BILL NUMBER: AB 704 ENROLLED
BILL TEXT
PASSED THE SENATE SEPTEMBER 1, 2015
PASSED THE ASSEMBLY SEPTEMBER 2, 2015
AMENDED IN SENATE JULY 6, 2015
AMENDED IN SENATE JUNE 15, 2015
AMENDED IN ASSEMBLY APRIL 6, 2015
INTRODUCED BY Assembly Member Cooley
FEBRUARY 25, 2015
An act to amend, repeal, and add Section 12389 of, and to add
Section 12340.13 to, the Insurance Code, relating to escrow.
LEGISLATIVE COUNSEL'S DIGEST
AB 704, Cooley. Escrow services: authorization to transact
business.
Existing law authorizes an underwritten title company to engage in
the escrow business and to act as an escrow agent if the company
satisfies specified requirements, including maintenance of specified
records, and the deposit of a specified sum of money with the
commissioner. Existing law specifies the conditions under which the
commissioner may release or return those deposits to the company.
This bill would expand the requirements for a company to be
authorized to conduct escrow services, to engage in the escrow
business, and to act as an escrow agent. The bill would authorize a
company that is a stock corporation to conduct escrow services
through a business location, as defined, if the company receives
approval of its name from the commissioner, maintains a minimum net
worth, obtains a license to transact its business from the
commissioner, and furnishes audits to the commissioner, as specified.
The bill would require a company, on and after July 1, 2016, as a
condition of engaging in the escrow business or acting as an escrow
agent, to maintain a bond or deposit in a specified amount. The bill
would authorize a company to, with the approval of the commissioner,
obtain an irrevocable letter of credit in lieu of that bond. The bill
would specify conditions for the issuance of that bond or letters of
credit or use of that cash deposit. The bill would require the
commissioner to promptly release all escrow-related deposits made
with the commissioner before July 1, 2016, under specified
conditions, including the deposit of the bond, letter of credit, or
cash deposit described above.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 12340.13 is added to the Insurance Code, to
read:
12340.13. "Business location" means a facility or other place of
business in this state where an underwritten title company or
controlled escrow company engages in the business of conducting
escrow services.
SEC. 2. Section 12389 of the Insurance Code is amended to read:
12389. (a) An underwritten title company as defined in Section
12340.5, which shall be a stock corporation, may, subject to
subdivision (b), (1) engage in the business of preparing title
searches, title reports, title examinations, or certificates or
abstracts of title, upon the basis of which a title insurer writes
title policies, and (2) conduct escrow services at business
locations, as defined in Section 12340.13, in counties in which the
underwritten title company is licensed to conduct escrow services
regardless of the location of the real or personal property involved
in the transaction.
(b) (1) Only domestic corporations may be licensed under this
section and no underwritten title company, as defined in Section
12340.5, shall become licensed under this section, or change the name
under which it is licensed or operates, unless it has first complied
with Section 881.
(2) (A) Depending upon the county or counties in which the company
is licensed to transact business, it shall maintain required minimum
net worth as follows:
Aggregate number of
documents
recorded and documents
filed in the
offices of the county
recorders in the
preceding calendar year in
all counties
where the company is
licensed to transact
business.
Amount of
required
Number of documents minimum net worth
Less than 50,000 .............. $ 75,000
50,000 to 100,000 ............. 120,000
100,000 to 500,000 ............ 200,000
500,000 to 1,000,000 .......... 300,000
1,000,000 or more ............. 400,000
(B) "Net worth" is defined as the excess of assets over all
liabilities and required reserves. It may carry as an asset the
actual cost of its title plant, provided the value ascribed to that
asset shall not exceed the aggregate value of all other assets.
