Mortgage Lending: Safety and Ethics Guide

1. Safety and Ethics: Red Flags for the MLO Chapter 2:Safety and Ethics: Red Flags for MLO Chapter 2

2. Disclaimer: Names of all persons, companies, and entities in any documented example have been changed. Therefore, if further research is desired, names will differ in the actual case law from that presented within the course. If further research is desired in regards to specific case law, research is best performed by visiting each specific state’s department of financial institutions website. Each state may use varying versions of this department name. Some case law may be easily researched and other states are extremely protective of case law and extended research may be required. As an example, to research Florida case law, first visit the Florida Office of Financial Regulation website and proceed to the Final Administrative Actions page where a search engine will be presented. For California, the Consumer Affairs agency must be selected from their state website (www.ca.gov). Researchers must then move through the following pages, Licenses, Press Release, and Board of Real Estate to arrive at the Disciplinary Actions page to research the case law. Chapter 2:Safety and Ethics: Red Flags for MLO Disclaimer

3. Arm’s Length Transaction Home Ownership Equity Protection Act (HEOPA) Housing and Economic Recovery Act of 2008 (HERA) Mortgage Disclosure Improvement Act (MDIA) Predatory Lending Chapter 2:Safety and Ethics: Red Flags for MLO Key Terms Refer to page 33

4. Lawfully and thoroughly catalog all important documentation Adhere to a code of ethics from a professional organization Serve the mortgage lending needs of the public in an ethical manner Treat everyone equally Instill honesty in every action Never use authority to take advantage of people Give full disclosure about all terms and conditions of the mortgage loan Chapter 2:Safety and Ethics: Red Flags for MLO To Be Ethical Refer to page 34

5. Provided by the National Association of Mortgage Professionals • Honesty and Integrity • Professional Conduct • Honesty in Advertising • Confidentiality • Compliance with Law • Disclosure of Financial Interests Chapter 2:Safety and Ethics: Red Flags for MLO Code of Ethics Refer to page 34

6. The Consumer Financial Protection Bureau (CFPB) Federal National Mortgage Association (FNMA) Federal Home Loan Mortgage Corporation (Freddie Mac) Housing and Urban Development (HUD) Veteran’s Administration (VA) Loans State Regulatory Agencies Chapter 2:Safety and Ethics: Red Flags for MLO The Informed MLO - Sources Refer to page 35 & 36

7. 1. A MLO acts in an ethical manner by adhering to all of the following actions EXCEPT • allowing a borrower to change the terms of the loan. • being honest with clients and lenders. • charging a higher interest rate to a minority borrower. • treating everyone in an equal manner. Chapter 2:Safety and Ethics: Red Flags for MLO Knowledge Check Refer to page 37

8. 2. On the website for HUD, a loan originator can locate all of the information listed below EXCEPT • disciplinary actions taken by a state regulatory agency against a MLO. • the FHA National Mortgage Limit list. • HUD-approved condominium projects. • HUD-approved counseling agencies. Chapter 2:Safety and Ethics: Red Flags for MLO Knowledge Check Refer to page 37

9. 3. The underwriting manual for FHA forward insured loans and programs is also titled • 203B. • 4155.1. • HUD Clips. • Section 8. Chapter 2:Safety and Ethics: Red Flags for MLO Knowledge Check Refer to page 37

10. A successful MLO seeks education and training that exceeds the national requirement of the annual 8 hours of continuing education required by the NMLS. • Traditional Education • Mentoring Chapter 2:Safety and Ethics: Red Flags for MLO Continuing Training Refer to page 37 & 38

11. Deception is the act of convincing an individual of a falsehood or untruth. Fraud is an intentional misrepresentation of the truth or facts for the sole intent to rob an individual of a right or possession. Criminal fraud is any fraud that injures an individual as a result of the action. Chapter 2:Safety and Ethics: Red Flags for MLO Crime and Reputation Refer to page 38

