BILL ANALYSIS Ó
AB 704
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Date of Hearing: April 22, 2015
ASSEMBLY COMMITTEE ON INSURANCE
Tom Daly, Chair
AB 704
(Cooley) - As Amended April 6, 2015
SUBJECT: Escrow services: underwritten title companies
SUMMARY: Adopts escrow rules governing underwritten title
companies (UTCs) consistent with rules that currently govern
independent escrow companies. Specifically, this bill:
1)Repeals, as of July 1, 2016, a requirement that a UTC make a
deposit with the Insurance Commissioner (commissioner) of
$7500 for each county in which it does escrow business.
2)Provides, as of July 1, 2016, that each UTC shall maintain a
bond satisfactory in form to the commissioner in the amount of
$25,000, $35,000, or $50,000, as determined by a formula that
takes into consideration the volume of escrow business
conducted by the UTC.
3)Provides that a UTC may use a cash deposit or an irrevocable
letter of credit acceptable in form to the commissioner in
lieu of the bond.
4)Clarifies the definition of "escrow" to ensure that escrows
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involving personal property (typically, but not always,
business inventory) may be performed by UTCs.
5)Defines "business location" as the place where a UTC conducts
escrow business.
6)Specifies that a UTC can do escrow business at its escrow
business locations with respect to property located in
counties where it is licensed to do title business.
EXISTING LAW:
1)Provides for the regulation of title insurance and title
insurers by the commissioner.
2)Authorizes UTCs to perform a range of activities with respect
to real estate and personal property transactions, including
acting as the agent of a title insurer for purposes of
underwriting and issuing policies of title insurance, and
handling the escrow in a real estate transaction.
3)Establishes various regulatory requirements on UTCs, including
statutory net worth requirement and escrow deposit
requirements.
4)Requires a UTC to post a deposit with the commissioner of
$7500 for each county in which it is licensed to conduct title
business.
5)Provides for the regulation of independent escrow companies,
which are licensed to handle real estate and other escrow
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transactions, by the Department of Business Oversight (DBO).
6)Authorizes a licensed real estate broker to handle real estate
escrows.
7)Provides that an independent escrow company must maintain a
bond satisfactory in form to the DBO in the amount of
$25,000, $35,000, or $50,000, as determined by a formula that
takes into consideration the volume of escrow business
conducted by the independent escrow company.
FISCAL EFFECT: Undetermined
COMMENTS:
1)Purpose. According to the author, this bill is designed to
level the playing field for companies authorized to perform
escrow services that are licensed by the DBO (independent
escrow companies) and the companies that are authorized to
perform escrow services that are licensed by the commissioner
(UTCs). The author argues that UTCs face unnecessarily
burdensome regulatory requirements in comparison to the
independent escrow companies regulated by the DBO, and the
escrow rules that govern UTCs should be made consistent with
those rules.
2)Background. There are 3 different types of licensees
authorized to perform escrow services in California: real
estate brokers, independent escrow companies, and UTCs -- each
with a separate regulator. Real estate brokers, while
authorized, rarely perform this function. Thus, the DBO
licensed escrow companies compete primarily with the
Department of Insurance (DOI) licensed UTCs.
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A UTC performs two distinct functions in the typical real estate
transaction where it is performing escrow services: it
underwrites (title search and report) the title insurance
policy, and it handles the escrow. The UTC also acts as the
title insurer's agent to issue the title policy. An
independent escrow company performs only one function - the
escrow portion of the transaction. One element of that
function is to ensure that a title company provides a title
insurance policy, but the independent escrow company is not
licensed to either underwrite or issue a title insurance
policy.
There is a debate within the title/escrow industry about which
format is best, and for historically unclear reasons, some
regions of the state tend to use independent escrow companies
and a separate title company, and other regions of the state
tend to use the title company for both functions. Regardless
of which approach is used, it is clear that the title
functions/services and the escrow functions/services are
distinct. The purpose of the bill is to align the regulatory
structures for the two primary type of escrow services
companies, but to leave the regulatory structure for title
services and insurance unchanged. The DOI agrees that the
bill does not impact the title insurance regulatory structure.
3)"Business location". The bill defines "business location" for
escrow purposes. This is intended to clarify a tension
between laws governing escrow, and laws governing title
services. Title services are licensed on a county by county
basis. A title company can only conduct title business with
respect to property located in a county where it is licensed.
