Why Haven’t Loan Officers Been Told These Facts? Ethical Frameworks

With interest rates continuing to drop, mortgage loan officers are turning their attention to refinancing. When it comes to refinancing, most consumers are usually looking for two key things: a better interest rate than what they currently have and the ability to tap into some of the equity in their homes for different needs.

Mortgage Loan Originators (MLOs) have an opportunity to mitigate ethical challenges when presenting refinancing options. Consumers often rely on MLOs—especially those with whom they have developed a relationship—for accurate information and trustworthy advice. If the financial analysis of a borrower’s refinancing options does not clearly demonstrate a net benefit, MLOs may feel compelled to discourage consumers from proceeding with the refinance. Conversely, when the analysis shows a clear net benefit to refinancing, MLOs may feel the need to actively promote the refinance.

What happens when the net tangible benefit is minimal? Just because a transaction meets the net tangible benefit requirements doesn’t mean the borrower will actually gain from refinancing. Moreover, it’s relatively simple to circumvent these net tangible requirements by initiating the new financing as a cash-out refinance. Typically, there are no net tangible thresholds to consider in these types of transactions. In some instances, MLOs will be ethically challenged when comparing secondary financing to cash-out refinance solutions.

One aspect of the issue could be that the MLO tends to focus on instructing the borrower on what to do. While it may be flattering to be seen as a financial expert, with customers eagerly awaiting our insightful analysis of their options, this approach may be misguided when considering whether or not to refinance.

Avoiding Ethical Challenges

From an ethical perspective, the priority should be to avoid ethical dilemmas whenever possible. Instead of primarily telling prospective borrowers what to do, mortgage loan originators (MLOs) should focus on helping them understand the analysis tools and calculations involved in their decisions. In some cases, refinancing may offer more advantages than just a simple reduction in interest rates. For example, the monthly payment is often the primary concern for consumers. Assumability may be a consideration that most consumers tend to underweight. By prioritizing their customers’ needs rather than simply directing them, MLOs are more likely to gain a better understanding of their customers’ requirements as well as their customers’ blind spots. This approach will help MLOs effectively communicate any potential benefits of refinancing.

In the past, when lenders covered the costs of refinancing, there was less emphasis on analyzing the potential benefits of refinancing. If a refinance didn’t cost the borrower anything, even a small rate improvement was considered worthwhile. However, today’s capital markets do not support Yield Spread Premiums or Service Release Premiums as they once did. Combined with higher origination costs, we should not expect a return to lender-paid refinancing transactions anytime soon. As a result, consumers now face significant costs associated with refinancing. Now more than ever, mortgage loan officers (MLOs) must be proficient in communicating clear and effective financial analyses to consumers who are considering refinancing.

Ethical Frameworks

The best time to address ethical dilemmas is before they arise. In organizational management, using an “ethics framework” is an effective way to reduce the likelihood and impact of ethical failures. These frameworks do not define what is right or ethical; instead, they assist users in making informed judgment calls. A framework serves as a tool that encourages individuals to consider and appropriately evaluate their decisions against established norms and expectations.

Santa Clara University’s Markkula Center’s Ethical Decision-Making Framework is such an approach to ethical decision-making. The Markkula Center developed six ethical lenses that offer broad ethical perspectives, useful when establishing an ethics framework.

The user is not asked to choose among them. Looking at a potential decision landscape through each of them in turn, a framework user will see different ethical aspects highlighted. The lenses are therefore complementary in that they help users and developers of ethical frameworks see more of the nuances of a situation. However, the lenses might also reveal ethical aspects that come into conflict with each other; when this happens, the user must balance those ethical considerations.

Adopting an ethical framework often requires cultural changes within an organization. However, these frameworks benefit not only customers but also the organization itself. The same ethical guidelines that help address issues with applicants can also be applied to internal ethical concerns.

