HB 13 - REGULATION OF ESCROW ACCOUNTS Number 0620 CHAIRMAN ROKEBERG announced the committee would take up HB 13, "An Act relating to the characterization of, use of, segregation of, deposit of, interest on, and disbursement of escrow money; relating to the recording, filing, and delivery of escrow documents; relating to civil penalties for violations of certain escrow provisions by escrow settlement agents; relating to the supervision by the Department of Commerce and Economic Development of escrow settlement agents; authorizing the adoption of regulations to implement certain escrow provisions; and providing for an effective date." The chairman noted the presence of a proposed committee substitute (CS) and stated he would entertain a motion to adopt the proposed CS as a working document. Number 0651 REPRESENTATIVE HALCRO made a motion that the committee accept the proposed CS, version 1-LS0126\D, Bannister, 1/22/99. There being no objections, the proposed CS was adopted as a work draft. Number 0680 JANET SEITZ, Legislative Assistant to Representative Norman Rokeberg, Alaska State Legislature, came forward to briefly present HB 13. She stated, "House Bill 13 is a bill that the Representative has worked on with escrow people, real estate people, concerned citizens. It's a bill that was before the legislature last year." Ms. Seitz explained, as a simple statement on the legislation, HB 13 would mean the money that was to go to the seller of residential property would be in hand before the title documents were recorded. She referred to information in the bill packets regarding situations where a seller and a buyer had made a deal, all the documents had been signed, the title company and the escrow agent had been told the funds were there, they recorded the documents, but the buyer either stopped the deal or something happened, and the money was not there. At this point, however, the title was in the buyer's name, not the seller's, and the seller did not have his or her money. She noted HB 13 was intended to prevent those situations from occurring. The sponsor statement read: At the request of the Alaska State Escrow Association, this legislation was reintroduced in an effort to assure consumers that their money will be safely received in a timely order, delivered, and properly accounted for when delivered to a settlement agent for a residential real property transaction. Currently, there are no Alaskan laws addressing these concerns. Consumers need to be assured that their funds (which can be rather large amounts) will not be jeopardized and will be available when needed during the course of a residential real estate transaction. From the seller's viewpoint, the execution of a deed and the deposit of that deed will bring forth proceeds upon recording 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 residential property (not commercial property) or creating a security interest in the property that the money required under the escrow agreement must be "Good Funds" available for distribution. An increasing number of incidents have occurred demonstrating the need for Alaska to join the large number of states having "Good Funds" legislation, including Washington, California, and Oregon. In the age of growing electronic commerce, people are shopping the Internet for mortgages and there is an increase in competition from "outside" mortgage companies caused by low interest rates. Problems have arisen from failure of these "outside" companies to properly fund these transactions in a timely fashion, or, in the case of a bankruptcy, at all. In drafting this bill, we have worked with various interested citizens, business groups, and financial institutions throughout Alaska. I would urge your support of this legislation. Number 0756 CHAIRMAN ROKEBERG asked Ms. Seitz to explain the changes in the proposed CS. MS. SEITZ indicated the first difference from the original bill version was on page 4, lines 17 and 18. She stated no change had been made in the definition of "escrow money"; it had simply been placed in alphabetical order, rather than following the definition of "escrow transaction" as it had in the original bill. Ms. Seitz noted the next change was on page 5, lines 12 through 16. She indicated the definition of "residential real property" was intended to clarify that commercial property was excluded; HB 13 concerned residential real property only. Number 0848 REPRESENTATIVE BRICE wondered if commercial property should be included, asking how that worked. CHAIRMAN ROKEBERG replied that he, as the author of the legislation, believed, when reviewing the implementation of this legislation and in working with commercial banks and other institutions, that requiring "good funds" for commercial transactions would not reflect common actual practices, particularly in large commercial transactions. He indicated that a multi-million dollar transaction could be funded in partial points or have other contingencies which needed to be met prior to the release of certain funds. The chairman said he thought the parties in the world of commercial real estate were well-protected, understood the rules of the game, and didn't need extra "(indisc.) protection," unlike residential consumers. He noted that was the legislation's intent; it was very much a consumer protection bill intended solely to have good funds available to the residential consumer, rather than protecting commercial interests and things of that nature. He added that the bill would have been much more difficult to draft, and to have applicable, if it was intended to be used for commercial transactions. Number 0944 REPRESENTATIVE CISSNA asked if the title company couldn't simply make it a standard of practice to not change the title until the funds were in hand. She questioned whether it needed to be a law. CHAIRMAN ROKEBERG referred to a witness who would be testifying via teleconference. He indicated the Alaska title companies would be making this practice standard but he said there was no mandate. The chairman further indicated much of this had to do with electronic commerce and the Internet. He stated Alaska consumers could now shop for mortgages over the Internet and were choosing to take lower interest mortgages from Internet mortgage providers. When they prepared to close the deal, the title or escrow agent, who was the actual agent for the transactional closing, was then