Ethics

The Red Flag Rules were created by the Federal Trade Commission under FACTA. Their purpose is to address identity theft by focusing on methods of detecting a security breach.

The Fair and Accurate Credit Transactions Act (FACTA) was passed as an amendment to FCRA. It includes provisions to address identity theft, to facilitate consumers’ access to the information retained by CRAs, and to improve the accuracy of consumer reports.

Unilaterally increasing the charges of another settlement service provider and retaining the difference. HUD considers mark-ups a form of illegal fee-splitting and a violation of RESPA.

One or both settlement service providers fail to perform enough work to earn the fee.

Section 8 of RESPA prohibits referral fees and other forms of kickbacks/fee splitting. Penalties include fines of up to $10,000 and up to one year in prison.

A business referral results in giving or accepting a fee or other thing of value. Things of value can include compensation in the form of meals, event tickets, entertainment or items such as office equipment and marketing materials.

Is a sure way to remain compliant with RESPA and Reg X.

An advertising trigger term under Regulation Z. TILA/Reg Z requires additional information to be provided in an advertisement contains trigger terms. Most commonly, APR must be provided.

- Amount or percentage of any down payment
- Number of payments or period of repayment
- Amount of any payment
- Amount of any finance charge

Disclosure of:
- Amount and percentage of the down payment
- Terms of repayment, such as inclusion of a balloon payment
- Annual percentage rate

Language used in an advertisement which triggers the requirement to include more information. Trigger terms are defined under TILA and Regulation Z.

The unethical practice of basing a loan approval on only the appraised value of the property. The practice doesn’t consider repayment ability. Some states have passed regulations aimed at prohibiting the practice.

“Let the buyer beware.” It is a common concept cited in the ethical debate over whether mortgage professionals should be agents for borrowers.

Provisions of TILA. The Fair Housing Act and the Financial Institutions Reform, Recovery and Enforcement Act also include regulations relating to property valuation.

An appraiser places a much higher value on a property than can be justified. This practice has been commonly used in conjunction with other forms of mortgage fraud.

Request that the appraiser return a minimum or specific value. You are permitted to communicate your opinion or the borrower’s opinion when ordering an appraisal, however requesting a specific or minimum value is considered improper influence of an appraiser and is a serious ethical/legal violation.

Violates the Federal Reserve’s Staff Commentary on Reg Z revisions. This example is considered a misleading claim of debt elimination.

An attractive interest rate or loan term that is not actually available. TILA and Reg Z include a number of prohibitions and requirements for advertising.

A trigger term. TILA and Reg Z require advertising containing trigger terms to include additional information such as APR.

Violates the Federal Reserve’s Staff Commentary on Reg Z revisions. This example is considered a misleading comparison in an advertisement.

Escrow account requirements. Mishandling a borrower’s funds by commingling them with the deposits of a mortgage broker business instead of placing them in an escrow account violates a number of federal and state laws

One person (agent) is acting in the best interests of another. It requires loyalty, good faith and an obligation of the agent to consider the interests of the other person before their own.

A fraudulent transaction where a fictitious borrower obtains a mortgage and secures it with fictitious property. Air loans may also include fictitious employers, appraisers and credit agencies in order to obtain verifications necessary to process the loan application.

It is illegal for a person to attempt to influence the decision of a lending institution by making a false statement regarding income, assets, debt, and personal identification in a loan application.

A property is bought and resold within a very short period of time. Some property flips occur within the same week, and even on the same day. The resale usually involves the use of an inflated appraisal of the property’s value.

Fees lenders can earn when selling loans in the secondary market.

A person who accepts a fee for the use of his/her social security number and other personal information on a mortgage application. Straw buyers are often unaware that they are liable for fraud and for making false statements to the government.

A creditor makes an unfavorable decision. An example would be a lender rejecting a loan application. ECOA requires notice of adverse action within 30 days of application.

In person, via U.S. mail or via facsimile. Email and secure document handling are also becoming acceptable means. Providing the information verbally or via a public posting are not acceptable methods for most disclosures.

Be on the lookout for, and report, anything that could jeopardize a lender’s investment. Originators have a fiduciary obligation to lenders.

Is an individual who accepts a fee to falsely claim ownership to a property. Straw sellers are sometimes used in conjunction with straw buyers in elaborate mortgage fraud schemes.

A mortgage industry professional forges a deed transfer and obtains ownership without the homeowner’s knowledge. Equity theft often occurs in foreclosure rescue scams.

Are falsified applications. Generally they are trying to obtain a loan they don’t qualify for but for the most part intend to repay the loan.

Factual data. Loan programs such as stated income loans – also called liar’s loans – led to an increase in loan applicant fraud. This has been blamed for increased foreclosures.

Is the purchase price being higher than the list price. This could be a sign that a legitimate buyer is not involved in the transaction.

