MLO Sample Questions Answers

A quit claim deed is a legal document used in real estate transactions to convey ownership or interest in a property from one party to another. It transfers the grantor’s interest in the property without any warranties or guarantees about the property’s title.

Promissory notes (B) represent a borrower’s promise to repay a loan.

Mortgage instruments (C) create a lien on the property but do not convey ownership.

Occupancy certificates (D) certify that a property complies with regulations for occupancy but are not involved in transferring ownership.

The Federal Trade Commission (FTC) has primary enforcement authority under the Red Flags Rule, which is part of the Fair and Accurate Credit Transactions Act (FACTA). The Red Flags Rule requires financial institutions and creditors, including mortgage companies, to implement identity theft prevention programs that detect, prevent, and mitigate identity theft.

IRS (A), HUD (C), and the Conference of State Bank Supervisors (D) are not responsible for enforcing the Red Flags Rule.

In mortgage loan origination, a key focus is ensuring the borrower has the financial means to cover the costs of the mortgage, including closing costs, down payments, and reserves. Fraud may be indicated when there are discrepancies or inconsistencies in the borrower's disclosed assets and income. Here’s a detailed explanation of why Option A is the correct answer:

Bank Deposits that are not supported by income or other disclosures (Option A):

This is a red flag for possible fraud. If large or frequent deposits are reflected in the borrower’s bank accounts but cannot be linked to their income or other sources of funds disclosed in the application (e.g., salary, bonuses, or documented gifts), it raises suspicions that the borrower may be trying to misrepresent their financial position.

The Uniform Residential Loan Application (URLA) or 1003 form requires borrowers to disclose their assets, liabilities, and income sources in detail. Mortgage underwriters will carefully review these disclosures and cross-check them with bank statements to verify the legitimacy of deposits.

According to Fannie Mae’s Selling Guide, large, unexplained deposits need to be sourced and seasoned (i.e., must be in the borrower’s account for a specific period, typically two months) to ensure the funds are legitimate. Unsupported deposits that cannot be explained could indicate that the funds are coming from non-disclosed sources, such as unreported loans, which could impact the borrower’s ability to repay the loan.

Disclosure of gift funds (Option B):

Disclosing gift funds is a legitimate and common source of funds for closing costs and down payments, especially for first-time homebuyers. As long as the gift funds are properly documented (typically via a gift letter from the donor), this would not raise concerns of fraud. Lenders typically require that the gift funds come from a verifiable source, and a gift letter confirming that the funds are a true gift, not a loan that must be repaid, is crucial.

Parental loans disclosed but not yet received (Option C):

If a borrower discloses a loan from a parent but has not yet received the funds, this may raise underwriting concerns about whether the borrower truly has sufficient assets for closing. However, this does not indicate fraud as long as the loan is disclosed. The lender would verify that the loan will be received and accounted for prior to closing. The loan could potentially affect the borrower’s debt-to-income ratio (DTI) but wouldn’t necessarily suggest deception.

Borrower's receipt of a large bonus from an employer (Option D):

Receiving a large bonus from an employer is not in itself suspicious as long as the bonus is documented and can be verified by the lender. Borrowers often use bonuses as part of their qualifying income, and these are acceptable as long as they are stable and likely to continue, as outlined in Fannie Mae or Freddie Mac guidelines. Therefore, this would not indicate fraud unless there was an attempt to misrepresent the amount or source of the bonus.

In conclusion, Option A (Bank deposits that are not supported by income or other disclosures) is the most likely indicator of potential fraud because it involves unexplained and unverified funds, which may suggest misrepresentation of the borrower's financial standing.

Under the Telemarketing Sales Rule, companies are required to access the National Do Not Call Registry at least once every 31 days and must maintain records documenting this process. Solicitors may not call any number on the registry that has been there for 31 days or more.

“You must update your call list every 31 days by accessing the National Do Not Call Registry.”

— FTC, National Do Not Call Registry FAQs

The TILA-RESPA Integrated Disclosure (TRID) rule applies to most closed-end consumer credit transactions secured by real property, including loans on primary residences, second homes, and investment properties. It does not apply to HELOCs, reverse mortgages, or chattel-dwelling loans (like mobile homes not secured by real property).

“TRID applies to most closed-end consumer credit transactions secured by real property. It does not apply to HELOCs, reverse mortgages, or chattel-dwelling loans.”