subject to the transfer and disposition funds of this out-of-state mortgage banker. Chairman Rokeberg commented it had been the practice in certain instances that money had not been forthcoming or that recordation had been required before funds were released. He indicated this was the opposite of the bill's intent. He said Alaska would be joining at least the three other western states, among other states, with similar legislation. The chairman indicated that without HB 13 there would be nothing restricting the business practice of withholding funds for "the daily and hourly interest accrued to extraordinarily large amounts of funds that we're talking about here." He termed this "the float" and said it was the entire issue there. Chairman Rokeberg stated the sponsor's intent was to protect the individual residential consumer or the average citizen, not letting them get involved in this banking and financial institution practice. Number 1065 REPRESENTATIVE CISSNA mentioned, then, there had apparently been an oversight on the part of the title companies, "for a kind of a (indisc.) ..." CHAIRMAN ROKEBERG said, "It's really a demand that the title companies are a service company, and they can set the procedures but ... they need the help statutorily to make sure that the rules of the game are played, and that's the intention here." He indicated he hoped the additional testimony would provide clarification. Number 1093 REPRESENTATIVE MURKOWSKI noted the fair number of letters in support of the legislation in the bill packet on behalf of the escrow settlement agents and the lack of any materials from the other side, the lenders. She asked what the lenders' response was. CHAIRMAN ROKEBERG referred to the notes on the previous legislative session's HB 247, the same bill. He stated they worked closely with the banking institutions and the Alaska Bankers Association to modify the legislation to meet the requirements of those groups. He indicated the Alaska Bankers Association had decided not to take a formal position on the legislation, which he took as a positive, legislatively speaking. He commented he had spoken with one of the association's officers within the previous hour and he also noted their lobbyist was present at the meeting to ensure everything was done correctly. Chairman Rokeberg said the association had assisted in drafting the legislation, referring specifically to the definition of "settlement agent" on page 5, line 17. The chairman noted that definition had been drafted with the help of First National Bank of Anchorage's David Lawer. The chairman commented that National Bank of Anchorage had a very large escrow business in Alaska handling third-party accounts. However, the bank acted more as a conduit than a closer; therefore, defining the settlement agent as a closer within a real estate transaction was the result of the banking industry's request to the committee. Number 1233 REPRESENTATIVE HARRIS stated he understood and appreciated the situation as a former real estate agent himself. He asked if this was the proper time to bring up a question from, he believed, the Department of Commerce and Economic Development (DCED) that was in the bill packet and was possibly about supervision. CHAIRMAN ROKEBERG indicated he preferred to hear further testimony first. Number 1270 REPRESENTATIVE HALCRO recognized the number of letters in support of the legislation in the bill packet, commenting on one situation where the transaction had been done out of Oregon, the funds were not received, and the company went bankrupt a couple of days later. However, notwithstanding, he wondered if this legislation would impede consumers from shopping online or dealing with out-of-state lending agencies to receive better interest rates. Number 1294 CHAIRMAN ROKEBERG stated that, in his opinion, this legislation would enable Alaskan financial institutions to better compete with those outside institutions, particularly "in this changing age of cyber-business." He indicated this was because consumers would know that the in-state financial institutions could make funds available on the same day for settlement. The chairman noted the reference in the bill to federal law regarding wire transfers [page 3, lines 9 and 10, "(3) a depository check, including a cashier's, certified, or teller's check, that is governed by 12 U.S.C. 4001 - 4010 (Expedited Funds Availability Act)."]. He indicated his recent research led him to believe that sometimes wire transfers could not be closed until the following day. However, he said they had found circumstances where some of these outside mortgage companies, not necessarily related to a large banking or financial institution, might delay as much as two to four days before making solid, positive delivery of the funds to the escrow title insurance agent, "trying to work the float." Chairman Rokeberg pointed again to this as the source of the problem. Number 1373 MS. SEITZ indicated there were two additional changes in the proposed CS. Line 24, page 5, contained the new short title [Good Funds Act] and line 28, page 5, contained the new effective date [July 1, 1999]. Ms. Seitz confirmed the effective date had been changed from the year 2000. CHAIRMAN ROKEBERG indicated the committee would find from the testimony that the title businesses had changed their practices regarding this subject as a practical matter in the past couple of months. He indicated it seemed unnecessary to wait another 11 months for this bill to take effect, noting the traditional practice of using the beginning of the fiscal year for enactment of legislation without an immediate effective date. Chairman Rokeberg stated the committee would take testimony. [There was some discussion between the chairman and the Anchorage teleconference moderator regarding the locations and number of witnesses.] Number 1460 TERRY BRYAN, Board Member, Alaska Land Title Association; President, First American Title of Alaska, testified via teleconference from Anchorage in support of HB 13. He indicated both the Alaska Land Title Association, and himself as a private entrepreneur with the First American Title of Alaska, saw this primarily as a consumer issue, and, from within the industry, did not feel an in-state and/or out-of-state lender had a competitive advantage resulting from electronic banking, electronic transfers and so forth. Mr. Bryan described