BILL ANALYSIS                                                                                                                                                                                                    



                                                                    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:








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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