WA State Legislative Changes: SHB 2770, SB 6471, SB 6381
The Washington State Legislature has passed three new laws that will go into effect June 12, 2008.
SHB 2770
Governor Gregoire’s legislation implementing the recommendations of the Homeownership Task Force. This legislation impacts Banks, Credit Unions, the Consumer Loan Act (CLA), and the MBPA. The bill addresses prepayment penalties, negative amortization loans, the federal guidance on nontraditional mortgage products and subprime lending, and makes mortgage fraud a class B felony.
SHB 2770 PDF
SHB 2770 Summary
SHB 2270 Final Bill Report
Interesting highlights from the Final Bill Report:
The DFI must adopt a disclosure summary understandable to the average person that includes:
• the fees and discount points on the loan;
• the interest rate of the loan;
• the broker’s yield spread premium;
• the presence of any prepayment penalties;
• the presence of a balloon payment;
• whether or not property taxes and property insurance is escrowed; and
• other key terms and conditions of the loan.
A residential mortgage loan may not be made unless the summary is provided by a financial institution to a borrower within three days of a loan application. If the terms of the loan change, a new summary must be provided to the borrower within three days of the change or at least three days before closing, whichever is earlier.
Steering
A person subject to licensing under the MBPA or the Consumer Loan Act may not steer, counsel, or direct any potential borrower to accept a residential mortgage loan with a risk grade less favorable than what the borrower would qualify for under the lender’s existing underwriting standards. The licensee must prudently apply the underwriting standards to the information provided by the borrower.
Prepayment Penalties
A financial institution may not make or facilitate the origination of a residential mortgage loan that includes a prepayment penalty that extends beyond 60 days prior to the initial reset of an adjustable rate mortgage.
Negative Amortization
A financial institution may not make or facilitate the origination of a residential mortgage loan
that is subject to the Guidance and Statement if the loan includes any provisions that result in
negative amortization for a borrower.
SB 6471
This legislation amends the CLA and MBPA. All lenders, except those making loans under chapter 63.14 RCW, must have a license under the Consumer Loan Act. Lending is no longer allowed under the MBPA. Read the FINAL BILL REPORT link below. There is a lot of concern and confusion over this change. More info is forthcoming at the next Mortgage Broker Commission meeting on May 13, 2008.
SB 6471 PDF
SB 6471 Summary
SB 6471 Final Bill Report
SB 6381
Establishes a fiduciary duty relationship between a mortgage broker and his or her client.
SB 6381 PDF
SB 6381 Summary
SB 6381 Final Bill Report
Other links:
Here’s a quick overview from the Wash State Housing Finance Commission.
There must have been some particulary serious violations that prompted this law. Wouldn't it have been easier just to make ...
When the issue of fudicial responsibility began coming to the forefront I felt a sense of relief. I guess I ...
Comment by Roger Ingalls on 1 May 2008:
Hello, in your new digs!
Still, I get no JS insight into the Consumer Loan Act, and the requirement that WA state correspondent lenders were surprised to find that they will be licensed under.
Honestly, I do not see the problem yet…which does NOT mean it is not a problem. A cursory reading of the RCW seems to indicate you have to act like a responsible lender.
So what IS the worry about?
Comment by mf on 1 May 2008:
Hi Roger,
When the legislature was setting forth to make all these changes, there were a couple of loopholes that folks wanted closed.
For example, there are several hundred mortgage brokers in this state who hold an “exemption” from being licensed under the MBPA for a few different reasons. For example, maybe they had direct fanniemae/fredddiemac approval. There were also consumer lenders licensed under the Consumer Loan Act who did consumer loans and also mortgage loans. These folks were exempt from the MBPA as long as they were not also brokering loans. Putting all lenders under the Consumer Loan Act gives DFI authority to regulate several hundred more lenders that would have escaped, for example, the new fiduciary duties laws. Now all of us will be licensed under the CLA.
The new changes also create a system for our state to enter into the new national mortgage license registration system. This way the bad apples who may have been denied a license under DFI, who use to be able to switch over to an unlicensed institution, will now be able to be tracked under the national licensing system.
