Lending News: Washington State Cracks Down?

A pair of articles printed Saturday in the Seattle Times show some slight tightening of lending practices in our state.

Nineteen states, including Washington, and the District of Columbia have moved quickly to warn state-regulated lenders about the hazards to consumers from nontraditional mortgages.

Tens of thousands of state-licensed lenders and mortgage brokers are affected by the advisories, also known as a "guidance."

Such loans include interest-only mortgages and other arrangements where the borrower cuts monthly costs by paying back less than full interest and nothing toward principal.

The states are following closely behind federal banking regulators, who issued a sternly worded advisory in late September to the lenders they supervise, telling them they should not make these loans to borrowers who may be unable to repay them.
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In 2003, just 10.6 percent of new loans tracked by First American LoanPerformance, a San Francisco-based real-estate information service, were nontraditional mortgages. But during the first nine months of 2006, about 34.1 percent of borrowers used these loans to buy or refinance homes.
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Many economists now say the surge in these loans contributed to the real-estate boom of the past few years. Regions that had the highest rates of nontraditional lending were those areas where housing prices rose most quickly.
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In Washington State, where the Department of Financial Institutions sent out its warning about three weeks ago, the guidance covers 1,767 mortgage brokers and 356 consumer-loan companies.

Not being in the mortgage lending business myself, I am not qualified to comment on whether the new "warning" will actually slow the spread of suicide lending. Hopefully potential home debtors will at least be better informed about what they're potentially getting themselves into with the more dangerous loans.

The second article deals with who is allowed to work as a loan officer in our state.

Until this month, virtually anyone could work in Washington as a loan officer for a mortgage broker — even convicted felons whose job gave them access to borrowers' most sensitive financial information.

But a new day has dawned, and it's mortgage brokers who pushed for the change.

A new state law, which went into effect Jan. 1, requires the state's 8,000 loan officers employed by mortgage brokers to be licensed. They write more than half of Washington's home loans.

Exempt from the new law are loan officers working for banks, credit unions and savings and loans. Also exempt are those working for consumer-finance companies.

Loan officers at mortgage brokerages must pass a background check meant to weed out those convicted of recent felonies or financially oriented misdemeanors, such as credit-card fraud. Also out are those who've generated a significant number of business-related complaints to state regulatory agencies.

I would think that shady loan officers are more likely to push people to take on more loan than they can truly afford, so this also comes as welcome news. I don't know if either one of these will do much to stem the tide of suicidal financing, but they couldn't make the situation worse. If these new regulations actually do significantly decrease the number of exotic loans that are issued, it would go a long way toward reigning in the runaway appreciation of the last few years.

(Kirstin Downey, Washington Post, 01.06.2007)
(Elizabeth Rhodes, Seattle Times, 01.06.2007)