BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON
                         BANKING AND FINANCIAL INSTITUTIONS
                             Senator Marty Block, Chair
                                2015 - 2016  Regular 

          Bill No:             AB 704         Hearing Date:    July 15,  
          2015
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          |Author:    |Cooley                                               |
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          |Version:   |July 6, 2015    Amended                              |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Eileen Newhall                                       |
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           Subject:  Escrow services: authorization to transact business.


           SUMMARY       Authorizes underwritten title companies (UTCs) licensed  
          under the Insurance Code to conduct escrows in all 58 counties,  
          as long as they do so from business locations in counties where  
          they are licensed to conduct escrows; replaces the requirement  
          that UTCs post a $7,500 deposit with the Insurance Commissioner  
          (IC) for each county in which they are licensed to conduct  
          escrows with a requirement that UTCs obtain a single $50,000 or  
          $100,000 surety bond, as specified, or post a single deposit in  
          that amount with the IC in order to conduct escrows statewide.  
          
           DESCRIPTION
             
            1.  Defines "business location" as a facility or other place of  
              business in California where an underwritten title company  
              (UTC) or controlled escrow company engages in the business  
              of conducting escrow services.

           2.  Provides that a UTC may conduct escrow services at business  
              locations in counties where the UTC is licensed to conduct  
              escrow services, regardless of the location of the real or  
              personal property involved in the transaction.  

           3.  Effective July 1, 2016, deletes the requirement that a UTC  
              deposit $7,500 per county in which it transacts escrow  
              business with the IC, as specified, for the security and  
              protection of persons having lawful claims against the UTC  







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              growing out of escrow transactions.  Establishes a process  
              through which UTCs may obtain refunds of their $7,500  
              deposits.  

           4.  Effective July 1, 2016, adds a requirement that a UTC  
              maintain a bond of $50,000 or $100,000 provided by a surety  
              insurer, naming the UTC as principal obligor, or make a  
              deposit with the IC, in lieu of and in the amount of the  
              bond.  Provides that the bond or deposit must run to the  
              state for the use of the state and for any person who has  
              cause against the UTC.  Requires the deposit to be  
              maintained until four years after all escrows handled by the  
              UTC have been closed, and provides a procedure by which the  
              IC may return the deposits to UTCs. The amount of the  
              required bond or cash deposit is calculated as follows:





































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              ------------------------------------------------------------- 
             |Aggregate Number of Documents |                              |
             |  Recorded and Filed In the   |                              |
             |  Preceding Calendar Year In  |                              |
             |    All Counties Where The    |                              |
             |    Company Is Licensed To    |    Amount of bond or cash    |
             |      Transact Business       |           deposit            |
             |------------------------------+------------------------------|
             |       Less than 50,000       |           $50,000            |
             |------------------------------+------------------------------|
             |      50,000 to 100,000       |           $50,000            |
             |------------------------------+------------------------------|
             |      100,000 to 500,000      |           $100,000           |
             |------------------------------+------------------------------|
             |     500,000 to 1,000,000     |           $100,000           |
             |------------------------------+------------------------------|
             |      1,000,000 or more       |$100,000                      |
             |                              |                              |
              ------------------------------------------------------------- 

           5.  Provides that the IC may permit a UTC to provide it with a  
              letter of credit, in lieu of and in the same amount of the  
              bond or deposit, if there is no reasonable or adequate  
              admitted market for surety bonds, or upon a showing of good  
              cause by the UTC.  

           6.  Authorizes the surety under the bond or the issuing bank of  
              a letter of credit to pay the full amount of its liability  
              to the IC as conservator, liquidator, or receiver in lieu of  
              payment to the state or persons having a cause of action  
              against the obligor, as specified. 

           EXISTING LAW
           
           7.  Defines a 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 (Insurance Code  
              Section 12340.5).

           8.  Requires every person engaged in the business of preparing  
              title searches, title examinations, title reports, and  








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              certificates of abstracts of title upon which a title  
              insurer writes title policies to be licensed as a UTC  
              (Insurance Code Section 12389.5)

           9.  Requires a UTC to be licensed in any county in which it  
              conducts business (Insurance Code Section 12389).

           10. Requires a licensed UTC to maintain a minimum net worth  
              ranging from $75,000 to $400,000.  Required net worth is  
              based on the aggregate number of documents recorded and  
              filed in county recorders offices in all of the counties  
              where the company is licensed to transact business  
              (Insurance Code Section 12389).  