(C) If a title plant of an underwritten title company is not being
currently maintained, the asset value of the plant shall not exceed
its asset value as determined in the preceding paragraph as of the
date to which that plant is currently maintained, less one-tenth
thereof for each succeeding year or part of the succeeding year that
the plant is not being currently maintained. For the purposes of this
section, a title plant shall be deemed currently maintained so long
as it is used in the normal conduct of the business of title
insurance, and (i) the owner of the plant continues regularly to
obtain and index title record data to the plant or to a continuation
thereof in a format other than that previously used, including, but
not limited to, computerization of the data, or (ii) the owner of the
plant is a participant, in an arrangement for joint use of a title
plant system regularly maintained in any format, provided the owner
is contractually entitled to receive a copy of the title record data
contained in the jointly used title plant system during the period of
the owner's participation therein, either periodically or upon
termination of that participation, at a cost not to exceed the actual
cost of duplication of the title record data.
(D) An underwritten title company at all times shall maintain
current assets of at least ten thousand dollars ($10,000) in excess
of its current liabilities, as current assets and liabilities may be
defined pursuant to regulations made by the commissioner. In making
the regulations, the commissioner shall be guided by generally
accepted accounting principles followed by certified public
accountants in this state.
(3) (A) An underwritten title company shall obtain from the
commissioner a license to transact its business. The license shall
not be granted until the applicant conforms to the requirements of
this section and all other provisions of this code specifically
applicable to the applicant. After issuance the holder shall continue
to comply with the requirements as to its business set forth in this
code, in the applicable rules and regulations of the commissioner
and in the laws of this state.
(B) An underwritten title company that possesses, or is required
to possess, a license pursuant to this section is subject as if an
insurer to the provisions of Article 8 (commencing with Section 820)
of Chapter 1 of Part 2 of Division 1 of this code and is deemed to be
subject to authorization by the Insurance Commissioner within the
meaning of subdivision (e) of Section 25100 of the Corporations Code.
(C) The license may be obtained by filing an application on a form
prescribed by the commissioner accompanied by a filing fee of three
hundred fifty-four dollars ($354). The license when issued shall be
for an indefinite term and shall expire with the termination of the
existence of the holder, subject to the annual renewal fee imposed
under Sections 12415 and 12416.
(D) An underwritten title company seeking to extend its license to
an additional county shall pay a two-hundred-seven-dollar ($207) fee
for each additional county, and shall furnish to the commissioner
evidence, at least sufficient to meet the minimum net worth
requirements of paragraph (2), of its financial ability to expand its
business operation to include the additional county or counties.
(4) (A) An underwritten title company shall furnish an audit to
the commissioner on the forms provided by the commissioner annually,
either on a calendar year basis on or before March 31 or, if approved
in writing by the commissioner in respect to any individual company,
on a fiscal year basis on or before 90 days after the end of the
fiscal year. The time for furnishing any audit required by this
paragraph may be extended, for good cause shown, on written approval
of the commissioner for a period, not to exceed 60 days. Failure to
submit an audit on time, or within the extended time that the
commissioner may grant, shall be grounds for an order by the
commissioner to accept no new business pursuant to subdivision (d).
The audits shall be private, except that a synopsis of the balance
sheet on a form prescribed by the commissioner may be made available
to the public.
(B) The audits shall be made in accordance with generally accepted
auditing standards by an independent certified public accountant or
independent licensed public accountant whose certification or license
is in good standing at the time of the preparation. The fee for
filing the audit shall be three hundred thirteen dollars ($313).
(C) The commissioner may refuse to accept an audit or order a new
audit for any of the following reasons:
(i) An adverse result in any proceeding before the California
Board of Accountancy affecting the auditor's license.
(ii) The auditor has an affiliation with the underwritten title
company, or any of its officers or directors, that would prevent his
or her reports on the company from being reasonably objective.
(iii) The auditor has suffered conviction of a misdemeanor or
felony based on his or her activities as an accountant.
(iv) A judgment adverse to the auditor in any civil action finding
him or her guilty of fraud, deceit, or misrepresentation in the
practice of his or her profession.
(D) A company that fails to file any audit or other report on or
before the date it is due shall pay to the commissioner a penalty fee
of one hundred eighteen dollars ($118) and on failure to pay that or
another fee or file the audit required by this section shall forfeit
the privilege of accepting new business until the delinquency is
corrected.
