Publication 1

What Does
"Right" Mean?
Developing an Ethical
Business Environment in
the Mortgage Industry
By William S. Bost III

Published by
William S. Bost III

2840 Plaza Place
Suite 400
Raleigh, NC 27612
(919)-787-5200
Copyright 2005 by William S. Bost III. All rights reserved.

Printed in the United States of America. No part of this
book may be used or reproduced in any manner whatever
without the express written consent of the author.
Although the author and publishers have made every effort

to ensure the accuracy of the information contained herein,
we assume no responsibility for any inaccurate statements,
omissions, or inconsistencies. Readers should use their
own judgment and consult with reputable advisors for
specific applications to their individual problems. None of
the comments in this book are to be construed as individual
or legal advice.
WHAT DOES
"RIGHT" MEAN?
DEVELOPING AN ETHICAL
BUSINESS ENVIRONMENT
IN THE MORTGAGE INDUSTRY
July 28, 2005
Published by:
William S. Bost III

2840 Plaza Place
Suite 400
Raleigh, NC 27612
WHAT DOES RIGHT MEAN?
DEVELOPING AN ETHICAL
BUSINESS ENVIRONMENT
IN THE MORTGAGE INDUSTRY
TABLE OF CONTENTS
INTRODUCTION ...............................................................1
WHAT IS ETHICS? ............................................................7
Approaches To Ethics ............................................14
BUSINESS ETHICS..........................................................19
Why Is Business Ethics Training Necessary?........20
Benefits Of Developing And
Adhering To Business Ethics.................................21
FRAMEWORK FOR ETHICAL DECISIONMAKING...27
Applying Ethical Principles
To The Decision-Making Process..........................29
PERSONAL BUSINESS ETHICS CODES......................33
Duty-Based Approach............................................35
Virtues-Based Approach........................................37
Writing A Personal Moral Code ............................44
ORGANIZATIONAL ETHICS CODES...........................51
BUSINESS ETHICS PROGRAMS...................................63
EXERCISES IN ETHICS ..................................................73
APPENDICES
Lists Of Virtues
List Of Sample Maxims
Sample Manager's Code Of Ethics
Best Practices Standards
CHAPTER 1
INTRODUCTION
“Perfect Credit Score, Perfect Loan Fraud”-

Washington Post, October 16, 2004
“Mortgage fraud: A booming and bizarre

business”- Charlotte Observer, October 16, 2004
“Mortgage fraud menacing lenders, buyers”-

Minnesota Star Tribune, October 16, 2004
As these recent headlines indicate, participants in

the mortgage industry are accused daily of fraudulent and
unethical behavior. The abusive practices range from
inflated applications and appraisals, misleading advertising,
predatory pricing practices, aggressive foreclosures, and
multiple refinancings of a single borrower in a short time.
These despicable practices occur despite clear
condemnation by lawmakers, consumer groups and the
lending industry.
In an industry where real and perceived fraud is
prevalent, mortgage business owners and employees must
make extra efforts to ensure that their activities are viewed
above reproach. Failure to address and promote ethics
ultimately will cost mortgage lenders, brokers, loan officers
What Does Right Mean?
and other employees of the mortgage industry in several

significant ways, including:
• Increased regulation of the industry with

commensurate compliance costs and limits on
profitability. Nearly every state, many
municipalities and the Federal government have
enacted laws, rules, and ordinances capping interest
rates and fees on mortgage loans; encouraging or
requiring borrowers to obtain, and lenders and
brokers to provide, financial counseling; placing
tight restrictions against prepayment penalties; and
banning or limiting single premium credit life
insurance. State statutes also add fines, criminal
penalties, and denial of business opportunities as
additional penalties. These measures limit revenues
to lenders and brokers and cause them to incur
additional costs.
• Loss of borrowers’ trust in non-bank mortgage

lenders and mortgage brokers. Negative reporting
by the press and regulatory agencies related to
predatory lending practices is focused generally on
non-bank mortgage lenders and brokers. Over time
this focus will erode borrowers’ confidence in these
participants in the mortgage industry, and
encourage borrowers to turn to national and
regional banking institutions for home mortgage
loans.
• Discouragement of capable employees from

entering the industry, and destruction of morale of
2
Chapter 1 – Introduction
those who adhere to high moral principles.

Competing against other businesses who gain a
financial advantage as a result of illegal and
unethical practices is frustrating and demoralizing.
Those who desire to act ethically get worn down to
a “If you can’t beat ‘em, join ‘em” or “Why
bother?” stance with respect to ethical practices,
which is detrimental to the entire industry. Smart,
pleasant and ethical people will not be drawn to an
industry where success is dependent upon
compromising their principles.
The purpose of this book is to outline steps that you

and your company can take to establish a culture of ethical
behavior which will ensure that you and it are not included
among the headlines.
******
A discussion of morality and ethics is, at its basis, a
discussion of how we are going to live our lives.
Philosophers have written for ages about good and evil, and
right and wrong. The following are not my words, but they
are worthy of consideration as an introduction to moral
thought.
A man, after he has brushed off the dust and chips

of his life will have left only the hard, clean questions: Was
it good or was it evil? Have I done well -- or ill? . . .
And in our time, when a man dies -- if he has had
wealth and influence, power and all the vestments that
arouse envy, and after the living take stock of the dead
man's property and his eminence and works and
3
monuments -- the question is still there: Was his life good

or was it evil? . . . . Envies are gone, and the measuring
stick is: Was he loved or was he hated? Is his death felt as
a loss or does a kind of joy come of it?
I remember clearly the deaths of three men. One
was the richest man of the century, who, having clawed his
way to wealth through the souls and bodies of men, spent
many years trying to buy back the love he had forfeited and
by that process performed great service to the world and,
perhaps, had much more than balanced the evils of his rise.
I was on a ship when he died. The news was posted on the
bulletin board, and nearly everyone received the news with
pleasure. Several said 'Thank God that son of a bitch is
dead.'
Then there was a man, smart as Satan, who, lacking
some perception of human dignity and knowing all too well
every aspect of human weakness and wickedness, used his
special knowledge to warp men, to buy men, to bribe and
threaten and seduce until he found himself in a position of
great power. He clothed his motives in the names of virtue,
and I wondered if he ever knew that no gift will ever buy
back a man's love when you have removed his self-love. A
bribed man can only hate his briber. When this man died,
the nation rang with praise, and just beneath, with gladness
that he was dead.
There was a third man, who perhaps made many
errors in performance, but whose effective life was devoted
to making men brave and dignified and good in a time
when they were poor and frightened and when there were
ugly forces loose in the world to utilize their fears. This
man was hated by the few. When he died, the people burst
4
Chapter 1 – Introduction
into tears in the streets and their minds wailed, 'What can
we do now? How can we go on without him?'
In uncertainty I am certain that underneath their
topmost layers of frailty men want to be good and want to
be loved. Indeed, most of their vices are attempted
shortcuts to love. When a man comes to die, no matter
what his talents and influence and genius, if he dies
unloved, his life must be a failure to him, and his dying a
cold horror. It seems to me that if you or I must choose
between two courses of thought or action we should
remember our dying so to live that our death brings no
pleasure to the world.
-East of Eden, John Steinbeck
5
6
CHAPTER 2
WHAT IS ETHICS?
In my legal practice representing mortgage lenders

and brokers, I have encountered numerous businessmen
engaged in a variety of business arrangements and selling a
variety of products. Without exception these individuals
express a commitment to operating ethical businesses and
to acting ethically. In fact, in many instances, clients say
that the protection of their reputation for ethical business
conduct is of higher priority than avoiding financial
damages or regulatory action when resolving legal matters.
This stated commitment to ethics, however, puzzled
me. Many businessmen who clearly placed a high value on
ethics often were embroiled in legal matters (mostly
opposite my clients) which could have been avoided if the
actor (whether the businessman or his employee) had
engaged in a small amount of moral thinking before
plowing forward into an unlawful, or at the least unwise,
transaction.
After several encounters of this nature, I began to
inquire of businesspeople with whom I came into contact
whether or not they considered themselves ethical. All of
them naturally did. I then asked them "How do you
know?"
7
Most started their answers with a blank stare or

"I've never thought much about it", and then added
something along the lines of the following:
• "I follow my gut reactions about what is right and

wrong. My instincts and feelings about these things
are pretty good."
• "I am a Christian (or Jew or Catholic or other

religious follower), and I conduct business in a way
that is consistent with and reflects my Christian (or
Jewish or other religious) faith."
• "I follow to the letter all the laws and rules that
apply to my profession or business."
• "I adhere to the methods and practices that are

accepted in my industry and community."
These may be similar to your response to the

question asked above, but they do not reflect a clear
understanding of the nature of ethics in a business
environment. After hearing these responses frequently, it
occurred to me that very few businesspeople have ever had
any formal ethics training. In other words, while nearly
every business person desires to act ethically in his
business pursuits, and in his life generally, very few know
exactly what ethical action entails.
A key aspect of ethics is that there are very few
right answers, and even those are subject to open debate
among scholars. More importantly, ethics is personal. I do
not begin to profess that this book contains the only correct
8
Chapter 2 – What is ethics?
way of thinking ethically. Rather my intent is to provide a

basic initiation into the language and process of ethical
thinking as it relates to the mortgage business so that you
may attempt to integrate it into your daily professional life.
*****
As I discussed above, many people have a vague

idea about the concept of ethics, but often their ideas are
wrong or incomplete. We will start our discussion by
clearly identifying those things that ethics is not.
Ethics is not feelings
Many people tend to equate ethics with their

feelings. But being ethical is not a matter of following one's
feelings. A person following his or her feelings may
withdraw from doing what is right. In fact, feelings
frequently deviate from what is ethical. For example, a
wandering wife may have feelings for another man or a
parent may desire to promote a child over a more worthy
employee. If either of these follows her feelings, then she
would commit unethical acts.
Nor are ethics “gut reactions”. These kinds of
feeling arise from moral thought and can result in ethical
behavior, but they do not provide a basis for
communicating the grounds for ethical decision-making to
others. Jiminy Cricket’s admonition to Pinocchio to “Let
your conscience be your guide” is hardly helpful in
thinking through a difficult moral dilemma.
9
Ethics is not religion
Religion can set high ethical standards and can

provide intense motivations for ethical behavior. Many
world religions and religious scholars espouse a “natural
law” theory; that is, the worshiped deity is the creator of an
established moral order to which human beings must
rightly conform. Other religions offer a “divine command”
theory whereby God functions as a divine commander,
directly issuing ethical edicts to human beings whose
proper response is simply to obey.
Yet if ethics were confined to religion, then ethics
would apply only to religious people. But ethics applies as
much to the behavior of the atheist as to that of the saint.
Equating ethics and religion in today’s varied
workplace also carries the risk that the choice of religious
theories to apply could be offensive or discriminatory. In
addition, even within religions, there is disagreement
regarding the provisions of the natural law or divine
commands human beings are required to follow. This
disagreement makes difficult determining a course of
action among several believers of different religious.
Discussion of ethics in secular terms, however, does
not entirely ignore religious values. The ethical norms of a
community depend on the norms and practices of the
community, and ethical judgments are informed by criteria
determined by that community. Thus, even though the
community standards may be expressed in secular terms,
the standards are influenced by the religious beliefs of the
community’s members.
10
Ethics is not compliance
Surprisingly, many of the practices derided as

unethical by consumer advocates, the press and even the
mortgage industry are perfectly legal under applicable state
and federal laws. In fact, many behaviors that are not
illegal are still unethical (i.e., lying, betrayal, nepotism).
Laws and legal systems create norms of behavior
which are enforced by the state with penalties for
violations. Compliance depends on an individual's desire
to avoid punishment. The most unethical person in the
world will comply with a rule if the punishment is stiff
enough; but let the same person feel that the punishment is
light or unlikely, and he surely will break those rules for his
benefit.
No government or other institution is capable of
promulgating rules that apply in all situations. An
intelligent and determined person will always be able to
find a loophole in a law or rule under which he may do
something mean, self-serving, or dishonest. Thus, ethics
programs that place inordinate value on compliance are
largely ineffective. In fact, the quest for loopholes may
even be encouraged where compliance is valued over
ethical behavior.
In addition, programs that focus on compliance
distract from encouraging ethical behavior by creating
confusion in the circumstances when doing the right thing
may have adverse consequences. Many professions
promulgate codes of ethics precisely because the law
cannot proscribe all inappropriate or harmful behavior.
And finally, some laws are unethical themselves.
The pre-Civil War slavery laws of the United States and the
11
apartheid laws of South Africa are obvious examples of

laws that deviate from what is ethical.
Thus, while ethical behavior requires adherence to
laws, mere compliance is not enough.
Ethics is not adhering to societal norms
Being ethical is not the same as doing "what society

accepts." In any society, most people accept standards that
are, in fact, ethical. But standards of behavior in society can
deviate from what is ethical. An entire society can become
ethically corrupt. Nazi Germany is a good example of a
morally corrupt society.
Moreover, if being ethical were doing "whatever
society accepts," then to find out what is ethical, one would
have to find out what society accepts. To decide what I
should think about gun control, for example, I would have
to take a survey of Americans and then conform my beliefs
to whatever society accepts. But no one ever tries to decide
an ethical issue by doing a survey. Further, the lack of
social consensus on many issues makes it impossible to
equate ethics with acceptance. Some people accept gun
control but many others do not. If being ethical were doing
whatever society accepts, one would have to find an
agreement on issues which agreement does not, in fact,
exist.
Ethics do not satisfy personal or business needs
Many acts, while they have positive consequences,

are a means of satisfying personal needs without regard to
their effect on others; thus, they mostly serve as a bridge
12
for attaining personal objectives and are not reflective of

ethical values (for example, making a donation to charity in
exchange for valuable sports tickets). Performance and
growth targets, while they influence many decisions, do not
give the basis for moral decision making. In fact, the
confusion of financial results with ethical behavior was a
defining factor in the downfalls of entities such as
HealthSouth and WorldCom in recent years.
Ethics is closely related to, but is not the same as, values
Our value system refers to our core beliefs or

desires, the things we value the most. Our values shape our
attitudes and determine how we will behave in certain
situations.
There are three types of values. Ethical values
directly relate to our beliefs concerning our moral duty.
These are the values that drive our ethical principles, and
are those about which we are concerned here. Examples of
ethical values are honesty, fairness, and justice.
Non-ethical values are concerned with things that
we like or find personally satisfying or important, with no
regard to the moral content. Examples of non-ethical
values are physical beauty, athleticism, and artistic
accomplishment.
Ethically neutral values, while not ethically based,
relate to our desires for such things as wealth, status,
happiness and fulfillment, personal freedom, and being
liked and respected. The pursuit of ethically neutral
objectives is normal and appropriate so long as ethical
values are not sacrificed or compromised in the process.
13
We have identified several things that ethics is not.

