Ethics Flashcards
Ethics (18%)
Prohibited acts: Redlining
- Redlining is an illegal practice in which lenders avoid providing services to individuals living in communities of color because of their race or national origin. It involves denying credit or other financial services based on discriminatory criteria related to the neighborhood where the borrower lives. Redlining is prohibited by the Fair Housing Act and the Equal Credit Opportunity Act.
- These laws ensure that borrowers have equal and fair access to credit, regardless of their race, color, or national origin. If you believe you’ve experienced redlining, you have the right to challenge it and seek equal treatment in the mortgage lending process
Ethics (18%)
Ethical Issues
Prohibited acts: RESPA prohibitions
RESPA (Real Estate Settlement Procedures Act) is a federal law that protects consumers during the mortgage loan origination process. It aims to ensure transparency, fairness, and accuracy in real estate transactions. Here are some key prohibitions under RESPA:
Kickbacks and Unearned Fees:
* RESPA prohibits giving or receiving any portion of a fee charged for a real estate settlement service unless the fee is for services actually performed.
* This prevents kickbacks, referral fees, or other compensation arrangements that could influence the choice of service providers.
Affiliated Business Arrangements (AfBAs):
* RESPA regulates AfBAs, where a person in a position to refer settlement business has an ownership interest in a provider of settlement services.
* AfBAs must meet specific disclosure requirements to ensure transparency and prevent conflicts of interest.
Escrow Accounts:
* RESPA sets guidelines for escrow accounts, ensuring that lenders do not demand excessively large escrow amounts from borrowers.
* It also requires lenders to provide annual escrow account statements to borrowers.
Remember that RESPA promotes fair practices and protects consumers from unethical behavior in the mortgage industry. If you encounter any violations, you have the right to report them and seek legal remedies
Ethics (18%)
Kickbacks/compensation
Kickbacks:
* A kickback refers to an illegal practice where one party receives a portion of a fee or payment for referring business to another party.
* In the mortgage industry, kickbacks can occur when a loan originator receives compensation from a third party (such as a title company or appraiser) for referring borrowers to their services.
* Kickbacks violate the Real Estate Settlement Procedures Act (RESPA) and are strictly prohibited.
Compensation:
* Loan originators are compensated for their services, but it must be based on legitimate work performed.
* Compensation can include origination fees, commissions, or salary.
* It is essential that compensation is transparent, fair, and compliant with RESPA guidelines.
Remember that ethical behavior and compliance with RESPA regulations are crucial in maintaining trust and fairness in the mortgage industry.
Ethics (18%)
Permitted/prohibited duties
Permitted Duties:
* Mortgage loan originators (MLOs) are permitted to:
* Take Loan Applications: MLOs can receive information from borrowers to determine their eligibility for a loan.
* Offer or Negotiate Terms: MLOs can discuss loan terms with borrowers, including interest rates, fees, and repayment options.
* Provide Information: MLOs can explain the loan application process, qualifications, and necessary documentation.
* Assist with Application: MLOs can help borrowers fill out loan applications and clarify required information.
Prohibited Duties:
* MLOs are prohibited from:
* Receiving Kickbacks: Accepting any portion of a fee or compensation for referring business to other parties (e.g., title companies, appraisers).
* Dual Compensation: Receiving compensation from both the borrower and another party involved in the transaction (e.g., seller, real estate agent).
* Steering: Steering borrowers toward specific loan products or terms that benefit the MLO financially but may not be in the borrower’s best interest.
* Remember that ethical behavior is essential in the mortgage industry to protect borrowers and maintain trust.
Ethics (18%)
Fairness in lending:
Referral (Definition/required disclosures)
- A referral in a real estate transaction occurs when one agent refers a client to another agent. This referral might happen in exchange for a share in the eventual commission earned. It’s important to note that a referral is not necessarily a violation of the Real Estate Settlement Procedures Act (RESPA) Section 8, as long as there is no requirement to use the specified company.
- However, when making a referral, certain disclosures are required. These disclosures help ensure transparency and protect the interests of all parties involved. Here are the key points related to referral disclosures:
Affiliated Business Disclosure: When referring a client to another agent or service provider, the referring party should provide an affiliated business disclosure. This disclosure must include details about the relationship between the parties and an estimate for the service being referred. Importantly, this disclosure should be provided at the time of the referral and not later2.
* In summary, while referrals are common and often beneficial, proper disclosures are essential to maintain fairness and transparency in lending and real estate transactions. Always ensure that clients are informed about the referral process and associated services.
Ethics (18%)
Fraud detection:
Asset/income/employment fraud
Asset Misappropriation:
* Definition: Asset misappropriation occurs when employees steal physical assets from their organization. These assets can include inventory, equipment, office supplies, or other tangible items.
