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White Paper: Washington State Law The Department of Financial Institutions (the Department) was created in 1993. There are four regulatory Divisions within the Department, including:
The latter Division regulates mortgage brokers, consumer loan companies, escrow agents, check cashers and sellers, and payday lenders. The Division of Consumer Services enforces statutes and regulations primarily focused on disclosure compliance, lending restrictions, trust accounting and other consumer protections. While the Divisions of Banks and Credit Unions are the primary regulators for the banking and credit union industries, their mission does not include direct responsibility for consumer compliance and protection issues. These areas fall within the jurisdiction of the federal banking and credit union regulators. The Department recommends the following in pursuing your case against those businesses regulated by the Division of Consumer Services.
The advantages of filing a written complaint are:
The disadvantages of filing a written complaint are:
The Mortgage Broker Practices Act, Chapter 19.146 RCW, the Mortgage Broker Practices Act (MBPA), and chapter 208-660 WAC regulate mortgage brokers. The statutes and codes are designed to "promote honesty and fair dealing and to preserve public confidence" in the lending industry by preventing fraudulent practices on consumers. RCW 19.146.010. What is fraud? The Department has identified the following major areas of fraud practiced against consumers: · Loan type: The borrower is led to believe that the type of loan will be different than what they ultimately sign for. Most often this deception takes the form of deceiving the borrower into believing that they will obtain a fixed rate mortgage when the loan will actually be an adjustable rate mortgage. · Loan amount: The borrower is confused about the principal amount of the loan to be borrowed. Generally, the borrower will be led to believe that the loan amount is smaller in order to hide the existence of financed costs. The disclosure of the Amount Financed on the Truth in Lending disclosure. · Loan costs: The borrower is led to believe that the costs will be far less than the actual costs to be paid. · Monthly loan payment: The borrower is led to believe that a principal and interest only payment also includes hazard insurance and property taxes. This deception is important because the false lower payment appears to correspond to a lower loan amount. · Prepayment penalties: The borrower is led to believe that the loan will not contain a penalty for early payoff of the principal balance. · Insurance packing: The borrower is either lied to about the inclusion of certain insurance (credit life, unemployment, disability, etc.), or is led to believe that acceptance of the insurance is required in order to obtain the financing. Loan officers may actually resort to forging a borrower's signature on optional insurance disclosures in order to include insurance in the loan without the borrower's knowledge. · Upselling: Any method of increasing the principal amount of the loan beyond the amount needed to satisfy the borrower's financing needs. One method is to inform the borrower that the property failed to appraise for a sufficient amount to achieve the borrower's financing goals through a first mortgage, and subsequently lead the borrower to sign on an additional higher rate second mortgage. The result of any of the above practices constitutes equity skimming as the borrower's equity is eroded with the loan transaction. Am I a borrower? The MBPA defines "borrower" as one who seeks a residential loan for personal, family or household use secured by a mortgage or deed of trust on the real estate. RCW 19.146.010. The real estate may be a single family dwelling or a multifamily dwelling of up to four units. Id. The definition of "borrower" is expansive, covering mortgage broker practices regardless of whether the borrower gets the loan. WAC 208-660-010(6). Was I dealing with a mortgage broker? The mortgage broker is defined in the negative, that is, the statute outlines who is not covered by the MBPA and then states that any business not exempted is covered. RCW 19.146.020. The exempted practices must otherwise be legitimate under state and federal laws, and the exempted entity may voluntarily apply to the Department for a license. Id. Examples of exempted entities include banks (commercial, savings, and holding companies), trust companies, savings and loans, credit unions, consumer loan companies, insurance companies, licensed attorneys, persons acting under court orders, licensed real estate brokers or salespersons, government