BILL ANALYSIS
AB 578
Page 1
ASSEMBLY THIRD READING
AB 578 (Leno)
As Amended July 3, 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 record real property documents
through an electronic delivery system in the form of a
"digitized electronic record" (i.e., a scanned paper
document), but specifies that an instrument of reconveyance, a
substitution of trustee or an assignment of deed of trust may
be recorded in the form of a "digital electronic record"
(i.e., an electronically created document).
2)Authorizes a pilot project that allows 12 counties to record
any real property document through a "digital electronic
record" (i.e., electronically created documents) and specifies
that the 12 counties to be included in the pilot project are:
Alameda, El Dorado, Fresno, Los Angeles, Orange, Placer,
Riverside, San Bernardino, San Mateo, Santa Clara, Tulare, and
Ventura.
3)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.
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4)Defines a "digitized electronic record" as a scanned image of
the original paper document.
5)Defines an "authorized submitter" as:
a) Any entity or instrumentality of local, state, or
federal government;
b) A title insurer or underwritten title company; and,
c) An institutional lender, as defined in Financial Code
Section 50003(j).
6)Provides that county recorders use the following guidelines
when considering whether to approve of an entity to submit
electronic documents:
a) Whether accepting electronically delivered records from
the person or entity is in the best interest of the public
and county;
b) 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;
c) Whether the volume and quality of electronic records
submitted will be sufficient to warrant electronic
delivery;
d) 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; and
e) Whether the authorized submitter is legally authorized
to conduct business in this state.
7)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
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contractual relationship between the recorder and each
authorized submitter, as specified.
8)Requires 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 specified
misdemeanor.
9)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.
10)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.
11)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
the AG.
12)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.
13)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.
14)Specifies certain requirements when a signature is required
to be accompanied by a notary's seal or stamp.
15)Provides that specified indexing information may be required
of the authorized submitter by the recorders.
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16)Subjects staff with secure access to the electronic recording
delivery system, 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.
17)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.
18)Permits the 12 pilot project counties to adopt an early fraud
notification system whereby the owner of record in the county
tax records would be notified of changes in ownership of the
property so that any fraud can be detected at an early date.
This is intended to enable the consumer and prosecutors to
take action to prevent the loss of the home. Permits the
county board of supervisors to collect a filing fee on deeds
of trust for the purpose of funding the notification system.
Counties would be required to report back to the Legislature
as to the success of the program on or before June 30, 2007.
19)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.
20)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.
21)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;
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b) Imposing a fee on any vendor, or person seeking approval
as an authorized submitter; or,
c) Specifying that the fee imposed cannot exceed the
reasonable cost of providing the services for which the fee
is charged.
22)Provides a sunset date of December 31, 2010, for the digital
electronic record delivery system.
23)Requires the AG to evaluate the pilot projects and report to
both houses of the Legislature on or before June 30, 2007.
24)Clarifies that a county recorder cannot be held civilly
liable for denial of an application from a submitter, if the
denial is pursuant to the Act.
25)Adds a requirement that electronic documents must be
submitted from a location from within the United States.
26)Adds a requirement that an authorized submitter and its
authorized representatives consent in writing to the
jurisdiction of the California courts as to any alleged civil
cause of action related to the operation of the electronic
recording delivery system.
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
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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
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. This bill 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 utilizes 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.
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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 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. This bill contains the
following important consumer protection and security provisions:
1)Any system must first be certified by the AG before going
operational;
2)An independent evaluation and testing by security experts;
3)Fingerprinting and background checks of authorized staff that
have access to the e-recording system and those auditors that
test it;
4)Regulations providing for the regulatory oversight of the
e-recording systems developed by the AG and recorders;
5)Suspension or termination of any e-recording system when fraud
occurs, as specified; and,
6)An early fraud notification system whereby the owner of record
in the county tax records would be notified of changes in
ownership of the property so that any fraud can be detected at
an early date.
This bill has been further amended limiting the field of
authorized submitters of the system. Escrow companies have been
deleted as an authorized submitter and only institutional
lenders as defined under a specified section of the Financial
Code, title companies and remain. Institutional lenders are
limited to electronically recording of an instrument of
reconveyence, a substitution of trustee, or an assignment of a
deed of trust. The idea of limiting the field eliminated the
need for additional civil liability language to secure against
any potential loss that may be suffered by the homeowners or the
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county. The present field of authorized submitters comes with
less risk and a proven track record of recording a large volume
of real property documents.
The author also added a provision that specifies that an
instrument of reconveyance, a substitution of trustee or an
assignment of deed of trust through can be recorded through both
a digitized and digital electronic record. All three of these
documents are considered to be "minimal risk" to the property
owner and also made up the bulk of what the authorized
submitters record currently under the paper system. For these
two reasons it seems appropriate to not limit the digital
recordation of these documents to only the pilot program.
For the last 8 months, county recorders, LADA, 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. With the recent amendments it appears
that the outstanding security concerns expressed by the
Governor, the Task Force, the recorders, and law enforcement
have been addressed.
Analysis Prepared by : Frances Chacon / L. GOV. / (916)
319-3958
FN: 0002165