HB 247 - REGULATION OF ESCROW ACCOUNTS Number 0070 CHAIRMAN ROKEBERG announced the first order of business was HB 247, "An Act relating to escrow accounts; and providing for an effective date." Chairman Rokeberg noted he had introduced HB 247 at the request of the Alaska State Escrow Association. Number 0105 CHAIRMAN ROKEBERG presented the sponsor statement for the record: "This was introduced at the request of the Alaska State Escrow Association in an effort to assure that consumers have their -- that their monies will be safe and properly accounted for when delivered to a settlement agent for a property transaction. There are no Alaskan laws concerning this now. "The bill has the support of the Alaska Escrow Association and the Alaska Association of Realtors. Consumers need to be assured that their funds, which can be rather large amounts, will not be jeopardized and will be available as needed during the course of a real estate transaction. From the seller's viewpoint, the execution of a deed and the - and the deposit of that deed will bring forth proceeds upon recording of - of the deed. Under current Alaskan business practices, a buyer deposits a cashier's check prior to recording a property deed; however, this is not the case if a lender provides the purchase funds. In the case of a lender, the deed is recorded along with the lender's lien and the funds are deposited after the deed and other documents have been recorded. "This procedure leaves sellers and settlement agents in the middle. The seller's interest in the property has been transferred but no funds have been received. This bill requires that before a settlement agent records documents transferring property, or creating a security interest in the property other than the seller's current interest, that the money required under the escrow agreement must be available for distribution in accordance with Alaska Statute 34.75.040 as set forth in the bill. Number 0238 "The basic thrust of this bill is to protect Alaskans that are selling their property and to make sure that the funds due those sellers are available in a timely fashion." CHAIRMAN ROKEBERG summarized that HB 247 means the escrow agent has to have the money in hand before the transaction closes and money is disbursed. He noted currently that is not the case. Number 0287 D.J. WEBB, Legislative Affairs Committee Chair and Past President, Alaska State Escrow Association; Senior Escrow Officer, First American Title Company of Alaska, testified via teleconference from Anchorage. MS. WEBB asked the committee to support HB 247 on behalf of the Alaska State Escrow Association. She noted, with the recent changes in lending closing activities, the association's members have found they are being asked by many lenders to record the warranty deed of a seller prior to receiving lender funds. MS. WEBB stated the association is concerned that there is no way to reference or determine the stability of lenders making these requests, especially from out of state. There is no way to determine if lenders will be funding on the date indicated or ever. There have been a few cases where the deed was recorded and the lender refused to fund for some reason. She related that the seller was left with having (indisc.) interest in the property, and no way to retrieve that without either filing a lawsuit or joining with the buyers to execute a deed back. Number 0330 MS. WEBB said the association is concerned that the general public has no knowledge this practice is standard. She stated the public suspects that, once they go into escrow and sign the documents, funds will be available upon recording. The general practice is that the lender funds after receiving confirmation the loan is of record. MS. WEBB commented that several other states have funds legislation which mandates and requires lenders to fund into escrow prior to the recording of the document. She stated, "In those states, where their lenders are -- that are also lending up here, it's just general practice for them to fund prior to recording when they know that the state statutes requires that." Number 0503 CHAIRMAN ROKEBERG cited Section 34.75.030, interest on escrow money, "Notwithstanding any other provision of law, interest may not be collected or paid by a settlement agent on money held in escrow unless authorized in writing by the parties to the escrow, including the settlement agent." He referred to the sectional summary from Legal Services, Division of Legal and Research Services, Legislative Affairs Agency, which reads, "Sec. 34.75.030. Prohibits collection or paying interest on escrow money unless the parties agree to do so." CHAIRMAN ROKEBERG stated that this account is not your typical escrow or impound account held by a "bank institution" for tax insurance on a house loan, noting debate about interest on retained escrow amounts. This bill provides that there can be an agreement to pay interest if there is an escrow account specifically with a settlement agent. This is not related to a typical situation in which a lender holds an escrow account to pay the taxes, insurance and other probated portions of a loan. Number 0580 MS. WEBB agreed. She said it makes it clear that the funds held by a settlement agent are not funds of the settlement