entities, and more. Id. A call to the Department may assist in understanding whether a particular business falls under the auspices of the MBPA. What acts does the MBPA prohibit or require? The MBPA prohibits acts, schemes, artifices or devices that mislead, misrepresent, deceive or defraud the borrower. RCW 19.146.0201. The MBPA further seeks to prevent deceptive sales practices by requiring a written good faith estimate disclosure of fees and costs within three days of receipt of the loan application or of money from the borrower. RCW 19.146.030; WAC 208-660-130. Rules are created for lock-in agreements and excess third party provider fees are prohibited. Id. Any agreement between the mortgage broker and the borrower must be in writing. RCW 19.146.040. The MBPA also governs how mortgage brokers keep and provide accounting for borrower funds delivered for the payment of third party services (e.g. appraisal, credit report, etc.). RCW 19.146.050. The mortgage broker may solicit costs, in advance, for appraisals, title reports, credit reports, etc. from the borrower. RCW 19.146.070(2)(b). The mortgage broker must provide a written receipt for these funds. WAC 208-660-200. These funds must be segregated into a trust account in an FDIC insured bank "designated and maintained for the benefit of the borrower." RCW 19.146.050; WAC 208-660-08010 through .085. These funds are exempt from garnishment, execution, or attachment. Id. Payments may be made only for bona fide services rendered to the borrower, and interest, which is tax exempt, inures to the borrower. RCW 19.146.050. The difference must be refunded to the borrower. WAC 208-660-200(2). The mortgage broker may not charge a fee unless the borrower actually obtains "a loan on the terms and condition agreed upon by the borrower and the mortgage broker." RCW 19.146.070. The exception to this is that the mortgage broker may charge a fee of up to $300 for services, document preparation, and the transfer of documents if the borrower obtains a written loan commitment on the agree upon terms and conditions and she or he fails to close through no fault of the mortgage broker - unless the fees are prohibited by TILA and Regulation Z. Id. WAC 208-660-200(2). In practice, it is unlikely that the mortgage broker will obtain the written commitment from the lender as required; the mortgage broker is therefore disallowed from charging the $300 fee for services. If the borrower is unable to obtain the loan, then within five business days of a written request for copies of paid appraisals, title reports, and credit reports, the mortgage broker must supply these to the borrower and must transmit the originals to any other designated mortgage broker. RCW 19.146.080; WAC 208-660-145. The mortgage broker must disclose the borrower's right to these documents to the borrower. RCW 19.146.030(d). The mortgage broker must maintain books and records pertaining to a borrower's transactions for 25 months. RCW 19.146.060; WAC 208-660-140. What are my remedies under the MBPA? The MBPA provides numerous remedies when licensees violate the MBPA. It invokes the Consumer Protection Act (CPA), chapter 19.86 RCW, for "unfair and deceptive acts or practices and unfair methods of competition in the conduct or trade of commerce in violation of RCW 19.86.020." RCW 19.146.100. The remedies of the CPA are "cumulative and not exhaustive." Id. Criminal penalties may occur. RCW 19.146.110. The Department may assess fines of up to $100.00 per day, with each day of the violation constituting a new violation. WAC 208-660-165. The Director of the Department is empowered to assess additional penalties. The MBPA also allows for private civil action against the bond of the mortgage broker. RCW 19.146.240. A mortgage broker must post a surety bond between the amounts of $20,000.00 and $60,000.00, file a letter of credit (or comparable instrument approved by the Department), or must assign a certificate of deposit to the Director. RCW 19.146.205. A borrower wishing to file against the bond must file a claim within a year of the date of the alleged violation. Id. Borrowers have priority over the Department or other third parties as to the bond, and the bond will be pro rated among borrowers if there is more than one party. RCW 19.146.205; RCW 19.146.240. A civil suit against the bond may be brought by the director, or by any other person injured by a violation of the MBPA, in the superior court where jurisdiction of the licensee may be obtained. RCW 19.146.240. There is a one-year statute of limitations. Id. The MBPA allows for actual damages, defined as the actual amount paid, including attorneys fees and costs. Id. The surety is exempt