BILL ANALYSIS
AB 578
Page 1
Date of Hearing: May 7, 2003
REVISED
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Simon Salinas, Chair
AB 578 (Leno) - As Amended: May 5, 2003
SUBJECT : County recorders: electronic recording.
SUMMARY : Creates the Electronic Recording Delivery System Act
of 2003. Specifically, this bill:
1)Authorizes all 58 counties to immediately start recording real
property documents through both a "digitized electronic
record" (i.e. scanned paper documents) or a "digital
electronic record" (i.e. electronically created documents).
2)Defines a "digital electronic record" as a record containing
information that is created, generated, sent, communicated,
received, or stored by purely electronic means, but not
created in paper form.
3)Defines a "digitized electronic record" as a scanned image of
the original paper document.
4)Defines an "authorized submitter" as:
a) Any entity of local, state, or federal government;
b) A licensed title insurance company, as defined;
c) Fannie Mae, or Freddie Mac;
d) An institutional lender, as defined;
e) An escrow company, as defined, and if all of the
following apply:
i) It has been audited regularly, and in the last three
audits there was no indication of an irregularity or
violation;
ii) It is a member in good standing of the Escrow Agents
Fidelity Corporation;
iii) It has a license in good standing from the
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Department of Corporations; and
f) Allows for additional submitters by requiring that the
county recorder consider the following factors when
deciding to approve an additional submitter:
i) Whether accepting electronically delivered records
from the person or entity is in the best interest of the
public and county;
ii) Whether the person or entity requesting access to
the program for the purpose of electronically delivering
documents has effective security precautions in place to
safeguard against potential fraud and forgery of documents
during the electronic delivery process;
iii) Whether the person or entity requesting access
demonstrates the maintenance of sufficient financial
ability to indemnify losses for which it is responsible
that might be suffered by the county or members of the
public. The recorder may in his or her sole discretion
consider or require net worth, maintenance of insurance
or bonding, access to indemnity or fidelity funds, other
evidences of financial ability, or any combination
thereof;
iv) Whether the volume and quality of electronic records
submitted will be sufficient to warrant electronic
delivery;
v) Whether factors of cost, capacity, or security
require the limitation of the provision
of access to persons requesting to participate, based upon
business reasons for recording documents, scope of
authority under a license, if any, and volume of
documents recorded in previous years;
vi) Whether the authorized submitter is legally
authorized to conduct business in this state;
vii) Whether the additional authorized submitters
regularly recorded documents in the county during the
three-year period prior to the date of application in
sufficient numbers to demonstrate a business need to
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record electronically.
5)States that, upon approval of its board of supervisors and
certification of the Attorney General (AG), a county recorder
can establish a system as long as:
a) An archiving system is set up, as specified; and
b) The system has a governing contractual relationship
between the recorder and each authorized submitter, as
specified.
6)Authorizes a recorder to refuse to enter into a contractual
relationship with an authorized submitter, or to accept a
document from an authorized submitter if the submitter, among
other things, has been convicted of a felony or misdemeanor.
7)Permits the recorder to terminate access to the system, or
access of an authorized submitter to protect homeowners or
real property owners from financial harm, and states that a
recorder is not open to any action or liability as a result of
terminating that access.
8)States that to be eligible to establish a system, a county
must first contract with, and obtain a report from an AG
approved computer security auditor (auditor) who must have
significant experience in the evaluation and analysis of
Internet security design, and in performing security testing
procedures. The auditor must continue to monitor the system
and issue periodic reports, as specified by the AG.
9)Provides that the monitoring will include, but not be limited
to, penetration testing to determine vulnerability of the
system to fraud (i.e. "hackers"), and recommendations on how
to improve security of the system. All of the testing reports
and responses to the recommendations must be transmitted to
its board of supervisors, the county district attorney, and
AG.
10)States that no county can begin its system until a
penetration study has demonstrated that the system is secure,
and the AG has certified the system.
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11)States that the authorized submitter is responsible for
mailing the electronic document by either the United States
Postal Service or through an electronic address, whichever is
specified in the mailing instructions.