agent. Usually, the only time (indisc.) interest is paid is when funds will be held for a period of time, for completion of items or for the final preparation of closing, and all parties agree to enter into an interest-bearing account. Typically, funds held in the normal trust account of a settlement agent are not held for more than one day to the next, between the time the funds are deposited and then disbursed. Number 0634 CHAIRMAN ROKEBERG noted some large commercial transactions contain substantial amounts of money, possibly in the hundreds of thousands of dollars, that can be held in escrow. The provision allowing interest to be paid by agreement is appropriate for these transactions. Chairman Rokeberg said he knew of situations where provisions had been made for (indisc.) payments of interest when $20,000 or $30,000 of option money was involved. He asked Ms. Webb if that was correct. Number 0670 MS. WEBB agreed. She noted, here again, the settlement agent would initiate an interest-bearing account at a local financial institution, rather than keep the money in a normal trust account. All interest is passed on to the party designated to receive that interest. Number 0754 DAVID LAWER, Senior Vice President, First National Bank of Anchorage; Alaska Bankers Association, testified via teleconference on behalf of the Alaska Bankers Association. Number 0782 MR. LAWER stated HB 247 was unnecessary in the view of the Alaska Bankers Association. This legislation, in large part, is merely a codification of what is already the law (indisc.) contracts. It is, he said, already a term of the contract between the escrow agent and the seller. Mr. Lawer commented that HB 247 appears to make transactions involving financing marginally more expensive for the borrower. Number 0850 MR. LAWER further stated that HB 247, at least by its terms, impacts the collection escrow business a number of the association's members are involved in, although it appears some effort has been made to restrict the impact of the legislation to escrows involving real estate closings. He noted, since the financial institutions of this state often close real estate transactions that they are involved in as financer, as mortgage lender, that the possible impact of this legislation on association members is unclear. Mr. Lawer stated, for all of those reasons, the Alaska Bankers Association recommends HB 247 not be enacted. Number 0907 MR. LAWER commented that, as far as the title companies are concerned and in so far as their activities as closing escrow agents are concerned, this legislation is not necessary. He stated, "They are simply in the position to refuse to go forward and close a transaction by sending the ... instruments of conveyance for recording until such time as they have the money available for this person to the seller." Number 0950 MR. LAWER continued, "It looks as if, by the terms of this legislation, they're entitled to go forward and record upon receipt of a cashier's check issued by a bank in this state. There is nothing to prevent them, in connection with every one of these transactions, from refusing to go forward and close the transaction by sending the documents of conveyance to the recorder's office or to - to the filing officer, until such time as they have in their hands a cashier's check issued by a bank in this state." Mr. Lawer noted again that the Alaska Bankers Association considers HB 247 unnecessary for all of the stated reasons. Number 1006 REPRESENTATIVE BILL HUDSON asked Mr. Lawer to expand on his belief that HB 247 might cost the borrower more money. Number 1023 MR. LAWER answered that currently, for loans made by Alaskan banks to finance the purchase and sale of real estate, the bank postpones disbursement of loan proceeds until such time as the instrument of conveyance and the mortgage have been recorded, and the title company involved furnishes notice to the bank that it is in a position to issue its title insurance in the form required by the bank. Then, he said, "The bank disburses and that - that's a day later." Number 1068 MR. LAWER continued, under the proposed legislation, if the bank is required to disburse in advance of closing, there will be at least a day's worth of interest added to the cost of financing at the buyer's expense. Mr. Lawer said that, if the lender disburses against recording, interest accrues from the date of recording. On the other hand, if the title company or escrow agent is required to be in receipt of payment, according to this law, there will be disbursement to the borrower in advance and additional interest charges. Mr. Lawer stated this was the additional cost to the borrower he had mentioned. Number 1149 CHAIRMAN ROKEBERG noted the original intent of HB 247 was not to impact business collections activities. He referred to the definitions of "escrow" in the bill and asked Mr. Lawer if they were the source of his concern. Number 1185 MR. LAWER responded that the definition of "settlement agent" in Section 34.75.090 (7) ("'settlement agent' means a person who engages in the business of handling escrow accounts, but does not include a person who collects money for the sole purpose of applying the money to the payment of a loan during the term of the loan: 'settlement agent' includes