Ethics - The Industry Moves
Forward
Overview
This course explores several aspects of ethical mortgage lending. We will
present a simple ethics framework for guiding individual decisions. We will
define and illustrate good ethical practices in the lending industry. We will
reinforce the need to correct poor behaviors and prevent fraud and
misrepresentation in order to protect the borrower. Finally, we discuss the
critical integration between fair lending laws and ethical behavior.
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Ethics – Moving Forward:
Ethical Action
Table of Contents
Table of Contents .................................................................................................................. 2
CHAPTER 1 Ethical Action ...................................................................................................... 4
The Ethics Goal .................................................................................................................. 4
What Brought Us to this Point? .......................................................................................... 4
The Ethics Pyramid ............................................................................................................. 6
Laws and Regulations........................................................................................................... 6
Ethical Practices ................................................................................................................... 7
Professional Success ............................................................................................................ 7
Good Ethics are Contagious ................................................................................................ 7
Professional Conduct ......................................................................................................... 8
NAMP ................................................................................................................................... 8
Rotary’s Four-Way Test........................................................................................................ 9
Application of Rotary’s Four–Way Test to Mortgage Lending ................................................ 9
CHAPTER 2 Fraud, Negligence and Misrepresentation .......................................................... 10
Introduction..................................................................................................................... 10
Mitigating Fraud by Industry Participants ......................................................................... 11
CHAPTER 3 Prevention and Consumer Protection ................................................................. 15
Develop a Strong Customer Relationship .......................................................................... 16
Explain the Paperwork ..................................................................................................... 16
Beware the “Jack of all Trades” ........................................................................................ 18
Golden Rule ..................................................................................................................... 18
What Do We Want to Accomplish? ................................................................................... 20
Other Issues ..................................................................................................................... 21
Chapter 4 ............................................................................................................................ 23
Ethics and Fair Lending Laws ............................................................................................... 23
Overview ......................................................................................................................... 23
The Truth-in-Lending Act (TILA) ........................................................................................ 24
Home Ownership and Equity Protection Act (HOEPA) ....................................................... 25
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Mortgage Disclosure Improvement Act (MDIA) ................................................................ 25
Equal Credit Opportunity Act (ECOA) ................................................................................ 26
Fair Credit Reporting Act and Red Flag Rules (FCRA) ......................................................... 26
The Gramm-Leach Bliley Act (GLB).................................................................................... 27
Real Estate Settlements Procedures Act (RESPA, Reg X) .................................................... 28
Appraiser Independence Requirements (AIR) / Valuation Independence .......................... 30
Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”): ................ 30
Appendix: Case Study Answers ........................................................................................ 34
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Ethics – Moving Forward:
Ethical Action
CHAPTER 1
Ethical Action
The Ethics Goal
We first define ethics as a set of values, conduct and principles that consistently guide our
behaviors and decisions to deliver fair and honest service to all parties. Mortgage loan
originators must always act in the best interest of the borrower while delivering a completely
compliant and accurate loan file to the investor/lender. Mortgage loan originators are in the
business of finding qualified borrowers and matching them with the most appropriate loan
programs available.
The need for enhanced ethics education, training, and monitoring is more important than ever.
The absence of good ethical practices adversely affects everyone in the mortgage lending
industry. As a result of the actions of a few unethical individuals, even highly ethical
professionals are painted with a broad negative brush. The mortgage loan originator should be
a trusted financial advisor—there is no place for unethical behavior in the mortgage industry.
Recurring cases of unacceptable ethics can lead to a regulatory backlash. The Consumer
Financial Protection Bureau has broad regulatory authority over all aspects of our industry.
It is in everyone’s best interest to practice strong ethics proactively. Over time, and across the
industry, as each properly executed transaction is completed, it strengthens overall standards
and expectations. Eventually, excellent business practices help lift the highest performing
business entities and begin to restore faith in our industry.
The few bad actors that will surface from time to time eventually lose their network and
customer base. They eventually move on to another scam in an industry with more vulnerable
and less informed consumers. It may take years to earn trust and a good reputation, but With
time and high ethical and professional standards it can be accomplished.
What Brought Us to this Point?
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Ethics – Moving Forward:
Ethical Action
Typically we can count on free-market forces, smart regulatory oversight, powerful industry
standards and good moral judgment to properly protect the innocent consumer; however,
for our discussion, we use as a background the years of 2004 – 2011 given the strong contrast
of unethical processes with an overall strengthening of the moral fiber of the industry. This
salient example allows us to:
 Examine what went wrong and to prevent recurrence
 Understand the role “ethics” must play in the lives of mortgage professionals
 Incorporate strict ethical principles in every interaction with our borrowers,
associates, and suppliers
 Make ethical practices the “norm,” so that improper behavior is immediately policed
and corrected
 Create an environment forever intolerant of behavior that abuses a borrower’s trust
 Install a permanent and continuous process of clearing out the bad actors in our
industry
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Ethics – Moving Forward:
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The Ethics Pyramid
One way to think of ethical action is to consider a pyramid with laws and regulations as the
support for ethical practices, where following these leads to professional success. Good ethics
is about fairness, honesty, complete communication, and full disclosure. Not only must our
actions be right, they must also look right.
Professional
Success
Ethical Practices
Laws and Regulations
Laws and Regulations
At the base of the pyramid are the vast set of federal and state laws, rules, and regulations that
we consistently and unquestionably learn and follow. These are requirements developed to
force and enforce ethical action in industry participants.
These laws and regulations are critical to developing an environment of faith and trust in the
industry. When industry participants circumvent laws and regulations, not only are those
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Ethics – Moving Forward:
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actions generally unethical, but these actions bring about new laws to broaden and further
define the base of the pyramid. We have seen massive changes in the law in the past several
years which will likely continue at a frenzied pace for several years to come.
Ethical Practices
These laws and regulations form a solid basis to encourage and enforce ethical practices and
professional standards. Ethical conduct and behavior grow out of our strict adherence to the
laws and regulations. There is no clear boundary between our ethical practices and the law.
Ethics drives our everyday decisions and judgments.
One cannot practice good ethical behavior without complying fully with the law; however,
ethics takes us well beyond the law into many grey areas that call on judgment, fairness, and
long-term relationship building to make appropriate decisions.
Professional Success
Completing the “Essential Practices” pyramid is the path to long-term professional success,
which stem from those behaviors, ethical behaviors, that instill customer trust, loyalty, brand
distinction, and repeat business. These impacts play a critical “building block” for effective
communication, correct pricing and product representation, meaningful marketing, and a
skilled team – all of which lead to long-term professional success.
Good Ethics are Contagious
There is also strong reason to practice good ethics beyond just one’s own behavior. An
organization’s reputation and the reputation and performance of its partners and vendors all
are necessary for personal success. To participate and benefit from the reputation of any
organization, it is critical for each participant to set the example and demand high standards of
professional conduct from customers, co-workers, superiors, investors and lenders.
There is no place in the mortgage industry for pressuring the appraiser for a specific amount or
in trying to coerce a title company or other party in the transaction to overlook a crucial fact.
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There can be no tolerance for unfair, abusive actions from anyone that would damage your
employer’s, supplier’s or industry’s reputation. Straying from this strong stance is a very
slippery slope – it is not surprising that deviating just once from high ethical standards makes it
more difficult to uphold those standards in the future.
Professional Conduct
There is an abundance of material on the subjects of ethics and professional conduct. Many mortgage
and real estate associations publish a Code of Ethics/Professional Conduct, and they have done so for
many years.
NAMP
The National Association of Mortgage Professionals (NAMP/NAMB)1 has developed a set of ethics
believing that the interests of the public and private sector are best served through the voluntary
observance of ethical standards of practice, hereby subscribing to their code of ethics.
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Honesty and Integrity: NAMP members shall conduct business in a manner reflecting honesty,
honor, and integrity.
Professional Conduct: NAMP members shall conduct their business activities in a professional
manner. Members shall not pressure any provider of services, goods, or facilities to circumvent
industry professional standards. Equally, Members shall not respond to any such pressure
placed upon them.
Honesty in Advertising: NAMP members shall provide accurate information in all
advertisements and solicitations.
Confidentiality: NAMP members shall not disclose unauthorized confidential information.
Compliance with Law: NAMP members shall conduct their business in compliance with all
applicable laws and regulations.
Disclosure of Financial Interests: NAMP members shall disclose any equity or financial interest
they may have in the collateral being offered to secure a loan.
1
Note: The National Association of Mortgage Professionals was previously the National Association of Mortgage
Brokers. The logo and website (www.namb.org) are still NAMB due to its longstanding recognition.
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Rotary’s Four-Way Test
Another simple, but useful, framework for ensuring that decisions stay within ethical
boundaries is a variation of Rotary International’s time-tested Four-Way Test
Rotary’s Four-Way Test has been translated into over 100 foreign languages and has been at
work worldwide for many years. Other organizations use this approach as well.
The Four-Way Test asks, “When formulating a decision, ask yourself:”