(c) An underwritten title company may engage in the escrow
business and act as escrow agent provided that:
(1) The company maintains a record of all receipts and
disbursements of escrow funds.
(2) (A) The company deposits seven thousand five hundred dollars
($7,500) for each county in which it transacts business in some form
permitted by Section 12351 with the commissioner who shall
immediately make a special deposit of that amount in the State
Treasury and that deposit shall be subject to Sections 12353, 12356,
12357, and 12358 and, as long as there are no claims against the
deposit, all interest and dividends thereon shall be paid to the
depositor. The deposit shall be for the security and protection of
persons having lawful claims against the depositor growing out of
escrow transactions with it. The deposit shall be maintained until
four years after all escrows handled by the depositor have been
closed.
(B) The commissioner may release the deposits prior to the passage
of the four-year period upon presentation of evidence satisfactory
to the commissioner of either a statutory merger of the depositor
into a licensee or certificate holder subject to the jurisdiction of
the commissioner, or a valid assumption agreement under which all
liability of the depositor stemming from escrow transactions handled
by it is assumed by a licensee or certificate holder subject to the
jurisdiction of the commissioner.
(C) With the foregoing exceptions, the deposit shall be returned
to the depositor or lawful successor in interest following the
four-year period, upon presentation of evidence satisfactory to the
commissioner that there are no claims against the deposit stemming
from escrow transactions handled by the depositor. If the
commissioner has evidence of one or more claims against the
depositor, and the depositor is not in conservatorship or
liquidation, the commissioner may interplead the deposit by special
endorsement to a court of competent jurisdiction for distribution on
the basis that claims against the depositor stemming from escrow
transactions handled by it have priority in the distribution over
other claims against the depositor.
(d) The commissioner shall, whenever it appears necessary, examine
the business and affairs of a company licensed under this section.
The examination shall be at the expense of the company.
(e) (1) If the commissioner determines, after notice and hearing,
that a company licensed under this section has willfully failed to
comply with a provision of this section, the commissioner shall make
his or her order prohibiting the company from conducting its business
for a period of not more than one year.
(2) A company violating the commissioner's order is subject to
seizure under Article 14 (commencing with Section 1010) of Chapter 1
of Part 2 of Division 1, is guilty of a misdemeanor, and may have the
license revoked by the commissioner. Any person aiding and abetting
any company in a violation of the commissioner's order is guilty of a
misdemeanor.
(f) The purpose of this section is to maintain the solvency of the
companies subject to this section and to protect the public by
preventing fraud and requiring fair dealing. In order to carry out
these purposes, the commissioner may make reasonable rules and
regulations to govern the conduct of its business of companies
subject to this section. The rules and regulations shall be adopted,
amended, or repealed in accordance with the procedure provided in
Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3
of Title 2 of the Government Code.
(g) The name under which each underwritten title company is
licensed shall at all times be an approved name. The fee for filing
an application for a change of name shall be one hundred eighteen
dollars ($118). Each company shall be subject to the provisions of
Article 14 (commencing with Section 1010) and Article 14.5
(commencing with Section 1065.1) of Chapter 1 of Part 2 of Division
1.
(h) This section is repealed as of July 1, 2016.
SEC. 3. Section 12389 is added to the Insurance Code, to read:
12389. (a) On and after July 1, 2016, an underwritten title
company as defined in Section 12340.5 that is a stock corporation
may, subject to subdivision (b), (1) engage in the business of
preparing title searches, title reports, title examinations, or
certificates or abstracts of title, upon the basis of which a title
insurer writes title policies, and (2) conduct escrow services
through business locations, as defined in Section 12340.13, in
counties in which the underwritten title company is licensed to
conduct escrow services regardless of the location of the real or
personal property involved in the transaction.
(b) (1) Only a domestic corporation may be licensed under this
section and no underwritten title company, as defined in Section
12340.5, may become licensed under this section, or change the name
under which it is licensed or operates, unless it has first complied
with Section 881.
