BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 204 (Benoit) Hearing Date: April 15, 2009
As Amended April 13, 2009
Fiscal: Yes
Urgency: No
SUMMARY Would enact changes to the Escrow Law, relating to
annual fees, audit frequency, and license surrender, and changes
to the Residential Mortgage Lending Act, related to license
surrender and branch office closures.
DIGEST
Existing law
Escrow Law
1. Establishes an annual licensee fee of up to $2,800 annually for
every licensed escrow agent, per office or location, and
requires the commissioner of the Department of Corporations
(DOC) to set the annual licensee fee amount at a level necessary
to cover the costs and expenses, including overhead, associated
with enforcement of the Escrow Law (Financial Code Section
17207);
2. Authorizes the commissioner of DOC to levy a special assessment
on each escrow agent of up to $500 for each office or location,
if the commissioner finds that the costs and expenses associated
with enforcing the Escrow Law, including overhead, will exceed
the amounts that will be collected from the annual assessment
(Section 17207);
3. Gives licensees up to 30 days in which to pay this special
assessment, after being notified by the commissioner, and
imposes specified penalties on licensees who fail to timely pay
the assessment (Section 17207);
4. Sunsets existing law numbers 1 through 3 above on January 1,
2010, and provides for an alternate method of assessing annual
fees, once the existing law fee provisions sunset. This
SB 204 (Benoit), Page 2
alternate method requires each escrow agent to annually pay to
the commissioner its pro rata share of the commissioner's Escrow
Law administrative costs (Section 17207);
5. Requires the commissioner to conduct an examination of every
licensed escrow agent as often as the commissioner deems
necessary and appropriate, but not less than once every 48
months (Section 17405);
6. Authorizes, but does not require, the commissioner to conduct
an indoctrination or preliminary examination, or both, of any
new licensee, within one year of issuing a license to that
licensee, and authorizes, but does not require, an examination
of a new licensee within two years of license issuance (Section
17405);
7. Provides that an escrow agent's license remains in effect,
until it is surrendered, revoked, or suspended (Section 17600);
8. Requires licensees who cease to engage in business as escrow
agents, and who no longer wish to be licensed, to notify the
commissioner in writing, and submit a closing audit or review
prepared by an independent certified public accountant, as
specified (Section 17600);
9. Provides that an escrow agent's license is not surrendered
until the commissioner has reviewed and accepted the closing
audit report or review, made a determination that there has been
no violation of law, and accepted tender of the license in
writing (Section 17600);
10. Creates the Escrow Law Advisory Committee in DOC, consisting of
eleven members, as specified, including the commissioner of DOC,
representatives of the Escrow Agents' Fidelity Corporation, and
various members of the escrow industry. The Escrow Law Advisory
Committee is required to meet at least quarterly, and is
intended to assist the commissioner in implementing his or her
duties under the Escrow Law (Section 17214);
California Residential Mortgage Lending Act (CRMLA)
11. Provides that a residential mortgage lender's or servicer's
license remains in effect, until it is surrendered, revoked, or
suspended (Section 50123);
12. Requires a licensee who ceases to engage in business as a
SB 204 (Benoit), Page 3
residential mortgage lender or servicer to notify the
commissioner in writing, surrender its license, and file a plan
for withdrawal from the regulated business, and requires the
plan to include both a timetable for disposition of the business
and a closing audit, review, or other agreed upon procedures
report performed by an independent certified public accountant;
further provides that the license surrender is not deemed
approved, until the commissioner deems the plan for withdrawal
satisfactory (Section 50123);
13. Requires residential mortgage lender and servicer licensees to
notify the commissioner in writing, by certified mail, return
receipt requested, prior to opening a branch office in
California or changing the business location or locations of its
headquarters or its branch office(s) (Section 50124).