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What is the right and proper course of action?
Is it fair to all parties?
Will it build good will with my customer and business associates?
If the situation was reversed, would I consider my choice a fair decision?
Application of Rotary’s Four–Way
Test to Mortgage Lending
ROTARY
MORTGAGE LENDING
Is it the TRUTH?
“Did I tell the customer
everything? Exactly?”
Is it FAIR to all concerned?
“Is the application completely
accurate?”
Will it build GOODWILL and
“Can the lender, appraiser,
BETTER FRIENDSHIPS?
manager, etc…trust me?”
Will it be BENEFICIAL to all
“Will the loan close? Will the
concerned?
customer refer?”
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Ethics – Moving Forward:
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CHAPTER 2
Fraud, Negligence and
Misrepresentation
Introduction
In general, we can define fraud as intentional deception resulting in injury to another. The most
common victims of fraud in mortgage lending are the borrower and the lender, although it does
not stop there. When a mortgage loan originator offers inappropriate or unnecessarily costly loan
products to a borrower, or fails to explain adequately potentially dangerous loan features, it is an
implication of fraud.
Mortgage fraud is clearly unlawful. Additionally, fraud is unethical; however it is difficult to prove
intent and therefore, legally defined fraud. Lazy or fee-maximizing mortgage loan originators often
violate good ethics practices and sometimes can avoid conviction. Industry actions cannot end at
a legal determination.
Mortgage fraud is a felony in every state in our country. Fraud occurs if any person involved in the
lending decision knowingly misstates, misrepresents, or omits information that the lender relies
upon while making the loan decision. Fraud also occurs if a person receives funds or files a
document with the county clerk based on the knowledge that misstatements, misrepresentations
or omissions took place during the lending process.
It is a widespread, fast-growing, white-collar crime aggressively prosecuted by the FBI and other
regulatory agencies. Various laws also deal with consumer protection, fair lending, proper
disclosure, and fair dealing.
The steps necessary for improving ethical practices take us well beyond the law. These steps focus
on the attitudes, behaviors, and values practiced throughout the lending decision process by all
participants. When a borrower falsifies and submits a loan application without proper mortgage
loan originator/processor oversight or counsel, it is an unethical practice, but once again, fraud is
difficult to prove.
In nearly every case, although the mortgage loan originator may not be the initiator of the
fraudulent behavior, or the direct cause, he is in a good position to prevent it.
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Mitigating Fraud by Industry Participants
The mortgage loan originator is in direct contact with the borrower and many other parties
throughout the loan decision process playing a unique role in the performance of good ethics. In
each of the following professional relationships, the mortgage loan originator typically has an
opportunity, or at least the “last clear chance,” to stop unethical behavior in its tracks.
 Consumer/borrower: Coach borrower to provide complete, absolutely accurate, and
timely information and responses. Stop and clearly state your position at any hint of
fraudulent behavior.
 Employer: Refuse to submit to any pressure to shortcut procedures, ignore standards,
manipulate numbers, or withhold essential information from borrowers. Watch for
pressure to offer loan products that are clearly not suitable for the borrower. If practical,
report abuses and/or seek other employment.
 Real estate licensees: Maintain complete, timely and honest communication on the status
of a borrower’s loan application. Keep sensitive personal information confidential. Work
with real estate professional(s) to review and if necessary, to refute errors in appraisals by
presenting factual information according to appraiser guidelines.
 Appraiser: Understand the appraiser’s role and obligation to present an unbiased thirdparty expert objective opinion on the market value of the property without succumbing to
undue pressure to arrive at a certain amount. Honor the independence and
communication restrictions of Appraiser Independence Requirements for all persons who
receive compensation for originating a loan. If errors in the appraisal report are discovered,
present relevant, factual market information by following Appraiser Independence
Requirements guidelines.
 Closing agent: Maintain timely communication regarding the status of loan approval.
Whenever possible obtain timely information from the borrower, lender, and other parties
and refuse to participate in or allow any improper payments outside of closing.
 Processor / Underwriter: Provide complete, accurate loan application files the first time,
and respond diligently to additional requests.
 Investors: Select loan programs best suited for borrower. If borrower information proves
to be different than initially reported, or clearly outside the guidelines of the program, do
not try to misrepresent the facts or force the approval. It is unethical to select a more
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costly or less suitable loan program than one for which the borrower qualifies, based on
sales pressure or higher compensation.
 Warehouse lenders: Follow lender’s strict guidelines and deadlines for funding and
approving loans.
DISCUSSION TOPIC
For each of the relationships listed above, what other ethics guidelines can you
recommend? Are there other professional relationships and/or practices that
should be discussed here?
Not surprisingly, there are many MLOs guilty of ethical failures. When the needs and the desires of
the loan originator or financial institution are pursued to the detriment of the borrower, there is
an ethics problem. Likewise, there is a problem when the borrower is likely to be unable to repay
the loan or to face fees and charges which are well above the going rate.
Here are the most common abuses:
1. Insufficient Income
Borrower’s income is insufficient to meet the loan requirements in the initial three-to-five year
time frame. Often a mortgage loan originator would create a “stated” income on the loan
application, then have the borrower sign the last page, without showing the completed
application to him, or the borrower would be “coached” to state a fictitious income that would
qualify him for the loan. Both parties acted fraudulently.
Mortgage loan originators often rationalized this behavior by betting that the home’s price
appreciation alone would eventually pay off the loan. This is an unacceptable and unethical
gamble.
2. Rate Adjustments
The interest rate adjustments are excessive in relation to the borrower’s ability to pay and/or
they are not well understood. Teaser rates and rapidly adjusting rates (also known as
exploding rates) were often not fully understood by the borrower. In some cases, even the
mortgage loan originator did not fully comprehend the adjustment formula.
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Many of these loans allowed negative amortization, again assuming the property’s
appreciation would cover the growing loan balance. The risks were seldom properly explained
by the mortgage loan originator and/or fully understood by the borrower.
3. Prepayment Penalties
Loans subject to a harsh prepayment penalty are abusive when coupled with interest rates
that could adjust beyond a borrower’s reasonable ability to pay. Likewise, expensive
prepayment penalties hold the borrower hostage when they apply during the period in which
a refinance is likely. Prepayment penalties are often not properly explained by the mortgage
loan originator, or intentionally skipped over. Many times they trap the borrower into
maintaining an expensive mortgage, with no ability to refinance out of it and/or cause the
borrower to ultimately default on the loan.
4. More Expensive than Normal
Overpriced loans (rates, fees) were provided to many inexperienced borrowers who simply
relied on the honesty of their mortgage loan originator. Some deals generated excessive
commissions for the mortgage loan originator. Other times, targeted groups such as
minorities, members of the military, students, senior citizens, non-English speaking, first time
borrowers, and low-credit-score applicants were “steered” (or coerced) into higher cost loans
than ones for which they qualified. Overly-aggressive, pressure sales tactics often
accompanied steering. The needs and best interests of the borrower were ignored.
5. Excessive Loan-to-Value Ratios
Everyone can use a little extra cash–so borrow more! Many times these loans would provide
cash back to the borrower or save the borrower some or all of their typical out-of-pocket costs
at closing. Sometimes, appraisal values were inflated or falsified to pump up the loan amount.
Other times, the borrower was encouraged to take out a higher-than-normal loan amount
relative to the market value of the property to generate higher commissions or meet loan
production targets. Higher LTV’s typically result in higher rates and fees; the borrower was
encouraged to use the cash to take a trip, or buy furniture, appliances, or maybe even a new
car. Many times, monthly payments exceeded normal debt-to-income ratios and refinancing
became impossible in the future.
Higher LTV’s translate into higher risk for the lenders. The risk was often overlooked or passed
onto other secondary market investors in the interest of making the sales numbers. These high
LTV loans have a much higher default rate. The underwriting process should and could have
screened out these applications.
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Ethics – Moving Forward:
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6. Empty Promises
Often a mortgage loan originator would promise to provide a refinance if the loan payments
became unmanageable in the future. This is an impossible guarantee! Even if the loan could be
refinanced, it came at a very high cost to the borrower.
7. Coaching Borrowers to Misstate
The worst of the bad actors in the lending business have coached borrowers to falsify income,
assets, liabilities, jobs, and/or pending legal action on their applications. Some just asked for a
signed application with key areas left blank. The scope of some of these misdeeds is shocking!.
This is clearly illegal, fraudulent, and unethical.
8. Failing to Fully Explain
A mortgage loan is, at best, a complex transaction; some are extremely complex transactions.
That fact does not excuse a mortgage loan originator from making sure all the key terms, costs,
conditions, and penalties are well understood by the borrower. In plain English, we must
explain, what would happen if the borrower did this, or did that...? We all hope for the best
and sell the benefits of the initial loan product. But what if scenario B, C, or D occurs? How will
that adversely affect the borrower? What are the options, the safeguards, and the exit
strategies?
Many of the “exotic” or non-traditional loans with multiple options and sweeteners to entice
borrowers initially contained complicated provisions and hidden risks. A common example was
an ARMs with short initial periods. Often the mortgage loan originator did not fully
understand all the details himself, and certainly made no attempt to explain it completely to
