You are on page 1of 58

Chapter 13

Ethics in the Mortgage


Lending Profession

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 1


Chapter 13: Ethics in the Mortgage Lending Profession

Overview

Chapter 13 discusses:
• Ethics and the purpose of codes of ethic
• Various anti-discrimination laws
• Various federal laws and the disclosure
obligations they impose
• Indicators of mortgage fraud
• Participants and their roles in mortgage fraud
schemes
• Predatory lending practices

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 2


Chapter 13: Ethics in the Mortgage Lending Profession

Key Terms

• Flipping
• Fraud
• Negligence
• Predatory Lending
• Redlining
• Straw Buyer

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 3


Chapter 13: Ethics in the Mortgage Lending Profession

Ethical and Legal


Considerations
• Treat everyone equally
• Be honest
• Give full disclosure
• Don’t take advantage of people
• Keep good documentation

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 4


Chapter 13: Ethics in the Mortgage Lending Profession

NAMB Code of Ethics

• Honesty and Integrity


• Professional Conduct
– Negligence
– Never give legal advice
• Honesty in Advertising
• Confidentiality
• Compliance with the Law
• Disclosure of Financial Interests

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 5


Chapter 13: Ethics in the Mortgage Lending Profession

Ethics in Advertising

• Any advertisements containing a triggering


term must also include
– Amount or percentage of down payment
– Terms of repayment
– Annual percentage rate, using that term
spelled out in full

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 6


Chapter 13: Ethics in the Mortgage Lending Profession

Triggering vs.
Non-Triggering Terms

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 7


Chapter 13: Ethics in the Mortgage Lending Profession

Questions to Consider
• Does your advertising make your customers
satisfied that they do business with you?
• Are you avoiding impossible promises and
guarantees?
• Are your advertised merchandise or programs
readily available?
• Do you mean to sell what you advertise?
• Do your ads avoid misleading inferences?
• Do your advertised terms agree with the facts?
• Is your advertising easy to understand without
asterisks and fine print?
• Do you believe your own comparatives?
• Would you be attracted by what your ad says?
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 8
Chapter 13: Ethics in the Mortgage Lending Profession

Discrimination

• Civil Rights Act of 1866


• Fair Housing Act of 1968 (Title VIII)
• Equal Credit Opportunity Act of 1974 (ECOA
or Regulation B)

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 9


Chapter 13: Ethics in the Mortgage Lending Profession

Protected Classes

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 10


Chapter 13: Ethics in the Mortgage Lending Profession

Prohibited Practices Under


the Fair Housing Act
• Refusing to sell, rent, or negotiate sale or lease of residential
property
• Changing the terms of sale/lease for different people
• Making false representations regarding availability of property
for sale/lease
• Discriminatory advertising
• Limiting participation in a MLS or similar service
• Blockbusting
• Steering
• Redlining (and other lending discrimination)

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 11


Chapter 13: Ethics in the Mortgage Lending Profession

Equal Credit Opportunity Act

• Implemented as Regulation B
• Prohibits discrimination based on:
• Race • Sex
• Color • Marital status
• Religion • Receipt of income from
• National origin public assistance
• Age programs
• Source of income should not be consideration
• Applicants not required to disclose alimony, child
support, separate maintenance
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 12
Chapter 13: Ethics in the Mortgage Lending Profession

Other Types of Discrimination

• Discrimination in municipal actions


– Exclusionary zoning laws
– Disparate impact
• Discrimination in advertising

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 13


Chapter 13: Ethics in the Mortgage Lending Profession

Disclosure and Privacy

• Compliance with the requirements of


Regulation Z, RESPA, the Gramm-Leach-
Bliley Act, and the Fair Credit Reporting Act
• Being clear and up front with clients about
any business relationships you may have
with other parties to the loan

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 14


Chapter 13: Ethics in the Mortgage Lending Profession

Truth in Lending Act


(Regulation Z)
• Requires lenders to disclose consumer credit
costs to promote informed use of consumer
credit
• Implemented by the Federal Reserve Board
• Covers all residential real estate loans
regardless of amount
• Disclosures are required
– When lenders offer credit to borrowers
– When credit terms are advertised to
potential customers
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 15
Chapter 13: Ethics in the Mortgage Lending Profession