that the seller and buyer went through a real estate transaction in good faith, with the settlement agent facilitating that transaction. He indicated the title was transferred on completion and the buyer came into possession, but funds might or might not be available to the seller, even though the seller might need those funds for another transaction. Noting there were 25 to 30 settlement agents throughout the state, Mr. Bryan commented that the recordation of a real estate transaction as a "nonavailability" of immediate funds occurred a few times every week; it was not necessarily a very rare occurrence. Mr. Bryan said it could simply be that the transaction had been completed and was recorded, the money was being wired from one bank to another, and, for whatever reason, the money did not get transferred that day. He noted a recent three-day weekend, describing a situation that occurred in their office: a buyer was in possession of a home but the money was not transferred for four days because a clerk keyed the wrong account number. Mr. Bryan stated there could be many reasons a transaction was completed but the funds were not being held by either a settlement agent or the trust account; the funds were still with a funding source "either 'Outside,' different city, different location." He indicated the legislation's purpose was more to protect the integrity of the transaction and the buyer and seller. Number 1622 MR. BRYAN referred to one of the committee member's earlier question about whether this wasn't a settlement agent issue and couldn't the settlement agents make that a matter of policy. Mr. Bryan indicated he did feel, on the surface, that this was a part of all settlement agents' fiduciary responsibility to ensure the viability and integrity of any particular transaction. However, he stated, with 25-plus settlement agents in Alaska and the same number or more mortgage companies and/or real estate lenders buying for different businesses, there was the likelihood that many companies, in order to expedite a transaction and to "facilitate (indisc.) possession," might not always follow what might be a sound business practice. He stated they felt "good funds" legislation was needed to protect the sanctity of the transaction and the individual buyer and seller." Number 1691 CHAIRMAN ROKEBERG referred to an earlier conversation with Mr. Bryan and Ms. Seitz about commission letters being included as "items" under the bill's definition section. MR. BRYAN said he did not believe that was his correspondence. Number 1725 REPRESENTATIVE MURKOWSKI asked if Mr. Bryan felt the actions of the settlement agents he described as occurring were inadvertent, or were they being done by the settlement agents in an effort to make the clients happy. She commented that Representative Rokeberg indicated the industry's practice in the past few months had been to delay recordation until the funds were available. Representative Murkowski also noted she had been reviewing the bill's civil penalty section. Number 1778 MR. BRYAN replied, to clarify Chairman Rokeberg's comments, that they were hoping, effective February 1, 1999, it would become the practice of the title companies to follow sound business practices and a good funds format "in receiving funding prior to recordation subsequently prior to further disbursement." He indicated that practice was presently rarely occurring among the 20-plus settlement agents from the title industry. Mr. Bryan stated the Alaska Land Title Association had passed a unanimous resolution at their December board meeting, subsequently adopted by all the members, that effective February 1, 1999, this policy would be voluntarily followed. Mr. Bryan said, therefore, they were moving in that direction. He noted not following a good funds practice had occurred over the course of the years for many different reasons, whether competitive or "in working with a (indisc.) -- a good relationship with a specific lender, a mistake, absolutely no one's fault, not trying to push a situation to get it closed quicker, and anything else from equipment breaking down." He said multiple situations had occurred since the first of the year, where, for example, they were recording a transaction and had taken the check offer, the person's car ran out of gas as he or she was delivering the check and the check delivery was forgotten, but the transaction was already recorded and the title was transferred. Number 1883 REPRESENTATIVE MURKOWSKI initially indicated some confusion about the imposition of the civil penalty for inadvertent mistakes, subsequently noting it only applied to willful violations. MR. BRYAN commented, regarding the civil penalty, that there would be no recordation until the receipt of funds if the good funds procedure was being followed, and so, therefore, no civil penalty applied. He indicated again that the good funds procedure was not currently being followed, stating the transaction was signed and recorded and then the settlement agent asked for the funds. He said that because the good funds procedure was not currently being followed, there were no willful or unwillful acts, the procedure simply wasn't being followed. CHAIRMAN ROKEBERG confirmed Mr. Bryan had concluded his testimony. Number 1951 ANN RINGSTAD testified off-net via teleconference from Fairbanks in support of HB 13. She related they had sold their house in Anchorage approximately four years ago, signing all the documents and moving out just before Christmas. She said the buyers delayed for a couple of weeks, finally signing off on all the documents and moving into the house. Ms. Ringstad stated the escrow agent called the bank "Outside," asking if the funds were coming by inter-wire transfer. The bank confirmed the funds were coming and the deed was recorded into the buyer's name. After moving into the house, the buyer called the bank in Oregon to stop the funds. She noted the funds were stopped, the house was now in the buyer's name, and the sellers had no money for the house but were still liable for it and the mortgage. Ms. Ringstad stated it took them about four months to straighten the situation out, noting it was a very emotionally "upheaving" experience and she was hoping it would not happen to anyone else. She indicated the problem with the inter-transfer of funds was the escrow companies' procedures to record after receiving a verbal affirmation