Mlpp3e C13 Ethics
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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 • Marital status • Color • Receipt of income from • Religion public assistance • National origin programs • Age • 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-LeachBliley 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. b. c. d.
Civil Rights Act of 1866 Equal Credit Opportunity Act Fair Housing Act 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. b. c. d.
FACT Act GLBA RESPA 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. b. c. d.
actual fraud. constructive fraud. good business. 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. b. c. d.
appraisers only. borrowers only. lenders and brokers only. 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. b. c. d.
Fair Credit Reporting Act Gramm-Leach-Bliley Act Regulation Z 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. b. c. d.
two three four 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
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 • Marital status • Color • Receipt of income from • Religion public assistance • National origin programs • Age • 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-LeachBliley 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Chapter 13: Ethics in the Mortgage Lending Profession
Case Study
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 13: Ethics in the Mortgage Lending Profession
Case Study
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 13: Ethics in the Mortgage Lending Profession
Case Study
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 13: Ethics in the Mortgage Lending Profession
Case Study
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 13: Ethics in the Mortgage Lending Profession
Case Study
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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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
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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
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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
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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
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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
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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
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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
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Chapter 13: Ethics in the Mortgage Lending Profession
Quiz 1. Which act specifically prohibits redlining? a. b. c. d.
Civil Rights Act of 1866 Equal Credit Opportunity Act Fair Housing Act Home Mortgage Disclosure Act
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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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. b. c. d.
FACT Act GLBA RESPA TILA
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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. b. c. d.
actual fraud. constructive fraud. good business. negligent misrepresentation.
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Chapter 13: Ethics in the Mortgage Lending Profession
Quiz 4. Mortgage fraud can be committed by a. b. c. d.
appraisers only. borrowers only. lenders and brokers only. any party to a mortgage loan.
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Chapter 13: Ethics in the Mortgage Lending Profession
Quiz 5. Which law prohibits kickbacks? a. b. c. d.
Fair Credit Reporting Act Gramm-Leach-Bliley Act Regulation Z RESPA
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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
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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
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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
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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.
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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
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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. b. c. d.
two three four five
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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
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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
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