This bill
1. Would delete the January 1, 2010 sunset date on the Escrow
Law annual assessment, thus permanently capping it at
$2,800, and would delete the section of law that provides
for a pro rata licensee assessment if the $2,800 annual
assessment were to sunset;
2. Would increase the amount of the special assessment the
commissioner may levy, if the annual assessment is
insufficient to cover his or her annual expenses related to
administering the Escrow Law, from $500 to $1000, and would
increase the amount of time that licensees have to pay that
assessment from 30 to 60 days after notification by the
commissioner;
3. Would require the commissioner, prior to notifying an
escrow agent of a special assessment, to submit supporting
budget and program justification and information for the
current or prior budget years to the Escrow Law Advisory
Committee, as part of a regular meeting of that body;
4. Would require (rather than authorize) the commissioner to
conduct an indoctrination or preliminary examination, or
both, of any new escrow agent licensee within one year of
license issuance, and would additionally extend this
requirement to include an indoctrination or preliminary
examination, within one year, of any escrow agent licensee
that undergoes a change in ownership;
SB 204 (Benoit), Page 4
5. Would require (rather than authorize) the commissioner to
conduct an examination of a new escrow agent licensee within
two years of license issuance, and would additionally extend
this requirement to include an examination within two years,
of any escrow agent licensee that undergoes a change of
ownership;
6. Would delete the reference to an agreed upon procedures
report performed by an independent certified public
accountant from the section of the Escrow Law relating to
license surrender and replace it with a reference to a
document prescribed by rule or order of the commissioner,
including, but not limited to, any document(s) which
demonstrate that all custodial fund accounts have been
properly transferred and closed;
7. Would delete the requirement that the commissioner of DOC
find that there has been no violation of law, in order to
accept the surrender of an escrow agent's license, and
instead authorize the commissioner to accept a license
surrender upon a finding that the surrender is in the public
interest;
8. Would, under the CRMLA, broaden the types of financial
documents that can be provided by a licensee who wishes to
surrender its license, to demonstrate that all custodial
fund accounts were properly transferred and closed;
9. Would, under the CRMLA, delete the requirement that the
commissioner of DOC find that there has been no violation of
law, in order to accept the surrender of a residential
mortgage lender's or servicer's license, and instead
authorize the commissioner to accept a license surrender
upon a finding that the surrender is in the public interest;
10. Would, under the CRMLA, require licensees to notify the
commissioner, in writing, by certified mail, return receipt
requested, prior to closing their business location or
locations or branch office(s).
SB 204 (Benoit), Page 5
COMMENTS
1. Purpose of the bill To enact changes sought by the Escrow
Institute of California (EIC; sponsor of some of the bill's
provisions) and by DOC (sponsor of other of the bill's
provisions).
2. Background Prior to 1997, escrow agent license fees were
levied on a pro rata basis. The pro rata assessment was
replaced with a flat assessment in 1997, to reduce what had
become a significant burden on small licensees, and more
fairly spread the costs of Escrow Law administration across
all licensees. AB 1646 (Conroy), Chapter 670, Statutes of
1996, imposed the first assessment, which was supplemented
by a special assessment, if the annual assessment proved
inadequate.
However, because AB 1646 contained a sunset, successor bills,
including AB 459 (Nation), Chapter 499, Statutes of 2001,
and SB 408 (Margett), Chapter 257, Statutes of 2005, were
enacted to extend that sunset and update the annual license
fee to its current "capped at $2,800" amount. If SB 204 or
another bill is not enacted to either delete or extend the
January 1, 2010 sunset on the existing annual assessment,
the Escrow Law annual assessment will revert to a pro rata
assessment on January 1, 2010. One of the two industry
trade groups representing the escrow industry (EIC) strongly
favors a flat annual assessment to a pro rata assessment,
and is sponsoring the fee provisions of this bill, as a
result.
Is a permanent cap of $2,800 appropriate? It appears to be.
According to DOC staff, DOC has imposed an annual assessment
of $2,800 as far back as 2002-03. Furthermore, according to
an audit of DOC, issued by the California State Auditor in
January 2007, the Escrow Law subaccount was one of only four
subaccounts, out of thirteen administered by DOC, that was
running a surplus when the audit was performed (i.e., one of
only four programs in which the fees collected by licensees
were more than sufficient to cover DOC's administrative
costs). Although DOC staff indicate that this surplus has
eroded in the years since the audit was conducted, DOC staff
have no concerns about capping the annual fee at $2,800.
The amendment in this bill, which increases the maximum
amount of the special assessment from $500 to $1,000, was
requested by Committee staff, to ensure that DOC is able to
SB 204 (Benoit), Page 6
fully cover its administrative costs in the future, if
economic conditions and other factors render the $2,800
annual assessment insufficient.
It is also important to note that DOC's overall fee structure
was identified in the State Auditor's report as requiring an
overhaul. According to the report, "In establishing fees to
charge licensees, Corporations must take into account two
basic goals: the need for individual fees to cover
Corporations' related administrative costs and the need to
limit the size of the fund reserve. Its current fee
structure does not accomplish either goal." Reforming DOC's
fee structure, not just for the Escrow Law, but for all
thirteen of the regulatory programs it administers, is a
long-term goal of the Department that was derailed during
the past two years, by the need to focus on California's
evolving mortgage crisis. Committee staff anticipates that
this fee reform may begin as soon as 2010. As part of this
reform, the Legislature will have another opportunity to
review Escrow Law license fees. Setting the fee at a
maximum of $2,800, where it has been since 2002, and where
it is generating sufficient revenue to offset the
Department's administrative costs, is likely appropriate
until such time as the Legislature revisits all of DOC's
license fees.
