BILL ANALYSIS Ó
SB 736
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Date of Hearing: July 6, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
SB
736 (Vidak) - As Amended May 5, 2015
SENATE VOTE: 40-0
SUBJECT: Escrow agents
SUMMARY: States that, whenever possible, the Commissioner of
the Department of Business Oversight (commissioner) shall
utilize the services of private individuals with prior escrow
experience to act as conservator, receiver or liquidator in
cases in which the Commissioner must take possession of the
property and business of an escrow agent due to insolvent
conditions of escrow law violations. Specifically, this bill:
1)Allows the Commissioner to redirect up to $125,000 in penalty
revenue to compensate conservators, liquidators or receivers.
2)Provides authority for the Commissioner to utilize all or a
portion of an escrow agents surety bond and any assets
remaining following conservation, liquidation or receivership
of that escrow agent to compensate the agent's conservator,
liquidator or receiver.
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3)Makes various technical changes.
EXISTING LAW:
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
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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.
FISCAL EFFECT: According to the Senate Appropriations
Committee, redirection of penalty revenue up to $125,000
annually.
COMMENTS:
Existing law specifies the procedures required to respond to the
failure of an escrow agent in order to prevent the loss of
escrow trust funds. These authorities allow:
1)DBO to wind-down and liquidate a failed escrow company.
2)DBO to petition a court to place a filed escrow company into
receivership.
3)DBO to appoint a conservator, liquidator, or receiver.
In addition to the authorities mentioned above, the Escrow Law
requires that every licensed company must obtain a surety bond
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to ensure that DBO and its representatives are compensated in
the event the company is placed into conservatorship or
receivership. Finally, every company licensed under the Escrow
Law must obtain a fidelity bond that provides insurance against
theft of trust funds.
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 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. The real estate broker'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 the broker 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 that the 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.
Unfortunately, EAFC rejected the claim claiming that the
conservator appointed by DBO failed to submit the proof of loss
claim within the statutorily prescribed deadline. 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 those with claims against the
roughly $700,000 in trust funds with which FSE's owners
absconded, $0.41 on the dollar.
After selling their home in October of 2010, the real estate
broker's clients received their 41% payout in October of 2014.
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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.
Private conservators/liquidators/receivers
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).
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. By increasing the amount that can be paid to private
conservators/liquidators/receivers may lead to an increase in
the use of private parties carrying out these duties rather than
DBO employees.
The items contained within SB 736 would add efficiency to the
process of handling failed escrow companies, but it is unclear
whether these changes would have changed the outcome in the FSE
case.
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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.
REGISTERED SUPPORT / OPPOSITION:
Support
None on file.
Opposition
None on file.
Analysis Prepared by:Mark Farouk / B. & F. / (916)
319-3081
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