BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 736|
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THIRD READING
Bill No: SB 736
Author: Vidak (R) and Block (D), et al.
AmendedAmended:5/5/15
Vote: 27
SENATE BANKING & F.I. COMMITTEE: 6-0, 4/29/15
AYES: Block, Galgiani, Hall, Hueso, Lara, Morrell
NO VOTE RECORDED: Vidak
SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/28/15
AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza, Nielsen
SUBJECT: Escrow agents
SOURCE: Authors
DIGEST: This bill directs Escrow Law penalty revenue to the
Commissioner of Business Oversight (commissioner) for use in
compensating persons appointed to act as conservators,
liquidators, or receivers of failed Escrow Law licensees (escrow
agents) and clarifies additional sources of revenue that can be
used by the commissioner for this purpose.
ANALYSIS:
Existing law:
SB 736
Page 2
1)Requires each escrow agent to maintain a surety bond equal to
$25,000, $35,000, or $50,000, depending on the size of its
prior year's average annual trust fund obligations (Financial
Code Section 17202).
2)Authorizes the commissioner to take possession of the property
and business of an escrow agent, as specified, when it appears
to the commissioner that an escrow agent is in an insolvent
condition; is conducting escrow business in an unsafe or
unauthorized manner; has violated its charter or any law of
the State of California; refuses to submit its books, papers
and affairs for inspection by an examiner; neglects or refuses
to observe any order of the commissioner made pursuant to the
Escrow Law or its regulations, as specified; or any officer,
director, stockholder, trustee, or attorney of an escrow agent
has embezzled, sequestered, or willfully diverted the assets
or trust funds of such escrow agent, has permitted its
tangible net worth to be lower than the minimum required by
law, or has failed to comply with the bonding requirements of
the Escrow Law (Financial Code Section 17621).
3)Establishes the Escrow Agents' Fidelity Corporation (EAFC;
Fidelity Corporation; Financial Code Section 17300),
establishes the purpose of EAFC as indemnifying its members
against loss, as specified (Financial Code Section 17310), and
requires each licensed escrow agent to participate as a member
in EAFC (Financial Code Section 17312). Requires EAFC to
provide fidelity coverage to its members based on their
monthly average escrow liability per licensed location. The
minimum coverage that must be provided by EAFC for each
licensed location is $1,000,000, and the maximum coverage for
each licensed location is $5,000,000 (Financial Code Section
17314).
4)Provides that the General Fund consists of money received into
the Treasury and not required by law to be credited to any
other fund (Government Code Section 16300). Because of this
rule, penalty revenue collected by the Department of Business
Oversight (DBO) and other state departments and agencies
reverts to the General Fund, if not otherwise redirected to a
specific use.
This bill:
SB 736
Page 3
1)States the intent of the Legislature that Fidelity Corporation
undertake its responsibilities in a manner that supports and
enhances trust in licensed escrow agents.
2)States that, whenever possible, the commissioner shall utilize
the services of one or more qualified private individuals with
relevant prior experience, as specified, to act as
conservator, liquidator, or receiver of a failed escrow agent.
3)Allocates Escrow Law penalty revenue to the commissioner to
compensate conservators, liquidators, or receivers of failed
escrow agents, caps the maximum amount of penalty revenue
available at any one time for this purpose at $125,000, and
allocates any penalty revenue above this amount to the General
Fund.
4)Clarifies that the commissioner may use all or a portion of an
escrow agent's surety bond and any assets remaining following
conservation, liquidation, or receivership of that escrow
agent to compensate the agent's conservator, liquidator, or
receiver.
