BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 2416 (Wilk)
Version: February 19, 2016
Hearing Date: June 14, 2016
Fiscal: No
Urgency: No
TH
SUBJECT
Escrow Agent Rating Service
DESCRIPTION
Existing law, until January 1, 2017, requires an escrow agent
rating service to comply with specified portions of the
California Consumer Credit Reporting Agencies Act, and
establishes policies and procedures reasonably intended to
safeguard from theft or misuse any personally identifiable
information the service obtains from an escrow agent.
This bill would eliminate the above sunset, thereby extending
these requirements indefinitely.
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 over 100
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 companies with which they contract. That bulletin, in part,
stated:
The CFPB recognizes that the use of service providers is often
an appropriate business decision for supervised banks and
nonbanks. Supervised banks and nonbanks may outsource certain
functions to service providers due to resource constraints,
use service providers to develop and market additional
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products or services, or rely on expertise from service
providers that would not otherwise be available without
significant investment.
However, the mere fact that a supervised bank or nonbank
enters into a business relationship with a service provider
does not absolve the supervised bank or nonbank of
responsibility for complying with Federal consumer financial
law to avoid consumer harm. A service provider that is
unfamiliar with the legal requirements applicable to the
products or services being offered, or that does not make
efforts to implement those requirements carefully and
effectively, or that exhibits weak internal controls, can harm
consumers and create potential liabilities for both the
service provider and the entity with which it has a business
relationship. Depending on the circumstances, legal
responsibility may lie with the supervised bank or nonbank as
well as with the supervised service provider.
. . .
The CFPB expects supervised banks and nonbanks to have an
effective process for managing the risks of service provider
relationships. The CFPB will apply these expectations
consistently, regardless of whether it is a supervised bank or
nonbank that has the relationship with a service provider.
(CFPB, CFPB Bulletin 2012-03 (Apr. 13, 2012)
[as of May 24, 2016].)
In response to that bulletin, some companies (self-described as
"risk management providers") 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 regarding these providers using a
combination of public and private data. In 2013, the
Legislature responded to concerns from escrow agents about the
business practices of these companies by enacting AB 1169 (Daly,
Ch. 380, Stats. 2013). AB 1169 enacted safeguards to ensure
that escrow agents are able to obtain access to information that
these third party vetting companies have collected about them,
as well as to challenge information they believe is incorrect or
misleading.
By its terms, the safeguards enacted by AB 1169 will sunset on
January 1, 2017. This bill eliminates that sunset, thereby
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extending these safeguards in perpetuity.
CHANGES TO EXISTING LAW
Existing law , the Escrow Law, which is administered by the
Department of Corporations, includes the following definitions:
"escrow" is any transaction in which one person, for the
purpose of effecting the sale, transfer, encumbering, or
leasing of real or personal property to another person,
delivers any written instrument, money, evidence of title to
real or personal property, or other thing of value to a third
person to be held by that third person until the happening of
a specified event or the performance of a prescribed
condition, when it is then to be delivered by that third
person to a grantee, grantor, promisee, promisor, obligee,
obligor, bailee, bailor, or any agent or employee of any of
the latter (Fin. Code Sec. 17003); and
an escrow agent is any person engaged in the business of
receiving escrows for deposit or delivery (Fin. Code Sec.
17004).
Existing law exempts the following from the Escrow Law:
any person doing business under any state or federal law
relating to banks, trust companies, building and loan or
savings and loan associations, or insurance companies;
any person licensed to practice law in California who has a
bona fide client relationship with a principal in a real
estate or personal property transaction and who is not
actively engaged in the business of an escrow agent;
any person whose principal business is that of preparing
abstracts or making searches of title that are used as a basis
for the issuance of a policy of title insurance by a company
doing business under any law of this state relating to
insurance companies; and
any broker licensed by the Real Estate Commissioner while
performing acts in the course of or incidental to a real
estate transaction in which the broker is an agent or a party
to the transaction and in which the broker is performing an
act for which a real estate license is required. (Fin. Code
Sec. 17006).