— CFPB, TILA-RESPA Integrated Disclosure Rule Small Entity Compliance Guide

When obtaining a mortgage loan, title insurance is typically required to protect the lender. The lender’s title insurance policy ensures that the lender has a valid lien on the property and protects against potential claims on the title, such as unpaid property taxes, liens, or ownership disputes.

While owner's title insurance protects the buyer, the lender’s title insurance is required to protect the financial interest of the lender.

A purchase money second mortgage allows a borrower to avoid paying private mortgage insurance (PMI) by using a second loan to cover part of the down payment. This structure, often referred to as a "piggyback loan", is commonly used when a borrower does not have a 20% down payment but wants to avoid PMI, which is typically required for loans with less than 20% down.

The borrower makes payments on both the primary mortgage and the second mortgage, but by keeping the loan-to-value (LTV) on the first mortgage below 80%, they can avoid PMI.

Community second funds are an acceptable source of funds for down payments, closing costs, or financial reserves. These are subordinate loans provided by housing finance agencies, nonprofits, or government entities to help borrowers meet the required down payment or closing costs. These funds are often offered to low-to-moderate income borrowers or first-time homebuyers as part of affordable housing programs.

Virtual currency (A), such as Bitcoin, is not an acceptable source due to its volatility and challenges in verifying its stability.

Personal unsecured loans (C) are generally not allowed, as they increase the borrower’s debt and reduce their financial stability.

Foreign assets outside of the U.S. (D) are not typically acceptable unless they can be easily liquidated and transferred to the U.S.

Interest-only mortgages are considered higher risk compared to traditional mortgages because the borrower’s scheduled payments only cover the interest on the loan, and none of the principal balance is reduced during the interest-only period. As a result, the loan balance remains unchanged, which increases the risk for both the borrower and lender if the value of the home decreases or if the borrower cannot make larger payments when the principal becomes due.

Other risks, such as exceeding the APOR (Average Prime Offer Rate) by a certain margin (C, D), apply to high-cost mortgages, not specifically interest-only loans.

Steering occurs when a loan officer influences or directs a borrower towards a specific loan product or lender based on the compensation the loan officer will receive, rather than the borrower’s best interests. In Option C, the loan officer is steering the borrower to a loan from a particular lender to earn higher compensation, which is prohibited under the Dodd-Frank Act and TILA’s Loan Originator Compensation Rule.

Other options:

Option A describes offering a loan with higher fees, but it does not indicate that compensation is the motive, so it is not a clear example of steering.

Option B and Option D describe fair loan presentation practices.

In an 80/20 loan structure, the borrower obtains two loans: an 80% first mortgage and a 20% second mortgage, often referred to as a "piggyback loan." The 20% loan has second lien priority, meaning it is subordinate to the 80% loan. If the borrower defaults and the property is foreclosed, the lender holding the first mortgage (80%) is paid first, and the second mortgage (20%) is paid from any remaining proceeds.

The first lien is always the larger 80% loan, and the second lien covers the smaller 20% loan.

Temporary authority to originate loans applies to registered MLOs (from a depository institution) who become employed by a state-licensed mortgage company, as well as to state-licensed MLOs seeking licensure in another state, provided they meet all SAFE Act requirements.

“Temporary authority to originate loans applies to… registered mortgage loan originators seeking state licensure and state-licensed MLOs seeking licensure in a new state.”

— SAFE Act, 12 U.S.C. § 5117; NMLS Temporary Authority Guidelines

It does not apply to real estate brokers or those who have not passed required testing/background checks.

Under the Equal Credit Opportunity Act (ECOA), the term "elderly" is defined as anyone who is 62 years of age or older. This designation is significant in fair lending, as the ECOA prohibits discrimination based on age in any aspect of a credit transaction, including mortgage lending.

ECOA protects borrowers from being denied credit or offered unfavorable terms based solely on their age, and it provides additional protections to borrowers considered "elderly."

Under TILA's Right of Rescission, in a federally related mortgage loan (such as a refinance) secured by a primary residence, any person who has an ownership interest in the property has the right to rescind the transaction within three business days after the closing, delivery of the notice of right to rescind, or delivery of all material disclosures, whichever occurs last.

This right applies to all individuals with a legal interest in the property, not just the primary borrower or the person who will occupy the property. This ensures that all owners can consent to the mortgage terms.

