Bryan Adamson, The Homeowners’ Illusory Safety Net: Mortgage Broker Surety Liability, 47 Gonz. L. Rev. 165 (2011)
Scenario: A Washington consumer realizes her dream of homeownership. Through the aid of a mortgage broker, she secures a loan to purchase a $ 215,000 home. On April 15, 2006, she signs all of the essential basic forms: the purchase and sale agreement, the Deed of Trust, the Promissory Note, the Truth-in-Lending disclosure statements, and the settlement statement. One year later, she decides to refinance in order to take advantage of a better interest rate.
During the refinancing process, her bank’s loan officer, reviewing her original mortgage closing documents, tells her of numerous problems in her initial transaction. Most notably, it appears that her home value was inflated by $ 60,000 based on an appraisal the bank performed in the refinancing process. A second, $ 15,000 loan obtained for needed home repairs, upon purchase, did not include required notice of her rescission rights. Nor did her settlement documents include notices of servicing and loan transfer. Her original broker received substantial fees and commissions from the lender for the transaction: a $ 4314 yield spread premium; a $ 575 mortgage broker fee; a $ 500 application fee; and a $ 595 processing fee. The appraiser – hired by the broker – received $ 750. A third-party company – eventually revealed to be a shell company of the mortgage broker principals – received $ 34,000 of the loan proceeds. The transaction was also rife with junk fees (e.g., $ 90 for a document delivered by Federal Express, and $ 75 for a credit report).
The next day she contacts an attorney, and on May 1, a lawsuit is filed on her behalf, naming her original mortgage company, its principals, the individual agents, the shell company, and the mortgage company’s surety. The mortgage company is now insolvent and the principals, brokers, and agents are nowhere to be found. The suit proceeds against the surety company, which moves for dismissal from the lawsuit based on a statute of limitations defense. The surety’s defense is successful. The homeowner is now left to seek recovery against an insolvent mortgage company.
Just over one year after the transaction, why is it that the homeowner cannot look to the surety for remedy? Under Washington state and common law, the homeowner’s suit against the principal wrongdoers was timely. However, under Washington’s Mortgage Brokers Practices Act (“MBPA”), a consumer must bring an action against the broker’s surety “not later than one year after the alleged violation … .”
Washington’s mortgage broker surety liability provision is both practically and procedurally absurd. First, the idea of bringing suit against the surety [*167] before one must bring an action against the principal is counterintuitive. Second, the provision creates a perverse incentive to compel the consumer to rush to the courthouse – exposing them to potential sanctions for frivolous or premature suits. Third, it subverts all state and federal statutes of limitations provisions otherwise applicable to mortgage brokers. Finally, given the volume and complexity of mortgage documents, it is unreasonable to expect the average consumer to become aware of any harm within a year. Given the mortgage industry’s decimation and the prevalence of mortgage broker fraud and deceit, the brokers’ surety bond is an important resort for the wronged consumer. While purporting to require a surety bond or other mechanism to guarantee protections to Washington consumers, the provision, in fact, does nothing but compel the consumer to look to the broker, with no guarantee that the consumer will be able to recover from that broker. Washington’s mortgage broker surety liability provision thus flies in the face of consumer protection policy.
This article exposes the absurdity of Washington’s one-year statute of limitations against mortgage broker sureties. Part I examines Washington’s regulation of mortgage brokers and its surety requirements, demonstrating how the state’s mortgage broker surety liability one-year statute of limitations provision is in direct conflict with state and federal laws. Part II explores the important role mortgage surety bonds play in enhancing consumer protections, especially in light of the seismic changes in the mortgage broker industry recounted in Part III. Part IV demonstrates how Washington consumers have no quarter under statutory or common law to defeat the explicit one-year statute of limitations provision. Part V answers whether federal laws covering mortgage brokers, such as the Secure and Fair Enforcement of Mortgage Licensing Act, preempt Washington’s mortgage broker surety statute of limitations provision. In closing, this article proposes that federal or state legislation correct the liability gap between mortgage brokers and surety liability.