BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2416


                                                                    Page  1


          CONCURRENCE IN SENATE AMENDMENTS


          AB  
          2416 (Wilk)


          As Amended  June 21, 2016


          Majority vote


           -------------------------------------------------------------------- 
          |ASSEMBLY:  |76-0  |(May 2, 2016)  |SENATE: |37-0  |(June 30, 2016)  |
          |           |      |               |        |      |                 |
          |           |      |               |        |      |                 |
           -------------------------------------------------------------------- 


          Original Committee Reference:  B. & F.


          SUMMARY:  Extends the sunset date from January 1, 2017, of the  
          statute governing escrow agent rating services to January 1,  
          2022.  


          The Senate amendments extend the sunset date to January 1, 2022,  
          rather than deleting the sunset date.  


          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  








                                                                    AB 2416


                                                                    Page  2


            connection with an extension of credit by that creditor or an  
            entity described in paragraph 2) below, 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  
            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.  This bill  
          extends the sunset date January 1, 2022.  


          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  








                                                                    AB 2416


                                                                    Page  3


          under CFPB supervision may be held responsible for the actions  
          of the companies with which they contract.  The CFPB further  
          noted that:


            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  








                                                                    AB 2416


                                                                    Page  4


          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.  


          Analysis Prepared by:                                             
                          Kathleen OMalley / B. & F. / (916) 319-3081  FN:  
          0003595