12. “Steers” borrower into a higher interest rate, which costs a continuing monthly sum of money Commits mortgage fraud by inflating consumer charges on GFE Fails to notify/disclose changed circumstances that have an impact on the fees paid at closing or monthly payment amounts Engages in illegal, improper, deceptive, or fraudulent business practices that cause harm to the consumer Chapter 2:Safety and Ethics: Red Flags for MLO Criminal Actions that Financially Impact Consumers Refer to page 38 & 39

13. ABC Loan Corporation was accused of violating which regulation? • How did ABC Loan Corporation violate this regulation? • How did the actions of ABC Loan Corporation cause harm to the consumer, sometimes without the consumer’s knowledge? • Today, MLO compensation is regulated by an amendment to which federal regulation? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study ABC Loan Corporation Refer to page 40

14. Violating the timeframes set by TILA and RESPA for proper disclosure to the consumer • Advertising violations • Failure to provide required information to processing/underwriting • Failing to submit loan files for processing and review in a timely manner Chapter 2:Safety and Ethics: Red Flags for MLO Criminal Actions that Financially ImpactEmployers Refer to page 40

15. By the creditor By the mortgage broker/banker/correspondent By surrounding homeowners To private mortgage insurers To FHA, VA or USDA Chapter 2:Safety and Ethics: Red Flags for MLO Criminal Actions that Financially Impact Mortgage Loan Parties Refer to page 41

16. Cautiously scrutinize all borrowers and the documentation that is provided • Qualify the borrower in advance with a thorough conversation with the borrower regarding the Four “C’s” of credit. Ask for: • Full names, including middle names • Current residence address and residences for the previous two years • Current rental/mortgage payment to determine the amount of payment shock that may occur Chapter 2:Safety and Ethics: Red Flags for MLO Avoid Common Licensee Mistakes Refer to page 41 & 42

17. SSN and address discrepancies within the loan file Verifications addressed to a specific party’s attention Verifications completed on the same day they were ordered or on weekend/holiday Documentation includes deletions, correction fluid or other alteration Numbers on the documentation appear to be “squeezed” due to alteration Different handwriting or type styles within a document Excessive number of AUS submissions Chapter 2:Safety and Ethics: Red Flags for MLO High-level Red Flags Refer to page 42 & 43

18. Significant or contradictory changes from handwritten to typed application Unsigned or undated application Employer’s address shown only as a post office box Loan purpose is cash-out refinance on a recently acquired property Buyer currently resides in subject property Same telephone number for applicant and employer Extreme payment shock may signal straw buyer and/or or inflated income Purchaser of investment property does not own residence Chapter 2:Safety and Ethics: Red Flags for MLO Mortgage Application Red Flags Refer to page 43

19. What actions did Lou Loan Officer take to ensure that his girlfriend demonstrated the ability to repay the mortgage loan and obtain financing? • What actions did Lou Loan Officer take to ensure that his girlfriend appeared to have sufficient assets for down payment and reserves? • What measures could SunTrust Mortgage have taken to prevent the fraudulent loan? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study Fraud for Love Refer to page 43 & 44

20. Applicant’s job title is generic • Employer’s address is a P O Box, the property address, or applicant’s current residence • Applicant’s residence is (will be) in location remote from employer • Employer name is similar to a party to transaction • Employer unable to be contacted Chapter 2:Safety and Ethics: Red Flags for MLO Employment & Income Red Flags Refer to page 44

21. Year-to-date past-year earnings are even dollar amounts Withholding not calculated correctly or totals do not flow from pay advice to pay advice Abnormalities in pay check numbering Handwritten VOE, pay stubs, or W-2 forms W-2 form presented is not the employee’s copy Employer’s ID # has format other than 12-3456789 Tax returns not signed or dated Income appears to be out of line with type of employment Applicant reports substantial income but has no cash in bank Chapter 2:Safety and Ethics: Red Flags for MLO Employment & Income Red Flags Refer to page 44

