Home Mortgage Disclosure - RDH Education Services › ... › uploads › 2014 › 09 › RDH … · Web viewInterest rates may change until locked in because the market fluctuates

Ethics - The Industry Moves Forward

Overview

© MortgageEducation.com | All Rights Reserved - 1 -

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.

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?............................................................................................5

The Ethics Pyramid...............................................................................................................6Laws and Regulations..........................................................................................................6Ethical Practices..................................................................................................................7Professional Success...........................................................................................................7

Good Ethics are Contagious..................................................................................................7

Professional Conduct...........................................................................................................8NAMP..................................................................................................................................8Rotary’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...................................................................16

Develop a Strong Customer Relationship............................................................................16

Explain the Paperwork.......................................................................................................17

Beware the “Jack of all Trades”..........................................................................................18

Golden Rule.......................................................................................................................19

What Do We Want to Accomplish?....................................................................................21

Other Issues.......................................................................................................................22

Chapter 4...............................................................................................................................24

Ethics and Fair Lending Laws.................................................................................................24

Overview...........................................................................................................................24

The Truth-in-Lending Act (TILA)..........................................................................................25

Home Ownership and Equity Protection Act (HOEPA)........................................................26



Mortgage Disclosure Improvement Act (MDIA)..................................................................26

Equal Credit Opportunity Act (ECOA)..................................................................................27

Fair Credit Reporting Act and Red Flag Rules (FCRA)...........................................................27

The Gramm-Leach Bliley Act (GLB).....................................................................................29

Real Estate Settlements Procedures Act (RESPA, Reg X).....................................................29

Appraiser Independence Requirements (AIR) / Valuation Independence...........................31

Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”):.................32

Appendix: Case Study Answers..........................................................................................34



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?



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



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.

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


ProfessionalSucces

s

Ethical Practices

Laws and Regulations


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.



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.

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.


http://www.namb.org/


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:”

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 BETTER FRIENDSHIPS?

“Can the lender, appraiser, manager, etc…trust me?”

Will it be BENEFICIAL to all concerned?

“Will the loan close? Will the customer refer?”

Ethics – Moving Forward:Prevention and Consumer Protection

CHAPTER 2 Fraud, Negligence and

MisrepresentationIntroduction

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.

© 2002-2011 MortgageEducation.com - 10 -


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 third-party 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



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.

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 IncomeBorrower’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 AdjustmentsThe 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.


DISCUSSION TOPICFor 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?


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 PenaltiesLoans 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 NormalOverpriced 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 RatiosEveryone 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.



6. Empty PromisesOften 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 MisstateThe 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 ExplainA 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 InformedSurprises 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 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 3Prevention and Consumer

Protection

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 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.

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:

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.

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

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.



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.



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.



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.


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’ self-imposed 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.


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 de-emphasis 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-

2 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 10263 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.19 4 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.165 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.15


disclosure6. It also imposes limitations on home equity plans that are deemed to be “high-cost” loans.

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

6 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.207 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


transaction, as defined in § 1026.22(a).”9 The homebuyer must receive the new disclosure at least 3 business days before closing.

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

9 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026 .17 (f) (2)(a)10 Equal Credit Opportunity Act (Regulation B) CFPB Section 12 CFR 1002

11 Fair Credit Reporting Act (Regulation V) CFPB Section 12 CFR 1022


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 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

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.

12 Gramm-Leach-Bliley Act (Regulation P) CFPB Section 12 CFR 101613 RESPA (Regulation X) CFBP Section 12 CFR 1024


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

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.

14 RESPA (Regulation X) CFBP Section 12 CFR 1024 1024.14 (b)

15 RESPA (Regulation X) CFBP Section 12 CFR 1024 1024.14 (c)

16 RESPA (Regulation X) CFBP Section 12 CFR 1024 1024.15


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.

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

Independence 18

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.

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


• 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

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, Dodd-Frank 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.

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

21 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.36(3)(e)


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

22 Truth in Lending Act (Regulation Z) CFPB Section 12 CFR 1026.36(3)(d)(ii)(iii) and 1026.36(3)(2)(i)(ii)


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. Good ethical practices encompass many other topics: the way we speak of one

another, fair, transparent and competitive compensation, constant vigilance against questionable ethics, and professional resolution of new ethical challenges.

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.


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)

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


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)

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.

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.


Documents

Home Mortgage Disclosure - RDH Education Services › ... › uploads › 2014 › 09 › RDH … · Web viewInterest rates may change until locked in because the market fluctuates