Ethical Lending: What's Good for the Goose is Good for the Gander

Ed Craine
July 2, 2008 — 1,920 views  
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The U.S Treasury reported in April that suspected mortgage fraud had risen 42% in 2007.  Moreover, the report also pointed directly to mortgage brokers as a large part of the problem.  Specifically, the report states that mortgage brokers acted as "intermediaries that did not verify information submitted on the loan application.”  This is clearly not painting a favorable image of brokers.  That’s why it is so vital that as commercial brokers we immediately begin to implement measures to ensure that we are operating at only the highest level of ethics, and that we’re also working hard to ensure that our clients and colleagues are doing the same. 

It is unfortunate that while most of us conduct business ethically day in and day out, our image has been marred by the practices of a few.  But, since what has been done can’t be undone, our only option now is to ensure that we do all we can to combat this.  We need to identify any actions that seem unethical, any applicants that seem questionable, and any practices that seem fraudulent and we need to nip them in the bud.  

 Broker Burdens:
As brokers, we now have the burden of restoring credibility to our industry. One of the major burdens that we’re going to have to confront is, sadly, that some of our borrowers are less than forthcoming with us.  Occasionally borrowers will try to exaggerate their earnings for example, but the onus is still on us to be the first layer of fraud protection.  How can we accomplish this?  It can be as easy as trusting our own instincts.  There is nothing wrong with requesting back up documentation, supporting evidence, or multiple years of tax returns from clients before agreeing to submit a loan application for them.  While this may sound intrusive, the times have changed and we can’t stake our reputation with our companies and our lenders on merely trusting a client to tell us the whole truth about their financial status.

There’s no doubt that borrower fraud is a reality, but that is not to say that as brokers we’re not guilty of mistakes every once in a while.  We’re human.  There are unintentional mistakes that brokers make and then there are intentionally unethical decisions that brokers make.  Unintentional mistakes may include forgetting to review for accuracy information given to us by our clients and their agents. This generally isn’t purposely unethical behavior.  However, ignoring potential borrower fraud begins to blur the line between an accidental mistake and intentionally fraudulent behavior.  Suggesting to a client that better tax returns or a better rent roll, etc. would result in a more favorable loan decision moves us to the doorstep of actively fraudulent behavior. And, of course, actively participating in “recreating” documents puts us firmly and unequivocally in the fraudulent activity arena.

Intentionally unethical decisions may also include misquoting rates and terms, or withholding changes in terms or conditions from clients as soon as these are available.  Misleading clients in other ways is also problematic. For instance, reassuring borrowers that you will be able to close a loan that you haven’t received final approval on, or promising that a lender will make a loan for a particular commercial property when you don’t have the support to back up the claim are other forms of unethical activities.

The Fear of Fraud: We Should All Have It
Fraud can be committed in numerous ways. Regrettably, although we know about many of the ways in which fraud is committed, many fraudulent practices may be so elaborate that they are not easily identifiable.  As we discussed above, common fraud includes the falsification of income statements, tax returns, expenses, costs, rental prices and more.  However, more complex fraud schemes can include activities such as bribery of third parties like appraisers and property inspectors.  One elaborate fraud scheme that has recently come to light (again) is that of third parties committing fraud for either profit (higher fees) or property.  This can run the gamut from third parties lying about rental rates, to property management companies deceiving appraisers, to appraisers inflating values, and so on.   Bribery of course, is illegal and can put brokers and cohorts out of business, not to mention in the courtroom and/or in jail.  Not only should you not participate in this (duh!), but also, you should be on the lookout for it.

Aside from acting ethically because it’s the right thing to do for ourselves, it is also the right thing to do for our clients. Consider the commercial broker who attempts to break lender guidelines, for example, by recording a junior loan on a property a day after close of escrow on a loan where the lender has mandated that no secondary financing will be allowed.   If detected, fraud of this nature will almost certainly cost you your approval with the lender.  But what about your client?  They can be forced to pay the full amount of the loan and any prepayment penalties.  This dangerous example has unfortunately happened often enough that lenders are on alert. 

These examples illustrate of the reasons that all commercial brokers need to make sure that not only are our own loans free of fraud, but also that any colleagues that we work with steer clear of these practices as well.  Guilt by association is happening more and more frequently. While no one likes to be a tattletale, it is advisable that if you suspect fraud is occurring whether it is being committed by a borrower, a colleague, or a third party; take action.   After all, our industry as a whole will only continue to suffer  if we don’t all work together to restore credibility through adhering to only the most ethical standards of commercial lending.

Ed Craine


Ed Craine is the CEO of award winning Smith Craine Finance, one of the oldest independent Mortgage Companies in San Francisco, California. A 25+ year veteran of the real estate financing industry, Ed has originated and negotiated loans in excess of $2 billion, to include both commercial and residential properties. He has simultaneously held such notable positions as Vice President of the California Association of Mortgage Brokers (CAMB), as well as serving as the Public Relations Committee Chairperson of the 5,000 member strong association during 2007, the year in which the mortgage industry received more media attention than in recent history. Ed currently also serves as 1st Regional Vice President of the Certified Commercial Investment Member Institute (CCIM). He will be inducted as Vice President of the Southwest Region of CCIM in September 2008.