12)Specifies certain requirements when a signature is required
to be accompanied by a notary's seal or stamp.
13)Provides that specified indexing information may be required
of the authorized submitter by the recorders.
14)Subjects all system authorized staff, including auditors, to
Department of Justice (DOJ) administered fingerprinting and
background checks, as specified, and transmits that
information to the Federal Bureau of Investigation for further
access to potential criminal history.
15)Requires DOJ to notify, after ascertaining whether system
authorized staff or an auditor has a record of a criminal
past, the AG of any criminal convictions or pending charges,
and in turn, the AG will notify in writing an applicant's
system access ineligibility.
16)Encourages recorders to experiment with notices to property
owners to help them become aware of possible fraudulent or
erroneous recordings against their property.
17)Requires the AG, in consultation with the County Recorders
Association of California and the California District
Attorneys Association, to adopt regulations establishing
standards for the review and approval by county recorders of
systems and processes to conduct electronic recording and
providing for the regulatory oversight of electronic recording
delivery systems, as specified.
18)Authorizes the AG to suspend any system for up to seven days
in the event of an emergency involving multiple fraudulent
transactions linked to one county's system, and bring a court
action seeking injunctive relief, restitution, rescission,
disgorgement of profits, or other equitable relief.
19)Requires a county that establishes a system to pay for the
direct cost of regulation and oversight by the AG through any
of the following mechanisms:
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a) Imposing a fee of up to $1 for each instrument that is
recorded by the county, or
b) Imposing a fee on any vendor, or person seeking approval
as an authorized submitter; and
c) Specifying that the fee imposed cannot exceed the
reasonable cost of providing the services for which the fee
is charged.
19)Requires the AG to evaluate the pilot projects and report to
both houses of the Legislature on or before June 30, 2007.
EXISTING LAW :
1)Requires county recorders to record written documents that
transfer title to or impose liens on property, or give a right
to a debt or duty.
2)Authorizes county recorders to accept digitized images from
any local, state or federal agency, so long as the technology
used to create the image conforms to all applicable statutes
regulating document reliability.
3)Provides, under the Uniform Electronic Transactions Act (UETA)
provides rules and procedures for the sending and receiving of
electronic records and signatures, the formation of contracts
using electronic records, and procedures governing changes and
errors in electronically transmitted records. The UETA
applies to all transactions in which records or signatures are
electronically transmitted by parties who have agreed to
conduct the transaction electronically.
4)Permits the recorders from the counties of Orange and San
Bernardino to accept digitized images for recordation subject
to specified criteria.
5)Provides that the AG shall appoint a Task Force to make
recommendations regarding the technical, legal, security and
economic issues associated with electronic recordation, and
that the Task Force shall report its recommendations to the
Governor and Legislature no later than July 1, 1999.
FISCAL EFFECT : Unknown
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COMMENTS :
1)The concept of electronic recording (e-recording) is a good
one. Technological advances have surpassed even the experts'
expectations and they continue to evolve faster than one can
say "pixel". It makes sense that government should
incorporate the "latest" in technology into its daily
operations to increase efficiencies and, more importantly, to
save scarce taxpayer dollars. However, along with progress
comes new challenges and e-recording is no different.
2)Since the first bills that authorized the counties of Orange
and San Bernardino to
e-record, there have been several more seeking to extend that
authorization to other counties that have failed. Their
failure was primarily due to a lack of sufficient and
effective security precautions. In his 2000 veto message for
AB 2614 (Oller), the Governor stated that the bill failed
because it did not limit the authorization to entities where
law enforcement agencies
were able to sufficiently ensure the integrity of those records.
AB 578 has incorporated numerous provisions to protect the
property owner from the potential fraud that would most
assuredly come with this relatively new and untested system.
3)In July 1999, the AG's Task Force on Electronic Recordation
(Task Force) presented its recommendations pursuant to the
charge given the Task Force by AB 1906 (Brewer), Chapter 463,
Statutes of 1998. The Task Force was composed of three county
recorders and a representative from the banking industry, the
title insurance industry, the mortgage banking industry, the
real estate industry, the trustee attorneys, the State
Franchise Tax Board, the San Diego District Attorney, Fannie
Mae, and the Internal Revenue Service as an ex-officio member.
