HOUSE BILL REPORT

HB 80

BYRepresentatives Zellinsky, Locke, Winsley, Lux, Crane, Chandler, Holland, Belcher, Betrozoff, Lewis and Dellwo; by request of Attorney General

Regulating mortgage brokers.

House Committe on Financial Institutions & Insurance

Majority Report:     The substitute bill be substituted therefor and the substitute bill do pass.  (11)

     Signed by Representatives Lux, Chair; Zellinsky, Vice Chair; Chandler, Crane, Day, Dellwo, Ferguson, Niemi, Nutley, Silver, Winsley.

House Staff:Harry Reinert (786-7110)

AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE JANUARY 22, 1987

BACKGROUND:

Financing of mortgages has undergone dramatic change over the past ten years.  The deregulation of much of the banking industry has led to the creation of a new class of business, mortgage brokering.  The other participants in mortgage lending are financial institutions and mortgage bankers.  Mortgage bankers differ from mortgage brokers in two significant ways.  Mortgage bankers generally provide the initial funds for a mortgage and then sell the mortgage on the secondary market.  Mortgage brokers seldom use their own funds to make a loan.  Instead the broker finds a lender to make the loan.  Mortgage bankers also usually retain responsibility for servicing the mortgage.  This entails collecting payments, assuring the property tax and insurance payments are made, and following up on past due payments.  The mortgage broker seldom gets involved in servicing mortgages.  Generally, once the broker has arranged for financing and the loan transaction is completed, the broker is no longer involved.

Washington State has no current statutory provisions governing mortgage brokers.

SUMMARY:

SUBSTITUTE BILL:  The mortgage broker practices act is established.  A mortgage broker is defined as any person who for compensation makes, negotiates, or offers to make a residential real property mortgage loan.  State and federal financial institutions, attorneys, real estate brokers, and mortgage brokers approved by the secondary market or the federal department of housing and urban development are exempt from the provisions of the act.

Prior to receipt of any payments from the borrower, a mortgage broker must make a full written disclosure to the borrower.  The disclosure must include:  a good faith estimate of the fees and costs; the annual percentage rate, finance charge, and other details about the loan; itemized costs of any services charged to the borrower; terms and conditions of any lock-in of the rate;  the name of the lender; and a statement that payment for third party services will be held in trust.  The name of the lender may be disclosed at the time the borrower accepts the commitment.

Prior to entering into a contract with a borrower or making any public solicitations, the broker must have a written agreement from a lender.  The broker must place payments for third-party services into a trust account.  The broker must use generally accepted accounting practices and maintain the business books and records for a period of six years.

The mortgage broker is prohibited from receiving any fee or commission until the borrower actually obtains a loan, unless otherwise permitted by the act.  The broker may receive a fee of up to one hundred dollars if the borrower fails to close on a loan for which the lender has made a commitment.  The broker may also charge in advance for third party services.  The broker is prohibited from making a contract that provides the broker may earn a fee for "best efforts," marking up the fees of third party providers, and advertising any financing terms that the broker does not have a written commitment for from a lender.  Mortgage brokers must comply with the federal truth-in-lending act.

Violation of the act is a violation of the consumer protection act.  Except for violation of the trusting provisions,  violation of the act is a gross misdemeanor.  Violation of the provisions requiring funds for third party providers to be placed in trust is a class C felony.

SUBSTITUTE BILL COMPARED TO ORIGINAL:  The original bill required the mortgage broker to disclose his or her own commissions.  This has been deleted in the substitute bill.  The original bill also required the broker to disclose the lender's name at the time the application for a loan is made.  The substitute bill permits the broker to delay disclosing this information until the borrower accepts the loan commitment.  The original bill prohibited all non-refundable fees.  The substitute bill permits non-refundable fees in limited circumstances. 

Fiscal Note:    Not Requested.

House Committee ‑ Testified For:     Juli Daniel, Jay Uchida, Attorney General's Office.

House Committee - Testified Against: Ed Moger, Washington Association of Mortgage Brokers; Kirk Shuster, Washington Association of Mortgage Brokers; Doug Erickson, Meritor Mortgage Corporation; Bob Porter, Pacific West Mortgage Corporation.

House Committee - Testimony For:     There have been numerous complaints to the Consumer Protection Division about mortgage broker practices.  This bill provides for full disclosure to potential borrowers and prohibits certain kinds of practices which have been subject to frequent complaints.

House Committee - Testimony Against: The bill does not go far enough in protecting against unethical practices.  Some provisions of the bill will work a hardship on many mortgage brokers.