Specific Disclosures
Required by TILA
• Required within three business days of application:
– Truth in Lending Disclosure Statement (TIL)
– Understanding the TIL consumer guide
– Consumer Handbook on Adjustable Rate
Mortgages (CHARM Booklet) *
– ARM Disclosure *
– When Your Home Is on the Line Booklet *
– Balloon Disclosure *
– Prepayment Disclosure *
– Notice of Right to Rescind *
• Retain evidence of compliance for at least two years
* As appropriate

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 16


Chapter 13: Ethics in the Mortgage Lending Profession

Real Estate Settlement


Procedures Act (RESPA)
• Regulation X implements RESPA
• Requires timely disclosures of the nature
and costs of the real estate settlement
services
– Good Faith Estimate and HUD information
booklet (within 3 business days)
– HUD-1 Settlement statement (available 1
day prior to close)

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 17


Chapter 13: Ethics in the Mortgage Lending Profession

Important Points
About RESPA
• Prohibits kickbacks and fees for services not
performed during closing
• Requires disclosure of affiliated business
arrangements
• Sets limits on the amount of escrow reserves a
lender can hold or require a buyer to deposit in
advance to cover real estate taxes, real estate
insurance premiums, and other similar costs.
• Requires disclosure of possibility and likelihood
that the loan will be sold or transferred
• Violations can result in $10,000 fine/incident
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 18
Chapter 13: Ethics in the Mortgage Lending Profession

Gramm-Leach-Bliley
Act (GLB Act)
• Financial Modernization Act of 1999
• Provisions in Title V protect/regulate sharing/disclosure of
consumers’ personal financial information:
– The Financial Privacy Rule
• Governs collection and disclosure of nonpublic personal
information
• Requires Consumer Privacy Policy
• Allows consumers to opt-out
• Annual disclosure of policy
– Safeguards Rule
• Design, implement, and maintain safeguards to protect customer
information while it is in the custody and control of the institution
and its agents
– Pretexting Provisions

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 19


Chapter 13: Ethics in the Mortgage Lending Profession

Fair Credit Reporting Act


(FCRA or Reg V)
• Federal law dealing with:
– The granting of credit
– Access to credit information
– The rights of debtors
– The responsibilities of creditors
• Gives consumers access to the same info
that lenders use when making credit
decisions
• Requires Notice of Adverse Action
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 20
Chapter 13: Ethics in the Mortgage Lending Profession

Fair and Accurate Credit Transaction


Act of 2003 (FACT Act or FACTA)
• Amended the federal Fair Credit Reporting Act
• Intended primarily to help consumers fight the
growing crime of identity theft
• Main provisions:
– Free copy of consumer credit file annually
– Allows consumers to place fraud alerts/freezes
– Requires truncation of credit/debit card #s
– Requires security and disposal measures
• Red Flag Rules – implementation of written
identity theft prevention program

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 21


Chapter 13: Ethics in the Mortgage Lending Profession

Fraud

• Fraud is the intentional or negligent misrepresentation or


concealment of material facts
– Failing to disclose information you’re required to disclose
– Also includes actively concealing information and making
false or misleading statements
• Actual Fraud
– An intentional misrepresentation or concealment of a
material fact
• Constructive Fraud
– A negligent misrepresentation or concealment of a
material fact

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 22


Chapter 13: Ethics in the Mortgage Lending Profession

Red Flags of
Mortgage Fraud (FFIEC)
• Steering buyers to a specific lender
• Stated income
• No money due at closing
• Sale subject to the seller acquiring title
• Difference in sale price
• Sale price changes to fit appraisal
• Related parties involved
• Funds paid to undisclosed third parties
• Cash paid to seller outside of escrow
• Cash paid to borrower