The Task Force found that by transmitting digital images of
documents over telecommunication lines, rather than delivering
them in person to county offices, business representatives
could save local agencies and themselves time and money.
"However," the Task Force warned, "the use of these new
technologies, while providing opportunities for substantial
improvement of service," also exposes the most sensitive of
public records to the possibility of "corruption, damage, or
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destruction."
4)Pilot projects in Orange and San Bernardino counties were
approved by the Legislature in 1996 [AB 3296 (Brewer), Chapter
842, Statutes of 1996] and 1998 [AB 1906 (Brewer), Chapter
463, Statutes of 1998]. However, only Orange County has
instituted electronic recording systems that utilize dedicated
transmission lines between the companies and the respective
county recorder's office. The dedicated lines appear to
ensure both (1) the security of document transmission, and (2)
the identity of the transmitter. According to the 1999 Task
Force Report, the results of the Orange County pilot project
have been promising: decreased costs of doing business,
decreased document processing times and expedited public
access to records. Neither the Orange County nor the San
Bernardino electronic recording pilot projects have been
independently evaluated, in fact, the San Bernardino project
is not yet operational.
5)The Los Angeles District Attorney's Office (LADA) states that
even the traditional system of walking in to the recorder's
office and recording a deed, creates hundreds of fraud cases,
and fears that with electronic recordation the situation will
worsen. LADA states that currently, criminals record a forged
deed transferring ownership of the victim's home to themselves
and use the victim's home as collateral for a loan and then
default on the loan. Because the victim is unaware the bank
forecloses on the home, and restitution of any kind is
unlikely. Both LADA and the AG's Office believe that the
extension of the authority to e-record should be independently
evaluated by security experts and thoroughly tested, reviewed,
and approved by the appropriate county or state prosecutorial
agency.
6)For the last six months, county recorders, LADA, and to a
certain extent, the California Association of Realtors, the
California Mortgage Bankers Association, and Fannie Mae have
been part of a working group to produce an e-recording bill
that addresses all of the stakeholders' concerns. Last month,
an agreement was reached between the recorders and LADA on
specific language that was to be amended into what is now SB
870 (Bowen). Many of the provisions of that language have
been amended into AB 578 addressing much of the Governor's,
the Task Force, the recorders' and law enforcement's concerns
regarding real estate fraud.
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7)AB 578 specifically addresses the Governor's concern by
limiting the users of the system. The two-tiered system
allows for those entities that have a legitimate purpose, and
past proven record of needing to e-record (i.e. federal, state
and local governments, title insurance companies). The second
group would be any other submitter that meets specified
criteria such as showing, among other things, that the volume
of documents to be recorded would warrant the need to e-record
and has sufficient financial ability to secure against any
potential loss that may be suffered by the homeowners or the
county. The working group continues to address the topic of
who should and should not be authorized.
8)The concern that Orange County's e-recording system, although
successful, has not been independently evaluated must also be
addressed. AB 578 calls not only for an independent security
audit to be performed, but that security audits be conducted
throughout the life of the system. Hackers continue to create
new ways of illegally entering systems, and likewise, security
experts must be vigilant in their ways of continuing to patch
any potential holes in the system.
9)The AG has a large oversight and regulatory role in
e-recording. The AG will adopt regulations for establishing
and reviewing the system in consultation with the county
recorders and the California District Attorneys' Association.
Any system must first be certified by the AG before going
operational. The AG plays a key role in the protection
of the consumer through fingerprinting, identifying proper
security experts, and emergency system suspension power.
Funding for the AG's efforts would come from fees charged to
authorized submitters, and to vendors or persons seeking
approval as an authorized submitter.
10)The first line of defense against intrusion into the system
is the county recorders. They are essentially the
gatekeepers. In AB 578, recorders have the power to authorize
or refuse to enter into a contractual relationship with an
authorized submitter, or to accept a document from an
authorized submitter if the submitter, among other things, has
been convicted of a felony or misdemeanor. The recorders are
also permitted to terminate access to the system, or access of
an authorized submitter to protect homeowners or real property
owners from financial harm.
