SENATE BILL REPORT

SB 5303

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

As of February 8, 2011

Title: An act relating to loans made under the consumer loan act.

Brief Description: Regulating loans made under the consumer loan act.

Sponsors: Senators Rockefeller, White, Tom, Nelson, Shin, Keiser, Fraser, Parlette and Kline.

Brief History:

Committee Activity: Financial Institutions, Housing & Insurance: 2/01/11.

SENATE COMMITTEE ON FINANCIAL INSTITUTIONS, HOUSING & INSURANCE

Staff: Alison Mendiola (786-7483)

Background: The Consumer Loan Act (CLA) authorizes the Department of Financial Institutions (DFI) to regulate consumer loan companies doing business in Washington. Consumer loan companies include mortgage lenders and consumer finance companies.

License Required. No person may engage in the business of making secured or unsecured loans of money, credit, or things in action unless licensed by the DFI under the CLA or exempt from licensure. The CLA provides exemptions from licensing for:

An applicant for a license and any officers and principals of the applicant must undergo a background check. A licensee must maintain a surety bond or meet other specified financial requirements. The amount of the bond is based on the annual dollar amount of loans originated with a minimum amount of $30,000.

Powers of a CLA Licensee. A CLA licensee may:

Prohibited Practices. There are a variety of prohibited practices under the CLA to ensure fair, honest, and open practices.

Administrative Enforcement. The Director of the DFI (Director) may deny applications or renewals or suspend or revoke licenses for specified actions or failures to act by an applicant or licensee. The Director may impose fines for violations. The Director may issue an order directing the licensee, its employee or loan originator, or other person subject to the CLA to:

Penalties. Violations of the CLA are violations of the Consumer Protection Act (CPA). The Office of the Attorney General may bring an action on behalf of persons injured by a violation of the CPA. A private party may also bring an action to enforce the CPA. The CPA allows an injured party to receive treble damages, up to a maximum of $25,000.

Certain violations are gross misdemeanors. A gross misdemeanor is punishable by up to one year in jail, or by a fine in an amount fixed by the court of not more than $5,000 or by both such confinement and fine.

In 2009 the statute concerning the exemptions was amended in two different bills. The difference in language could not be reconciled by the Code Reviser. The result is two different overlapping statutes in law.

Summary of Bill: Under the Consumer Loan Act, it is clarified that the exemption regarding loans made primarily for business, commercial, or agricultural purposes does not apply to loans that are secured by a lien on the borrower's primary residence.

Technical changes are made.

Appropriation: None.

Fiscal Note: Available.

[OFM requested ten-year cost projection pursuant to I-960.]

Committee/Commission/Task Force Created: No.

Effective Date: Ninety days after adjournment of session in which bill is passed.

Staff Summary of Public Testimony: PRO: There is a loophole in the law that allows lenders of last resort to take advantage of people by providing a commercial loan that is secured by a borrower's primary residence. When a loan is deemed commercial it is not subject to the Consumer Loan Act and its consumer protections. It has been documented in the media how borrower's don't understand they are signing over their house and in no way have these loans been commercial in nature. The statute needs to be updated to address this issue. Also the statute needs a clean-up due to two bills that passed referencing the same section, creating an overlap that couldn't be fixed by the Code Reviser.

Persons Testifying: PRO: Senator Rockefeller, prime sponsor; David Leen, private attorney; Tom Echlos, Washington State Financial Services Association.