an employee of a person who engages in the business of handling escrow accounts when the employee is carrying out the employee's duties in the business.") leads him to believe this legislation could impact collection escrows. Number 1212 CHAIRMAN ROKEBERG asked Mr. Lawer if he understood that definition to apply to anyone handling funds in his collection escrow department. Chairman Rokeberg noted the definition of escrow in HB 247 (Section 34.75.090 (3), "'Escrow' means a transaction where, for the purpose of effecting the sale, transfer, encumbrance, leasing, or other disposition of real or personal property to another person, ..."), commenting that there is no existing law in statute. Applying this to Mr. Lawer's situation, he said, "Of course many of your collections are ... on, say, secondary deeds of trust and things of that nature for real property, but they are run through your collection department." Number 1251 MR. LAWER agreed, noting his institution is involved in all sorts of purchase and sale transactions, not only those pertaining to real property, but also, for example, limited entry permits. Number 1272 MR. LAWER noted he understood the intent was to define "settlement agent" as, in fact, the closing agent at a closing between a buyer and seller. However, he feels Section 34.75.090 (7) is not effective. Number 1294 CHAIRMAN ROKEBERG commented that he would have the same concern about the breadth of the definition of "escrow." Number 1301 MR. LAWER responded, "Exactly so, it's ... very difficult, for instance, to reckon how this impacts the bank when it indeed is closing a transaction that involves a purchase and sale of real property ... and is also doing the financing. Under the definition of escrow, escrow means a transaction where there is, to the effect if you will, the sale, transfer, encumbrance, leasing -- all those activities are part and parcel of one involving a loan by a bank that it closes itself. I would agree with you that definition, too, is perhaps overly broad, if not otherwise narrowed." Number 1348 CHAIRMAN ROKEBERG noted it is clear many banking institutions would be covered by HB 247 because they close home loans and other loans "that would be appropriate for this purpose." He stated concern over costs related to accrued interest and the alleged delay in recording. He asked Mr. Lawer to explain, in steps, how his institution would fund a typical home loan through a title company. Number 1382 MR. LAWER replied that his institution furnishes written instructions to the title company, as do the buyer and seller who are involved. The buyer's instructions are: Pay the seller when you are in a position to deliver a recorded deed to me. The seller's instructions are: Deliver the deed when you are in a position to pay me, in cash, the price. MR. LAWER said the instructions from the bank that is financing the transaction are: We will pay you the proceeds of a loan we are making to the buyer as soon as you, title company, are in a position to tell us: 1) the deed of conveyance in our mortgage has been recorded and 2) you will issue to us your policy of title insurance which is in keeping with our requirements. Number 1459 MR. LAWER continued that the bank waits once those instructions are issued, if this transaction is being closed at a title company, until the seller has gone to the title company and executed the deed, and the buyer has gone to the title company and executed a note and the mortgage. Following that, the bank waits until the deed is recorded and the title company notifies all parties, which is normally at least a day after the documents are executed. Number 1494 MR. LAWER explained, under those circumstances, the bank pays the title company the proceeds of the loan when the title company notifies the bank that the deed has been recorded. According to HB 247, the bank would have to pay the title company the proceeds of the loan conditionally at least a day in advance of that recording. He noted the bank would be charging its customer interest from its disbursement date, not from the date the title company disburses. Number 1532 CHAIRMAN ROKEBERG questioned Mr. Lawer briefly on occupancy and closing dates. Number 1580 CHAIRMAN ROKEBERG asked Mr. Lawer if he was suggesting that when people execute their deeds and assume they now own their homes, the money has not changed hands. Number 1601 MR. LAWER said he wasn't sure he understood. Number 1606 CHAIRMAN ROKEBERG said Mr. Lawer had stated that the lender had to wait until the buyer and seller executed their note and their deed. Then, usually at least a day after, the lender funded. Chairman Rokeberg commented that most people assume they have purchased their home at the point they executed the documents. He noted, "I think the court of law would probably indicate that whatever cause of (indisc.) you had, either in damages or equity, that you had purchased your property then but you're suggesting that you normally fund them a day later -- is that right?" Number 1635 MR. LAWER disagreed. He stated, "Assuming I'm the buyer, I'm telling the title company, 'Don't give the seller the money until you have, to deliver to me, his deed of conveyance.' And vice versa, the seller is saying, when - when he signs that deed on - on