the borrower.
9. Failing to Keep Borrower Informed
Surprises at the closing table are inexcusable. Interest rates may change until locked in
because the market fluctuates hourly. However, the new GFE locks the lender and loan
originator into certain settlement costs, and holds most others to a minor (10%) cost overrun.
If the APR increases or decreases by more than 1/8% (for a regular loan) , the TIL disclosure
must be re-issued. If any loan costs, rates, or terms change, the proper disclosures must be
reissued at least three business days prior to closing.
Too often, “busy” mortgage loan originators chose not to communicate negative news. They
avoided having uncomfortable discussions with the borrower and hoped things would just
“slide through” at closing. Many avoided incoming borrower calls by letting their voice mail
systems take the message, rather than face the situation head on and try to find a workable
solution. Mortgage loan originators rationalized their neglectful behavior by reminding
themselves how much money they were making.
Nearly every consumer article on “how to” select a mortgage loan encourages the borrower to
shop around, to do their research, and to know what the market is generally offering to
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Ethics – Moving Forward:
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borrowers like themselves. Ethical mortgage loan originators should encourage borrowers to
make this pre-application survey of the market. But, many borrowers won’t make the effort.
In those cases, ethical mortgage loan originators must do that work for the borrower in order
to provide sufficient information for him to make an informed decision. The next section will
cover the mortgage loan originator’s role in educating, communicating, comparing options,
and ensuring complete understanding.
CHAPTER 3
Prevention and Consumer
Protection
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Ethics – Moving Forward:
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Develop a Strong Customer Relationship
It is necessary to develop extremely effective communication skills as a foundation for good
ethical practices. Great communication starts with the twin skills of active listening (building
trust, rapport, and understanding) and continual information exchange.
The mortgage loan originator’s initial meeting(s) with the borrower must uncover:
 True objectives for the loan
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 Is it to leverage cash, build equity, short-term hold and sell, or other?
How the loan fits with the family’s overall financial plan
 What is the plan -- Long term wealth building, college education, retirement, or
current cash needs?
Critical requirements
 Minimal cash outlay, low interest cost, maximum flexibility, other
How long does the borrower expect to hold the loan
 (minimum-maximum time frame)?
Critical real estate transaction due dates
Initially, the mortgage loan originator uses these meetings to “sell” his expertise and ability to
solve the borrower’s needs, but he must complement that with a detailed, probing interview
to uncover and understand the borrower’s key issues and needs. It is unethical for the
mortgage loan originator to allow his own needs to come before the borrower’s best interest.
An effective technique involves asking key questions, listening closely to borrower responses,
probing further where necessary, and then confirming that both parties have a complete
understanding. It is important to have the borrower feel comfortable asking for more
clarification about areas he does not understand. Likewise, the mortgage loan originator must
not hesitate to probe borrower responses and question more deeply to gain a complete
understanding.
Explain the Paperwork
Under both federal and many state laws, mortgage loan originators must provide various
written disclosures to borrowers very early in the application process and keep them updated
as the loan process evolves.
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For example, the MLO must provide an initial Good Faith Estimate (GFE) along with other
disclosures. Many of these disclosures must be updated and re-signed multiple times
throughout the loan application process whenever numbers change. It is imperative that the
MLO takes these responsibilities seriously and performs them to the letter of the law, even
though doing so may be time consuming or inconvenient. Helping the borrower truly
understand the initial disclosures can make subsequent changes go more smoothly.
Mortgage loan originators are obligated by regulation and ethical standards to ensure that all
parties in the transaction have a clear working understanding of the forms and disclosures.
They are responsible for ensuring that the paperwork is completed accurately in its entirety,
and in a timely manner. Lacking proper knowledge, but pretending to know the details is
misleading and unethical.
The mortgage loan originator must be particularly careful to explain these commonly
misunderstood areas fully:
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Loan interest rates (both contracted and APR)
Originator fees, lender fees, third party fees, government fees
All other fees
Thoroughly explain cash needed for closing and PITI
Need for reserves
Loan lock-in rate, deadlines, conditions
Terms of the loan, penalties, restrictions, and borrower’s contractual obligations
Critical due dates
Plan “B” actions you will take if processing is delayed or the application is denied
The key role for the mortgage loan originator is to thoroughly explain and assure the
borrower’s understanding of all aspects of these documents by using a methodical, simple,
plain-English dialogue. The mandated disclosures are complex with many components and
numbers, therefore, the mortgage loan originator must work slowly and carefully with the
borrower to help him understand the various parts.
The MLO must prepare the borrower for the massive amount of paperwork and signatures
required throughout the loan process, and must assure that the borrower understands every
document before signing.
Following the initial disclosures, active discussions are necessary to compile the most
complete, accurate loan application package possible.
The next step is locking in the rate. This step in the loan process must be explained thoroughly
to the borrower, handled exactly as the borrower instructs, monitored as the deadlines
approach, and placed in writing each time with both parties signing.
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The mortgage loan originator must be careful to explain the rate lock procedure, its costs, and
limitations. He must then implement the borrower’s decision, being careful to document each
move, and monitor the deadlines. Further, he must allow enough time to maneuver if the
application process gets bogged down. He must also be careful NOT to speculate on the
movement of interest rates with his borrower’s money at risk, Instead he must be certain that
his opinion and advice on the lock decision is understood as just an opinion.
Just prior to closing, review all final documents with the borrower both for accuracy and to
verify any recent changes. If there are mistakes or discrepancies, get them clarified and
resolved with all parties prior to the closing. This will create a less stressful environment in
which to address any misunderstandings or surprises. Take extra effort to make sure the
borrower understands why the APR is different from the stated interest rate, or there are
changes in rate/fees, differences in cash at closing, or monthly payments.
Beware the “Jack of all Trades”
All professions these days - medicine, law, investments as well as mortgage lending - cover too
vast a field for any one practitioner to know it all. For these reason, specialists and individual
experts focus on specific segments. Avoid the temptation to solicit business outside of your
area of expertise and competence, even though your license may permit you to do so. If your
inexperience results in bad advice or mismatching the product to the borrower, the financial
damage to the borrower and potential harm to your reputation are great.
Instead, develop strategic relationships with experienced, proven mortgage loan originators
for loan products outside your normal practice. Refer borrower leads to qualified experts in
areas beyond your expertise. You may still earn referral fees by following guidelines in RESPA
Section 8. Be honest, you cannot be all things to all borrowers. Special borrower situations that
you do not regularly encounter and, products like reverse mortgages, and the vast array of
commercial lending (office, medical, retail, hotel, multi-family) deserve the focused attention
and experience of a specialist.
Golden Rule
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If the roles were reversed, would your conduct make you be happy? The golden rule very
much applies to our discussion of good ethics. Treat others the way you would like to be
treated.
Another spin on this is, “is this good enough to serve your mother”? Would it pass inspection
by a tough critic? How you behave must be right, look right and smell right.
If in doubt, fix it… make it right. If it looks to you, or can be viewed by someone else as “fishy”,
a conflict of interest, or a questionable move, then assume it needs fixing, and make it right.
Remove the doubt.
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What Do We Want to Accomplish?
Above all, mortgage loan originators are matchmakers, bringing the right loan product to a
qualified borrower. We focus on the borrower’s interests and help facilitate a smooth loan
transaction. We build trust and a reputation for impeccable ethics. We enjoy repeat business
and referrals from the borrowers who have benefited from our guidance. If the market shifts,
or the borrower information does not support the original loan proposal, they know we will
tell it to them straight and find solutions in their best interest.
Achieving the best match between borrower and loan product requires an honest and
comprehensive analysis of the borrower’s overall financial needs and capabilities in relation to
the loan products currently available in the marketplace. The underwriting decision takes into
consideration the borrower’s monthly cash flow, total obligations, assets, and credit history.
The mortgage loan originator must widen the lens to help the borrower consider overall family
financial goals, possible unexpected future needs, and a realistic consideration of interest rate
and repayment risk.
The first stage of the trust we build begins with the initial meeting and proper handling of the
disclosures, particularly the Good Faith Estimate (GFE). We need to treat that as a promise to
the borrower that we strive very hard to deliver; this is the next best thing to providing a
guarantee on the pricing. We need to work hard to minimize changes to it, but if changed
circumstances occur, we must spend time to fully explain and gain borrower understanding.
By law, the final GFE must mirror the HUD-1 at closing, and be presented at least 3 business
days before the closing and 3 business days of application. The legal requirements for timing are
there to enforce clarification through the process. This is the time to explain the key disclosures
concerning fees and costs (Truth-in-Lending, GFE, and HUD-1), in person if possible, to educate
the borrower and hopefully to gain his full understanding of the transaction.
