CHAPTER 1: BECOMING AN MLO

Question 1

What did the federal reserve establish?

Answer 1

a federal charter for banks that permitted them to make real estate loans, which established a framework for government involvement in mortgage lending.

Question 2

What act was created to help the housing industry recover from the Great Depression?

Answer 2

the National Housing Act created the Federal Housing Administrative (FHA) in 1934

Question 3

A mortgage loan originator (MLO) is

Answer 3

• An individual who for compensation or gain or in
the expectation of compensation or gain.
• Takes a residential mortgage loan application; or
• Offers or negotiates terms of a residential
mortgage loan.

Question 4

An MLO does not include:

Answer 4

• An individual engaged solely as a loan processor or
underwriter except if they are an independent
contractor.
• A person or entity that only performs real estate brokerage activities and is licensed
or registered per [State] law, unless the person or entity is compensated by a lender,
a mortgage broker, or other mortgage loan originator or by any agent of such
lender, mortgage broker, or other mortgage loan originator; and
• Does not include a person or entity solely involved in extensions of credit relating to
timeshare plans.

Question 5

Real estate brokerage activity: For purposes of this Act the term “real estate brokerage
activity” means any activity that involves offering or providing real estate brokerage
services to the public, including:

Answer 5

• Acting as a real estate agent or real estate broker for a buyer, seller, lessor, or lessee
of real property.
• Bringing together parties interested in the sale, purchase, lease, rental, or exchange
of real property.
• Negotiating on behalf of any party, any portion of a contract relating to the sale,
purchase, lease, rental, or exchange of real property (other than to provide
financing with respect to any such transaction).
• Engaging in any activity for which a person engaged in the activity is required to be
registered or licensed as a real estate agent or real estate broker under any
applicable law; and
• Offering to engage in any activity or act in any capacity described above.

Question 6

There are registered mortgage loan originators. A registered mortgage loan originator is
an individual who:

Answer 6

• Meets the definition of the mortgage loan originator and is an employee of—
o A depository institution.
o A subsidiary that is:
o Owned and controlled by a depository institution
o Regulated by a Federal banking agency; or
o An institution regulated by the Farm Credit Administration; and
o All mortgage bankers and mortgage brokers (they must also be licensed)
• Is registered with and maintains a unique identifier.

Question 7

What is the NMLS?

Answer 7

is a registration system that was developed and maintained by the Conference of
State Bank Supervisors (CSBS) and the American Association of Residential Mortgage
Regulators (AARMR). It stores the information for each licensee.

Question 8

What is sponsorship?

Answer 8

To be licensed as an MLO, an individual is required to be sponsored
(employed) by a mortgage lender or broker. If the applicant is not sponsored, they will not be
able to obtain an active license. Sponsorship requests go through the NMLS. An MLO can be
sponsored by only one company and not operate as an independent contractor with multiple
companies.

Question 9

What would be considered a clerical or support duty? “Clerical or support duties” can
include, after the receipt of an application:

Answer 9

• The receipt, collection, distribution, and analysis of information common for the
processing or underwriting of a residential mortgage loan.
• Communicating with a consumer to obtain the information necessary for the processing
or underwriting of a loan, as long as the communication does not include offering or
negotiating loan rates or terms, or counseling consumers about residential mortgage loan
rates or terms.

Question 10

Big players on the secondary market are:

Answer 10

• The Federal National Mortgage Association (FNMA, Fannie Mae).
• The Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac); and
• The Government National Mortgage Association (GNMA, Ginnie Mae).

Question 11

This process is called the mortgage loan life cycle. There are three stages:

Answer 11

• The first stage is the borrower decides to obtain a mortgage loan; they are financially
capable and ready to buy their home.
• The second stage is the primary market; this is when the borrower goes to a lender or a
broker to obtain a loan, and the lender originates the loan.
• The third stage is the secondary market that allows the lender to replenish their cash by
selling the loan to an investor (like Fannie Mae or Freddie Mac).

Question 12

What is a surety bond?

Answer 12

A surety bond is a lot like malpractice insurance for a doctor. If a
doctor does something negligent or harmful to a patient and that patient sues the doctor and wins,
the doctor’s malpractice insurance typically covers the judgment. A surety bond does a similar
job just for MLOs and the entities that they work for. If an MLO or an entity does something
harmful to a borrower and that borrower sues them and wins, that borrower will be paid out by
that surety bond

Question 13

There are a lot of things that go into the

decision, and each applicant must meet specific criteria. Those criteria include:

Answer 13

• No license revocation – an applicant cannot have ever had an MLO license revoked in
any state previously. The only exception would be if the revocation was vacated.
• No felony conviction – an applicant cannot have been convicted of, or pled guilty or no
contest to any felony (in any type of court) in the past seven years or EVER if the crime
involved an act of fraud, dishonesty, breach of trust or money laundering
• A non-financial felony, the applicant would be eligible after waiting seven (7) years from
the date of the conviction.
• An applicant must demonstrate financial responsibility, character, and general fitness that
commands the confidence of the community and warrants the determination that the
MLO will operate honestly, fairly, and efficiently within the purposes of the law.
• Pre-Licensing Education – the applicant must have completed their continuing education
requirements
• Testing –the applicant must have passed the National Test Component with UST.
• Net Worth, Surety Bond, or State Fund Requirement – the applicant must have satisfied
that requirement.

