This document discusses ethics, fair lending practices, and mortgage fraud. It covers ethical lending standards, predatory lending practices like kickbacks, and how lenders can combat mortgage fraud by looking for red flags and filing suspicious activity reports. It also discusses the CFPB complaint process for consumers and the CFPB's enforcement actions against financial institutions for violations of consumer protection laws.

1. Module 3: Ethics, Fair Lending, and Mortgage
Fraud

2. 3.1 Ethical Lending Practices
What is Ethics?
 The word “ethics” is from the Greek word ethos meaning moral custom,
use, and character.
 Ethics frequently is defined as a system of moral principles or standards
that govern the conduct of members of a group, such as the NAMB Code of
Ethics that members of the Association of Mortgage Professionals must
follow.
 Ethics refers to our business and social conduct and our attitudes toward
others.
 The basis of ethics is the Golden Rule often expressed as Do unto others as
you would have them do unto you. This is also known as the Ethic of
Reciprocity, which states that each person should treat others in a decent
manner.

3. 3.1 Ethical Lending Practices (continued)
Professional Ethics and Conduct
 Professional ethics define standards of conduct or practice that help a
professional choose what to do when faced with a problem at work that
raises a moral issue.
 Reasonable care, also known as due care or diligence, refers to the amount of
care that an average, rational person would take under the same or similar
circumstances.
 The courts use a standard of care to decide whether a mortgage loan originator
has used reasonable skill and care in a disputed transaction.

4. 3.1 Ethical Lending Practices (continued)
Professional Organizations
 National Association of Mortgage Brokers.
 The National Association of Mortgage Brokers (NAMB) was founded in 1973
and is affiliated with all 50 state associations and the District of Columbia, such
as the California Association of Mortgage Professionals (CAMP), the Arizona
Association of Mortgage Professionals (AzAMP), or the Louisiana Mortgage
Lenders Association (LMLA). Members must follow the NAMB Code of Ethics.
 National Reverse Mortgage Lenders Association.
 The National Reverse Mortgage Lenders Association (NRMLA) was established
in 1997 to enhance the professionalism of the reverse mortgage business.
NRMLA’s Standards and Ethics Committee published the Code of Ethics &
Professional Responsibility, a copy of which every member must sign when
joining or renewing membership.

5. 3.2 Overview of Predatory Lending Practices
Kickbacks & RESPA Violations
 Predatory lending is a term commonly used to describe mortgage practices
that are deceptive, unfair, or even blatantly fraudulent. Some mortgage
loan originators, processors, and executives of mortgage companies have
been involved in predatory lending.
 The most frequently targeted consumers are often the most vulnerable
members of society, such as the elderly, those with a shaky credit history,
and consumers in dire financial straits.
 A kickback is the payment of something of value to an individual with the
goal of persuading or influencing his or her decision or performance in a
certain situation. Nearly every fraud scheme involves some type of illegal
kickback.

6. 3.3 How Lenders Can Combat Mortgage Fraud
Kinds of Mortgage Fraud
 Fraud for Property
 Fraud for property typically represents illegal actions conducted solely by the
borrower, who is motivated to acquire and maintain ownership of a house
under false pretenses.
 Fraud for Profit
 Fraud for profit is a complex scheme involving multiple parties, including
mortgage-lending professionals, in a financially motivated attempt to defraud
the lender of large sums of money.
 Investigators find two sets of settlement statements. One settlement statement is prepared
and provided to the seller accurately reflecting the true selling price of the property. A
second fraudulent statement is given to the lender showing a highly inflated purported
selling price.
 Money laundering is simply a process of trying to make illegally earned income appear to be
legitimately earned.

7. 3.3 How Lenders Can Combat Mortgage Fraud
(continued)
Red Flags Lenders Should Look for
 Mortgage fraud became such a widespread problem that the Federal
Bureau of Investigation (FBI) opened a division specifically for dealing with
fraud. Fraud affects entire neighborhoods by causing foreclosures and
falling property values.
 Red Flags and Common Elements of Mortgage Fraud:
 Agreements exist that are to be performed outside of closing or after closing
 Appraisal that is higher than the agreed sales price
 Buyer falsifies his or her income and writes other false information on the loan application
 Buyer is going to do substantial improvements to the property and the value of the property
is increased to reflect high-dollar soft costs vs. hard costs
 Excessive land flipping
 Fictitious or stolen identities used on the loan application
 Mortgage broker does not disclose the name of the actual lender
 Multiple transactions between third parties

