BILL ANALYSIS
SB 1223
Page 1
Date of Hearing: June 29, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1223 (Calderon) - As Amended: May 27, 2010
SENATE VOTE : 33-0
SUBJECT : ESCROW AGENTS
KEY ISSUE : IN AN AUCTION SALE OF FORECLOSED REAL PROPERTY,
SHOULD THE AUCTIONEER OR AUCTION COMPANY BE ALLOWED TO ACT AS
THE AGENT OF THE PROPERTY SELLER SIMPLY FOR THE PURPOSE OF
DIRECTING THE ESCROW AGENT TO TIMELY RETURN THE BIDDER'S
DEPOSITS AND FEES?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This non-controversial bill contains two distinct provisions
relating to escrow agents. First, this bill would allow an
auction company to act as the agent of the property seller,
simply for the purpose of directing the escrow agent to return
deposits and fees to the non-winning bidders in an auction sale
of a foreclosed home. This is intended to facilitate more
timely return of bidders' deposits in these types of auction
sales. Secondly, this bill would require notification to the
Department of Corporations and the Escrow Agents' Fidelity
Corporation, the sponsor of this provision, if the surety bond
required of all escrow licensees is cancelled, not renewed, or
released. According to the sponsor, this provision is intended
to help provide early warning of problems at escrow companies
that could increase the risk of losses in escrow trust accounts.
This bill passed in the Senate by a 33-0 vote, and passed the
Assembly Banking & Finance Committee by a 9-0 vote. There is no
known opposition.
SUMMARY : Requires the escrow agent to return deposits and fees
to bidders in auction sales of foreclosed properties, and
requires notification to the Department of Corporations when the
surety bond required of all licensed escrow agent is cancelled
or not renewed. Specifically, this bill :
1)Requires the escrow agent, upon receipt of escrow instructions
SB 1223
Page 2
from the bidder, auctioneer, or auction company directing the
return of all funds placed on deposit by the bidder, to return
to the bidder all deposits and fees received from the bidder
in connection with an auction sale of real property that has
been the subject of a foreclosure sale.
2)Applies this requirement to licensed escrow agents and to
certain entities not required to be licensed as an escrow
agent, including banks, credit unions, attorneys, and licensed
real estate brokers.
3)Exempts certain sales of real property from this requirement,
including:
a) A sale of real property pursuant to a nonjudicial
foreclosure governed by Article 1 (commencing with Section
2920) of Chapter 2 of Title 14 of Part 4 of the Civil Code.
b) A sale of real property under a judicial foreclosure
ordered under a money judgment, pursuant to Article 6 of
Chapter 3 of Division 2 of Title 9 of Part 2 of the Code of
Civil Procedure.
c) A unified sale of real property and personal property or
fixtures, conducted pursuant to Section 9604 of the
Commercial Code, if an obligation secured by a security
interest in personal property or fixtures is also secured
by an interest or an estate in real property.
4)Requires notification to the Department of Corporations, and
the Escrow Agents Fidelity Corporation if the surety bond
required of all escrow licenses is canceled, not renewed, or
released.
EXISTING LAW :
1)Regulates the business of escrow under the Escrow Law and
defines "escrow" as a transaction in which one person, for the
purpose of effecting the sale, transfer, encumbering, or
leasing of real or personal property to another person,
delivers any written instrument, money, evidence of title to
real or personal property to a third person to be held by that
third person until the happening of a specified event or the
performance of a prescribed condition, when it is then to be
delivered by that third person to a specified person.
SB 1223
Page 3
(Financial Code Section 17000 et seq.)
2)Requires every licensed escrow agent to deposit and maintain
with the Commissioner of Corporations a surety bond in the
amount of at least twenty-five thousand dollars ($25,000),
which shall run to the state for the use of the state and for
any person who has cause against the obligor of the bond under
Division 6 of the Financial Code (governing licensed escrow
agents). (Financial Code Section 17202.)
3)Provides that the escrow agent's bond shall be conditioned
that the licensee will faithfully conform to and abide by the
provisions of this division and all the rules made by the
Commissioner under this Division. Also provides that the bond
shall be conditioned that the licensee will honestly and
faithfully apply all funds received, will faithfully and
honestly perform all obligations and undertakings under this
division, and will pay to the state and any person all amounts
which become due or owing to the state or to such person under
the provisions of this division. (Financial Code Section
17203.)
4)Exempts a variety of entities from Escrow Law including
depository institutions; a person licensed to practice law in
California as specified; title insurance companies regulated
by the Department of Insurance; and real estate brokers
performing in the course of, or incidental to a real estate
transaction in which the broker is an agent or a party to the
transaction and is performing an act for which a real estate
license is required. (Financial Code Section 17006.)
5)Requires each auctioneer and auction company to, among other
things, do the following:
a) Disclose their name, telephone number, and bond number
in all advertising;
b) Post or distribute the terms, conditions, restrictions,
and procedures whereby goods will be sold at the auction,
and announce any changes to those prior to the beginning of
the auction sale.
c) Disclose the existence and amount of any liens or
encumbrances; and return the blank check or deposit of each
buyer who purchased no goods at the sale. Existing law
imposes specified fines for violation of the above
provisions. (Civil Code Section 1812.607.)