In the mortgage industry, lenders must comprehensively approach ethics. Management cannot insist on high sales volume without ensuring ethical originations, as was illustrated by the Wells Fargo account-opening scandal some years ago. An organization that genuinely prioritizes ethical interactions with its customers is commendable. However, if lenders fail to apply these ethical standards to the organization’s internal practices, it is no different than putting new tires on a broken-down car—it simply doesn’t work.

 

 

BEHIND THE SCENES: Short Sale Fraud Alive and Well

PROVIDENCE, RI – A Johnston-based real estate investment firm, the company’s owner, and an employee of the real estate investment firm were sentenced in U.S. District Court today for conspiring to defraud and for defrauding homeowners, many of whom spoke little or no English, and financial institutions, criminal conduct that caused some homeowners to move out of their property, announced Acting United States Attorney Sara Miron Bloom.

In April 2023, after a three week trial, a jury convicted Gregory F. Aloisio, 63, of Johnston, his real estate investment company, Aloisio Group, LLC, and Aloisio Group employee John DiFruscio, Jr., 72, of North Providence, for their roles in a scheme to fraudulently obtain properties from financially distressed homeowners; to fraudulently obtain fees, commissions, and other income associated with the rental, use and short sale of homeowners’ properties; to fraudulently purchase properties in short sales and illegally “flip” them for significant personal gain; and defraud several financial institutions.

Aloisio Group, LLC and DiFruscio, Jr., were each convicted of conspiracy to commit bank and wire fraud; Gregory Aloisio and John DiFruscio were each convicted on three counts of bank fraud and one count of wire fraud; and Gregory Aloisio was also convicted on a charge of money laundering.

U.S. District Court Judge Mary S. McElroy today sentenced Gregory Aloisio to a term of incarceration of 12 months and one day to be followed by three years of supervised release and John DiFruscio, Jr. to three years supervised release, the first three months in home confinement. District Court Judge McElroy imposed a term of one year of probation against the Aloisio Group. Restitution orders in this matter will be entered by the court within 30 days.

The government presented evidence during the trial that, as part of the conspiracy and to further their scheme, the defendants lied to homeowners, financial institutions, and others, including evidence of the following:

  • Through misrepresentations and concealment, the defendants represented that they were working at “arm’s length” from the homeowners, meaning that there were no relationships or connections between themselves and the homeowners that could create incentive for suppressions of house purchase prices. In fact, the defendants were controlling both sides of the purchase transactions.
  • The defendants filed affidavits and documents that falsely represented 1) that no commercial relationship existed between the parties to induce lenders to approve short sales; 2) that there was no agreement to “flip” or rent the targeted properties after the short sale; and 3) the identity of the seller, the identity of the buyer, and/or cash to the parties at closing.
  • In fact, defendants lined-up buyers prior to short sale so as to guarantee a flip and profit after the short sale. Prior to short sale, the defendants entered into agreements with lined-up buyers to sell properties at prices more than the short sale prices.
  • The defendants deceived homeowners into believing that they offered a legitimate solution to the homeowners’ financial distress. In reality, the defendants were using homeowners to perpetuate their fraud. Some financially distressed homeowners were convinced to move out of their residences and lost their homes. Others remained in their properties and paid rent to the co-conspirators.

The case was prosecuted by Assistant United States Attorneys Sandra R. Hebert and Milind M. Shah. The matter was investigated by the U.S. Department of Housing and Urban Development – Office of Inspector General and the FBI.

 

Tip of the Week – Sign Up for 2025 CE

Expanding your product offerings is an effective way to enhance your business’s vitality. This year, the Loan Officer School is surveying non-government financing options for construction and renovation projects.

The shortage of affordable housing is unlikely to be resolved anytime soon. As affordable, move-in-ready housing solutions remain hard to find, the demand for construction and renovation loans is expected to increase. According to the JCHS, Harvard University, the US remodeling market soared above $600 billion in the wake of the pandemic and, despite recent softening, remains 50 percent above pre-pandemic levels.

Discover how to enhance borrower advantages through construction and renovation financing.

  • Enhanced housing affordability.
  • Housing options for aging or disabled borrowers.
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  • Multi-generational housing solutions.

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