BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



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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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