           11. Authorizes a UTC to engage in escrow business and act as an  
              escrow agent, provided that it maintains a record of all  
              receipts and disbursements of escrow funds and deposits  
              $7,500 for each county in which it transacts business with  
              the IC, for the security and protection of persons having  
              lawful claims against the UTC growing out of escrow  
              transactions with it.  Requires the deposit to be maintained  
              until four years after all escrows handled by the UTC have  
              been closed, and provides a procedure by which the IC may  
              return the deposits to UTCs (Insurance Code Section 12389)

           12. Requires UTCs to submit quarterly financial statements to  
              the IC, as specified (Insurance Code Section 12389.4).

           13. Provides that if a UTC is placed into bankruptcy,  
              receivership, or conservation by the IC, each title insurer  
              operating under an underwriting agreement with that UTC  
              during the six months prior to the conservation, bankruptcy,  
              or receivership is liable for its proportionate share of the  
              IC's costs and any escrow and subescrow account shortages,  
              as specified (Insurance Code Section 12376).

           14. Provides that nothing in the requirement summarized  
              immediately in Number 7 above relieves a person of liability  
              under any other provision of law that he or she may have for  
              a shortage in an escrow or subescrow account (Insurance Code  
              Section 12376).

           15. Authorizes the IC to borrow from the Insurance Fund to  
              cover shortages in subescrow or escrow accounts, as  








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              specified (Insurance Code Section 12376).

           COMMENTS
         
          1.  Purpose:   This bill is sponsored by the California Land  
              Title Association (CLTA) to standardize the rules under  
              which UTCs are authorized to perform escrows in California  
              and replace an outdated consumer protection safety net with  
              an alternative safety net better suited to today's escrow  
              marketplace.

           2.  Background:   Real estate escrows can legally be performed in  
              California by three different types of licensees: UTCs  
              licensed by the Department of Insurance (CDI) under Chapter  
              1 of Part 6 of Division 2 of the Insurance Law, escrow  
              agents licensed by the Department of Business Oversight  
              (DBO) under the Escrow Law, and real estate brokers licensed  
              by the Bureau of Real Estate (BRE) under the Real Estate  
              Law.  

          Under existing law, the rules governing escrows performed by  
              UTCs, escrow agents, and real estate brokers are, and if AB  
              704 is enacted, will continue to be quite different.  For  
              historically unclear reasons, the three laws governing real  
              estate escrow transactions evolved in very different ways;  
              each law contains its own, unique set of financial  
              requirements for the entities performing escrows and its  
              own, unique set of protections for persons who entrust their  
              money to escrow professionals.  To date, there have been no  
              legislative efforts to standardize the rules governing  
              escrows and escrow providers.  AB 704 continues the  
              practice, begun long ago, of modifying individual laws to  
              better reflect the unique circumstances of the licensees  
              operating under those laws and the consumers obtaining  
              services from those licensees.  

          AB 704 applies to UTCs, which perform title searches on behalf  
              of title insurers and open escrows to facilitate the sale,  
              transfer, refinancing, or exchange of real properties in  
              connection with which title insurance is issued.  As  
              described in more detail below, AB 704 makes two changes  
              applicable to UTCs. First, it clarifies that a UTC may  
              conduct an escrow for a property located in any one of  
              California's 58 counties, as long as that UTC is operating  








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              out of a business location in a county where it is licensed  
              to conduct escrow services.  Second, it replaces the  
              requirement that each UTC deposit $7,500 with the IC for  
              each county in which it is licensed to conduct escrows with  
              a requirement that each UTC obtain a surety bond of either  
              $50,000 or $100,000, as specified, or post a deposit with  
              the IC in that amount.  The bond or deposit applies  
              statewide; a separate bond or deposit is not required for  
              each county in which a UTC is licensed.  

           3.  Provision Clarifying Where Escrows May Be Performed:   AB 704  
              authorizes UTCs to conduct escrow services at business  
              locations in counties where the UTC is licensed to conduct  
              escrow services, regardless of the location of the real or  
              personal property involved in the transaction.  This change  
              has the effect of ensuring that UTCs do not require licenses  
              in counties in which they do not have business locations;  
              they can handle escrows for properties located throughout  
              California, as long as they do so from business locations in  
              counties where they are licensed.  This provision of AB 704  
              simplifies the law and resolves a longstanding dispute  
              between CLTA and the IC over county licensing requirements.   
              Allowing licensed UTCs to conduct escrows statewide is  
              generally consistent with the rules applicable to escrow  
              agents licensed by DBO and real estate brokers licensed by  
              BRE.

           4.  Provision Replacing the $7,500 Per County Deposit With a  
              $50,000 or $100,000 Statewide Surety Bond or Deposit:   The  
              second provision of this bill eliminates the existing  
              requirement that each UTC post a $7,500 deposit with the IC  
              for every county in which that UTC is licensed to conduct  
              escrows in California.  According to CDI, the $7,500 deposit  
              requirement has been part of the Insurance Code since 1973,  
              when the UTC statute was first enacted.  

