AN ACT Relating to financial institutions; adding a new chapter to Title 30 RCW; and providing an effective date.

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

NEW SECTION. Sec. 1. Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter.

(1) "Borrower" means a person who becomes obligated on a real estate loan agreement, either directly or indirectly, and includes, but is not limited to, mortgagors, grantors under trust deeds, vendees under conditional land sales contracts, and persons who purchase real property securing a real estate loan agreement, whether the person assumes the loan or purchases the property subject to the loan.

(2) "Direct reduction provision" or "capitalization provision" means any provision which is part of a real estate loan agreement, whether incorporated into the agreement or as part of a separately executed document, whereby the borrower makes periodic prepayment of property taxes, insurance premiums, and similar charges to the lender or the lender's designee, who applies the prepayments first to accrued interest and then to the principal amount of the loan, and upon payment of the charges, adds the amount of the payment to the principal amount of the loan.

(3) "Escrow account" or "reserve account" means an account which is a part of a real estate loan agreement, whether incorporated into the agreement or as part of a separately executed document, whereby the borrower makes periodic prepayment to the lender or the lender's designee of taxes, insurance premiums, and similar charges, and the lender or the lender's designee pays the charges out of the account on the due dates.

(4) "Lender" means a person who makes, extends, or holds a real estate loan agreement and includes, but is not limited to, mortgagees, beneficiaries under trust deeds, and vendors under conditional land sales contracts.

(5) "Lender's security protection provision" means a provision which is a part of a real estate loan agreement, whether incorporated into the agreement or as part of a separately executed document, whereby the borrower prepays, pledges or otherwise commits cash or other assets owned by the borrower in advance of due dates for payments of property taxes, insurance premiums and similar charges relating to the property securing the loan in order to assure timely payment of the charges and protect the lender's security interest in the property, and includes, but is not limited to, escrow accounts, direct reduction provisions, capitalization provisions, and pledges of savings accounts.

(6) "Person" means individuals, corporations, associations, partnerships and trusts, and includes, but is not limited to, banks, trust companies, national banks, savings banks, savings and loan associations, private bankers, credit unions, investment companies, insurance companies, pension funds, and mortgage companies.

(7) "Real estate loan agreement" or "real estate loan" means an agreement providing for a loan on residential property, including multi-family, mobile homes, and manufactured housing, occupied by the borrower in the amount of one hundred fifty thousand dollars or less, secured in whole or in part by real property, a mobile home, or manufactured housing, or any interest therein, located in this state, and includes, but is not limited to, mortgages, trust deeds and conditional land sales contracts.

NEW SECTION. Sec. 2. Except as provided by section 3 of this act, no lender may require as a condition to making a new real estate loan or as a condition to extending, renegotiating, consenting to assumption, or otherwise maintaining in force an existing real estate loan, that a borrower agree to a lender's security protection provision.

NEW SECTION. Sec. 3. (1) A lender may require a lender's security protection provision if such provision is required by state or federal law or regulation.

(2) A lender may require a lender's security protection provision in connection with a real estate loan agreement when:

(a) It is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way by the secretary of housing and urban development or any other officer or agency of the federal government or under or in connection with a housing or urban development program administered by the secretary of housing and urban development or a housing or related program administered by any other officer or agency of the federal government;

(b) It is eligible for purchase by the federal national mortgage association, the government national mortgage association, the federal home loan mortgage corporation, the state housing finance commission, or by any financial institution from which it could be purchased by the federal home loan mortgage corporation; or

(3) A lender may require a lender's security protection provision if a borrower is delinquent in payment of two consecutive semiannual tax payments. A lender's failure to require the provision in one instance shall not constitute a waiver of the lender's right to require the provision in the event of a subsequent delinquency by the borrower in such payments.

(4)(a) A lender may require a lender's security protection provision if the original principal amount of the real estate loan is in excess of eighty percent of the lesser of the original purchase price paid by the original borrower at the time the loan was made or the lender's original appraised value of the property at the time the loan was made.

(b) When the principal amount of the loan is reduced to eighty percent or less of the lesser of the original purchase price or the lender's original appraised value of the property at the time the loan was made, the borrower shall have a right to terminate the lender's security protection provision.

(c) The lender shall notify the borrower of this right in writing no later than December 1 of the calendar year in which the principal amount was valued at eighty percent or less. If the borrower so requests in writing, the lender shall terminate the security protection provision as of the December 31 following the date of the borrower's request. If the lender's security protection provision is an escrow account, upon termination the lender or his designee shall refund to the borrower all funds on deposit therein, plus accrued interest.

NEW SECTION. Sec. 4. Notices required to be given by the lender to the borrower pursuant to section 3 of this act shall clearly inform the borrower, in practical language, of the alternatives available to him or her with respect to security protection provisions and the financial effects of choosing each of the alternatives.

NEW SECTION. Sec. 5. Nothing in this chapter prevents a lender from terminating the lender's security protection provision established in connection with a real estate loan agreement at any time the lender determines that such provision is no longer necessary to protect the lender's security interest in the property securing the loan agreement.

