BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2003-2004 Regular Session
AB 578 A
Assembly Member Leno B
As Amended August 24, 2004
Hearing Date: August 25, 2004 5
Government Code 7
GMO 8
SUBJECT
County Recorders: Electronic Recording Delivery Systems
DESCRIPTION
This bill would establish a limited electronic recording
delivery system that may be used statewide to record
digitized or digital electronic records of instruments
affecting right, title or interest in real property. The
bill would authorize a county to enter into contracts with
authorized submitters of digitized and digital instruments,
subject to specified conditions.
The bill would direct the Attorney General to adopt
regulations for certification and oversight of electronic
recording delivery systems for security and reliability,
and for certifying software and other services for
electronic recording delivery systems.
The bill would authorize the county to pay the Attorney
General's costs for the regulation and oversight of the
electronic recording delivery system and to collect a $1
fee from every recording of an instrument in the county to
pay for the costs associated with the system.
The bill would authorize the Attorney General, district
attorney or city attorney to bring an action for injunctive
relief relating to violations.
BACKGROUND
(more)
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This bill is sponsored by the California Association of
Realtors, the California Mortgage Bankers Association, and
Fannie Mae (FNMA).
In July 1999, the Attorney General's Task Force on
Electronic Recordation presented its recommendations
pursuant to the charge given the Task Force by AB 1906
(Brewer, Chapter 463, Statutes of 1998). The Task Force
found that electronic recording of real property documents
could save local agencies and businesses plenty of time and
money. However, the Task Force warned that the use of these
new technologies also "exposes the most sensitive of public
records to the possibility of "corruption, damage, or
destruction."
AB 1906 also approved pilot projects in Orange and San
Bernardino Counties. While San Bernardino County's pilot
project never got off the ground, Orange County has
instituted an electronic recording system that utilizes
dedicated transmission lines between specified escrow/title
companies and the 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 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.
In the last four years, several bills were introduced to
allow specific county recorders to join the pilot projects
or establish new ones. When AB 1732 (Torlakson, 2000) was
heard in this Committee, the bill included regulation of
systems and contracts by the Attorney General. The bill
died on the Senate inactive file.
AB 2614 (Oller, 2000) would have allowed the Placer County
recorder to establish a system for electronic recording
that has been reviewed and approved by the Attorney
General, and to authorize the Attorney General to suspend
use of the system upon a finding that fraudulent activity
has occurred as a result of a system defect in the
electronic recording of documents. AB 2614 was vetoed by
Governor Davis, citing unbudgeted costs to the Attorney
General's office, and raising a concern about security and
integrity of records accepted for recordation.
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SB 407 (Sher, 2001) would have established pilot projects
in 12 counties for electronic recording using a system
reviewed and approved by the Attorney General and requiring
the counties to select a security consultant from a list of
computer security experts prepared by the Attorney General.
The bill was held in this Committee. Negotiations among
the stakeholders ensued during the interim, but the
legislation was allowed to die the following year.
AB 578, introduced in 2003, is the product of further
negotiations among the county clerks, district attorneys,
realtors, mortgage bankers, escrow and title companies, to
achieve a workable scheme for the electronic recordation of
instruments relating to real property. While the basic
framework for a viable system is contained in the bill, it
is still a work-in-progress. As presented to the Committee
today, AB 578 is limited in applicability, but will
hopefully provide sufficient data for a meaningful
evaluation by the Attorney General by June 30, 2009.
CHANGES TO EXISTING LAW
Existing law requires county recorders to record written
documents that transfer title to or impose liens on real
property, or give a right to a debt or duty.
Existing law 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.
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.
Existing law , Government Code Section 27279.1, permits the
recorders for the Counties of Orange and San Bernardino to
accept digitized images for recordation provided that the:
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a.requester submitting the image is an entity or
instrumentality of the state or federal government; or
b.if the requester is not an instrumentality of state or
federal government,
(1) the county recorder finds that the requester will
submit digitized records
in sufficient quantity and will take effective
precautions to prevent fraud and forgery; and
(2) the county recorder determines that accepting
digitized images serves the
public interest.
