Brief Description: Enacting the governor's homeownership security task force recommendations regarding responsible mortgage lending and homeownership.

Sponsors: Representatives Kenney, Lantz, Upthegrove, Conway, Morrell, Schual-Berke, McIntire, Hudgins, Simpson and Rolfes; by request of Governor Gregoire.

Hearing Date: 1/22/08

Staff: Jon Hedegard (786-7127).

Background:

Regulation of Financial Institutions
Financial institutions are regulated in accordance with their charters. A financial institution may be chartered in Washington, a different state, or the federal government. An institution that is chartered in Washington is subject to the regulatory authority of the Department of Financial Institutions (DFI).

State and Federal Issuances on Mortgage Lending
In October of 2006, federal financial regulators published the final Guidance on Nontraditional Mortgage Product Risks (Guidance). "Nontraditional" mortgage product include interest-only mortgages, payment option adjustable rate mortgages, and other products that have negative amortization (certain products that result in monthly payments where the payment is insufficient to cover the interest due on the loan). The national associations for state financial regulators adopted parallel standards to address state-licensed mortgage entities that are not subject to the federal guidance.

In June of 2007, federal financial regulators published the final Statement on Subprime Mortgage Leaning (Statement). The statement addresses the use of hybrid adjustable rate thirty year mortgages that have low rates for a two or three year period before adjusting for twenty-seven or twenty-eight year period. The national associations for state financial regulators adopted parallel standards to address state-licensed mortgage entities that are not subject to the federal statement.

Mortgage Broker Licensing
The DFI licenses mortgage brokers and loan originators under the Mortgage Broker Practices Act (MBPA). The MBPA has provisions regarding licensing, continuing education, prohibited practices, examinations, investigations, and criminal, civil, and administrative penalties.

Foreclosure on Mortgages and Deeds of Trust
Mortgages and deeds of trust are two forms of security interest in real property used for real estate financing. A mortgage is a pledge of real property as security for a debt owed to the debtor. A mortgage creates a lien on the real property. A mortgage may be foreclosed only through a judicial proceeding according to detailed statutory requirements and procedures.

A deed of trust is, in essence, a three-party mortgage. The borrower grants a deed creating a lien on the real property to a third party (the trustee) who holds the deed in trust as security for an obligation due to the lender. The deed of trust transfers title to the borrower, yet the trustee has a lien against the property until the borrower pays off the obligation in full. If the borrower defaults on the obligation, a deed of trust may be foreclosed without a judicial proceeding. The trustee may foreclose on the property by conducting a public trustee sale when the required procedural and notice requirements are met. The trustee must provide notice to the borrower thirty days prior to the recording of a notice of sale. At least ninety days prior to a sale, the trustee must record a notice of sale in the office of the auditor in the county where the property is located.

Criminal Profiteering
In 1985, the Legislature passed laws regarding "criminal profiteering". These laws are similar to the federal Racketeering Influenced and Corrupt Organizations (RICO) Act. Criminal profiteering involves the commissioner of a crime listed in the statute for financial gain. Crimes that are included in the statute are violent felonies and felonies associated with gambling, drugs, pornography, prostitution, extortion, identity theft, insurance fraud, and securities fraud. There are criminal penalties and civil remedies for criminal profiteering. The civil remedies include monetary penalties, injunctive remedies, and forfeiture.

In September of 2007, Governor Gregoire established the Task Force for Homeowner Security to evaluate instability in the mortgage market and minimize the impact in Washington. The Task Force met six times between September and mid-December. The Task Force issued a report on December 21, 2007. The report included approximately twenty-four recommendations, including:

• improving disclosure;
• notice to homeowners facing potential foreclosure;
• adoption of the federal guidance and statement by rule by the DFI;
• prohibiting the steering of consumers into higher cost loans;
• limiting prepayment penalties;
• prohibiting certain products that result negative amortization;
• clarifying the duty a mortgage broker owes to a customer; and
• increasing the penalties for mortgage fraud.

Summary of Bill:

A number of definitions are provided. "Financial institution" is defined to include state chartered banks, consumer loan companies, credit unions, mutual savings banks, savings and loans, and mortgage brokers.

Disclosure
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.

State and Federal Issuances on Mortgage Lending
The DFI must adopt rules and apply the Guidance and Statement to financial institutions. The financial institutions must adopt and adhere to policies that are reasonably intended to achieve the objectives in the Guidance and Statement.

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 sixty 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 includes any provisions that result in negative amortization for a borrower.

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 loan product with a risk grade less favorable than what the borrower would qualify under the lender's existing underwriting standards. The licensee must prudently apply the underwriting standards to the information provided by the borrower.

Rules
The DFI is given general authority to adopt rules.

Mortgage Fraud
In the lending process, it is a Class B felony to:

• defraud or mislead any borrower, lender, or person;
• engage in deceptive practices;
• obtain any property by fraud or misrepresentation;
• make, use, or facilitate a deliberate misstatement, misrepresentation, or omission knowing that it may be relied on by another; and
• receive anything of value in connection with a closing that resulted from a fraudulent practice.

A knowing violation or knowingly aiding or abetting a violation is "ranked" on the sentencing grid in the III tier. This places it on a level that gets a sentence ranging from one to three months up to five years in prison.

Mortgage fraud is added to the list of felonies that are subject to the criminal profiteering laws.

Any person who knowingly alters, destroys, or conceals information to impair the investigation of mortgage fraud is guilty of a class B felony.

Examinations, Investigations, and Enforcement
The DFI has the authority to investigate or examine mortgage brokers, state-chartered banks, state-licensed consumer loan companies, state-chartered credit unions, state-chartered mutual savings banks, and state-chartered savings and loans to enforce applicable provisions of the act.

Duties of Mortgage Brokers
Mortgage brokers, loan originators, and people working with or for mortgage brokers must:

• be actuated by good faith;
• abstain from deception; and
• practice honesty and equity in all matters related to their profession.

Notice of Foreclosure On a Deed of Trust
If the property is owner-occupied residential property, the notice must include a statement that provides some specific information for the homeowner to consider about the foreclosure and the possible options the homeowner may have available to them, including low-cost or free counseling and legal help.

Appropriation: None.

Fiscal Note: Requested on January 18, 2008.

Effective Date: The bill takes effect 90 days after adjournment of session in which bill is passed.