NEW SECTION. Sec. 6. (1) A lender shall not require a borrower to deposit in an escrow account established prior to or at the time of the real estate loan agreement:

(a) An amount in excess of the estimated total amount of property taxes, insurance premiums, and similar charges due and payable as of the date of the agreement; and

(b) The pro rata portion of any charges which will be due and payable within the twelve months following the date of the agreement.

(2)(a) A lender as part of a real estate loan agreement shall not require a borrower to deposit in an escrow account in any month a sum in excess of one-twelfth of the total amount of estimated property taxes, insurance premiums, or similar charges which will become due and payable during the twelve-month period beginning on the first day of the month.

(b) If the lender determines that there will be a deficiency in the escrow account to pay a charge when due, the lender may require additional monthly deposits in the escrow account to eliminate the deficiency by the due date.

NEW SECTION. Sec. 7. (1) Except as provided by subsection (3) of this section, if a lender's security protection provision requires the borrower to make deposits into any account, the lender shall pay interest in the manner provided in subsection (2) of this section.

(2)(a) If the lender offers an open passbook or statement account, it shall pay interest at a rate not less than that provided for its open passbook or statement accounts or six percent per annum, whichever is greater.

(b) If the lender does not offer an open passbook or statement account, it shall pay interest at a rate not less than six percent per annum.

(c) Interest shall be computed on the average daily balance in the account and shall be paid quarterly by crediting to the account the amount of interest due.

(3)(a) This section does not apply to a real estate loan agreement for which federal law or regulation prohibits the payment of interest on deposits under a lender's security protection provision.

(b) This section does not apply to a real estate loan agreement made by the state of Washington or made, or held, for sale to, or sold to, the state of Washington.

NEW SECTION. Sec. 8. In any real estate loan agreement with respect to which a lender does not require a lender's security protection provision, the parties may mutually agree to any arrangement whereby the borrower prepays, pledges, or otherwise commits assets in advance of due dates for payment of property taxes, insurance premiums, and similar charges relating to the real property in order to assist the borrower in making timely payments of the charges. Prior to entering any such arrangement, the lender shall furnish the borrower a statement in writing, which may be set forth in the loan application:

(1) That the arrangement is not a condition to the real estate loan agreement;

(2) If it is an escrow account, whether or not the lender will pay interest and if interest is to be paid, the rate of interest; and

(3) Whether or not the borrower must pay the lender a charge for the service. If a charge is agreed to, the charge shall not exceed the amount of interest income earned under subsection (2) of this section.

NEW SECTION. Sec. 9. (1) If a lender has a requirement that the borrower pay funds into a lender's security protection provision for the payment of property taxes on property that is the security for the real estate loan agreement, insurance premiums, and similar charges, and there are funds in the account, the lender shall pay the taxes or the amount in the account if less than the taxes due and all other charges on or before the due dates for payments.

(2) (a) If the lender fails to make a first semiannual payment of property taxes permitted by RCW 84.56.020, resulting in a requirement that all taxes be paid immediately, the lender shall pay the entire tax and any delinquency charges. The lender may not charge the account for the second semiannual installment until the date it would ordinarily be due. The lender is responsible for any delinquency charges, including interest which accrues as a result of its failure to pay in a timely manner.

(b) If upon discovery of the failure to pay taxes, the lender fails to credit the lender's security protection provision required by subsection (2)(a) of this section, the borrower shall have a cause of action against the lender to recover an amount equal to fifteen times the amount of any interest that accrued on the unpaid property taxes to the date of recovery. Any borrower recovering damages under this section is entitled to reasonable attorneys' fees at trial and on appeal as determined by the court in addition to costs and necessary disbursements.

NEW SECTION. Sec. 10. A violation of this chapter by a lender renders the lender's security protection provision voidable at the option of the borrower. A violation of this chapter by a lender is an unfair business practice under chapter 19.86 RCW.

NEW SECTION. Sec. 11. (1) Except as provided in subsection (2) of this section, this chapter does not apply to a real estate loan agreement that is serviced or held for sale within one year by a mortgage servicing company neither affiliated with nor owned in whole or in part by the purchaser and which is made, extended, or held by a purchaser whose principal place of business is outside this state.

(2) If the purchaser requires a lender's security protection provision prior to entering into the agreement, the mortgage servicing company shall furnish the borrower a statement in writing, which may be set forth in the loan application, that the mortgage servicing company is not required by the laws of this state to pay interest on the lender's security protection provision, and specifically informing the borrower why he or she is not entitled to interest on the account.

NEW SECTION. Sec. 12. This chapter applies to any real estate loan agreement entered into after the effective date of this act.

NEW SECTION. Sec. 13. This act shall take effect January 1, 1986.

NEW SECTION. Sec. 14. Sections 1 through 12 of this act shall constitute a new chapter in Title 30 RCW.

NEW SECTION. Sec. 15. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.