More than a decade after the passage of the Dodd-Frank Act, the daily practice of loan origination involves many reminders of the ethical failures that led to the global financial crisis. Traditional disclosures, such as the good faith estimate, were redesigned to more clearly represent detailed loan information to a prospective borrower.
Waiting periods between disclosure and consummation of a mortgage were implemented to give borrowers time to read and better understand loan documentation before arriving at the closing table. Mortgage originator compensation is now regulated, and originators are required to present borrowers with multiple loan product options at the time of disclosure.
The above measures, and several more like them, are among the minimum standards of compliant loan origination. In the U.S., the financial crisis of the late 2000s was associated with large-scale economic impacts, including an $11 trillion loss of household wealth, widespread job losses and home foreclosures.
Laws such as the Dodd-Frank Act were passed after the housing crisis to assure members of the public that the provision of financial services, such as mortgage origination, would be conducted in ways that are transparent, honest and not harmful to consumers. It is important to remember that these compliance measures were not proactive efforts at self-monitoring, developed by mortgage professionals as “best practices,” but were implemented by federal and state regulators as a reaction to the unethical practices that led to the crisis.
Today’s mortgage industry professionals have a responsibility to strive for a higher ethical standard than mere compliance with laws and regulations. Failure to act in this way has proven harmful for businesses in the past and would be bad in the future as well.
Culture of trust
Today, although Dodd-Frank-era regulations have now been well- integrated into day-to-day origination practices, public trust in mortgage professionals has been slower to repair. Until earlier this year, mortgage brokers have had less than 20% of the market share of loan originations, down from 56% in 2006.
Additionally, many consumers feel that regulators did not do enough to punish the unethical and sometimes criminal actions of individuals and institutions during the financial crisis. This has created feelings of distrust and cynicism in the financial system.
Ethics can be understood as a practice that explores the beliefs, values and behaviors of individuals and organizations. Industry leaders should develop sustainable, ethical behavior throughout their organizations, working to create a culture of principled conduct that benefits all stakeholders and protects the viability of the organization. Doing this, however, is usually easier said than done.
Mortgage company executives are under continuous pressure to meet production goals while promoting sustainable, ethical growth. Although many business leaders say that doing the right and moral thing is important to them, it is often difficult for managers to know how to best make ethical decisions.
Ethical issues tend to be complex and are influenced by the competing interests of different groups of stakeholders. There are many existing models, however, that set out to describe how people make moral decisions.
While these models differ, they share the common theme that the development of ethical decisionmaking is best viewed as a process, one that moves over time to a more mature state. For example, in a less mature state, individuals make moral decisions based on their own self-interest or the avoidance of punishment. At the next stage of moral development, individuals consider how their actions will be received by their peers or social groups. Ultimately, individuals begin to make ethical decisions based on universal principles of fairness and justice for society.
For mortgage companies, understanding moral decisionmaking as a progression leaves organizational leaders with a significant gap to bridge between the essential compliance and licensing requirements of mortgage origination and the development of ethical thinking in their companies. Furthermore, many mortgage originators work at companies that are small- or medium-sized enterprises, which often have more limited resources to invest in formal professional development and corporate governance initiatives. Aside from the Secure and Fair Enforcement for Mortgage Licensing Act requirement that state-licensed originators complete two hours of ethics education each year, formal ethical standards for originators often fall to their employers or professional organizations, if they are developed at all.
Mortgage companies with short-term vision that is narrowly focused on regulatory compliance and avoidance of penalties are less likely to survive when they fail to build an ethical culture. To sustain their companies, leaders must align long-term strategic goals with a culture of ethical reasoning and decisionmaking.
There are some practical ways that mortgage company leaders can cultivate ethical development in their employees. These include workplace mentoring, aligning with industrywide standards, and encouraging employees to become involved with professional associations or obtain professional credentials. This also includes the modeling of ethical behavior by managers.
Employees and managers will undoubtedly encounter situations that pose an ethical dilemma for which there is no immediate, clear solution. Senior leadership should create an environment in which managers and employees can freely discuss past and current ethical concerns with each other. Employees who are given the opportunity to think through problematic scenarios with trusted members of their team experience fewer conflicts and demonstrate improved problem-solving behavior. By engaging in active problem-solving, this process allows work teams to develop a repertoire of well-reasoned responses to ethical problems, making future ethical decisionmaking more efficient.
Many originators work for smaller nonbank lenders or brokerages, and these organizations often have less formal offerings in terms of corporate governance structures or professional development opportunities. When companies align themselves with professional organizations that articulate industrywide ethical standards, their salespeople demonstrate greater concern for borrower outcomes.
Managers and principals can benefit from becoming members of the many professional organizations that are available for originators, including the Mortgage Bankers Association (MBA) and the National Association of Mortgage Brokers (NAMB). These organizations operate according to codes of ethics that require commitment from their members to standards such as honesty, transparency and the disclosure of conflicts of interest. Additionally, organizations like MBA and NAMB have networks of local chapters across the country, through which originators can obtain ethics training.
Smaller mortgage companies may have limited professional development resources for their employees. Mortgage professionals have other opportunities available to them to earn job-related credentials, such as the Certified Mortgage Planning Specialist designation or the Certified Mortgage Processor certificate. The professional associations that grant these credentials also require their members to be governed by codes of conduct that include duties of transparency, honesty and professional communication in their business practices.
Lastly, employees involved in sales activities (including originators) emulate the behavior of their managers and apply this behavior to their sales practices. When managers display principled, moral behavior in the workplace, salespeople are more likely to demonstrate a high standard of ethical behavior to their clients. In addition to ethical behavior, salespeople are more likely to emulate the behavior of managers who demonstrate good listening and interpersonal communication skills. Managers can support an environment of ethical conduct in their workplaces by modeling this behavior themselves.
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The reputation of the mortgage industry still suffers lingering effects from the ethical failures that led up to the global financial crisis. These failures resulted in new federal and state laws that reformed many of the day-to-day practices of mortgage origination, implemented amid concerns that the mortgage industry required external regulation and had failed to adequately monitor itself.
Although these practices have increased transparency and accountability between originators and consumers, compliance with these regulations represents the minimum level of conduct that borrowers should expect from mortgage companies. Business leaders and managers should take steps to elevate an ethical culture and a duty of responsibility to stakeholders, thus developing sustainable and growth-oriented organizations. ●