Lender Vetting of Escrow Holders: Who Do Our Members Work For?

The Escrow Institute of California (EIC) is the professional trade association which represents California Department of Corporations licensed escrow holders. The California Department of Corporations currently licenses 965 locations throughout the state where more than 6,100 people are employed. California consistently tops 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 that has existed since 1947. Our members are extremely well regulated. Owners and their employees are subject to state and federal criminal background checks and are required to carry surety and fidelity bonds. All licensees are subject to annual CPA audits with mandated reporting to DOC by the CPA and are also subject to mandated regular compliance audits by the DOC and for cause audits by both DOC and Escrow Agents Fidelity Corporation, which is the statutory bonding body for licensees. These requirements are designed to protect the consumer from illegal acts, errors and trust shortages for the sole purpose of providing reliable Escrow Services for California Consumers. THE CORE ISSUES: Settlement Services in the United States are practiced in forms and manners that vary, not only from state to state, but from county to county and even city to city. Consolidation in the Banking and Mortgage Lending industries have accelerated the ongoing process of disconnect between the wants, needs and desires of those making mortgage loans with the those of consumers and of settlement service providers. The ever increasing regulation 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 Protection Bureau (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. Title insurance is an insurance product and is not interchangeable with the service of acting as an escrow agent and/or settling and disbursing a transaction. Confusion arises because of the dual role title insurance companies assume 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 that lenders should be made into defacto regulators of title insurers and escrow service providers. Particularly in light of the fact that these services are both routinely selected by sellers and buyers during the negotiation of their contract; and have value to consumers outside of the loan product, as demonstrated by the routine use of these products and services in cash transactions. Nor do we believe the CFPB realized that their bulletin would be used by private sector entrepreneurs to convince lenders they had such a responsibility, in order to sell their highly provocative and unregulated vetting services. The Secure Settlements Inc. (SSI) model is a prime example of what we believe to be such an unintended consequence. Secure Settlements, Inc. represents that it relies on the Dodd-Frank Wall Street Reform and Consumer 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 settlement services personnel and companies. EIC disputes this position and postulates the Dodd-Frank Act never supposed that unregulated vetting companies such as Secure Settlements, Inc. would rise from the depths of the law to create millionaire collectors of personal and confidential information on escrow/settlement professionals. This point aside, Secure Settlements, Inc. is completely unregulated and has no reasonable need, legal authority or requirement to collect individuals and corporations personal and confidential information. The information it proposes 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
Escrow Institute of California - P.O. Box 1069 - Carlsbad, California 92018-1069 Phone: (760) 633-4342 - Fax: (760) 942-1048 - Toll Free: 1 (800) 3-ESCROW

will then be available to its personnel who are completely unregulated and unlicensed. The persons whose information it has are then exposed to the serious risk of wrongful use by SSI personnel or Cyber thieves who can access even the most secure computer systems. A statement that the information will be secure as collected from 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 our members who are all small businesses as defined by the Federal Government, many of which are minority and women owned businesses. Further, lenders have indicated they will waive this vetting process for large national title insurers. This is both ironic and troubling in light of the movement in the lending industry over the past 20 years to direct all loan fundings to the title insurer or its underwritten agents sub-escrow account, rather than the settlement agent. In California today most escrow companies are relegated to directing the title companys subescrow department to make the existing loan payoffs from the funding and only directly receive and disburse the residual funds remaining after recordation and payoff, at which point the funds no longer belong to the lender, but to the consumer. EIC represents an industry consisting 100% of small business as defined by the Federal Government, many of which are women and minority owned. Our industry is already struggling under the immense burdens of a major and prolonged economic downturn accompanied by regulatory agencies zealously imposing additional requirements in the aftermath of the financial meltdown. Our members were not the cause of those twin catastrophes. Our members are already legally licensed and regulated by the State of California and authorized to perform their services under the Real Estate Settlement Procedures Act (RESPA) and the Wall Street Reform and Consumer Protection Act (Dodd Frank Act). Additional burdens such as the idea that our members need further vetting simply cannot be born by this industry. Lender controls over escrow companies are the worst possible outcome for consumers and for escrow practitioners. California escrow agents operate under a statutory authority that, combined with case law, clearly requires an escrow agent serve as a neutral third party fiduciary to the principals in a real estate transaction. That means the seller and the buyer. It further outlines a limited statutory duty to a new lender that is limited to the use of the lenders 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 the escrow agent primarily an agent of the lender, via their closing instructions. These closing instructions often contain requirements that escrow holders perform activities such as underwriting and red flag reporting that goes beyond the escrow agents statutory limitations and that are improper, compromising and/or illegal for them to perform. Accepting these contractual agreements as issued is tantamount to playing Russian roulette with our members businesses. Lender controls effectively put the fox in charge of guarding the henhouse and charging the farmer more for the privilege. Further, we believe this attempted transference of duties also presents an 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 of escrow/closing providers: 1) Establishes a party other than a state or federal regulator to act as a defacto regulator by an unqualified entity, 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, to the detriment of both consumers and escrow holders. 3) Vetting services like Secure Settlements, Inc, (SSI) require substantial personal and financial information 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 to consumers 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. Any requirement to provide substantial banking and account information further exacerbates that risk to funds being 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 credit reporting agency. 6) We believe the SSI model is merely a pay to play scheme that forces the unwilling participation of those who derive no benefit from it for an uncertain perceived benefit to lenders. We view this scenario as a RESPA 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 regional laws and practices into account. 8) We are already seeing exemptions to vetting processes for major national title companies and their employees, 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, these would likely be national standards that simply cannot be adopted in many areas, such as the SSI certification requirements that a provider only represent the seller or buyer, not both and that the provider agree to act as an agent of the lender... 10) Lender directed vetting assumes that consumers have no choice in their affairs and encourages a lenders interference with an existing consumer contract where services and terms have been negotiated and agreed upon in advance of the lenders involvement, resulting in damages in the form of more limited choices 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 to employee liability and personal data security. We recognize after years of striving for it, that there is no perfect system. To assume, under any system, that there will never be a loss is as unlikely a proposition as assuming there will never be a bank failure. The goal is to do as much preventative action as is reasonable and assure that a system is in place to cover the inevitable losses 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. California has been a leader in the regulation of escrow holders for the protection of its citizens since 1947. We understand this is a big country and there may be areas where such regulations do not exist to a sufficient degree. These are issues that should be addressed on a statewide basis rather than a draconian national appointment of extraregulatory private industry entities and a one-size fits all approach where consumers are left out in the cold. We have attached herewith an outline of the method and manor of regulation and consumer protection for escrow holders licensed by the California Department of Corporations that comprises our membership, entitled Licensing and Regulatory Standards for Escrow Holders under the California Department of Corporations.

