Report Title:

Escrow Depository Law

 

Description:

Revises the escrow depository law to: (1) clarify which escrow transactions are covered by the statute and which are not; (2) update the statute to adequately reflect the present day size of the transactions routinely handled by the industry; (3) provide for more flexibility in supervising and regulating the industry; and (4) ensure adequate protection for the consumer.

 


HOUSE OF REPRESENTATIVES

H.B. NO.

1069

TWENTY-FIFTH LEGISLATURE, 2009

 

STATE OF HAWAII

 

 

 

 

 

A BILL FOR AN ACT

 

 

RELATING TO ESCROW DEPOSITORIES.

 

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 


     SECTION 1.  Chapter 449, Hawaii Revised Statutes, is amended by adding three new sections to be appropriately designated and to read as follows: 

     "§449-   Disclosures involving personal property.  An escrow depository that receives, holds, or delivers the money, other consideration, or instrument affecting title to personal property shall disclose in writing to all parties involved in the transaction that the transaction is not covered by this chapter.

     §449-   Submission of security breach information.  Upon discovery or notification of any security breach, as defined in chapter 487N, of the personal information of individuals whose personal information was, or is reasonably believed to have been, acquired by an unauthorized person, the escrow depository shall provide notice of the security breach to the commissioner.  The notice shall be made without unreasonable delay and shall be consistent with any measures necessary to determine the scope of the breach, and restore the reasonable integrity, security, and confidentiality of the data system.

     §449-   Temporary closures and relocations.  An escrow depository may temporarily close or relocate an office for a period of time up to 180 days, or a longer time period as determined to be necessary by the commissioner in the event of an emergency or for other good cause.  For purposes of this section, an "emergency" means a situation of an unusual or compelling urgency that creates a threat to life, public health, welfare, or safety by reason of major natural disaster, epidemic, riot, fire, or such other reason as determined by the commissioner.  Written notice of a temporary closure or relocation shall be provided to the commissioner as soon as practicable and notice shall also be provided to the escrow depository's customers in the form of a sign posted in a safe, conspicuous location on or in proximity to the primary public entrance of the office that has been or will be temporarily closed or relocated.  The written notices provided to the commissioner and the escrow depository's customers shall state the reasons for the temporary closure or relocation, the expected date of reopening, and information regarding where and how customers of the closed or relocated office will be accommodated during the temporary closure or relocation.  Notice of the reopening of the office that was temporarily closed or relocated shall be provided to the commissioner within five days of the reopening."

     SECTION 2.  Section 449-1, Hawaii Revised Statutes, is amended by amending the definition of "escrow" to read as follows:

     ""Escrow" means any transaction affecting the title to real property, including leaseholds, proprietary leaseholds, and condominiums, in which a person not a party to the transaction and neither having nor acquiring any interest in the title receives from one party to the transaction, holds until the happening of an event or performance of a condition and then delivers to another party to the transaction, any money or other consideration or any instrument affecting the title to that real property, all in accordance with the terms of the agreement between the parties to the transaction.  For purposes of this chapter, "escrow" does not mean a transaction affecting title to personal property."

     SECTION 3.  Section 449-1.8, Hawaii Revised Statutes, is amended to read as follows:

     "[[]§449-1.8[]]  Confidential portion of application or records.  (a)  Information contained in any application or record shall be made available to the public unless that information may be withheld from public disclosure by the commissioner under chapter 92F.

     (b)  The commissioner may also disclose statistical data regarding the number of consumer complaints filed against an escrow depository, the general nature of each complaint, and the resolution of each complaint."

     SECTION 4.  Section 449-4, Hawaii Revised Statutes, is amended to read as follows:

     "§449-4  Administrative penalty.  Any person who [wilfully] violates any of the provisions of this chapter, [shall] may be subject to an administrative fine of up to $5,000 for each violation.  [No licensee shall be subject to this penalty for a violation of section 449-16(b) or (c) if the violation was not intentional or resulted from a bona fide error, notwithstanding the maintenance of procedures reasonably adopted to avoid that error.  Examples of bona fide errors include, but are not limited to, clerical miscalculations, computer malfunction, printing errors, and computer programming errors.]"