Finally, not enough can be said about maintaining contact with the borrower after the closing.
Making yourself available to answer questions about the initial loan payments and statements
is very comforting. Staying in contact periodically (once a quarter) after the closing, with as
little as an informative email, concerning the overall housing market or economy, with clear
contact information is a good way to generate repeat business and referrals .
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Ethics – Moving Forward:
Prevention and Consumer Protection
Other Issues
There is a never-ending list of additional issues and questions that arise from every day
operations that will rely on your high ethical standards.
 How we speak of and treat one another. Professionals must treat one another as
respected colleagues, no matter where it is done and who is listening. Recently the NAR
(National Association of Realtors) confirmed their ethics standards apply to comments
made verbally, in writing, and on the internet (i.e. blogs). That’s an ethical standard loan
originators should also practice.
 Excessive compensation. No simple answer exists. However, once you are sure that the
total package you are delivering to the customer warrants a certain level of compensation,
AND if the roles were reversed you would feel it was justified (the golden rule), AND it is
similar to other competitive offerings in the market, it probably meets your personal code
of ethics.
 Look into the future. When considering the borrower’s reasonable ability to meet the
obligations of the loan, you must realistically consider the foreseeable future . This is a
judgment call, but you must be sure to clearly present the key features and risks of the
loan to encourage the borrower to think through their predictable financial timeline. Have
him consider both financial extremes (best case/worst case) and test various loan products
against those assumptions.
 Daily monitoring. Many businesses today abide by a zero tolerance policy for fraudulent
behavior. Some even extend their zero tolerance policy to include serious ethics violations.
It is important for businesses to install monitoring and reporting systems that act decisively
to root out the bad practices and send a clear message to the “undecided.” Eventually,
each professional’s own high standard of ethics will create the first defensive line against
bad behavior. It will be complemented by their company’s and the mortgage industry’s
strong code of ethics practice.
 Peer review. Even with strong ethics policies in place, businesses should still encourage
workers to sound out their judgment calls and borderline decisions with one another
without the fear of punishment. It is important to have a peer-to-peer sounding board to
learn from the experiences of co-workers.
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Ethics – Moving Forward:
Prevention and Consumer Protection
 The fee is the fee; the interest rate is the interest rate. Mortgage loan originators must
clearly make their fee known up-front. It is critical now with Dodd-Frank and the current
environment that there is no perception that an MLO is steering a customer into certain
loans. For the fee, the borrower can pay it up front from limited funds at closing or
incorporate it into the interest rate. The MLO must make the borrower fully understand
this choice and then allow the borrower to choose how that fee is paid.
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Chapter 4
Ethics and Fair Lending Laws
Overview
A strong interconnection exists between the laws that govern lending professionals and their
practice of ethics. That relationship works in both directions. Often, new laws are created to
address lending activities where ethics are lacking, or areas where ethics practices need to
become more formalized. There are many clear examples of this recently in the area of
adjustable rate loan products. Too often, mortgage loan originators failed to make certain
borrowers understand the risks and the way the product could adjust over time. To remedy this
lawmakers mandated more consistent, timely, and clear information disclosures.
Likewise, laws and/or professional regulations address important issues but may sometimes fall
short of the best way for the mortgage industry to approach a particular business situation, so
ethics practices must be continually revised and enhanced. An example of this is lenders’ selfimposed restrictions on funding hard money loans, particularly those governed under the Home
Ownership and Equity Protection Act and also under many individual state’s Fair Lending Act.
Whether the actual reason for doing this lies somewhere between careful risk management
and the practice of good ethics, the law allows for considerably more high risk/high cost lending
than most market participants care to offer.
First, we review the key federal fair lending and consumer protection laws in relation to the
practice of good ethics. Three recurring themes in the federal laws are:
1. Provide clear, useful information to the borrower in all communication, advertising, and
disclosures.
2. Provide fair, non-discriminatory treatment of applicants, and safeguard their privacy.
3. Empower the borrower to shop the competition, manage one’s financial information,
and if unsure, delay, or even cancel the transaction.
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The Truth-in-Lending Act (TILA)2
Enacted in 1968 and administered by the Consumer Financial Protection Bureau (CFPB), TILA (Reg.
Z) is applicable to all types of consumer credit. The TILA statement should be sent within 3
business days of application3. The purpose of TILA is to promote the informed use of
consumer credit. The main tool used is requirements for increased disclosure about loan
terms and cost. As part of its rules for consumer credit, TILA naturally applies to mortgages,
also specifically prohibiting certain acts or practices in connection with credit secured by a
consumer's principal dwelling.
The main document associated with mortgage lending and with disclosure is the TIL
disclosure. The TIL disclosure summarizes for the borrower a standardized list of loan
terms. It also makes very clear how much a borrower is paying for the loan and other
details about the financing. TILA rules aim to make all disclosure of APR and other financing
terms standardized across loan products in order to inform the consumer properly.
In the past, it was not unusual for lenders and loan originators to advertise misleading or
varying credit terms that proved confusing to consumers. Unethical advertisements
included inappropriate measures of APR, omission of key terms, misplacement or deemphasis on important risks or drawbacks of certain products or just words that could
mislead a consumer to believe something untrue. Under TILA lenders must accurately
disclose the terms of their credit offers. They must disclose to the borrower the annual
percentage rate (APR). The APR reflects the effective yield on a loan including all lender and
loan originator fees and discount points4.
TILA also gives consumers the right to cancel certain credit transactions that involve a lien
on a consumer's principal dwelling (the right to rescind for a period of 3 business days after
closing)5. TILA describes what occurrences qualify for re-disclosure6. It also imposes
limitations on home equity plans that are deemed to be “high-cost” loans.
2
3
Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026
Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.19
4
Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.16
5
Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.15
6
Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.20
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Home Ownership and Equity Protection Act
(HOEPA)7
The federal law, HOEPA, an amendment to TILA, works to end abusive lending practices.
This law prohibits certain loan provisions and requires specific consumer disclosures for
various closed-end, refinancing type loans when they charge excessive interest rates and
fees. Violations can result in severe penalties. As a result, the lending industry imposes even
stricter restrictions on itself and offers very little lending of this type for refinancing
principal residences.
Mortgage Disclosure Improvement Act
(MDIA)8
The Mortgage Disclosure Improvement Act, effective in 2009, amended TILA requirements
regarding early and final disclosures to homebuyers. This law also addressed fee scheduling.
Key changes included:
 The early disclosure must be provided at least 7 business days before settlement.
 Upfront fees cannot be collected by the MLO (other than a credit report fee) until
the initial disclosures are received.
 The homebuyer must be provided a copy of the appraisal no less than 3 business
days before closing.
 Disclosures must be reissued ” if the annual percentage rate at the time of consummation
varies from the annual percentage rate disclosed earlier by more than 1⁄8 of 1 percentage
point in a regular transaction, or more than 1⁄4 of 1 percentage point in an irregular
transaction, as defined in § 1026.22(a).”9 The homebuyer must receive the new disclosure at
least 3 business days before closing.
7
Home Ownership and Equity Protection Act (Amendment to the Truth in Lending Act Regulation Z) CFPB Section
12 CFR 1026.32
8 Home Mortgage Disclosure (Regulation C) CFPB Section 12 CFR 1003
9
Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026 .17 (f) (2)(a)
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Equal Credit Opportunity Act (ECOA)10
A federal law enacted in 1974 that requires lenders and other creditors to make credit
equally available without discrimination based on race, color, religion, national origin, age,
sex, marital status, the receipt by an applicant of income from public assistance programs,
or the exercise by an applicant in good faith of any right under the Consumer Credit
Protection Act. ECOA applies to loans for property purchases, refinancing purposes or home
improvement purposes.
ECOA requires notice to the applicant within 30 days of the lender’s credit decision. If the
lender takes adverse action, he must notify the applicant of the reasons for his decision and
the sources used for the credit information; he must also advise the applicant how to
request a free copy of his credit report. Any counter-offer of credit from the lender must be
withdrawn if not accepted by the applicant within 90 days. The lender must provide the
applicant with a copy of the appraisal report, or at least inform him of his right to obtain a
copy.
Fair Credit Reporting Act and Red Flag
Rules (FCRA)11
Enacted in 1970, the primary purpose of the FCRA is to ensure the accuracy, fairness and
privacy of personal information used by consumer reporting agencies. Provide credit
reporting agencies with a certification of permissible purpose when requesting credit
reports. Further, if some harmful action is taken because of the information in a credit
report (such as turning down a loan application), the broker or lender has to provide a
“Notice to the Home Loan Applicant Notification of Adverse Action.”
Below are some of the goals of FCRA:
 Promotes accuracy of credit report information
 Ensures the privacy of consumers’ credit information
10
Equal Credit Opportunity Act (Regulation B) CFPB Section 12 CFR 1002
11
Fair Credit Reporting Act (Regulation V) CFPB Section 12 CFR 1022
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


