Why Haven’t Loan Officers Been Told These Facts?
The Most Common Violation of The Truth In Lending Act
It took about eight years of legislative wrangling, but Congress eventually passed the Truth in Lending Act into law in 1968. It’s an oldie but a goodie, for sure.
Fifty-seven years later, TILA remains a chief concern of various stakeholders, including state regulators. In fact, TILA is foremost in mortgage lender noncompliance. Amongst TILA violations, the most frequent violation is charging unallowable fees to the consumer.
Regulation Z implements the TILA disclosure requirements. In the regulation, the CFPB provides express accuracy guidance for the early and final disclosures (E.g., Loan Estimate and Closing Disclosure).
Intent, sloth, and negligence are the usual suspects when it comes to material nondisclosure. However, sometimes, noncompliance stems from a wooden concept of the TILA accuracy requirements. Neglecting the disclosure requirements is not difficult.
Think of TILA’s overarching intent in terms of what the law seeks to avoid or its antithesis: unwise, uninformed, or ill-informed consumer buying decisions. Not too much can go wrong when consumers buy a low-risk item, like a cookie jar. Cookie jars don’t destroy wealth or families. No one ever lost a cookie jar to a foreclosure action. However, as stakeholders have learned, the unwise use of consumer credit can severely impact individuals, families, communities, industries, and even the nation. With mortgage credit, the stakes are unusually high.
The government, and rightly so, requires that credit sellers bear the burden of reasonable and timely disclosure. As such, TILA provides granular requirements to ensure that credit sellers provide timely and accurate information that enables more intelligent consumer decisions.
Below are a few general and specific rules to keep in mind.
12 CFR § 1026.19(e)(3)
MORTGAGE LOANS – EARLY DISCLOSURE
Good Faith Determination for Estimates of Closing Costs
THE GENERAL ACCURACY RULE
An estimated closing cost is in good faith if the charge paid by or imposed on the consumer does not exceed the amount disclosed.
EXCEPTIONS TO THE GENERAL RULE
- Limited increases are permitted for certain charges, e.g., 10% aggregate tolerance.
- Variations are permitted for certain charges, e.g., escrows and prepaids.
- Revised estimates are permitted due to changed circumstances.
ZERO TOLERANCE FOR INCREASES
Regulation Z states that certain estimated closing costs are not in good faith if the charge paid by or imposed on the consumer exceeds the amount originally disclosed.
The general rule or “zero tolerance” standard is fairly straightforward. The charges that are generally subject to this accuracy requirement (Zero tolerance for increases absent changed circumstances) include, but are not limited to, the following:
- Fees paid to the creditor.
- Fees paid to a mortgage broker.
- Fees paid to an affiliate of the creditor or a mortgage broker.
- Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop for a third-party service provider for a settlement service.
- Transfer taxes.
- Lender Credits (specific and general).
ACCURACY BEYOND THE GENERAL RULE
Lenders, including mortgage brokers, must provide disclosures in good faith. In general, the lender’s disclosure is in good faith if it is based on the best information reasonably available to the creditor when providing it to the consumer. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information.
Some originators mistakenly believe that Regulation Z, absent quantified accuracy stipulations, does not impose accuracy standards on early disclosures (Loan Estimate). That is false. The good faith, best information reasonably available, and due diligence standards extend to nearly all disclosures. Estimates for hazard insurance and monthly MI premiums, as well as per diem and escrow estimates, must adhere to the standard. Even § 1026.37(g)(4) Other Costs, Subheading “H.Other” are subject to the standard (E.g., Inspections, HOA Fees, owner’s title insurance policy, commissions of real estate brokers or agents, payments to the seller to purchase personal property, HOA/Condo Transfer Fees).
§ 1026.37(g)(4) Under the subheading “Other,” an itemization of any other amounts in connection with the transaction that the consumer is likely to pay or has contracted with a person other than the creditor or loan originator to pay at closing and of which the creditor is aware at the time of issuing the Loan Estimate, a descriptive label of each such amount, and the subtotal of all such amounts.
12 CFR § 1026.17(c)(2)(i)
If any information necessary for an accurate disclosure is unknown to the creditor, the creditor shall make the disclosure based on the best information reasonably available at the time the disclosure is provided to the consumer, and shall state clearly that the disclosure is an estimate.
Comment 17(c)(2)(i)-1. Basis for estimates. Except as otherwise provided in §§ 1026.19, 1026.37, and 1026.38 (TRID requirements), disclosures may be estimated when the exact information is unknown at the time disclosures are made. Information is unknown if it is not reasonably available to the creditor at the time the disclosures are made. The “reasonably available” standard requires that the creditor, acting in good faith, exercise due diligence in obtaining information. For example, the creditor must at a minimum utilize generally accepted calculation tools, but need not invest in the most sophisticated computer program to make a particular type of calculation. The creditor normally may rely on the representations of other parties in obtaining information. For example, the creditor might look to the consumer for the time of consummation, to insurance companies for the cost of insurance, or to realtors for taxes and escrow fees. The creditor may utilize estimates in making disclosures even though the creditor knows that more precise information will be available by the point of consummation.