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 23


Chapter 13: Ethics in the Mortgage Lending Profession

Fraud Participants

• Buyers
– Supplying false documents or false information
on the loan application
– Straw buyer
• Lenders and brokers
– Falsifying documents
– Making loans to straw buyers
– Illegally flipping properties
• Appraisers
– Inaccurate information—whether completed
because of fraud or negligence
– Inflated appraisals
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 24
Chapter 13: Ethics in the Mortgage Lending Profession

Appraisal Practices
Prohibited by TILA
• Implying to appraiser that current or future jobs
depend on opinion of value
• Excluding an appraiser from consideration for
future job because appraiser reports a value
that does not meet or exceed a minimum
threshold
• Telling appraiser a minimum value needed to
approve the loan
• Failing to compensate an appraiser for not
valuing property at or above a certain amount
• Conditioning an appraiser's compensation on
loan consummation.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 25


Chapter 13: Ethics in the Mortgage Lending Profession

Other Industry Insiders


• Attorneys
– Prepare bogus deeds
• Accountants
– Falsify tax returns, profit and loss statements, and other docs
• Title companies
– Charge fees for services never provided
– Complete incorrect title reports
• Government workers
– Falsify deeds and other records
• Real estate agents
– Assist in the preparation of false documentation
– Find straw buyers
– Collude in flipping schemes
• Rehabbers and FSBO flippers
– Use sub-par material
– Remove materials or fixtures after an appraisal
– Provide straw buyers
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 26
Chapter 13: Ethics in the Mortgage Lending Profession

Flipping

• Legal flipping: Investor remodels property and quickly


sells for profit
– Increases property values
– Improves neighborhoods
– Provides housing that otherwise might not be available
• Illegal flipping: Investor purchases at low price, gets
appraisal at high price without valid reason, resells at
much higher price
– Generally requires collusion with other
– May involve series of quick sales and re-sales
– More prevalent in mixed value areas
– Rarely use local entities to handle loan

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 27


Chapter 13: Ethics in the Mortgage Lending Profession

FHA Response to
Flipping Schemes
• Sellers must own property for at least 3 months
prior to the new sale
• Will not insure any resale properties unless the
owner of record is the seller
• Resales that take place 91–180 days after the
initial sale can be FHA-insured only if there is a
second appraisal that matches a resale
threshold percentage established by HUD

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 28


Chapter 13: Ethics in the Mortgage Lending Profession

Other Types of Mortgage Fraud

• Air Loan
• Non-existent loans and no-collateral loans
• Deed scam
• Seller’s signature on the deed is forged
• Double sold loans
• Loan sold to fraudulent company for servicing
• Multiple applications submitted to multiple lenders
• Unrecorded or silent second
• Seller offers concession without informing lender
• Disappearing second
• Entice buyers to get a larger loan/pay more for property with
“seller-held” mortgage

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 29


Chapter 13: Ethics in the Mortgage Lending Profession

Predatory Lending

Loans that take advantage of ill-informed consumers for profit


through:
• Excessively high fees, e.g., exorbitant prepayment
penalties
• Packing loan with credit insurance or other extra fees (junk
fees)
• Misrepresented loan terms
• Extending credit to people with little chance of repaying
• Frequent refinancing that does not benefit the borrower
(loan flipping)
• Equity skimming
• Extreme lending over and above lending guidelines

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 30


Chapter 13: Ethics in the Mortgage Lending Profession

Indicators of Predatory Lending


from Mortgage Bankers Assoc.
1. Steering borrowers to high-rate programs
2. Falsely identifying loans as lines of credit
or open mortgages
3. Structuring high-cost loans with
unaffordable payments
4. Falsifying loan documents
5. Making loans to mentally incapacitated
homeowners

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 31


Chapter 13: Ethics in the Mortgage Lending Profession

Indicators of Predatory Lending


from Mortgage Bankers Assoc.
6. Forging signatures on loan documents
7. Changing loan terms at closing
8. Requiring credit insurance
9. Increasing interest rates for late payments
10. Charging excessive prepayment penalties
11. Failing to report good payment history on a
borrower’s credit report
12. Failing to provide the accurate loan
balance and payoff information
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 32
Chapter 13: Ethics in the Mortgage Lending Profession