22. Manny, Moe, Curly, and Shem’s motivation was to help obtain fraudulent loans for straw buyers, and then split the loan proceeds, beginning in 2008. What new regulations, which are part of the Dodd-Frank Act and were implemented in 2014, address the acts that these four engaged in? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study Straw Buying Scheme Refer to page 45

23. Difference in names, addresses and birth dates • Superior credit histories; or histories that are not in line with age of applicant • Tri-merge report alerts – recently issued SSN, credit inquiries, new/closed accounts Written verifications of employment, rent, deposits, and sometimes loans (for credit that is not reported on the credit report) should be obtained as independent verifications of the information presented by the borrower. Chapter 2:Safety and Ethics: Red Flags for MLO Credit Report Red Flags Refer to page 45 & 46

24. How did Mickey, Donald, and Ralph assist persons with poor credit histories or criminal records to obtain a “clean slate?” • If the defendants are convicted, what would the maximum penalty be for the alleged crimes? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study Identity Thieves Refer to page 46 & 47

25. The MLO took an initial loan application on August 28. The borrower stated he was employed as an operations manager. Should the MLO have rejected the application initially? • Less than a month later, the MLO is informed by another employee of the lender that the borrower’s employment had been terminated by the employer on August 2, three weeks prior to the initial application. What call should have been made by the MLO? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call Refer to page 48

26. Upon hearing of the employment status, the MLO emailed the borrower to discuss the job situation and to request updated paycheck statements. The borrower stated there was an error and asked the MLO to call the Phoenix office (the VOE came from the corporate office in Tucson) and ask for “Adrianne”. Within minutes, the paycheck statements dated 8/15, 9/5, and 9/15 were emailed by the borrower to the MLO. Is it possible to receive paychecks and be terminated/severed from employment? What bothers you about the borrower’s response? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call Refer to page 48

27. On September 27, the lender is again informed that the borrower was terminated on August 2. The employer communicated this to the lender both verbally and in writing by re-submitting the Verification of Employment to the lender. Was the former employer at fault in this situation? • When the MLO received the information for the second time, he was asked by the processing unit if there was anyone else at the employer’s workplace that could complete a second VOE. What should the MLO have done to properly address the possible fraud? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call Refer to page 48 & 49

28. The MLO did not bring the borrower’s loan file to a “hard stop" or request that further work on the file be suspended. Although he did inform the processing supervisor about the discrepancies in the loan file, he failed to bring the information to the attention of the branch manager. He failed to file a suspicious activity report with the branch manager. In paragraph g, there was a lot of activity that could have alleviated a DFI Order and financial repercussions for the employer. What actions could have been taken at this point to address and prevent the fraudulent actions that were taking place? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call Refer to page 49

29. The MLO made the phone call to the “inside contact” at the employer and advised processing that he verbally verified the borrower’s employment. He then requested a Verification of Employment be sent to a specific person at the employer as the borrower was “still gainfully employed”; two email addresses were given. This information was also given to the senior loan processor. What are the indicators of a fraudulent loan that are beginning to be discovered? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call Refer to page 49

30. What actions of the MLO bother you as a professional mortgage loan originator? • Who is responsible for validity of documentation in a loan file? • What actions can be taken by the secondary market buyer of the loan in the event of fraud? • What actions can be taken by the state regulatory authority against the licensees in a fraudulent mortgage loan scheme? Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call Refer to page 50

31. Down payment from bank account with no ties to the applicant, does not appear as a withdrawal from applicant’s accounts, cannot be traced back to an account or source, or is made from gifts or from sales transactions Banking information has no traditional banking history, investment portfolio is concentrated and not diversified, or bank statements are co-owned by unrecognized parties Bank statements include even dollar amounts, do not identify the applicant, balances significantly higher than the accounts monthly average with no documentation explaining the increase, out-of-sequence dating on bank statements, or inconsistent deposits with the potential borrower’s income Chapter 2:Safety and Ethics: Red Flags for MLO Asset Documentation Red Flags Refer to page 50

