BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 704 Hearing Date: June 24,
2015
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|Author: |Cooley |
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|Version: |June 15, 2015 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Hugh Slayden |
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Subject: Escrow services: authorization to transact business.
SUMMARY Revises escrow rules governing underwritten title companies
(UTCs) to more closely align with those that currently govern
independent escrow companies.
DIGEST
Existing law
1.Provides for the regulation of title insurance and title
insurers by the Insurance Commissioner (IC) through the
California Department of Insurance (CDI).
2.Defines "underwritten title company" (UTC) as any corporation
engaged in the business of preparing title searches, title
examinations, title reports, certificates or abstracts of
title upon the basis of which a title insurer writes title
policies.
3.Authorizes a UTC 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.
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4.Requires a UTC, depending on the county, to maintain a minimum
net worth based on the number of documents recorded and filed
in the county recorders offices in the preceding year.
5.Requires a UTC furnish an annual audit with the IC and
quarterly financial statements to the IC.
6.Permits a UTC to engage in the escrow business and act as an
escrow agent by making and maintaining $7,500 deposit for each
county in which it transacts business.
7.Authorizes the IC to examine the business and affairs of a UTC
at the expense of the company.
8.Provides that a title insurer operating under an underwriting
agreement with a UTC during the 6 months prior it being placed
into bankruptcy, receivership, or conservation by the IC shall
be liable for its proportionate share of the IC's costs and
any escrow account shortages.
9.Requires that underwriting agreements between a UTC and a
title insurer include one of several written procedures
reasonably calculated to prevent the misappropriation,
disappearance, or wrongful use of escrow or that the title
insurer require the UTC to maintain a fidelity bond or
insurance policy of at least 10 times the UTC's required
minimum net worth.
This bill
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1. Defines "business location" as the place where a UTC
conducts escrow services and permits a UTC to provide escrow
services at its licensed business locations regardless of
the location of the real or personal property involved.
2. Repeals, as of July 1, 2016, a requirement that a UTC make
a deposit with the IC of $7500 for each county in which it
does escrow business and provides for a process of returning
the deposits to the UTC when specified conditions are met.
3. Provides, as of July 1, 2016, that, in order to provide
escrow services or act as an escrow agent, each UTC shall
maintain a bond satisfactory in form to the IC in the amount
of $50,000, the proceeds of which may be used for any
purpose, including the funding of the costs of
conservatorship, receivership, or liquidation.
4. Provides that a UTC may deposit an irrevocable letter of
credit (LOC) approved by IC in lieu of the bond.
5. Makes technical and clarifying changes.
COMMENTS
1. Purpose of the bill 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
Department of Business Oversight (DBO), known as
"independent escrow companies" and the companies that are
authorized to perform escrow services that are licensed by
the IC, known as "underwritten title companies" (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 Escrow services provide a neutral third-party to
conduct the transaction real estate transactions. Generally,
the escrow agent receives and holds funds from the buyer to
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be released to the seller and other parties when certain
conditions related to the transaction are met. This
provides the buyer, lenders, and seller a way of confirming
that each party has the ability to and will complete the
transaction. Parties to the transaction place their trust
and money in the hands of the escrow agent.
There are two basic types of escrow companies, the
"licensed" and "controlled" escrow company. An independent
escrow company (sometimes referred to as a "licensed escrow
company") is licensed by DBO and subject to the requirements
set forth by the Escrow Law (Fin. Code §§ 17000 et seq.).
The Escrow Law requires independent escrow companies to
maintain a surety bond, irrevocable letter of credit
approved by DBO, or a deposit in the amount of $25,000,
$35,000, or $50,000, depending on its average annual trust
fund obligations plus $5,000 for each additional location.
As an additional safety net, each escrow agent must either
be a member of the Escrow Agents' Fidelity Corporation, a
non-profit mutual benefit corporation that indemnifies
members (like an insurance guarantee association) or
maintain a fidelity bond between $1 million and $5 million
for each licensed location depending on the location's
monthly average escrow liability.
A controlled escrow company is owned by another form of
licensee, such as a title insurer or real estate broker. AB
704 addresses regulatory requirements for UTCs, a form of
controlled escrow company that is associated with at least
one title insurer.
In addition to escrow services, a UTC underwrites (performs
a title search and report) and serves as the title insurer's
agent. UTCs may be affiliated with the title insurers, that
is a member of the same corporate family, or non-affiliated,
that may work with multiple title insurers. UTCs are
licensed by CDI and subject to separate licensing
requirements.
Escrow funds may be at risk of loss due to negligence or
theft. UTC licensing requirements have several mechanisms
to ensure that assets or security are available in case of
escrow shortages.
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UTC Licensing Requirements. Unlike licensed escrow
companies, geography played a critical role in the
development on the UTC regulatory requirements because UTCs
conduct title searches. Title searches are performed by
searching a "title plant," database of title records.
Historically, the company had to physically check the
paper-based records in each county and the title plants only
covered the county where it was physically located.
Limiting the UTC license to specific counties was one way of
ensuring that the UTC was qualified to perform the records
search. However, title plants and title searches are no
longer bound to hardcopy.
There is some disagreement as to whether a title company
licensed in one county may handle a transaction involving
property located in another county even if every aspect of
the transaction occurs in the licensed location.
DBO-licensed escrow companies are not limited in this way.
This bill would allow a UTC to handle escrows in one of its
licensed locations related to property located in another
county.
This bill would also streamline the UTC security
requirements. For one, it would clarify that UTCs may
conduct transactions related to properties outside those
counties for which it is licensed. But more significantly,
it would replace the existing $7,500 deposit with a security
requirement satisfied by a bond or irrevocable letter of
credit in the amount of $50,000. It also establishes a
process for returning the deposits once the UTC establishes
the security requirement has been satisfied.