that funds were coming. She said the problem was, in fact, that the deed was recorded and the funds were never received. Ms. Ringstad stated a number of attorneys told them they would have probably won their case [in court] but it would have taken two years and $30,000. She noted they eventually did get the house back. Ms. Ringstad emphasized her concern was that the funds actually be in hand before the documents were recorded. Number 2067 CHAIRMAN ROKEBERG stated that was the bill's intention, indicating he had inquired with National Bank of Alaska and double-checked the United States Code on wire transfer in response to a concern voiced by Ms. Ringstad. The chairman said a wire transfer might be cleared the following business day under United States statute and, additionally, depending on the time of day in Alaska when a wire transfer occurred, it might clear the next day. However, he noted that was "consistent with this legislation inasmuch as the recordation is an act subsequent to the clearing of the funds." Chairman Rokeberg stated that was the mandate of the bill, "You cannot record until the funds are cleared and even if there's a delay from a timing of an electronic wire transfer, they cannot record until the funds are cleared. In the real instance it was the (indisc.), not the actual transfer of the funds or receipt of the transfer." MS. RINGSTAD agreed, noting they never received the funds but the escrow agent was told that the funds were wired. CHAIRMAN ROKEBERG said, "(Indisc.) with this book because of the steps you have to follow through ... it's certainly the intention of the author that the language is sufficient to do that." He thanked Ms. Ringstad for her letter and testimony, noting he knew both brokers who had been involved in the transaction. He commented it was actually a famous story in the annals of Alaska real estate [history]. He confirmed with Ms. Ringstad the problem resulted from a "condensating" skylight, but the buyer told the bank in Oregon the house was flooding. The chairman accepted Ms. Ringstad's thanks for the legislation. Number 2148 MARY ANN ROWE, President, Alaska Land Title Association; President, Kachemak Bay Title, Incorporated, testified via teleconference from Homer in support of HB 13. She indicated she thought Mr. Bryan had done an excellent job of explaining why the Alaska Land Title Association supported HB 13. She said would just like to reiterate a couple things regarding the bill, mentioning the December resolution and commenting that they were now working with the majority of the bankers and mortgage bankers in Alaska to enact this resolution on February 1. Ms. Rowe noted they had received positive responses but continued to feel HB 13 was necessary. She indicated they were still concerned about those who solely existed on "floats," and some lenders who felt it really wasn't the problem of the title companies that the funds came after recording. Ms. Rowe stated their concern, besides being a good business practice, was to make sure the consumer was protected. She indicated these problems occurred throughout the state, even in Homer, relating a recent situation where a delivery person twice forgot to take the check to the bank. She stated she thought some of the definitions were excellent, noting definitions of "escrow transaction" and "settlement agent" had long been needed, and the ones in HB 13 were very acceptable to the industry. She urged the committee to enact HB 13 that year. Number 2261 CHAIRMAN ROKEBERG asked if the resolution and policy to be established in February was voluntary in nature. MS. ROWE replied it was voluntary but their active membership of all the title companies in the state was going to completely enforce it, with all agreeing in writing to adhere to the February 1 resolution. She confirmed to Chairman Rokeberg that there was nothing mandating mortgage brokers from "floating" or not cooperating with the title companies. She commented that they, as individual companies, would simply have to demand that those funds be delivered prior to recordation; HB 13 was what they needed behind this. Ms. Rowe mentioned a list of "Lower 48" mortgage companies which had declared bankruptcy or which required underwriter approval before closing that she had received from her underwriter. She noted they received these lists about once a month. Ms. Rowe confirmed to Chairman Rokeberg she meant the title company underwriters, not mortgage bankers or lenders, by her use of the term "underwriter." She mentioned "First American," "Pacific Northwest" and "Old Republic" as examples. Number " DAVID A. LAWER, Senior Vice President and General Counsel, First National Bank of Anchorage; Alaska Bankers Association, testified via teleconference from Anchorage on behalf of the Alaska Bankers Association. He noted he had testified the previous year against the bill, generally speaking, because of his view that it might have unintended consequences in connection with one aspect of the business of First National Bank of Anchorage and National Bank of Alaska. He stated the draft went a long way toward eliminating that unintended effect. Mr. Lawer apologized for not commenting sooner on his advance draft copy. He commented he would recommended one simple additional change to ensure that this would not reach the escrow business of the two banks. Mr. Lawer refuted rumors that the banks were opposed to HB 13, confirming the chairman's earlier comments regarding the Alaska Bankers Association's decision not to take a position on the legislation. He stated that was largely because HB 13 operated favorably in many respects in so far as Alaskan banks were concerned, presenting them with some sort of competitive advantage, whether this was an intentional effect or not. Mr. Lawer noted, however, the legislation in its present form did not necessarily accomplish all that was intended. He requested the definition of "settlement agent" be changed by deleting five words and adding one. He also commented he felt the definition of "residential real property" would create some problems; it did not exclude certain commercial transactions as was intended. As an example, he indicated the sale of 100 homes in a block by a developer to another developer or to a retailer would not be excluded by the current definition. [TESTIMONY INTERRUPTED BY TAPE CHANGE] TAPE 99-1, SIDE B Number 0001 