BILL ANALYSIS
AB 578
Page 1
ASSEMBLY THIRD READING
AB 578 (Leno)
As Amended May 12, 2003
2/3 vote. Urgency
LOCAL GOVERNMENT 9-0 APPROPRIATIONS 25-0
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|Ayes:|Salinas, Lieber, Daucher, |Ayes:|Steinberg, Bates, Berg, |
| |Garcia, | |Calderon, Lowenthal, |
| |La Suer, Leno, Mullin, | |Laird, Daucher, |
| |Steinberg, Wiggins | |Diaz, Firebaugh, |
| | | |Goldberg, Haynes, Leno, |
| | | |Maldonado, Nation, |
| | | |Negrete McLeod, Nunez, |
| | | |Pacheco, Pavley, |
| | | |Ridley-Thomas, Runner, |
| | | |Samuelian, Simitian, |
| | | |Wiggins, Yee, Chu |
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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 a "digitized electronic record"
(i.e., scanned paper documents), and authorizes 12 counties to
record real property documents through 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;
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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
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
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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
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
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and responses to the recommendations must be transmitted to
its board of supervisors, the county district attorney, and
the 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.
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
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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:
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.
20)Provides a sunset date of December 31, 2010, for the digital
electronic record delivery system.
21)Requires the AG to evaluate the pilot projects and report to
both houses of the Legislature on or before June 30, 2007.
FISCAL EFFECT : According to the Assembly Appropriations
Committee analysis, costs associated with establishing, and
implementing electronic recording (e-recording) systems would be
funded through fees charged to authorized submitters, and the AG
would be authorized to charge vendors directly for approval of
the systems.
COMMENTS : The concept of 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.
Since the first bills that authorized the counties of Orange and
San Bernardino to e-record, there have been several more that
have been unsuccessful in seeking to extend that authorization
to other counties. Their failure was primarily due to a lack of
sufficient and effective security precautions. In his 2000 veto
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message for AB 2614 (Oller), the Governor stated that AB 2614
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.
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 destruction."
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 implemented
e-recording 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 e-recording pilot projects have been
independently evaluated, in fact, the San Bernardino project is
not yet operational.
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,
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and fears that with e-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, 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.
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
this bill addressing many of the concerns of the Governor, the
Task Force, the recorders and law enforcement regarding real
estate fraud.
This bill 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.
The concern that Orange County's e-recording system, although
successful, has not been independently evaluated must also be
addressed. This bill 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.
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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.
The first line of defense against intrusion into the system is
the county recorders. They are essentially the gatekeepers.
Through this bill, 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.
Although this bill goes a long way in addressing the
long-standing security concerns, there is more work to be done.
The outstanding issues submitted by LADA, have not yet been
resolved. It is the understanding of the Local Government
Committee, the author, the sponsors, and LADA that these issues
will be resolved before the bill is taken up on 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. To view the detailed list of outstanding
issues, please see the Local Government Committee analysis.
Analysis Prepared by : Frances Chacon / L. GOV. / (916)
319-3958
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