     SECTION 5.  Section 449-5.5, Hawaii Revised Statutes, is amended to read as follows:

     "§449-5.5  [Net] Tangible net capital.  The tangible net capital of any corporation engaging in the escrow depository business under this chapter shall be not less than [$50,000.] $250,000.  A corporation in lieu of the tangible net capital requirement may alternatively file a bond for [$50,000] $250,000 conditional upon its satisfactory performance of escrow conditions and satisfaction of all escrow liabilities.  The amount of the minimum tangible net capital of [$50,000,] $250,000, or the bond, or a combination of both tangible net capital or bond totalling [$50,000] $250,000 shall be maintained at all times by the licensee.

     [Licensees in operation on May 24, 1973, pursuant to this chapter with a net capital of less than $50,000 shall increase its net capital to $50,000 or file a bond for $50,000, or take action so that a combination of its net capital and bond totals $50,000, before May 24, 1978.]"

     SECTION 6.  Section 449-6, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

     "(b)  The application shall contain the following information:

     (1)  The corporate name, amount of capital, and office   address of the applicant;

     (2)  The names of the stockholders, officers, and directors      of the applicant;

     (3)  Evidence of the character, financial responsibility, experience, and ability of the officers and directors; [and]

     (4)  The names of the proposed escrow officers and their qualifications[.]; and

     (5)  Information necessary to conduct a criminal history record check in accordance with section 846-2.7 for each of the proposed officers, directors, and escrow officers of the applicant, accompanied by payment of the applicable fee for each record check to be conducted."

     SECTION 7.  Section 449-9, Hawaii Revised Statutes, is amended to read as follows:

     "§449-9  Escrow depository's bond.  [Before an escrow depository's license becomes effective, the] (a)  An escrow depository shall [give] at all times maintain a bond given to the commissioner in the penal sum of not less than [$100,000] $200,000, executed by a surety insurer authorized to do business in this State, conditioned:

     (1)  That the escrow depository will honestly, faithfully, and with diligence apply all funds, other consideration, or property and instruments affecting title in accordance with the instructions under which the same were deposited with it, and will promptly account for the same; and

     (2)  That the escrow depository will satisfy all judgments and decrees which may be recovered against it in any action or proceeding brought under this chapter.

     (b)  The aggregate liability of the surety for all breaches of the conditions of the bond shall, in no event, exceed the penal sum of the bond.  In lieu of the bond, an escrow depository may deposit cash[, a] or an unconditional and irrevocable letter of credit[, or securities acceptable to the commissioner]."

     SECTION 8.  Section 449-11, Hawaii Revised Statutes, is amended to read as follows:

     "§449-11  Fidelity bonds[;] or fidelity insurance; deposit.  [A] For all of its directors, officers, and employees who have access to money or negotiable securities or instruments in their possession or under their control, a licensed escrow depository shall at all times either:

     (1)  Maintain a fidelity bond [executed] or fidelity insurance issued by a surety insurer authorized to do business in the State in an amount not less than [$25,000; provided that any bond which is subject to a deductible thereunder in excess of $5,000 per occurrence shall require the prior approval of the commissioner, who may take into consideration, among other factors, the amount of the proposed bond;] $125,000; or

     (2)  Deposit an equivalent amount of cash or [securities under such terms and conditions as are acceptable to the commissioner, an unconditional and irrevocable letter of credit

upon all of its directors, officers, and employees who have access to money or negotiable securities or instruments in its possession or under its control.  Notwithstanding the above provision, the escrow depository may carry bonds or deposit cash or securities above the amounts required by the commissioner.] an unconditional and irrevocable letter of credit."

     SECTION 9.  Section 449-12, Hawaii Revised Statutes, is amended to read as follows:

     "§449-12  Errors and omissions insurance; deposit.  A licensed escrow depository shall at all times either:

     (1)  Maintain a policy of errors and omissions insurance executed by an insurer authorized to do business in the State in an amount not less than [$100,000; provided that any policy which is subject to a deductible thereunder in excess of $10,000, per occurrence, shall require the prior approval of the commissioner, who may take into consideration, among other factors, the amount of the proposed coverage;] $250,000; or

     (2)  Deposit an equivalent amount of cash or [securities under such terms and conditions as are acceptable to the commissioner.] an unconditional and irrevocable letter of credit."

