BILL REQ. #:  S-1208.1 

Read first time 02/05/2003.   Referred to Committee on Financial Services, Insurance & Housing.

     AN ACT Relating to mortgage lending; amending RCW 31.04.015 and 31.04.102; and adding new sections to chapter 31.04 RCW.

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

NEW SECTION.  Sec. 1   A new section is added to chapter 31.04 RCW to read as follows:
     The legislature finds that abusive mortgage lending has become an increasing problem in this state, exacerbating the loss of equity in homes and causing the number of foreclosures to increase in recent years. Abusive lending has threatened the viability of many communities and caused decreases in homeownership. While the marketplace appears to operate effectively for conventional mortgages, too many homeowners find themselves victims of overreaching lenders who provide loans with unnecessarily high costs and terms that are unnecessary to secure repayment of the loan. The legislature finds that as competition and self-regulation have not eliminated the abusive terms from home-secured loans, the consumer protection provisions of this act are necessary to encourage lending at reasonable rates with reasonable terms.

NEW SECTION.  Sec. 2   A new section is added to chapter 31.04 RCW to read as follows:
     (1) A licensee refinancing an existing residential mortgage loan or making a loan secured by a subordinate lien against real property must have reasonable grounds for believing that the loan will provide a net tangible benefit to the borrower.
     (2) Making a residential mortgage loan that does not provide a net tangible benefit to the borrower is unconscionable and is a violation of this act.

Sec. 3   RCW 31.04.015 and 2001 c 81 s 1 are each amended to read as follows:
     The definitions set forth in this section apply throughout this chapter unless the context clearly requires a different meaning.
     (1) "Person" includes individuals, partnerships, associations, limited liability companies, limited liability partnerships, trusts, corporations, and all other legal entities.
     (2) "License" means a single license issued under the authority of this chapter with respect to a single place of business.
     (3) "Licensee" means a person to whom one or more licenses have been issued.
     (4) "Director" means the director of financial institutions.
     (5) "Insurance" means life insurance, disability insurance, property insurance, involuntary unemployment insurance, and such other insurance as may be authorized by the insurance commissioner.
     (6) "Add-on method" means the method of precomputing interest payable on a loan whereby the interest to be earned is added to the principal balance and the total plus any charges allowed under this chapter is stated as the loan amount, without further provision for the payment of interest except for failure to pay according to loan terms. The director may adopt by rule a more detailed explanation of the meaning and use of this method.
     (7) "Simple interest method" means the method of computing interest payable on a loan by applying the annual percentage interest rate or its periodic equivalent to the unpaid balances of the principal of the loan outstanding for the time outstanding with each payment applied first to any unpaid penalties, fees, or charges, then to accumulated interest, and the remainder of the payment applied to the unpaid balance of the principal until paid in full. In using such method, interest shall not be payable in advance nor compounded, except that on a loan secured by real estate, a licensee may collect at the time of the loan closing up to but not exceeding forty-five days of prepaid interest. The director may adopt by rule a more detailed explanation of the meaning and use of this method.
     (8) "Applicant" means a person applying for a license under this chapter.
     (9) "Borrower" means any person who consults with or retains a licensee or person subject to this chapter in an effort to obtain or seek information about obtaining a loan, regardless of whether that person actually obtains such a loan.
     (10) "Loan" means a sum of money lent at interest or for a fee or other charge and includes both open-end and closed-end loan transactions.
     (11) "Loan originator" means a person employed, either directly or indirectly, or retained as an independent contractor by a licensee, to make or assist a person in applying to obtain a loan.
     (12) "Making a loan" means closing a loan in a person's name, or advancing, offering to advance, or making a commitment to advance funds to a borrower for a loan.
     (13) "Mortgage broker" means the same as defined in RCW 19.146.010, except that for purposes of this chapter, a licensee or person subject to this chapter cannot receive compensation as both a consumer loan licensee making the loan and as a mortgage broker in the same loan transaction.
     (14) "Officer" means an official appointed by the company for the purpose of making business decisions or corporate decisions.
     (15) "Principal" means any person who controls, directly or indirectly through one or more intermediaries, alone or in concert with others, a ten percent or greater interest in a partnership; company; association or corporation; or a limited liability company, and the owner of a sole proprietorship.
     (16) "Senior officer" means an officer of a licensee at the vice-president level or above.
     (17) "Third party service provider" means any person other than the licensee or a mortgage broker who provides goods or services to the licensee or borrower in connection with the preparation of the borrower's loan and includes, but is not limited to, credit reporting agencies, real estate brokers or salespersons, title insurance companies and agents, appraisers, structural and pest inspectors, or escrow companies.
     (18) "Residential mortgage loan" means a loan secured by:
     (a) A mortgage or deed of trust on real estate in this state upon which there is located or there is to be located a structure or structures designed principally for occupancy of from one to four families which is or will be occupied by a borrower as the borrower's principal dwelling; or
     (b) A security interest on a manufactured or mobile home in this state which is or will be occupied by a borrower as the borrower's principal dwelling.

