CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2004 No.18
September 29, 2004

Vol 2004 No. 18 September 29, 2004

New Law Permits Electronic Recording

The passage of AB 578 (Electronic Recording Delivery Act of 2004), which becomes effective immediately, permits the state's county recorders to receive and record documents electronically. During the past few years, electronic recordation, in concept, has been seen as a solution to many challenges facing the broader mortgage industry. The recent, extended re-financing boom, which among other things, generated a mountain of recorded documentation, has brought to light deficiencies in the system that is based almost entirely on paper.

The physical handling and transportation of documents for recording, particularly in more remote county offices, is time-consuming and expensive. Some counties face shortages of staff and space, resulting in backlogs of submitted but unrecorded documents. This in part has contributed to problems for lenders, including litigation over the late recording of reconveyance deeds following payoff, and also lenders being subject to heightened scrutiny for charging too many days' interest prior to recording.

The digital age offers the possibility of inexpensive and near-instantaneous delivery and recordation of documents, much in the same way that Check 21 is expected to expedite check processing. But electronic recording is not immune to the challenges that the digital age also brings-concerns over security and fraud. Would electronically available documents be vulnerable to manipulation or unauthorized access? How are filers to be authenticated and, if necessary, traced? Are transmission lines secure? Who would be responsible for establishing standards?

Summary

AB 578 balances most of these potential benefits and concerns by adopting a gradual approach that makes electronic recordation voluntary for filers, limits the entities permitted to file electronically, establishes standards for security, and assigns a statewide agency (the Attorney General's Office) with general oversight and rulemaking authority.

In order to establish an electronic recording delivery system (hereafter, simply "system") a county recorder must first obtain approval by resolution of its board of supervisors, and a "system certification" from the Attorney General.
Initially, the only entities permitted to file electronically are title insurers, underwritten title companies, institutional lenders, and local, state, or federal government entities. Documents that may be filed electronically are "instrument[s] affecting a right, title, or interest in real property." As discussed in more detail below, different rules apply to the filing of "front end" documents like notes and deeds of trust, and "back end" documents like reconveyances.

Voluntary system. It is important to note that banks and other "authorized submitters" are not required to file electronically in any county. Even where a county does accept electronic filing, it must also continue to accept for recording paper documents. Filers who wish to utilize the electronic system are required to enter into a contract to do so with the county. A county recorder may refuse to enter into a contract with a party or may terminate or suspend access to a system "for any good faith reason," such as if the county deems it necessary to protect the integrity of public records, or if the filer breaches the contract or violates a provision of AB 578 or its underlying regulations.

Funding. Counties will fund the creation of electronic recording delivery systems themselves, including the costs of regulation and oversight by the Attorney General. Counties may impose a fee of up to one dollar for each instrument that is recorded, which may or may not be limited to instruments recorded electronically. In addition, fees may be charged on vendors seeking "approval" of software and other services for use in a system, and fees may be charged on authorized submitters. The total fees assessed by a county recorder may not exceed the costs of establishing and operating the system. In essence, a county would not be in a position to establish a system without the backing and tacit commitment of filers to use it.

Safeguards. AB 578 establishes a series of safeguards to ensure that the proposed systems are secure. Most of the duties fall upon the state Attorney General's office, which has the ultimate responsibility to ensure that each county's system is secure and capable of being operated lawfully. The office is also responsible for enforcing standards, monitoring compliance, approving vendors, issuing detailed regulations, and providing a report to the legislature in 2009.

These safeguards directly affect banks and other filers in two ways. First, submitters of electronic records are required to undergo a background check, including fingerprint check, to ensure that any person granted "secure access" to a system has not been convicted of (or is facing pending charges for) a felony or of a misdemeanor related to theft, fraud, or a "crime of moral turpitude."

Second, electronic filers who file front-end documents such as notes and deeds of trust may be subject to audits of their systems under Section 27394 by security auditors designated by the Attorney General. That a submitter's software and equipment may be treated as part of the county's system and subject to audit is not explicitly stated in Section 27394, but is implied in Section 27397.5(c).

Back end filings. Much of AB 578 does not apply to the electronic recording of a reconveyance, substitution of trustee, and assignment of deed of trust by an authorized submitter. Section 27397.5(c) exempts authorized submitters who file these documents from the security audit provisions of Section 27394 and the criminal records check provisions of Section 27395. Instead, the county recorder and the Attorney General must certify that the method of submission will not permit an authorized submitter (or its employees and agents, or any third party) to alter information in the recorded electronic records. The recording of these documents is believed to be less susceptible to fraud against consumers.

AB 578 is considered as an initial step to institute electronic recording in California. The bill explicitly states that the Legislature will consider expanding the system to cover additional submitting entities and digital electronic records in accordance with the experience with the system now being created. As indicated, the bill was passed and signed as urgency legislation, and is thus effective immediately. If you have any questions, you may contact Kevin Gould, CBA's lead lobbyist on the bill at kgould@calbankers.com.

1)The term is defined as "a system to deliver for recording, and to return to the party requesting recording, digitized or digital electronic records." Section 27390(b)(5).
2)AB 578 refers to the definition of "Institutional lender" in Financial Code Section 50003(j)(1), (2) and (4) as follows: (1) The United States or any state, district, territory, or commonwealth thereof, or any city, county, city and county, public district, public authority, public corporation, public entity, or political subdivision of a state, district, territory, or commonwealth of the United States, or any agency or other instrumentality of any one or more of the foregoing, including, by way of example, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
(2) Any bank, trust company, savings bank or savings and loan association, credit union, industrial loan company, or insurance company, or service or investment company that is wholly owned and controlled by one of the preceding entities, doing business under the authority of and in accordance with a license, certificate, or charter issued by the United States or any state, district, territory, or commonwealth of the United States.
(4) A person licensed to make residential mortgage loans under this law.
3)Government Code Section 27391(b). Unless otherwise noted, all citations are to the California Government Code.
4)Section 27391(b).
5)Section 27391(c). Regulations are to be issued by the Attorney General's office.
6)This authority to charge is in addition to any existing authority. See section 27399(b), which states that "The authority granted in this article is in addition to any other authority or obligation under state or federal law."
7)Section 27397(d).
8)See generally sections 27392 - 27398.
9)Section 27395, which sets forth the background check requirement, does not refer to the term "authorized submitter," which is defined and used elsewhere in the bill. However, the intent here is to encompass submitters within the meaning of those having secure access, and it is anticipated that the Attorney General will define the term by regulation expressly to include submitters. See also Section 27397.5(c).
10)That section states that the filing of back end documents such as reconveyances (as contrasted with other real estate documents) is not subject to the auditing requirements of Section 27394 and the background checks of Section 27395.
11)Section 27397.5. This section refers to an institutional lender with a reference to Financial Code Section 50003 rather than the more specific reference in the definition section (see footnote 2), but this discrepancy does not appear to be significant or intended.
12)See paragraph (c) to Section 1 of the preamble to the bill. The bill may be viewed at www.leginfo.ca.gov.