Sec. 1103.22 et seq.), and raised
questions about whether the practice could violate the federal
prohibition on kickbacks under the federal Real Estate
Settlement Procedures Act (RESPA) or be considered an unfair
business practice actionable under Section 17200 of the Business
and Professions Code.
Support : California Land Title Association; Escrow Institute of
California; National Notary Association
Opposition : None Known
HISTORY
Source : California Escrow Association
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Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Senate Committee on Banking and Financial Institutions (Ayes 9,
Noes 0)
Assembly Floor (Ayes 75, Noes 0)
Assembly Committee on Banking and Finance (Ayes 11, Noes 0)
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