The Real Estate Settlement Procedures Act (RESPA) prohibits payment of fees or kickbacks to any party unless that party performs actual, legitimate services related to the origination or processing of a loan. In this case, the MLO did not perform any actual origination services for the borrower, so the fee paid by Bank XYZ to the MLO is not permitted.

RESPA Section 8 prohibits referral fees or any unearned fees. The MLO did not originate the loan or perform any substantive services related to the HELOC, which makes the payment illegal.

An individual who had their MLO license application denied, or had a license revoked or suspended in any governmental jurisdiction, is not eligible for temporary authority to act as a mortgage loan originator (MLO) under the SAFE Act. Temporary authority allows registered MLOs who move to a state-licensed mortgage company to act as MLOs while their application for a state license is being processed. However, individuals with disqualifying events, such as prior license denial or revocation, lose this privilege.

Other options:

Court orders for child support (B) and being a witness in a trial (A) do not disqualify individuals from obtaining temporary authority.

Under TILA-RESPA Integrated Disclosure (TRID) rules, if a lender overcharges the borrower by more than the allowable 10% aggregate tolerance on certain closing costs, the lender must refund the excess amount to the borrower within 60 days of loan consummation. The 10% tolerance applies to certain fees like title insurance and government recording fees, ensuring that the lender provides accurate estimates on the Loan Estimate (LE) and does not exceed allowable variances at closing.

The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act) requires all state-licensed mortgage loan originators (MLOs) to complete annual continuing education (CE) as part of their licensure requirements. This includes 8 hours of CE, covering topics like federal law, ethics, and nontraditional mortgage products.

The goal of the SAFE Act is to ensure MLOs are knowledgeable about regulations, ethical practices, and current mortgage industry trends. Failing to complete the required education can result in a license being suspended or revoked.

Other Acts:

The Dodd-Frank Act (B) sets broader regulations, such as those related to mortgage loan origination compensation.

TILA (C) governs disclosures and loan terms but does not mandate CE.

ECOA (D) focuses on preventing discrimination in credit but does not require CE.

According to the TILA-RESPA Integrated Disclosure (TRID) rule, the borrower must receive the Closing Disclosure (CD) at least 3 business days prior to loan consummation. This waiting period gives the borrower adequate time to review the final terms and costs associated with the mortgage loan. If there are significant changes to the terms of the loan after the CD is issued, a new 3-day waiting period may be required.

For FHA loans, when a borrower’s commission income is 25% or more of total income, the lender must obtain copies of the borrower’s signed federal income tax returns for the previous two years and must also document current commission income.

“Commission income must be averaged over the previous two years. Borrowers whose commission income represents 25 percent or more of their total annual employment income must provide signed tax returns for the previous two years.”

— HUD 4000.1 FHA Single Family Housing Policy Handbook

The Real Estate Settlement Procedures Act (RESPA, Regulation X) applies specifically to loans secured by a 1-4 family residential property (owner-occupied or investment) made by lenders, brokers, or others involved in real estate settlement services. RESPA does not cover auto loans, student loans, or commercial real estate loans.

“RESPA covers loans secured with a mortgage placed on a one-to-four family residential property, including most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit.”

— Consumer Financial Protection Bureau (CFPB): Real Estate Settlement Procedures Act (Regulation X)

Thus, of the choices provided, only residential real estate loans are covered by RESPA.

For a 30-year fixed-rate mortgage with an escrow account, the monthly mortgage payment consists of principal, interest, taxes, and insurance (often referred to as PITI). The principal and interest portions remain constant with a fixed-rate mortgage, but the escrow account is used by the lender to collect and pay property taxes and homeowners insurance premiums on the borrower's behalf.

Escrow accounts are required by many lenders to ensure that taxes and insurance are paid on time. If the annual property taxes and/or homeowners insurance premiums increase, the lender will adjust the amount collected for escrow each month, which will increase the total monthly payment (even though the principal and interest portion stays the same).

“While your principal and interest payment remains the same on a fixed-rate mortgage, your total monthly payment can increase if your property taxes or homeowners insurance premiums increase, since these are typically included in your monthly escrow payment.”

— Consumer Financial Protection Bureau (CFPB): What is an escrow account?