MR. LAWER continued, "... (indisc.) handed to the title company (indisc.) imperfect. I do see a lot of effort being made ... with the provisions to make sure that the title company has collected funds before their (indisc.) lawfully to record documents in connection with the covered transaction. That goes a long way to assure that somebody'll get paid. Nevertheless, collected funds doesn't mean that whatever item it is, whether it be an electronic transfer or a check that was deposited, it is not an item that can be reversed. ... Available for withdrawal as a matter of right does speak to the title companies' opportunity to withdraw, but notwithstanding that, if it hadn't been withdrawn ... if a transaction is reversed or in the event of a bankruptcy, I can think of potential situations in which the credit given for an item or the credit given for a wire can be reversed, so it's imperfect in that sense. ... I will offer some assistance if it's requested in that connection, but that's not grounds upon which (indisc.) the Bankers Association [Alaska Bankers Association] or me speaking on behalf of the First National Bank [First National Bank of Anchorage] would oppose the legislation." Mr. Lawer commented the members of his association had discussed this and agreed not to take a position. However, he said he thought their conversation had led to this conclusion: while this legislation did not impact them negatively, it seemed to be a matter of competition and industry that could be accomplished by the title companies through self-policing. He indicated the reaction of the Alaska Bankers Association was somewhat that "once you start having some impact on competition in an industry you start down a very slippery slope," and they felt the legislation was unnecessary. Number 0123 CHAIRMAN ROKEBERG asked Mr. Lawer which five words he would like to see removed. MR. LAWER replied the change was in the definition of "settlement agent" on page 5, line 20. He recommended the deletion of "a loan during the term of the loan" and the insertion of "indebtedness. He indicated he was completely confident this change would prevent any unintended consequences to the other portion of the business of First National Bank of Anchorage and National Bank of Alaska that they understood HB 13 was not targeting. Number 0195 REPRESENTATIVE HALCRO asked Mr. Lawer if he felt the legislation improved consumer protection, again noting the letters of support in the bill packet. He mentioned Mr. Lawer's testimony about competition and the association's neutral position because it felt the legislation gave its members a competitive advantage. MR. LAWER referred to Ms. Ringstad's situation, commenting she had testified she had been told the money was on the way, which left her open to some considerable difficulty. He asked the committee if they would conclude a transaction and transfer their interest in property on the promise that the money was on the way. Mr. Lawer said yes, in that sense, the legislation would, to some extent, protect the unwitting consumer from the prospect of the delay involved when payment was not received or when payment was revoked at a time when it could still be revoked and before the transaction was concluded. Number 0275 REPRESENTATIVE SANDERS asked if the problem was nonpayment or if the problem was premature filing. MR. LAWER replied he thought "premature" was not an accurate word. He said they did have a system that called for the recordation of documents only during a limited period of time. He noted this did create some practical problems in connection with closing a transaction if it involved delay or a nuisance that, to some extent, interfered with legitimate expectations in connection with the transaction. Mr. Lawer said he didn't know a common cure, but suggested there could be changes in the system of recordation which could considerably improve things for the title companies, and also outside lenders. Mr. Lawer stated the current system and the changes proposed by this legislation, whether enacted by legislation or by agreements of the title companies not to record until they had money in hand, worked in favor of local lenders to some extent. He indicated this was because: a) local lenders could accomplish the process quicker than outside lenders, and b) it put the lenders in a position where they could charge at least an additional day of interest in comparison to their present practices. He noted it operated in their favor in both respects. Mr. Lawer said, in response to Representative Sanders' further question about whether this situation could be cured by voluntary actions on the part of the association without legislation, that was the point he had tried to make. However, he reiterated that the Alaska Bankers Association had decided not to take a position on the legislation. Number 0392 REPRESENTATIVE MURKOWSKI asked Mr. Lawer if he had any suggested language regarding the definition of "residential real property". MR. LAWER indicated the transaction should be defined in terms of not only the property being transferred, but also the participants. He said they were talking about a covered transaction being one involving the sale or transfer of residential real property between consumers, noting he agreed with the chairman's comment regarding retail rather than wholesale. Mr. Lawer said he could make some suggestions regarding language, if given some time. Number 0454 CHAIRMAN ROKEBERG thanked Mr. Lawer for his testimony. The chairman declared for the record that he, the chairman, was a real estate broker by profession and also indicated he held stock in National Bank of Alaska and First National Bank of Anchorage. Number 0494 MICHAEL PRICE testified via teleconference from Anchorage in support of HB 13. He noted that although he was a member of the Alaska Land Title Association, he was testifying on his own behalf as a 24-year real estate practitioner. Mr. Price described some real estate closing practices. He said the United States could probably be divided into half, stating the Eastern states did what was called "table" closings, where the buyer and the seller met to exchange documents and payment and this type of legislation was not really needed. Mr. Price said he believed the majority of western states had passed "good funds" legislation. He noted he believed, at least, that most states operated off of a "good funds" concept, with Alaska being one of the few that probably did not. He referred to the voluntary resolution of the Alaska Land Title Association, but reminded the committee that not all escrow closing agents belonged to the association. Mr. Price said he knew of one independent escrow company, and he also commented there were no prohibitions against future escrow companies with less sound and consumer-oriented business practices. He indicated the association's voluntary resolution could be voided in the future and that he still saw need for legislation. Additionally, Mr. Price said he felt the definition of "residential real property" on page 5 did not necessarily include condominiums and he suggested perhaps that could be examined in the coming week or so. Number 0624 CHAIRMAN ROKEBERG asked Mr. Price if he was an attorney at law. MR. PRICE confirmed he was an attorney and had been practicing in Alaska for 24 years, stating, "Twenty-one of which I was proud to practice with (indisc.), one of your past members of the legislature." CHAIRMAN ROKEBERG indicated the committee would be taking up the definition of residential real property later that day, commenting, "(Indisc.) bit of a scrutiny, followed by deleting the last section of it and then introducing in the wholesale aspect, to clarify that conceptually." Number 0657 JEFF BLAKE, Vice President, Pacific Rim Title Insurance Agency, Incorporated, testified via teleconference from Anchorage in support of HB 13. He noted he had submitted a letter in support of legislation the previous Friday to the committee by facsimile and said he would just like to speak to a couple issues he had heard there that day. Mr. Blake noted that in almost all escrow closings in the title companies, the funds the buyers owed were required by the title companies to be in good, hard funds. He also referred parenthetically to instances back in the 1980s when, at times, the title companies would have required the same of the sellers' funds owed to close the transaction. Mr. Blake described that there were two transactions in the average deal: 1) the transaction between the seller and the buyer, and 2) the transaction between the buyer and his or her lender. Usually, the funds the buyer had negotiated to borrow to purchase the property were the ones they had problems receiving in a timely manner. Mr. Blake indicated the lending institutions have instructed the title companies that money will not be funded until the lender's deed of trust is in a first lien position. He further indicated this put the title companies in a difficult position when attempting to comply with good practices by requiring everything to be deposited on the two transactions. He also referred to Mr. Price's comments about what was voluntary that day, and what everyone wanted to follow without any enforcement mandates or provisions, might not be voluntary tomorrow. MR. BLAKE additionally referred to an issue raised as to legislation and regulation regarding insurance. He noted the State of Alaska, through its "insurance department," had sent out a requirement that all claims to be paid in Alaska by insurance companies had to be paid on an in-state bank, or carry a cover letter indicating an in-state bank that would honor that check on presentation. He stated, "Maybe the consumer issue is being looked at from other aspects too, because most insurance companies are not ... based in this state. So this is a type of issue that us Alaskans, so to speak, are concerned with -- not just necessarily the electronic, but we want to make sure that we get paid for what we worked hard to obtain and pass on." Mr. Blake then reiterated support for the legislation. Number 0787 CHAIRMAN ROKEBERG referred to his concern about the definition of "items" [page 5, line 9, (6) "item"], specifically as it related to commission letters, for example. He stated, "When the broker will have a commission letter that's not -- and the funds are actually not in hand of the settlement agent (indisc.) are accounted for on a debit-credit basis. Do we need to expand that as part of the list of the items, or is that because it's already just accounted for in the closing statement ..." MR. BLAKE indicated he didn't feel that was necessary, stating, "That would be part and parcel as to the credit (indisc.) debit items within the actual settlement (indisc.)." CHAIRMAN ROKEBERG said, "Okay, because just to use the word item' there is actually something that appears in the definition to be equivalent to a cash or convertible to cash." MR. BLAKE replied that was his understanding, that that was more a banking term than an escrow term. He confirmed for the chairman that other debits and credits like pre-paid insurance, utility bills, et cetera, were commonly part of the closing statement and it was his understanding this would be outside the realm of the legislation's intent. In response to the example of a larger sum like an earnest money payment held in escrow by a broker which would be debited against the commission payable, Mr. Blake indicated he did not think this would be an item under the bill's definition. He noted, "It would be items that would go on the settlement statement that would go to the bottom line to determine who deposits what funds to complete the transaction." Number 0882 CHAIRMAN ROKEBERG asked Mr. Blake's view on Mr. Lawer's recommendation to change the definition of settlement agent. MR. BLAKE indicated he had no objections to that change. Remembering an additional point, he added, "I hear a lot of concern about the monies being available and (indisc.) being available, but in the bill itself ... I think the recording is contingent upon us having funds necessary to be dispersed at that time." He noted that didn't necessarily mean the entire purchase price; it was basically just what the parties had agreed upon. Mr. Blake gave the example he and the chairman had discussed the previous year of a $6 million loan on a projected construction project, commenting that they only needed the lot sale price to be disbursed at the time they were recording. Number 0929 CHAIRMAN ROKEBERG indicated that was the reason they were trying to exclude commercial transactions. MR. BLAKE noted, in turn, that the disbursement of certain funds by the settlement agent could be excluded by agreement. CHAIRMAN ROKEBERG noted, "That would also provide for what would