This bill would allow a county recorder, upon approval by
the Board of Supervisors and system certification by the
Attorney General, to establish an electronic recording
delivery system for recordation of:
a. digitized electronic records (scanned images) of
instruments affecting title, right or interest in real
property (other than reconveyances, substitutions of
trustee or assignments of deeds of trust) submitted by a
title insurer, an underwritten title company, an
institutional lender, or any local, state, or federal
agency; and
b. digitized electronic records (scanned images) and
digital electronic records (created and stored
electronically without a paper original) of
reconveyances, substitutions of trustee or assignments of
deeds of trust submitted by a title insurer, underwritten
title company, institutional lender or any local, state
or federal agency.
The bill would permit a county to contract for use of the
electronic recording delivery system (ERDS) by an
authorized submitter using only a system that has been
approved by the Attorney General. The bill would require
any person who would have authorized access to the ERDS,
including employees of the county and the authorized
submitters (except as provided below for reconveyances,
substitutions of trustee and assignments of deeds of trust)
to undergo fingerprinting and criminal background checks
prior to being authorized to have access to the ERDS.
This bill would require the Attorney General to certify an
electronic recording delivery system prior to its use. It
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would require the Attorney General to adopt regulations
that establish standards for the review, approval and
oversight of electronic recording delivery systems, provide
regulatory oversight of those systems, approve a list of
computer security auditors as defined, monitor security of
those systems and evaluate the systems established
according to these regulations in order to report back to
the Legislature on or before June 30, 2009.
This bill would authorize county reimbursement to the
Attorney General for certifying a proposed electronic
recording delivery system and for oversight of the system
once implemented. It would authorize the Attorney General
to charge a fee to cover the costs of regulatory oversight,
and any other cost associated with implementation of this
bill.
This bill would authorize the county to impose a fee of up
to $1 for each instrument recorded by the county, which may
be limited to those recorded using the electronic recording
delivery system at the county's option. It also would
authorize the county to impose a fee on any vendor seeking
approval of software or other services as part of an
electronic recording delivery system and to charge a fee on
any person seeking approval as an authorized submitter.
This bill would authorize the Attorney General, in the
event of an emergency involving multiple fraudulent
transactions linked to one county's use of an electronic
recording delivery system, to suspend the use of the system
in any county or in multiple counties, for a period of up
to seven court days.
The bill contains an urgency clause, for the purpose of
allowing county recorders to implement electronic recording
delivery systems at the earliest possible time in order to
alleviate fiscal constraints.
COMMENT
1. Need for the bill
According to the Attorney General's Report to the
Legislature on Electronic Recordation, "[t]he rapid
advance of telecommunication technologies has made it
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possible to file property documents from remote
locations?Using such media as dedicated lines, email, and
the Internet, businesses and local government agencies
should be able to implement considerable efficiencies on
behalf of all those dealing with property records in the
state?However, the use of these new technologies, while
providing opportunities for substantial improvement of
service, also creates the possibility of exposing the
most sensitive of public records - property documents -
to corruption, damage, or destruction. The
implementation of any method of electronic recording
must, therefore, proceed with caution and with serious
attention to maintaining the security of the public's
official records in order that the integrity of our
property records not be dangerously compromised."
This bill results from several years of negotiations
among the stakeholders of an electronic recording
delivery system, and after several bills were abandoned
on the way to the Governor's desk. While some county
recorders and real property brokers have claimed current
statutes permit e-recording of documents, the Attorney
General opined in September, 2002 that the county
recorder has no authority to engage in electronic
recordation of documents, except for the Counties of
Orange and San Bernardino which were authorized by
statute to implement pilot programs. The author states
that AB 578 will "resolve the ambiguity in favor of the
ability to use e-recording, and set out guidelines for
such programs."
The bill contains a comprehensive scheme for the
regulation of electronic recordation of digitized
documents (those paper documents that are scanned and
transmitted electronically) and digital documents (those
created, transmitted, or stored electronically with no
paper original) that are submitted by title insurers,
underwritten title companies, specified institutional
lenders, and local, state or federal government agencies.