Other options are incorrect:

A. Utility bills are not part of the mortgage payment or escrow.

B. The interest rate does not increase with a fixed-rate mortgage; it remains constant.

D. Servicers do not collect payments for unrelated auto loans with the mortgage.

The MLO must advise the borrower that if they plan to purchase a new home shortly after refinancing, they must disclose this information upfront. Since the terms of the refinance loan require that the borrower occupy the property for 12 months, the MLO should suggest refinancing the current property as a non-owner-occupied loan if the borrower does not intend to stay in the home. This approach ensures compliance with the loan terms and avoids potential mortgage fraud.

Other options (A, B, C) involve potential conflicts of interest or violations of the loan terms.

The debt-to-income (DTI) ratio is a key metric used by lenders to assess a borrower’s ability to manage monthly payments and repay a mortgage. It is calculated by dividing the borrower’s total monthly debt obligations, including:

Monthly housing expenses (principal, interest, taxes, and insurance, also known as PITI).

Any other recurring debt obligations (car loans, student loans, credit card payments, etc.).

This total is divided by the borrower’s gross monthly income (before taxes and deductions). This calculation helps determine whether the borrower meets lending standards, with most lenders preferring a DTI ratio below 43% for qualified mortgages.

When applying for a Home Equity Line of Credit (HELOC), consumers should carefully review the APR and the total costs of acquiring and maintaining the HELOC. The APR reflects the overall cost of borrowing, including interest and certain fees, and is crucial for understanding the long-term expense of the HELOC. Additionally, consumers should consider fees associated with setting up and maintaining the HELOC, such as annual fees, transaction fees, and closing costs.

While HUD insurance (A) and FDIC deposit insurance (C) are unrelated to HELOCs, and private mortgage insurance (B) is generally not required for HELOCs, the APR and fees are critical factors that directly impact the cost of borrowing.

Under the Ability-to-Repay (ATR) rule (TILA § 1026.43), lenders must evaluate specific factors such as income, employment, current debt, alimony, child support, credit history, monthly payment for the loan, and monthly payments on simultaneous loans. However, projected proceeds from the sale of the property securing the loan are explicitly not required (and are generally prohibited from being considered).

“The creditor must not consider the value of, or proceeds from, the sale of the property securing the loan.”

— 12 CFR § 1026.43(c)(4); CFPB ATR/QM Rule

Under the Equal Credit Opportunity Act (ECOA), the term adverse action is defined as a refusal to grant credit based on the requested loan terms, an unfavorable change in loan terms, or a termination of an account/application. This can include:

Denying a credit application.

Offering credit on terms different from those requested.

Closing an existing credit account.

Lenders must provide a formal notice of adverse action, explaining the reasons for the denial or change in terms, to comply with ECOA’s requirements for transparency and fairness.

Other options:

Account closure (B) and credit closure (C) are not specific ECOA terms.

Denial of credit (D) is a form of adverse action but does not cover all situations like a change in loan terms.

Under TRID/Regulation Z, if a borrower requests a change in loan product, this is considered a changed circumstance, and a new Loan Estimate must be provided reflecting the revised terms within three business days.

“A revised Loan Estimate must be provided if a changed circumstance affects the consumer’s eligibility for a specific loan product or terms.”

— 12 CFR § 1026.19(e)(3)(iv)

Regulation Z allows creditors to provide a written estimate of costs before a Loan Estimate is triggered, provided the estimate clearly states that the figures are not binding and are not the official Loan Estimate. The required statement is:

“Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.”

“If a creditor provides a written estimate of terms or costs before providing the Loan Estimate, the creditor must clearly and conspicuously state at the top of the first page, in 12-point font, ‘Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.’”

— 12 CFR § 1026.19(e)(2)(ii), Regulation Z

The right of rescission is a provision under TILA (Truth in Lending Act) that gives borrowers the right to cancel certain types of loans within three business days after closing. This right applies specifically to refinance transactions on a borrower's primary residence, where they are taking cash out or refinancing their mortgage.

Cash-out refinances on a primary residence (C) are subject to the right of rescission because they involve the homeowner's primary residence.

Purchase loans (A) and loans secured by vacation homes (B) or other investment properties are not subject to this rule.

Even if the same creditor is refinancing the loan (Option D), the right of rescission still applies if it's a refinance of the primary residence.

Mortgage loan originators (MLOs) are subject to strict rules regarding compensation to prevent conflicts of interest and protect consumers. According to the Truth in Lending Act (TILA) Regulation Z, Loan Originator Compensation Rule (12 CFR § 1026.36(d)), an MLO may not receive compensation from both the borrower and any other person (such as a creditor or lender) in a single transaction. This is often referred to as the "anti-dual compensation rule" and is designed to prevent situations where an MLO could be incentivized to steer consumers into less favorable loans for higher pay.