(2) (A) Depending upon the county or counties in which the company
is licensed to transact business, it shall maintain required minimum
net worth and a bond or cash deposit as follows:
Aggregate number of
documents
recorded and documents
filed in
the
preceding calendar year
in all
counties
where the company is
licensed to
transact
business
Amount of Amount of
required bond
Number of documents or
minimum net cash
worth deposit
Less than 50,000.......... $ 75,000 $ 50,000
50,000 to 100,000......... 120,000 50,000
100,000 to 500,000........ 200,000 100,000
500,000 to 1,000,000...... 300,000 100,000
1,000,000 or more......... 400,000 100,000
(B) "Net worth" for the purposes of this section is defined as the
excess of assets over all liabilities and required reserves. The
company may carry as an asset the actual cost of its title plant,
provided the value ascribed to that asset shall not exceed the
aggregate value of all other assets.
(C) If a title plant of an underwritten title company is not
currently maintained, the asset value of the plant shall not exceed
its asset value as determined in the preceding paragraph as of the
date to which that plant is currently maintained, less one-tenth
thereof for each succeeding year or part of the succeeding year that
the plant is not being currently maintained. For the purposes of this
section, a title plant shall be deemed currently maintained so long
as it is used in the normal conduct of the business of title
insurance, and (i) the owner of the plant continues regularly to
obtain and index title record data to the plant or to a continuation
thereof in a format other than that previously used, including, but
not limited to, computerization of the data, or (ii) the owner of the
plant is a participant, in an arrangement for joint use of a title
plant system regularly maintained in any format, provided the owner
is contractually entitled to receive a copy of the title record data
contained in the jointly used title plant system during the period of
the owner's participation therein, either periodically or upon
termination of that participation, at a cost not to exceed the actual
cost of duplication of the title record data.
(D) An underwritten title company shall at all times maintain
current assets of at least ten thousand dollars ($10,000) in excess
of its current liabilities, as current assets and liabilities may be
defined pursuant to regulations made by the commissioner. In making
the regulations, the commissioner shall be guided by generally
accepted accounting principles followed by certified public
accountants in this state.
(3) (A) An underwritten title company shall obtain from the
commissioner a license to transact its business. The license shall
not be granted until the applicant conforms to the requirements of
this section and all other provisions of this code specifically
applicable to the applicant. After issuance the holder of the license
shall continue to comply with the requirements as to its business
set forth in this code, in the applicable rules and regulations of
the commissioner, and in the laws of this state.
(B) An underwritten title company that possesses, or is required
to possess, a license pursuant to this section shall be subject as if
an insurer to the provisions of Article 8 (commencing with Section
820) of Chapter 1 of Part 2 of Division 1 of this code and is deemed
to be subject to authorization by the Insurance Commissioner within
the meaning of subdivision (e) of Section 25100 of the Corporations
Code.
(C) The license may be obtained by filing an application on a form
prescribed by the commissioner accompanied by a filing fee of three
hundred fifty-four dollars ($354). The license when issued shall be
for an indefinite term and shall expire with the termination of the
existence of the holder, subject to the annual renewal fee imposed
under Sections 12415 and 12416.
(D) An underwritten title company seeking to extend its license to
an additional county shall pay a two-hundred-seven-dollar ($207) fee
for each additional county, and shall furnish to the commissioner
evidence, at least sufficient to meet the minimum net worth
requirements of paragraph (2), of its financial ability to expand its
business operation to include the additional county or counties.
(4) (A) An underwritten title company shall furnish an audit to
the commissioner on the forms provided by the commissioner annually,
either on a calendar year basis on or before March 31 or, if approved
in writing by the commissioner in respect to any individual company,
on a fiscal year basis on or before 90 days after the end of the
fiscal year. The time for furnishing any audit required by this
paragraph may be extended, for good cause shown, on written approval
of the commissioner for a period, not to exceed 60 days. Failure to
submit an audit on time, or within the extended time that the
commissioner may grant, is grounds for an order by the commissioner
to accept no new business pursuant to subdivision (d). The audits
shall be private, except that a synopsis of the balance sheet on a
form prescribed by the commissioner may be made available to the
public.