But what is ethics?
Ethics is the study of principles that indicate how

we should behave based on moral duties and virtues as well
as accepted standards of conduct. It requires that we have
the ability to discern right from wrong. Ethics is about the
way we treat one another and dictates how we choose to
live our lives. The ultimate true test of our character is
when we are willing to do the right thing even when it is
not in our best interest to do so.
Approaches to Ethics
Ethics has been discussed for centuries by

philosophers who have been puzzled by the meaning of
right and wrong and of good and evil, and by the purpose
of our lives. The studies that are most relevant are those
that relate to the interaction of human beings in an orderly
society and the various duties that we owe to each other.
Five of the most common types of ethical analysis are
utilitarianism, the rights approach, the justice approach, the
common good approach, and the virtues-based approach.
Utilitarianism
John Stuart Mill conceived the concept of

utilitarianism in the 19th century to guide lawmakers in
determining which laws were morally best. An analysis of
an issue under the utilitarian approach first requires the
identification of the available courses of action. Then one
must determine who will be affected by each action and
14
what benefits or harms will be derived from each. The

ethical action is the one that provides the greatest good for
the greatest number.
The Rights Approach
Immanuel Kant and his followers focused on the

individual's right to choose for herself or himself.
According to them, human beings are unique from all other
things because they have dignity based on their ability to
choose freely what they will do with their lives. In
addition, human beings, they believed, have a fundamental
moral right to have these choices respected. People are not
objects to be manipulated; it is a violation of human dignity
to use people in ways they do not freely choose.
These philosophers also believed that other rights
followed from this basic right, including:
• The right to be told the truth and to be informed

about matters that significantly affect our choices.
• The right to do, believe, and say whatever we

choose in our personal lives so long as we do not
violate the rights of others.
• The right not to be harmed or injured unless we

freely and knowingly do something to deserve
punishment or we freely and knowingly choose to
risk such injuries.
15
• The right to what has been promised by those with

whom we have freely entered into a contract or
agreement.
In deciding whether an action is ethical using the

rights approach, one must ask whether the action respects
the moral rights of everyone involved. Actions are wrong
to the extent that they violate the rights of individuals; the
more serious the violation, the more wrongful the action.
The Justice Approach
The justice approach to ethics can be summarized

by a single statement: “Equals should be treated equally
and unequals unequally." In analyzing a question under
this approach, one must ask whether an action is fair,
whether it treats everyone in the same way, and whether it
shows favoritism and discrimination. Favoritism gives
benefits to some people without a justifiable reason for
singling them out; discrimination imposes burdens on
people who are no different from those on whom burdens
are not imposed. Both favoritism and discrimination are
unethical.
The Common-Good Approach
This approach to ethics promotes the idea that each

society is comprised of individuals whose own good is
inextricably linked to the good of the other members of the
community. Community members are bound by the pursuit
of common values and goals. The common good is defined
16
as "certain general conditions that are equally to everyone's

advantage."
This approach focuses on ensuring that the social
policies, systems, institutions, and environments in a
particular society are beneficial to all, and encourages
individuals to view themselves as members of a single
community, and to reflect on broad questions concerning
the nature of the desired community and actions necessary
to achieve that community. While respecting and valuing
individual freedoms, the common-good approach
challenges citizens to recognize and further those goals we
share with others.
The Virtue Approach
The virtue approach to ethics states that each person

should strive toward certain ideals which provide for the
full development of our humanity. These ideals are
discovered through thoughtful reflection on what kind of
people we have the potential to become. Virtues are
attitudes or character traits that enable us to be and to act in
ways that develop our highest potential. They enable us to
pursue the ideals we have adopted. Virtues are like habits;
that is, once acquired, they become characteristic of a
person. Moreover, a person who has developed virtues will
be naturally disposed to act in ways consistent with moral
principles. The virtuous person is the ethical person.
In summary, however derived, ethics are

standards of conduct that indicate how one should
behave based on shared duties, values and virtues.
When one acts in ways that are consistent with his
17
community’s moral values we characterize that as acting

ethically. When one's actions are not congruent with the
community’s moral values - its sense of right, good and just
- we view that as acting unethically. Importantly, an
individual does not have the ability to determine what is
ethical on his own. The ethics of our decisions and actions
is defined by us as a society, not individually.
18
CHAPTER 3
BUSINESS ETHICS
We have defined ethics, but what does the term

“business ethics” mean? The concept means various things
to various people, but generally it is thought to be the study
of ethics and standards of moral conduct in the workplace.
Business ethics generally takes into account the effects of
business acts and practices on a business’ various
“stakeholders” who are defined as those who have an
interest in the business such as customers, employees,
suppliers, lenders, landlords, regulators, the community and
others.
Generally, there are two areas of business ethics.
The first is “individual mischief” which involves the
illegal, unethical, or questionable practices of individual
managers or organizations, as well as the causes of such
behaviors and remedies to eradicate them. And the second
is “moral dilemmas” which involves the numerous ethical
problems with which business owners and employees must
deal on a daily basis, such as potential conflicts of interest,
wrongful use of resources, and mismanagement of
contracts and agreements. We will discuss later the
development of business ethics programs that deal with
each of these areas.
19
Why is business ethics training necessary?
Many business owners, regulators and others in the

mortgage industry are frustrated by the lack of ethical
behavior displayed by some of their business partners,
lenders, brokers and loan officers. The apparent increase of
unethical behavior, and the need for ethical training, is
attributed to many factors.
As we discussed above, ethics and ethical behavior
are based on a person’s understanding of and actions upon
common moral duties, values and virtues. As cultural
diversity increases, the number of employees with common
origins and experiences decreases. Workers come from a
variety of geographical locations, educational institutions,
and family structures.
Thus, a business owner can no longer reasonably
assume that the workers and managers whom he employs
share a common set of values and a common interpretation
of those values. Nor is it necessarily reasonable to assume
that lenders, shareholders, suppliers, customers, and
communities where the company operates share a common
understanding about the obligations and priorities of the
business. Accordingly, clearly defining duties, values and
virtues is imperative for those coming to a business or
community from other environments.
This need to clearly identify ethical standards is
heightened by two emerging trends in America. The first is
a continuing move away from an emphasis on the common
good towards individualism. In this individualistic culture,
people do not automatically believe that they should
sacrifice their freedom, personal goals and self-interest for
the sake of the "common good." Some of our cultural
20
Chapter 3 –Business Ethics s
traditions reinforce the individual who thinks that she

should not have to contribute to the community's common
good, but should be left free to pursue her own personal
ends; clearly, sacrifice for the common good is not
frequently recognized or acknowledged.
The second is a trend towards generalization of
ethical norms. As individualism increases, common ethical
values come increasingly to be made up of highly
generalized and indeterminate modes of thought and
sentiment, which leave room for an increasing number of
individual differences. While all may agree, for example,
that predatory lending practices are bad, many disagree on
what constitutes a predatory loan.
Benefits of Developing and Adhering to Business Ethics
While the need for training in business ethics is

undeniable, the benefits of such ethical behavior are not so
obvious. Here are some of them.
Effect on Employees and Morale
Conducting business in an ethical manner produces

a tangible positive atmosphere within an individual and an
organization, and promotes a strong sense of community
and belonging. This attitude is an invaluable asset in
maintaining morale and in attracting future employees and
customers. Those who are committed to doing good, the
very basis of business ethics, become enthusiastic about it,
and provide a motivational effect that can motivate
individuals and organizations.
21
An organization’s or individual’s ethical positions

and practices are directly related to the well-being,
motivation and inspiration among its employees or those he
supervises. While there are several different ways that this
can be explained, the most apparent one is as follows: an
organization or individual that consistently demonstrates
that he or it is unwilling to sacrifice his or its ethical values
develops an image as trustworthy, both to its customers and
other external contacts and employees.
Employees have a reasonable expectation that they
will be treated fairly and with respect by an organization or
individual with this quality. As a result, the levels of trust
among employees and departments, and among
management and employees, are greater than in
organizations with less clear ethical principles. Along with
this trust comes pride in being part of a team that manages
to create satisfied customers.
Effects on Customers and Marketing
The good feelings held by those in an ethical

organization are spread to its customers. There is little
doubt that there exists a clear link between the treatment
and attitudes of an organization’s managers and employees,
and their corresponding treatment of and attitudes towards
the organization’s customers. Poorly treated employees
with little moral guidance will communicate this poor
treatment and lack of morality to those they contact in the
course of their duties.
Many companies attempt to place themselves as the
sole choice for their customers when buying a particular
good or service. They are able to get their customers to
22
choose them always, even when such a choice is more

expensive or inconvenient. Some organizations do this by
providing consistent quality, implementing loyalty
programs or providing consistent low pricing. Others,
however, obtain this position in the market by appealing to
customers’ higher values.
When customers feel that their patronage
contributes to more than profits, that is, to the common
good, this feeling is a strong motivator to continue their
patronage. Many people complain that it is very difficult to
make a difference in the world. Feeling that your needs are
fulfilled and that your business contributes to societal good
in the process is an easy way to promote good. This feeling
will keep customers returning.
Another reason a customer will more often choose
an ethical provider is that the customer is confident that he
will be treated fairly. A customer of an ethical business
will be certain that the prices he pays fairly reflect the value
of the goods or services provided, that any problems that
arise will be dealt with seriously and fairly, and that little
hassle will be endured during the buying or resolution
processes. A customer is less afraid of committing to a
purchase from this kind of company.
Ethics can be profitable
Fortune magazine annually examines the

performance of the most admired companies, where
admiration is determined based on criteria that closely
resemble ethical criteria: reputation, quality of
management, quality of management, quality of products,
innovativeness, and social responsibility. The ten most
23
admired companies in 2004 were Wal-Mart; Berkshire

Hathaway; Southwest Airlines; General Electric; Dell;
Microsoft; Johnson & Johnson; Starbucks; FedEx; and
IBM. As you can see by these names, ethics pays. The
reasons for their success include low employee turnover
and absentee rates, higher productivity, and less workplace
fraud.
At the very least, lack of ethics is a recipe for a
disaster. Unethical behavior led to the downfall of several
high-profile companies and celebrities in the past years.
Enron and Martha Stewart come to mind.
In addition, attention to ethics is heightened by the
number of organizations who have an interest in disclosing
or profiting from unethical behavior. Class action lawyers,
government agencies, consumer groups, media, and
politicians have as one of their purposes the punishment of
corporate misdeeds. In this litigious climate, a focus on
ethics will result in lowering an organization's risks of
adverse regulatory action, of lawsuits related to fraud or
other misconduct by employees, and of unfavorable media
coverage of employee misdeeds.
Attracting investors, suppliers and business partners
Customers are the most important type of third-

party relationship that a business requires, but there is a
range of other parties that a business must have in order to
thrive. These include investors, lenders, suppliers, vendors,
and partners. Increasingly, these participants in a
company’s business apply ethical standards to evaluate
their relationships.
24
Third parties are more likely to enter into favorable

agreements with organizations that treat them fairly and
have a reputation for treating others fairly as well. The
converse is true; suppliers are not likely to seek
relationships with those who are known to act unethically.
Promoting ethical behavior is the right thing to do
If we all made an effort to act in accordance with

appropriate ethical standards in our personal and
professional lives during that time, then it is possible that
the world would be a better place.
25
26
CHAPTER 4
FRAMEWORK FOR ETHICAL DECISIONMAKING
We have discussed the basics of ethics, what it is

and what it is not, and made the case for the need for ethics
training. We now turn to a model for ethical decision-
making.
A good starting point is a widely accepted definition
for the term “decision”, which is “the act or process of
choosing one course of action from among several
alternatives”. In order to conduct the process rationally and
orderly, business people follow these steps:
• Step 1. Define the problem. This refers to the

process of correctly identifying the fundamental
problem or opportunity faced by the decision
maker. Care should be exercised at this stage to
make sure that the problem is defined at the most
basic level; focusing on symptoms of the problem,
rather than the real problem, accomplishes little.
• Step 2. Gather information. The purpose of

information gathering is to ascertain relevant facts
related to the problem. Typical sources of
information are published articles and reports,
internal company records, market surveys and
intelligence, personal views and opinions of various
27
people culled by interviews and questionnaires or

even informal conversations, professional
consultations, and direct observation by the decision
maker of actual problem-related processes within or
outside the organization.
• Step 3. Identify alternative actions. Creativity is

called upon in this phase of the overall decision
process. As the decision maker gathers information,
he begins to identify possible alternative solutions.
Good decision-making draws heavily on subjective
aspects such as intuition, experience and judgment.
Other methods may also be invoked, such as
brainstorming and focus groups. The emphasis at
this point should be on generating alternatives that
have a reasonable chance at success. Critical
analysis of them is not a part of this step.
• Step 4. Evaluate the alternatives. The decision

maker compares the advantages and disadvantages
inherent to each alternative action. Costs and
benefits are estimated and their impact
on organizational or individual objectives
is assessed. Weak alternatives are eliminated and a
set of preferred choices is determined.
• Step 5. Select the best alternative. By now, the

decision maker ought to be clear on which
alternative offers the best course of action.
Consequently, the decision is made.
28
Chapter 4 – Framework for Ethical Decision-Making
• Step 6. Implement the chosen alternative.

