BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Hannah-Beth Jackson, Chair 2015-2016 Regular Session AB 2143 (Irwin) Version: June 6, 2016 Hearing Date: June 21, 2016 Fiscal: Yes Urgency: No TH SUBJECT County Recorder: Electronic Recording DESCRIPTION Upon approval by resolution of the board of supervisors and system certification by the Attorney General, existing law authorizes a county recorder to enter into a contract with a title insurer, underwritten title company, institutional lender, or an entity of a local, state, or the federal government for the delivery for recording, and return to the party requesting recording, of a digitized electronic record affecting a right title or interest in real property. This bill, until January 1, 2027, would authorize a county recorder to enter into a contract with additional third parties for such functions, provided the third party provides proof of financial responsibility evidencing an amount of general liability coverage of at least $1,000,000. BACKGROUND In July 1999, the Attorney General's Task Force on Electronic Recordation presented its recommendations pursuant to AB 1906 (Brewer, Ch. 463, Stats. 1998), which, among other things, required the Attorney General to appoint a task force to meet on a regular basis to address technical, legal, security, and economic issues associated with electronic recordation, recommend which persons and entities should be authorized to digitize and record documents electronically, and prepare and submit recommendations to the Governor and the Legislature. The AB 2143 (Irwin) Page 2 of ? task force found that while electronic recording of real property documents could save local agencies and businesses significant time and money, it warned that the use of these new technologies also "exposes the most sensitive of public records to the possibility of corruption, damage, or destruction. AB 1906 approved electronic recordation pilot projects in Orange and San Bernardino Counties, and while San Bernardino County's pilot project was slow to get off the ground, Orange County quickly instituted an electronic recording system that utilized dedicated transmission lines between specified escrow/title companies and the county recorder's office. These dedicated lines ensured both the security of document transmission and the identity of the transmitter. According to task force reports evaluating the pilot, Orange County's program decreased the costs of doing business, decreased document processing times, and expedited public access to records. Following the initial pilot program, several bills were introduced to allow specific county recorders to join the program or establish new ones. When AB 1732 (Torlakson, 2000) was heard in this Committee, the bill provided for the regulation of document transmission systems and private sector participant contracts by the Attorney General. That bill died on the Senate inactive file. AB 2614 (Oller, 2000) would have allowed the Placer County recorder to establish a system for electronic recording that has been reviewed and approved by the Attorney General, and would have authorized the Attorney General to suspend use of the system upon a finding that fraudulent activity had occurred as a result of a system defect in the electronic recording of documents. AB 2614 was vetoed by Governor Davis, citing unbudgeted costs to the Attorney General's office, and raising a concern about security and integrity of records accepted for recordation. SB 407 (Sher, 2001) would have established pilot projects in 12 counties for electronic recording using a system reviewed and approved by the Attorney General and requiring the counties to select a security consultant from a list of computer security experts prepared by the Attorney General. That bill was held in this Committee. AB 578 (Leno, Ch. 621, Stats. 2004) made elements of the pilot program permanent by enacting the Electronic Recording Delivery Act of 2004. That bill established a statewide system to record digital electronic records of real property instruments, and required the Attorney General to adopt regulations for certification and oversight of electronic delivery systems, AB 2143 (Irwin) Page 3 of ? associated software, and related services. The bill authorized counties to pay for costs associated with regulation and oversight, and to collect a $1 fee from every recording of an instrument in the county to pay for costs associated with the system. The bill also authorized a county recorder, upon approval by the board of supervisors and certification of the system by the Attorney General to establish an electronic recording delivery system. AB 578 limited the parties with which a county recorder could contract to title insurers, underwritten title companies, institutional lenders, and entities of a local, state, or the federal government. The following year, AB 1738 (Cmte. on Local Gov., Ch. 520, Stats. 