Ensures that consumers have access to their credit information used by lenders,
insurers, and others.
Allows consumers to understand how the information was used to decide whether
or not to providing credit and other services.
Though FCRA and FACTA apply to all professionals who are involved in credit
decisions, we will focus on those sections applicable to the mortgage industry
FACTA also has specific requirements for Mortgage Professionals, including:




Provide applicants with information about the credit score used to assess
creditworthiness
Advising loan applicants of their rights with regard to credit scores
Providing a consumer with records of lending transactions that are carried out with
the fraudulent use of his/her name
Complying with the FTC’s Disposal Rule for proper disposal of personal financial
information
The Red Flag Rules were an amendment to FCRA. Upon the enactment of the Red Flag Rule
in FACTA in 2004, the FTC (Federal Trade Commission) was charged with creating
regulations to implement the law. As many as nine million Americans have their identities
stolen each year. Identity thieves may drain bank accounts, damage credit worthiness, and
even endanger future medical treatment. The Red Flag Rule aims at protecting consumer
information and preventing identity theft by requiring financial institutions to develop and
implement identity theft prevention programs.
The Red Flag Rule is enforced by the Federal Trade Commission (FTC), the various federal
bank regulatory agencies and the National Credit Union Administration. This regulation
covers a broad selection of financial institutions. Although the specific companies covered
are still a subject of debate, it is clear that mortgage brokers and lenders are covered. The
Red Flag Rule aims at protecting consumer information and preventing identity theft by
requiring financial institutions to develop and implement identity theft prevention
programs.
The Gramm-Leach Bliley Act (GLB)12
12
Gramm-Leach-Bliley Act (Regulation P) CFPB Section 12 CFR 1016
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Requires financial institutions (including loan originators) to protect consumers’ personal
financial information (institutions can be fined up to $100,000 for each violation). It contains three
main parts:
1. Financial privacy rule – governs the collection and disclosure of consumer financial
information.
2. Safeguards rule – requires financial institutions (and loan originators) to design,
implement, and maintain safeguards for the protection of consumer financial
information.
3. The Pretexting provision – protects consumers from financial institutions obtaining
personal financial information under false pretenses.
Real Estate Settlements Procedures Act
(RESPA, Reg X)13
Enacted in 1974, RESPA was aimed at preventing settlement service providers from
generating unearned fees using unethical business practices. RESPA has a number of
requirements regarding fees and how they are either presented or distributed.
The general theme in RESPA is that earned fees must be commensurate with the amount
value of the work. Some of the specific areas of focus for RESPA are kickbacks, markups and
affiliated business arrangements.

