BILL ANALYSIS
AB 578
Page 1
Date of Hearing: August 27, 2004
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Simon Salinas, Chair
AB 578 (Leno) - As Amended: August 26, 2004
SUBJECT : County recorders: electronic recording.
SUMMARY : Creates the Electronic Recording Delivery System Act
of 2004.
The Senate amendments delete the Assembly version of this bill,
and instead:
1)Authorize 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)Define 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)Define a "digitized electronic record" as a scanned image of
the original paper document.
4)Define 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).
5)State that, upon approval of its board of supervisors and
certification of the Attorney General (AG), a county recorder
can establish a electronic recording system as long as the
system has a governing contractual relationship between the
recorder and each authorized submitter, as specified.
AB 578
Page 2
6)Specify that a county recorder can refuse to enter into a
contract with any party or terminate or suspend access to a
system for any good faith reason (i.e. protecting public
interest or protecting the integrity of public records).
7)Allow a county recorder to require a party electronically
submitting records to mail a copy of the recorded electronic
document once the recording is complete.
8)Specify certain requirements when a signature is required to
be accompanied by a notary's seal or stamp.
9)Require the AG, in consultation with interested parties, to
adopt regulations for the review, approval, and oversight of
electronic recording systems, that may include, but not be
limited to:
a)Establishment of a baseline technological and procedural
specifications for electronic recording delivery systems;
b)Requirements for security, capacity, reliability, and
uniformity;
c)Requirements as to the nature and frequency of computer
security audits;
d)A statement of a detailed and uniformed definition of the term
"source code;"
e)Requirements for placement of a copy of the operating system,
source code, compilers, and all related software with each
county's recording delivery system in an approved escrow
facility prior to the system's first use;
f)Requirements to ensure that any substantive modifications to a
system are approved by the AG;
g)Procedures for the initial certification of vendors offering
software and other services to counties for electronic
recording delivery systems;
h)Requirements for system certification and oversight;
i)Requirements for fingerprinting and criminal record checks on
AB 578
Page 3
those who have access to the electronic recording system;
j)Requirements for a uniform index of information that needs to
be included in every digitized or digital electronic record;
1)State 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, an who must continue to monitor the system and
issue periodic reports, as specified by the AG.
2)Provide 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.
3)Require that 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, and
exempt them from disclosure under the California Public
Records Act.
4)Provide that an auditor can have access to any aspect of an
electronic recording delivering system, in any form requested.
5)Require that if the county recorder, an auditor, the county's
district attorney, or the AG reasonably believes that an
electronic recording system is vulnerable to fraud or
intrusion, the county recorder, the board of supervisors, the
district attorney, and the AG must be notified immediately.
6)Specify that the county recorder take the immediate steps
necessary to guard against any compromise of the electronic
recording delivery system, including, if necessary, the
suspension of an authorized submitter or suspension of the
electronic recording delivery system.
7)Prohibit a person to be a computer security officer or be
granted access to an electronic recording system if he or she
has been convicted of a felony, a misdemeanor related to
theft, fraud, or a crime of moral turpitude, or if he or she
has pending criminal charges for any of these crimes.
AB 578
Page 4
8)Require that anyone with secure access to an electronic
recording delivery system must submit fingerprints to the AG
for criminal records check.
9)Require that the AG submit these fingerprints to the
Department of justice (DOJ) for the purpose of obtaining
information as to the existence and nature of a record of
state level convictions and arrests for which the applicant
was released on bail or on their own recognizance pending
trial.
10)Authorize the AG to request subsequent arrest notification
service for all individuals with secure access to the
electronic recording delivery system and all computer security
auditors.
11)Require that the AG provide written notification to the
individual, his or her employer, the computer security
auditor, and the county recorder of an individual's
ineligibility for access to the system.
12)Authorize the DOJ to charge a fee sufficient to cover the
cost of processing the criminal offender record information
request.
13)Authorize the AG to suspend any system 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, or other equitable
relief.
14)Require a county that establishes a system to pay for the
direct cost of regulation and oversight by the AG through
either of the following mechanisms:
a) Imposing a fee of up to $1 for each instrument that is
recorded by the county;
b) Imposing a fee on any vendor, or person seeking approval
as an authorized submitter.
15)Specify that, in instances where a county has established a
secure system for accepting a digital or digitized electronic
record that is an instrument of reconveyance, substitution of
AB 578
Page 5
trustee, or assignment of deed of trust; the requirement of
the security audit and the criminal background check are not
applicable if the county recorder and the AG certify that the
method of submission provided by this system will not permit
an authorized submitter or its employees and agents, or any
third party to modify, manipulate, insert, or delete
information in these records.
16)Require that the AG conduct an evaluation of electronic
recording systems authorized by this bill and report to the
Legislature by June 30, 2009
17)Add an urgency clause to the measure.
AS PASSED BY THE ASSEMBLY , this bill created an earlier
iteration of the Electronic Recording Delivery System Act (refer
to Assembly Floor Analysis from July 3, 2003).
FISCAL EFFECT : According to the Assembly Appropriations
Committee analysis, of an earlier iteration of AB 578, 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
message for AB 2614 (Oller), the Governor Davis 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
AB 578
Page 6
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.
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
AB 578
Page 7
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
important consumer protection and security provisions
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
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 more than a year, 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 Task
Force, the recorders, and law enforcement have been addressed.
AB 578
Page 8
REGISTERED SUPPORT / OPPOSITION :
Support
County of Sacramento
CA Association of Realtors
CA Land Title Association
County Recorders Association of CA
Los Angeles District Attorney's Office
Office of the Attorney General
Opposition
None on file
Analysis Prepared by : Katie A. Dokken / L. GOV. / (916)
319-3958