2005) required the Attorney General to conduct federal background checks for those who access an electronic recording delivery system. This bill would, subject to a 10-year sunset, authorize county recorders to enter into contracts with additional third parties for the delivery and return of digitized electronic records and instruments affecting rights, titles, or interests in real property, provided these third parties obtain general liability coverage of at least $1,000,000. CHANGES TO EXISTING LAW Existing law , the Electronic Recording Delivery Act of 2004, authorizes a county recorder to establish an electronic recording delivery system upon approval by resolution of the board of supervisors and system certification by the Attorney General. (Gov. Code Sec. 27391(a).) Existing law provides, upon system certification, a county recorder may enter into a contract with a title insurer, an underwritten title company, an institutional lender, or an entity of local, state, or federal government for the delivery for recording, and return to the party requesting recording, of a digitized electronic record that is an instrument affecting a right, title, or interest in real property. Existing law specifies that the contract may provide for the delivery of documents by an agent, but that the agent shall not be a vendor of electronic recording delivery systems. (Gov. Code Sec. 27391(b).) Existing law provides that no electronic recording delivery system may become operational without system certification by AB 2143 (Irwin) Page 4 of ? the Attorney General. This certification shall affirm that the proposed county system conforms to all legal requirements, that security testing has confirmed that the system is secure and that the proposed operating procedures are sufficient to assure the continuing security and lawful operation of that system. Existing law provides that the Attorney General shall approve software and other services for electronic recording delivery systems. (Gov. Code Sec. 27392.) Existing law requires the Attorney General to adopt regulations for the review, approval, and oversight of electronic recording delivery systems. These regulations are to include, among other things, the following elements: establishment of baseline technological and procedural specifications for electronic recording delivery systems; requirements for security, capacity, reliability, and uniformity; requirements as to the nature and frequency of computer security audits; requirements to place of a copy of the operating system, source code, compilers, and all related software associated with each county's electronic recording delivery system in an approved escrow facility prior to that system's first use; requirements to ensure that substantive modifications to an operating system, compilers, related software, or source code are approved by the Attorney General; procedures for initial certification of vendors offering software and other services to counties for electronic recording delivery systems; requirements for system certification and for oversight of approved systems; and requirements for fingerprinting and criminal records checks. (Gov. Code Sec. 27393.) Existing law states that to be eligible to establish an electronic recording delivery system, a county recorder shall contract with, and obtain a report from, a computer security auditor selected from a list of computer security auditors approved by the Attorney General. Existing law specifies that electronic recording delivery systems shall be audited at least once during the first year of operation and periodically thereafter, and that audits shall include: examinations of the safety and security of the system, including the vulnerability of the electronic recording delivery system to fraud or penetration; AB 2143 (Irwin) Page 5 of ? results of testing of the system's protections against fraud or intrusion, including security testing and penetration studies; and recommendations for any additional precautions needed to ensure that the system is secure. (Gov. Code Sec. 27394.) Existing law specifies that no person shall be a computer security auditor or be granted secure access to an electronic recording delivery system if he or she has been convicted of a felony, has been convicted of a misdemeanor related to theft, fraud, or a crime of moral turpitude, or if he or she has pending criminal charges for any of these crimes. (Gov. Code Sec. 27395.) This bill would, until January 1, 2027, authorize a county recorder to enter into a contract with an authorized submitter not otherwise authorized for the delivery for recording, and return to the party requesting recording, of an electronic record that is an instrument to be recorded. This bill would specify that an authorized submitter and any agent submitting documents on behalf of an authorized submitter shall provide proof of financial responsibility by providing a certificate of insurance evidencing an amount of general liability coverage of at least $1,000,000. This bill would expand the scope of documents that may be delivered via an electronic recording delivery system to include "digital" electronic records. COMMENT 1.Stated need for the bill The author writes: Often recording paper documents in person through the county recorder is a time-consuming and costly process, especially for entities that submit a high volume of documents. Electronic recording has proven to be an efficient, safer, and cost-effective method of recording documents. Current law allows specified title organizations and financial institutions to electronically record certain legal documents