13
14
Kickbacks. RESPA prohibits anyone from giving or accepting “anything of value” for
the referral of mortgage business. This rule broadly applies to all fees, kickbacks and
even free sports tickets. The key question is whether any value given is related to a
service provided. Additionally, if there is a service, then the value given must be
equivalent to the market value of the service provided.14
RESPA (Regulation X) CFBP Section 12 CFR 1024
RESPA (Regulation X) CFBP Section 12 CFR 1024 1024.14 (b)
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
Markups. RESPA prohibits one settlement service provider increasing the fee
charged by another provider while retaining the additional fees. Which This means
that actual third party fees cannot be increased on the GFE and HUD1 so that the
lender or MLO retains any portion of that fee.15

Affiliated Business Arrangements. RESPA prohibits affiliated business arrangements
when they are established for the sole purpose of disguising a fee splitting scheme.
Referrals between affiliated businesses are considered legal when the referrals help
borrowers obtain services necessary for the completion of a lending transaction.16
For these legal affiliated business arrangements, the referrals cannot be required.
For example, a specific title insurance company can be suggested by a lender, the
broker or the MLO, but other title companies should be listed and the borrower
must have complete leeway in choosing providers. Furthermore, there are specific
disclosures that must be made to the borrower regarding the arrangement. Lastly,
there are several rules that determine what compensation may be given or received
by a referral partner.