be typically an individual construction loan for a residence between an individual and a banking institution ... where there's progress payments and therefore ... periodic draws against the principal?" He confirmed Mr. Blake agreed. MR. BLAKE added, "That would allow that so that your initial draft could pay for the lot -- the bank would not have to disburse the whole construction loan at that point." Number 0974 REPRESENTATIVE MURKOWSKI confirmed they were discussing page 2, lines 22 through 26, on disbursement of escrow money, subsection "a" [Sec. 34.80.040(a)]. Number 1008 D.J. WEBB, Past Legislative Affairs Committee Chair and Past President, Alaska State Escrow Association; Senior Escrow Officer, First American Title of Alaska, testified via teleconference from Anchorage in support of HB 13. She stated the escrow association had been striving for the legislation for several years and was very appreciative of the chairman's sponsorship. Ms. Webb noted, "Buyers and sellers normally come to the escrow table expecting that all parties are complying with the rules of escrow. Escrow's where monies and documents are deposited with a third party so that there could be no withdrawal of those items." She commented that the general public was not familiar with the lenders not funding into escrow and was quite surprised when funds were not available. Ms. Webb said she thought HB 13 was important to get the lenders on the same rules of escrow: the funds have to be available before the transaction is recorded. MS. WEBB stated she did not think it was out of line to expect Alaska to follow suit with the other western states which have enacted the "good funds regulation." She noted real estate has always been an extremely competitive industry and customer demands often dictate business practices. It has not been unusual for a lender to specify compliance with their nature of business. She indicated she did not think that simply having the title companies all agree to a certain practice would alleviate that pressure from lenders. She stated they wanted a safe area for real estate transactions to occur, commenting they felt the passage of HB 13 was very important to ensure that consumer protection, so that all industry players were on the same set of rules. Number 1142 CHAIRMAN ROKEBERG confirmed there were no other witnesses wishing to testify on HB 13, noting some materials had been received from the Kodiak Legislative Information Office (LIO) to be included in the bill packet. The chairman announced the public testimony on HB 13 was closed. He stated he would entertain a "conceptual" amendment to page 5, subsection 8, beginning on line 20. REPRESENTATIVE HALCRO moved that the committee make an amendment to the proposed CS on page 5, subsection 8, line 20, by deleting the wording "a loan during the term of the loan" and inserting "indebtedness", per Mr. Lawer's recommendation. Number 1212 CHAIRMAN ROKEBERG asked if there were any objections to the amendment. There being none, Conceptual Amendment 1 was adopted. Number 1228 CHAIRMAN ROKEBERG himself moved a conceptual amendment on the definition of "residential real property" on page 5, subsection 7, beginning on line 14. He offered the deletion of the wording on line 14 after "fewer" and before "if" to the end of the paragraph, deleting, "if the real property has one or more other buildings, those buildings may not contain dwelling units and may not be used for commercial purposes;". The chairman said he thought this confused the issue and asked "that the drafter add clarifying language to permit wholesale activities and to make sure that such attached housing as condominium developments are not swept into an exclusionary portion of the definition." He asked if there were any objections to Conceptual Amendment 2. Number 1297 REPRESENTATIVE BRICE confirmed the language to be deleted. CHAIRMAN ROKEBERG indicated he thought the testimony emphasized that wholesale activities should not be proscribed, and attached housing like condominiums should be covered. Number 1372 CHAIRMAN ROKEBERG asked if there were any objections to the amendment. There being no objections, Conceptual Amendment 2 was adopted. The chairman asked the will of the committee regarding the legislation. REPRESENTATIVE BRICE questioned whether the chairman wished to make any changes to the definition of "item" on page 5, regarding letters of credit or possibly other issues. CHAIRMAN ROKEBERG indicated he felt the testimony of Mr. Blake showed for the record the issue had been addressed and there was clarity on that. Number 1438 REPRESENTATIVE CISSNA asked if the DCED had any recommendations on HB 13. CHAIRMAN ROKEBERG noted the department was in attendance at the meeting and confirmed no one from the department wished to make any comments. The chairman indicated there had been some concern from the department about the supervision of the bill's provisions, stating, "But we have actually even given them the right to regulate but they don't have to take it up, and there is a private cause of action here - that was the intention of the sponsor - we do not want to create a bureaucracy. ... The question that revolves around the issue of whether or not the industry itself could be self-policing ... I think is a valid question, and I, certainly for one philosophically, particularly, do not want to add [an] additional clause to the bill. But it seems to me because of interstate commerce and the competition from outside financial institutions, that if we don't codify this in our statutes as the other western states have, we will be putting our institutions in a situation where they weren't being competitive on an equal basis. In other words, there could be mortgage companies and even independent escrow agents that were not members of the Alaska association who conduct themselves as they so desired with no constraints." Indicating his dislike of additional laws and regulations, the chairman, however, stated it was clear from the evidence and the testimony that there was a need in the commerce of the state to be able to provide this type of protection to individuals. Number 1553 REPRESENTATIVE HALCRO indicated he thought, from comments attached to the fiscal note, that the DCED was concerned about some liability against the state for not supervising in the case of loss. He asked if the chairman felt the department would be protected by the ability given, but not mandated, to regulate. CHAIRMAN ROKEBERG replied he did not care to speculate on the potential legal liabilities of the state "for omission, given this litigious nature of society. We can only hope and pray that they won't." The chairman indicated he was not aware of any instance where the failure to regulate in that regard, in the absence of anything else, showed liability. He noted there were many areas of private conduct and commerce in the state that were not regulated at all. Number 1620 GINNY FAY, Legislative Liaison, Office of the Commissioner, Department of Commerce and Economic Development, came forward to testify. She stated the committee could address this situation one way by changing on page 2, line 2, the "shall" to "may" [current language: "The department shall supervise the compliance of settlement agents with the provisions of this chapter ...."]