(B) The audits shall be made in accordance with generally accepted
auditing standards by an independent certified public accountant or
independent licensed public accountant whose certification or license
is in good standing at the time of the preparation. The fee for
filing the audit shall be three hundred thirteen dollars ($313).
(C) The commissioner may refuse to accept an audit or order a new
audit for any of the following reasons:
(i) An adverse result in any proceeding before the California
Board of Accountancy affecting the auditor's license.
(ii) The auditor has an affiliation with the underwritten title
company or any of its officers or directors that would prevent his or
her reports on the company from being reasonably objective.
(iii) The auditor has been convicted of a misdemeanor or felony
based on his or her activities as an accountant.
(iv) A judgment adverse to the auditor in any civil action finding
him or her guilty of fraud, deceit, or misrepresentation in the
practice of his or her profession.
(D) A company that fails to file an audit or other report on or
before the date it is due shall pay to the commissioner a penalty fee
of one hundred eighteen dollars ($118) and on failure to pay that or
another fee or file the audit required by this section shall forfeit
the privilege of accepting new business until the delinquency is
corrected.
(c) An underwritten title company may engage in the escrow
business and act as escrow agent, provided that:
(1) It maintains a record of all receipts and disbursements of
escrow funds.
(2) (A) It maintains a bond satisfactory to the commissioner in
the amount set forth in subparagraph (A) of paragraph (2) of
subdivision (b) of this section. The bond shall run to the state for
the use of the state, and for any person who has cause against the
obligor of the bond or under the provisions of this chapter.
(B) (i) In lieu of the bond described in subparagraph (A), the
company shall maintain a deposit in the amount set forth in
subparagraph (A) of paragraph (2) of subdivision (b) of this section,
and in a form permitted by Section 12351, with the commissioner, who
shall immediately make a special deposit in that amount in the State
Treasury. The deposit shall be subject to Sections 12353, 12356,
12357, and 12358. As long as there are no claims against the deposit,
all interest and dividends thereon shall be paid to the depositor.
The deposit shall be security for the same beneficiaries and purposes
as the bond, as set forth in subparagraph (A) and in paragraph (3)
of this subdivision. The deposit shall be maintained until four years
after all escrows handled by the depositor have been closed.
(ii) The commissioner may release the deposit prior to the passage
of the four-year period described in clause (i) upon presentation of
evidence satisfactory to the commissioner of either a statutory
merger of the depositor into a licensee subject to the jurisdiction
of the commissioner, or a valid assumption agreement under which the
liability of the depositor stemming from escrow transactions handled
by it is assumed by a licensee subject to the jurisdiction of the
commissioner.
(iii) With the foregoing exceptions, the deposit shall be returned
to the depositor or lawful successor in interest following the
four-year period described in clause (i) upon presentation of
evidence satisfactory to the commissioner that there are no claims
against the deposit arising out of escrow transactions handled by the
depositor. If claims against the deposit are presented to the
commissioner, the commissioner may pay a valid claim or claims until
the deposit amount is exhausted. If the commissioner has evidence of
one or more claims against the depositor, and the depositor is in
conservatorship, bankruptcy, or liquidation proceedings, the
commissioner may release the deposit to the conservator, trustee, or
liquidator. If the depositor is not in conservatorship, bankruptcy or
liquidation, the commissioner may interplead the deposit by special
endorsement to a court of competent jurisdiction for distribution to
claimants on the deposit.
(3) (A) The bond provided by a surety insurer naming the
underwritten title company as principal obligor or the letter of
credit of an issuing bank shall be subject to the following
conditions:
(i) The licensee shall faithfully conform to and abide by the
provisions of this chapter and all of the rules made by the
commissioner under this chapter concerning the conduct of escrow
services.
(ii) The licensee will honestly and faithfully apply all funds
received, and will faithfully and honestly perform all obligations
and undertakings under this chapter, concerning the conduct of escrow
services.
(B) In determining the liability of the principal and the sureties
under the bond, any money recovered to restore any deficiency in the
trust shall not be considered as an asset of the liquidation subject
to the assessment for the cost of the liquidation.