Deciding on the best alternative is not the same as
doing something. The action itself is the first real,
tangible step in changing the situation. It is not
enough to think about it or talk about it or even
decide to do it. A decision only counts when it is
implemented. According to the Noah Principle,
"There are no prizes for predicting rain. There are
only prizes for building arks."
• Step 7. Evaluate the decision. Every decision is

intended to fix a problem. The final test of any
decision is whether or not the problem was fixed.
Did it go away? Did it change appreciably? Is it
better now, or worse, or the same? What new
problems did the solution create?
Applying Ethical Principles to the Decision-making

Process
The foregoing has been a discussion of a generic

decision model similar to those taught in business school
and management training programs. But our concern is not
just decision making; it is ethical decision making.
As you can see, the decision-making process can be
broken into several distinct components. At each of these
steps, the decision maker should consider whether ethical
considerations arise.
The ethical analysis required is done in three parts.
The first inquiry requires the decision maker to determine
whether the problem or the alternative solutions (i) violate
any applicable laws or rules, or (ii) any of the organizations
29
substantive policies or guidelines. Compliance with

applicable laws, rules and policies is the bare minimum of
ethical behavior. We will not address these issues here.
The second, and most important, inquiry requires
the decision maker to decide whether the problem or any
alternative solution requires consideration of his own moral
code. And the third inquiry requires the decision maker to
determine whether the problem or the alternative solutions
involve the ethical principles and values of the
organization.
The ethical analysis described is best applied in
Step 1 (Identification of the Problem), Step 3 (Analysis of
Alternative Solutions), and Step 7 (Evaluation of Results)
of the decision-making process described above. Ethical
analysis is integrated into these steps as follows:
• Step 1. Define the problem AND identify the

ethical issues inherent in it?
• Step 2. Identify available alternative solutions to

the problem.
• Step 3. Evaluate the identified alternatives for their

likelihood of success AND their ethical impact.
• Will the alternative I am considering resolve

existing ethical issues?
• Will the alternative being considered create any

new ethical issues?
• Are the ethical trade-offs acceptable?
30
Chapter 4 – Framework for Ethical Decision-Making
• Step 4. Make the decision
• Step 5. Implement the decision
• Step 6. Evaluate the decision to determine whether

it was successful in solving the problem AND
identify any remaining or new ethical issues.
• Does the resulting situation resolve the earlier

ethical considerations?
• Are there any new ethical considerations to be

addressed?
This approach to ethical decision-making in

business requires effective communication so there is a
common understanding of (i) the organization's policies
and procedures as they apply to the situation, (ii) the
applicable laws and regulations, (iii) the agreed upon set of
ethical principles that the organization desires to promote,
and (iv) the individual's sense of right, fair and good arising
from his personal values. This approach also requires a
formal or informal mechanism, provided by the
organization, to allow employees access to a definitive
interpretation of the organization’s policies, laws and
values when their own knowledge is insufficient for them
to make the decision with confidence.
Use of this means of ethical decision-making does
not guarantee an ethical decision. It merely ensures that the
ethical components of the situation will be identified so that
they might be considered. Ultimately, whether the
decision meets the ethical standards of the organization or
31
the individual decision maker is a matter of personal

responsibility.
32
CHAPTER 5
PERSONAL BUSINESS ETHICS CODES
As you can see, making ethical business decisions

requires reference to a personal business code and an
organization’s code of ethics. This chapter will focus on
personal business ethics codes.
A person’s moral code is a collection of ideals that
the person desires to promote, attitudes and actions that the
person will not tolerate, and actions that the person will
take in response to certain situations. It is developed
throughout childhood and early adulthood by his
interaction with society. Thus, by adulthood all people
have a moral code by which they live. A person’s business
code consists of those components of the person’s moral
code that apply to his business activities.
Many people are not fully aware of their business
moral code; they have never taken time to reflect upon its
contents. Thus, these people are guided by a “gut feeling”
of right and wrong, without having thought long and hard
about how that gut feeling might apply to various
circumstances that arise in their day to day business. When
an ethical dilemma arises, those gut feelings are fuzzy and
assist little in making a decision with which the decision
maker is morally comfortable.
33
Others rely on religious codes which do not apply

directly to business situations. For example, the Ten
Commandments offers little guidance as to whether it is
ethical to divulge to a subsequent employer that a person he
is about to hire has previously been convicted of a crime.
Business is conducted today at breakneck speed.
Customers must be answered on demand or they will move
on to those more ready to perform. Goals must be reached.
Financial obligations must be met. Supervisors and
investors must be satisfied. Opportunities and temptation
are a telephone call or computer click away. In this fast-
paced world, where decisions must be made quickly, and
where there is little opportunity to retract them, each
businessperson must have a clearly defined set of
parameters within which he will act. This set of parameters
also will guide the person holding them in evaluating the
attitude he should have with respect to the actions of others.
Thus, the goal of this Chapter is to help you to
derive a written set of standards that will guide you in
making difficult ethical decisions quickly in your business.
While there are many ways to express a moral code,

two common ones are (i) deontological, or duty-based,
which is the identification of rules by which to live which
reflect duties that we have to ourselves and society (i.e.
“Do unto others as you would have others do unto you”),
and (ii) virtues-based, which is the identification of specific
virtues that should be manifested by one’s actions (i.e.,
integrity and charity). Both of these approaches have
value in clearly defining an individual’s moral code. Many
ethical codes combine these approaches, and we will
pursue that method here.
34
Chapter 5 – Personal Business Ethics
Duty-based Approach
A moral code based on duty does not determine

whether an action is right or wrong by its consequences.
Under this approach, a person is not morally obligated to
seek the best overall outcome by his actions, but rather to
perform those actions in accordance with his fundamental
duty to treat others, and himself, in a manner that is
consistent with human dignity and worth. A person who
acts from the right intentions is an ethical person.
When we discuss the concept of duty in this regard,
we are not talking about duties imposed by others (i.e., a
soldier’s duty to follow orders). Nor are we talking about
things that are done in order to get something else (i.e., we
go to work in order to earn money). Rather, we are
focusing on the duties that a person imposes upon himself
in order to promote his values; that is, those duties
undertaken by a person for no other reason than to
undertake them is the right thing to do.
An ethical code of this type is a list of maxims that
attempt to make this meaningful but vague criterion for
moral judgment more precise and explicit, so that it may be
used in a clear way as the basis of moral judgment (i.e.
“Thou shalt not kill”, “Thou shalt not lie”). A maxim is a
personal guide for behavior expressible in the form of a
normative judgment (e.g., "I ought to . . ." or "One ought to
. . ."). An alternative is to express a maxim in an
imperative form (“i.e. “Do not kill”, “Do not lie”).
Three principles provide guidance in determining
whether a maxim or rule is appropriate for a personal moral
code:
35
1. A maxim is only appropriate in a moral code

if one could rationally recommend it to others in all
circumstances. This is called the law of universality. For
example, “I should get dressed every morning” is
acceptable because that action can be recommended to
others with no harm being done; on the other hand “I will
lie whenever it suits my purposes” is not acceptable
because that cannot be recommended universally.
To understand this, think about these circumstances.
Suppose you desperately needed money. Should you ask
someone to lend you money with no intention of paying it
back? Do your extreme consequences justify a promise
that you do not intend to keep? The maxim that would
govern (and allow) this conduct would be as follows: It is
morally permissible for anyone in desperate financial
circumstances to make a lying promise to repay money
with no intention of doing so. Could this maxim be applied
universally to everyone in all situations? Of course not.
Therefore, the action, along with the maxim that would
allow it, is unethical.
2. The maxim should ensure that the person

treats another’s humanity as an end, and never as a means.
This “respect for persons” principle does not prohibit
commercial transactions; clearly, there is no harm to either
party in a transaction where both benefit.
This principle, however, does require a person in
business to do two things. The first is to avoid using others
for profit through coercion and deception. And the second
is to conduct business practices in such a way that they
contribute to the development of human rational and moral
36
capacities, rather than inhibit the development of these

capacities. For example, this latter requirement would be
satisfied by an organization who provides employees an
environment in which (i) they choose their jobs freely, (ii)
they are given the opportunity to act autonomously, (iii)
they are paid fairly and sufficiently to satisfy their physical
well-being and reasonable desires, (iv) they are able to
grow intellectually, and (v) their moral development is not
impeded.
3. The maxim should reflect a commitment by the

person to create an environment in which he would like to
live in and preside over (i.e., “to be both sovereign and
subject at the same time”). This requires the code to reflect
(i) the consideration of all interested persons in any
decisions made; (ii) the participation by those affected in
the decisions that are made; (iii) the fact that the interests of
one party will not always take priority over others; (iv) a
duty of beneficence or charity; and (v) a commitment to
justice.
Virtues-Based Approach
Virtues-based codes of morality are based upon the

theory that every person desires, and should desire, to seek
happiness. And if a person obtains happiness, and acts in
accordance with this happiness over a course of time, he
will achieve the ultimate goal of all human beings: the good
life. Thus, a significant amount of time is spent by virtue
ethicists to develop a meaning of “happiness” and the
“good life”.
37
The reader may define happiness as a “pleasurable

state of mind”. But if happiness were a mere mental state,
it would absurdly follow that a person could be happy
while asleep. In addition, this is a difficult concept to apply
to business ethics, as the goal of business is not pleasure,
but profit. Thus, happiness in the context of business ethics
means being engaged in activities that make appropriate
use of our capacities; virtue-based business ethics will
consist of those principles that lead to “the good life” in
commercial activities.
Reason is the capacity on which virtues-based
ethics focuses. The abilities to grasp universal concepts, to
think rationally, to deliberate among alternative courses of
action, and to restrain our appetites are uniquely human.
Thus, an ethical person is required to employ these aspects
of reason in all phases of his life, including his business
life. When he attains this goal, then he is considered
virtuous, or ethical.
Importantly, virtues are not feelings, nor are they
abilities. They are states of being that make a human being
good and make him perform his function well. There are
two types of virtue; intellectual and moral. Intellectual
virtues refer to conduct that deploys reason’s deductive
powers; moral virtues relate to the regulation of desire.
Moral Virtues
There are generally thirteen categories of classical

moral virtues, of which seven are of particular application
to business: courage, self-control, good taste, modesty,
generosity, cordiality, and justice. These, like all other
38
moral virtues, are acquired through constant use until they

develop into habits.
Courage and Self-Restraint. Courage is the conduct

that regulates fear, and is only apparent when a person is
acting in support of a good cause. A courageous person is
one who "endures and fears the right things, for the right
motive, in the right manner, and at the right time, and who
displays confidence in a similar way." The fear of death is
the most discussed in defining courage, but the fear of
death is seldom present in the business world.
Other actions in business, however, resemble and
demonstrate the virtue of courage. These include taking
actions based on conscience with uncertain consequences
to a career, such as disclosing the bad conduct of others or
advocating for equal treatment of customers where such
equal treatment is adverse to the company’s business plan.
Another place businesspeople exercise and experience
courage is when they take risks, such as when a business
owner starts a new business or launches a new product.
While courage addresses fear, self-restraint deals
with the attraction to pleasure, namely food, drink and sex.
Self-restraint is not the same as austerity or prudishness;
pleasure is fine as long as it is undertaken in moderation
and does not involve bad behavior. Thus, a person who
exercised virtue ethics would limit his advertising and other
practices to those that do not encourage people to live
immoderately, would not encourage self-indulgent behavior
among his employees and co-workers, and would support
employer supervision of self-control.
39
Generosity, Good Taste, Modesty and Cordiality.