. Ms. Fay noted she interpreted the current language as obligating the department to supervise if there was a complaint. Ms. Fay also offered an alternative solution, if the committee was concerned about excessive regulation bureaucracy, of deleting bill sections 34.80.070 and 34.80.080 completely, so there could be no confusion that it would be a civil process not involving the DCED. She noted the department would not have any problems with that deletion. Number 1672 CHAIRMAN ROKEBERG commented he would be happy to debate that, questioning whether staff had any objections to the removal of those two bill sections. The chairman stated he would entertain a motion to delete those two sections if the committee wished to do so. Number 1721 REPRESENTATIVE BRICE indicated he thought there was a certain amount of value to allowing a consumer in this situation to approach the department as an intermediary step rather than filing a lawsuit, given the problems with the court system as it was. He confirmed the chairman's comment that it provided more work for the department. CHAIRMAN ROKEBERG stated, "... providing the private cause of action ... that's why I left it in ..." REPRESENTATIVE BRICE noted, then, on the other hand, what the alternative was. He said the next step was the courts and referred to the backlog of judicial cases. He said it might be that the department could be able to act as an arbiter in a controverted case to minimize the problems. Number 1807 CHAIRMAN ROKEBERG commented that the department had bee kind enough to provide a zero fiscal note, stating he would be the first to recognize there was a potential for the DCED to take up a complaint if it came forward. He noted this, in essence, did equate to some cost. On the other hand, he indicated Representative Brice had made the other argument, which was why that had been left in the bill. REPRESENTATIVE BRICE continued, asking how many times per year this situation would occur. He confirmed the chairman felt it would not happen that often. CHAIRMAN ROKEBERG indicated the importance was that the Alaska Land Title Association was making a change of practice he felt they would not have been comfortable making without the accompanying legislation. He noted the practice itself would be self-policing and he said it would be a rare occurrence. REPRESENTATIVE BRICE added, "And if it's a rare occurrence they should be able to handle it fairly easily, and if they can't, it goes to the courts." CHAIRMAN ROKEBERG indicated he didn't feel the change from "shall" to "may", or the deletions of sections 070 and 080, would be a seriously damaging blow to the legislation, noting he felt it was probably a carry-over from last session and things had changed somewhat since that time. Number 1923 REPRESENTATIVE HALCRO stated he would support deleting sections 070 and 080 simply because he didn't think they wanted the DCED to become the "Better Business Bureau." However, he indicated he thought the more serious concern was that, with the inclusion of language stating the DCED shall supervise, when one of these cases did occur and went to court because a resolution could not be reached, the state would be named as liable. Representative Halcro indicated it would only take one case. He added he thought if the department was comfortable deleting those two sections, the committee should do so. He indicated he felt that if it was a private cause of action, the parties should be allowed to "battle it out" without the state's involvement, adding he felt the department should not be involved at all if it was not given any authority. Number 1993 REPRESENTATIVE MURKOWSKI said she would echo Representative Halcro's comments. She noted the "teeth" in the legislation was a civil penalty. She also referred to the bill's language that said the department could not audit the records of the settlement agent ["Sec. 34.80.070. Department supervision ... However, the department may not audit a settlement agent's records and accounts unless a person who is party to an escrow transaction of the settlement agent has complained in writing to the department about the agent's noncompliance with this chapter and the audit is limited to the records and accounts of the escrow transaction to which the person is a party."]. Representative Murkowski indicated she didn't see any reason to include the regulations if they were not going to be adopted. Number 2060 CHAIRMAN ROKEBERG confirmed there were no further questions on this and indicated he would entertain a motion to adopt the suggested amendment. Number 2075 REPRESENTATIVE HALCRO moved that the committee strike Sections 34.80.070 and 34.80.080 and the associated references to the DCED from the proposed CS. Number 2108 CHAIRMAN ROKEBERG asked if there were any objections to Conceptual Amendment 3. There being none, the amendment was adopted. The chairman asked the committee if there was any further discussion on HB 13. There being none, the chair stated he would entertain a motion. Number 2150 REPRESENTATIVE BRICE indicated he was concerned that the changes to the title were made so it was reflective of the bill. CHAIRMAN ROKEBERG stated that was their intent. Number 2199 REPRESENTATIVE HALCRO made a motion to move CSHB 13, version 1-LS0126\D, Bannister, 1/22/99, out of committee, as amended, with the attached zero fiscal note and individual recommendations. There being no objections, CSHB 13(L&C) moved out of the House Labor and Commerce Standing Committee.