NEW SECTION.  Sec. 4   A new section is added to chapter 31.04 RCW to read as follows:
     (1) A prepayment penalty may not be charged by a licensee for a prepayment on a residential mortgage loan made on a date that is more than twenty-four months from the origination date of the loan.
     (2) A prepayment penalty may not be charged by a licensee on a residential mortgage loan if the existence of the prepayment penalty was not fully or timely disclosed in writing clearly (a) describing the circumstances in which a prepayment penalty will be assessed, and (b) stating the amount of the prepayment penalty that the borrower would be required to pay if the loan was paid in full at any time after the rescission period of the loan.
     (3) The department of financial institutions may order a waiver of a prepayment penalty if, upon a complaint from a consumer, it finds that the licensee charging the prepayment penalty has violated RCW 31.04.027.

NEW SECTION.  Sec. 5   A new section is added to chapter 31.04 RCW to read as follows:
     (1) A borrower refinancing an existing residential mortgage loan or receiving a loan secured by a subordinate lien against real property is presumed not to have received a net tangible benefit if:
     (a) The loan refinances any unsecured debt and bears an annual percentage rate higher than that of the unsecured debt; or
     (b) The loan will cause the borrower to lose one or more of the benefits, such as a below-market interest rate or nonstandard repayment terms, of an existing residential mortgage loan that originated with or was subsidized or guaranteed by or through a state, local, or tribal government or nonprofit organization.
     (2) A borrower refinancing an existing residential mortgage loan or receiving a loan secured by a second or subsequent lien against real property is presumed to have received a net tangible benefit if the loan meets one or more of the following criteria:
     (a) The loan is a conventional mortgage loan as defined in rule by the director;
     (b) The loan retires a residential mortgage loan or loans, the borrower receives a cash disbursement from the loan, the payments on the new loan are no higher than the payments on the old loan, and the cash proceeds disbursed to the borrower exceed the total closing costs of the loan;
     (c)(i) The interest rate on the loan does not exceed by more than six percentage points for first-lien loans, or by more than eight percentage points for subordinate-lien loans, the yield on treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the licensee;
     (ii) The total points and fees payable by the borrower at or before loan closing does not exceed the greater of six percent of the total loan amount, or five hundred dollars; and
     (iii) The borrower's combined monthly payment amount to service all of the borrower's debt obligations does not exceed fifty percent of the borrower's verified gross monthly income as reflected in the application for the loan; or
     (d) The licensee has obtained from the borrower a signed and notarized statement indicating that the loan provides them with a net tangible benefit and identifies that benefit in the statement.
     (3) For the purposes of this section, "total closing costs" means all costs paid by the borrower to obtain the loan, including but not limited to points, fees, and other costs assessed at closing, whether financed in the loan or paid directly at closing.

Sec. 6   RCW 31.04.102 and 2002 c 346 s 1 are each amended to read as follows:
     (1) For all loans made by a licensee that are not secured by a lien on real property, the licensee must make disclosures in compliance with the truth in lending act, 15 U.S.C. Sec. 1601 and regulation Z, 12 C.F.R. Sec. 226, and all other applicable federal laws and regulations.
     (2) For all loans made by a licensee that are secured by a lien on real property, the licensee shall provide to each borrower within three business days following receipt of a loan application a written disclosure containing an itemized estimation and explanation of all fees and costs that the borrower is required to pay in connection with obtaining a loan from the licensee. A good faith estimate of a fee or cost shall be provided if the exact amount of the fee or cost is not available when the disclosure is provided. Disclosure in a form which complies with the requirements of the truth in lending act, 15 U.S.C. Sec. 1601 and regulation Z, 12 C.F.R. Sec. 226, the real estate settlement procedures act and regulation X, 24 C.F.R. Sec. 3500, and all other applicable federal laws and regulations, as now or hereafter amended, shall be deemed to constitute compliance with this disclosure requirement. Each licensee shall comply with all other applicable federal and state laws and regulations.
     (3) In addition, for all loans made by the licensee that are secured by a lien on real property, the licensee must provide to the borrower an estimate of the annual percentage rate on the loan and a disclosure of whether or not the loan contains a prepayment penalty within three days of receipt of a loan application. The annual percentage rate must be calculated in compliance with the truth in lending act, 15 U.S.C. Sec. 1601 and regulation Z, 12 C.F.R. Sec. 226. If a licensee provides the borrower with a disclosure in compliance with the requirements of the truth in lending act within three business days of receipt of a loan application, then the licensee has complied with this subsection. If the director determines that the federal government has required a disclosure that substantially meets the objectives of this subsection, then the director may make a determination by rule that compliance with this federal disclosure requirement constitutes compliance with this subsection.
     (4) A licensee that charges fees that benefit the licensee, and gives the borrower a good faith estimate of those fees, may not charge an amount for those fees at settlement that exceeds the good faith estimate by more than ten percent.