Generosity is that virtue which regulates our desire for
wealth. In exhibiting the virtue of generosity, ethicists
encourage a person to seek a balance between prodigious
and unwise giving and greed. Greed is defined as
stinginess or the making of money from disreputable
activities. Examples of those who are considered greedy
are gambling operators, pimps and high interest lenders.
Good taste, or magnificence, is the virtue of
spending large sums of money in the right way for a worthy
purpose. Magnificent people do not try to show off their
wealth by spending more than the occasion requires or by
allowing anything gaudy to be exhibited, nor do they fret
the cost of every detail. Consumption is not an evil, it just
needs to be pursued in the interest of self-perfection.
Modesty is the virtue that shows the appropriate
attitude towards success. Modesty requires patience,
because the opportunity for success and its recognition
comes rarely. In addition, modesty requires a
businessperson to exhibit all of the virtues, because it is
unlikely that success will be achieved if a large range of
excellence is not exhibited. While one is waiting for
success to occur, he must speak clearly and honestly, avoid
holding grudges, perform favors more willingly than
accepting them, and conduct his affairs in a clear state of
mind.
And finally, cordiality reflects a good-natured
disposition in interacting with others, whether strangers or
friends, on agreeable terms. A sociable person willingly
pleases others, as long as nothing shameful is condoned and
the overall outcome is advantageous. In addition, a
40
sociable person adjusts his or her manners depending upon

with whom they are dealing.
Justice. Justice is the most important virtue in the

examination of business ethics. It involves the proper
allocation of "external goods", which are defined as things
people value that can be taken away, or denied to them, by
others. These external goods include life, bodily integrity,
freedom, money, property, sex, offices, power, and status.
A just person is one who has a constant and
perpetual will to give others those external goods which
they have earned or to which they are entitled. Thus,
justice has to do with at least two parties. But several
combinations can exist between two parties, which gives
rise to several kinds of justice:
• Commutative justice inclines one individual to

render to another individual what the other is due
• Legal justice inclines one to render what is due to

society, i.e. the whole community. These
obligations are satisfied by observing civil laws.
• Distributive justice inclines society or the whole

community to render what is due to individual
members of that society or community.
The aim of justice is to establish some kind of

equality, or just balance or proportion between the parties
involved. This goal differs in the different kinds of justice.
An ethical person exhibits all three kinds of justice.
41
The purpose of commutative justice is to preserve

equality of rights between individuals. This type of justice
applies when analyzing the equality between the value of
an item purchased and the price paid for it, or between the
wage paid by an employer and the work done by an
employee. A special characteristic of commutative justice
is the obligation of making restitution where another’s
rights are violated or where one’s actions intentionally or
unintentionally cause harm to another. That restitution may
involve the returning of something stolen (or if not
possible, its value), the repair or restoration of something
damaged or destroyed, or compensation for an injury that
has been unjustly inflicted. This aspect of justice prohibits
coercive or deceptive behavior in business transactions.
Legal justice aims immediately at the common good
of society, and brings about the establishment of just laws
and ordinances. Its application to business ethics requires
business leaders to establish just rules and policies which
promote the common good, and requires all businesses and
employees to observe those rules and policies. The truly
just person is aware of the many ways he benefits from the
common good, and does what he can to promote and
maintain it. He also is attentive not only to the letter of the
law, but especially to its spirit.
Distributive justice inclines those who lead an
organization or community to distribute benefits and
burdens among its members according to the merit, ability
and needs of each citizen or group. Violations of
distributive justice include the distribution of benefits or the
imposition of burdens through discrimination or favoritism,
that is, not based on merits and true needs, but singling out
42
one less qualified because of friendship, family ties, bribes,

or in return for favors.
Intellectual Virtues
Two intellectual virtues can be applied to business:

knowledge and practical wisdom.
Knowledge. Ethicists know that a person who has

little basis in the facts surrounding a decision has a difficult
time in making such a decision ethically, if at all. Thus, the
accumulation of knowledge related to business, the markets
in which it operates, its customers and regulators is
essential to conducting business ethically.
Practical Wisdom. A prudent person uses reason to

choose rightly the proper means to attain the end in view.
The exercise of practical wisdom involves three steps: (i)
deliberating as to the various means of attaining the desired
end; (ii) judging or deciding on the means or action to be
taken or not taken; and (iii) commanding that the means
decided upon be put into action. This last step is the
principal act of this virtue, the first two only prepare the
way. True prudence commands that the decision be put into
effect with courage and without needless delays, and
without being discouraged by any difficulties encountered.
Practical wisdom may only be acquired through experience.
We have discussed nine classic virtues in this
chapter. There are many other virtues which may apply in
a business context. A list of some of these virtues, as well
as their meanings is included as Appendix A.
43
Writing a Personal Moral Code
Many professions, including mortgage brokers,

have a Code of Ethics. These codes generally are derived
by a small group, and adopted after discussion among those
affected. They are then published for all to follow.
These codes are important, but they are not entirely
effective because they do not reflect the individual values
of those who are using them. In addition, they often are too
general to provide guidance to assist in quick decisions on
ethical issues when they arise.
Thus, it is important to take time to write down your
own personal moral code to apply to business situations.
This code should be specific enough so that it can guide
your actions when you are presented with situations that are
common, or likely, in the course of your work. In other
words, when you are developing your moral code, you are
developing answers to difficult questions with which you
will be presented at some point in your career. Keep this in
mind as you proceed.
Your code of ethics reflects your values, and sets
down rules or duties based on those values by which you
may conduct your business. Accordingly, as an initial
matter, it is important to determine exactly what values you
desire to emphasize in your business life. I believe that a
set of eight to ten are important.
44
Example:
The following are the values that are most

important to me:
Respect Courage
Fairness Justice
Loyalty Knowledge
Honesty Generosity
Dependability Social Harmony
The next important step in developing a code is

determining those to whom you owe a duty, with whom
you interact, and with respect to whom you may have to
make ethical decisions. In the mortgage industry, that list
generally will be as follows:
The following are the people and entities that I

serve in connection with my business activities:
Borrowers Regulators
Employer/Employees Family
Lenders Community
Once you have identified your most important

values and those whom you serve, write a preamble to your
Code which sets forth who you are and what you desire.
The preamble should describe your business activities and
45
duties, and should indicate a commitment to those whom

you have identified. For example,
I, William S. Bost III, recognize my commitment to

provide borrowers access to a variety of quality
mortgage products and to assist them in the closing
of housing purchase and refinancing transactions. I
will strive to live a meaningful, productive,
satisfying life that simultaneously serves myself,
my employer, my customers, lenders with whom I
do business, and my community. My actions,
behaviors, and attitudes at all times will be
consistent with my commitment to applicable laws,
my family and public service. I will avoid holding
grudges, perform favors more willingly than
accepting them, and conduct my affairs in a clear
state of mind. I intend to follow this Code in all
aspects of my professional life.
Think about your duties in your employment. For a

loan officer, these might include the following:
• Soliciting a potential borrower for his loan business
• Completing borrower’s loan application
• Determining mortgage products for which the

borrower qualifies
• Educating and advising the borrower in the home

buying and financing process
46
• Collecting financial information from the borrower
• Initiating and ordering verifications of employment

and of deposit
• Ordering appraisals, surveys engineering reports,

and legal documents
• Providing disclosures to the borrower
• Assisting the borrower in understanding and

clearing credit problems
• Coordinating parties to the transaction
• Participating in the loan closing
Apply your values to these duties. Write a few

sentences about each duty you have identified. They can
be general or specific. For example:
Maxim Virtues
I will only offer loan products which reflect fair Fairness,

terms after taking into account my customer’s credit Justice
history and personal needs. I will try to counsel my
borrowers so that they do not make decisions that
are not in their best interests.
47
I will answer all inquiries by customers and lenders Honesty,

regarding their loans honestly. I will require the Courage,
same of my customers and my employer. I will act Justice, Respect
with courage to disclose to my employer, lenders or
law enforcement or regulatory agencies the
existence of fraudulent, unlawful or unethical
lending practices of which I become aware.
I will give a portion of my income to charity. I will Generosity
make time for and share my successes and failures
with my family.
I will be loyal to my employer and my customers. I Loyalty,
will not disclose confidential information relating to Justice, Respect
any of them except as required in the course of my
duties.
I will work diligently to deliver a loan closing at the Dependability,
time and on the terms that I promise to the customer. Honesty,
I will explain honestly to the customer the reasons I Respect
am not able to do so, if that is the case. I will not
make promises that I cannot reasonably keep.
I will continue to be educated in the laws and Knowledge,
regulations applicable to, and the markets and Justice
environments affecting, the mortgage business
throughout my career. I will follow all applicable
laws.
If I am responsible for circumstances that are Justice
harmful or disadvantageous to another, then I will
use my best efforts to correct the situation, even if it
is at some cost to me. I will undertake to ensure that
all service providers with whom I interact are paid
for their services.
I will show good taste in my personal affairs, and Social
will act with a good nature towards those whom I Harmony,
contact. Respect
I will show restraint in my personal habits and will Social
not encourage others to act self-indulgently through Harmony,
my actions or any advertising I may do. Respect, Justice
48
I will manage my personal and business affairs in Fairness,

such a way that I will not be tempted to violate these Justice,
ethical standards. I will not ask others to do Honesty
anything that I would not do under these rules.
When you have completed this list, ask

yourself the following questions with respect to
each of the rules, or maxims, that you wrote:
• Can this rule be applied universally? If

everybody in my industry did this, would a
good or bad result ensue?
• Does this rule foster respect for those with

whom I am dealing? Does this rule reflect
my respect for the dignity, and promote the
interests, of others?
• Would I be willing to enforce this rule

against all others who are similarly situated
with me? Would I be willing to have this
rule enforced against me?
Accept and refine those maxims that you

have developed which satisfy these criteria. Keep
them close at hand and refer to them when faced
with a difficult question of right or wrong action. If
properly done, this code should provide guidance
and answers. These business ethics provisions of
your moral code can be combined with your
“universal” moral code (the one you use for all of
49
your non-business activities) and any religious code

that you believe is appropriate.
Note: A list of possible additional maxims

for an individual business ethics code is included as
Appendix B. A list of responsibilities and a sample
code for an employer or supervisor is included as
Appendix C.
50
CHAPTER 6
ORGANIZATIONAL ETHICS CODES
Ethical business decisions require reference to an

organization’s code of ethics in addition to an individual's
code of ethics. A code demonstrates management’s
commitment to meeting all applicable industry practices
and government regulations, and addresses minimum
standards of conduct and procedures to reduce the business’
risk of liability and damage to its reputation. A code of
conduct also goes beyond these minimums to guide
employees and agents toward enhancing the business’
reputation and adding genuine value to its community.
To be effective, the organization’s code of ethics
must be part of the organization’s overall business ethics
program. This chapter will focus on the writing of a
business code of ethics; the development of an overall
business ethics program will be discussed in the following
chapter.
Unlike personal codes of ethics, businesses do not
obtain them through education and experience. Rather a
business organization’s code of ethics is derived from the
personal business codes of its leaders and employees, and
the environment within which it operates. This
environment is comprised of the business practices within
its industry, business practices within its geographic
51
location, applicable laws and rules, and relevant financial

and economic matters.
The average small business is closely identified
with its owners and managers. Thus, they must be
particularly alert when designing a well-balanced business
ethics code. Often they will write the code and simply
present it to employees and other stakeholders. They have
limited resources and staff, and, after all, it is their
business. Though in many places workers expect to be told
what to do—even what to think—a program is more likely
to succeed where workers are involved enough in its design
to feel committed to it and where workers are willing to use
individual judgment to apply its standards to the issues they
face. Owners and managers should, therefore, resist the
temptation to do all of the work, and engage their
employees and other stakeholders as much as possible.
The goal of the process is to create a code of
conduct that is comprehensive enough to give guidance to
employees and agents on all important matters. It must
have had enough participative feedback from internal
stakeholders—especially the owners, managers, and
workers—that they will recognize it as their own, support
it, and be willing to live by it.
An initial matter is to determine the orientation of
the code, and, by extension, of the organization’s business
ethics program . The primary orientations are:
• A compliance-based approach, which focuses

primarily on preventing, detecting, and punishing
violations of law.
52
Chapter 6 – Organizational Ethics Codes
• A values-based approach, which aims to define

organizational values and encourage employee
commitment to ethical aspirations.
• An external stakeholders approach through which

the business hopes to maintain or improve its public
image and relationships with external stakeholders
• A protecting senior management approach which is

introduced in part to protect owners and senior
management from blame for ethical failures or legal
problems.
Compliance-based approaches result in inflexible

approaches to significant problems, and may encourage
employees and others to exploit inherent and unavoidable
loopholes. Ethical codes that reflect a concern for the
protection of senior management lead to employee
cynicism. Codes that focus on customers and others may
not reflect an appropriate concern for the feelings and
desires of employees. Thus, when writing a code of ethics,
an organization should strive to ensure that it reflects a
value-based approach.
Thus, the next important step is to identify the

values of the organization. For example:
53
The core values of XYZ Mortgage Corporation, as

determined by its Ethics Committee are as follows:
Fairness Quality
Integrity Knowledge
Courage Generosity
Justice
The next task is to anticipate the tough decisions that

employees and agents might face in performing their
duties. These duties can be divided among the several
stakeholders in the organization: owners, employees,
customers, service providers, competitors, and lenders (or
suppliers).
In this regard, consider the following:
• What responsibilities does the business and its

employees have to its OWNERS?
• Maximizing shareholder value

• Minimizing business risk
• Using business resources prudently
• Engaging in legal and ethical behavior
• Being responsible to community and
environment
54
• What responsibilities does the organization have to

its CUSTOMERS?
• Providing quality goods and services

• Communicating clearly
• Protecting confidential information
• Preventing bribes and kickbacks
• Regulating gifts and entertainment
• Ensuring accurate fee disclosures and billing
• Safeguarding property of others
• Acquiring marketing data properly and legally
• What responsibilities TO ITS EMPLOYEES does

the business have? What does it expect FROM
EMPLOYEES?
• Promoting respect for one another

• Promoting equal opportunity and anti-
harassment
• Creating a hassle-free environment
• Respecting right to privacy
• Promoting workplace health and safety
• Maintaining skills and qualifications
• Preventing substance abuse
• Preventing workplace violence
• Regulating use of company funds
• Regulating company e-mail and computer use
• Preventing conflicts of interest
• Regulating outside business activities
• Regulating gifts and entertainment
• Promoting business with the company
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• Regulating employment outside the company

