BILL ANALYSIS Ó AB 704 Page 1 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 AB 704 Page 2 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 AB 704 Page 3 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. AB 704 Page 4 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 AB 704 Page 5 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, AB 704 Page 6 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 AB 704 Page 7 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 AB 704 Page 8 Analysis Prepared by:Mark Rakich / INS. / (916) 319-2086