(C) The surety under the bond, or the issuing bank of a letter of
credit, may pay the full amount of its liability thereunder to the
commissioner as conservator, liquidator, receiver, or anyone
appointed by the commissioner as a conservator, liquidator, or
receiver in lieu of payment to the state or persons having a cause of
action against the principal of a bond or applicant under a letter
of credit, and upon such payment the surety on the bond, or the
issuing bank under a letter of credit shall be completely released,
discharged, and exonerated from further liability under the bond or
letter of credit, as applicable. The conservator, liquidator, or
receiver may use the proceeds of the bond, or letter of credit, for
any purposes, including the funding of the costs of conservatorship,
receivership, or liquidation.
(D) If there is no reasonable or adequate admitted market for
surety bonds as required by this section, the commissioner may act
pursuant to Section 1763.1 or, for good cause shown, may permit a
letter of credit in lieu thereof, and in the amount of the bond or
deposit required by this section. In that case, the commissioner may
fashion the letter of credit requirements as appropriate to the
circumstances and cause.
(4) On and after July 1, 2016, the commissioner shall promptly
release to the depositor, upon application, all escrow-related
deposits previously made pursuant to paragraph (2) of subdivision (c)
of former Section 12389 if any of the following occurs:
(A) The underwritten title company has provided to the
commissioner bond coverage, a deposit, or an approved irrevocable
letter of credit as set forth in this subdivision.
(B) Upon presentation of evidence satisfactory to the commissioner
of either a statutory merger of the underwritten title company
depositor into a licensee or certificate holder subject to the
jurisdiction of the commissioner, or a valid assumption agreement
under which all liability of the depositor stemming from escrow
transactions handled by it is assumed by a licensee or certificate
holder subject to the jurisdiction of the commissioner.
(5) Otherwise the deposit shall be promptly returned to the
depositor, its duly appointed trustee in bankruptcy or lawful
successor in interest upon application for release following the
four-year period specified in paragraph (2) , as that paragraph read
on June 30, 2016, unless the commissioner has received claims against
the deposit stemming from escrow transactions handled by the
depositor. If the commissioner has received one or more claims
against the depositor, and the depositor is not in conservatorship,
bankruptcy, or liquidation, the commissioner may interplead the
deposit by special endorsement to a court of competent jurisdiction
for distribution on the basis that claims against the depositor
stemming from escrow transactions handled by the depositor have
priority in the distribution over other claims against the depositor.
(d) The commissioner shall, whenever it appears necessary, examine
the business and affairs of a company licensed under this section.
The examination shall be at the expense of the company.
(e) (1) At any time that the commissioner determines, after notice
and hearing, that a company licensed under this section has
willfully failed to comply with a provision of this section, the
commissioner shall make his or her order prohibiting the company from
conducting its business for a period of not more than one year.
(2) A company that violates the commissioner's order is subject to
seizure under Article 14 (commencing with Section 1010) of Chapter 1
of Part 2 of Division 1, is guilty of a misdemeanor, and may have its
license revoked by the commissioner. Any person aiding and abetting
any company in a violation of the commissioner's order is guilty of a
misdemeanor.
(f) The purpose of this section is to maintain the solvency of the
companies subject to this section and to protect the public by
preventing fraud and requiring fair dealing. In order to carry out
these purposes, the commissioner may make reasonable rules and
regulations to govern the conduct of its business of companies
subject to this section. The rules and regulations shall be adopted,
amended, or repealed in accordance with the procedures provided in
Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3
of Title 2 of the Government Code.
(g) The name under which each underwritten title company is
licensed shall at all times be an approved name. The fee for filing
an application for a change of name shall be one hundred eighteen
dollars ($118). Each company shall be subject to the provisions of
Article 14 (commencing with Section 1010) and Article 14.5
(commencing with Section 1065.1) of Chapter 1 of Part 2 of Division
1.
(h) This section does not prohibit an underwritten title company
from engaging in escrow, settlement, or closing activities on
properties located outside this state if those activities do not
violate the laws of that other state or country.
(i) This section is operative on July 1, 2016.