In his testimony, Jim Nabors, president of the National Association of Mortgage Brokers, advocates financial literacy programs in middle school as one way to address predatory lending. (See Inman News story, “Education key to fight predatory lending.”) With utmost respect to Mr. Nabors, we think that this is like arguing for similar programs in medicine, law, accounting, real estate, and so forth. While it is true that it is harder to cheat an informed customer, we believe that moral clean-up efforts should focus on the source of the problem and not its victims.
While we believe that consumer education is an excellent goal, we also believe that we should take a closer look at some of the roots of unethical behavior in the industry itself. In our article here, we’d like to address only one source of the problem of predatory lending, as well as prolegomena about the solution.
To our knowledge, there is no well-defined code of ethics in the mortgage-lending industry with effective enforcement processes. For example, NAMB, the Mortgage Bankers Association and the National Association of Professional Mortgage Women have rudimentary codes, but they are so vague that they fall short of guiding behavior in a clear and specified manner. In the NAMB code, for example, the first provision requires “honesty and integrity,” which is specified as a duty to “conduct business in a manner reflecting honesty, honor and integrity.” Reasonable minds often disagree about the meaning of the word “honesty,” because in complex transactions, there are many ways to be honest. Further, “honor” can mean anything, just like the concepts of justice and beauty. “Integrity” is a technical term that connotes consistent adherence to a set of moral standards, but we still do not have guidance about the standards themselves.
This vagueness of duty has led to an ethical climate of subjectivism, implying that there are no agreed-upon standards of practice that climb beyond the specifications of the law. Without clear ethical standards, as long as practitioners follow the law, anything goes. Some states require mortgage originators and brokers to take licensing exams that demonstrate substantive competence and moral awareness. As a whole, standards of practice across the nation vary greatly. In contexts where there are no written moral standards, the principles of caveat emptor should apply and a buyer/consumer would be liable for his mistakes. This is basically a typical retail environment where consumers understand that they are not seeking the advice and services of an expert with superior knowledge and a duty to protect any consumer’s interest.
On the other hand, if we want to reverse the dictum of caveat emptor and replace it with the dictum of caveat venditor, we must implement and enforce a well-defined code of ethics. This would create a clear consumer expectation that they can and ought to rely upon the expertise of their mortgage lenders. This could lead to less external regulating and more profit for the industry and the new professionals within it. As an integral part of this code, we ought to mandate that mortgage lenders have a fiduciary duty to their customers. This would be the first step in bringing our new profession into line with other groups such as doctors, lawyers and accountants.
Self-regulation with remedial education and disciplinary boards could avert excessive attempts to regulate the industry externally, which carries additional costs and more serious punitive measures. The mortgage-lending industry is at a historical crossroads. It can remain as a largely retail industry, in which consumer confidence will be constantly challenged, or it can implement much more detailed ethical standards, which could bring practitioners into the professional realm.
Jillayne Schlicke is president of BPI Consulting Group and co-executive director of Ethical Lending Foundation. She has co-authored several articles with Dr. Boileau, is a consultant and national public speaker, and is in the process of developing the BPI Leadership Institute.
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