Mishandling of Borrowers’ Funds. RESPA prohibits commingling, conversion or
misappropriation of clients funds. Regulation X expands on this by laying out
specific processes for managing the funds after closing, for calculating the various
changes and impacts on escrow accounts and for reporting.

Limits on Escrow Accounts. RESPA sets limits on the amounts that a lender may
require a borrower to put into an escrow account for purposes of paying taxes,
hazard insurance and other charges related to the property. RESPA does not require
lenders to impose an escrow account on borrowers; however, certain government
loan programs or lenders may require escrow accounts as a condition of the loan.
During the course of the loan, RESPA prohibits a lender from charging excessive
amounts for the escrow account. Each month, the lender may not require a
borrower to pay into the escrow account more than the sum of (1) a monthly
payment average, or specifically, 1/12th of the total of all disbursements payable
during the year and (2) an amount necessary to pay for any shortage in the account.
15
RESPA (Regulation X) CFBP Section 12 CFR 1024 1024.14 (c)
16
RESPA (Regulation X) CFBP Section 12 CFR 1024 1024.15
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In addition, the lender may require a cushion in the account, not to exceed an
amount equal to 1/6 of the total disbursements for the year. The lender must
perform an escrow account analysis once during the year and notify borrowers of
any shortage. If it turns out that there is an excess of $50 or more in the account
and the borrower is current on payments, the amount must be returned to the
borrower. If the borrower is late on payment, the excess does not need to be
returned.17
Appraiser Independence Requirements (AIR)
/ Valuation Independence18
On October 15, 2010, Fannie Mae and Freddie Mac implemented these rules requiring
sellers of conventional, single family (1-4 unit) loans to them to warrant that the appraisal
reports were obtained under the strict guidelines of AIR. TILA in subsection 1026.42 makes
it illegal for a lender or originator to influence the outcome of an appraisal in any consumer
transaction secured by a principal dwelling.19 The main areas of AIR that touch on good
ethics practice are:
•
•
•
•
•
Prohibits lenders and third parties (particularly mortgage loan originators) from
influencing the appraisal process and outcome through coercion or
mischaracterization of value
Requires lenders to provide borrowers with a copy of the appraisal no less than 3
days before closing
Requires lenders or lender-authorized third parties to select and pay appraisers.
Requires absolute independence within a lender’s organization between the
appraisal function and loan production and also limits communication with the
appraiser. These same restrictions apply to a lender’s in-house appraisal function.
Requires lenders to conduct training, and implement written policies, procedures
and disciplinary rules on appraiser independence.
Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank”):20
17
RESPA (Regulation X) CFBP Section 12 CFR 1024 1024.17
18
Truth in Lending Act CFPB Section 12 CFR 1026.42 Valuation Independence.
19 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.42
20
Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010, as amended, Public Law 111-203 (July 21,
2010), Title X, codified at 12 U.S.C. 5481 et seq
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Dodd–Frank is a federal statute signed into law on July 21, 2010. The Act broadly covered a
number of areas in finance that generated concern over the last few years. One of the
main impacts of Dodd-Frank with regard to the mortgage industry was the effective
elimination of the Yield Spread Premium (YSP). Though the YSP still exists since it is allowed
for borrower credit, it can no longer be charged for origination as it once was. Also, DoddFrank made clear rules prohibiting steering of potential borrowers toward specific products
or loan options.21
What was a YSP? A YSP was defined by HUD’s Statement of Policy 2001-1 as:
“a payment from the lender as some or all of the compensation to the broker for goods and
services that are provided to both the borrower and the lender (inseparably) for the purpose of
lowering the up-front costs to the borrower”
One of the ethical issues behind the YSP was an inherent conflict of interest. For a broker,
given that the lender paid the MLO based on the effective interest rate, there existed an
incentive to obtain the loan most beneficial to a lender and not the loan most beneficial to
the borrower. Lenders also paid MLOs for originating certain types of loans with non-
standard loan terms such as ARMs. An MLO could receive more compensation for
qualifying borrowers for loans that were not appropriate given their financial situations.
Dodd-Frank prohibits mortgage loan originators from receiving compensation from both the
borrower and the lender. Further, MLOs cannot receive, from any person, directly or
indirectly, compensation that varies based on the terms of the loan (other than the principal
amount). Consequently, the MLO no longer receives a YSP from the mortgage lender and
instead receives compensation based on a different metric, such as the total amount of the
loan.22
21
Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.36(3)(e)
22
Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.36(3)(d)(ii)(iii) and 1026.36(3)(2)(i)(ii)
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Key Point Review

