Visit aaplonline.com/ethics for more on our Code of Ethics

Mike Hanna, Managing Partner, Investmark Mortgage, LLC
“Bait and switch” lending and truth in advertising are the top ethical challenges in the
marketplace today. There are more lenders now than there were just a few years ago, and
the lending environment has become hypercompetitive in some markets. Most borrowers
are looking at multiple lending programs before making their final decision.

As rates have compressed, lenders are using techniques such as below market interest rates, no payments required and limited due diligence—along with novel advertising methods—
to attract new investors. If the program being advertised is exactly as intended, there is
no need for concern. However, in situations where there isn’t enough information on a
competing product, the tendency can be to counter with the same offering.

The likely scenario is that the “bait-and-switch” program has hidden fees to recover additional funds from the low interest rate being offered. Without divulging all the details, this can put a lender matching the offer in an ethical dilemma. It also is a dilemma for the bottom line of their business, if their intent is to deviate from what is being marketed.

Explaining nuances of a hard money loan can create a lot of confusion, especially with new borrowers, who do not yet grasp the techniques used to bait them in the first place. This has been an ongoing issue. Lenders need to be cautious and not put their business or clients in
a compromising position.

Kellen Jones, President, Prospera
Although the Jobs Act and other legislation have brought more attention to our space,
private lenders still have a lot of autonomy.

A thriving secondary market has made it possible for new models and yield opportunities. One of those models centers on table funding and note sales, where yesterday’s loan brokers can offer terms to borrowers as if they are the lender. Because an originator goes from packaging a loan for submission to fulfilling an underwriting role just to get a deal done, loan quality and what ultimate check writers expect can be compromised.

Originators are being empowered to fund like a lender because the secondary market needs the coupon, but these brokers have almost nothing at risk, very little experience in dealing with defaults and foreclosures, and everything to gain by getting a deal done. Automation tools even allow brokers to set pricing, so criteria become more important than quality. Direct lenders, marketplaces and secondary market makers should be cautious in giving brokers this much power. And originators should treat investor capital as they would their own.

The last financial crisis was partially caused by traditional brokers being given power to
originate bad loans. Let’s not make the same mistake.

Kevin Kim, Partner/Corporate & Securities Department Lead, Geraci LLP
I think it’s the same for any entrepreneur and businessperson: remembering to put
integrity first.

Today’s aggressively competitive marketplace makes it challenging to operate a business. But I firmly believe that positivity, honesty and simply doing the right thing will take a private lender further than any opportunistic or aggressive strategy. Sometimes the deal in front of you isn’t in the best interests of your company, your investors or even the borrower. And that’s OK. That’s ultimately what business ethics is all about.

Bobby Montagne, Founder & CEO, Walnut Street Finance
In this period of increasing competition in private lending, it may be tempting to loosen
your underwriting loan criteria to win more deals in order to hold or increase your market share. A short-term compromise on loan quality may help reverse a trend in decreasing originations, but in the long term, it may be problematic. You could put your customers, investors and employees at risk for unsuccessful projects, a poor performing loan portfolio and ultimately a declining business.

On the surface, loosening your underwriting may not seem like an ethical challenge. One could argue it is a business decision that balances risk and reward. However, if you have represented to your stakeholders that you originate quality loans and your company values the success of your borrowers, then it does become an ethical challenge. Holding solid to your underwriting loan criteria in a period of increasing competition is an ethical challenge most private lenders face today, even if it appears to be a risk management issue. Understanding it as an ethical challenge will help frame it in a way that makes it easy to see what the right decision is.

Susan Naftulin, Founder & Managing Member, Rehab Financial Group, LP
Unfortunately, the biggest ethical challenge facing private lenders today is the lack of
ethics within the industry.  The bad actors engaging in unethical conduct make it harder
for the rest of us to do business and make the possibility of closer governmental
regulation possible.

These unethical actors range from those that take large upfront fees from potential
customers and then do not deliver a loan product at all. Or, they offer a product vastly
different from what was originally contemplated, frequently baiting and switching at the
last minute. They also include brokers who represent themselves as lenders and do
not disclose true loan terms or that they are not the actual lender until the very end
of the process.

When these things happen to borrowers, they tend to either drop out of the business
altogether or be very distrustful when working with an ethical lender. It frequently
takes a long time to break down the barriers built by the less scrupulous members
of our community.

Jeffrey Tesch, CEO, RCN Capital
Many of our members have deep roots in mortgage origination from a residential perspective. They understand the rules that govern that side of the industry. However, with the commercial world being largely devoid of the stringent regulations that govern residential originations, it is imperative that lenders always hold themselves to best practices.

As the private lending industry has become more institutionalized with large inflows of
capital from very sophisticated lending partners, I have seen the “originate to a box” mentality take over. When we started RCN Capital, our platform was based on lending our own funds, which we continue to do today (augmented with additional funding partners).

What concerns me is the number of “lenders” that are originating to a takeout partner’s
box with little regard for underwriting items that may give a lender pause if they were
funding with their own capital. Best practice advice to the lenders in the industry who do
not hold any loans on their balance sheet is to always underwrite and fund as if it was your own capital at risk. As a lender who has benefited from the inflow of capital to our industry,
I am imploring every lender to put best practices into their underwriting department for
the good of the industry.