The Law Recognizes Three Degrees of Diligence:
How much effort must an MLO put into obtaining the best information reasonably available to meet this standard? In a word, treat the consumer like one should treat family.
Diligence can be defined as prudence, vigilant activity, attentiveness, or care. “Due Diligence” is defined as “care or attention to a matter that is sufficient to avoid liability, though not necessarily exhaustive” (Cornell Law School).
(1) Common or ordinary, which persons generally exert regarding their concerns; the standard is necessarily variable concerning the facts, although it may be uniform concerning the principle.
(2) High or great (Exacta diligentia), which is extraordinary diligence, or that which very prudent persons take of their concerns.
(3) Low or slight, which is that which persons of less than ordinary prudence, or indeed of no prudence, take of their concerns.
Exacta Diligentia
Exacta diligentia is a Latin term used in Roman law that means great care. In Roman law, the term’s origin refers to the level of care that a good parent would take in their family care. The law demands a high standard of care when someone is responsible for looking after another person’s interests.
Neither the TILA nor the Consumer Financial Protection Act expressly imposes a fiduciary responsibility on lenders and loan officers. However, two specific statutes may imply a fiduciary responsibility or similar degree of care.
Fiduciary, from the Latin fiducia, means trust, confidence, and reliance.
Under the diligence standard of care, as a general rule, covered persons must demonstrate careful, accurate, and sound practices. When failing to exercise appropriate diligence, the covered person is answerable for all wrongs and harms, provided that one who showed the proper degree of care and prudence would have avoided such harm.
Two Statutes That May Imply Fiduciary Responsibilities
1) THE SAFE ACT
The SAFE Act states that the purposes and methods for establishing a mortgage licensing system and registry are to establish a means by which residential mortgage loan originators would be required to act in the consumer’s best interests to the greatest extent possible.
2) THE CONSUMER FINANCIAL PROTECTION ACT
(CFPA) PROHIBITING UNFAIR, DECEPTIVE, OR ABUSIVE ACTS OR PRACTICES (UDAAP)
The CFPA empowers the CFPB to take action to prevent a covered person from engaging in an unfair, deceptive, or abusive act or practice under Federal law concerning any transaction with a consumer for a consumer financial product or service. A lender action is abusive and violates the CFPA if it takes unreasonable advantage of the consumer’s reasonable reliance on a covered person to act in their interests.
Measuring Appropriate Diligence
MLOs should act in the consumer’s interest. They must exercise good faith and due diligence to provide the best information reasonably available and sufficient disclosure so that a reasonable consumer can make an informed and intelligent credit buying decision.
When considering the effort necessary to satisfy the Regulation Z due diligence standard, ask yourself: What degree of diligence is appropriate to fulfill your responsibility to act in the consumer interest? Ordinary, great, or slight?
Considering that the mortgage may be the most significant contract or purchase the consumer has or will encounter, it is improbable that mere ordinary diligence is appropriate. The law may permit ordinary diligence, but should MLOs not strive for better? Instead, perhaps great diligence is the right thing and what is necessary to safeguard consumer interests. And great care won’t hurt your reputation.
Prospective mortgagors need someone to trust. They should be confident in the MLO’s integrity, honesty, and competence. In short, vulnerable prospects need someone they can rely on. Which side of the consumer care argument are you on? Will ordinary care describe your effort? Or are you, and will you be known for the great care exercised on behalf of your customers?
BEHIND THE SCENES – CFPB Takes Action Against Draper & Kramer Mortgage for Discriminatory Mortgage Lending Practices
COUNT I: VIOLATIONS OF THE EQUAL CREDIT OPPORTUNITY ACT
COUNT II: VIOLATIONS OF THE CONSUMER FINANCIAL PROTECTION ACT (CFPA)
DKMC neither admits nor denies the allegations in the Complaint, except as specified in this Order. For purposes of this Order, DKMC admits the facts necessary to establish the Court’s jurisdiction over DKMC and the subject matter jurisdiction related to the Lawsuit Subject Matter.
Lenders must monitor marketing and production numbers to avoid being targeted by powerful regulators. The LOSJ profiles recent CFPB enforcement activity against another non-depository lender in this issue. The failure to market to and serve majority-minority neighborhoods is considered discriminatory treatment violating the ECOA and, in this case, also inciting a Consumer Financial Protection Act complaint.
Among other allegations, the CFPB stated they had loan officer emails that evidenced racist comments indicating a culture of discriminatory attitudes.
“DKMC’s Loan Officers Exchanged Emails Indicating Racial Bias and Discriminatory Animus”
“From at least 2019 through 2021, some DKMC loan officers sent and received emails via their DKMC email accounts containing racist content or otherwise reflecting discriminatory animus.”
The CFPA grants the CFPB tremendous power. This is another example of a non-depository mortgage company that the CFPB has temporarily eliminated from the mortgage business in the last few years.