with county recorders provided that they register with the Department of Justice and meet minimum liability requirements. AB 2143 (Irwin) Page 6 of ? This bill seeks to expand the types of documents that can be recorded electronically and those who may record them provided certain security measures are in place. It allows a county recorder to enter into a contract with an authorized submitter who is not already mentioned in existing law (title insurers, institutional lenders, government entities) to record digitized and digital records if they have proof of insurance for one million dollars in general liability coverage. The [Attorney General] must also adopt regulations governing the requirements for this insurance and a county recorder may still refuse to enter into contract with any party for any good faith reason. Recent amendments have set a sunset date of January 1, 2027, to allow for legislative review of the increased size of the system. AB 2143 will expand electronic recording to all submitters that register with the Department of Justice and hold minimum liability insurance. Allowing more entities to record documents electronically will save costs for all parties involved, allow documents to be recorded more quickly, and help bring the infrastructure of local government into the 21st century. 2.Security of electronic recording systems Existing law imposes fairly rigorous security standards, implemented through regulations promulgated by the Department of Justice, to ensure the security and reliability of electronic recording delivery systems. These regulations not only require baseline security procedures and testing of the computerized delivery systems, but also require periodic system audits and restrict who can have access to these systems. As presently implemented, participation in the electronic recording delivery system is limited by statute to title insurers, underwritten title companies, institutional lenders, and entities of a local, state, or the federal government, and only "digitized" records may be delivered across a system. This bill would authorize additional third parties to enter into contracts with county recorders for the delivery for recording, and return, of electronic records affecting interests in real property, provided those parties obtain a certificate of insurance evidencing an amount of general liability coverage of at least $1,000,000. This bill would also expand the scope of documents that may be delivered via an electronic recording delivery AB 2143 (Irwin) Page 7 of ? system to include "digital" electronic records. The security implications of the two changes proposed by this bill deserve some consideration. First, expanding the scope of participating entities to third parties other than those currently authorized, could, without more, undermine the integrity of a county's electronic recording delivery systems. However, in context, it is clear that this bill would subject these additional third parties to the same oversight and system certification standards that are required of existing participants. Additionally, this bill would require these additional third parties to demonstrate financial responsibility in the amount of $1 million dollars to cover potential legal liabilities. Given the cost of real property in California, liability from a systematic defect in an electronic recording delivery system that impacts multiple parties could, rather quickly, exceed this amount. Although stakeholders in support of this bill report that these systems have not suffered significant security breaches of the type seen with other computerized record systems, the Committee might, nonetheless, wish to consider whether this required amount of financial responsibility is sufficiently high to cover potential losses. Second, expanding the scope of records transmitted across these systems to include "digital" records could introduce new reliability concerns that warrant further consideration. Under existing law, only "digitized" records - such as computer scanned copies of paper forms - may be transmitted via an electronic recording delivery system. Depending on the security standards built into a particular system, digital records - those which are completely computer generated - may not have the same level of reliability. The Committee may wish to consider directing the Attorney General to investigate whether expanding the types of records transmitted across these systems warrants any changes to the security regulations governing this program. Support : California Association of Realtors; California Mortgage Association; California State Association of Counties Opposition : None Known HISTORY Source : County Recorders Association of California AB 2143 (Irwin) Page 8 of ? Related Pending Legislation : None Known Prior Legislation : AB 1738 (Cmte. Local Gov., Ch. 520, Stats. 2005) See Background. AB 578 (Leno, Ch. 621, Stats. 2004) See Background. SB 407 (Sher, 2001) See Background. AB 2614 (Oller, 2000) See Background. AB 1732 (Torlakson, 2000) See Background. AB 1906 (Brewer, Ch. 463, Stats. 1998) See Background. Prior Vote : Assembly Floor (Ayes 77, Noes 0) Assembly Appropriations Committee (Ayes 20, Noes 0) Assembly Local Government Committee (Ayes 9, Noes 0) **************