Monday, and gives it to the title company, 'Don't give this to the buyer and cause it to be recorded until you've got money in hand to pay me.' So, on the day that the documents are executed, if you will, ... there is not presently any - any conveyance. That's - that's the law the way it is today." MR. LAWER noted there is a constructive delivery to the title company of a deed and maybe the proceeds, but the transaction doesn't "incur" until a later point, when all conditions are satisfied. Number 1699 CHAIRMAN ROKEBERG noted that included the conveyance of the consideration and the money. He further noted, "So people's assumptions aren't quite correct. It's the operation of law that dictates that." Number 1709 MR. LAWER agreed and said, "I think you would find your way to that same conclusion by reviewing the ... instructions that are routinely furnished to the title companies ... in their own form. It is a matter of contract, yes." Number 1726 CHAIRMAN ROKEBERG noted he could appreciate many practical implications in the process. He asked if the lender normally waited until it was actually in receipt of the deed before issuing the draft for the funds. Number 1758 MR. LAWER said the lender waits until the title company notifies the lender that it is in a position to go forward, and is prepared to furnish the lender with the policy of title insurance required by the lender in connection with the transaction. At that time the lender funds the loan. Number 1784 CHAIRMAN ROKEBERG mentioned variable occupancy and closing dates and commented, "I guess that's the whole point of this bill -- is when you're going to actually take possession legally, and you're suggesting it's upon the receipt of the conveyance and the - the completion of the transaction. ... I suggest that the intent here is to make sure that those monies are in place so that the transaction can be completed, and I think we should both be in concurrence on that." Number 1820 MR. LAWER said that objective is not necessarily offensive, at least from the banker's standpoint. He noted the unintended consequences of HB 247 raise, perhaps, the strongest objections. Number 1844 CHAIRMAN ROKEBERG asked, "Do you actually don't accrue interest on the date it was executed, the following date when it was recorded, is that your practice?" Number 1852 MR. LAWER answered in the affirmative. Number 1878 WILLIS KIRKPATRICK, Director; Division of Banking, Securities and Corporations; Department of Commerce and Economic Development, came forward to testify on HB 247. Number 1898 MR. KIRKPATRICK related a story about a friend, Lee Coffman (ph), a former president of Alaska Federal Savings Bank, who purchased a piece of property in Juneau and experienced an abnormal practice at a title company which included a delay in recording. Mr. Kirkpatrick noted this was not under his jurisdiction and he was in the process of advising the Division of Insurance about the situation. Number 2012 MR. KIRKPATRICK recommended some amendments to HB 247. On page 4, line 21, "financial institution," he suggested the committee consider replacing (A) and (B) with "(A) whose deposits are insured by an agency of the federal government." Mr. Kirkpatrick noted this wording includes both (A) and (B), and has been used elsewhere in Alaska statutes. Number 2097 MR. KIRKPATRICK referred to Section 4, page 5, a proposed amendment to Alaska Statute 45.55.110 (g), the Alaska Securities Act of 1959. He noted the reference in (g) is in the offering of securities, allowing a promoter to participate in a stock offering that is not available to the public, but restricting those stocks from sale for a period of three years. MR. KIRKPATRICK mentioned, regarding the other provision, an Anchorage structure known in the 1970s as the "Blue Birdcage." He noted it was a public offering he had registered as a securities examiner but hadn't provided for escrow collection. He described the history of the structure and summarized the definition of escrow collection as, "If you need to raise money for a certain purpose and that purpose has a dollar amount, if you can't raise that, we're not going to let you have it. You need to at least raise that much, or a certain percentage of that much." Number 2221 MR. KIRKPATRICK noted this section was kind of the "apple out of this orange bill" and asked the committee to consider deleting it. He said it had no other effect if left in. Number 2251 MR. KIRKPATRICK referred to page 3, Section 34.75.070, department supervision. He commented that he thought, possibly, the Division of Banking, Securities, and Corporations might be appropriate. However, he is concerned the legislation doesn't give enough instruction to the division to act appropriately. He noted that if the division finds a violation, it needs some sort of a means to act upon that violation. MR. KIRKPATRICK stated the division can use violation language from the banking code or the securities act; this language instructs the division how to proceed if a violation is found. He commented, "The way that it stands now, I'm afraid there's an implied responsibility of the state but if the state doesn't interpret this properly, that it would perform a deep pocket to somebody for neglect of the state." MR. KIRKPATRICK suggested, if