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
AB 704 (Cooley) Page 2
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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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