          In the 42 years since the deposit requirement has existed, no  
              one is aware of anyone receiving a payment from a deposit to  
              cover their escrow losses.  It is unclear whether the  
              deposits have gone unclaimed because they are too small to  
              be of any use in a state where real estate escrows commonly  
              run into the hundreds of thousands of dollars, or because no  
              consumers have suffered unreimbursed escrow losses at the  
              hands of UTCs.  However, available evidence suggests the  








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              latter.  As discussed below, the Insurance Code contains two  
              unique provisions intended to protect individuals who  
              entrust their escrows to UTCs.  These protections do not  
              exist in either the Escrow Law or the Real Estate Law.  

          The two most important protections for consumers who entrust  
              their funds to UTCs are found in Insurance Code Section  
              12376 and in the agency relationship that title insurers  
              have with their UTCs.  Insurance Code Section 12376 requires  
              title insurers to cover their proportionate share of any  
              escrow account shortages that result from the bankruptcy,  
              receivership, or conservation of a UTC with which that title  
              insurer has an underwriting agreement.  If an escrow account  
              shortage occurs outside of a bankruptcy, receivership, or  
              conservation, the agency relationship that exists between  
              UTCs and title insurers serves to hold the title insurers  
              financially liable for the shortage.  Because of these  
              safety nets, neither the CDI nor this bill's sponsor is  
              aware of any instances in which an individual has lost  
              escrowed funds at the hands of a UTC.  In all known cases  
              where an escrow account shortage has occurred due to the  
              actions of a UTC, a title insurer has stepped forward to  
              cover that shortage and keep consumers whole.

          Because of the safety nets provided by Insurance Code Section  
              12376 and the agency relationship between title insurers and  
              UTCs, it is unclear that the $7,500 deposit required under  
              existing law is necessary for the protection of consumers  
              who entrust their funds to UTCs.  However, in an abundance  
              of caution, this bill's author, sponsor, and CDI prefer to  
              replace the county-specific $7,500 deposit with a statewide  
              $50,000 or $100,000 bond or deposit that has greater  
              potential to be useful to consumers.  

          After months of negotiation, CDI and this bill's sponsor have  
              agreed to require UTCs to obtain a surety bond in the amount  
              of $50,000 or $100,000, depending on the number of counties  
              in which they are licensed, and on the sizes of those  
              counties.  That bond must run to the state for the use of  
              the state and for any person who has cause against the UTC.   
              In lieu of a surety bond, the bill allows a UTC to post a  
              deposit with the IC in the amount of the bond.  The deposit  
              exists as security for the same beneficiaries and purposes  
              as the bond.  In the event a UTC is unable to obtain a bond  








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              and chooses not to post a deposit, AB 704 allows the UTC to  
              apply to the IC for approval to obtain a letter of credit in  
              the amount of, but in lieu of the bond or deposit.

           5.  Summary of Arguments in Support:   

               a.     CLTA is sponsoring AB 704, and Fidelity National  
                 Title Group and First American Title Insurance Company  
                 are supporting the bill.  "AB 704 seeks to level the  
                 playing field with regard to how 'escrow activities' are  
                 regulated in California while also increasing consumer  
                 protections...AB 704 will standardized the rules and  
                 apply them consistently to all UTCs, regardless of when  
                 they were created, where their offices are located, and  
                 where the properties for which they conduct escrows are  
                 located."

               Furthermore, "AB 704 leaves in place the primary safety net  
                 for consumers...AB 704 does not change in any way the  
                 existing statutory requirement that well-funded and  
                 reserved title insurers must cover any escrow losses  
                 associated with a UTC that acts as their agent in  
                 conducting escrows and issuing title policies.  This  
                 provision, found in Insurance Code Section 12376, has  
                 created a safety net that has worked well in California  
                 to protect escrow consumers using UTCs...AB 704 merely  
                 creates another 'safety net behind this primary safety  
                 net' in the form of a bond or cash deposit ranging from  
                 $50,000 to $100,000, depending on the size of the county  
                 of licensure.  These bonds or cash deposits are superior  
                 to the $7,500 certificates of deposit currently required  
                 but never used by the Department of Insurance."  

           6.  Summary of Arguments in Opposition:    None received.
        

















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          7.  Prior and Related Legislation:   

               a.     AB 1704 (Hagman), 2013-14 Legislative Session:   
                 Would have authorized the IC to license a UTC to engage  
                 in escrow business in all 58 counties, following  
                 submission of a single application and payment of a  
                 specified filing fee by the UTC.  Never taken up by the  
                 author in the Assembly Insurance Committee.

           
          LIST OF REGISTERED SUPPORT/OPPOSITION
            
          Support
           
          California Land Title Association (sponsor)
          First American Title Company
          Fidelity National Title Group

           Opposition
               
          None received


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