JAN 17, 2025
WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) took action against Draper & Kramer Mortgage Corporation (Draper) for discriminatory mortgage lending activities that discouraged homebuyers from applying to Draper for homes in majority-Black and Hispanic neighborhoods in the greater Chicago and Boston areas. The CFPB alleges that Draper located all its offices in majority-white neighborhoods, concentrated its marketing in majority-white neighborhoods, and avoided marketing to majority-Black and Hispanic areas. These actions resulted in disproportionately low numbers of mortgage loan applications and mortgage loan originations from majority-Black and Hispanic neighborhoods in Chicago and Boston compared to other lenders. If entered by the court, the proposed order announced today would ban Draper from engaging in residential mortgage lending activities for five years, and require Draper to pay a $1.5 million civil money penalty into the CFPB’s victims relief fund.
“Draper illegally excluded homeowners and engaged in redlining across the Chicago and Boston metro areas,” said CFPB Director Rohit Chopra. “Today’s order bans Draper from mortgage lending for five years and ensures that the company pays for its unlawful discrimination.”
Draper & Kramer Mortgage Corporation is a non-depository mortgage lender based in Downers Grove, Illinois. Draper received applications and originated mortgage loans across the United States, including in Illinois, Indiana, Massachusetts, New Hampshire, and Wisconsin.
The CFPB alleges that, from 2019 through 2021, Draper engaged in redlining majority-Black and Hispanic neighborhoods in the greater Chicago and Boston areas, resulting in it significantly underperforming its peers in lending activity to these areas. Draper discouraged mortgage applicants from making or pursuing an application for credit on the basis of race, color, and national origin, violating the Equal Credit Opportunity Act and Regulation B.
Specifically, the CFPB alleges that Draper violated the law by:
- Intentionally focusing mortgage lending activities in majority-white neighborhoods and excluding Black and Hispanic neighborhoods: Draper had no offices, no loan officers, and virtually no marketing or outreach in majority- or high-Black and Hispanic neighborhoods in Chicago and Boston. Draper did not assign any loan officers to solicit applications in majority-Black and Hispanic communities and failed to train or incentivize its loan officers to lend in these communities. Draper’s outreach and marketing also specifically targeted majority-white neighborhoods and largely avoided majority-Black and Hispanic neighborhoods.
- Discouraging mortgage applicants from pursuing properties in majority-Black and Hispanic neighborhoods: Draper’s business model discouraged borrowers from applying for loans to purchase property located in these neighborhoods. Draper’s peer lenders generated applications for properties in majority-Black and Hispanic areas in the Chicago metro area at over two and-a-half times the rate and in the Boston metro area at three times the rate that Draper generated such applications. Draper also originated disproportionately low amounts of mortgage loans for properties in these neighborhoods, with peers in Chicago and Boston originating two and-a-half times more loans than Draper in majority-Black and Hispanic neighborhoods.
Enforcement Action
Under the Consumer Financial Protection Act, the CFPB has the authority to take action against institutions violating consumer financial laws, including the Equal Credit Opportunity Act and engaging in unfair, deceptive, or abusive acts and practices.
If entered by the court, the order would require Draper to:
- Cease residential mortgage lending activities for five years: For a period of five years, Draper cannot perform any residential mortgage lending activities, nor receive any compensation for any residential mortgage lending.
Pay a $1.5 million penalty: Draper will pay a $1.5 million civil penalty to the CFPB’s victims relief fund.
Urban Institute, Mortgage Lending Discrimination: A Review of Existing Evidence
Tip of the Week – Goal Setting Steps
Step 1: Begin with your preferred goal-setting approach. Once you identify a goal, proceed to step 2.
Step 2: Now ask yourself, “What impact will the failure to achieve the goal have on me or what matters to me?” Proceed to step 3.
Step 3: Suppose you foresee the failure to reach your goal having significantly negative or devastating consequences. In that case, you have yourself a bona fide goal. On the other hand, imagine failure to achieve your goals having little to no adverse effects. In that case, your goal is meaningless and without the power to motivate you and stimulate the necessary ambition to reach your goal. The goal is illegitimate. Set only legitimate goals.
Step 4: Repeat Steps 1, 2, and 3 until you set worthwhile and legitimate goals. To help identify meaningful goals, try building a portfolio of strategic interests. See the portfolio examples below.
This goal-setting technique is iterative, which means trial and error is normal. Therefore, you can expect to repeat the goal-setting exercise until you understand what is most important to you and how to get there.
Use Portfolios to Begin Your Goal-Setting
Your short-term goals should connect with and support your long-term goals. Long-term goals must have a nexus with your values. A strategy involves lesser objectives that support more significant objectives. Your strategy might include discrete “portfolios” to ensure you don’t miss anything important. For example, your portfolios may consist of:
- Spiritual goals
- Physical well-being
- Professional success
- Financial security
- Marital success
- Paternal success
- Retirement success
Once you identify the portfolios, consider each portfolio’s short-term goals. Be very specific with goals. You need the specificity to determine success. No target, no ability to objectively measure progress. If your short-term goals are aligned with your strategy, even partial success in reaching the goals has value.
These portfolios are discrete yet overlap and integrate more or less. Therefore, the apt strategy is better if it is more holistic and integrated than siloed. In other words, balance your portfolios.