3. Support . EIC is sponsoring the provisions of this bill
relating to the annual assessment and audits of new
licensees and licensees who have undergone a change in
ownership. Deleting the sunset date on the existing "up to
$2,800" assessment and increasing the maximum size of the
special assessment from $500 to $1000 is intended to allow
DOC to continue collecting sufficient licensee fee revenue
to cover its administrative costs, while at the same time
ensuring that DOC never returns to its prior method of
imposing pro-rata assessments on escrow law licensees.
According to EIC, the pro-rata assessments were unfair, and
had the greatest financial impact on small (4-5 employees),
largely women-owned escrow businesses. "Prior to the
imposition of the annual flat assessment in 1996, the
average pro-rata assessment fee for a typical small escrow
agent ran anywhere from $15,000 to $18,000, which we submit
would have a devastating impact on escrow licenses during
these very difficult economic times."
EIC also believes that the long-term success of a licensee is
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enhanced by early efforts to ensure that it clearly
understands the law and acquires the requisite skills for
trust funds handling. This is of particular importance,
given the increased entry of licensees who lack a previous
escrow background. The examination provisions of the bill
are intended to ensure that DOC takes a close look at every
new escrow agent licensee, and every escrow agent licensee
that undergoes a change in ownership, at least twice during
its first two years of existence, in furtherance of EIC's
(and DOC's) goal of ensuring licensees' compliance with the
Escrow Law and trust fund accounting protocols.
DOC is sponsoring the provisions of this bill relating to the
surrender of escrow agent and CRMLA licenses, to allow
itself more flexibility in accepting license surrenders, and
eliminate its need to revoke a license, where no public
purpose is served by doing so. DOC is also sponsoring the
provision that would require CRMLA licenses to report branch
closures to the department in a timely manner, to ensure
that it has accurate records of operating locations.
Finally, DOC is sponsoring the provision that would make
changes to the accounting reports required to be submitted
to the department as a condition of surrendering an escrow
license, to correct an unintentional drafting error that
prevents DOC from taking action against a licensee whose
closing audit or review is lacking.
4. Opposition None received.
5. Suggested Amendments .
a. Staff suggests deleting the provision (page 6,
lines 15 through 20), which would require the
commissioner of DOC to notify the Escrow Law Advisory
Committee and submit "any budget and program
justification and information for the current or prior
budget years that would support the special
assessment" prior to levying a special assessment on
Escrow Law licensees.
Rationale: The special assessment is intended to ensure
that DOC is able to cover its administrative costs, if
the annual assessment, currently capped at $2,800,
generates insufficient revenue to fully cover those
costs. By law, DOC is authorized to impose fees to
cover its administrative costs, and need not request
SB 204 (Benoit), Page 8
permission to do so from the Escrow Law Advisory
Committee. It is therefore unclear why the
commissioner of DOC would need to submit justification
for any special assessment to the Escrow Law Advisory
Committee. That Committee does not have veto
authority over any fee increase or assessment, nor is
the Committee required to agree to the fee increase or
assessment; why, therefore, would DOC be required to
submit detailed financial information to the Committee
before levying a special assessment?
6. Prior Legislation
a. SB 408 (Margett), Chapter 257, Statutes of
2005: Extended the sunset date on the existing annual
assessment from January 1, 2006 to January 1, 2010.
b. AB 459 (Nation), Chapter 499, Statutes of
2001: Increased the cap on the annual licensee fee
from $2,000 to $2,800, extended the sunset date on the
annual assessment from January 1, 2002 to January 1,
2006, and decreased the frequency of regulatory
examinations of Escrow Law licensees from once every
24 months to once every 48 months.
c. AB 1646 (Conroy), Chapter 670, Statutes of
1996: Replaced the pro rata annual assessment with a
flat $2,000 annual assessment, supplemented by a
special assessment, which could be levied by DOC if
necessary, and sunset these two new fees on January 1,
2002.
POSITIONS
Support
Escrow Institute of California (sponsor of escrow fee and
examination frequency provisions)
Department of Corporations (sponsor of escrow license surrender
provisions and CRMLA provisions)
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102
SB 204 (Benoit), Page 9