the division does have a responsibility, that responsibility be better defined. Number 2319 MR. KIRKPATRICK referred to page 3, Section 34.75.060, civil penalty. He read, "the settlement agent who willfully violates this chapter is liable to the state for five times the amount of the consideration paid." Consideration paid is usually around $230. He noted his trouble, as a bank regulator and a securities regulator, with the wording "wilfully violates," which has the connotation of intent. Number 2366 MR. KIRKPATRICK commented it seems that if there is a problem with someone intending to deceive, the civil penalty isn't spelled out. He noted, "Then coupled with the Section 70, which says that - that the only thing the department is to look at is the one that contains the written complaint. But yet, if we find, on an audit or an examination, that somebody is wilfully ... violating the law, we're restricted from looking at other - other activities that the escrow agent has." Number 2394 CHAIRMAN ROKEBERG indicated the committee would take Mr. Kirkpatrick's suggestions under advisement and asked Ms. Webb if she would care to comment on any of the testimony. Number 2427 MS. WEBB referred to Mr. Lawer's testimony stating HB 247 was unnecessary. She said part of the reason the Alaska State Escrow Association feels the proposed legislation is necessary is because many lenders are unwilling to fund into escrow prior to recording without legislation requiring them to do so. Although the escrow companies can say they are unwilling to proceed, the lenders can go to another title company or escrow company. She commented that this allows for an uneven playing field with those parties who are playing more involved in the risky business of not having funds in their escrow accounts. Number 2460 MS. WEBB stated it certainly was not the escrow association's intent to include escrow collections in HB 247. She said she thought that was why the definition existed out on page 5 .... TAPE 98-2, SIDE B Number 0001 MS. WEBB continued, "... (indisc.) They're technically a party to that transaction and would have the loan funds, so I think the only part of this [that] would apply to them would be any down payment deposit that the buyer makes would need to be collected -- and I'm not even sure if that would apply by the definition of who the settlement agent is -- because if they're - if they're doing their own in-house financing, I don't see how they could be considered as a disinterested third party on an escrow." MS. WEBB noted, "In regards to funds being funded before recording and interest being charged by the buyer, those same loan funds that are being disbursed into our escrow, we take those right back and deposit them into our trust accounts at local banks, and we don't receive interest on those. So, it's likely there would be a scenario where a lender would funds to us and we would take those funds right back and deposit right into their depository account, if - if that's where we have our trust account. ... The funds could be back in their own account if (indisc.) a local lender." Number 0056 MS. WEBB stated, "Many out-of-state lenders who are in the habit of funding before recording if ... that's required for them to do so, they typically charge interest from the day the buyer signs the note, not necessarily the date of recording." MS. WEBB noted she wanted to clarify Mr. Lawer's comments about next day loan disbursement. She said, "Typically, we record first thing in the morning in order to make sure that those conveyances and deeds of trust are in the first lien position, or a first position, so we can check the title records. Typically a buyer and a seller will sign the business day prior to our recording, and - and it's just function of when we record that would cause the ... one day delay on - on the funding from the date (indisc.) documents are executed and the date that it's recorded." Number 0101 CHAIRMAN ROKEBERG asked if there were problems that had come up in the last couple of years because of the growing number of out-of- state lenders delaying their funding for several days. Number 0114 MS. WEBB responded that was certainly true, noting a few lenders were known to take several weeks from the date documents were forwarded down to them for review before funding. She thought many local escrow companies have taken the position of not recording until they receive loan funds from that particular lender. Number 0141 MS. WEBB noted the industry is changing and growing all of the time and the escrow association is concerned about mortgage brokers and lenders entering this marketplace with no track record. She commented that it is not possible to know all the companies one works with. Number 0158 CHAIRMAN ROKEBERG asked Ms. Webb if she would be comfortable exempting Alaskan banks from HB 247 if that were possible. Number 0168 MS. WEBB noted she thought the liability to the consumer was the same whether a local or out-of-state bank was involved. More knowledge might be available about a local lender, but, she said, in the interest of consumer protection it didn't matter where a lender was located. Number 0199 CHAIRMAN ROKEBERG closed public comment on HB 247. He noted that HB 247 would be held over for further consideration.