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Licensing and Regulatory Standards for Escrow Holders Under the California Department of Corporations
State of California Escrow/Settlement Services Providers can be classified under three types, each governed under a different state government agency: 1. Licensed Escrow Companies are governed by the State of Californias Department of Corporations (DOC) 2. Title Company Escrow Departments work under a Title Insurance Companys umbrella and are governed under the Department of Insurance (DOI) 3. Real Estate Broker Owned Escrow Department work under a Real Estate Brokers license and are governed under the Department of Real Estate (DRE) The purpose of this statement is to set down the process within which a Licensed Escrow Company and its individual staff are approved to conduct settlement services business. Escrow Agents are governed by the Department of Corporations (DOC) under Californias Financial Code, Division 6, Section 17000 through 17703 and are subject to the following requirements: 1. The Escrow Company must be a corporation organized for this purpose only and licenses by the Commission of the Department of Corporations. 2. The application for the escrow agent license must include the names address of all incorporators, directors and officers. Each of these persons shall submit their own personal information and fingerprints. 3. All staff of the company, whether they process escrow or work in an ancillary capacity, must also submit their own personal information application and fingerprints. 4. The personal information and fingerprints are submitted to the Department of Justice for state and federal criminal background checks. 5. The Escrow Company must file and maintain a minimum $25,000.00 surety bond that is satisfactory to the commissioner. The amount of said bond is increased dependent on the yearly trust fund obligations. 6. The Escrow Company must maintain a tangible net worth of $50,000, including liquid assets of at least $25,000 in excess of current liabilities. 7. On any given business day each location must have one manager who is approved and qualified by the DOC (a minimum of 5 years of responsible escrow experience) on the premises. 8. Every year a Certified Public Accountant (CPA) must audit the Escrow Agent Company and provide an audited financial statement to the DOC, showing compliance with Section 17210 of the Financial Code. Annual CPA audits contain specific reporting requirements for both the general and trust accounts and for escrow files. Licensees are mandated to request their banks and CPAs report trust account shortages to the DOC. 9. Any application for an owner, staff, director of the Escrow Company may be refused if the DOC has found that within the last 10 years the person has been convicted or has pleaded nolo contendere to a crime, or has committed an act involving dishonesty, fraud, or deceit, which crime is substantially related to the duties and functions of the person engaged in this settlement services business. 10. The licensed Escrow Company will automatically become a member of the Escrow Agents Fidelity Corporation which organization carries the Fidelity Bond coverage for its members and indemnifies the member against loss of trust obligations as a result of embezzlement, theft, or mysterious disappearance, subject to certain limitations of the Code. 11. Every year the Escrow Company shall provide to the DOC a list of their personnel on file, including how many staff has the authority to sign checks and receipts. Also to be provided is a breakdown of the monthly liabilities based on the adjusted bank reconciled balances.

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12. The Escrow Company shall be subject to an unscheduled audit by the DOC at least every four years, covering all books and records, wherein the Trust Account monthly reconciliation and balances, the General Account, and open and/or closed files are pulled for audit purposes and are examined for the following additional compliance. All instructions have been signed by the appropriate parties and were followed All checks have been issued pursuant to signed instructions from parties All receipts for funds received reflect the correct account numbers and senders information There are no kickback or referrals payments to others, whether monetary or otherwise, as an inducement for business 5) There are no fee preferential treatments to one of the party of the transaction without full disclosure to the other. 6) Correct handling clients interest bearing accounts 7) Proper documentation for invoices for payment and approval by client of same Anyone with questions regarding Californias Escrow Law, the process to approve companies to handle the settlement process, and any information with regards to a particular company should refer to the Department of Corporations and their website on Escrow Law: http://www.corp.ca.gov/Laws/Escrow_Law/Default.asp 1) 2) 3) 4)

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