"A loan originator may not receive compensation directly or indirectly from both the consumer and another person in connection with the same transaction."

— 12 CFR § 1026.36(d)(2), Regulation Z, Truth in Lending Act

Other options are not prohibited and are actually required or encouraged by law:

B: Presenting best program options is part of an MLO’s fiduciary and ethical duties.

C: Providing required disclosures (e.g., Loan Estimate) within three business days of application is required under TILA/RESPA Integrated Disclosure (TRID) rules.

D: Providing a copy of the credit application is permissible and often requested.

A 2-1 buydown provides for a reduced interest rate for the first two years:

Year 1: Note rate minus 2% (6% - 2% = 4%)

Year 2: Note rate minus 1% (6% - 1% = 5%)

Years 3–30: Note rate (6%)

“In a 2-1 buydown, the interest rate is reduced by 2% the first year and 1% the second year. The third and subsequent years, the rate is the note rate.”

— SAFE MLO National Test Study Guide; CFPB Mortgage Glossary

Under the Homeowners Protection Act (HPA) of 1998, PMI must be automatically terminated by the lender when the principal balance reaches 78% of the original value of the property (based on the original amortization schedule), provided the borrower is current on payments.

“PMI must be automatically terminated by the lender when the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the property, if the borrower is current on payments.”

— 12 USC § 4901-4910, Homeowners Protection Act (HPA)

Private mortgage insurance (PMI) is typically required for conventional first-lien loans when the loan-to-value (LTV) ratio exceeds 80%. That is, when the borrower puts down less than 20% as a down payment.

“PMI is required by lenders on conventional loans with a loan-to-value ratio greater than 80 percent.”

— Homeowners Protection Act of 1998; CFPB PMI Guidance

Under the Equal Credit Opportunity Act (ECOA), age cannot be a basis for discrimination in the loan application process. If borrowers are over 72 years old, the MLO must complete the application and proceed as normal, treating them the same as any other applicant. The MLO should not make assumptions about the borrowers' needs, such as automatically suggesting a reverse mortgage (A) or a home equity line of credit (B). Similarly, there is no obligation for the MLO to inquire specifically about the borrower's ability to repay in the event of death (D), as this would be age discrimination.

A Loan Estimate is considered “expired” if the consumer does not express an intent to proceed within 10 business days after the Loan Estimate is provided, unless a longer period is specified by the creditor.

“If a creditor does not receive an intent to proceed from a consumer within ten business days after the Loan Estimate is provided, the creditor is no longer bound by the Loan Estimate.”

— 12 CFR § 1026.19(e)(3)(iv)(E); CFPB TILA-RESPA Guide

Non-qualified mortgages (Non-QM) are designed to help borrowers who do not meet the standard documentation or income verification requirements of traditional qualified mortgages (QM). Non-QM loans provide more flexibility in underwriting guidelines and are often used by borrowers such as:

Self-employed individuals who may have inconsistent or difficult-to-verify income streams. These borrowers may use bank statements or asset-based verification instead of W-2 forms or tax returns to qualify for a loan.

Non-QMs cater to borrowers who have unique financial situations but still demonstrate the ability to repay. Non-QM loans are not necessarily high-risk but offer alternatives for those who don’t meet the stringent Qualified Mortgage rules.

Other options:

Unemployed individuals (A) typically cannot qualify unless they have alternative forms of income.

No down payment (C): Non-QM loans usually still require a down payment, though the amount may vary.

Living with parents (D) is not a relevant factor in Non-QM lending.

Under the SAFE Act, offering or negotiating the terms of a loan includes presenting specific loan terms to an applicant, whether verbally, in writing, or through any other communication method. This activity directly involves discussing or negotiating loan details like interest rates, loan amounts, and repayment terms, which requires licensure as a mortgage loan originator (MLO).

Providing general explanations (A) and arranging loan closings (D) do not require an MLO license because they do not involve negotiating or offering specific loan terms.

Making underwriting decisions (B) is also a separate activity not considered "offering or negotiating" loan terms.

The Gramm-Leach-Bliley Act (GLBA) prohibits the disclosure of nonpublic personal information about consumers to third parties, except as permitted by law (e.g., for processing the loan). Discussing a consumer’s credit history in a public place where privacy cannot be ensured is a violation of GLBA privacy rules.