• Encouraging self-development and lifelong
learning
• Regulating the hire of closely related people
• Ensuring accurate books and records
• Retaining records
• What responsibilities does the organization have to

its SUPPLIERS (i.e., lenders) and SERVICE
PROVIDERS (i.e., lawyers, appraisers, realtors,
etc)?
• Treating all suppliers and service providers

fairly
• Regulating the acceptance or offer of gifts
• Respecting intellectual property of others
• Protecting proprietary data of others
• Using software for its intended purposes
• Requiring suppliers to act legally and ethically
• Ensuring prompt payment
• Honoring contractual arrangements
• What do we owe our COMPETITORS?
• Dealing fairly with competitors

• Winning on product and service merits
• Discouraging disparagement of competitors
• Prohibiting inducement of others to break
binding contracts with competitors
• Prohibiting illegal or unethical methods to
gather competitive information
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• Promoting adherence to principles of free

competition
• What responsibilities to its COMMUNITIES and

GOVERNMENT does the organization have?
• Obeying both the letter and the spirit of law

• Promoting good competitor relations
• Complying with laws and customs
• Promoting anticorruption practices
• Voluntarily disclosing violations
• Cooperating with authorities
• Promoting charitable contributions
• Encouraging employee volunteer work
After consideration of these issues, the organization

should draft a Code of Ethics which addresses the most
important points identified by its stakeholders. The Code
should be concise and written in plain English. The
following is an example:
57
INTRODUCTION
The mission of XYZ Mortgage is to deliver a high

quality of loan products and services to the marketplace.
To that end, the employees, directors and shareholders of
XYZ Mortgage Company adopt the following Code of
Ethics to guide the conduct of its business.
We understand that this Code and our actions based

upon it are the basis on which first impressions are formed
and ongoing relationships maintained. We understand that
laws and contracts cannot anticipate all the possibilities that
may arise in the course of our business; thus, in our
dealings with our customers, lenders and others we will
make decisions based on common sense and sound ethical
and moral principles. No inducement of profit and no
instruction from customers ever can justify departure from
this ideal.
RELATIONSHIPS WITH CUSTOMERS
• We will only offer and sell those products which

reflect fair and reasonable terms and which we have
the ability to deliver on a timely basis.
• We will charge and collect fees for our services
which are reasonable considering the prevailing
market, the services performed, and their value.
• We will have respect for the dignity and property of
our customers, and will live up to the trust placed in
us.
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• We will provide customers with, and assist them in

understanding, accurate information regarding their
transactions with us.
RELATIONSHIP WITH EMPLOYEES
• We will obey all applicable labor laws, and remain

committed to the health and safety of our
employees.
• We will not discriminate in the recruitment,
compensation, termination and promotion of
employees.
• We will abide by all clearly stated policies relating
to compensation, benefits, promotions, and other
employment conditions.
• We will provide all employees with the
opportunities, training and resources to succeed and
be happy in their work.
RELATIONSHIPS WITH OTHER BUSINESSES
• We will display a commitment to excellence,

honesty and value in all of our products and
services.
• We will display respect in all business relations, and
will not disparage other business organizations.
• We will respect the sanctity of contracts into which
we enter, and will perform timely our obligations
thereunder, including payment of our debts.
• We will, in case of a commercial dispute, display a
willingness to negotiate and compromise in order to
reach an amicable solution.
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RELATIONSHIP WITH THE COMMUNITY
• We will be sensitive to the concerns of our

neighbors, and will show tolerance for people of
other cultures, races, beliefs, and countries.
• We will undertake and contribute to efforts to build
a pleasant environment for business and personal
growth in our community.
• We will obtain and maintain all governmental
permits, licenses, and approvals required to do
business; follow all applicable laws, resist crime
and corruption, and do our part to ensure that no
one will profit from unlawful conduct, crime or
corruption.
• We will respect the rule of law, including abiding in
a timely manner with decisions of any court or other
administrative bodies.
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Matters that need to be addressed specifically can
be addressed in a code of standards and practices such as
the one included as Appendix D.
In developing the organization’s code of ethics, it is

important to remember that the process is as important as
the product. Each person or group who will be asked to
abide by the code should participate in its drafting or be
represented in its development. In addition, the process
should reflect the commitment of management and the
ownership of the organization to ethical action and
decision-making.
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62
CHAPTER 7
BUSINESS ETHICS PROGRAMS
An organization’s Code of Ethics is an essential part

of an overall business ethics program. The goals of the
business ethics program are to show that the owners and
management of the organization are committed to and
expect ethical behavior; to set and communicate the ethical
standards of the organization; and to create an environment
where ethical behavior becomes second nature, and where
employees are confident that their ethical values and
decisions will be respected.
An effective ethics program has several
characteristics. It is aligned with an organization’s core
beliefs which are reflected in its Code of Ethics and its
standards and practices. An effective program also is
integrated well with organization systems, policies, and
practices, and is used by employees at all levels to guide
decision-making and action. Finally, a well-designed
ethics program ensures that, over time, ethical decision-
making becomes a central part of the organization’s
culture.
In addition to the Code of Ethics and a set of
Standard Practices, the components of an effective business
ethics program are as follows:
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• Communication of standards to employees
• Systems for implementation
• Programs that monitor and audit conduct
• Encouragement to seek advice and report concerns
• Due diligence in hiring
• Encouragement to follow standards and procedures
• Appropriate responses to violations
• Regular evaluations of program effectiveness
Communication of Standards
An ethical organization must develop a means of

communicating the ethical standards of the organization
and the organization’s commitment to ethics. These means
include an initial orientation of employees to the ethics
program which must be followed by regular
communication to remind employees of and to reinforce
ethical business practices. These reminders can take the
form of newsletters, websites, and personal visits from
executives. In all manner of communication about ethics,
those communicating must have a clear and consistent view
of the organization’s ethical goals.
In addition to this view, the organization must take
into account the varying natures of its employees with
respect to ethics, and tailor its messages to them
64
Chapter 7- Business Ethics Programs
accordingly. There are generally four different types of

employees:
• Ethical enthusiasts who hold views on corporate

responsibility that are strong enough to influence
their choice of employer.
• The ethically committed who have adopted the

company’s standards, procedures, and expectations
in principle but still require support. They need to
be assured that their choices and actions will meet
the business’ expectations. They also need to know
that if they follow business standards and
procedures they can still succeed.
• The ethically unaware who are not aware of—or

have not yet embraced—ethical standards,
procedures, and expectations and need to be
educated about them.
• The ethically challenged. They have rejected ethical

standards and procedures because they make
lucrative “business as usual” more difficult. These
people need to be advised that (a) the business is
dedicated to its standards, procedures, and
expectations and (b) deviation from them will not
be tolerated.
Those who deliver the initial messages related to the

organization’s code of ethics should expect (i) that the
message will be received with relative skepticism, and (ii)
65
that employees and others will be influenced as much by

what is not said as by what is said. Thus, it is important
that any initial program reflect ownership’s and
management’s commitment to ethics, and include some
training in ethical thinking and decision-making. All
participants should leave the initiation program confident
that they know what the organization expects of them and
what they can expect from the organization in turn. They
should be able to recognize issues of responsible business
conduct and have the confidence to make the right decision,
explain that decision to the appropriate people, and act
accordingly.
Subsequent communication with employees should
reflect feedback from them related to the training, issues
that arise after the training occurs, and general reminders of
the code of ethics. Many commenters suggest supplying all
employees with a laminated card printed with the
organization’s code of ethics, and posting the code of ethics
in several places throughout the organization’s offices.
Implementation of Systems of Authority, Responsibility and

Accountability.
An effective ethics program has the following

characteristics to ensure adherence by employees and
managers:
• A mechanism that ensures that the owners or owner

representatives have adequate information regarding
the organization’s performance with respect to
ethical matters
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• The owners and managers set a tone of support for

responsible business conduct.
• The owner or another high-level person is

responsible for the business ethics program.
• Supervisors and employees are responsible for how

things are actually done in day-to-day business
operations
Clearly, in a small business atmosphere,

responsibility for the ethics program must rest with the
owner; in a larger business, the responsibility can rest with
another responsible, respected senior officer. Wherever the
responsibility lies, the organization must communicate to
the employees and other stakeholders that access to these
individuals related to ethical matters is fairly unrestricted.
These individuals also must set the tone for ethical
behavior and communicate this tone throughout the
organization. They must rely on, and expect, supervisors
and other employees to implement the ethical standards of
the organization in its day-to-day business.
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Monitoring and Auditing Conduct; Encouraging Reporting

By Employees
An ethical business organization must have systems

in place to ensure that its employees and others are abiding
by its ethical principals. These systems must collect
information related to employee actions and employees’
consideration of ethical principles in taking action.
Generally, this information comes from five sources:
• Monitoring ongoing operations
• Auditing books, records, and process

documentation
• Responding to employees and agents seeking advice

and reporting concerns
• Investigating incidents and reports
• Engaging third party service providers and suppliers
Monitoring and auditing are good business practices

that all responsible businesspeople employ and understand.
Responding to reports and incidents is a more delicate
matter.
Many employees have difficulty reporting the
wrongdoing of their co-workers; they put their loyalty to
their friends above loyalty to the business. They also are
concerned that their friends and supervisors will retaliate
against them if they report unfavorably about them.
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Reporting of bad news should not be discouraged

by managers and owners; rather an ethical business
organization should encourage employees to come forward
by establishing discreet procedures for them to seek advice
and report concerns. Clearly, the best approach is an open-
door policy which allows employees to report these matters
without concern. Where such a policy is not appropriate or
effective, suggestion boxes, “help” lines and protection
from retribution may encourage openness.
When an employee reports an ethical issue, the
responsible person who receives it should (i) record the
concern, (ii) evaluate it and develop a plan for dealing with
it, (iii) initiate an investigation or inquiry, if necessary, and
(iv) take appropriate action on its finding and conclusions.
Critical to the success of any ethics program is reporting
back to the employee who raised the issue the nature of the
action taken. Employees who feel their ethics concerns are
ignored will be cynical about the ethics program generally.
Also critical to the success of the program is making
changes to it where the analysis and action described
require it.
Due Diligence in Hiring
No practice can prevent unethical behavior in a

business organization better than excluding unethical
people from the organization. Before hiring anyone, an
owner or manager should ascertain through interviews,
background and credit checks, and references whether the
person is competent, responsible, AND ethical.
Hiring managers and employees who hold and
reflect values that are consistent with the organization’s
69
business ethics plan is important for three reasons. Firstly,

hiring those who do not hold and reflect such values shows
to other employees that the owners and management are
not committed to the ethical code and program. Secondly,
employees or managers with poor ethics can “pollute” an
otherwise ethical environment. And thirdly, training those
who already possess ethics consistent with those of the
organization is much easier and more effective than
engaging in remedial moral training.
Once having hired ethical employees, the ethical
business organization should take steps to assign to them
work that is worthwhile and challenging, and recognize
them for their contributions. Very often it is the good, and
ethical, employees that are most taken for granted. Ethical
employees do a good job all of the time, not just when their
compensation is raised or when a bonus is at stake. Thus,
managers should avoid practices that reward unscrupulous
employees, while leaving conscientious employees feeling
frustrated and unappreciated.
Encouragement to Follow Standards and Procedures;

Responses to Violations
An ethical business organization should engage in

management practices that support ethical conduct,
including (i) recognizing employee contributions, (ii)
rewarding ethical behavior, and (iii) punishing unethical
behavior.
Where appropriate, regular performance reviews
should include an acknowledgement of ethical behavior.
They also should include a review of the extent to and
70
manner in which an employee encourages ethical behavior

among subordinates and others.
Compensation plans which reward unethical
behavior should be avoided. Commission plans which
focus on how much is sold, as opposed to how well a
person serves his customers, are one source of
encouragement of such behavior.
On the other hand, ethical behavior should not be
rewarded financially; that is, one should not be paid extra
for doing what he is supposed to do. In addition, rewarding
an individual for behavior resulting from a group culture
may disrupt the favorable culture. Ethical behavior,
however, can be recognized in a variety of non-financial
means, such as letters of appreciation, public
acknowledgment, etc.
Unethical behavior must be punished and
addressed, even if the punishment is costly to the
organization. Where a customer is harmed by unethical
behavior, the organization should make him whole EVEN
IF HE DOESN’T ASK FOR IT. Where an employee is
caught in an unethical situation, appropriate consequences
should follow, EVEN IF THE EMPLOYEE IS A
VALUABLE ONE WHOSE LOSS WILL HURT THE
ORGANIZATION. Otherwise an undesirable message is
sent: Our beliefs are negotiable. Our standards apply only
if they are not too costly. Unethical behavior is acceptable
if we can avoid getting caught.
Clearly, the punishment or the compensation must
fit the gravity of the behavior. In addition, business owners
should take care to distinguish between unethical behavior
and mistakes or misunderstandings. Business owners also
should determine an appropriate policy to deal with
71
employees or others who voluntarily disclose unethical acts

they have committed.
Evaluation of Effectiveness of the Program
In evaluating the effectiveness of an ethics program,

business owners should ask themselves the following
questions:
• Is there less misconduct than before the program?
• Are employees able to recognize responsible

business conduct issues?
• How often do employees speak in terms of ethical

standards, procedures, and expectations?
• How often are decisions made with reference to

ethical standards, procedures, and expectations?
• How willing are employees to seek advice?
• How willing are employees to report concerns?
• How satisfied are those who report their concerns

with management’s response?
• How committed are employees to the business?
• How satisfied are customers with the business?
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CHAPTER 8
EXERCISES IN ETHICS
We have spent a lot of time on developing our

personal and business ethics codes and our business ethics
programs. To gauge your success in developing a workable
code and program, consider whether they would be helpful
to you or your organization in addressing the following
ethical dilemmas.
Situation 1
Mort Gage is a loan officer. A borrower applies

with him for a loan. Mort quotes him a rate from a current
rate sheet, and the borrower is pleased with the terms of the
transaction. After the customer leaves, but before the rate
is locked, the lender sends a new rate sheet with a lower
rate on it.
Should Mort tell the borrower this? Or does Mort

say nothing and lock the borrower’s rate at the higher rate
to which he agreed?
Situation 2
Mort has ten closings coming at the end of the

month with the same lender. While he is at the copier one
73
day, he notices a W-2 form lying on the copier glass for a

borrower in a loan transaction originated by Dishon Est, a
co-worker. Mort has a reason to believe that the numbers
on the W-2 form are incorrect and the form may have been
altered by Dishon. Dishon’s borrower also will be using
the same lender. All of the loans have been approved.
Dishon and Mort are friends.
What should Mort do? If your answer is to talk to

