BILL ANALYSIS Ó
AB 704
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ASSEMBLY THIRD READING
AB
704 (Cooley)
As Amended April 6, 2015
Majority vote
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|Committee |Votes |Ayes |Noes |
|----------------+------+------------------------+--------------------|
|Insurance |12-0 |Daly, Beth Gaines, | |
| | |Calderon, Cooley, | |
| | |Cooper, Dababneh, | |
| | |Frazier, Gatto, | |
| | |Gonzalez, Grove, Mayes, | |
| | |Rodriguez | |
| | | | |
|----------------+------+------------------------+--------------------|
|Appropriations |17-0 |Gomez, Bigelow, Bloom, | |
| | |Bonta, Calderon, Chang, | |
| | |Daly, Eggman, | |
| | |Gallagher, Eduardo | |
| | |Garcia, Holden, Jones, | |
| | |Quirk, Rendon, Wagner, | |
| | |Weber, Wood | |
| | | | |
| | | | |
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SUMMARY: Adopts escrow rules governing underwritten title
companies (UTCs) consistent with rules that currently govern
independent escrow companies. Specifically, this bill:
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1)Repeals, as of July 1, 2016, a requirement that a UTC make a
deposit with the Insurance Commissioner (commissioner) of $7,500
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
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.
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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 $7,500
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
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: According to the Assembly Appropriations
Committee:
1)One-time costs to the California Department of Insurance (DOI),
under $100,000, and annual ongoing costs of less than $100,000
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to manage new bonding and regulatory requirements at a state,
instead of county, level (Insurance Fund).
2)Projected revenues of in the range of $50,000 annually
(Insurance Fund).
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 three 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 DOI
licensed UTCs.
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
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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." This 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 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. This
bill's language is intended to codify this practice.
The DOI has concerns about the language that clarifies this
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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 this bill creates a
licensing problem that will make effective regulation of the
escrow function more complicated. DOI has proposed language to
the proponents of this bill, but at this point, there has been
no agreement on compromise language.
4)Deposit vs. bond. This 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 this 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, 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
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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. This 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 four years after the UTC closes its final
escrow. This 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. This bill establishes a formula to calculate
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 this 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.
Analysis Prepared by: Mark Rakich / INS. / (916)
319-2086 FN: 0000437
AB 704
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