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Escrow Institute of California

Escrow Institute of California

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Published by 51 Pegasi

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Published by: 51 Pegasi on Oct 09, 2012
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Escrow Institute of California - P.O. Box 1069 - Carlsbad, California 92018-1069Phone: (760) 633-4342 - Fax: (760) 942-1048 - Toll Free: 1 (800) 3-ESCROW
 
Lender Vetting of Escrow Holders: Who Do Our Members Work For?
The Escrow Institute of California (EIC) is the professional trade association which represents CaliforniaDepartment of Corporations licensed escrow holders. The California Department of Corporations currentlylicenses 965 locations throughout the state where more than 6,100 people are employed. California consistentlytops the chart in loan origination volume; originating a larger loan volume than the next 4 highest volume states.Our members are licensed by the California Department of Corporations (DOC) under a regulatory authority thathas existed since 1947. Our members are extremely well regulated. Owners and their employees are subject tostate and federal criminal background checks and are required to carry surety and fidelity bonds. All licensees aresubject to annual CPA audits with mandated reporting to DOC by the CPA and are also subject to mandatedregular compliance audits by the DOC and “for cause” audits by both DOC and Escrow Agent’s FidelityCorporation, which is the statutory bonding body for licensees. These requirements are designed to protect theconsumer from illegal acts, errors and trust shortages for the sole purpose of providing reliable Escrow Servicesfor California Consumers.THE CORE ISSUES:Settlement Services in the United States are practiced in forms and manners that vary, not only from state tostate, but from county to county and even city to city. Consolidation in the Banking and Mortgage Lendingindustries have accelerated the ongoing process of disconnect between the wants, needs and desires of thosemaking mortgage loans with the those of consumers and of settlement service providers. The ever increasingregulation of mortgage lending related industries by the Federal Government coupled with that consolidation,have furthered an East Coast Centric view of the entire process, creating conflicts of interest and duties.Like its predecessors, in implementing RESPA and various lending acts, the Consumer Financial ProtectionBureau (CFPB), seems to make no effective distinction in its collective mind between title insurance and escrow(settlement/closing) services for covered transactions; literally viewing them as the same product or service. Titleinsurance is an insurance product and is not interchangeable with the service of acting as an escrow agent and/orsettling and disbursing a transaction. Confusion arises because of the dual role title insurance companiesassume in many states. Regardless, they are separate and distinct products and services.In issuing CFPB Bulletin 2012-03, we do not believe the Bureau intended to take the unreasonable position thatlenders should be made into
defacto 
 
regulators 
of title insurers and escrow service providers. Particularly in lightof the fact that these services are both routinely selected by sellers and buyers during the negotiation of theircontract; and have value to consumers outside of the loan product, as demonstrated by the routine use of theseproducts and services in cash transactions. Nor do we believe the CFPB realized that their bulletin would beused by private sector entrepreneurs to convince lenders they had such a responsibility, in order to sell theirhighly provocative and unregulated “vetting” services.The Secure Settlements Inc. (SSI) model is a prime example of what we believe to be such an unintendedconsequence. Secure Settlements, Inc. represents that it relies on the Dodd-Frank Wall Street Reform andConsumer Protection Act (Pub.L. 111-203,H.R. 4173) (the "Dodd-Frank Act") in promulgating the alleged necessity of its “vetting” assistance and collection of personal and confidential information from settlementservices personnel and companies. EIC disputes this position and postulates the Dodd-Frank Act neversupposed that unregulated “vetting” companies such as Secure Settlements, Inc. would rise from the depths ofthe law to create millionaire collectors of personal and confidential information on escrow/settlementprofessionals.This point aside, Secure Settlements, Inc. is completely unregulated and has no reasonable need, legal authorityor requirement to collect individuals’ and corporations’ personal and confidential information. The information itproposes to amass from thousands of persons across the United States includes their social security numbers,corporate identifying numbers, credit reports and concomitant information including residence addresses, which
 