It will be run by the Conference of State Bank Supervisors:
http://www.csbs.org/AM/Template.cfm?Section=Mortgage_Licensing
Let’s say a firm is licensed to originate loans in multiple states. Now there will be just ONE place to go to renew your license instead of doing things state-by-state.
http://www.stateregulatoryregistry.org/NMLS//AM/Template.cfm?Section=Home3
Instead of trying to juggle mortgage broker licenses with consumer loan licenses, everyone will receive a consumer loan license so that the information can flow into this new system.
http://www.stateregulatoryregistry.org/AM/Template.cfm?Section=Washington&Template=/CM/ContentDisplay.cfm&ContentID=15964
Comment by Roger Ingalls on 2 May 2008:
Wow, that is a huge leap from what the law ACTUALLY says. It says
If a company offers mortgage loans to Washington residents, but does not offer loans in
excess of 12 percent, the company must either be licensed under the Mortgage Broker
Practices Act (MBPA) regulated by DFI, or be exempt from the MBPA.
Summary: The Consumer Loan Act (CLA) is amended to eliminate the 12 percent interest
threshold. Mortgage lenders currently exempt from the MBPA are required to be licensed
under the CLA.
It does NOT give authority to make mortgage brokers currently licensed under the MBPA to now be regulated by the CLA. That’s a good reason for the currently licensed mortgage brokers to be upset.
It might be in the best interest of the DFI to streamline and expand their authority, but it probably won’t be in the best interest of the smaller lending organizations, and there probably won’t be a good return on investment for the consumer.
Comment by chris on 7 May 2008:
This is me rambling on the issue sorry not all of it is linear in thought:
“Mortgage brokers with correspondent lines of credit, with FHA approval in place, with in-house underwriting, compliance, auditing, and training all in place will be able to weather the storm and I predict the cream of the crop will survive”
Above is a quote from your article. You are correct in saying the cream of the crop will survive. The cream of the crop are usually good brokers who decide to get a correspondent line of credit, get the appropriate approvals in place (FHA, FNMA etc). They move from broker to correspondent lender so that they can take control of more pieces of the loan transaction and provide a better service for the consumers. They focus on long term objectives instead of making a quick buck in a refi boom. These companies typically carry higher bonds and have had to amass a net worth of 1MM plus so that they can move from broker to correspondent lender. They typically have great compliance procedures in place to make sure all the rules of lending for both state and national agencies. They typically attract a more seasoned mortgage professional. Overall, these are usually the brokerage companies that you want to do business with.
The problem with this legislation is that it is anti competitive and anti consumer. How? Because it puts those same companies that have ran their business with the focus on growth and sustainability at a distinct financial disadvantage. The CLA license will increase cost by about 2 basis points on each 300K as well as not allow CLA licensed companies to charge the typical fees that brokers and banks charge. The CLA licensed companies will now have to increase rates to cover the costs or charge fees in different areas, this will put the CLA companies at competitive disadvantage in rates and will confuse the process for the consumers even great if the fees are not common among the banks, brokers and CLA companies.
How this bill unanimously passed the house and senate without consideration for the impact this has on the correspondent lenders is moronic at best. It was stated that the impact on correspondent lenders was overlooked. How does a government created task force forget about the impact on one of the only three (brokers, banks and correspondent lenders), players in this industry? There go our taxes hard at work again.
If the correspondent lenders are put out of business now and the broker yield spread is changed in q4 of this year as predicted than it will force many if not most brokers and correspondent lenders out of business. This will greatly reduce competition (brokers originated over 60%, not sure how accurate that number is in today’s market), which in turn greatly reduces the benefit to the consumer. Who will benefit from this? The big banks, that is all. There is a reason that consumers used brokers over banks, it is usually because the consumer received a better deal. Now the banks will have the luxury of increasing their rates and offering consumers higher interest rates.
The banks are really the folks that started this whole mortgage issue in the first place. Somehow the broker has received the blame for selling the products that the big banks and wall street came up with and asked the brokers to sell. I guess there always needs to be someone to point the finger at but we are pointing it at the wrong group of people.
Comment by mf on 8 May 2008:
Hi Chris,
Consumer Loan Lenders have made enormous profits during the housing bubble run-up and I predict correspondent lenders will be able to make their profits with a consumer loan license.
Let’s let the invisible hand of the free market work its magic. If costs go up, that means businesses will have to find a way to offset those costs in order to remain competitive.
I have faith that correspondent lenders are smart enough to compete, survive, and prosper.
Comment by Rita Green on 10 August 2008:
The CLA licens will increse costs that will simply be passedon to the consumer, making them have to come up with more out of pocket expenses to secure a homeloan. It will also force many lenders out of business thereby reducing competition. Compretition is better for consmers because it forces lenders to decrease fees and rates.