from treble or punitive damages. Id. However, because the remedies are "cumulative and non-exclusive," other remedies may be available at law. Id. The MBPA specifies the mortgage broker's responsibilities and liabilities vis a vis its employees and independent contractors too. RCW 19.146.245; see also WACs. The Consumer Loan Act, The Washington State legislature passed the Consumer Loan Act (CLA) to authorize higher interest rates so as to ensure credit availability to borrowers with higher than average credit risks who might otherwise be unable to obtain loans. RCW 31.04.005. Accordingly, the CLA licensees are exempt from usury laws to the extent of the protections afforded by the CLA. Am I a borrower who falls under the CLA? The "borrower" is defined as anyone who either consults or retains a licensee (a consumer loan business falling under this chapter) to seek information to obtain a loan regardless of whether that person actually obtains the loan. RCW 31.04.015; WAC 208-620-010. A loan is defined as a "sum of money lent at interest for a fee or other charge and includes both open-end and closed-end loan transactions." Id. A loan is made when a licensee "closes or advances or offers to advance or makes a commitment to advance funds to the borrower for a loan." Id. The CLA also delineates between consumer loan licensees and mortgage brokers, and it states that the mortgage broker cannot receive one commission as a consumer loan licensee and a second commission as a mortgage broker on the same loan. Id. Was I dealing with a lender governed by the CLA? The CLA defines it's licensees in the negative. RCW 31.04.025. Excluded are "banks, savings banks, trust companies, savings and loan or building and loan associations, or credit units . . . [state licensed] pawnbrokers, . . . loan of credit made pursuant to a credit card plan." Id. What acts does the CLA prohibit or require of lenders? Chapter 31.04 RCW was substantially re-written effective July 21, 2001, to include new prohibitions, additional disclosure requirements, increased bond coverage and penalties. The CLA now prohibits unfair and deceptive practices and requires good faith estimate disclosures and TILA-like disclosures to the borrower within three days of the date of application. RCW 31.04.027; RCW 31.04.102. In investigating a claim under the CLA, the advocate must determine the date of any alleged violation to determine whether it falls under the old or revised CLA. The amended statute is not retroactive. Accordingly, the Department recommends that complainants for violations occurring under the old statute seek alternative remedies (e.g. private counsel) in addition to filing a complaint with the Department. Any existing cause of action for complaints under the old statute might better lie in another statute or common law. A note for a loan must contain the following:
The CLA authorizes lending at higher rates within restrictions, which include: a twenty five percent per annum interest cap, limits on loan origination fees, restrictions on third party fees, prohibiting mortgage broker fees for the licensee working as a lender under the CLA, limited installment payment delinquency penalties, allowing the collection of fees for dishonored checks, and provision for open-ended loans (as defined and restricted by RCW 31.04.115; WAC 208-620-130 through -150). RCW 31.04.115; see also WAC 208-620-130 through -150. The maximum dishonored check penalty is currently $25.00. WAC 208-620-130. The CLA also allows licensees to sell life and disability insurance and include the cost in the loan. RCW 31.04.115; WAC 208-620-130 through - 150. The insurance amount is limited to that amount required to pay off the total balance owing and may not be required in order to obtain a loan. RCW 31.04.125(4). As of January 1, 2003, prepayment penalties are prohibited. WAC 208-620-130(4). When a borrower takes out a new loan within four months of another CLA loan, the fee may only be based on the amount which is the difference between the first and the second consumer loan. WAC 208-620-130(6). The CLA also provides definitions of the "add-on method" for computing interest and the "simple interest method." RCW 31.04.015; WAC 208-620-010. It then places restrictions on the loans using these forms of interest computation. RCW 31.04.125. The CLA requires those who make secured or unsecured loans of money, credit, or things in action at the interest rates authorized by the CLA to obtain a license and to know the pertinent federal and state laws involved in the lending. RCW 31.04.035; WAC 208-620-170. A licensee must carry either a surety bond or "unimpaired capital, surplus, and long term subordinated debt