Fewer than half of last year's applicants for the state's new loan-originator license have fulfilled all the requirements and can now write...

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Fewer than half of last year’s applicants for the state’s new loan-originator license have fulfilled all the requirements and can now write mortgages legally.

As a result, the state Department of Financial Institutions (DFI), which regulates them, is cautioning the public to verify that any originator they use is operating legally.

“We understand that the reduction reflects a dramatic drop in loan activity due to the downturn of the mortgage industry and a number of firms going out of business or dropping their state license,” said DFI Director Scott Jarvis. “But the reduction is still a concern.”

Originators, or loan officers, who flout the law may be fined and forced to refund fees they charged their customers, added Deb Bortner, DFI’s director of consumer services.

Starting last January, Washington joined numerous states in requiring annual licensure for loan originators, who, unlike real-estate agents, previously could handle real-estate transactions without state oversight.

The push came as some mortgage providers were being faulted for exacerbating the meltdown in the home-loan industry. Those that wrote subprime loans to credit-impaired borrowers, such as Ameriquest, have been particularly singled out for lax or unscrupulous business practices.

Because Washington’s law was new last year, DFI gave originators the entire year to apply, undergo a background check and pass a newly created competency test.

According to the department’s records, 13,722 originators applied for a license, and 90 percent of those who took the test passed it.

However just 5,720 have successfully completed the entire process.

Meantime DFI has denied 170 applicants because of criminal history, bad credit or “character and fitness issues.” Felony or gross misdemeanor convictions within the previous seven years accounted for the majority, Bortner said.

Bortner suspects the number of denials is low because the department made it known within the industry that individuals with those issues would not be granted a license.

Adam Stein, the immediate past president of the Washington Association of Mortgage Brokers, championed the new law and thinks it’s been good for the industry.

“If there were 13,000 who wanted licenses, how many were seriously engaged in a full-time endeavor? Clearly half decided it wasn’t worth it, and they weren’t going forward,” said Stein, the president of American Brokerage in Auburn.

He thinks the majority left because of the slump that permeates the entire real-estate industry. Since August, the state has lost 1,300 real-estate jobs of all kinds, according to state Employment Security records.

Mortgage firms have been particularly hit hard as some of the underlying funding for loans, particularly subprime ones, has disappeared.

Last year, the state also tightened the requirements on mortgage brokers. They must renew their licenses annually, and the test they take is harder. Two-thirds of those previously licensed have met the new requirements.

Because DFI is concerned that some who failed to gain licensure are still in business, it’s advising consumers to verify the status of loan brokers or originators either online at http://dfi.wa.gov/cs/list.htm or by calling 877-746-4334.

It’s worth noting, however, that loan officers who work for banks, credit unions and some other types of financial entities do not have to be licensed by the state.

“We have a huge number of lenders who are not regulated by anyone in this state,” said Bortner. “That’s a question the Legislature will probably take up during this session.”

Elizabeth Rhodes: erhodes@seattletimes.com