I belive the banking industry is trying to drive competitors out of business, so they can have a monopoly on the industry.
Comment by Kevin Haynes on 8 September 2008:
As usual, our state government is a day late and a dollar short. They are reactionary. The part of SHB 2770 regarding a disclosure summary are items that have already been in place. I like the idea of being licensed under the CLA so that all companies will have to adhere to fiduciary responsibility.
Comment by Stephanie Grosely on 10 September 2008:
Our company already had a version of the disclosure summary in place, a little tweaking and it worked perfect. I actually like the idea of using the summary, because it’s usually easier to explain to the borrower than a Good Faith Estimate, and highlights to info. that is important to them.
I also do not think the CLA license is all bad. We may be subject to fiduciary responsibility, but if we’re honest and upfront with disclosing fees, etc. it shouldn’t impact (too much), the way we do business.
Comment by Susan Lohse on 19 September 2008:
I think it’s great that Governor Gregoire is implimenting legislation that 1) makes mortgage fraud and class B felony. It should be! And 2) That Dfi has to adopt a new disclosure explaining to consumers about the the Good Faith and TIL, in a way that the average person can understand. We all know that these disclosures, especially the TIL, is very confusing for the average borrower.
Regarding the CLA license, it seems that the only lenders affected by that bill are the ones that lend money above the 12% threshold, leaving the remainder of us lending on conforming or jumbo loans unaffected by it. Correct me if I’m reading that wrong. It seems to be a great way to regulate those high interest rates loans.
Comment by Michael Belisle on 3 November 2008:
These laws are great as long they are possible to abide by. With all the changes in the way loans are processed and qualifide is it is becoming extremly difficult to approve clients withing 3 days. Adding new terms to what is required may lead to incorrect rates and approval disclosures. Not because the LO’s are intentially misleading clients but because they cannot get the required loan information in time.
Comment by Jeff Rafuse on 4 November 2008:
I have absolutely no problem with the new disclosure form and the general shift in the industry in that direction. I have been openly disclosing and discussing yield spread premiums with my clients for several years, and allowing them to use YSP as a way to reduce closing costs. Susan also made a very good point concerning the TIL. This document is antiquated and does not do a good job presenting the loan to the borrower. The new diclosure does much of what the TIL should do, without the confusion on the “amount financed” and the APR. I am not suggesting we abolish the TIL or the disclosure of APR, but suggesting that we use this time of change to really revamp disclosures overall and make them much more friendly to the average borrower. I feel we are reaching a point of having two many different forms with too much redundancy, which ultimately the borrowers don’t really pay close attention to them, because they are overwhelmed with paper.
Comment by Denise Swafford on 10 November 2008:
I agree that the new disclosure form is great….however since they have left it up to the broker to create the form without a consistent template….there will be issues. Regardless of the form if the loan officer/broker is compitent and dedicated to the fiduciary responsibility they will have fully disclosed to the consumer in terms that they understand.
Comment by Sandi Paradiso on 11 November 2008:
I agree with Michael, that these laws are great if all abide by them.
We all need a check and balance, with everything we do, clearer paper work for the consumer is great, A lot of consumers are not aware of everything in the paper work before they sign, It’s up to us to share and help them understand, I too am worried if they have left it up to the brokers to create there own forms, that will become an issue, the forms need to be standard across the board.
Comment by Sarah Batson on 11 November 2008:
The more informed the consumer is, the better. However, I find that when I sit down with my client and go through their disclosures with them, and then later their redisclosures, they often are overwhelmed by all of the paperwork and repetition and as a result they feel frustration and apathy. I want them to have a good experience and find it difficult to ease this as more and more forms are required.
I also agree that as it is becoming more and more difficult to approve clients gettting them estimations or program options within the 3 days often becomes very challenging.
Comment by Catherine Rawlins on 17 November 2008:
The changes brought by legislation in the State of Washington have been beneficial to the consumer with the exception of the SB6471 which just seems to have added more costs and confusion to the realm of correspondent lenders. I still don’t understand this law.
It looks like the latest DFI version of the disclosure form is going to the one we use. I like it and I know my clients will like it too…But, I wonder if we have use this AND the new RESPA Good Faith Estimate together if we won’t inundate the consumer with repetive information.
Fiduciary responsiblity for loan officers raises the bar of professionalism for our industry. It will be interesting to see of their are lawsuits that are filed regarding a Mortgage Broker’s failure to act as a fiduciary. Has anybody heard of one being filed yet?