There is general agreement that the current system of
requiring $7,500 deposits has not been used and offers
consumers little, if any, protection. The primary
controversies in this bill relate to whether the deposit
needs replacing with alternative security, and if so, the
size and type of the security.
Because of the multiple layers of consumer protections
already applied to UTCs, it is not clear that additional
security is necessary. UTCs are required to have a minimum
net worth based on the number of documents filed, are
subject to close scrutiny by CDI and by associated title
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insurers, and current law makes associated title insurers
liable for escrow shortages if the UTC acted as an escrow
agent for the insurer or the IC places the UTC in
bankruptcy. Arguably, there may be occasions when liability
might not attach to the insurer if the UTC is not an agent
of the insurer or enters bankruptcy on its own initiative.
Assuming that additional security is necessary, CDI argues
that the proposed bond requirement is too low. Previously
the bill imposed the same bond requirements as independent
escrow companies licensed under DBO and that was based on an
average escrow account liability (which ties the bond amount
to the risk). CDI objected on the grounds that the
licensing requirement posed an unnecessary burden on the
regulator. The author recently amended the bill to minimize
the regulatory burden by applying the highest minimum bond
amount required of independent escrow companies, $50,000, to
all UTCs regardless of escrow liability.
This issue could be summarized as whether to replace the
existing $7,500 deposit per county requirement, that all
stakeholders agree provides little to no protection, with a
$50,000 bond that has a lower aggregate value but may be far
more accessible than the cash deposits.
This bill is double-referred to the Committee on Banking and
Finance.
3. Arguments in Support California Land Title Association
(CLTA) argues that existing law, even without the $7,500
bond, provides an effective safety net for consumers. When
a UTC goes out of business, the title insurance underwriter
is responsible for any escrow losses incurred by an escrow
consumer dealing with the failed UTC. This existing section
of law works very well to protect consumers because it
encourages the title insurer to (1) immediately step in and
close any outstanding escrows (e.g. sales, transfers,
refinancing of loans, etc.) to avoid escrow losses, and (2)
ensures that the title insurers closely watch their agents
to make sure they are solvent and operating properly.
CLTA also notes that the existing deposit system is archaic
and only provides illusory protections for consumers. While
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this provision has been in place since the 1960's, CLTA is
unaware of a single instance where CDI has sought access to
the certificates. Rather, AB 704 seeks to replace the
$7,500 deposit with a simple $50,000 bond or irrevocable LOC
requirement for more substantial consumer protections.
Additionally, CLTA states that AB 704 clarifies operating
rules so that all UTCs may open and close escrows in the
county in which they are licensed regardless of where the
real property is located in the state. CLTA further
explains that there has been a very inconsistent application
of the Insurance Code to UTCs in California. Some recent
UTCs were required to get $7,500 certificates of deposit in
all 58 counties. Others have only one or two certificates of
deposit yet have no restrictions on their UTC license
relating to escrows. Others have very restrictive language
in their UTC licenses that specifically limit escrow to only
one or two counties. Other UTCs have centralized processing
centers for handling escrows for all 58 counties but do not
have certificates of deposit for all 58 counties. Thus,
there is a strong need to create a uniform and logical UTC
licensing scheme where UTCs can open and close escrows in
the county in which they are licensed, regardless of where
the real or personal property is located to reflect the
longstanding way escrows have been handled. AB 704
accomplishes this goal.
4. Arguments Opposition CDI opposes this bill because it would
permit a UTC to satisfy the bond requirement through an
irrevocable letter of credit. CDI explains that the
proposed (LOC) option increases regulatory burdens while
reducing the benefits CDI believes a surety bond mechanism
would achieve. Fidelity coverage, through a surety bond, has
been nationally recognized as potentially reducing or
eliminating escrow losses and should be adopted in
California as it has been in many other states.
CDI points out that, according to Civil Code 2787, LOCs are
not surety obligations. The California Supreme Court has
said: "Generally, a surety's liability for an obligation is
secondary to, and derivative of, the liability of the
principal for that obligation (see Civil.Code, § 2806 et
seq.) By contrast, the liability of the issuer of a LOC to
the letter's beneficiary is direct and independent of the
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underlying transaction between the beneficiary and the
issuer's customer. Because of its form, a LOC will not
obligate the underwritten title company to be primarily
responsible - have skin in the game - nor will it provide a
simple mechanism for third parties to make claims. The
claims presentation if this form is chosen will necessarily
involve the beneficiary on the LOC, the CDI, and therefore
will pose regulatory burdens. And the CDI will need to
approve the form of the LOCs on an individual basis, rather
than through a promulgated form.
CDI also maintains that the proposed $50,000 bond amount is
too low and is not comparative to the fidelity insurance
required by escrow companies licensed by the Division of
Business Oversight, which requires from $1,000,000 to
$5,000,000 of coverage be provided by a statutorily
established fidelity corporation. In response to concerns
that the single dollar amount, if raised may be too costly
for certain small companies, CDI proposes a tiered approach
to the amount of the financial security based on the size of
the counties of licensure. Under a tiered approach the
security would be either $40,000, $100,000 or $250,000,
depending upon the size of the largest county of licensure.
5. Prior and Related Legislation SB 193 (Costa), Chapter 408,
Statutes 1995, required title insurers associated with a UTC
be liable for the UTC's escrow account shortages in the
event that it is placed into bankruptcy, receivership, or
conservatorship by the IC.
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POSITIONS
Support
California Land Title Association (sponsor)
Fidelity National Title Group
First American Title Insurance Company
Oppose
Department of Insurance
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