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1 PROPOSED AMENDMENT : There is a fairly serious drafting error
that should be fixed. AB 578 was meant to include the 12
county pilot project approach for transmission and recording
of records which exist only in electronic form (digital
electronic records). It was agreed that all other counties
would be limited to electronic recording of digitized
electronic records (defined in the bill as scanned paper
documents). While the Legislative Council's Digest states
that AB 578 authorizes a county recorder to establish a system
for the recording of "digitized electronic records affecting
the right, title or interest of real property", this language
was inadvertently left out of the bill.
The above error should be corrected by amending 27392 (a) as
follows: 27392(a) Upon approval by resolution of the board of
supervisors and system certification by the Attorney General,
a county recorder may establish an electronic recording system
based upon the recording of digitized electronic records
affecting the right, title, or interest in real property, in
accordance with this article.
1 Although this bill goes a long way in addressing the
long-standing security concerns, it has a ways to go. The
following issues, submitted by LADA, have not yet been
resolved. It is the understanding of the Committee, the
author, the sponsors, and LADA that these issues will either
be resolved in Committee or before AB 578 reaches the Assembly
floor. It is also the Committee's understanding that nothing
in the bill will be changed or modified without the prior
consent of the stakeholders.
a) Persons entitled to be submitters . AB 578 contains a
limitation upon those who can electronically record in the
initial phase of an electronic recording project. It is
limited to those institutions where fraud is least likely
to occur. Other proposed submitters can be phased in later
upon a showing that there is a demonstrated business need
to record based on prior experience with that applicant.
The following definitions of initial submitters contained
in Section 27390 (b) (2) (D) and (E) are overly broad and
potentially defeat this important consumer protection:
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i) 27390 (b) (2) (D) Institutional lender as defined in
subdivision (j) of Section 50003 of the Financial Code
too broad. This definition is too broad. It includes
any person licensed to make a residential mortgage loan.
LADA suggests that the definition be limited to
paragraphs (1) through (3) of subdivision (j) of Section
500003 of the Finance Code. This would still include
government lenders, banks, savings and loans, credit
unions, industrial loan companies and insurance companies
but would exclude individual mortgage lenders. Individual
mortgage lenders could still apply to electronically
record under the more rigorous standards required for
additional submitters.
ii) 27390 (b) (2) (E) Escrow definition may be too
broad. AB 578 currently includes any escrow company
audited within the last 3 years with no irregularity or
violation, that is a member in good standing of the
Escrow Agents Fidelity Corporation and has a license in
good standing from the Department of Corporations. Given
that escrow companies have been a significant source of
real estate fraud in Los Angeles County and Southern
California, LADA is researching whether there should be
more stringent requirements in this category.
b) Financial Responsibility Section 27391 (c) (2) provides
that "the recorder may in his or her sole discretion
consider or require net worth, maintenance of insurance or
bonding, access to insurance or fidelity funds, other
evidences of financial ability, or any combination thereof.
This conflicts with the language and intent of AB 578
which provides for regulations by the Attorney General.
Instead, the paragraph should read: " Subject to regulations
of the Attorney General, the recorder shall consider or
require net worth, maintenance of insurance or bonding,
access to indemnity or fidelity funds, other evidences of
financial ability, or any combination thereof." LADA
requests that the above amendment be made in Committee.
c) Prohibiting Those with Criminal Records from Gaining
Secure Access to the Electronic Recording System . Security
experts inform us that the greatest security risk to an
internet based system are the persons with secure access to
the system. AB 578 prohibits those who been convicted of a
felony or a misdemeanor for a crime of moral
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turpitude from being granted secure access to the system.
However, AB 578 deletes an
essential paragraph from the Country Recorder/District
Attorney Draft. This paragraph excludes those who have
been convicted and punished for the above crimes but who
subsequently petitioned for a statutory pardon under
Section 1203.4 of the Penal Code. Persons who petition
under this section are guilty of the criminal offense but
are permitted to keep their conviction confidential for
limited purposes. We strongly oppose giving these
individuals secure access to electronic recording systems.
