LOS Journal – Volume 5 Issue 11 - LoanOfficerSchool.com

Why Haven’t Loan Officers Been Told These Facts? The Truth In Lending Act, An Overview of the TILA’s Original Principles

Over the last 57 years, Congress has made significant amendments to the Truth in Lending Act (TILA). The current version of the law reflects a return to the intent envisioned by its original champion, Senator Paul Douglas: protecting consumers from deception and alerting borrowers to the high cost of borrowing.

It is well-known that the high cost of credit can lead to financial difficulties, reputational damage, and even the breakdown of families. Unfortunately, many consumers do not recognize this reality. Therefore, it is essential to warn them about the risks associated with unchecked materialism and the dangers of excessive borrowing. Disclosure is great, but, like treating diseases at acute stages, an ounce of prevention is worth a pound of cure.

When prospective homebuyers approach a lender, it is often too late to address their borrowing issues. The main problem is not a lack of disclosure but rather a mindset. Many people struggle with the tendency to purchase unnecessary items. If credit didn’t exist, individuals would likely buy less. Senator Douglas, an economist, emphasized this idea. He believed that while credit itself is not inherently bad, the failure to understand the “high cost of credit” can lead to significant financial problems.

Schools should be teaching children about responsible financial habits alongside subjects like quadratic equations. After all, how often does the average homebuyer use quadratic equations?

The disclosure is beneficial, but it puts the cart before the horse. Consumers need assistance before Madison Avenue’s perspective distorts their consumer mindset.

Congress has made some mistakes regarding the Truth in Lending Act (TILA). However, we should commend Senators Douglas, Proxmire, and others like them for their efforts to promote sound business practices while protecting both the housing industry and consumers.

The Fifth Principle

The fifth principle of the truth-in-lending bill is that consumer credit, unencumbered by deception and confusion can be a force for stability in our economy. If consumers understand the price of credit as they understand the price of other articles and services, their choices can help to combat inflation or a recession. When finance charges go up in a period when inflation threatens, the consumers-if they know the cost of credit is going up-will be encouraged to postpone credit purchases; or when recession threatens, the knowledge that finance charges are lower can encourage consumers to buy. Thus, this knowledgeable action by consumers can help to keep the economy on an even keel. But of course, where finance rates are concealed, this mechanism of the marketplace is not permitted to work.

Recent Amendments to TILA: Safeguarding Consumers Against Steering (Dodd-Frank)

12 CFR § 1026.36(e)(1) In connection with a consumer credit transaction secured by a dwelling, a loan originator shall not direct or “steer” a consumer to consummate a transaction based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered to the consumer, unless the consummated transaction is in the consumer’s interest. For purposes of § 1026.36(e)(1), directing or “steering” a consumer to consummate a particular credit transaction means advising, counseling, or otherwise influencing a consumer to accept that transaction. For such actions to constitute steering, the consumer must actually consummate the transaction in question.

BEHIND THE SCENES – Good News For Angelinos, HUD Extends Foreclosure Moratorium in Los Angeles County

HUD provides an automatic 90-day foreclosure moratorium beginning on the date of any Presidentially Declared Major Disaster Area (PDMDA) declaration. On January 8, 2025, Los Angeles County, California, was declared a major disaster area due to the wildfires that resulted in significant
economic and property damage across the county. HUD’s automatic foreclosure moratorium is set to expire on April 8, 2025. HUD believes that Borrowers need additional time provided by an extension to the moratorium to access federal, state, or local housing resources. Therefore, HUD is
extending the foreclosure moratorium.

The provisions of Mortgagee Letter 2025-07 are effective immediately. The moratorium will remain in effect through July 7, 2025. Properties located in Los Angeles County, California, and secured by FHA-insured single-family forward-mortgages are subject to an extended foreclosure moratorium through July 7, 2025. The moratorium applies to the initiation of foreclosures and to the completion of foreclosures in process.

Tip of the Week – Gift Giving Under RESPA Section 8(a)
“Can I Give a Gift to Referral Partners or Pay For Promotions?”

12 USC §2607(a) Prohibition against kickbacks and unearned fees (a) Business referrals. No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

Can I give gifts to my referral partners? That depends. If you provide gifts for referral partners while excluding similar gift-giving to persons who are not referral partners, that would indicate a pattern or practice that violates RESPA Section 8(a) and Regulation X 12 CFR § 1024.14(e).

Under RESPA Section 8(a), gifts and promotions generally are “things of value” and therefore could, depending on the circumstances, violate RESPA Section 8(a).

If the gifts or promotions are given or accepted, as part of an agreement or understanding, for referral of business incident to or part of a real estate settlement service involving a federally related mortgage loan, they are prohibited.

An agreement under the Real Estate Settlement Procedures Act (RESPA) does not mean what people typically think it does. For instance, if a loan officer gives expensive tickets to sporting events exclusively to their best customers—those who refer business to them—this pattern of behavior may serve as sufficient evidence of an agreement or understanding related to the exchange of something of value for referrals.

If an item or activity is targeted narrowly toward prior, ongoing, or future referral sources, this could indicate the item or activity is conditioned on referral of business.

For example, if a promotional item is provided only to a limited set of real estate agents who also happen to be current referral sources or an intentionally targeted group of future referral sources, this may suggest that the recipient is receiving the promotional item because of past or future referrals and, thus, the promotional item may be conditioned on referrals.

If, instead, a promotional item is provided to a broader set of recipients, such as the general public or all settlement service providers offering similar services in a given locality, then that may indicate that the promotional item is not conditioned on referral of business.

If a referral source is routinely and frequently provided with an item or included in an activity, and particularly if that referral source is provided with the item or included in the activity more often than other persons, this could indicate the item or activity is conditioned on referrals.

There is no exception to RESPA Section 8 solely based on the value of the gift or promotion. Accordingly, lenders should carefully analyze whether providing gifts or opportunities to win prizes to referral sources could violate the prohibitions under RESPA Section 8.

Regulation X

Regulation X 12 CFR § 1024.14(e) Agreement or understanding. An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.

Regulation X 12 CFR § 1024.14(f) Referral.

(1) A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.
(2) A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use (see § 1024.2, “required use”) a particular provider (such as an AMC or credit reseller) of a settlement service or business incident thereto.