BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 1169| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 1169 Author: Daly (D) Amended: 8/21/13 in Senate Vote: 21 SENATE BANKING & FINANCIAL INSTITUTIONS COMM : 9-0, 6/19/13 AYES: Correa, Berryhill, Beall, Calderon, Hill, Hueso, Roth, Torres, Walters SENATE JUDICIARY COMMITTEE : 6-0, 7/2/13 AYES: Walters, Anderson, Corbett, Jackson, Leno, Monning NO VOTE RECORDED: Evans ASSEMBLY FLOOR : Not relevant SUBJECT : Escrow agent rating service: escrow agents SOURCE : California Escrow Association DIGEST : This bill defines the term escrow and escrow agent rating service and, until January 1, 2017, requires 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. Senate Floor Amendments of 8/21/13 refine the definition of "escrow agent rating services," define "escrow," and add clarifying language ensuring that title insurers are not CONTINUED AB 1169 Page 2 considered escrow agent rating services when they engage in their regular business activities. ANALYSIS : Existing law: 1.Provides for the Escrow Law (Financial (FIN) Code Section 17000 et seq.), administered by the Department of Corporations (CORP). The Escrow Law includes the following 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. B. An "escrow agent" is any person engaged in the business of receiving escrows for deposit or delivery. 1.Exempts from the Escrow Law all of the following (FIN Section 17006): A. Any person doing business under any law of 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 CONTINUED AB 1169 Page 3 performance of escrow services by title insurers and underwritten title companies licensed under the Insurance Code (INS). D. Any broker licensed by the Commissioner of the Department of Real Estate (DRE) 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 DRE to perform escrow services, as specified. 1.Pursuant to INS 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. 2.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 underwritten title company. 3.Provides for the Consumer Credit Reporting Agencies Act (CCRAA; Civil Code (CIV) 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). This bill, until January 1, 2017: CONTINUED AB 1169 Page 4 1.Defines "escrow" as 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, promise, promisor, obligee, obligor, bailee, bailor, or any agent or employee of any of the latter. 2.Defines 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. An escrow agent rating service does not include (a) a creditor or an agent of a creditor evaluating an escrow agent in connection with an extension of credit by that creditor, nor (b) an entity for which a natural person performs escrow services as an employee or an independent contractor. 3.Defines an "escrow agent" as a natural person described who performs escrow services for an entity licensed pursuant to the Escrow Law (FIN Chapter 1 of Division 6); a natural person performing escrow services for a title insurer, as specified, or an underwritten title company licensed pursuant to INS Article 3.7 of Chapter 1 of Part 6 of Division 2; a natural person performing escrow services for a controlled escrow company, as defined in INS Section 12340.6; or a natural person licensed pursuant to Business and Professions Code Division 4, who performs escrow services in accordance with FIN Section 17006. 4.Provides that an escrow agent shall be considered a consumer for purposes of the bill. 5.Requires an escrow agent rating service to comply with and be subject to all of the following portions of the Consumer Credit Reporting Agencies Act; all code section references are to the CIV: A. Section 1785.10 (a) (requirement to allow a consumer, CONTINUED AB 1169 Page 5 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. Section 1785.10 (b), limited to the obligation to inform a consumer of his/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. Section 1785.10 (d) (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. Section 1785.11 (a)(2) (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; 10 years in other cases] in a consumer's credit report). F. Section 1785.15 (a)(1) (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/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 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). CONTINUED AB 1169 Page 6 H. Section 1785.18 (requirement for consumer credit reporting agencies to specify the source of any public records they include in their credit reports). 1.Requires 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. 2.Provides that an escrow agent rating service is a reseller of credit information if it assembles and merges information contained in the database(s) of a consumer credit reporting agency. Requires an escrow agent rating service that acts as a reseller of credit information to comply with CIV 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. 1.Authorizes 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 CIV Section 1785.31, which provides for all of the following: 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 CONTINUED AB 1169 Page 7 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. 1.Provides that nothing in this bill (a) 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; nor (b) is intended to alter FIN Section 17420, including the legal authority of an escrow agency to compensate an escrow agent rating service for a report, as specified. Background Escrow services may legally be performed in California under a variety of different laws, administered by a variety of different regulators. Escrow may be performed by persons licensed under the Escrow Law, administered by CORP; 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. In April 2012, the CFPB issued Bulletin 2012-03, dated April 12, 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 CONTINUED AB 1169 Page 8 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: Conducting thorough due diligence to verify that the service provider understands and is capable of complying with federal consumer financial law; 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 of employees or agents that have consumer contact or compliance responsibilities; 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; Establishing internal controls and on-going monitoring to determine whether the service provider is complying with federal consumer financial law; and 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 CONTINUED AB 1169 Page 9 and other third parties involved in the foreclosure process. A list of third party vetting services, nor a comparison of what information each of the third party vetting services is seeking from the professionals they vet, has not been developed. 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. 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. In December 2012, CORP issued a bulletin (Commissioner's Bulletin 001-12) stating that, "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." CORP went on to cite FIN 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." CORP 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. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 8/22/13) California Escrow Association (source) Escrow Institute of California CONTINUED AB 1169 Page 10 California Land Title Association National Notary Association ARGUMENTS IN SUPPORT : The California Escrow Association (CEA) 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'; 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 states that 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. The Escrow Institute of California observes that, although this bill does not deal with how risk management providers collect data or charge settlement service providers to be on a database, the bill does provide some level of protection and due process under the CCRAA. The California Land Title Association notes that without this bill providing oversight and controls on the risk management provider process, an error in reporting could cause significant harm to an individual in the event that an inaccurate evaluation resulted in the denial of business to the person. The National Notary Association supports the consumer protections that this bill will give to all who must use third party risk management companies, including notaries public. MW:nl 8/22/13 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED AB 1169 Page 11 CONTINUED