Using another person’s name, social security number and other personal information to secure credit or make purchases. It often figures into elaborate mortgage fraud schemes.

Submission of fraudulent information on the loan application. This falls under bank fraud which carries stiff penalties. The FBI Mortgage Fraud Warning Notice reminds all parties to a loan transaction of this fact.

The statute of limitations for bank fraud is ten years. Penalties can include fines of up to $1,000,000 and prison for up to 30 years.

A conflict between a broker's opportunity for personal financial gain and the proper performance of his responsibilities.

The extension of credit to borrowers who cannot afford the credit on the terms being offered. It includes steering, packing, padding, targeting, flipping as well as asset-based lending, excessive rates and fees, prepayment penalties, negative amortization, bait-and-switch tactics, balloon payments and mandatory arbitration clauses.

Predatory lenders and mortgage brokers target persons with limited access to mainstream sources of credit to accept loans that are not affordable or in their best interest. They will inadequately disclose the true costs, risks and appropriateness of the transaction to the borrower.

Knowingly advertising or offering one set of terms which are more appealing but are not readily available and then pressuring the borrower into signing a contract with more expensive terms and hidden fees.

The practice of directing a borrower toward a subprime loan when he could qualify for a more standard loan. Steering can also refer to directing borrowers to settlement service providers with whom the broker or lender has a relationship, either because of financial benefit to the broker or lender or because that service provider will help bend rules to get a loan approved.

Loans based on the borrower’s home equity and the foreclosure value of the collateral, rather than on a determination that the borrower can make the payments as scheduled in the loan terms and based on the borrower’s current and expected income, current obligations, employment status and other relevant financial resources. The lender simply relies on its ability to seize the borrower’s equity in the collateral to satisfy the debt and to recover the high fees associated with the loan.

The inclusion in the loan principal amount of such costs as points, mortgage broker fees, prepayment penalties on a prior loan and charges for additional related products without the borrower’s informed consent.

Are considered predatory behavior. Predatory loans often have fees in excess of 5% of the loan amount even though such fees do not have anything to do with the credit risk of the borrower. These fees are financed into the loan, decreasing the homeowner’s equity.

Charging borrowers fees many times their actual cost or itemizing charges that are duplicative.

Repeated refinancing of a loan within a short period of time without any real benefit to the borrower.

Prepayment penalties are charges for early payoff of the loan. They serve as deferred fees that the lender expects to receive and the borrower never expects to pay.

A situation where the monthly payment made does not pay off all the accrued interest, so the principal balance will increase each month. The borrower may end up owing more than the amount originally borrowed and have to make a balloon payment at the end of the loan term.

Those of loyalty and trust owed by a person who holds funds in trust for another or by a person acting as an agent of another.

A borrower lying about income or assets in order to qualify for a loan to buy a home in which he plans to live, but which he might resell at a profit if his income does not increase to enable him to keep making his payments.

Fraud for property and/or fraud for profit.

Failing to disclose the use of a credit card (an unsecured loan) advance as the source of a down payment.
- Overstating assets for a down payment or collateral for the loan
- Claiming a loan for the down payment as a gift, with use of a fraudulent gift letter
- Claiming payment of an earnest money deposit that does not exist

Overstating income and/or place or length of employment, reporting fictitious employment and/or other sources of income with verification provided by co-conspirators or lumping part time income, bonuses and sporadic income in with salaried income.

A person who purchases the property or applies for the loan in his own name for the actual borrower

The applicant assuming the identity of another person.

The applicant or a loan originator arranging for an appraiser to inflate the appraised value of the property to make up for no down payment and/or to generate cash proceeds.

A primary lender grants a loan to a borrower, who the lender believes has invested his own money in the down payment and closing costs. However, the borrower has actually borrowed the needed funds from the seller secured by an unrecorded and undisclosed second mortgage.

An alternative to a silent second. A seller agrees to create a second, falsified sales agreement with an inflated purchase price in order to obtain a larger loan from a lender.

A seller or agent colluding with a buyer and appraiser to create a phony inflated sale price for presentation to the lender. The lender lends more than the actual purchase price based on the appraisal and the seller or agent kicks back at least some of the excess proceeds to the buyer.

Representation by the buyer that an investment property will be owner-occupied in order to obtain the more favorable terms offered by the lender on owner-occupied real estate.

Employment and income fraud, concealment of liabilities or alteration of the applicant’s credit history.

Broker-facilitation fraud, appraisal fraud, and loan application fraud. Of these, the most common involves mortgage-broker facilitation in misrepresenting, misstating or omitting information used to underwrite a loan.

Fraud for property, fraud for profit or a combination of both.

when a loan originator accepts a legitimate application and documents from a buyer and submits them to two lenders to have them each fully fund the loan. Neither the applicant nor the lenders know the application has been submitted to more than one lender.