Department of Financial Protection and Innovation Seeks Public Input on Draft Regulations Impacting Escrow Companies

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By Alexandra Loyo

On November 4, 2021, the Department of Financial Protection and Innovation (DFPI) noticed and held a public hearing for comments on modifications to the proposed rulemaking PRO 13/13, which would amend sections 1711.1 through 1741.7, Title 10 of the CCR. On January 1, 2021, DFPI initially published notice of its intent to add sections 1711.1 and 1741.7 to, and amend sections 1732.2, 1737.3, and 1741.5 of, Title 10 of the CCR relating to escrow law to clarify the meaning of “personal property” and “prohibited compensation”; clarify how to maintain books and preserve records; and clarify that the annual report must consist of audited financial statements and the results of an agreed-upon procedures engagement, an agreement between an escrow company and a certified public accountant on audit procedures. [See 26:2 CRLR 262–263]  This proposed modified text outlines changes to escrow regulations on personal property, prohibited compensation, escrow books and records, and the annual and closing audit reports due from these companies.

The public hearing included many comments specifically about section 1741.7 of PRO 13/13. The text includes changes to compensation that escrow companies receive and pass out in the course of business. Prohibited actions in the proposed rulemaking include, among other things, paying or offering to pay for business expenses, advertisements, food, beverages, and services unrelated to the escrow business. The proposed text prohibits actions related to offering free escrow services. The proposed rulemaking will substantially regulate how escrow companies reduce rates when they engage in business, which will prohibit escrow companies from offering discounts without mutually agreed upon discounts for all parties involved. The companies must explicitly write these discounts, and these discounts cannot contravene the fees associated with escrow costs and cannot be made so that one party is covering the escrow costs of another party unless this allocation of escrow fees was otherwise made between the parties. These changes will also prohibit escrow companies from offering discounts to individual clients of a specific broker without that discount being available to clients of all brokers.

These changes will impact how escrow companies do business and many comments at the public hearing explicitly called these changes “kickback” regulations, noting that this would do more harm to the good-faith actors in the escrow business than regulate the bad actors. Some public commentators noted that the current law, section 17420 of the California Financial Code, covers the situations that this proposed rulemaking is trying to regulate, and additional regulations are unnecessary and outside of the powers of the Commissioner.

As of this writing, DFPI has not taken further action on PRO 13/13 in response to the comments made at this public hearing.

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