While most title insurers and many UTCs are licensed in all
counties, a number of UTCs are not. Nonetheless, there are
many circumstances where a consumer may wish to have a
title/escrow firm handle an escrow for an out of county
property, and in fact, DBO-licensed escrow companies can do
this. For example, UTC is licensed in County A, but not
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County B. Consumer is selling a home in County A, and buying
in County B. Consumer wishes to coordinate the escrow of both
transactions with the same escrow company. UTC would need to
obtain title services from a title company licensed in County
B, but could, pursuant to current practices, conduct both
escrows at the business location in County A. The bill's
language is intended to codify this practice. However, the
language may need clarification to ensure it is specific
enough to authorize situations such as the scenario just
described. The following amendment would cure the ambiguity:
page 4, line 27, and page 10, line 5, add the phrase
"regardless of the location of the real or personal property
involved in the transaction,".
In addition, the DOI has concerns about the language that
clarifies this issue. DOI does not object to allowing a UTC
to handle an escrow in a county other than the county where
the property is. However, it believes that the language in
the bill creates a licensing problem that will make effective
regulation of the escrow function more complicated. DOI has
proposed language to the proponents of the bill, but at this
point, there has been no agreement on compromise language.
4)Deposit vs. bond. The bill calls for a bond to replace the
existing deposit system, and establishes the process for each
UTC's deposit funds to be returned once an appropriate bond
(or the letter of credit or cash deposit option) is
established. This is probably the most contentious aspect of
the bill. While DOI believes existing deposit rules do not
work well, it disagrees with the way the bill functionally
reduces the amount of potential funds available for consumer
recovery, and has concerns about the procedure for liquidating
existing deposits.
Proponents raise several arguments in favor of the proposal.
First, they argue that bonding is working for DBO licensees,
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so it should be sufficient for UTCs as well. DBO has not
contradicted this assertion, but DOI remains uncertain that
the DBO bonding structure is adequate. Second, they point out
that existing deposits have never been liquidated to fund
escrow losses. DOI responds that there is significant
difficulty in accessing deposits, and therefore consumers have
not pursued this option. DOI suggests that if access were not
so difficult, it might not be the case that deposits have not
been used to remediate consumer losses. In this regard,
proponents point out that the UTC is an agent of the title
insurer, which has substantial assets, and the insurer has
always stepped in to cover losses that have occurred. DOI
argues that title insurers have paid, but increasingly
objected to their obligation to cover escrow, as opposed to
title, obligations of UTCs. Finally, proponents assert that
the commissioner is required to go to court to access the
deposit, whereas the bond would be readily available. DOI
does not dispute that the deposits are not an efficient
security mechanism, but assert that fact is not a reasonable
basis to reduce the scope of potential protection from several
hundred thousand dollars (which varies among UTCs depending on
how many counties they operate in) to $50,000 or less. DOI
has proposed a $500,000 bond requirement, which is more in
line with a 58 county UTC, which would have a $435,000 deposit
requirement.
5)Release of current deposits. The bill is intended to govern
the return of deposit funds once a UTC has the bond, or its
alternatives, in place. Under current law, the deposit must
remain in place for 4 years after the UTC closes its final
escrow. The bill provides for a procedure to return current
deposits to the UTC once a UTC has implemented the bill's
bonding requirements. The DOI believes that the procedure is
cumbersome and uncertain, and will lead to inevitable disputes
and regulatory disagreements. DOI has proposed language to
address these concerns, but agreement has not been reached on
this issue.
6)Bonding formula. The bill establishes a formula to calculate
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which of the tiered level of bond a UTC must undertake. The
formula is based on escrow volume, and must be calculated
annually. DOI believes this annual calculation would be
burdensome on both UTCs and on the DOI. Proponents
acknowledge that most UTCs will be at the $50,000 bond level.
However, agreement on a methodology for determining bond
amount has not occurred. Proponents note that the bill is
patterned after the law governing DBO escrow companies.
Regardless, a formula that is burdensome on both the
regulated, and the regulator, may not be in either's best
interest even if there is precedent.
REGISTERED SUPPORT / OPPOSITION:
Support
California Land Title Association
Fidelity National Title Group
First American Title Insurance Company
Opposition
Department of Insurance
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Analysis Prepared by:Mark Rakich / INS. / (916) 319-2086