Our New Responsible Mortgage Lending law

Just when you thought you had seen the most stupid law from our legislature regarding real estate omitting common sense, here comes another! House Bill 2770 aims to make what was a federal offense a state class-B felony. While it is aimed at mortgage brokers, it has wide sweeping implications to real estate agents, buyers, sellers, home inspectors, contractors, and just about anyone else who has even a limited financial interest in a real estate transaction involving a mortgage.

cross my fingersThis law provides that a residential mortgage loan may not be made unless a disclosure summary of all material terms is placed on a separate sheet of paper and has been provided by a financial institution to the borrower and that a financial institution may not make or facilitate the origination of a residential mortgage loan that includes a prepayment penalty or that imposes negative amortization under certain circumstances. And here’s the catch-all clincher: The law says that certain acts and omissions by any person in connection with making, brokering, or obtaining a residential mortgage loan are unlawful.

While part of the law attacks important issues like negative amortization and pre-payment penalties, it’s the broad definition regarding the disclosure of material facts relating to a property that causes me the greatest concern.

Example: Buyer purchases a home “subject to inspection

62 thoughts on “Our New Responsible Mortgage Lending law

  1. Another case of “Legislators Gone Wild”…and no thanks, I don’t want see the video. These folks have no idea what they’re passing and I’m convinced they are not doing enough (any?) research before they draft, discuss and pass these bills. It’s irresponsible and will wind up grinding our housing industry to a hault. Let’s see… in addition to this, they have 1) made helping a Distressed Homeowner a risky situation for RE agents 2) forced Correspondent Lenders to become Mortgage Brokers and then switch to Consumer Loan Lenders…and I know there’s more but I haven’t had my cup of coffee yet. GRRRR.

  2. I see they left the poor condo owner out in the cold again, and this time they expressly excluded rental properties. The exclusion regarding investment properties is rather poorly drawn.

    One thing I note is that a minor change in terms could seemingly hold up closing 3 days. Perhaps a mortgage professional could comment on how common such changes are–I really don’t know.

  3. This is another ridiculous law, written in panic-mode, and written poorly. It is worse than irresponsible, it is damaging to sellers and to buyers.

    We need to all write our lawmakers, and perhaps a form letter would be useful to generate the massive numbers of letters that need to be sent.

  4. Actually, I think this new law is GREAT! Clearly being “forced” to show credits as toward closing costs vs. for what they REALLY were for WAS a fraudulent act. I’ve been complaining about not being able to be transparent with regard to the true purpose of the credit for a long time.

    Everyone is better served if the repair is done vs. a credit. We all know that the credits are very often not used to make the repair “at a future date”. By making sure repairs are done, instead of just throwing money at the problems, all parties are better served.

    Remember, the lender is the one funding that “credit”, so it is only right and just that the repair be made prior to closing, so that the lender’s collateral is improved by the amount financed to make the improvement.

  5. Pingback: Issaquah Undressed » Blog Archive » The New Washington State Consumer Protection Law Throws People Out On The Streets

  6. Ardell,
    If you show the credit for a repair expect that the Lender will not only require it to paid by closing but also require that the appraiser reinspect which will be an additional cost to the buyer. There are many situations where the buyer would prefer to have the work done themselves.
    As a loan originator, I have often times seen last minute “credit to borrower” show up on an estimated HUD the day before closing. If the credit is for a repair, what is to be done about it at that point? Do we hold up closing until the repair is made?

  7. In addition to the buyer wanting to do the work, there are also situations where the seller simply can’t do the work. If it’s not a critical situation with the house (e.g. the wiring hypothetical), it really shouldn’t be a big deal., especially if the buyer can demonstrate having the funds to do the work.

    It’s a tough issue because obviously defective conditions regarding their security should not be hid from the lender, but at the same time not all defects that might result in credits are significant.

  8. The point IS that the credit is financed. Any financed credits should become part of the lender’s collateral OR you take the amount off the purchase price, so the LTV is an accurate reflection of true value.

    The house is $350,000. The credit is $8,000 for a new deck (someday). The loan amount is $280,000 and the remaining portion of the purchase price is the 20% downpayment. If the buyer ends up with the $8,000 cash and never puts on the new deck, the net effect to the lender is that the loan was overfunded and not a true 80% LTV and not a true 20% down. It was 20% down minus $8,000 and the collateral was shorted by $8,000.

    If the Inspection resolution is “price to be $342,000”, then all is OK. But if you are asking the lender to fund based on a price containing a credit, the lender has the right to insist that the credit be used to increase the value of the collateral up to the sale price.

    Sure they can have a provision for a holdback for X days so the improvement can be made by the buyer, as long as the lender is assured that the repair will be made within a reasonable period of time after closing. But they can’t just take the money and run…and we all KNOW that is what happens in many cases.

  9. Ardell, I was assuming credit to the price. But would it really matter if the deal didn’t already max out the seller credits for closing costs that the lender would otherwise allow? Not that they wouldn’t need to know of the change, and again only on something that wasn’t in or very near critical condition.

  10. Oh Goodie! I’m glad my hypothetical was grey enough to generate debate. This is exactly the area where I see it becoming problematic.