Consumer Protection
on High Cost Loans (HOPEA)
• Balloon payments on HOEPA loans less than 5
years prohibited
• Negative amortization prohibited
• Pressure tactics prohibited (provide right of
rescission)
• Loan pricing limited
• Acceleration clauses that increase rates prohibited
• Prepayment penalties limited
• Loan flipping – refinancing within 1 year - prohibited
• Demand clauses prohibited
• Income verification required

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 33


Chapter 13: Ethics in the Mortgage Lending Profession

Case Study

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 34


Chapter 13: Ethics in the Mortgage Lending Profession

Case Study

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 35


Chapter 13: Ethics in the Mortgage Lending Profession

Case Study

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 36


Chapter 13: Ethics in the Mortgage Lending Profession

Case Study

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 37


Chapter 13: Ethics in the Mortgage Lending Profession

Case Study

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 38


Chapter 13: Ethics in the Mortgage Lending Profession

Case Study

1. If you were the Commissioner of Banks who


received that letter from Jane Consumer,
what would be your impression of the
ABCDFG Mortgage Company?

2. Were the loan originator’s actions:


ETHICAL UNETHICAL DEBATABLE

3. Discuss what bothers you about the actions


taken by the loan originator.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 39


Chapter 13: Ethics in the Mortgage Lending Profession

Summary

1. Mortgage Professional Obligations laws are


the minimum duty required of a mortgage
professional. Mortgage professionals should
strive to fulfill not only the letter of the law, but
also its intent. Ethical guidance can come
from: Better Business Bureau (BBB) or State
Attorney General’s office. The National
Association of Mortgage Brokers (NAMB)
Code of Ethics.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 40


Chapter 13: Ethics in the Mortgage Lending Profession

Summary
2. Discrimination: Federal Fair Housing Act of 1968
(Title VIII) protected classes: Race, color, religion,
sex, national origin, disability, or familial status.
Redlining: Illegally refusing to make loans on
property located in a particular neighborhood for
discriminatory reasons. The Home Mortgage
Disclosure Act (HMDA) helps enforce compliance.
Equal Credit Opportunity Act (Reg B) prohibits
discrimination in granting credit to people based on
sex, age (if at least 18), marital status, race, color,
religion, national origin, receipt of public assistance,
or exercised rights under the Consumer Credit
Protection Act.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 41


Chapter 13: Ethics in the Mortgage Lending Profession

Summary
3. Truth in Lending Act (TILA)
• Requires disclosure of consumer credit costs to
promote informed use of credit; implemented by
Regulation Z
• Requires Truth in Lending Disclosure Statement (TIL)
that details:
– Annual percentage rate (APR)
– Total cost of financing including an interest rate, fees, and all
other charges
– Total payments, amount financed, and finance charge
• Provides right to rescind within three business days
of closing certain types of loans on a primary
residence
• Regulates lender advertising
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 42
Chapter 13: Ethics in the Mortgage Lending Profession

Summary

4. Real Estate Settlement Procedures Act


(RESPA) regulates settlement and closing
procedures and requires lenders, mortgage
brokers, or servicers of home loans to provide
borrowers with pertinent and timely disclosures.
Prohibits kickbacks. Requires use of HUD-1
Settlement Statement for federally related
residential mortgages (buyer may review one day
prior to closing) and Good Faith Estimate of
closing costs and explaining booklet.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 43


Chapter 13: Ethics in the Mortgage Lending Profession

Summary

5. Fraud: Misrepresentation or concealment of a


material fact. Avoid any situation that can be
construed as mortgage fraud. Can be
perpetrated by borrowers who lie on
applications, by an appraiser who provides an
inflated property value, or by a mortgage
broker who ignores derogatory information to
get a loan approved. Also includes not
reporting all items on the HUD closing
statement accurately, creating phantom
documents for verification, or concealing the
true nature of the borrower’s down payment.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 44


Chapter 13: Ethics in the Mortgage Lending Profession

Summary

6. Predatory lending: Loans that take advantage of ill-informed


consumers through excessively high fees, misrepresented
loan terms, frequent refinancing that does not benefit the
borrower, and other prohibited acts. Targets borrowers with
little knowledge of, or defense against, these practices. Home
Ownership and Equity Protection Act (HOEPA) establishes
disclosure requirements and prohibits: Equity stripping,
balloon payments on short-term loans (less than five years),
negative amortization, excessive prepayment penalties, loan
flipping, and other abusive practices.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 45


