BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 1169|
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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
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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
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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:
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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,
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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).
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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
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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
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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
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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
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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
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