    I think we can agree that up to now the standard business practice among lenders has been “don’t-ask-don’t-tell” with regards to credits in lieu of repairs. Now we have to disclose all of details of this to them, and they in turn must share it with the underwriter. Underwriters don’t like complications, red flags, or loose ends that need explaining. When lenders package loans for investors they like tight, clean packages of loans with no string attached, such as hold-backs.

    So the key to all this is what the underwriters are going to be comfortable accepting as dollar credits, and what they are going to be requiring to be corrected or repaired before loan approval and release of funds.

    While I don’t think this law is “great” like Ardell, I do think it has a couple of benefits, in spite of it being drafted by our legislature. One is what Ardell pointed out: actual truth-in-lending. Another is that Buyers will be less likely to hold the Sellers hostage to inspection responses to extort additional concessions. Most people who have been in this business for awhile have run into Buyers who utilize the inspection contingency to pry unwarranted credits from a Seller because they know the Seller will not want to go back on the market and they can get away with it.

    I know that mortgage brokers are working out what their policies and are speaking with their underwriters about what will be acceptable right now as we are having this discussion. So I’m sure we will hear much more about this.

  11. The example I can think of was work necessary to the overhang area of a historic house. It was largely (entirely?) cosmetic, and the buyer originally asked for the seller to fix it. They then realized that it would be something better for them to fix, so they could control the quality of the work, and they asked for a few hundred dollars credit. So not only was it cosmetic, but it was very nominal (less than .1%).

  12. LOL…I hope we’re not going to get into our differences regarding “in or very near critical condition” again…and clearly not on Jim’s post. Fact is, if it isn’t an issue, it wouldn’t be a credit issue either. If it is important enough for the buyer to want a credit, then it is important enough for the lender to have protection against the defect in the event it becomes an REO property. Otherwise the lender pays for it TWICE!

    Think of it this way. Lender funds the loan INCLUDING the $8,000 credit. Then it becomes an REO property without the $8,000 (that the lender funded) being used to put on a new deck. At the time of sale by the bank as an REO property, the next buyer complains about the deck AGAIN and the lender has to shell out for a new deck at time of sale. So that deck costs the lender $16,000 instead of $8,000.

    As to “maxed out credits”, that’s rationalizing. Just because the lender would allow $8,000 for costs doesn’t mean you can take that same $8,000 and use it for something different. It DOES matter. It’s like your kid asking you for $100 for new contact lenses and then buying dope with it and then the kid saying “What’s the dif…you were willing to give me $100 bucks and you did…what’s your beef?”

  13. Here’s the irony of recent legislation.

    The legislators seem to want to see higher standards and a higher bar set.

    There is merit in the pretext of all the recent new laws, yet, execution of these 11th hour laws, pushed through with blatant conflicts, errors and omissions makes one wonder about the height of our lawmaker’s bar.

    If we practiced so, our license could be forfeited. In fact many mistakes now result in felony (jail time?)

    We have only one recourse. Our vote.

  14. I agree with being upfront with the lender regarding property conditions and that the seller credits really should be a reduction in price. But I can also tell you that if loan originators starting turning an inspection report over to Underwriters because of “seller credit for repairs” you are going to see a laundry list of items needing to be done before closing whether or not they are critical. Underwriters are overconditioning on loans to make sure they are sellable to investors right now.
    I wonder too, if a “seller credit for repairs” on a contract shouldn’t automatically trigger an appraiser to request a copy of the inspection report and if that should be addressed in the appraisal? Appraisers aren’t and cannot be property inspectors, but I would be interested in hearing an appraisers point of view on this.

  15. “So that deck costs the lender $16,000 instead of $8,000.”


    Yet lenders lend against a home-owner’s equity every day in re-fis, without a clue to how the homeowner will spend it.

    Yes, they are financing it, but they are not paying for it. The Buyer is the person responsible for repayment. And the huge majority of Buyers in fact do repay.

    If the loan has sound underwriting, the lender has very little risk that the buyer will not pay it back. Most defaults are from the highly leveraged loans, not from the $8,000 deck. When the improvement is made the value of the property is maintained.

  16. Ardell, critical would be different than latent/patent, and could be either. What I was getting at was something that if not repaired would cause the house to deteriorate further and quickly. And connecting that up to the credits thing, I still don’t see it matters because the lender allows that to be used–in effect creating an exception to loan to value for a limited amount. Now if the defect was such that it would lead to further deterioration of the house, that would be another matter. There the value of the house could be affected. But if the credit just allows the buyer to keep money they would otherwise pay in, to allow them to do the work, it would be the same as if the deal was just written up that way in the first place.

    I do really wonder though whether the lender shouldn’t always see the inspection report. If I were going to loan my own money, I’d want to see it. They really should know what’s likely to affect the house in the not to near future.

    Greg, good luck counting on the vote changing things. I don’t see that happening.

  17. Greg,

    It’s the pendulum swinging. It’s often how change comes about in ALL things. I remember when I worked at the bank. The minute there was a fraud perpetrated on one of the tellers the systems in place became tighter than a drum for awhile. Then it relaxed out a bit and a bit and a bit until the next teller got swindled and then back to really strict enforcement again.

