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California Escrow Industry Group Seeks Uniform Regulation

 


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In late May, the Santa Clara County, Calif. District Attorney’s Office charged a former escrow officer with 32 counts of embezzlement and grand theft for allegedly living “high on the hog” on the tab of her clients.

Melanie Melim, a former escrow officer with Alliance Title Co. , faces up to 21 years in prison for allegedly stealing more than $1 million from client escrow accounts — funds that were considered to be guarded by a neutral third-party to the real estate transaction.

Instead, Melim used the funds to attend concerts and sporting events, take trips to Las Vegas and go on shopping sprees, authorities alleged.

As much as the allegations against Melim are personally troublesome, they also raise questions about the security of the escrow industry, a staple of the real estate business in California for more than a century.

But as the California escrow industry juggles confronting incidents such as these, waiting for the filing of a controversial rulemaking that would drastically cut its rates and pacing the floor of the state Capitol, one trade group has hinted that the industry may be gearing up for its toughest challenge yet.

‘An aligning of the stars’

Members of the Escrow Institute of California (EIC), a trade group that represents the state’s licensed, independent escrow industry, are laying the groundwork for a cross-industry meeting of the minds to bring stability to an industry confounded by a confusing maze of uneven regulatory oversight.

The EIC has officially opened the door for formal discussion of a proposal to bring California’s escrow practitioners — who, depending on their primary real estate business, must answer to one of five different state regulators — under the umbrella of a comprehensive, uniform escrow law with a single regulator.

According to EIC President P. J. Garcia, it’s a system that could do much to solve the escrow industry’s problems and relieve it of the burden of a regulatory structure that “just doesn’t make sense. ”

“There is a broad array of bureaucracries that regulate escrow in California, to the extent that not even the regulators have an integral grasp of the picture, ” Garcia said. “If that is the case, how can the consumer possibly understand it and know who to turn to? It’s a question of enhancing consumer protection and streamlining government, both of which we think are good goals. ”

However, it’s an idea that has been tossed around before, without much agreement. Still, Garcia describes initial discussions among the various affected industries and regulators as “encouraging. ”

“There’s the sense that there is an aligning of the stars, ” she said. “But the devil is in the details. What we have to do is build a consensus. ”

In the beginning

Independent escrow corporations have been providing closing services to California consumers in California since the late 1940s. The state Escrow Law, which was enacted in 1947, defines escrow providers as neutral, third-party agents for all principals in a real estate transaction.

The Escrow Law requires all corporations engaged in the escrow business as escrow agents to be licensed as independent escrow companies by the California Department of Corporations (DOC). However, in order to reach California’s more rural consumers, the state began to allow other real estate practitioners to provide escrow services to give consumers greater flexibility.

Thus, the state excluded the following groups from the licensure requirements of the Escrow Law:

“Any person whose principal business is that of preparing abstracts or making searches of title that are used as a basis for the issuance of a policy of title insurance by a company doing business under any law of this state relating to insurance companies. ” These individuals are regulated by the Department of Insurance (DOI).

“Any real estate broker licensed by the real estate commissioner while performing acts 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 in which the broker is performing an act for which a real estate license is required. ” These individuals are regulated by the Department of Real Estate (DRE).

“Any person doing business relating to banks, trust companies, building and loan or savings and loan associations. ” These individuals are regulated by either the DOC or the DRE.

“Any person licensed to practice law in California who has a bona fide client attorney relationship with a principal in a real estate transaction and who is not actively engaged in the business of an escrow agent. ” These individuals are regulated by the state bar. Garcia argued that while the current regulatory structure may have made sense when it was created, times have changed, and so should the system.

“I think the market has changed over the last 60 years or so, particularly in the last 10 or 15 years, ” she said. “Technology has made a lot of changes. We’re no longer a predominantly rural state. Even the rural areas aren’t just rural anymore. ”

Moreover, escrow practitioners licensed by the DOC are subject to a higher regulatory standard than those who are exempt from the Escrow Law, Garcia said. DOC licensees undergo background checks and fingerprinting by the Department of Justice and are bonded by the Escrow Agents’ Fidelity Corp. , while those who are exempt from the Escrow Law get the all-clear from their primary industry regulator.

Such uneven standards may be a factor contributing to incidents such as the one involving Melim, Garcia said.

“Whenever something is reported, it is just reported as escrow. There is no distinction made as to who the regulator is, ” Garcia said. “We all sort of get painted with the same broad brush, and that is not something we have been happy about. ”

Mike Belote, legislative advocate for the California Escrow Association (CEA), a trade group representing all escrow practitioners, agreed change is needed, but said the discussion has been simmering for 25 years without coming to a boiling point.

“We think if you were creating an escrow regulation system from scratch, you wouldn’t do it this way, ” Belote said. “Everyone understands it’s a weird system we have now, but it’s been this way for over 50 years. The question is, how do you conform all of that if there is no political will to do that?”

Winds of change

It’s no secret that for more than a year, the DOI has been focused on implementing regulations to drastically reduce title insurance premiums and escrow rates by $1 billion annually. The DOI has been colorful in its depiction of the title insurance industry as “a system rife with illegal kickbacks and gratuities, ” and the department was generous enough with its brush to paint the escrow industry as “middlemen” who only further drive up prices for consumers.

This included DOC licensees, who were baffled that they were lumped into a regulation proposed by a regulatory authority other than their own. The EIC spent most of last year fighting the proposal — and standing beside the group was the California Land Title Association (CLTA), which linked arms with the EIC on many occasions, including a contentious day-long DOI hearing last August.

Bridges built and alliances formed, the EIC is hopeful it will be able to bring the CLTA, the California Association of Mortgage Brokers (CAMB) and the California Association of Realtors (CAR) together to hash out a proposal in time to introduce legislation in the 2008 session. While details are still sketchy at this point, Garcia said one suggestion is to bring all escrow providers under the DOC’s jurisdiction.

“Logistically speaking, all of the people who know escrow best are at the Department of Corporations, ” Garcia said. “But again, the devil’s in the details. I couldn’t give any commitment on how that might look in the end. Of course, it will have to be done collaboratively because if the other industries are flat-out opposed to it, it would obviously be a lot more difficult to do. ”

Craig Page, executive vice president and counsel of the CLTA, and Jack Williams, president of CAMB’s executive board, both said their groups are open to the discussion, but as pen hasn’t yet been put to paper, they declined to state formal opinions on the proposal. Garcia said the DOC and DOI have also been receptive to initial talks.

CAR and the DRE, which historically have been the most resistant to the idea, did not respond to a request for comment by press time.

“The process of going through the Department of Insurance hearings really brought home to us once again that this is a very fractionated and confusing process, ” Garcia said. “2007 is paving the way. We’re pleasantly surprised by the response we have received so far. ”

Amy Swinderman is the editor of The Legal Description , a trade publication specializing in focused analysis of legislative, regulatory and legal issues facing the title insurance and real estate settlement services industries. The Legal Description is a publication of October Research Corp , the nation’s premier provider of real estate industry news and analysis.

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