Written by attorney Seth Alan Rosenberg | May 5, 2011

Does the Washington State Department of Financial Institutions Sell Licenses?

DOES THE DEPARTMENT OF FINANCIAL INSTITUTIONS SELL LICENSES? Regular interactions with the Department of Financial Institutions ("DFI") and the assistant Attorney Generals who represent them at administrative hearings make it clear that they are willing to trade greater fines for retention of licenses in instances where the licensee has been charged with offenses that ostensibly warrant banning them from the industry. Let's take a step back and see how the process works. State agencies license and regulate the activities of many professionals involved in real estate sales and financing, among many others. I will be examining the complaint process as practiced by DFI with regard to mortgage brokers and loan originators. The DFI has a variety of tasks, one of which is to monitor licensees under the Mortgage Broker Practices Act. RCW ? 19.146 and WAC ? 208-660. DFI, through its Division of Consumer Services, regulates the activities of mortgage brokers, loan originators, escrow agents, brokerages, and principals of brokerages (even though they need not be licensed). DFI investigations are complaint driven. The DFI does not do annual or random audits. When a complaint is received, it goes to the examination and compliance unit. The examiners will then conduct an investigation involving the interviewing of the licensee and a review of all relevant loan files. These examiners almost never interview individual borrowers or purchasers if they are not the complainant. This means that critical information can often be missed. For example, occupancy or income fraud will be attributed to a licensee without ever having spoken to the borrower. Often times there are reasonable explanations that, if obtained, could obviate subsequent DFI action based on its erroneous belief that the activity violated the rules. Given budget shortfalls it is apparent that there is a strong pressure upon investigators to find some violation in order to recoup the costs associated with the investigation. This reality can be seen in settlement negotiations conducted after a Statement of Charges and Proposed Order are issued. That document has five parts: Restitution to the Public; Investigative Fees; Fines; Prohibition from the Industry, and: Revocation of License. The initial negotiations see that the DFI is willing to give away any restitution to the public most readily. DFI is never willing to give up its investigative fees as without this return it appears that the DFI cannot operate. What is left? Fines and the Revocation/Prohibition. Here is where the horse trading really begins. Resolution of the Charges is geared towards settlement. The operating principle is that there is a trade-off between the fine and retention of the license. If a licensee wants to retain their license, they will have to pay a greater fine and vice versa. This is not a subtlety within the negotiation. It is clearly and shamelessly stated. There are two problems with this approach by the DFI. One, those who committed the more lucrative frauds upon the public have the money to pay to keep their license. I would think that the DFI's interest was in driving those bad actors out of business, but apparently their priorities lie elsewhere. Second, this approach raises the interesting question of what the purpose of the fines and licensing are for. I was under the impression that fines are punitive, meant to punish wrongdoing. Licenses, however, are given or revoked on the basis of fitness of character. Those are two different matters and one would think would be treated differently. However, the DFI is willing to trade a license to a party it has asserted is unfit for a greater fine. I am still waiting for an explanation as to the logic in this.

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