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

1. Which act specifically prohibits


redlining?
a. Civil Rights Act of 1866
b. Equal Credit Opportunity Act
c. Fair Housing Act
d. Home Mortgage Disclosure Act

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 46


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

2. As mortgage broker, Sam puts together


an ad to attract some new customers.
What law should he be most concerned
about?
a. FACT Act
b. GLBA
c. RESPA
d. TILA

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 47


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

3. Mortgage broker Dave knows that his


customer is losing his job at the end of
the month because the plant where he
works is closing, but in his eagerness to
close the deal, he decided to ignore that
fact. This might be considered an
example of
a. actual fraud.
b. constructive fraud.
c. good business.
d. negligent misrepresentation.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 48
Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

4. Mortgage fraud can be committed by


a. appraisers only.
b. borrowers only.
c. lenders and brokers only.
d. any party to a mortgage loan.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 49


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

5. Which law prohibits kickbacks?


a. Fair Credit Reporting Act
b. Gramm-Leach-Bliley Act
c. Regulation Z
d. RESPA

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 50


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

6. Predatory lending involves


a. forcing the borrower to refinance a loan
with inferior terms.
b. misrepresenting the loan terms by the
lender.
c. requiring excessively high fees, such as for
credit life insurance.
d. all of the above

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 51


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

7. Which situation is LEAST likely to be an


example of predatory lending?
a. ABC Mortgage Co. offers a subprime loan to
Mark, who is coming out of bankruptcy.
b. Dave shows up at closing and finds that the lender
has changed the terms of the loan.
c. Ellie was 12 days late paying her mortgage, and
the lender raised the interest rate 1/4%.
d. Frank paid off his mortgage loan early with lottery
winnings and the lender charged a $12,000
prepayment penalty.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 52


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

8. Which situation does NOT involve


a straw buyer?
a. Ann revises her pay stubs so she can qualify for a
loan to buy her dream house.
b. Bob uses his twin brother’s Social Security
number and credit information to apply for a loan.
c. Dave agrees to secure a loan under his name
even though only his sister with bad credit will live
in the house.
d. Tina tells Rob, who is facing foreclosure, that if he
deeds the property to her, she will refinance on
good terms and let him stay in the house.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 53


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz
9. Mortgage broker Cindy’s customer purposely does not
tell her that he just co-signed his nephew’s auto loan.
The credit report shows neither that loan nor a credit
inquiry, and so that debt is not considered when Cindy
pre-approves him for a larger mortgage than he really
should have. Do you think Cindy did anything wrong?
a. No, she can’t be held responsible if a client withholds
information that does not show on his credit report.
b. Yes, she colluded with the customer to withhold
material information.
c. Yes, she committed actual fraud by approving a
purposely false application.
d. Yes, she committed constructive fraud by not
confirming the customer’s debts.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 54


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

10. Which of the following is NOT one of


the indicators of predatory lending as
provided by the Mortgage Banker’s
Association?
a. charging excessive prepayment penalties
b. falsifying loan documents
c. increasing interest charges on late loan
payments
d. requiring mortgage insurance

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 55


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

11. Within how many business days after


receiving a loan application must the
lender provide the borrower with the
Good Faith Estimate and the Mortgage
Servicing Disclosure Statement?
a. two
b. three
c. four
d. five

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 56


Chapter 13: Ethics in the Mortgage Lending Profession

Quiz

12. What legislation restricts the


circumstances under which a
financial institution may disclose a
consumer’s personal financial
information to non-affiliated third
parties?
a. Fair and Accurate Credit Transaction
Act
b. Fair Credit Reporting Act
c. Gramm-Leach-Bliley Act
d. Home Mortgage Disclosure Act
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 57
Thank You!

Thank You for Choosing the


Real Estate School of SC for
Your Mortgage Educational
Needs!

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 58