32. John Wayne, although not involved with a mortgage loan application, committed a common type of asset fraud by: • John Wayne could be sentenced to a maximum prison term of _______ and a maximum fine of $ _________, which is the maximum punishment for mortgage fraud. Chapter 2:Safety and Ethics: Red Flags for MLO Case Study Cattle Fraud Refer to page 51

33. Purchase Transactions: • Real estate listed on application however applicant is a renter • Applicant intends to lease current residence • Significant or unrealistic commute distance • Applicant is downgrading from a larger or more expensive house • Sales Contract is subject to an existing lease • Occupancy affidavits reflect applicant does NOT intend to occupy • New homeowner’s insurance is a rental policy Chapter 2:Safety and Ethics: Red Flags for MLO Owner Occupancy Red Flags Refer to page 52

34. Refinance Transactions: • Rental property listed on application is more expensive than subject property • Different mailing address on applicant’s bank statements, pay advices, etc. • Different address reported on Credit Report • Significant or unrealistic commute distance • Appraisal reflects vacant or tenant occupancy • Occupancy affidavits reflect applicant does NOT intend to occupy • Homeowner’s insurance is a rental policy • Reverse directory does not disclose subject property address Chapter 2:Safety and Ethics: Red Flags for MLO Owner Occupancy Red Flags Refer to page 52

35. Appraisal ordered by a party to the transaction • Occupant shown to be tenant or unknown • Owner is someone other than seller shown on sales contract • Appraisal indicates transaction is a refinance, but other documentation reflects a purchase • Purchase price is substantially higher than predominant market value • Purchase price is substantially lower than predominant market value • Subject property obsolescence is minimized • Large positive adjustments made to comparable properties Chapter 2:Safety and Ethics: Red Flags for MLO Appraisal Red Flags Refer to page 52

36. Inconsistency in comparable sales Map scale distorts distance of comparable properties “For Rent” sign appears in photographs Photos appear to be taken from an awkward or unusual standpoint Address reflected in photos does not match property address Weather conditions in photos inconsistent with date of appraisal Appraisal dated before sales contract Significant appreciation in short period of time Prior sales are listed for subject and/or comparables without adequate explanation Chapter 2:Safety and Ethics: Red Flags for MLO Appraisal Red Flags Refer to page 52

37. Non arms-length transaction: seller is real estate broker, relative, employer, etc. Seller is not currently reflected on title Purchaser is not the applicant Purchaser(s) deleted from/added to sales contract No real estate agent is involved Power of Attorney is used Second mortgage is indicated, but not disclosed on the application Chapter 2:Safety and Ethics: Red Flags for MLO Sales Contract Red Flags Refer to page 52

38. Earnest money deposit equals the entire down payment, or is an odd amount for local market Multiple deposit checks have inconsistent dates, i.e., #303 dated 10/1, #299 dated 11/1 Name and/or address on earnest money deposit check differ from buyer Real estate commission is excessive Contract dated after credit documents Contract is “boiler plate” with limited fill-in-the-blank terms, not reflective of a true negotiation Chapter 2:Safety and Ethics: Red Flags for MLO Sales Contract Red Flags Refer to page 52

39. Ethical behavior in mortgage lending involves applying fundamental principles of honesty, integrity, and service to mortgage loan clients and their application, disclosures, and closing. • Ethics in mortgage lending includes serving the mortgage lending needs of the consumer, treating everyone ethically, being honest, making full disclosure to the consumer always, not taking advantage of people, keeping good documentation, and adhering to a code of ethics. • The Lending Seal of Integrity is the nation’s first national standard for mortgage loan originators and is administered by the National Association of Mortgage Professionals (NAMB). • Many successful loan originators work to not only increase their production and closings, but their knowledge of mortgage related topics and issues. Chapter 2:Safety and Ethics: Red Flags for MLO Summary Refer to page 53