 
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will then be available to its personnel who are completely unregulated and unlicensed. The persons whoseinformation it has are then exposed to the serious risk of wrongful use by SSI personnel or Cyber thieves who canaccess even the most secure computer systems. A statement that the information will be secure as collectedfrom thousands of people annually is clearly insufficient to give anyone confidence.This type of lender driven “vetting” is discriminatory, unnecessary, expensive, duplicative and burdensome to ourmembers who are all small businesses as defined by the Federal Government, many of which are minority andwomen owned businesses. Further, lenders have indicated they will waive this “vetting” process for large nationaltitle insurers. This is both ironic and troubling in light of the movement in the lending industry over the past 20years to direct all loan fundings to the title insurer or its underwritten agent’s sub-escrow account, rather than thesettlement agent. In California today most escrow companies are relegated to directing the title company’s sub-escrow department to make the existing loan payoffs from the funding and only directly receive and disburse theresidual funds remaining after recordation and payoff, at which point the funds no longer belong to the lender, butto the consumer.EIC represents an industry consisting 100% of small business as defined by the Federal Government, many ofwhich are women and minority owned. Our industry is already struggling under the immense burdens of a majorand prolonged economic downturn accompanied by regulatory agencies zealously imposing additionalrequirements in the aftermath of the financial meltdown. Our members were not the cause of those twincatastrophes. Our members are already legally licensed and regulated by the State of California and authorizedto perform their services under the Real Estate Settlement Procedures Act (RESPA) and the Wall Street Reformand Consumer Protection Act (Dodd Frank Act). Additional burdens such as the idea that our members needfurther “vetting” simply cannot be born by this industry.Lender controls over escrow companies are the worst possible outcome for consumers and for escrowpractitioners. California escrow agents operate under a statutory authority that, combined with case law, clearlyrequires an escrow agent serve as a neutral third party fiduciary to the principals in a real estate transaction. Thatmeans the seller and the buyer. It further outlines a limited statutory duty to a new lender that is limited to the useof the lender’s documents and funds within the context of the consumer transaction.Lenders now routinely attempt in terms both subtle and blatant, to subvert those relationships and make theescrow agent primarily an agent of the lender, via their “closing instructions”. These “closing instructions” oftencontain requirements that escrow holders perform activities such as underwriting and “red flag” reporting thatgoes beyond the escrow agent’s statutory limitations and that are improper, compromising and/or illegal for themto perform. Accepting these contractual agreements “as issued” is tantamount to playing Russian roulette withour members businesses. Lender controls effectively put the fox in charge of guarding the henhouse andcharging the farmer more for the privilege. Further, we believe this attempted transference of duties also presentsan issue with regards to RESPA anti-kickback regulations.Below is a brief listing of the issues the EIC has identified with regards to lender directed “vetting” ofescrow/closing providers:1) Establishes a party other than a state or federal regulator to act as a
defacto regulator 
by an unqualifiedentity, overlaying the proper and valid regulation of the intended body.2) Banks and their representatives can, and have, proposed self serving standards upon escrow holders, tothe detriment of both consumers and escrow holders.3) “Vetting” services like Secure Settlements, Inc, (SSI) require substantial personal and financialinformation from both the escrow holder and its employees, creating the risk of identity theft and fraud.We also believe this exposes the employing company to significant liability to its employees and toconsumers if any of the information provided is misused.4) There is a rising problem of business bank accounts being targeted for theft by outside sources. Anyrequirement to provide substantial banking and account information further exacerbates that risk to fundsbeing safeguarded for consumers and may be problematic in the eyes of our regulator.
 
 
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5) We believe the SSI model may constitute an unlicensed insurance product and an unlicensed creditreporting agency.6) We believe the SSI model is merely a “pay to play” scheme that forces the unwilling participation of thosewho derive no benefit from it for an uncertain perceived benefit to lenders. We view this scenario as aRESPA “anti-kickback” violation. If it is pursued we will be exploring the legal aspects as to collusion,restraint of trade, extortion and racketeering aspects as well.7) Any “vetting” process we have seen to date appears extremely subjective and does not take regionallaws and practices into account.8) We are already seeing exemptions to “vetting” processes for major national title companies and theiremployees, making it discriminatory and anti-small business.9) Establishing such
defacto regulators 
allows entities that lack the requisite knowledge and expertise, to set“best practices” standards and continuing education requirements for our industry. Worse still, thesewould likely be national standards that simply cannot be adopted in many areas, such as the SSIcertification requirements that a provider only represent the seller or buyer, not both and that the provideragree to act as an agent of the lender...10) Lender directed “vetting” assumes that consumers have no choice in their affairs and encourages alender’s interference with an existing consumer contract where services and terms have been negotiatedand agreed upon in advance of the lender’s involvement, resulting in damages in the form of more limitedchoices and higher fees to the consumers who are the principals.11) A lender directed “vetting” model creates an untenable level of risk for our members with regard toemployee liability and personal data security.We recognize after years of striving for it, that there is no perfect system. To assume, under any system, thatthere will never be a loss is as unlikely a proposition as assuming there will never be a bank failure. The goal isto do as much preventative action as is reasonable and assure that a system is in place to cover the inevitablelosses to the greatest degree possible. We believe that California licensed escrow holders meet that criteria.In conclusion, we firmly believe the State of California intended that our members work for Consumers. Californiahas been a leader in the regulation of escrow holders for the protection of its citizens since 1947. We understandthis is a big country and there may be areas where such regulations do not exist to a sufficient degree. These areissues that should be addressed on a statewide basis rather than a draconian national appointment of extra-regulatory private industry entities and a one-size fits all approach where consumers are left out in the cold. Wehave
attached herewith 
an outline of the method and manor of regulation and consumer protection for escrowholders licensed by the California Department of Corporations that comprises our membership, entitled Licensingand Regulatory Standards for Escrow Holders under the California Department of Corporations.

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