These are the hallmarks to which association members strive.

AAPL’s Code of Ethics has several purposes. The Code is well-articulated in the association’s annual conference content, continued education for fund managers and private lenders, and online. The association strives to create industry best practices, enforce a code of conduct, and prevent regulatory encroachment. Most items adopted are included to address “gray areas” surrounding formal regulations already in place. 

The association itself acts almost as a self-governing body on issues outside of regulation. Those who operate through regulatory loopholes typically get needed out with time. But other areas of the code, outside of regulated business practices, are just as important for members of the private lending community to adhere to. In fact, these character-based provisions in the code shape the reputation of the industry and provide protections for members in good standing.

In the traditional capital markets, independent review agencies such as Standard & Poor’s typically rate groups with stellar reputations higher than those with obvious impairments. But in non-bank lending, the burden falls on private lenders, and then it trickles throughout the ecosystem to loan brokers, borrowers, and vendors. One guideline within the AAPL code of ethics states, “Members will be honest, forthright, and professional in all their business dealings.” Everyone has different applications and perspectives in business when it comes to character adjectives, which makes defining standards difficult.

HONESTY AND INTEGRITY

Honesty and integrity are frequently used interchangeably. In private lending, dishonest players rarely blatantly lie. Thus, identifying and reporting unethical behaviors that often hide within financing and servicing processes becomes even more important.

Lenders may bait borrowers with enticing loan economics but ultimately fund at much higher prices. It’s one thing to apply risk adjustments to loan pricing after a careful underwriting, but it’s problematic when lenders have no intention of offering the terms they advertise under any circumstance.

Brokers may lead borrowers to believe they are direct lenders, but really FALL 2021 39 manage no capital. It’s one thing to have correspondent or table funding relationships, but quite another to mislead applicants. Borrowers have several opportunities to fudge in any number of areas throughout the application, underwriting, and approval processes. Although it’s fair for borrowers to put their best presentation forward when seeking a loan, leaving critical details out is dishonest.

FORTHRIGHTNESS

Forthrightness is a first cousin to honesty. Being habitually direct and sincere in practice saves everyone money and arrives at the facts sooner. The adage that “all truth comes out in time” usually proves accurate when a borrower or lender gets through the funding process nefariously. If a party fails to be forthright in the lead-up to a loan closing, the project or loan will likely fail or be negatively impacted by the omitted information. Rarely is the intended outcome awarded when it was achieved by skirting the truth.

PROFESSIONALISM

Professionalism can also vary in definition. Office culture, company vintage, the staff’s generation identity, education level and discipline, experience, and industry can affect how traditionally professional organizations must be. The AAPL code goes beyond the tenants of professionalism we’re used to addressing (dress codes, phone etiquette, etc.). When an organization lacks decorum entirely, the standards that define positive character traits typically suffer. On the contrary, an organization that lacks levity may breed less trustworthiness, which leads to greater challenges unilaterally. Professionalism is an important quality for private lenders because it requires checks and balances, policies, and procedures. Committing to a system helps organizations protect themselves against fraud and deception, while breeding an honest culture.

NO LIP SERVICE

Private lenders must be careful not to use character adjectives as clichés. Many organizations integrate concepts of integrity into mission statements and company collateral. Although these inclusions are noble, the industry must strive to really address matters of integrity head on, understanding that sometimes, these elements get glossed over or generalized. In his book “The Bottom Line on Integrity,” Quinn McKay provides subtle tools of deception that apply almost universally. He explains that most deception and dishonesty center around manipulations in the communication process. Here are a few he covers:

  • Outright lying by saying things are not so, that truly are, is the same as stating a falsehood. Although most would agree that lying is wrong, many still engage in this type of dishonesty to avoid getting into trouble, to make a sale, or to get out of a difficult situation. Perhaps an organization had a bad experience that became publicly known. Instead of addressing the root of such a problem and addressing it head on, perhaps a lender trains its originators to deny culpability or existence of the issue. It’s almost always better to “own” a crisis, take responsibility, and commit to a change if needed.
  • Overstating or exaggerating is a common form of deception. To compete against other organizations, loan pricing, fund performance, or borrower experience may be misrepresented in an effort to find an edge.
  • Understating circumstances is a common tactic because it may feel less dishonest to merely understate a problem. Perhaps a lender hears about a storm near a project after the lender already completed its site visit and asks the prospective borrower whether any major damage was suffered. The borrower may know full well the property experienced significant damage, but to maintain their approval, they state they haven’t been to the property yet.
  • Withholding information is a well-used tactic of dishonesty. When loan approvals require only certain information, even originators will sometimes withhold information from underwriters to avoid a denial. This type of deception leads not only to more default and contention but also to more regulation. Providing disclosures and all the pertinent information is almost always better than withholding it. Lenders can factor in any challenging dynamic of a loan scenario and work with borrowers and brokers to overcome the obstacle.

McKay further articulates how pressure within our organizations and industry can create an environment in which dishonesty thrives. These pressures can lead to bad decisions that often require defensiveness in organizations competing to survive. Organizations must recognize that operating under pressure can often lead to overstepping ethical or even legal boundaries. Quotas and benchmarks can be a great way to motivate individuals to achieve their highest potential, but without proper guidelines and expectations, motivation can quickly lead to unhealthy pressure.

Leaders should eliminate and reduce any major pressure source however possible, even if it means reducing the intensity of competitive dynamics. Training should be offered to help people develop highly ethical behaviors.

Leaders must create an integrity litmus test at the ground level and commit to revisiting it often. Questions to ask:

  • How close are the terms we are using in marketing to the terms we are funding with?
  • How are we telling our organization’s story?
  • How are we achieving and reporting our organization’s performance?
  • How are we representing our lending volume? Is it accurate?
  • Am I creating pressures in my organization that cause our people to deceive?

At the industry level, each member has an obligation to contribute to a culture of honesty, forthrightness, and professionalism. There is an abundance of business available for anyone who ethically wants to participate. Most aggravators of deception operate in a place of scarcity; in an effort to gobble up anything they can, success comes at any cost. Beyond implementing more honest practices throughout your organization, AAPL has established a place to help identify and remove bad actors with ill intent from the industry.