* Examples: Unauthorized transfers, falsified records, or creating fake invoices to divert company assets for personal use fall under this category.
Income Fraud:
* Definition: Income fraud involves deceptive practices related to an individual’s income. It can occur in various ways, such as underreporting income, inflating earnings, or providing false information about income sources.
* Impact: Income fraud can distort financial statements and mislead stakeholders, affecting decision-making and financial stability.
Employment Fraud:
**Definition: Employment fraud encompasses fraudulent activities related to employment status, compensation, or qualifications.
Examples:
* Embezzlement: Employees misappropriate company funds or use company assets for personal gain. This can involve unauthorized transfers, falsified records, or creating fake invoices.
* False Credentials: Providing false information about qualifications, certifications, or work experience during the hiring process.
* Ghost Employees: Creating fictitious employees on the payroll to divert funds.
* Time Fraud: Manipulating work hours or attendance records to receive undeserved compensation.
Detecting and preventing fraud requires a comprehensive approach that includes ethical behavior, robust internal controls, and regular risk assessments. Organizations should establish and communicate a fraud risk management program that emphasizes high integrity and ethical values. Additionally, conducting thorough fraud risk assessments helps identify specific fraud schemes and implement actions to mitigate residual risks
Ethics (18%)
Fraud detection:
Sales contract/application red flags
Inconsistent Signatures:
* Warning Sign: Signatures on the application or paramedical exam are not consistent.
* Implication: Inconsistencies in signatures may indicate fraudulent behavior or misrepresentation1.
Discrepancies in Customer Information:
* Warning Signs:
* Multiple accounts with methodical spelling variations on the same name (e.g., William Smith, Will Ian Smith, Bob Smith, Bobby N. Smmith).
* Multiple customers with different names using the same contact information.
* Accounts with inconsistent personal details, such as invalid social security numbers or different names associated with the same account.
* Unusual activity using minors’ personally identifiable information (PII).
Implication: These discrepancies could suggest identity fraud.
Transactions Inconsistent with Customer Profiles:
* Warning Signs:
* Point-of-sale (POS) transactions that don’t match the customer’s address or typical habits (especially if occurring at widely varying locations or without reasonable travel time).
* Payments or received funds that don’t align with the customer’s lifestyle, income, or expected behavior.
* Excessive payments exceeding a balance or credit limit, especially when combined with repetitive, unusual timestamp or amount patterns.
* Public benefit payments (e.g., Social Security retirement) to an individual who doesn’t qualify.
* Repetitive purchase returns, disputes, and chargebacks exceeding reasonable activity for the customer.
Seller-Buyer Relationships:
* Warning Signs:
The seller is the buyer’s real estate broker, relative, or employer.
* The seller isn’t listed on the home’s title.
* The buyer isn’t the loan applicant.
By paying attention to these red flags, organizations can enhance their fraud detection efforts and mitigate risks associated with deceptive practices. Remember that vigilance and thorough assessments are crucial in maintaining integrity and preventing fraud.
Ethics (18%)
Occupancy fraud
Definition:
* Occupancy fraud occurs when a borrower falsely claims that a property will be owner-occupied (i.e., their primary residence) when, in reality, it will not be.
* Lenders typically offer more favorable terms (such as lower interest rates) for owner-occupied properties, making this deception attractive to borrowers.
Implications:
* Higher Loan-to-Value Ratios: Investors engaging in occupancy fraud aim to qualify for higher loan-to-value ratios, allowing them to finance a larger portion of the property’s purchase price.
* Lower Out-of-Pocket Costs: By claiming owner occupancy, borrowers can reduce their upfront costs, as lenders may require a smaller down payment.
* Lower Mortgage Rates: Owner-occupied properties often receive more favorable mortgage rates, which can significantly impact the borrower’s overall financial burden.
Detection and Prevention:
* Lender Vigilance: Lenders closely monitor occupancy status during the loan application process. They may verify the borrower’s intent through interviews, documentation, and site visits.
* Penalties: Government and regulatory bodies impose penalties on those caught engaging in occupancy fraud. Borrowers should be aware of the risks associated with deceptive practices.
Remember that honesty and transparency are crucial in mortgage transactions.
Ethics (18%)
General red flags
Discrepancies in Customer Information:
* Multiple accounts with methodical spelling variations on the same name (e.g., William Smith, Will Ian Smith, Bob Smith, Bobby N. Smmith).
* Multiple customers with different names using the same contact information.
* Accounts with inconsistent personal details, such as a social security number that comes back invalid or returns a different name than is on the account.
* Multiple accounts manifesting unusual activity using minors’ personally identifiable information (PII).
Transactions Inconsistent with the Customer’s Profile:
* Point-of-sale (POS) transactions inconsistent with the customer’s address or typical habits, especially if they occur at wildly varying locations or without time for travel (e.g., a customer spends at a supermarket in their hometown at noon, then at a boutique shop in Paris an hour later).