Background
SB 736 is a response to a problem that was brought to the
Legislature's attention during the fall of 2014, when a real
estate broker named David Lawrence contacted several legislative
offices, expressing great dissatisfaction with the way in which
DBO and EAFC had handled a matter involving two of his former
real estate clients. Mr. Lawrence's clients were an older
couple that placed their home on the market in October of 2010
and entered into a sales agreement that would have netted them
$154,000 in profit - money they planned to use in their
retirement. Unbeknownst to Mr. Lawrence or his clients, the
company selected to handle the real estate escrow by the
purchaser of his clients' home was about to fail, and the owners
of that company were about to flee the country with an unknown
amount of client money. The first indication Mr. Lawrence's
clients had that anything was amiss was when the check for
$154,000 that they had received from First Southwestern Escrow
(FSE) bounced due to insufficient funds in the escrow company's
account.
SB 736
Page 4
Existing California law contains a number of provisions, which
are intended to help prevent the loss of escrow trust funds
following the failure of an escrow agent. Among these
provisions: authority for DBO to conserve (wind down) and
liquidate a failed escrow company; authority for DBO to petition
a court to place a failed escrow company into receivership;
authority for DBO to appoint a conservator, liquidator, or
receiver; a requirement that every company licensed under the
Escrow Law obtain a surety bond, to ensure that money is
available with which to compensate DBO and its
conservator/liquidator/receiver in the event the commissioner
must place an escrow company into conservatorship or
receivership; a requirement that every company licensed under
the Escrow Law obtain a fidelity bond, to provide insurance
against theft of trust funds; and language establishing EAFC, a
private entity created by the Legislature to serve as the
fidelity insurer for escrow agents.
Unfortunately, all of these protections failed to work as
designed in the FSE case. The conservator appointed by DBO (a
DBO employee who worked as an examiner within the Escrow Law
program) failed to submit a proof of loss claim to EAFC within
the statutorily prescribed deadline for submitting such claims.
EAFC rejected the claim. DBO prepared to appeal the rejection,
believing that its submission was timely, but ultimately opted
to settle with EAFC in lieu of challenging the rejected claim
before an administrative law judge. The settlement netted Mr.
Lawrence's clients, and all others with claims against the
roughly $700,000 in trust funds with which FSE's owners
absconded, $0.41 on the dollar. To add insult to injury, not
only did the claimants receive less than half of the money they
lost, but they had to wait nearly a year to receive their
payouts after the settlement, due to rules which must be
followed when a state department or agency (in this case DBO)
makes payments to private individuals.
After selling their home in October of 2010, Mr. Lawrence's
clients received their 41% payout in October of 2014. Although
a criminal case alleging 11 felony counts against FSE's
principals was opened in the matter by the Alameda County Real
Estate Fraud Unit within the Alameda County District Attorney's
Office, prosecution of FSE's owners will be impossible, unless
those individuals can be compelled to return to the United
States to face the charges against them.
SB 736
Page 5
Comments
Although DBO and EAFC disagree on a great many things involved
in the FSE case, they do agree on one key point: namely that
the conservation, liquidation, and receivership process works
more smoothly if a private individual is appointed as
conservator, liquidator, or receiver, rather than a DBO
employee. Private conservators/liquidators/receivers do not
have to juggle multiple jobs when serving in that capacity (DBO
employees appointed as conservator/liquidator/receiver have to
continue to do their regular DBO jobs as escrow examiners while
also acting as conservators/liquidators/receivers); private
conservators/liquidators/receivers may have specialized
expertise in winding down failed entities; and money paid out by
EAFC to private conservators/liquidators/receivers can be paid
out to claimants far faster than it can if a DBO employee is
appointed as conservator/liquidator/receiver (a function of
State Administrative Manual rules which apply to the payment of
money by state departments and agencies to private individuals).
According to DBO staff, the commissioner always tries to hire a
private conservator/receiver for failed escrow agents when
possible. However, if there are insufficient funds available
with which to compensate a qualified private individual, the
commissioner appoints one of her own employees to perform this
function. As a matter of practice (though not as a matter of
statute), money to compensate conservators, liquidators, and
receivers comes from the surety bonds that escrow agents must
maintain, as well as from any money remaining in the escrow
company after all creditors and claimants have been paid.