“Financial institutions must protect the confidentiality of consumer records and information. Discussing customer information in public or unsecured locations can violate privacy regulations.”

— GLBA Privacy Rule; FTC Compliance Guidelines

Other choices reflect permissible or prudent actions, such as sharing information with authorized third parties or using secure data storage.

When a licensed mortgage loan originator (MLO) shares their commission with another licensed MLO at the same company for actual services performed on a loan, it is referred to as fee splitting.

Fee splitting is legal and permissible under certain conditions, such as when both MLOs are licensed and have contributed to the loan's origination, processing, or closing in a meaningful way. This is different from illegal kickbacks, which are prohibited under RESPA.

Fee splitting must comply with all applicable state laws and company policies to ensure transparency and that all compensation is based on legitimate work performed.

Redlining is an illegal discriminatory practice where lenders refuse to offer credit or offer less favorable terms to residents of certain neighborhoods, often based on race, ethnicity, or national origin.

“Redlining is an illegal practice in which lenders refuse to make loans or provide other services to people in certain neighborhoods based on their race or ethnicity.”

— CFPB, Fair Lending Glossary; Equal Credit Opportunity Act (ECOA)

Under the SAFE Act, mortgage loan originators (MLOs) must complete 8 hours of continuing education (CE) each year to maintain their licenses. The required CE topics include:

3 hours of federal law and regulations.

2 hours of ethics, which must include instruction on fraud, consumer protection, and fair lending.

2 hours on nontraditional mortgage lending standards, which refers to loan products that do not have fixed interest rates, such as adjustable-rate mortgages (ARMs) and other alternative loan types.

1 elective hour, which can vary based on state or company preferences.

The focus on nontraditional mortgage lending helps ensure MLOs understand the complexities and risks of nonstandard loan products.

Under RESPA, a settlement service includes any service provided in connection with a real estate settlement, including the origination, processing, or funding of a federally related mortgage loan. A federally related mortgage loan is defined as any loan (other than temporary financing) secured by a first or subordinate lien on residential real property.

“Settlement service means any service provided in connection with a real estate settlement including but not limited to… the origination of a federally related mortgage loan.”

— 12 CFR § 1024.2, Regulation X

Timeshare, chattel, and unsecured loans are not considered federally related mortgage loans under RESPA.

A rate lock agreement is the document that specifies the time period during which a mortgage lender agrees to hold the interest rate at a certain percentage for the borrower. It guarantees that the rate will not change, even if market interest rates fluctuate, as long as the loan closes within the agreed-upon timeframe.

The loan application (A) initiates the mortgage process, but it does not secure the interest rate.

A preapproval letter (B) gives a preliminary loan approval but does not lock the rate.

The Closing Disclosure (C) provides final loan terms but does not set the rate lock.

To prevent fraud, mortgage companies are required to independently verify information provided in the loan application by contacting third parties not involved in the transaction (e.g., employers, financial institutions). Relying solely on documents supplied by the borrower or MLO can lead to acceptance of falsified information.

“Verification of income, employment, and other borrower information must be obtained directly from third parties not involved in the transaction.”

— Fannie Mae Selling Guide; SAFE MLO National Test Study Guide

An origination fee is considered a finance charge under TILA because it represents the cost of obtaining credit. A finance charge includes all fees that a borrower must pay as a condition of securing a loan, excluding certain exempt fees like notary or appraisal fees.

Notary fees (A) and appraisal fees (C) are typically excluded from the finance charge calculation.

Late payment fees (D) are not considered finance charges; they are penalties for delinquent payments.

Under the SAFE Act, an individual must be licensed as a mortgage loan originator (MLO) if they take a residential mortgage loan application and offer or negotiate terms for compensation or gain. Activities such as only performing clerical or support duties, or acting solely as a real estate broker in their normal capacity, do not require an MLO license.

“The term ‘mortgage loan originator’… means an individual who (i) takes a residential mortgage loan application; and (ii) offers or negotiates terms of a residential mortgage loan for compensation or gain.”

— SAFE Act, 12 USC § 5102(4)

The Uniform Residential Loan Application (URLA/Fannie Mae Form 1003) allows the applicant to select one of the following occupancy types: primary residence, secondary residence, or investment property.