Dishon, what should he tell him? What does Mort do if
Dishon is not responsive?
Does your answer change if Dishon’s borrower has

a business on the side and the income he makes on that
business plus his regular paycheck exceed the amount on
the W-2?
If your answer is to tell the CEO of the company,

does that answer change if the CEO does nothing with the
information? Does it change if the CEO fires Dishon, but
allows the loan to close without correct documentation?
Does your answer change if the lender will prevent

Mort from closing his transactions on time if it learns of the
doctored document, which would cause harm to his
borrowers? Does your answer change if the mortgage
company is in financial trouble and several employees will
be fired if Mort does not close his deals?
74
Chapter 8 -- Exercises in Ethics
Situation 3
Mort has the responsibility of filling a position in

his company. His friend Jenny May has applied and is
qualified, but someone else seems even more qualified.
Mort wants to give the job to Jenny, but he feels guilty,
believing that he ought to be impartial. That's the essence
of morality, he initially tells himself. This belief is,
however, rejected, as Mort resolves that friendship has a
moral importance that permits, and perhaps even requires,
partiality in some circumstances. So he gives the job to
Jenny.
Was he right?
Situation 4
Mort sits down with a borrower to talk with him

about a mortgage loan. After listening to the borrower’s
needs, Mort determines that the borrower will be perfectly
served by Selma Savings Bank’s ARM product. Mort does
not do business with Selma, but he knows that the borrower
would qualify for a loan to which he does have access
which is similar to those offered by SSB. Mort also
suspects that the loan product he has in mind for the
borrower would be more expensive, more difficult to close,
and contains a prepayment penalty, which the SSB loan
does not.
What does Mort do?
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Situation 5
The owner of the company for whom Mort works is

mean and difficult. Mort has not been provided the
resources that he needs to perform his job at a high level.
One day in May, Mort meets a friend, Linda Lott. Linda
also is a loan officer with another company. Mort tells her
that he is unhappy and they discuss opening Gage & Lott
Mortgage Company. Mort tells her that August 1 would be
a perfect time to open the Company because he has eight
deals closing in August which will pay overhead for a few
months; Linda says that she has about the same number
closing in that month, too.
Mort and Linda apply for a mortgage company

license on June 30. Mort does not want to tell the owner of
his company about the application. Should he?
Linda tells her employer about the application, and

she is allowed to stay and work for the coming month, on
the condition that she and her employer will split the profits
of all of the loans she closes during the month and all the
loans in her pipeline on the last day of the month. On July
31, her last day, Linda receives a report which shows all of
the loans that the employer believes are in her pipeline.
There are six. She also knows that there are two more that
are not on the employer’s list, but Linda believes that they
will not close for various reasons. Does she tell the
employer about them?
Mort is anxious about the opening of his new

business and is very excited. He goes to the Copy Shop
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and has business cards printed. He also writes a very nice

letter addressed to his current and former customers
alerting them of the opening of his new business venture.
Should he send the letter on July 15? Should he send the
letter to current AND former customers? Should he send
the letter after August 1? (Assume that there are no
licensing issues.) Should he send the letter at all? Should
the letter contain a sentence which says “Wait till August 1
for your loan, and we will give you a $500.00 discount on
your origination fees?”
Before he leaves his current employer, Mort calls

all of the borrowers for his August loans and alerts them to
the fact that he will be moving his office and will be at a
different phone number. They unanimously congratulate
him and tell him that they will do business with him until
he dies. On the last day of his employment, Mort takes all
of the files related to his August loans to his new office.
He also downloads from his computer information relevant
to the files and his contact lists. On August 1, his former
employer demands that he return them. What should he
do?
Linda unexpectedly closed the two loans that were

not on the former employer’s list of loans in her pipeline.
She knows that he will never ask for the money, he doesn’t
need the money, and is not expecting the money. What
should she do?
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Situation 6
Mort Gage and Linda Lott open their mortgage

company and business is good. They hire a very good
assistant branch manager, Faith Estimate, and when they
hire her they explain that, while they would never break
any laws, they do not like to do business with minorities
because they are a bad credit risk. A few days later, Ineda
Sumcash, and her husband, Gottahava, who are minorities,
are turned down for a mortgage, despite a good joint
income and an excellent credit rating. Ineda asks Faith
why their mortgage has been turned down.
How should Faith answer her? What should Faith

do? Do you agree with Mort? Would you do anything
differently if you were Mort? Is it ethical for Faith to
continue to work for Mort?
Situation 7
Mort Gage has been in business for several months

and has gained a reputation for good customer service with
his customers. He offers a standard array of conforming
products that are competitive in the market. Because of
national economic events, the lenders with whom Mort
does business raise their rates and fees more than other
lenders operating in his market. Thus, while his rates are
still competitive, they are higher than those offered by other
brokers in the area on similar products. Obtaining products
from new lenders will take several weeks and could cost
Mort's company thousands of dollars. He decides to go
forward anyway.
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Questions:
Should he tell his customers that the rates and fees

charged on the loan that he is obtaining for them are higher
than those charged by other brokers for identical products?
Should he lower his rates and fees? Should he tell his
employees, so they will be knowledgeable with the
customers? On what conditions would you borrow from
Mort?
Situation 8
After a few successful months, Mort and Linda hired

Rea Lee Smart as a loan underwriter. Rea Lee had been in
the mortgage business for several years underwriting for a
large national lender. In the first few months of her new
job, Rea quickly grew to admire her new bosses. In most
cases, when she attended to the needs of a customer for or
with Mort or Linda, they readily agreed with her analysis
and recommendations and praised her attention to detail.
One recent loan application left Rea totally
confused. Evaluating a request from Byer House for a
$500,000 loan to refinance his house, Rea noted that Byer
was the owner of Tweedy's Clothing Stores, a business
about which she read an article in the morning newspaper.
Tweedy was closing several stores and laying off several
workers, but Byer was using his income from the previous
year to qualify for the loan. In addition, the home was in a
neighborhood in which Mort's company had made several
loans; no home in the neighborhood had appraised for more
than $450,000.00. The appraisal for Byer's home was
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$550,000.00. Rea promptly noted these facts to Mort and

Linda.
Rea explained these potential problems to Mort and
he responded by telling her not to mention them again.
After the loan was approved, Mort told Rea that the reason
she should not worry about these issues was that Byer's
current financial problems were temporary, the loan was
going to be made under a "no-doc" program, and the house
was nicer than all of the others in the neighborhood and
that Byer would pay the mortgage payments with income
from other sources.
In spite of Mort's reassurances, Rea knew that the
lender would not have made this loan to an owner of a
small business if it had known that the company was in
deep financial trouble. While pondering this problem in
her office, she reviewed the settlement statement for the
transaction. The appraiser that was used was not one of
their regular appraisers and Byer had paid her $2,400.00,
$2,000.00 more than the usual $400.00 fee. As her heart
raced, Rea overheard Mort talking excitedly on the phone
about how he was entering into a contract to purchase one
of Tweedy's clothing stores for investment at a very
favorable price.
What should Rea do?
Situation 9
Suppose a particular lender with whom Gage & Lott

do business rewards loan officers who sell its products with
dinners, golf outings, prizes and "educational trips" to
various resorts. In addition, when Gage & Lott and its loan
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officers lend that lender's products above a certain

threshold, the company gets preferential pricing on the
lender's loan products. The lender's products are
competitively priced, but the lender is a little slower than
others to lower rates. Although Gage & Lott has a policy
against loan officers taking gifts from lenders, it says these
trips and outings are "informational and educational."
Loan officers are not required to focus on this lender's
products. "No pressure to do more or less," says Mort.
However, Mort gives loan officers who qualify for the trips
special treatment, such as providing them with leads not
available to others, placing them in the nicest offices, and,
in some instances, promoting them to managerial positions.
Is anybody acting unethically in this situation?
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82
Appendix A
Lists of Virtues
There are many lists of virtues that can be

referenced and used in connection with the development of
a personal moral code. These are a few that I find
interesting.
A Complete List of Aristotle's Virtues
Aristotle was the first "virtue ethicist". Here is his

complete list of virtues.
Moral Virtues
Courage The appropriate attitude toward

fear.
Temperance Feeling appropriate amounts of

pleasure, and only toward those
things that are conducive to health
and fitness.
Liberality The right disposition with regard to

spending money
Munificence Giving in large amounts for

suitable occasions.
Justice Justice can mean either lawfulness

or fairness
Right Ambition Concerned with honors, but not

overly so
Good Temper Becoming angry on the right

occasions, with the right people, at
the right time and for the right
length of time
Friendly Civility Amiable not only to friends and

without regard to whether he likes
or dislikes a person; not joining in
dishonorable pleasures and
disapproving of pleasures that give
harm to the agent
Sincerity Having clear knowledge of oneself

and social position when presenting
oneself to others
Wittiness Saying the right things in the right

manner and also listening to things
properly
Modesty Appropriately susceptible to

shame.
2
Appendix A-Lists of Virtues
Just Resentment Feeling pained by the undeserved

good or bad fortune of others, but
pleased by the deserved good or
bad fortune of others.
High Mindedness Knowing that to which you are

entitled and insisting on it;
maintaining high standards in all
things and setting an example for
the community.
Intellectual Virtues
Scientific Knowledge of what is necessary

Knowledge about the world
Artistic or Knowledge of how to make or

Productive produce things
Knowledge
Practical Knowledge of how to reach life’s

Knowledge goals
Intuitive Knowledge of basic principles

Knowledge
3
Philosophical Scientific knowledge and intuitive

Knowledge knowledge together
Benjamin Franklin's List of Virtues
Benjamin Franklin thought and wrote often about

virtue and ethics, including business ethics. These were the
virtues that he claimed to live by.
Temperance Eat not to dullness; drink not to

elevation
Silence Speak not but what may benefit

others or yourself; avoid trifling
conversation
Order Let all your things have their places;

let each part of your business have
its time
Resolution Resolve to perform what you ought;

perform without fail what you
resolve
Frugality Make no expense but to do good to

others or yourself; waste nothing
Industry Lose no time; be always employed

in something useful; cut off all
unnecessary actions
4
Sincerity Use no hurtful deceit; think

innocently and justly, and, if you
speak, speak accordingly
Justice Wrong none by doing injuries, or

omitting the benefits that are your
duty
Moderation Avoid extremes; forbear resenting

injuries so much as you think they
deserve
Cleanliness Tolerate no uncleanliness in body,

clothes, or habitation
Tranquility Be not disturbed at trifles, or at

accidents common or unavoidable
Chastity Rarely use venery but for health or

offspring, never to dullness,
weakness, or the injury of your own
or another's peace or reputation
Humility Imitate Jesus and Socrates.
5
Roman Virtues
Aristotle was Greek; the following are some Roman

virtues. These are included for their variety.
Humor Ease of manner, courtesy, openness, and

friendliness
Mercy Mildness and gentleness
Dignity A sense of self-worth, personal pride
Tenacity Strength of mind, the ability to stick to

one's purpose
Frugalness Economy and simplicity of style,

without being miserly
Gravity A sense of the importance of the matter

at hand, responsibility and earnestness
Respectability The image that one presents as a

respectable member of society
Humanity Refinement, civilization, learning, and

being cultured
Industriousness Hard work
Dutifulness A respect for the natural order socially,

politically, and religiously
Prudence Foresight, wisdom, and personal
6
discretion
Wholesomeness Health and cleanliness
Sternness Gravity, self-control
Truthfulness Honesty in dealing with others
Equity Fair dealing both within government

and among the people
Good fortune Remembrance of important positive

events
Concord Harmony among people, and between

nations
Mirth An expression of happy times
Joy The celebration of thanksgiving, often

of the resolution of crisis
Nobility Noble action within the public sphere
Patience The ability to weather storms and crisis
Safety Concern for public health and welfare
Hope Especially during times of difficulty
7
Religious Virtues
St. Thomas Aquinas was one of the first writers

about religious virtues. Here is his list of the seven cardinal
religious virtues and their definitions.
Courage The ability to choose and carry out the

right course of action, even when it
involves grave danger. The capacity to
overmaster one’s fear, when required.
Temperance The ability to avoid excessive

indulgence of one’s sensual appetites,
including the appetite for food, sex, ease
and comfort.
Prudence The ability to make wise choices,

employing the best principles in the best
way, despite uncertainty and partial
information.
Justice The disposition to demand what is due

to oneself, and no more, and to afford to
others what is due to them.
Faith The disposition to believe the

