BILL ANALYSIS Ó
AB 2416
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Date of Hearing: April 25, 2016
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 2416
(Wilk) - As Introduced February 19, 2016
SUBJECT: Escrow agent rating service
SUMMARY: Deletes the sunset date of January 1, 2017 of the
statute governing escrow agent rating services thereby extending
the statute indefinitely.
EXISTING LAW:
1)Defines an escrow agent rating service as a person or entity
that prepares a report, for compensation or in expectation of
compensation, for use by a creditor in evaluating the capacity
of an escrow agent to perform escrow services in connection
with an extension of credit. An escrow agent rating service
does not include either of the following: A creditor or an
employee of a creditor evaluating an escrow agent in
connection with an extension of credit by that creditor or an
entity described in paragraph (2) for which a natural person
performs escrow services as an employee or an independent
contractor. [Civil Code, Section 1785.28]
2)Provides a sunset date of January 1, 2017 unless a later
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enacted statute, that is enacted before January 1, 2017,
deletes or extends that date. [Civil Code, Section 1785.28.6]
FISCAL EFFECT: None.
COMMENTS:
In 2013, the California Legislature enacted protections for
California escrow agents. New entities, defined as "escrow
agent rating services" in Civil Code Section 1785.28, were
evaluating the suitability of escrow agents to perform
settlement services by examining credit information, bankruptcy
filings, and other criteria. These companies were providing the
services as third-party vendors for lenders to assist with
federal requirements to conduct due diligence on their vendors.
The 2013 bill applied protections from California's credit
reporting laws to escrow agents, such as the right to receive a
copy of any report produced by the rating service, and the right
to dispute and correct inaccurate information. Without these
protections, escrow agents could literally be put out of
business based upon inaccurate information. The 2013 bill
included a January 1, 2017 sunset date, to determine if any
problems arose for lenders or others as a result of extending
credit report protections to these ratings services. Assembly
Bill 2416 merely repeals this sunset date.
Background:
The federal Consumer Financial Protection Bureau (CFPB),
established by the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act), supervises 111
depository institutions and their affiliates. On April 13,
2012, the CFPB released a bulletin to clarify that institutions
under CFPB supervision may be held responsible for the actions
of the companies with which they contract. The CFPB further
noted that:
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Using outside vendors can pose additional risks. A service
provider that is unfamiliar with consumer financial
protection laws or has weak internal controls can harm
consumers. The CFPB wants to ensure that consumers are
protected from irresponsible service providers and that
banks and nonbanks are contracting with honest third
parties.
Today's bulletin states the Bureau's expectation that
supervised financial institutions have an effective process
for managing the risks of service provider relationships.
The CFPB recommends that supervised financial institutions
take steps to ensure that business arrangements with
service providers do not present unwarranted risks to
consumers. (CFPB, Consumer Financial Protection Bureau to
hold financial institutions and their service providers
accountable (Apr. 13, 2012)
[as of June 26, 2013].)
In response to that bulletin, some companies (self-described as
"risk management providers" (RMPs)) now offer to vet service
providers (such as escrow agents) for supervised financial
institutions. Some of those companies reportedly charge fees to
the service provider for inclusion (or preferential treatment)
in their database and prepare reports using a combination of
public and private data.
How do these RMPs work? For a fee, a settlement provider, such
as an escrow agent, sign up to be included on a database managed
by the RMP that generates a low, medium or high risk index score
that is made available to lenders and others in the mortgage
industry. Settlement service providers are told that they will
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receive preference by lenders for the use of their services
because of the special vetting process. The fee for each
settlement service provider is several hundred dollars per year
to maintain "accreditation." A failure to maintain
"accreditation" could lead a provider to lose business from
lenders as these RMPs use information on settlement providers to
create lists of vetted agents that are made available to
supervised entities. As one company advertises, "These lenders
and underwriters utilize the?list as their key source of closing
professionals?" The implication here appears to be that either
through a bad review or no review at all, a settlement service
provider runs the risk of being pushed out of their industry.
The reports done by RMPs are prepared using a combination of
public and private data, including credit reports, civil cases,
arrest records, bankruptcy, unlawful detainer actions and more.
On December 5, 2012, the Commissioner of the Department of
Corporations now known as the Department of Business Oversight
issued Commissioner's Bulletin No: 001-12. The Commissioner's
Bulletin addressed the rise of concerns relating to RMPs.
Previous Legislation:
AB 1169 (Daly, Chapter 380, Statutes of 2013) defined the term
"escrow agent rating service" and would, until January 1, 2017,
require escrow agent rating services to comply with specified
portions of the California Consumer Credit Reporting Agencies
Act (CCRAA), and establish policies and procedures reasonably
intended to safeguard from theft or misuse any personally
identifiable information it obtains from an escrow agent.
REGISTERED SUPPORT / OPPOSITION:
AB 2416
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Support
California Escrow Association (CEA) - Sponsor
Opposition
None on file.
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081