in an amount that at any time is outstanding promissory notes or other evidence of debt (other than long term subordinated debt) in the aggregate amount of unimpaired capital, surplus, and long term subordinated debt." RCW 31.04.014; WAC 208-620-020 through - 040. If the licensee uses real estate as the collateral, then an additional minimum surety bond is required. Id. What are my remedies under the CLA? In the remedies arena, the CLA invokes the Consumer Protection Act. RCW 31.04.208. The remedies contained in the Consumer Protection Act are cumulative and not exhaustive. Id. An aggrieved party, including the Department, may file a claim directly against the licensee's bond. RCW 31.04.045. The Escrow Agent Registration Act What is escrow? The Escrow Agent Registration Act (EARA) defines escrow as:
Which escrow agents must be licensed under the EARA? As with the two previous Acts, the EARA carves out exceptions to its licensing requirements including, banks, trust companies, mutual savings banks, savings and loan associations, credit unions, insurance companies, some federally approved lending agencies, lawyers, realtors performing incidental duties to a sale, joint control agents for real property construction or improvement transactions, various bankruptcy court personnel, and licensed title insurance companies. RCW 18.44.021. There are exceptions to the exceptions too. What acts does the EARA require or prohibit of escrow agents? Escrow officers and agents must not engage in fraudulent or deceptive practices as defined in RCW 18.44.301 and WAC 208-680D-090. False and deceptive advertising and business practices are expressly prohibited. RCW 18.44.440. The EARA also prohibits referral fees or gifts between escrow agents and officers and banks, savings and loan associations, savings banks, credit unions, mortgage companies or other businesses making loans secured by real property in Washington. RCW 18.44.450. The EARA creates specific requirements for agreements entered with borrowers. WAC 208-680D-040. The agreement may be entered orally or in writing, must disclose and provide an itemized statement of fees using the same terms found in the closing agreement, and must ensure that all costs and fees are justifiable and for bona fide services. WAC 208-680D-040. The escrow agent must comply with the instructions and must maintain records, and if a material change in the transaction financing is made, the escrow agent must add an addendum to the purchase and sale agreement. Id. The escrow agent must provide HUD1 or HUD1A with the complete and detailed closing agreement; must pay the net proceeds to the seller; and must obtain the original signature of the principals on a preliminary or final closing agreement. Id. Escrow agents and officers are required to be licensed, and each branch office must be separately licensed with the Department. RCW 18.44.031 through .061. Escrow officers must supervise transactions, are responsible for escrow agents, and must be current on the law. RCW 18.44.071; WAC 208-680D-080. The director may take action against the escrow agent or officer's license when statutory or other violations occur. RCW 18.44.430; RCW 18.44.440. Engaging in the escrow business without a license may result in a misdemeanor subject to up to ninety days in jail and/or a fine of up to $100 per day for the duration of the violation. RCW 18.44.171; WAC 208-680G-040. Escrow officers and agents must be bonded. They must carry a fidelity bond of $200,000 with a maximum deduction of $10,000; an errors and omissions policy of $50,000 or cash deposit, principal and securities in an approved depository; and a surety bond of $10,000 unless the fidelity bond has no deductible. RCW 18.44.201; WAC 208-680F-010 through -070. The chapter provides alternatives for escrow officers and agents for whom the above bonding requirements prove cost prohibitive. RCW 18.44.221 through.261. The WACs provide further illumination into the requirements of these bonds and policies. In order to file a claim against any cash deposit, a claimant must obtain a judgment and a certified copy of the judgement against the escrow officer or agent. WAC 208-680F-050. An escrow officer or agent must keep records for six years. RCW 18.44.400; WAC 208-680E-011. Escrow funds must be segregated and deposits must be made the next business day. Id. Escrow disbursal may only occur once a corresponding escrow deposit has been made. WAC 208-680D-050. Funds in escrow subject to a dispute may be held or interpleaded into a court action. WAC 208-680D-060. Violation of these requirements is subject to both criminal and CPA liabilities.RCW 18.44.400. What are my remedies under the EARA? Finally, the