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According to the DFI, this fund creates more than $800,000 in annual revenue. Expanding criminal penalties into a class-B felony enhances the state's ability to use these funds.
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Washington State's New Licensing Rules
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Another bill that takes effect in Washington state this month — state Senate Bill No. 6471, an expansion of the state's Consumer Loan Act (CLA) — will affect mortgage-broker licensing. Here are some highlights:
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Brokers who are solely licensed under the state's Mortgage Broker Practices Act (MBPA) can no longer originate their own loans. Under the new legislation, these brokers also must have a CLA license. CLA licensees may either originate their own loans or broker loans.
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The Fannie Mae and Freddie Mac exemption from the MBPA has been eliminated. Previously, lenders that sold directly to Fannie Mae or Freddie Mac were exempt from licensing. The new bill requires companies that originate their own loans to be licensed under the CLA unless they make loans under state or federal laws that relate to banks, savings banks, trust companies or credit unions.
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Licenses are not required for loan-originator employees. All independent-contractor loan originators must be licensed regardless of the license under which they work.
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Decoding the rules
The ideas that borrowers must protect themselves and that "whatever the traffic will bear is permissible" are attitudes of the past in the mortgage industry. Brokers' affirmative obligation now is to deliver a loan product that the borrower understands and that is prudent for that borrower.
When it comes to litigation, it is no longer enough for mortgage brokers in Washington state to simply produce loan documents that borrowers signed. Instead, they now must greatly increase their communication and show the utmost good faith and fair dealing with clients. This includes ensuring that borrowers understand the loan's material aspects. Just giving the information is not enough.
Brokers have the affirmative obligation to offer loan products appropriate for borrowers' risk classification and clearly must avoid excessive loan charges. All communications with consumers -- including advertisements, oral statements and promotional materials -- also must provide clear and balanced information about the products' benefits and risks.
Brokers also should have timely communication that will help borrowers' product selection and should not steer them to a particular product to the exclusion of others. Brokers also must explain costs of reduced-documentation loans, as well as risks such as payment shock, prepayment penalties, balloon payments, and lack of escrow for taxes and insurance.
Controls will become especially important and should include written policies and procedures that cover criteria for hiring and training loan personnel; compliance with applicable laws and regulations; consumer disclosures; and record-keeping.
With their new fiduciary duty, brokers must have practices and procedures in place that are well-documented and that include regular reviews.
It also is important to keep any compliance program in writing. Documenting borrower communication also is critical. An undocumented file will be nearly indefensible in light of the new responsibility for brokers to assure that borrowers understand the loan product, its costs and risks and that the product they receive is appropriate to their circumstances.
Though some brokers in Washington and nationwide may balk at these new requirements, it is important to note that ethical business dealings are key to any industry.
Given the mortgage industry's recent turmoil, ethical behavior is essential for turning its image around. These new bills likely set the stage for doing so.
John Long is a sole-proprietor attorney who limits his practice to mortgage-regulatory-compliance law and defense. He selectively represents brokers in Washington state and various other states before regulatory agencies and in defense of civil-liability claims. He has been actively involved in review and analysis of the Washington state Mortgage Broker Practices Act and administrative code.
Contact Long at john@johnlonglaw.com or (425) 427-9660.
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