LADA asks that the following language be inserted: as
subdivision (d) of Section 27293: 27293(d) A plea or
verdict of guilty or nolo contendere or a finding of guilt
by a court in a trial without a jury or upon the forfeiture
of bail is deemed to be a conviction within the meaning of
this Article, irrespective of a subsequent order under the
provisions of Section 1203.4 of the Penal Code allowing the
withdrawal of the plea of guilty and entering of a plea of
not guilty, or setting aside the verdict of guilty, or
dismissing the accusations or information.
LADA asks that the above language be inserted in the bill as
an author's amendment in Committee.
d) Bonding Requirement . In order to protect consumers from
the risk of theft and fraud, LADA has suggested that
employees with secure access to an electronic recording
system be subject to a bonding requirement. A bonding
requirement guarantees a source of funds for restitution to
consumers for loss due to theft or fraud. Bonding companies
also provide an additional layer of protection by denying
bonding to those who have engaged in questionable financial
practices. LADA proposes the following language:
7396 (a) (1) Prior to the issuance of a system certification
letter by the Attorney General, each authorized submitter,
all authorized staff and any computer security auditor
shall execute a bond by an admitted surety in favor of the
State of California, in a form acceptable to the Attorney
General . The bond must be filed with the Attorney General.
The bond shall be for the benefit of any person damaged in
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connection with an electronically recorded transaction,
made pursuant to this chapter, which was the result of a
violation of a fiduciary duty, negligence, or fraud by the
authorized submitter, its agent or employee or any computer
security auditor .
( 2) The authorized submitter shall have on file a surety bond
in the sum of $500,000. Each authorized staff and computer
security auditor and any other person who is entrusted with
access to an electronic recording delivery system shall
register with the Attorney General and shall file with the
Attorney General a surety bond in the sum of $50,000 .
(3) No bond shall be required of an authorized submitter who
can prove alternative bond surety of least the sum of
$500,000 that has been previously filed with the State of
California pursuant to licensing requirements of a state
agency or department. No bond shall be required of
government entity employees .
(4) A person claiming against a bond required by this chapter
shall serve a copy of his complaint in a civil action
making claim against the bond upon the Attorney General by
certified or registered mail. The Attorney General shall
maintain a record, available for
public inspection of all actions so commenced. If any bond
which may be required is insufficient to pay all claims in
full, the sum of the bond shall be distributed to all
claimants in proportion to the amount of their respective
claim .
(5) An injured person may file a civil action for enforcement
pursuant to Section 995.850 of the Code of Civil Procedure
in relation to a bond required by this chapter .
LADA would prefer that the bonding language be placed in the
bill in Committee, subject to revision upon further
discussion with the author.
e) Post Card Notification . For several years Los Angeles
County has sent a post card to the owner of record on the
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tax roles whenever a document is recorded transferring
title to that property. This "early warning system" has
enabled many homeowners to initiate legal action in time to
save their homes in cases where title has been fraudulently
transferred. Unfortunately, Los Angeles County is the only
county with authority to institute this important consumer
protection. Due to the possibility of an increase in fraud
under electronic recording, recorders and district
attorneys from other counties have requested that they be
given the option of implementing early warning system.
LADA has asked that the following language be inserted in the
bill:
Subject to approval of the Board of Supervisors, Sections
27297.6 and 27387.1 shall apply in all California counties .
LADA understands that this issue is subject to further
discussion.
REGISTERED SUPPORT / OPPOSITION :
Support
CA Association of Realtors [CO-SPONSOR]
CA Mortgage Bankers Association [CO-SPONSOR]
FANNIE MAE [CO-SPONSOR]
CA Bankers Association
CA Business Properties Association
CA District Attorney's Association (if amended)
County Recorders' Association (if amended)
Los Angeles District Attorney's Office (if amended)
Opposition
None on file
Analysis Prepared by : Frances Chacon / L. GOV. / (916)
319-3958