Ethics, Fraud Prevention, and Consumer Protection
Ethical standards and prohibited practices
Originators owe duties of honesty, fairness, and good faith. Prohibited conduct includes fraud, misrepresentation, misstatement of material facts, and omission of material facts. Steering a borrower into a higher-cost loan to increase compensation, without disclosure or benefit to the borrower, is a classic ethics violation. So is signing a document on a borrower's behalf or encouraging a borrower to leave signature fields blank.
Fraud types to recognize
- Fraud for property: Borrower misrepresents income or occupancy to obtain a loan they intend to repay.
- Fraud for profit: Organized scheme, often involving inflated appraisals, straw buyers, or flipping.
- Identity theft: Use of another person's information without consent.
- Occupancy fraud: Claiming a primary residence when the property is an investment.
Red flags include altered documents, income inconsistent with occupation, unusual urgency, and third parties directing the transaction.
Consumer protection rules
- Safeguards and privacy rules require protection of nonpublic personal information and a written information security program.
- Red flags rule requires an identity theft prevention program.
- Anti-money laundering obligations require monitoring and suspicious activity reporting.
- Fair lending prohibits discrimination and discouragement on prohibited bases.
Traps
Questions often present a scenario where a borrower asks the originator to "estimate" income higher to qualify. The correct answer is always to refuse and document actual income. Another trap: assuming a suspicious document should simply be corrected; instead it must be escalated and reported.
Rule of thumb
If a fact would influence a lender's decision and it is untrue or omitted, it is a material misstatement. Never complete, alter, or backdate a borrower document.
Worked example
A borrower submits a bank statement with a font inconsistency. The originator should not accept it, should request an original from the source, and should escalate per the fraud policy.