EARA covers various rights of borrowers if an escrow agent's license is suspended, revoked, or terminated or the business goes into receivership. RCW 18.44.460 through.490. The statute of limitations for an oral escrow agreement is three years. RCW 4.16.040(2). For a written escrow agreement, the statute of limitations is six years. RCW 4.16.080(3). See also Sanwick v. Puget Sound Title, 70 W.2d 438,442, 423 P.2d 624 (1967). The Consumer Protection Act The Unfair Business Practices-Consumer Protection Act (CPA), RCW 19.86, is Washington's principal consumer protection statue. It prohibits "unfair and deceptive acts or practices" in trade or commerce. In addition, many other state statues incorporate the Consumer Protection Act within their own provisions. For example, a violation of the state Fair Credit Reporting Act is deemed to be an unfair and deceptive act under the CPA as well. RCW 19.182.150. The Washington State Attorney General The Attorney General of Washington, through her Consumer Protection Division, enforces the CPA. The Attorney General may initiate court proceedings in the name of the State of Washington against any person to enjoin present and future violations of the CPA. In addition, the statute allows the Attorney General to seek restitution for individual consumers, civil penalties of up to $2,000 per violation and to recover attorney's fees and costs for a successful legal action. To aid in enforcing the law, the CPA gives the Attorney General Civil Investigative Demand (CID) authority. Under a CID the Attorney General, prior to filing suit, may require all persons having knowledge of relevant facts, under oath, to answer written interrogatories, produce documents or give oral testimony about possible CPA violations. Private Enforcement The CPA also provides for a private enforcement by individuals who have been injured by violations of the Act. To prevail in a consumer protection action, a private plaintiff must prove five elements:
Private litigants may recover their actual damages and a court has discretion to award three times that amount, known as treble damages, not to exceed $10,000. A private litigant may also seek to enjoin present and future CPA violations and recover reasonable attorney's fees and costs. Exemptions The Washington legislature has "shielded various activities from the rigors of competition" by exempting them from the CPA. These include labor, agricultural, and horticultural organizations; municipal corporations; and "acts or practices which are reasonable in relation to the development and preservation of business or which are not injurious to the public interest." Advertising media have a limited exemption for advertisements made in good faith and without knowledge that the advertisement contained a false claim. Also exempt from the CPA are "learned professions." In Short v. Demopolis, the Washington Supreme Court held that the CPA only reaches the entrepreneurial or commercial aspects of the legal profession. Washington courts have applied the holding in Short to medical professions, real estate closings, handling of attorneys' fees, and failing to disclose conflicts for the purpose of obtaining clients or increasing profits. Finally, regulated industries such as insurance companies and public utilities are exempt from the CPA. Washington courts, however, have indicated that they will construe this exemption narrowly. As a result, some aspects of the business of regulated companies remains subject to the provisions of the CPA. Unfairness The CPA does not contain a definition for the term "unfair." Following federal law, Washington courts consider three criteria in determining whether a trade practice is unfair:
Deception An act or practice is "deceptive" under the CPA if the act or practice has a "tendency or capacity to deceive a substantial portion of the general public." Deceptive practices can involve written or oral misrepresentations. Indeed, silence can be a deceptive act if one has a duty to speak up, such as when a seller is aware of a hidden problem or defect with the product being sold. Predatory Lending Practices Many of the lending practices commonly considered to be predatory violate the CPA because they involve unfairness or deception. For example, a misrepresentation regarding the amount of the interest rate is a deceptive act under the CPA. A one-sided loan contract may be unfair and thereby violate the Act.
In such cases, you should contact a private lawyer or file a complaint with the Washington Attorney General's Consumer Protection Division. Call 1-800-551-4636 to request a consumer complaint form or go to www.wa.gov/ago/consumer/ to file a complaint on line. |