8. 3.3 How Lenders Can Combat Mortgage Fraud
(continued)
Red Flags Lenders Should Look for
 Red Flags and Common Elements of Mortgage Fraud:
 Multiple transactions between third parties
 Principals in the transaction are asked to sign blank loan documents
 Real estate commission is based on a sales price that is different than the agreed to sales
price
 Rebates on sale
 Rebates on the broker’s fees
 Sales contract is amended prior to closing to substitute a new purchaser
 Sales price inflated, based on an invoice for recent improvements received from an
unknown third party
 Sales price inflated, without justification
 Selling broker is also the loan originator
 Suspicious appraisal methods, such as the use of inappropriate comparables
 Transactions with an unknown title company
 Two sets of settlement statements

9. 3.3 How Lenders Can Combat Mortgage Fraud
(continued)
Filing a Suspicious Activity Report as a Lender
 The Suspicious Activity Report (SAR) contains data fields for subject
addresses, the institution’s main office address, and the branch address
where the suspicious activity was discovered. Freddie Mac and Fannie
Mae are required to report suspicious mortgage fraud activity on a
Mortgage Fraud Incident Notice (MFIN) to an examiner-in-charge.
 Sources of Data on Mortgage Fraud Compiled by the FBI
 HUD Office of Inspector General (HUD-OIG) reports
 Suspicious Activity Reports (SARs) filed with the Financial Crimes Enforcement Network of
the Department of the Treasury (FinCEN)
 Complaints from the mortgage industry

10. 3.3 How Lenders Can Combat Mortgage Fraud
(continued)
Mortgage Fraud Index
 The LexisNexis Mortgage Asset Research Institute compiles a database
called the Mortgage Industry Data Exchange (MIDEX), which consists of
information about persons who participated in mortgage fraud.
 This information is contributed voluntarily by lenders, insurers, and
regulatory agencies.
 The Mortgage Fraud Index (MFI) is a measure of fraudulent mortgage case
activity.
 An MFI of zero would indicate no reported fraud to MIDEX for a state.

11. 3.4 Enforcing Consumer Financial Laws
CFPB Complaint Process
 Elements of a Response
 Steps Taken To Respond To the Complaint.
 Communication(s) from the Consumer
 Follow-Up Actions or Planned Follow-Up Actions
 Select a Category from the Following Options That Summarizes the Response
 Closed with monetary relief
 Closed with nonmonetary relief
 Closed with explanation
 Closed
 In progress
 Alerted CFPB
 Incorrect company
 Duplicate CFPB case reported
 Redirected to related company
 Sent to regulator

12. 3.4 Enforcing Consumer Financial Laws (continued)
CFPB Complaint Process
 CFBP Office of Enforcement
 The CFPB’s Office of Enforcement is authorized to employ investigatory tools
provided in Title X, Subtitle E of the Dodd-Frank Act, such as the authority to
compel documents and testimony, and to seek injunctive and monetary
remedies through civil actions or administrative proceedings.
 Office of Administrative Adjudication
 CFPB Civil Penalty Fund
 The Civil Penalty Fund is a separate account maintained at a Federal reserve bank to collect
civil penalties obtained by the CFPB in judicial or administrative actions under the Federal
consumer financial laws. [12 CFR §§10975.100–.108].

13. 3.4 Enforcing Consumer Financial Laws (continued)
CFPB Complaint Process
 Office of Administrative Adjudication
 Bureau-Administered Redress
 When the CFPB takes an enforcement action against a person or company for violating a
federal consumer financial protection law, sometimes the person or company may have to
compensate its consumers for the harm it caused. This compensation is known as redress.
Sometimes, the CFPB requires the person or company that violated the law to pay the
redress to the CFPB and then that money is distributed to the victims. This type of redress is
called Bureau-administered redress.

14. 3.5 CFPB Enforcement Actions
Enforcement Action - False Advertising
 Lenders sometimes use false and deceptive advertisements to lure in
borrowers and consumers. In addition to each state’s own laws, the use of
unfair and deceptive acts and practices in commerce is regulated at the
federal level by the Federal Trade Commission (FTC).