Scriptures, even when they speak on
matters beyond our natural powers of
comprehension.
Hope The disposition to choose those means

of grace that are prescribed by the
8
Scriptures, confident that by so doing

we can in fact attain to the eternal good
that is promised therein.
Love The disposition to delight in God and

his will, and to make only those choices
that are most pleasing to him.
9
Appendix B
List of Sample Maxims
The following are several examples of additional

provisions that can be included in a personal moral code:
• I will act in such a way that I always treat

humanity, whether myself or others, never
simply as a means but always at the same
time as an end. That is, I will consider and
promote the well-being of others, as well as
myself.
• I will treat others with respect, which means

that I will live according to moral standards
that the other would also be willing to live
under without loss of self-respect.
• I will only do an act if it sets a precedent

that everyone else could follow.
• I will not do anything which, if consistently

done by everyone, would cause harm to me
or others.
• I will not do anything that I am not willing

to have happen to me.
• I will obey the laws and customs of my

country.
• I will act resolutely in accordance with my

moral code.
• I will not intentionally deceive another.
• I will not take any action which is intended

to coerce another to act in a manner that is
not in his best interests.
• I will consider the impact of my actions on

all affected.
• I will allow those whom I manage to act

freely in accordance with their abilities.
• I will endeavor to assist those with whom I

am in contact to further their education in
spiritual as well as academic matters.
• I will ensure that those for whom I establish

salaries are paid fairly upon considering
their skills, experience and needs.
• I will attempt to involve in the decision-

making process all those who will be
affected by my decisions.
• I commit to treating all of my customers,

suppliers and employees fairly.
• I will contribute my time and resources to

charitable and worthy causes.
2
Appendix C
Sample Manager's Code of Ethics
Desired Virtues
The following are the values that are most

important to me in my business affairs:
Respect Courage
Fairness Justice
Patience Generosity
Prudence Industriousness
Affected Groups
The following are the people affected by my

actions:
Employees Family
Owners Regulators
Customers
Duties and Activities
The following are my duties and activities:

• Hiring and terminating employees
• Setting compensation and bonuses
• Settling disputes among employees
• Determining benefits
• Making promotion decisions
• Assigning duties
• Preparing advertising copy
• Maintaining relationships with lenders,
attorneys, appraisers, regulators,
landlords and other third party
businesses
• Paying employees and taxes
• Determining expansion or investment
plans and goals
• Determining prices and product
selection
Preamble
I, William S. Bost III, recognize my commitment

to provide those whom I manage and for whom I
am responsible with a safe, fair and productive
workplace. I will strive to live, and to support my
employees in their efforts to live, a meaningful,
2
Appendix D--Sample Standards and Practices
productive, satisfying life. My actions, behaviors,

and attitudes at all times will be consistent with my
commitment to fairness, honesty and human
dignity. I will use caution and good judgment in
all aspects of my professional life.
Code
Maxim Virtues
I will ensure that my company offers only loan Fairness, Justice

products which reflect fair terms. All advertising
for which I am responsible will reflect those terms
clearly and fairly.
I will answer all inquiries by employees about Fairness,
regarding their employment honestly, and will, to Justice,
the extent possible, provide them with sufficient Respect,
information regarding the Company's business so Patience
that they can make appropriate decisions about their
careers and future. I will explain honestly to the
employee the reasons I am not able to do so, if that
is the case. I will not make promises that I cannot
reasonably keep. I will give employees the
opportunity to be heard on matters that affect them,
and will give them sufficient time and resources to
accomplish their duties effectively.
I will act with courage to disclose to my employer, Justice,
lenders or law enforcement or regulatory agencies Courage
the existence of fraudulent, unlawful or unethical
lending practices of which I become aware.
I will give a portion of my income to charity. I will Generosity
make time for and share my successes and failures
with my family.
3
I will be loyal to the Company's customers and Justice, Respect

shareholders. I will not disclose confidential
information relating to any of them except as
required in the course of my duties.
I will work diligently to manage the business of the Justice,
Company so that it benefits its customers, its Industriousness
shareholders, its employees, the community and me.
I will continue to be educated in the laws and Justice,
regulations applicable to, and the markets and Prudence
environments affecting, the mortgage business
throughout my career. I will follow all applicable
laws. I will act with thought and care when
required to address matters of importance.
If I, or any employee for whom I am responsible, Justice
causes circumstances that are harmful or
disadvantageous to another, then I will use my best
efforts to correct the situation, even if it is at some
cost to me. I will undertake to ensure that all
service providers with whom I interact are paid for
their services.
I will use all means available to me to ensure that all Respect, Justice
wages due to my employees are paid in full, and that
all state and federal taxes are paid with respect to
such wages are paid in accordance with applicable
laws. I will not purchase goods or services on
behalf of the Company for which I do not
reasonable believe the Company can and will pay.
In hiring, compensating, managing and terminating Respect, Justice
employees I will not make any decision through
discrimination or favoritism. My decisions will be
based on merits and true needs and will not be
influenced inappropriately by friendship, family ties,
bribes, or in return for favors.
I will show leadership and calm in the face of crisis. Courage
I will act nobly and will expect such nobility from
my employees.
4
Appendix D
BEST PRACTICES STANDARDS
XYZ MORTGAGE COMPANY
July 28, 2005
PREAMBLE ....................................................................... 2
DEFINITIONS.................................................................... 2
RELATIONSHIP OF MORTGAGE BROKER TO
CUSTOMER....................................................................... 3
Nature of Relationship. ........................................... 3
Declining or Termination of Relationship .............. 4
OBLIGATIONS OF MORTGAGE PROFESSIONALS ... 6
Services Provided to Customer............................... 6
Requirement of Competence................................... 8
Diligence ................................................................. 9
Safekeeping of Property........................................ 10
Rate Locks ............................................................ 10
Confidentiality ...................................................... 11
Communication..................................................... 12
Mortgage Professional as Borrower, Lender or
Seller ..................................................................... 12
Dealings with Others............................................. 12
OPERATIONS.................................................................. 13
Fees ....................................................................... 13
Responsibility of Organization and Supervisors... 14
Responsibilities of Subordinate ............................ 15
Unauthorized Activities ........................................ 15
Duty Upon Discovery of Violations ..................... 16
Retention of Records............................................. 17
Advertising............................................................ 19
Appraisers ............................................................. 19
PREAMBLE
The mission of XYZ Mortgage Company is to

enable our employees to deliver a high quality of loan
products and services to the marketplace, and to promote
our Company and employees within the financial
community. We recognize that as Mortgage Professionals,
we are, above all, service providers. To that end, we pledge
our honor and our intellect to serving the interests of our
borrowing customers and the lenders who make funds
available to them. The term "Mortgage Professionals"
connotes competency, fairness and integrity, resulting from
adherence to an ideal of high moral and ethical conduct. No
inducement of profit and no instruction from customers
ever can justify departure from this ideal.
We are adopting these standards voluntarily to

further our desire to conduct our business at the highest
ethical levels. Adherence to these standards is not optional.
Where these Standards conflict with applicable law,
applicable law shall apply.
ARTICLE 1
DEFINITIONS
For purposes hereof, “Mortgage Professional” shall
mean an individual who is employed by XYZ Mortgage.
For purposes hereof, “Mortgage Lender” shall mean

a partnership, limited liability company, corporation or
other entity that makes mortgage loans secured by real
property located in the State of North Carolina.
For purposes hereof, “Mortgage Company” shall

mean XYZ Mortgage Company.
2
ARTICLE 2
RELATIONSHIP OF MORTGAGE BROKER TO

CUSTOMER
Standard 2- 1. Nature of Relationship.

The Mortgage Company acts as a facilitator who brings
together borrowers and Mortgage Lenders in residential
mortgage loan transactions. The Mortgage Company shall
not be the agent of a Mortgage Lender nor the borrower in
any such transaction.
Comment:
In a mortgage transaction involving the Mortgage

Company, the Mortgage Company may not serve as an
agent to the borrower nor a Mortgage Lender because the
nature of the transaction and the mortgage lending business
prevents the Mortgage Company from being able to fulfill
the fiduciary obligations implied by an agency relationship.
The Mortgage Company’s duties involve the collection of
information from its borrowing customers, communicating
such information to Mortgage Lenders, and facilitating the
closing of the loan transaction. In each of these duties, the
interests of the borrower and the lender are adverse, and an
agency relationship is not possible. The Mortgage
Professional shall take care to avoid creating such a
relationship.
Standard 2- 2. Disclosure of Nature of

Relationship. A Mortgage Professional shall disclose to
his or her customers upon the initiation of the customer
relationship the nature of the relationship between the
Mortgage Company and the customer. Such disclosure
shall include statements as to the following:
3
(a) That the Mortgage Company does not lend
its own funds;
(b) That the Mortgage Company does not

underwrite its loans, or, in the alternative,
that the Mortgage Company underwrites its
loans but such underwriting is subject to the
review and approval of a third party;
(c) The terms and conditions on which the

customer will owe to the Mortgage
Company a fee in the transaction;
(d) That the Mortgage Company does not have

access to and cannot provide all mortgage
products available in the market, but is
limited to offering the products of those
lenders with whom it has a business
relationship;
(e) That the Mortgage Company is not an agent

of the borrower nor the lender in the
transaction.
Standard 2- 3. Declining or Termination of

Relationship.
(a) Neither the Mortgage Company nor a

Mortgage Professional shall provide services
to a customer or Mortgage Lender if:
(i) such relationship would result in a

violation of existing rules, laws or
these Standards;
(ii) The Mortgage Company’s physical

or mental condition impairs his
ability to provide such services; or
4
(iii) The Mortgage Company is
discharged by the customer.
(b) A Mortgage Professional may terminate the

relationship with a customer if:
(i) such termination may be

accomplished with no material
adverse impact to the interests of the
customer; or
(ii) the customer consents to the

termination; or
(iii) the Mortgage Professional

reasonably believes that the customer
is engaging in a course of conduct
that is fraudulent or otherwise
unlawful; or
(iv) the customer insists on engaging in

conduct or a transaction which the
Mortgage Professional believes is
imprudent or with which the
Mortgage Professional has a
fundamental disagreement; or
(v) the customer has used the Mortgage

Professional’s services to perpetrate
a crime or fraud; or
(vi) the customer has failed to fulfill an

obligation to the Mortgage
Professional or his Mortgage
Company regarding the Mortgage
Professional’s services and has been
given reasonable warning that the
Mortgage Professional will terminate
5
his services if such obligation is not
fulfilled; or
(vii) other good cause exists.
(c) Upon the termination of a customer

relationship, a Mortgage Professional shall
take reasonable action to protect the
customer’s interests, such as giving
reasonable notice to the customer,
surrendering papers and property of the
customer to which he is entitled and
refunding any advance payment of any fee
or expense which has not been earned or
incurred.
ARTICLE 3
OBLIGATIONS OF MORTGAGE PROFESSIONALS
Standard 3- 1. Services Provided to

Customer.
(a) The Mortgage Company through its

Mortgage Professionals and other employees
shall provide to a customer one or more of
the following services:
(i) Taking information from the

borrower and filling out the
application;
(ii) Analyzing the prospective borrower's

income and debt and pre-qualifying
the prospective borrower to
determine the maximum mortgage
that the prospective borrower can
afford;
6
(iii) Educating the prospective borrower
in the home buying and financing
process, advising the borrower about
the different types of loan products
available, and demonstrating how
closing costs and monthly payments
could vary under each product;
(iv) Collecting financial information (tax

returns, bank statements) and other
related documents that are part of the
application process;
(v) Initiating or ordering VOEs

(verifications of employment) and
VODs (verifications of deposit);
(vi) Initiating or ordering requests for

mortgage and other loan
verifications;
(vii) Initiating or ordering appraisals;
(viii) Initiating or ordering inspections or

engineering reports;
(ix) Providing disclosures (truth in

lending, good faith estimate, others)
to the borrower;
(x) Assisting the borrower in

understanding and clearing credit
problems;
(xi) Maintaining regular contact with the

borrower, realtors, lender, between
application and closing to appraise
them of the status of the application
7
and gather any additional
information as needed;
(xii) Ordering legal documents;
(xiii) Determining whether the property

was located in a flood zone or
ordering such service; and
(xiv) Participating in the loan closing.
(b) A Mortgage Professional shall listen to and

consider the desires and needs of his
customer when entering into a mortgage
loan transaction.
(c) A Mortgage Professional shall not counsel a

customer to engage, or assist a customer, in
conduct that the Mortgage Professional
knows is criminal or fraudulent.
(d) In communicating with a customer, the

Mortgage Professional should use plain
language and should avoid reference to
technical terms where possible. A Mortgage
Professional shall explain matters to a
customer to the extent reasonable necessary
to permit the customer to make informed
decisions regarding such matters.
Standard 3- 2. Requirement of
Competence. A Mortgage Professional shall not handle
any financial matter or transaction that the Mortgage
Professional knows or should know he or she is not
competent to handle. Competence requires the knowledge,
skill, thoroughness, and preparation reasonably necessary
for the matter or transaction. A Mortgage Professional
shall not engage in the unauthorized practice of law, the
8
unlawful practice of appraisal, or the unlawful brokering of
real estate.
Comment:
In determining whether a Mortgage Professional

employs the requisite knowledge and skill in a particular
matter, relevant factors include the relative complexity and
specialized nature of the matter, the Mortgage
Professional's general experience, the Mortgage
Professional's training and experience, and the preparation
and study the Mortgage Professional is able to give the
matter. A Mortgage Professional need not necessarily have
special training or prior experience to handle matters of a
type with which the Mortgage Professional is unfamiliar.
Some important skills, such as knowledge of mortgage
lending products, current market conditions, and credit
evaluation are required in all matters. To maintain the
requisite knowledge and skill, a Mortgage Professional
should keep abreast of changes in the law and its practice,
engage in continuing study and education, and comply with
all continuing legal education requirements to which the
Mortgage Professional is subject.
Standard 3- 3. Diligence. A Mortgage

Professional shall act with reasonable diligence and
promptness in providing services to lenders and customers.
Comment:
In obtaining a mortgage loan for a borrower, a

