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 ----------------------------------------------------------------- |Author: |Cooley | |-----------+-----------------------------------------------------| |Version: |July 6, 2015 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- 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 AB 704 (Cooley) Page 2 of ? 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: AB 704 (Cooley) Page 3 of ? ------------------------------------------------------------- |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 AB 704 (Cooley) Page 4 of ? 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 AB 704 (Cooley) Page 5 of ? 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 AB 704 (Cooley) Page 6 of ? 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 AB 704 (Cooley) Page 7 of ? 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 AB 704 (Cooley) Page 8 of ? 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. AB 704 (Cooley) Page 9 of ? 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 -- END --