BILL ANALYSIS                                                                                                                                                                                                    





                             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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