“Occupancy types on the URLA are: Primary Residence, Secondary Residence, Investment Property.”

— Fannie Mae Form 1003: Uniform Residential Loan Application

Under the Appraiser Independence Requirements (AIR), appraisers are obligated to perform their duties free from outside influence or coercion. Asking the appraiser to substantiate a value is permissible because it falls within the scope of ensuring an accurate and credible appraisal. However, it is not permissible to pressure the appraiser into achieving a target value (A) or to withhold payment (B) for unfavorable valuations.

Direct communication between the loan officer and the appraiser (D) may be restricted or controlled to prevent undue influence.

Under TILA/Regulation Z, a finance charge is any charge payable directly or indirectly by the consumer and imposed as a condition of the extension of credit.

“The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable by the consumer and imposed by the creditor as a condition of or an incident to the extension of credit.”

— 12 CFR § 1026.4(a), Regulation Z

If an applicant withdraws the application or the loan is denied by the creditor within three business days of receiving the application, the creditor is not required to provide a Loan Estimate.

“If the creditor determines within the three-business-day period that the application will not or cannot be approved on the terms requested, and notifies the applicant, a Loan Estimate is not required.”

— 12 CFR § 1026.19(e)(1)(iii)

Section 8 of RESPA prohibits giving or accepting anything of value in exchange for referrals of settlement service business related to federally related mortgage loans. Renting office space at lower rates (or free) in exchange for referrals is specifically called out in RESPA guidance as an illegal kickback.

“Section 8(a) of RESPA prohibits giving or accepting any fee, kickback, or thing of value… for the referral of settlement service business. Examples of violations include… renting office space at above or below market rates based on the amount of business referred.”

— 12 CFR § 1024.14; CFPB RESPA Section 8 Guidance

Hosting seminars, sponsoring uniforms, or donating to charity are generally permissible if not conditioned on referrals.

A loan is a Qualified Mortgage (QM) with “safe harbor” legal protection if its APR does not exceed the average prime offer rate (APOR) by more than 100 basis points (1%) for a first-lien transaction.

“A covered transaction is a safe harbor QM if the APR does not exceed the APOR for a comparable transaction by 1.5 or more percentage points for first-lien transactions, or 3.5 percentage points for subordinate-lien transactions. For purposes of safe harbor protection, the threshold is 1 percentage point (100 basis points) above APOR.”

— 12 CFR § 1026.43(e); CFPB QM/ATR Rule Summary

Under the SAFE Act, any activity that involves offering, negotiating, or discussing loan terms with consumers requires licensure as a mortgage loan originator (MLO). Communicating the details of an offer over the phone would require MLO licensure, as it involves explaining or negotiating loan terms.

Providing general information or resources like a Homebuyer's Toolkit (A) or loan policies (B) does not require an MLO license, as these are not specific to negotiating loan terms.

Under the SAFE Act, administrative and clerical duties may be performed by an individual (including a third-party underwriter) if performed at the direction and supervision of a licensed MLO. Origination activities must be done only by licensed MLOs, and company or MLO licensing is state-specific.

“Administrative or clerical tasks performed at the direction and subject to the supervision and instruction of a licensed mortgage loan originator do not require licensure.”

— SAFE Act, 12 U.S.C. § 5102(4)(C)

Under the TILA-RESPA Integrated Disclosure (TRID) rule, fees that are paid to third parties not controlled by the lender, such as property taxes, are not subject to tolerance limits. This means they can change from the Loan Estimate to the Closing Disclosure without restriction.

Lender fees (like tax service or processing fees) and escrow fees (when the borrower did not shop for the service) are subject to zero or 10% tolerance limits.

“Property taxes, homeowners insurance premiums, and similar charges are not subject to any tolerance limitation, and can change between the Loan Estimate and the Closing Disclosure.”

— 12 CFR § 1026.19(e)(3)(iii); CFPB TILA-RESPA Small Entity Compliance Guide

Under the Ability-to-Repay (ATR) Rule and Qualified Mortgage (QM) standards, mortgages with adjustable rates can be considered qualified mortgages if they meet certain criteria, such as having fully amortizing payments and adhering to limits on points and fees. Adjustable-rate mortgages (ARMs) are qualified as long as the borrower’s ability to repay is assessed using the maximum rate that could apply in the first five years.

Loans like interest-only mortgages (A), balloon payment loans (B), and negative amortization loans (C) are not typically considered qualified mortgages because they carry higher risks of default.