Mortgage Professional must make reasonable efforts, with
lenders with whom the Mortgage Company regularly does
business to secure a loan that is reasonably advantageous to
the borrower considering all the circumstances, including
the rates, charges, and repayment terms of the loan and the
loan options for which the borrower qualifies. A Mortgage
Professional is not required, however, to press for every
9
advantage that might be realized for a customer nor to
obtain the very best terms that may be available to the
customer. A Mortgage Professional's work load must be
controlled so that each matter can be handled competently.
Standard 3- 4. Safekeeping of Property.
(a) A Mortgage Professional shall take

reasonable efforts to safeguard property and
documents entrusted to him by a customer.
(b) All trust funds received by a Mortgage

Professional shall be promptly deposited
into a general trust account maintained by
the Mortgage Company. No funds
belonging to the Mortgage Professional shall
be deposited into such account. The
Mortgage Professional shall not use funds
held in trust to obtain credit or for other
personal benefit.
(c) A Mortgage Professional shall promptly pay

or deliver to the customer, or to third
persons as directed by the customer, any
entrusted property belonging to the
customer.
(d) A Mortgage Professional who discovers or

reasonably believes that entrusted property
has been misappropriated or misapplied (i)
by the Mortgage Professional, shall take
prompt steps to remedy the misappropriation
or misapplication, or (ii) by a third person,
shall promptly inform an executive officer
of the Mortgage Company.
Standard 3- 5. Rate Locks. A Mortgage

Professional shall inform its customer of the need for and
10
consequences of locking an interest rate for a mortgage
loan product, and shall take reasonable steps to lock a rate
with the lender promptly upon receiving directions to do so
from the customer. Disclosure of the rate obtained and the
consequences of the lender’s action may be in writing.
Comment:
A rate-lock or rate commitment is a lender's

promise to hold a certain interest rate and a certain number
of points for customer, usually for a specified period of
time, while the customer’s loan application is processed.
Most rate locks are not the same as loan commitments,
although some loan commitments may contain a rate-lock
provision. A Mortgage Professional should communicate
to the customer the consequences of the rate lock, and any
events or circumstances which cause the rate on the
customer's mortgage to differ from the locked rate. While
rate locks may in many circumstances be oral, a better
practice is to obtain a rate lock confirmation in writing
from the lender. Loan commitments should be evidenced
in a writing binding upon the lender.
Standard 3- 6. Confidentiality. A
Mortgage Professional shall take necessary steps
(a) To insure the security and confidentiality of

customer information;
(b) To protect against any anticipated threats or

hazards to the security or integrity of such
information; and
(c) To protect against unauthorized access to or

use of such information that could result in
substantial harm or inconvenience to any
customer.
11
Standard 3- 7. Communication. A
Mortgage Professional shall keep his customer informed
regarding the status of his loan, events that may affect his
ability to obtain a loan, and circumstances which could
result in a material change in the fees and expenses charged
or collected by the Mortgage Company.
Standard 3- 8. Mortgage Professional as

Borrower, Lender or Seller. If a Mortgage Professional
is involved in a transaction with a lender or customer in
which the Mortgage Professional is the borrower, the
lender or the seller, then the Mortgage Professional shall
disclose the nature of his role to the other parties in the
transaction and to an executive officer of the Mortgage
Company. If any of the other parties objects to the
Mortgage Professional’s continued participation in the
transaction, then the Mortgage Professional may not
proceed with the transaction.
Standard 3- 9. Dealings with Others.
(a) In the course of its business, a Mortgage

Professional shall not knowingly make a
false statement to a borrower, a lender, or
any other participant in a residential
mortgage transaction.
(b) A Mortgage Professional shall not seek to

influence the conclusions or activities of an
appraiser, a lender, a title attorney or any
other participant in a mortgage transaction
by any means prohibited by law.
(c) In its business, a Mortgage Professional

shall not use means that have no substantial
purpose other than to delay, embarrass or
burden a third person, or use means of
12
obtaining information that violate the legal
rights of such person or applicable law.
(d) Mortgage Professionals should refrain from

criticism of other Mortgage Professionals.
Furthermore, the Mortgage Professional
shall not speak disparagingly of the business
practices of a competitor or of a transaction
being negotiated by a competitor.
ARTICLE 4
OPERATIONS
Standard 4- 1. Fees.
(a) A Mortgage Professional shall charge only

fees that are authorized by the management
of the Mortgage Company, which fees shall
be reasonably related to the value of the
work performed and the services provided.
(b) In a mortgage transaction, the Mortgage

Company may collect fees from a Mortgage
Lender, the borrowing customer, and the
seller of the property, or any of them.
(c) Neither the Mortgage Company nor a

Mortgage Professional may charge fees for
work not performed or services that have not
been provided.
(d) All fees charged to the borrower or paid to

the Mortgage Company by a Mortgage
Lender in connection with the borrower’s
transaction shall be disclosed to the
borrower in writing in accordance with
applicable laws. A Mortgage Professional
13
should notify the borrower promptly in
writing of any material change in the fees to
be charged or collected by the Mortgage
Company.
(e) A Mortgage Company shall not charge rates

and fees that vary based on race, color,
religion, natural origin, gender, marital
status, age, receipt of income from public
assistance programs, or good faith exercise
of rights under consumer finance laws.
Standard 4- 2. Responsibility of
Organization and Supervisors.
(a) The shareholders, members, directors, and

executive officers of the Mortgage Company
who have managerial authority shall make
reasonable efforts to ensure that the
company or organization has in effect
measures to ensure that all Mortgage
Professionals in the company or
organization conform to the North Carolina
Mortgage Lending Act, applicable federal
laws, and these Standards.
(b) An employee of the Mortgage Company

who has direct supervisory authority over
another employee shall make reasonable
efforts to ensure that the subordinate
employee conforms to the North Carolina
Mortgage Lending Act, applicable federal
laws, and these Standards.
(c) A person shall be deemed to be in violation

of these Standards for the acts of a third
person if:
14
(i) Such person orders, or with
knowledge of the specific conduct,
ratifies the conduct of the third
person; or
(ii) Such person has direct supervisory

authority over the other person and
knows of such conduct at a time
when its consequences can be
avoided or mitigated but fails to take
reasonable remedial action to avoid
the consequences.
Standard 4- 3. Responsibilities of
Subordinate. A Mortgage Professional is subject to these
Standards notwithstanding that the Mortgage Professional
acted at the direction of another person. A subordinate
employee subject to these standards does not violate these
Standards if that employee acts in accordance with a
supervisor’s reasonable resolution of an arguable question
under these Standards.
Standard 4- 4. Unauthorized Activities.

Mortgage Professional shall engage in
business in a jurisdiction where doing so
violates the regulation of mortgage lenders
and brokers in that jurisdiction.
(b) A Mortgage Professional shall not assist

another in practices that violate the North
Carolina Mortgage Lending Act or other
state and federal laws.
(c) The Mortgage Company will not employ as

a processor or clerk any loan officer whose
license has been permanently suspended if,
15
at the time of the events which caused the
suspension, the loan officer was employed
by the Mortgage Company.
Standard 4- 5. Duty Upon Discovery of

Violations.
(a) A director, shareholder, member or

executive officer of the Mortgage Company
who has managerial authority shall, upon the
discovery of a violation of these Standards
or applicable law:
(i) Take actions to mitigate or prevent

adverse harm to third parties as a
result of such unlawful action; or
(ii) Report promptly such unlawful

conduct to the board of directors of
the Mortgage Company or its
designated representative.
(b) A Mortgage Professional who does not have

managerial authority, shall upon the
discovery of a violation of these Standards
or applicable law:
(i) Take actions to mitigate or prevent

adverse harm to third parties as a
result of such unlawful action; or
(ii) Report promptly such unlawful

conduct to the board of directors of
the Mortgage Company or its
designated representative; or
(iii) Report promptly such unlawful

conduct to a person who has
16
managerial authority who is not
involved in such unlawful conduct.
Standard 4- 6. Retention of Records. The

following records should be maintained by the Mortgage
Company with respect to its business:
(a) The originals or copies of all documentation

dated and signed by the borrower and a loan
originator in connection with any loan
transaction, including, but not limited to:
(i) uniform residential loan application

(Fannie Mae Form 1003);
(ii) Initial Truth-in-Lending Disclosure

(within 3 days of the application
date);
(iii) Final Truth-in-Lending Disclosure

(at settlement);
(iv) Good Faith Estimate (within 3 days

of the application date);
(v) Notice of Right to Receive Copy of

Uniform Residential Appraisal
disclosure (provided any time during
the loan process prior to settlement);
(vi) Equal Credit Opportunity Act

Disclosure (within 3 days of
application date);
(vii) Notice of Right to Cancel (for

refinanced loans at settlement);
(viii) Notice of Adverse Action (within 3

business days of receiving notice that
17
loan is denied or within 30 calendar
days of receiving an application
denied by creditor);
(ix) Affiliated Business Agreement

(Disclosure) given within 3 days of
application;
(x) Notice of Transfer Servicing

Disclosure (if funding the loan);
(xi) Signed verification that the applicant

received the “Settlement Cost
Booklet” (for a purchase within 3
days of the application date);
(xii) Verification of borrower’s

authorization giving broker/lender
permission prior to ordering a credit
report;
(xiii) Notice of Amortization required by

statute;
(xiv) Patriot Act and Right to Privacy

Notices;
(xv) HUD-1/HUD-1A Settlement

Statement (at settlement);
(b) A log or computer generated list of all

residential mortgage loan applications taken,
including originator’s name, applicant’s
name and address, application date, loan
amount, loan status (i.e. closed, rescinded,
pending, denied), and to whom loans were
sold, transferred, or brokered;
18
(c) Bank statements and cancelled checks of all
business accounts related to residential
mortgage lending activity;
(d) Receipts and invoices of third party

transactions such as but not limited to
appraisers, credit Bureau, title companies,
couriers, etc.;
(e) Copy of receipts provided to consumers for

all funds collected in connection with
procurement of a loan.
Standard 4- 7. Advertising.

Mortgage Professional shall engage in false
or misleading advertising.
(b) The Mortgage Company will not offer any

loan product or terms that it knows or should
know it cannot provide or that are subject to
onerous conditions that can be satisfied by
few, if any, borrowers.
(c) The Mortgage Company and Mortgage

Professionals shall maintain a copy of all
advertisements for a period of three years.
Standard 4- 8. Appraisers. The Mortgage

Company will not fail promptly to pay when due
reasonable fees to a licensed appraiser for appraisal
services that are requested from the appraiser in writing by
the Mortgage Company or a Mortgage Professional and
performed by the appraiser in connection with the
origination or closing of a mortgage loan for a customer or
the Mortgage Company.
19
WHAT DOES “RIGHT” MEAN?
◊◊◊◊
William S. Bost III is an attorney with fifteen

years’ experience representing mortgage lenders,
mortgage brokers and other financial services
providers. He has written this piece to give
participants in the mortgage industry assistance in
developing an ethical framework in which to
operate their individual and collective business.
The following issues are addressed, among others:
• What is ethics?
• How do ethical principles apply to the ever-

changing mortgage business?
• How can you and your company benefit by

clearly defining your ethical principles?
• What are the components of an effective

individual ethics code?
• What are the components of an effective

business ethics program?

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What Does

By William S. Bost III

William S. Bost III

Copyright 2005 by William S. Bost III. All rights reserved.

Although the author and publishers have made every effort

July 28, 2005

William S. Bost III

“Perfect Credit Score, Perfect Loan Fraud”-

“Mortgage fraud: A booming and bizarre

“Mortgage fraud menacing lenders, buyers”-

As these recent headlines indicate, participants in

and other employees of the mortgage industry in several

• Increased regulation of the industry with

• Loss of borrowers’ trust in non-bank mortgage

• Discouragement of capable employees from

those who adhere to high moral principles.

The purpose of this book is to outline steps that you

A man, after he has brushed off the dust and chips

monuments -- the question is still there: Was his life good

-East of Eden, John Steinbeck

In my legal practice representing mortgage lenders

Most started their answers with a blank stare or

• "I follow my gut reactions about what is right and

• "I am a Christian (or Jew or Catholic or other

• "I adhere to the methods and practices that are

These may be similar to your response to the

way of thinking ethically. Rather my intent is to provide a

As I discussed above, many people have a vague

Ethics is not feelings

Many people tend to equate ethics with their

Ethics is not religion

Religion can set high ethical standards and can

Ethics is not compliance

Surprisingly, many of the practices derided as

apartheid laws of South Africa are obvious examples of

Ethics is not adhering to societal norms

Being ethical is not the same as doing "what society

Ethics do not satisfy personal or business needs

Many acts, while they have positive consequences,

for attaining personal objectives and are not reflective of

Our value system refers to our core beliefs or

We have identified several things that ethics is not.

Ethics is the study of principles that indicate how

Ethics has been discussed for centuries by

John Stuart Mill conceived the concept of

what benefits or harms will be derived from each. The

The Rights Approach

Immanuel Kant and his followers focused on the

• The right to be told the truth and to be informed

• The right to do, believe, and say whatever we

• The right not to be harmed or injured unless we

• The right to what has been promised by those with

In deciding whether an action is ethical using the

The Justice Approach

The justice approach to ethics can be summarized

The Common-Good Approach

This approach to ethics promotes the idea that each

as "certain general conditions that are equally to everyone's

The Virtue Approach

The virtue approach to ethics states that each person

In summary, however derived, ethics are

community’s moral values we characterize that as acting

We have defined ethics, but what does the term

Why is business ethics training necessary?