Existing law , the Consumer Credit Reporting Agencies Act
(CCRAA), establishes obligations of consumer credit reporting
agencies, requirements for users of consumer credit reports,
obligations of furnishers of credit information, and provides
for remedies available to persons harmed through violations of
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the CCRAA, as specified. (Civ. Code Sec. 1785.1 et seq.)
Existing law requires an escrow agent rating service to comply
with and be subject to the following provisions of the CCRAA:
upon request and proper identification of any consumer, allow
the consumer to visually inspect all files maintained
regarding that consumer at the time of the request;
inform a consumer of their right to request a decoded written
version of the file a consumer credit reporting agency has on
that consumer;
disclose the recipients of any consumer credit report on the
consumer which the consumer credit reporting agency has
furnished within two-years preceding the consumer's request;
only furnish a consumer credit report in accordance with the
written instructions of the consumer to whom it relates;
prohibit a consumer credit report from containing:
bankruptcies that antedate the report by more than 10 years;
suits and judgments that antedate the report by more than
seven years; unlawful detainer actions, unless the lessor was
the prevailing party; paid tax liens that antedate the report
by more than seven years; accounts placed for collection or
charged to profit or loss that antedate the report by more
than seven years; and records of arrest or other adverse
information that antedates the report by more than seven
years;
maintain reasonable procedures to ensure that consumer credit
reports are furnished only to persons entitled to receive
them;
allow a consumer to request and receive either a decoded
written version of their file or a written copy of their file,
including all information in the file at the time of the
request, with an explanation of any code used;
allow a consumer to dispute the completeness or accuracy of
any item of information in his or her credit file, require the
consumer credit reporting agency to reinvestigate information
that is disputed, allow a consumer to include a note in his or
her file disputing certain information, and require the
consumer credit reporting agency to include a consumer's note
in any consumer credit report it provides that includes
information being disputed by that consumer; and
specify the source of any public records they include in their
credit reports. (Civ. Code Sec. 1785.28 (b).)
Existing law additionally provides that an escrow agent rating
service that acts as a reseller of credit information shall
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comply with the following:
only procure a consumer credit report for the purpose of
reselling the report or any information therein if the person
discloses to the consumer credit reporting agency which issues
the report the identity of the ultimate end user and each
permissible purpose for which the report is furnished to the
end user of the consumer credit report or information therein;
and
if the report is procured for the purpose of reselling the
report or any information in the report, the service must
establish and comply with reasonable procedures designed to
ensure that the report or information is resold by the person
only for a purpose for which the report may legally be
furnished. (Civ. Code Sec. 1785.28 (c).)
Existing law requires an escrow agent rating service to
establish policies and procedures reasonably intended to
safeguard from theft or misuse any personally identifiable
information it obtains from an escrow agent. (Civ. Code Sec.
1785.28 (d).)
Existing law provides that an escrow agent who suffers damages
as a result of the failure of an escrow agent rating service to
comply with the above requirements may bring an action and
recover the following:
in the case of a negligent violation: actual damages,
including court costs, loss of wages, attorney's fees and
costs, and, when applicable, pain and suffering;
in the case of a willful violation: actual damages, including
court costs, loss of wages, attorney's fees and costs, plus
punitive damages between $100 and $5,000 per violation, as the
court deems proper, plus any other relief the court deems
proper;
in the case of a class action alleging a willful violation:
punitive damages in an amount that the court may allow, plus
attorney's fees and costs; and
in the case of injunctive relief to compel compliance with the
above requirements: court costs and attorney's fees. (Civ.
Code Sec. 1785.28 (e).)
Existing law provides that if an escrow agent rating service is
also a consumer credit reporting agency, as specified, it must
also comply with other provisions of the CCRAA applicable to
consumer credit reporting agencies. (Civ. Code Sec. 1785.28
(f).)
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Existing law specifies that the above provisions shall remain in
effect only until January 1, 2017, and on that date shall be
repealed. (Civ. Code Sec. 1785.28.6.)
This bill would remove the above sunset provision, thereby
extending these provisions of existing law indefinitely.
COMMENT
1.Stated need for the bill
According to the author:
In 2013, the Legislature enacted Assembly Bill 1169 (Daly),
which created . . . Chapter 3.6, commencing with Section
1785.28 to the California Civil Code. The intent of the bill
was to apply provisions of California's credit reporting law
to "escrow agent rating services" which purport to evaluate
the suitability of escrow professionals to close transactions.