A subprime loan is a type of loan offered to borrowers with low credit scores or other risk factors. These loans typically have higher interest rates to compensate for increased risk.

“Subprime loans are made to borrowers who have poor or limited credit histories and pose a higher risk of default.”

— SAFE MLO National Test Study Guide

Under the Truth in Lending Act (TILA) Regulation Z, for a refinance or non-purchase transaction secured by the borrower’s principal dwelling, the right of rescission allows the borrower to rescind the transaction until midnight of the third business day following consummation or delivery of all material disclosures, whichever occurs last.

“The consumer may rescind the transaction until midnight of the third business day following consummation, delivery of the notice of right to rescind, and delivery of all material disclosures, whichever occurs last.”

— 12 CFR § 1026.23(a)(3), Regulation Z

The Consumer Financial Protection Bureau (CFPB) is responsible for regulating mortgage lenders and overseeing their origination practices and procedures. The CFPB was created under the Dodd-Frank Act to protect consumers from unfair, deceptive, or abusive practices in financial services, including mortgages. Its functions include:

Enforcing rules related to mortgage origination, such as TILA, RESPA, and ECOA.

Ensuring that lenders provide clear disclosures and follow fair lending practices.

Other functions:

Regulating the federal funds rate (A) is the role of the Federal Reserve.

Deciding the quantity of mortgage-backed securities purchased by the government (D) is related to Federal Reserve monetary policy, not the CFPB.

The minimum amount of flood insurance required by lenders for a residential building located in a Special Flood Hazard Area (SFHA) is the lesser of:

100% of the replacement cost of the structure, or

The maximum available under the National Flood Insurance Program (NFIP), which is $250,000 for residential property structures.

This requirement ensures that the property is adequately covered in case of flood damage.

The only ethical and legal option for an MLO is to ask the borrowers if they have any additional, previously undisclosed assets that can be documented. All assets used for closing must be sourced and verified.

Editing documents to show false contributions or facilitating undisclosed loans/fake deposits constitutes fraud.

“All assets used for closing must be verified and properly documented… Any undisclosed assets must be evaluated and properly sourced.”

— Fannie Mae Selling Guide B3-4.2-01; SAFE MLO National Test Study Guide

The SAFE Act requires all state-licensed mortgage loan originators (MLOs) to obtain and maintain an active license through their state’s regulatory agency, including meeting annual renewal and continuing education requirements.

“Each mortgage loan originator must obtain a license from, and annually renew a license with, the State in which the mortgage loan originator maintains a unique identifier.”

— SAFE Act, 12 U.S.C. § 5104(a)(1)-(2)

AARMR and CSBS administer the NMLS system, but licenses are maintained through state agencies. While re-taking the national test is required after some periods of inactivity, it is not required specifically after failing to maintain a license for four years unless mandated by the state.

FHA loans are available for primary residences, including manufactured homes, if they meet HUD standards. FHA loans are not available for vacation homes, investment properties, bed and breakfasts, or commercial real estate.

“FHA will insure mortgages on manufactured homes that are principal residences and meet HUD requirements.”

— HUD 4000.1 FHA Single Family Housing Policy Handbook

The Bank Secrecy Act (BSA) requires mortgage lenders and other financial institutions to adopt anti-money laundering (AML) policies to detect and prevent money laundering and other financial crimes. Under BSA, lenders must:

Implement a written AML compliance program.

Report suspicious activities using Suspicious Activity Reports (SARs).

Maintain records and report large cash transactions to prevent illegal financial activities such as money laundering and fraud.

Other laws mentioned:

The National Bank Act and National Currency Act focus on the regulation of national banks.

The Real Estate Settlement Procedures Act (RESPA) addresses settlement and disclosure requirements but does not cover AML rules.

According to the SAFE Act, state-licensed MLOs must complete at least eight hours of approved continuing education annually, including three hours of federal law and regulations, two hours of ethics (which includes instruction on fraud, consumer protection, and fair lending), and two hours of training on nontraditional mortgage products.

“The annual continuing education requirement must include at least—(A) 3 hours of Federal law and regulations; (B) 2 hours of ethics, including instruction on fraud, consumer protection, and fair lending issues; (C) 2 hours of training related to lending standards for the nontraditional mortgage product marketplace.”

— SAFE Act, 12 U.S.C. § 5105(b)(2)(A)-(C)