2. Bill aims to minimize possibility of fraudulent use
of electronic recording delivery system (ERDS)
Although somewhat limited in application, proponents
believe that this bill would revolutionize the
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recordation of real property documents by county
recorders on a statewide basis. While faxed documents
have been accepted in the courts and in other settings
on a regulated basis, real property documents have been
recorded only in their original paper form (except for
those recorded electronically as part of the Orange
County pilot project). Even Fannie Mae, whose
representatives contend that they are already conducting
electronic recordation of real property documents, can
point only to an insubstantial use of the system in a
few states.
AB 578 contains the details of an electronic recording
delivery system that would meet security requirements to
prevent fraud, as well as assure county recorders will
achieve savings and efficiency in the recordation of
real property documents. In general, the bill would:
a. Permit the recordation of digitized records of
documents affecting title, right or interest in real
property submitted to county recorders' offices. As
to these digitized records, the bill generally would:
require that the county's ERDS system be
certified by the Attorney General;
require that the authorized submitter's system
be certified by the Attorney General;
allow only title insurers, underwritten title
companies, specified institutional lenders, and
local, state or federal government agencies
(authorized submitters) to contract with a county
for use of the county's ERDS;
require that all employees of the county and
the authorized submitters undergo the required
fingerprinting and criminal background checks and
prohibits certain persons convicted of specified
crimes to have access to the ERDS; and
require that the authorized system be subject
to periodic testing to ensure security and
reliability.
b. Permit the recordation of digitized and digital
electronic records of reconveyances, substitutions of
trustee, and assignments of deeds of trust submitted
by authorized submitters. All of the provisions
applicable to digitized records would apply to these
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records, except that requirements for security testing
and criminal background checks (including
fingerprinting) of employees of authorized submitters
would not apply if the Attorney General certifies that
the authorized submitter's system would not permit
anyone to manipulate, modify, insert, delete, or alter
the information contained in the public records or
documents submitted to the county for recordation.
The rationale given for dispensing with the
requirement for periodic security testing and criminal
background checks of persons with authorized access to
the ERDS is that these three types of instruments
(reconveyance, substitution of trustee, assignment),
which constitute the bulk of transfers of title, are
generated and transferred institution-to-institution.
Thus, proponents assert that the system would be
"closed" and that the risk of any losses stemming from
any fraudulent transaction would be borne by the
financial institution and not the public or the
private owner of the subject property.
3. Attorney General's role
Before a county recorder contracts with a title insurer,
underwritten title company, institutional lender, or
government agency to conduct electronic recordation of
any document affecting title, right or interest to real
property, the county must have a computer system that
has been certified by the Attorney General. Thus, the
Attorney General plays a pivotal role in the
implementation of this new system of recording
instruments in the state.
The AG would be required, under this bill, to adopt
regulations to:
establish baseline technologies and procedural
specifications for ERDS;
certify vendors of software and other services that
a county may use to create a certifiable system;
certify and monitor an ERDS used by a county and
inspect and certify a system to be used by an
authorized submitter, where necessary;
establish requirements for computer security
audits, including certifying computer auditors;
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conduct fingerprinting and criminal background
checks of employees of authorized submitters, where
necessary, and the county; and
other regulations necessary to implement this bill.
4. Enforcement provisions
The most difficult problem that proponents of electronic
recordation of real estate documents had to surmount in
drafting this bill was how to ensure that fraudulent
documents are not recorded using the electronic system.
County recorders contend that, under existing law
governing paper documents, a recorder has only the
ministerial duty to record a document that appears
correct on its face, upon payment of proper fees. In
essence, the burden of authenticating the documents falls
on the "authorized submitter" who wants to use the ERDS
for convenience and speed. An "authorized submitter"
that contracts with a county recorder for use of the ERDS
thus is necessarily licensed in the state, or regulated
sufficiently, and the recordation of a fraudulent
document enabled by an authorized submitter would
jeopardize the submitter's license through action by
other regulatory agencies.
Proponents state that during the negotiations in the past
year, it became clear that reconveyancing documents -
those that release a lender's interest in a borrower's
property - are "the safest place for counties to begin
using electronic delivery." They contend that even if
there were an error or forgery of a reconveyance, the
property owner could suffer no harm, and that "only a
lender's interests can be effected (sic) by the
reconveyance?" The lenders are in support of this bill,
they state, because lenders "already exercise very tight
controls over their loan servicing systems and are
confident that their use of electronic delivery poses no
risk." It should be noted that under this bill, these
three types of documents (reconveyances, substitutions of
trustee, and assignments of deeds of trust) may be
recorded when submitted in either digitized or digital
form.