Sometimes the sum of these amounts is insufficient to attract a
qualified private individual to take a case.
This bill codifies the existing practice of using surety bond
revenue and any money remaining in an escrow agent's business
after all creditors and claimants have been paid to compensate
conservators/liquidators/receivers. It also increases the
amount of money available to the commissioner to compensate
private conservators/liquidators/receivers by authorizing the
commissioner to utilize penalty revenue collected from escrow
agents that have violated the law for the purpose of hiring
private conservators/liquidators/receivers.
SB 736
Page 6
On the basis of information provided by DBO, there were 20
instances during the past 10 years in which an escrow agent was
conserved, liquidated, or placed into receivership. Private
individuals handled 15 of those cases; DBO employees handled
five.
-------------------------------------------
| | Number of |
| | Conservatorships, |
| Calendar Year | Liquidations, and |
| | Receiverships (Private |
| |Individual/DBO Employee) |
|-----------------+-------------------------|
| 2005 | 0 (0/0) |
|-----------------+-------------------------|
| 2006 | 0 (0/0) |
|-----------------+-------------------------|
| 2007 | 2 (1/1) |
|-----------------+-------------------------|
| 2008 | 1 (1/0) |
|-----------------+-------------------------|
| 2009 | 4 (2/2) |
|-----------------+-------------------------|
| 2010 | 3 (2/1) |
|-----------------+-------------------------|
| 2011 | 4 (4/0) |
|-----------------+-------------------------|
| 2012 | 2 (2/0) |
|-----------------+-------------------------|
| 2013 | 3 (2/1) |
|-----------------+-------------------------|
| 2014 |1 |
| |(1/0) |
| | |
-------------------------------------------
Revenue obtained from escrow-related penalties is quite
variable, as shown below. However, it appears that if penalty
revenue had been available for use by the commissioner to
compensate private conservators/liquidators/receivers in the
five instances where DBO employees were used in lieu of private
individuals, an additional $444,000 would have been available to
the commissioner with which to attract qualified private
SB 736
Page 7
individuals to perform the conservation, liquidation, or
receivership activities (approximately $90,000 per case).
----------------------------------------
| Fiscal Year | Escrow Penalties |
| | Collected |
|-----------------+----------------------|
| 2008-09 | $133,311 |
|-----------------+----------------------|
| 2009-10 | $119,386 |
|-----------------+----------------------|
| 2010-11 | $ 67,523 |
|-----------------+----------------------|
| 2011-12 | $ 99,863 |
|-----------------+----------------------|
| 2012-13 | $ 5,731 |
|-----------------+----------------------|
| 2013-14 | $ 17,943 |
|-----------------+----------------------|
|Total |$443,757 |
| | |
----------------------------------------
Prior Legislation
AB 1679 (Harkey, 2014) would have eliminated the commissioner's
ability to rule on an appeal of an EAFC claim denial filed by a
successor in interest following a conservation or liquidation
proceeding involving a failed escrow agent, when a DBO employee
acted as that successor in interest.
FISCAL EFFECT: Appropriation: Yes Fiscal
Com.:YesLocal: No
According to the Senate Appropriations Committee:
Redirection of penalty revenue up to $125,000 annually
(General)
SB 736 allows DBO to use up to $125,000 of penalty revenue that
would otherwise be deposited into the General Fund. This
redirection will unlikely be as high as $125,000 each year
because the penalty revenue varies greatly every year and has
ranged between $5,731 and $133,311 during the last six fiscal
SB 736
Page 8
years. The intent is to create a reserve of $125,000 that can
be used in years when the DBO needs to compensate a conservator,
liquidator, or receiver. Additionally, SB 736 authorizes the
commissioner to use all or a portion of an escrow agents bond
and assets to compensate conservators, liquidators, or
receivers. This bill does not cap the amount of money that can
be used from this source.
SUPPORT: (Verified5/26/15)
None received
OPPOSITION: (Verified5/26/15)
None received
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
5/28/15 14:16:51
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