The bill was approved unanimously in both houses. The bill
contains a January 1, 2017 sunset clause, codified at Section
1785.28.6.
Without the protections provided by existing provisions of the
Civil Code, escrow agent rating services could incorporate
inaccurate credit or bankruptcy data in evaluations of escrow
agent settlement services providers, effectively putting these
escrow agents out of business based upon inaccurate data. As
noted in the analysis of AB 1169 prepared by the Assembly
Banking and Finance Committee, these companies are clearly
evaluating credit information in assigning a low, medium or
high risk index score to be made available to lenders and
others in the mortgage industry. These index scores are thus
not unlike credit scores in the consumer context. The law
does not prohibit the evaluative process; in fact lenders have
been evaluating settlement service providers for many years
and new rules promulgated pursuant to Dodd-Frank obligate
lenders to perform due diligence on vendors. Existing law
also does not affect evaluations performed by lenders
themselves. Instead, the law applies to third-party
evaluation entities.
2.Removal of sunset provision
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Existing law protects escrow agents from being subjected to
unfair business practices by third-party escrow rating or
vetting companies by applying certain provisions of the Consumer
Credit Reporting Agencies Act (CCRAA) to these companies.
Existing law, among other things, grants escrow agents the right
to inspect the files a rating service maintains pertaining to
that agent, grants agents the right to receive a decoded copy of
the file, prohibits reports from containing certain adverse
events that are over seven or ten years old, and allows an
escrow agent to dispute the completeness or accuracy of any item
in his or her file. Existing law also requires an escrow agent
rating service to establish policies and procedures reasonably
intended to safeguard from theft or misuse any personally
identifiable information it obtains from an escrow agent.
The Escrow Institute of California, writing in support, states:
The Daly bill was enacted to address the emergence of
unregulated "risk management providers" (RMPs) that organized
following the issuance of Bulletin 2012-03 on April 13, 2012
by the Consumer Financial Protection Bureau (CFPB). The
Thesis that has been promoted since 2012 by certain
out-of-state unregulated RMPs is that the CFPB Bulletin
requires some level of "vetting" of settlement service
providers which, from our discussions with the CFPB, is not
accurate.
From our limited analysis and input we have received from
attorneys that have a significant base of escrow agent client
representation is that the requirements and safeguards to
ensure that these third party RMPs maintain proper policies
and procedures to protect information from escrow agents, that
escrow agents have the ability to access any information that
these third party vetting companies may have collected about
them, and that escrow agents may challenge that information if
they believe it is incorrect or misleading, has seemed to
serve as a necessary caution and warning to these unregulated
risk management providers. Further, the law provides some
level of protections and legal rights for California Escrow
Agents and their clients should any information be misused or
compromised . . .
Despite their apparent utility, information received from the
sponsor of this bill suggests that these protections are rarely
invoked, and that they instead serve more of a deterrent role in
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protecting escrow agents from unfair business practices. Given
the lack of sufficient information to determine whether these
provisions operate as intended for those who invoke them
directly, the author offers the following amendment to extend
the current sunset period by an additional five years.
Author's Amendment :
On page 2, strike lines 2 through 5, and insert: "1785.28.6.
This chapter shall remain in effect only until January 1,
2022, and as of that date is repealed, unless a later enacted
statute, that is enacted before January 1, 2022, deletes or
extends that date."
Support : Escrow Institute of California
Opposition : None Known
HISTORY
Source : California Escrow Association
Related Pending Legislation : None Known
Prior Legislation : AB 1169 (Daly, Ch. 380, Stats. 2013)
required, until January 1, 2017, an escrow agent rating service
to comply with specified portions of the California Consumer
Credit Reporting Agencies Act, and established policies and
procedures reasonably intended to safeguard from theft or misuse
any personally identifiable information obtained from an escrow
agent.
Prior Vote :
Assembly Floor (Ayes 76, Noes 0)
Assembly Banking and Finance Committee (Ayes 12, Noes 0)
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