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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
Key Terms
• Flipping
• Fraud
• Negligence
• Predatory Lending
• Redlining
• Straw Buyer
Ethics in Advertising
Triggering vs.
Non-Triggering Terms
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?
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Chapter 13: Ethics in the Mortgage Lending Profession
Discrimination
Protected Classes
• Implemented as Regulation B
• Prohibits discrimination based on:
• Race • Sex
• Color • Marital status
• Religion • Receipt of income from
• National origin public assistance
• Age programs
• Source of income should not be consideration
• Applicants not required to disclose alimony, child
support, separate maintenance
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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
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
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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
Fraud
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
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.
Flipping
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
• 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
Predatory Lending
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
Case Study
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Summary
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.
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
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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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