Ethics
The ethics domain tests judgment under pressure: fraud detection and prevention, fair lending, honest advertising, conflicts of interest, confidentiality, and cooperation with regulators. Most items present a scenario with a tempting shortcut and ask what the licensed originator must do.
Fraud patterns to recognize
Fraud for property is a borrower misstating facts to qualify for a home; fraud for profit is an organized scheme. Watch for straw buyers, occupancy misrepresentation (a primary-residence loan on a rental), inflated appraisals and rapid resale flipping, undisclosed subordinate financing, altered or fabricated income and asset documents, silent second liens, and air loans with no real property. Red flags include documents that look uniform or freshly typed, a borrower who cannot explain the numbers, and pressure to close before verification.
Prohibited practices
RESPA Section 8 bars fees, kickbacks, or things of value for referrals. A disclosed kickback is still a kickback. The affiliated business arrangement safe harbor requires a written disclosure of the affiliation, no requirement that the consumer use the affiliate, and only a return on ownership. Advertising must not be misleading, and Reg Z advertising rules require trigger terms to be followed by full disclosure. Steering borrowers to higher-cost products, discouraging applicants on protected grounds, and redlining are fair lending violations.
Worked example
A real estate agent offers the originator 500 dollars for every loan that closes. Even with written disclosure to the borrower and even if the agent genuinely refers business, the payment is a thing of value for a referral and violates RESPA Section 8. The permissible path is co-marketing with fair-share costs or a documented affiliated business arrangement meeting the safe harbor. The originator should decline, document the conversation, and escalate to compliance.
Traps that cost marks
- Believing disclosure cures a referral fee.
- Accepting borrower-supplied documents without verification because the numbers fit.
- Completing or altering the borrower's application or signature.
- Sharing nonpublic personal information outside permitted exceptions.
- Retaliating against or discouraging a borrower who questions fees or exercises a right.