     SECTION 10.  Section 449-15, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

     "(b)  The audited financial statements shall be prepared in accordance with generally accepted accounting principles and the examination by the independent certified public accountant shall be performed in accordance with generally accepted auditing standards.  The financial statements and the independent certified public accountant's report shall include but not be limited to the following:

     (1)  An unqualified opinion on the fair presentation of the financial statements taken as a whole.  To the extent that this is not possible, then a detailed footnote explaining the reason why an unqualified opinion could not be given shall suffice;

     (2)  A direct verification of escrow funds and escrow liabilities.  If less than a one hundred per cent verification is performed, there shall be a separate letter from the independent certified public accountant indicating: the number of accounts verified; the percentage of the verification; the basis for determining the sample size; the method used in selecting the sample items to verify; a description of the sampling technique used; the discrepancies noted; and how the discrepancies were resolved;

     (3)  Footnotes to the audited financial statement showing the escrow funds and escrow liabilities and, to the extent that these amounts differ, a reconciliation of the amounts; [and]

     (4)  A statement as to whether the escrow depository is in compliance with this chapter.  If the independent certified public accountant reports any incident involving noncompliance, the statement shall address whether the noncompliance may have a material adverse impact on the ongoing operations of the company[.]; and

     (5)  A statement as to whether the escrow depository is in compliance with chapter 523A."

     SECTION 11.  Section 449-16, Hawaii Revised Statutes, is amended to read as follows:

     "§449-16  Accounting for moneys, property, etc.  (a)  Every licensee under this chapter shall have the responsibility of a trustee for all moneys, other consideration, or instruments received by it.  No licensee shall [mingle] commingle any such moneys or other property with its own moneys or other property, or with moneys or other property held by it in any other capacity.  All moneys held by a licensee in escrow as herein defined shall be deposited in financial institutions, payable on demand.  Under this chapter, deposits in financial institutions are limited to sweep accounts as described in this section, checking accounts, money market deposit accounts, and savings accounts with no specified maturity date.  Deposits at financial institutions may be held in sweep accounts, provided that:

     (1)  The licensee using the sweep account shall have a net worth of not less than $1,000,000;

     (2)  The sweep account is a deposit account administered by a financial institution in which the moneys over a minimum balance are periodically transferred into a money market mutual fund account invested only in obligations of:

         (A)  The United States government;

         (B)  Agencies backed by the full faith and credit of the United States government; or

         (C)  Agencies originally established or chartered by the United States government to serve public purposes; and

periodically recredited to the sweep account; and

     (3)  The licensee is liable for all moneys transferred to the money market mutual fund account under the sweep account, including any loss of value.

     (b)  No licensee shall [disburse funds from an escrow account until cash and or items sufficient to fund any disbursements from the account have been received and deposited to the account, and with respect to such items the licensee complies with the provisions of either paragraphs (1) or (2) hereof.

     (1)  Where an item has been received and submitted for collection, no licensee shall disburse funds from an escrow account with respect to the item until final settlement of the item has been received by the financial institution to which the item has been submitted for collection.

     (2)  No licensee shall disburse funds from the escrow account with respect to an item drawn on a financial institution until the licensee confirms that sufficient collected funds are on deposit in the drawer's account.

     (c)  A licensee may deliver any money, consideration, or instrument affecting the title to real property prior to funds becoming available for disbursement under subsection (b) if it has received the written consent of the parties to the transaction.] make a disbursement on behalf of a specific escrow unless sufficient collected funds have been received for that escrow."

     SECTION 12.  Section 846-2.7, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

     "(b)  Criminal history record checks may be conducted by:

     (1)  The department of health on operators of adult foster homes or developmental disabilities domiciliary homes and their employees, as provided by section 333F-22;

     (2)  The department of health on prospective employees, persons seeking to serve as providers, or subcontractors in positions that place them in direct contact with clients when providing non-witnessed direct mental health services as provided by section 321-171.5;

     (3)  The department of health on all applicants for licensure for, operators for, and prospective employees, and volunteers at one or more of the following:  skilled nursing facility, intermediate care facility, adult residential care home, expanded adult residential care home, assisted living facility, home health agency, hospice, adult day health center, special treatment facility, therapeutic living program, intermediate care facility for the mentally retarded, hospital, rural health center and rehabilitation agency, and, in the case of any of the above-related facilities operating in a private residence, on any adult living in the facility other than the client as provided by section 321-15.2;