40. An MLO should use the Consumer Financial Protection Bureau’s website to learn the new regulations that are being proposed or implemented. • Fannie Mae’s website provides underwriting guidelines for conventional, conforming loans for sale into the secondary market. • Freddie Mac’s website provides the Primary Mortgage Market Survey, which is a weekly average of the top lender’s annual percentage rates. • HUD’s website educates the loan originator regarding FHA rules and regulations. Information on reverse mortgages is also found on this website. Chapter 2:Safety and Ethics: Red Flags for MLO Summary Refer to page 53

41. The VA website is shared with veterans and informs the veteran regarding programs that are designed to assist them. Information regarding VA guaranteed home loans and guidelines are on this site also. • State regulators maintain sites that contain information on licensing and state law for mortgage licensees. They also report disciplinary actions concerning licensees. • Loan originators have many resources to assist them in staying informed of pending changes to the industry, including onsite classes, online classes, and self-study programs of information. • When an entry-level loan originator needs further instruction in the everyday practices and procedures, he may want to seek a more capable MLO who can “mentor” him. Chapter 2:Safety and Ethics: Red Flags for MLO Summary Refer to page 53

42. A mortgage “team” comprised of senior MLO team leaders and junior MLO’s or assistants can provide the environment that is needed to further learn the nuances of the mortgage industry. • Deception is making someone believe something that is not true. Fraud is the deliberate misrepresentation, omission, or misstatement of a material fact that will cause a different underwriting decision had the material fact be known. • Parties to the mortgage loan could be affected by mortgage fraud. Those that can be affected include the consumer, the employer or licensee, the lender and/or servicer, and Federal and State regulators. • When qualifying a borrower for a mortgage loan, the 4 C’s of underwriting should be considered: Credit, capacity, cash, and the collateral. Chapter 2:Safety and Ethics: Red Flags for MLO Summary Refer to page 53

43. Detection of mortgage fraud is the responsibility of all parties to the transaction. • Mortgage fraud detection begins at the time of prequalification and application. MLO’s should know the red flags of mortgage fraud and how they apply to the 4 C’s of underwriting • When fraud is committed, there are consequences, such as loss of value in a property, potential repurchase of the mortgage loan, monetary fines, and possibly time in prison. Chapter 2:Safety and Ethics: Red Flags for MLO Summary Refer to page 53

44. 1. Ethical behavior in mortgage lending involves all of the following EXCEPT • applying principles of service to mortgage loan clients. • not disclosing a prepayment penalty to the consumer. • practicing principles of integrity. • principles of honesty. Chapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz Refer to page 54

45. 2. Which website provides information about the index value used to determine if a mortgage loan is a HOEPA or a Higher-Priced loan? • www.consumerfinance.gov • www.fnma.com • www.freddiemac.com • www.hud.gov Chapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz Refer to page54

46. 3. On the HUD website www.hud.gov, the MLO can access information about all of the following information EXCEPT • an alphabetical list of licensed MLO’s sorted by state. • appraisers approved by HUD. • condominiums approved by HUD. • national maximum loan limits. Chapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz Refer to page 54

47. 4. All of the following are considered part of the Four C’s of credit EXCEPT • cash assets available to close the loan. • collateral. • conditions. • credit. Chapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz Refer to page 54

48. 5. All of the following are examples of high-level red flags EXCEPT • verification of rent completed with a payment history ledger. • verifications addressed to a specific party’s attention. • verifications completed on the same day they were ordered. • verifications completed on weekend or holiday. Chapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz Refer to page 54

49. 6. If a borrower does not earn sufficient income but wants to make sure he meets the debt-to-income ratio requirement, all of the following red flags may be present EXCEPT • paycheck stubs that are computer generated. • Social Security and Medicare withholding taxes that are not calculated correctly and do not equal 7.65% of gross income. • the W-2 form is handwritten. • the W-2 form presented is not the employee’s copy. Chapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz Refer to page 54

50. 7. Indicators of fraudulent income tax returns may include all of the following EXCEPT when the • high income applicant does not use a paid preparer for compilation of returns. • paid preparer signs taxpayer’s copy of returns. • self-employed or commissioned applicant does not make estimated tax payments. • tax returns are stamped “Client’s Copy.” Chapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz Refer to page 54