To ensure there is little risk, however, the bill
contains several provisions to address situations where
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an operating electronic recording delivery system may be
compromised. These provisions would:
allow the county recorder to suspend for up to
seven days an authorized submitter if the county or
the Attorney General reasonably believes that the ERDS
has been compromised or is vulnerable to fraud or
intrusion;
allow the Attorney General, in the event of an
emergency involving multiple fraudulent transactions
linked to one county's or multiple counties' use of an
ERDS to suspend the operation or use of the system; or
allow the Attorney General, district attorney or
city attorney to obtain injunctive relief, rescission,
restitution for damages or economic loss, or other
equitable relief for violations.
It should be noted that under existing law and this
bill, a property owner who is harmed by a fraudulent
transaction resulting from a faulty electronic record
delivery system may take direct action against
responsible parties.
5. Allocation of costs, sources of payment
This bill is designed to be cost-neutral, if viewed from
a distance. However, there will certainly be up-front
costs to get the systems running, including the Attorney
General's expedited adoption of regulations.
The county would be allowed to charge fees to the vendor
whose computer system, software or other services would
be used and tested, and to the submitters who would be
transmitting the electronic record to be recorded. The
county would be allowed to charge each instrument
recorded in the county up to $1 to pay for the county's
electronic recording delivery system. The total fees
charged by a county in this manner may not exceed its
total cost for the system.
6. Copy of recorded document may be mailed
Under this bill, once the digitized electronic record or
digital electronic record of a real property document
has been recorded, the county recorder would transmit
the recorded document back to the authorized submitter
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that requested the recordation.
This bill would allow the county to require the
recipient of the recorded document (i.e., the
"authorized submitter") to mail a copy of the recorded
electronic document to the person specified on the
instructions for mailing upon completion of the
recording.
This provision should create great cost efficiencies for
the county recorders. Currently, paper documents are
delivered to the county for recording and after
recordation the county recorder mails the original
recorded document to the person specified on the
document. This bill would eliminate any requirement for
the county recorder to mail the original document back,
because the original is in the custody of the authorized
submitter. Thus, the county recorder would save not
only the cost of mailing the document, but more
importantly, processing time and personnel costs. On
the other hand, the authorized submitter would normally
have to mail a thick package of documents to the person
specified in the document anyway, and the inclusion of
the recorded document (which could be no more than three
or four pages) would not create a new or insurmountable
burden.
7. Technical amendments
The author has submitted the following technical
amendments to the bill:
a. Add to the end of subdivision (b) of proposed Sec.
27391: The contract may provide for the delivery of
documents by an agent. However, the agent shall not
be a vendor of electronic recording delivery systems.
b. At the subdivision (d)(1) of proposed Sec. 27397.5,
strike out "other electronic records" and insert:
electronic records, other than those specified in
subdivision (a),
Support: (support to previous version) County Recorders'
Association of
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California; California Business Properties
Association; County of Riverside Assessor-County
Clerk-Recorder; County of Sacramento; Contra Costa
County Clerk-Recorder; County of San Bernardino
Auditor/Controller-Recorder; County of San Diego
Assessor/Recorder/County Clerk; El Dorado County
Recorder-Clerk; Alameda District Attorney's Office;
Orange County District Attorney's Office; County of
Placer; Charter One Mortgage; Citimortgage; First
American Title Insurance Company - Utah Division;
Peelle Management Corporation; American Release
Corporation; Alliance Mortgage Company; (support to
last amended version): California Land Title
Association; California District Attorneys
Association; Los Angeles County District Attorney's
Office
Opposition: None Known
HISTORY
Source: California Association of Realtors
Related Pending Legislation: None Known
Prior Legislation: See Background
Prior Vote: Asm. L. Gov. (Ayes 9, Noes 0)
Asm. Appr. (Ayes 25, Noes 0)
Asm. Flr. (Ayes 78, Noes 0)
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