     (4)  The department of education on employees, prospective employees, and teacher trainees in any public school in positions that necessitate close proximity to children as provided by section 302A-601.5;

(5)  The counties on employees and prospective employees who may be in positions that place them in close proximity to children in recreation or child care programs and services;

     (6)  The county liquor commissions on applicants for liquor licenses as provided by section 281-53.5;

     (7)  The department of human services on operators and employees of child caring institutions, child placing organizations, and foster boarding homes as provided by section 346-17;

     (8)  The department of human services on prospective adoptive parents as established under section 346-19.7;

     (9)  The department of human services on applicants to operate child care facilities, prospective employees of the applicant, and new employees of the provider after registration or licensure as provided by section 346-154;

    (10)  The department of human services on persons exempt pursuant to section 346-152 to be eligible to provide child care and receive child care subsidies as provided by section 346-152.5;

    (11)  The department of human services on operators and employees of home and community-based case management agencies and operators and other adults, except for adults in care, residing in foster family homes as provided by section 346-335;

    (12)  The department of human services on staff members of the Hawaii youth correctional facility as provided by section 352-5.5;

    (13)  The department of human services on employees, prospective employees, and volunteers of contracted providers and subcontractors in positions that place them in close proximity to youth when providing services on behalf of the office or the Hawaii youth correctional facility as provided by section 352D-4.3;

    (14)  The judiciary on employees and applicants at detention and shelter facilities as provided by section 571-34;

    (15)  The department of public safety on employees and prospective employees who are directly involved with the treatment and care of persons committed to a correctional facility or who possess police powers including the power of arrest as provided by section 353C-5;

    (16)  The department of commerce and consumer affairs on applicants for private detective or private guard licensure as provided by section 463-9;

    (17)  Private schools and designated organizations on employees and prospective employees who may be in positions that necessitate close proximity to children; provided that private schools and designated organizations receive only indications of the states from which the national criminal history record information was provided as provided by section 302C-1;

    (18)  The public library system on employees and prospective employees whose positions place them in close proximity to children as provided by section 302A-601.5;

    (19)  The State or any of its branches, political subdivisions, or agencies on applicants and employees holding a position that has the same type of contact with children, vulnerable adults, or persons committed to a correctional facility as other public employees who hold positions that are authorized by law to require criminal history record checks as a condition of employment as provided by section 78-2.7;

    (20)  The department of human services on licensed adult day care center operators, employees, new employees, subcontracted service providers and their employees, and adult volunteers as provided by section 346-97;

    (21)  The department of human services on purchase of service contracted and subcontracted service providers and their employees serving clients of the adult and community care services branch, as provided by section 346-97;

    (22)  The department of human services on foster grandparent program, retired and senior volunteer program, senior companion program, and respite companion program participants as provided by section 346-97;

    (23)  The department of human services on contracted and subcontracted service providers and their current and prospective employees that provide home and community-based services under Section 1915(c) of the Social Security Act (Title 42 United States Code Section 1396n(c)), or under any other applicable section or sections of the Social Security Act for the purposes of providing home and community-based services, as provided by section 346-97;

    (24)  The department of commerce and consumer affairs on proposed directors and executive officers of a bank, savings bank, savings and loan association, trust company, and depository financial services loan company as provided by section 412:3-201;

    (25)  The department of commerce and consumer affairs on proposed directors and executive officers of a nondepository financial services loan company as provided by section 412:3-301;

    (26)  The department of commerce and consumer affairs on the original chartering applicants and proposed executive officers of a credit union as provided by section 412:10-103;

    (27)  The department of commerce and consumer affairs on:

         (A)  Each principal of every non-corporate applicant for a money transmitter license; and

         (B)  The executive officers, key shareholders, and managers in charge of a money transmitter's activities of every corporate applicant for a money transmitter license,

          as provided by section 489D-9; [and]

    (28)  The department of commerce and consumer affairs on proposed officers, directors, and escrow officers of the applicant for a license as an escrow depository as provided by section 449-6; and

   [(28)] (29)  Any other organization, entity, or the State, its branches, political subdivisions, or agencies as may be authorized by state law."

     SECTION 13.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 14.  This Act shall take effect upon its approval; provided that sections 6 and 12 shall take effect on July 2, 2009, and sections 5, 7, 8, and 9 shall take effect on January 1, 2010.

 

INTRODUCED BY:

_____________________________

 

 

By Request