* Payments or received funds that don’t match a customer’s lifestyle, income, or expected behavior. This can include unusually high deposits quickly withdrawn or immediately paid back to the originating account. It can also include excessive payments exceeding a balance or credit limit – especially when combined with repetitive, unusual timestamp or amount patterns.
* Public benefit payments (such as Social Security retirement) to an individual that does not qualify and whose spending is not on behalf of a legitimate recipient.
* Repetitive purchase returns, disputes, and/or chargebacks that exceed reasonable activity for the customer.
Use of Supporting Documentation:
* When assessing anomalies, consider whether there is supporting documentation.
* Evaluate whether the documentation appears to be falsified, altered, or fictitious.
* Ensure that the transaction and its reflection in the financial statements make sense in light of the company’s operations, goals, and objectives.
Remember, staying informed about these red flags and implementing effective fraud detection practices is crucial for maintaining integrity and protecting against deceptive activities.
Ethics (18%)
Suspicious bank and other activity; information not provided to borrower; verifying application information
Suspicious Bank and Other Activity:
* Definition: Suspicious activity refers to transactions or behaviors that raise concerns about potential fraud, money laundering, or illicit financial activity.
* Red Flags:
* Unusual Transactions: Activities that significantly deviate from the customer’s normal practices.
* Inconsistent Information: Discrepancies in customer details, such as multiple accounts with variations in names or addresses.
* Excessive Payments or Returns: Transactions exceeding reasonable activity levels or repetitive purchase returns.
* Public Benefit Payments: Unusual use of minors’ personally identifiable information (PII) for financial transactions.
Verifying Application Information:
* Loan Processors’ Role: Loan processors play a critical role in verifying application information before it goes to the lender. They check for red flags, ensure accuracy, and verify the data provided by the borrower.
** Responsibilities:**
* Confirming the authenticity of supporting documentation.
* Ensuring all information is verifiable and accurately recorded.
* Not offering or negotiating loan terms (which must be done by a properly licensed individual).
In summary, maintaining vigilance, adhering to ethical standards, and thoroughly verifying application information are essential in preventing fraud and ensuring fair lending practices.
Ethics (18%)
Advertising:
Misleading information
False Advertising:
* Definition: False advertising involves using misleading or untrue information to promote a consumer product. It is an unethical marketing tactic that has deceived consumers since the early days of the consumer business industry.
* Modern Challenges: With the rise of social media, consumers are more vulnerable than ever to falling victim to deceptive representations. The recent ‘Fyre Festival’ documentaries on Netflix and Hulu serve as a contemporary example of false advertising combined with unethical social media influencer promotion.
Ethical Issues in Advertising:
* Exaggerated Claims: Advertisements often make exaggerated claims, which can mislead consumers.
* Promotion of Harmful Products: Ethical concerns arise when advertising promotes alcohol, tobacco products, or gambling.
* False Advertising: Companies may engage in false advertising by embellishing and overstating the benefits of their products or services.
* Stereotypes: Advertisers portraying hurtful stereotypes can perpetuate harmful biases.
Consequences of Unethical Advertising:
* Consumer Trust: Unethical advertising erodes consumer trust.
* Brand Reputation: It damages brand reputation and undermines the integrity of the entire advertising industry.
* Individual Harm: Misleading or manipulative ads can harm individuals by promoting unrealistic expectations, fostering insecurities, or exploiting vulnerabilities.
In summary, ethical advertisers recognize that maintaining integrity and truthfulness in their campaigns is essential for long-term success.
Ethics (18%)
Due diligence review
What is a Due Diligence Review?:
* A due diligence review is a process that one business undertakes to confirm how reliable another business is before conducting a transaction with it.
* The specific focus of due diligence depends on the type of transaction. For example:
* In a merger, the acquiring company performs due diligence on the target company to verify customer contracts and other critical aspects.
* In a technology purchase, due diligence ensures that a vendor has the necessary operations to provide follow-up services.
* In the compliance world, due diligence assesses business partners to confirm they pose no corruption or misconduct risks that could affect your own business.
* The goal is to gain assurance in the other party, reducing the potential for harm to an acceptable level.
Why Are Due Diligence Reviews Necessary?:
* Without due diligence, the risk of harm may materialize, causing significant trouble for your business.
* For instance, failing to review a tech vendor could lead to software failures, leaving critical tasks unfulfilled and resulting in lawsuits from shareholders or customers.
* Regulators also expect prudent steps to reduce the risk of legal violations, making due diligence an essential part of compliance efforts.
How to Prepare for a Due Diligence Review:
* Understand the purpose of the review based on the specific transaction.
* Collect relevant information about the other party, including financials, contracts, and compliance records.
* Assess the reliability and integrity of the business partner.