    C’est la vie!

    It’s like agents putting up 25 directional signs on a busy corner over in Rose Hill (Greg, you know which one I mean). One day they will say NO SIGNS!!!…and who will be to blame for the unreasonable solution to the problem? Those who abused the privelege to the point of everyone being fed up.

    We are largely granted the privelege of “self governed body” in this industry. When we don’t self govern to the degree necessary to protect the public, and not just one another…well, then we get the consequences of our own neglect to act properly in the first place.

    The REAL problem is that everyone and their mother got a real estate license and “the norm” became “not good enough”. Every broker should send back every license of every licensee they would not hire to represent THEM or their loved ones in a real estate transaction. Brokers “housing” licenses is the REAL problem and conversely the real solution. Brokers need to stop being landlords who simply collect desk fees, and get back to being the guards at the gate.

  18. Ardell wrote: “Brokers need to stop being landlords who simply collect desk fees, and get back to being the guards at the gate.”

    I think this is what got us to the distressed property law applying to agents, and the reason we won’t ever get a blanket exception (but again, I don’t think attorneys should be given a blanket exception either).

    Also, it’s sort of disheartening that the response of the NWMLS through its forms was basically to perpetuate such a system. The forms are largely broker protection, and offer little agent protection or consumer protection.

  19. Cathy,

    I think the appraiser SHOULD have the inspection report, or at least the Major Defects Summary page. Disclosure should include the lender and appraiser as “parties of interest”.

  20. Ardell,
    Appraisals are always done “as is” and not “subject to” for home purchases and refinances. Appraiser are also supposed to note visual defects that can readily be seen but are not expected to comment on things they cannot see. Like I said, they are not inspectors.

    So now we would have both the appraiser and underwriter interpreting what defects may materially affect the value of the property. I think allowing two more third parties into the inspection process is not a good idea unless there is a compelling reason… like safety & health issues…. leaking roof, failing septics, debris, broken stairs and deckrails, water stains which an appraiser will note on a report thus triggering the need for an providing a copy of the inspection report to both parties and a reinspection (442) to insure those matters have been repaired.

    If an inspection report becomes part of our routine paperwork,
    I can see Underwriters asking for kitchen sink leaks to be repaired, exterior paint, replacing broken tiles, etc. before closing. We don’t want to go there.

  21. Until inspections are either standardized (kind of unlikely), or done by the bank and the buyer pays for it, much like they do for an appraisal, there are going to be many problems.

    Personally, I think an inspection is a critically important detail to have on a home you are buying, and I don’t think you should be forced to use a company that your lender insists upon.

    The way it is now, works well. The banks representative is the appraiser. The appraiser is most certainly trained to look for certain things, and can require them to be further inspected, and/or repaired/replaced prior to closing.

    To change the rules the banks have basically made up in the first place means a whole lot of disruption in a working process.

    First of all there is a contractural relationship between the inspection company and the buyer. That report is for the buyers benefit only, not the lenders, not the sellers and not the agents. The inspectors
    E & O only covers the buyer, not anyone else. Yes, we often use the inspection re[orts to negotiate, but it says right on most of them that the report is not to be given to any third party, nor used by any third party. The bank is indeed a third party.

    Secondly, if lenders agreed with our lovely WA legislators, they would already have come up with a different plan, probably one that would require a prospective buyer to use an ‘approved’ home inspector and name the lender as additionally covered for the report. Hmmmm, that doesn’t seem too likely to me, and fraught with so many, many legal problems.

    Thirdly, I do expect lenders appraisers to become more intent on requiring work orders that must be completed prior to closing. Remember, we’re all going to see “going back to basics” being critical to successful transactions. Some things that were ignored in past years are going to be more important now. Wet crawl spaces, old roofs at the end of life, dry rotted decks and steps, health and saftey issues, things like that.

    Many years ago one of my buyers was asked by her lender’s processor to send over her inspection report. The loan officer got it back (by mail, this was before faxes or (horrors!) email) highlighted with a yellow highlighter by the underwriter … what a nightmare that was. The underwriter literally highlighted every single comment made by the inspector and said it all needed to get done by closing. The loan officer was fabulous, and went to work on getting the entire problem deleted, since it never should have happened that way.

    Underwriters who have never seen the particular property in question should not be the ones reading, reviewing an inspection report. The banks have appraisers to do their ‘eyes & detail work’, and all they need to do is decide on what basics we all need to adhere too.

    Too many legislative fingers in the transaction makes things too expensive … and not just in real estate transactions.

  22. Jim,

    This is a great post! I have to agree with Ardell. I would think that there is great reason for full disclosure. What buyers may want to consider is that “critical

  23. Ardell,

    Thank you as I am honored. It would be a great pleasure to meet you as well and I assure you it is on my to-do list! As of right now I do not plan on attending though I would love too, but because of workload and season I do not see my self freed up until… I am hoping the forth quarter of 08 or first quarter of 09! I am hoping to visit the west coast then. In the mean time please know that you are always welcome to contact me at anytime if you like or need to. 🙂

Leave a Reply