SB 1223
Page 4
COMMENTS : This non-controversial bill contains two distinct
provisions relating to escrow agents. First, this bill would
allow auction companies to act as agents of the property
sellers, for the purpose of directing escrow agents to return
deposits to unsuccessful bidders in auction sales of foreclosed
homes. This is intended to facilitate more timely return of
bidders' deposits after these types of auctions end. Secondly,
this bill would require notification to the Department of
Corporations and the Escrow Agents' Fidelity Corporation, the
sponsor of this provision, if the surety bond required of all
escrow licensees is cancelled, not renewed, or released.
According to the sponsor, this provision is intended to help
provide early warning of problems at escrow companies that could
increase the risk of losses in escrow trust accounts.
Obtaining refunds of deposit money from escrow agents after
foreclosure auctions. Auction sales of foreclosed properties
have become increasingly common in California, as banks seek
effective ways of facilitating the sale of properties that would
not otherwise sell on the open market, or which would sell for
far less than they could fetch at auction. Because of the
particular way these auctions are typically conducted, according
to the author, some bidders have reported having trouble
obtaining refunds of their refundable deposits following
auctions which they did not win. The author describes the
problem further:
Auction sales of foreclosed properties are commonly
conducted as "reserve" auctions, in which the seller
of the property establishes an unpublished reserve
price, above which it is willing to sell the property,
but below which it may be unwilling to agree to a
sale. When an auction is conducted and the high bid
is below the unpublished reserve price, the auctioneer
typically announces that the sale is made, subject to
seller confirmation, approval, or acceptance. The
high bidder is instructed to open escrow on the
property, and is asked to place a deposit on hold with
the escrow agent, pending a decision by the property
owner regarding whether to accept the bid.
If a seller does not accept a bidder's bid (likely
because it is too far below the reserve price to
warrant acceptance), the bidder is entitled to receive
SB 1223
Page 5
a refund of his or her deposit. However, some bidders
encounter a circular problem in obtaining a refund.
The auction company doesn't hold the money so has no
ability to return the deposit. The escrow agent holds
the money, but requires instructions from both parties
to the real estate contract (the property buyer and
the property seller) before it will release the funds.
If the property seller has rejected the bid that
formed the basis for a bidder's deposit, it often has
no further interest in the transaction, and can be
difficult to reach for purposes of obtaining escrow
instructions. Yet, without escrow instructions from
the property seller, the escrow agent is unable to
release the deposit to the bidder.
To address this concern, this bill would allow the auctioneer or
auction company to act as the agent of the property seller, for
the purpose of directing the escrow agent to return deposits and
fees received from a bidder in connection with an auction sale
of foreclosed real property. This bill provides that an auction
company or auctioneer may satisfy the requirement to return all
deposits and fees collected from the bidder by giving escrow
instructions to the escrow agent that direct the escrow agent to
return all funds placed on deposit by the bidder with that
agent.
This provision accounts for the fact that the funds are not
actually in the possession of the auction company at the time
the law requires the company to return the funds to the bidder,
but are held by the escrow agent during the time that seller
confirmation is pending. Because the auction company is not in
a position to return the money itself, the bill instead allows
the auction company to satisfy the requirement by instructing
the escrow agent to return all deposited funds to the bidder.
The author contends, quite reasonably, that there is little
reason to believe that the escrow agent will fail to comply with
properly deposited instructions from the auction company in
these situations.
Notification of cancellation of required surety bond : Existing
law requires every licensed escrow agent to deposit and maintain
with the Commissioner of Corporations a surety bond in the
amount of at least $25,000. The sponsor of this provision,
Escrow Agents' Fidelity Corporation (EAFC), is a non-profit
mutual benefit corporation with a membership consisting of
SB 1223
Page 6
independent escrow companies licensed by the Department of
Corporations. EAFC believes that escrow company trust account
losses can be prevented or minimized if the Department of
Corporations, EAFC, and owners of the escrow business have early
warning of problems within the escrow companies. Under existing
law, both the Department and EAFC can cause examinations to be
made of the licensee, and the Department can take immediate
action to seize the companies in appropriate circumstances.
According to EAFC:
The situation with respect to notification of bond
cancellation or non-renewal is not at all clear.
While the Department of Corporations acknowledges that
the standard form surety bond requires notification to
the Department if the bond is cancelled or withdrawn,
and while the law is clear that the bond runs to the
benefit of the state (Financial Code Section 17202),
there does not appear to be a clear requirement in
statute that the Department of Corporations be
notified on bond cancellation, substitution,
withdrawal, or non-renewal.
To address this concern, this bill would make clear the
notification requirement to the Department of Corporations, and
additionally require notification to the EAFC.
Previous Legislation : SB 109 (Calderon) of 2009 would have: 1)
removed the exemption for sales of real property from the
Auctioneer and Auction Company Law for sales of real property;
2) established specific rules for auction sales of foreclosed
real estate, including requiring notification to an auction
audience of all fees that would be levied as a condition of
bidding and an explanation of specified terms relating to the
auction; and 3) required the return of deposits and fees in a
specified time if the high bidder's offer was rejected or if the
seller did not respond to the offer. SB 109 was vetoed by the
Governor for, among other things, "imposing unnecessary
restrictions and fees upon real estate auctioneers." This bill
contains only a narrower version of SB 109's provision for the
quicker return of bidder's deposits and fees.
REGISTERED SUPPORT / OPPOSITION :
SB 1223
Page 7
Support
Escrow Agents' Fidelity Corporation (EAFC)
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334