* Be thorough and sincere in your due diligence efforts, even if perfection is unattainable.
* Remember that due diligence is an indispensable part of corporate life, regardless of regulatory climates or geographical differences.
In summary, due diligence reviews play a crucial role in assessing reliability, mitigating risks, and maintaining ethical business practices.
Ethics (18%)
“Unfair, deceptive, or abusive acts”
Unfair Trade Practices:
* Definition: Unfair trade practices refer to the use of various deceptive, fraudulent, or unethical methods to obtain business. These practices can harm consumers, competitors, or the overall market.
Examples:
* Misrepresentation: Providing false information about a product or service.
* False Advertising: Misleading consumers through exaggerated claims or misrepresentations.
* Tied Selling: Forcing customers to purchase additional products or services as a condition for buying something else.
* Deceptive Pricing: Manipulating prices to mislead consumers.
* Noncompliance with Manufacturing Standards: Failing to meet safety or quality standards.
Unfair, Deceptive, or Abusive Acts or Practices (UDAAP):
* Definition: UDAAP is an acronym that refers to unfair, deceptive, or abusive acts or practices by those who offer financial products or services to consumers. These practices are illegal according to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
* Regulatory Source: The rules about UDAAPs were created by the Consumer Financial Protection Bureau (CFPB).
* Scope: UDAAPs cover a wide range of behaviors, including misleading advertising, hidden fees, and practices that harm consumers.
In summary, maintaining ethical advertising practices involves avoiding unfair, deceptive, or abusive acts.
Ethics (18%)
Federal regulation
Under the law, claims in advertisements must be truthful, cannot be deceptive or unfair, and must be evidence-based. For some specialized products or services, additional rules may apply1. The Federal Trade Commission (FTC) plays a crucial role in enforcing “truth-in-advertising” laws in the United States. These laws require advertisers to be truthful, avoid deception, and back up their claims with reliable, objective evidence. Here are some key points:
Division of Advertising Practices (DAP):
* The Division of Advertising Practices within the FTC enforces truth-in-advertising laws.
* DAP’s mission is to protect consumers by ensuring that advertisements are honest and supported by evidence.
* They use various tools, including law enforcement actions, warning letters, industry self-regulation advocacy, and consumer education materials.
* DAP focuses on health products, addiction-related services, emerging issues (such as social media influencers), deceptive conduct by national advertisers, tobacco marketing, and alcohol industry self-regulation.
Rules and Guides:
* DAP develops regulations and issues policy statements and business guidance:
* Contact Lens Rule and Eyeglass Rule: These rules require prescribers to automatically provide patients with copies of their prescriptions after lens or eyeglass fittings.
* Guides Concerning Use of Endorsements and Testimonials in Advertising: These guides emphasize truthful endorsements and clear disclosure of material connections between advertisers and endorsers.
* Enforcement Policy Statement on Deceptively Formatted Advertisements and Native Advertising: This guide applies truth-in-advertising principles to social media marketing, paid search results, and “native” ads that resemble non-advertising content.
In summary, federal regulations ensure that advertisers maintain honesty, transparency, and evidence-based claims in their advertising practices.
Ethics (18%)
Predatory lending and steering
Definition:
* Predatory Lending: Predatory lending occurs when lenders impose excessive fees, high-interest rates, or steer borrowers into expensive loans, even when they could qualify for more affordable credit.
* Impact: It devastates both individual victims and their neighborhoods. Borrowers may struggle with excessive monthly payments, risking their basic needs, and potentially losing their homes. Entire neighborhoods can suffer as property values decline, businesses leave, and community cohesion weakens.
Examples of Predatory Practices:
* High-Cost Loans: Offering loans with exorbitant interest rates and fees.
* Steering: Pushing borrowers into loans they don’t need or can’t afford.
* Hidden Costs: Concealing fees and charges.
* Loan Flipping: Encouraging frequent refinancing, resulting in higher fees.
* Balloon Payments: Structuring loans with low initial payments but large final payments.
* Equity Stripping: Providing loans based on home equity rather than repayment ability.
Challenges in Defining Predatory Lending:
* There is no universally agreed-upon definition of predatory lending.
* Consumer advocates use the term as shorthand for various exploitative practices, but objective criteria are lacking.
* Distinguishing between high-cost lending and predatory lending remains a challenge.
Efforts to Combat Predatory Lending:
* Legal Actions: Some states have sued lenders for discriminatory practices.
* Regulatory Measures: Stricter regulations aim to protect borrowers.
* Consumer Education: Raising awareness about predatory practices.
* Industry Accountability: Encouraging lenders to adopt fair lending practices.
In summary, addressing predatory lending requires a multifaceted approach involving legal action, regulation, and public awareness. Protecting vulnerable borrowers and promoting ethical lending practices are essential goals.