There is no clear boundary between the practice of good ethics, the
need to comply with all relevant state and federal laws, and the
elements necessary for growing a successful business.

Practicing good ethics takes place every minute of every day and must
involve all team members, senior managers, and marketing partners.
Good ethical practices are contagious.

A good framework for making ethical decisions in the absence of a
written operating procedure is the four-way test:
 What is the right and proper course of action?
 Is it fair to all parties?
 Will it build good will with my customer and business associates?
 If the situation were reversed, would I consider my choice a fair
decision?

Each individual determines his own ethical behavior, and must
sometimes fight peer pressure, numbers pressure, or other
organizational temptations. One’s reputation is to be protected at all
costs.

Mortgage Loan Originators must maintain clear, timely, and
understandable communication with the borrower regarding the
features and risks of various loan options. They must obtain
understanding and written acknowledgement from the borrower, and
maintain constant communication.

Know the limits of one’s expertise. When stretched, seek assistance or
refer the file to a more knowledgeable colleague.

Practice the golden rule: treat others as you would expect to be
treated.

MLOs must match the most suitable loan product to the borrower.
Success is building satisfied, repeat customers and referral sources.
Not surprisingly, there are many MLOs guilty of ethical failures. When the needs and the desires
originator
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© 2002-2011 MortgageEducation.com
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End of Chapter Assessment
June is a mortgage loan originator with an application in process for
$88,000. It is an 80% LTV where the borrower Ray is buying a home valued
at $110,000. Ray now has less cash available for closing than was indicated
at the time of application. Cash in the amount of $26,750 was stated on
the application. Actually, $24,550 is all that exists, leaving a shortfall of
$2,200.00. June had quoted a loan program with a 30-year fixed rate of
4.25% par, costing Ray a 2.5% mortgage broker fee.
What ethical issues does June need to examine here?
1. June could re-quote the loan at a higher rate of 6% to earn her 2.5%
fee through YSP. The reduced closing costs remedy the cash
shortfall.
2. June could increase the loan amount to $92,500 and keep the 4.25%
interest rate. However, raising the LTV to 84% would require PMI
which adds an upfront and monthly insurance cost.
3. Suggest that the seller pay a contribution of 2% towards the closing
costs to keep the deal moving forward. If the seller refuses, suggest
the seller raise the sales price to cover the 2% contribution.
4. Try to convince Ray to obtain a “gift” of $2,200 from his brother to
close the deal.
5. What are some other solutions? (Answers to case study included in appendix)
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Appendix: End of Chapter Answers
June is a mortgage loan originator with an application in process for $88,000. The loan is at an
80% LTV where the borrower, Ray, is buying a home valued at $110,000. Ray now has less cash
available for closing than was indicated at the time of application. Cash in the amount of
$26,750 was stated on the application. Actually, $24,550 is all that exists, leaving a shortfall of
$2,200.00. June had quoted a loan program with a 30-year fixed rate of 4.25% par, costing Ray
a 2.5% mortgage broker fee.
What ethical issues does June need to examine here?
1. June could increase the loan amount to $92,500 and keep the 4.25% interest rate.
However, raising the LTV to 84% would require PMI which adds an upfront and
monthly insurance cost.
June would need to fully disclose the changed circumstances and receive Ray’s informed
approval for the change. She should present that option along with other solutions. The change
raises the closing cost requirements and monthly payment. June would want to make sure the
PMI added to the monthly payment would be within Ray’s financial capability.
2. June could try to convince the seller to make a 2% contribution towards the closing
costs to keep the deal moving forward. If the seller refuses, suggest the seller raise
the sales price to cover the 2% contribution.
It might be feasible to amend the contract and convince the seller to make a 2% contribution
toward closing costs. However, adjusting the sales price is unethical and not practical in today’s
financing environment.
3. June could try to convince Ray to obtain a “gift” of $2,200 from his brother to close
the deal.
A legitimate gift from a friend or relative is proper and feasible. However if it is not truly a gift,
but a repayment obligation, that would be unethical if disguised, and impractical if presented as
a second lien.
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4. What are some other solutions?
Any combination of the above solutions might work, including some reduction in broker fees
and/or other settlement costs, if possible. At that historically low 4.25% interest rate, it would
seem feasible to allow it to rise in return for reduced closing costs. Delaying the closing by 30 to
60 days might allow the buyer to accumulate the full $26,750 in closing costs.
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