A bill aimed at preventing banks from dictating the escrow service to be used in transactions involving real estate-owned (REO) properties is expected to reach California Gov. Arnold Schwarzenegger’s desk following its approval by the state Senate.

Assembly Bill 957, which passed the Assembly in a unanimous 77-0 vote in May, was approved by the Senate on Sept. 1 in a 29-to-4 vote. Because the bill was amended, it must now go back to the Assembly for concurrence before going to the governor’s desk. As an urgency measure, the bill can take effect immediately if the governor signs it into law.

The bill’s author, Assemblywoman Cathleen Galgiani, D-Livingston, claims banks and the federal Department of Housing and Urban Development (HUD) increasingly require the use of specific settlement-service providers when they are the seller of residential property.

Local escrow companies "are being shut out of the (REO) housing market," Galgiani said in a press release.  "Instead of local businesses assisting buyers and expediting the transfer of foreclosed properties to homeowners, they’re literally locked out of the market."

The Escrow Institute of California, which endorses the bill, says banks are directing properties to preselected settlement-service providers "regardless of service or cost." If a potential buyer does not agree to use these services providers, "their purchase offer will not be submitted or, if reviewed by the lender, will be denied."

Although such conduct may already by prohibited under the federal Real Estate Settlement Procedures Act (RESPA), Galgiani and the Escrow Institute believe "California needs to further enforce that the action of banks predetermining title and escrow companies for buyers is prohibited especially with the sale of REO properties," according to an analysis of the bill by Assembly staff.

The bill’s language bars sellers of one- to four-family homes from requiring that title insurance or escrow services provided in connection with the sale of the property be purchased by the buyer from a particular title insurer or escrow agent as a condition of selling the property.

As amended by the Senate, the bill does not prohibit a buyer from accepting the services of a title insurer or an escrow agent recommended by the seller if written notice of the right to make an independent selection of those services is first provided by the seller to the buyer.

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