Question 14

Some of the things that are taken into consideration when determining whether an
applicant is financially responsible are:

Answer 14

• Current outstanding judgments (except medical judgments)
• Current outstanding tax liens or other government liens or filings
• Foreclosures within the past three years
• A pattern of seriously delinquent accounts within the past three years
• Some states require that your child support is paid up to date

Question 15

What does temporary authority allow for?

Answer 15

an MLO licensed in another state, to operate in a new
state while the license application is processed. Temporary authority can also be used by a
registered MLO to transition to a licensed MLO or moving from a financial institution to a nonfinancial company without having to wait for their license application to be approved (note: they
have to be already employed by a state-licensed broker or lender). The MLO has to meet specific
criteria to be eligible

Question 16

How renew your license?

Answer 16

• Continue to meet the minimum standards for licensure (including financial responsibility
and a clean criminal background – you may have to do updated credit reports or criminal
background checks).
• Satisfy the continuing education requirements.
• Pay all required renewal fees. (The cost for renewal varies by state)

Question 17

What does the Loan Orginator Compensation Rule Prohibit?

Answer 17

prohibits compensation based on terms or

fees of a transaction or a proxy of a term of a transaction

Question 18

A loan originator receives compensation if the borrower uses one title company over another.
There are safe harbor types of compensation provided for in this rule:

Answer 18

The loan originator’s overall dollar volume.
• The long-term performance of the originator’s loans.
• An hour pay rate based on the actual number of hours worked.
• Loans made to new customers versus loans to existing customers.
• A payment that is fixed in advance for every loan the originator arranges.
• The percentage of the loan originator’s applications that close.
• The quality of the loan originator’s files submitted.

Question 19

What is Steering?

Answer 19

Steering in the sense of actions that mortgage loan originators take that is like steering a
car.

Question 20

The Recession of 2008 brought about many changes to the mortgage industry through the
passing of _______________.

Answer 20

The Dodd-Frank Wall Street Reform Act.

Question 21

Dodd-Frank implemented __________________________.

Answer 21

MLO compensation rules, created CFBP and MLO contact of

appraisers.

Question 22

What did the safe act implement?

Answer 22

NMLS, registration of all MLO’s and the licensing of
MLO’s working for non-financial companies. SAFE stands for Secure and Fair
Enforcement

Question 23

Fannie Mae (FNMA)

Answer 23

a government sponsored entity that buys only Conventional

Conforming Loans and is overseen by Federal Housing Finance Agency (FHFA).

Question 24

Freddie Mac (FHLMC)

Answer 24

a government sponsored entity that buys only Conventional

Conforming Loans and is overseen by Federal Housing Finance Agency (FHFA).

Question 25

Fannie & Freddie place the loans into a ___________ and is sold into the ___________.

Answer 25

1. Mortgage BAcked Security (MBS)

2. Secondary Market

Question 26

Ginnie Mae

Answer 26

is a government agency that places closed government loans (FHA, VA),
into Mortgage backed Securities, to be sold into the Secondary Market

Question 27

Mortgage Brokers cannot

Answer 27

underwrite or fund loans.

Question 28

Mortgage Bankers can

Answer 28

fund and underwrite loans. Also, called a Mortgage Lender

Question 29

NMLS stands

Answer 29

Nationwide Multistate Licensing System and Registry.

Question 30

Wholesaler/wholesale lending is

Answer 30

the lender underwriting and funding Mortgage Broker

loans

Question 31

Obtaining a License as an MLO:

Answer 31

• Any person that takes applications, negotiates terms or expects compensation on the
loan, is required to be licensed.
• Any person looking to be licensed, must:
o Take a 20-hour Pre-licensing course
▪ 3 Hours of federal law
▪ 3 Hours of ethics
▪ 2 hours of non-traditional
▪ 12 hours of mortgage related topics
o Pass the National Test Component with UST with a passing grade of at 75%,
▪ The UST test is 125 questions,
▪ 10 are thrown out,
▪ You have to obtain a 75% score of 115 question (88 questions right or
more).
o Complete a background check (provide fingerprints)
o Complete application for licensure (MU4 for MLOs, MU1 for companies)
o Be covered by a surety bond, meet a net worth or state fund requirement and.
o Be sponsored by a licensed entity.
• Every MLO must have a Unique Identifier (AKA, NMLS ID#)
• If your license is inactive for over 3-5 years, you may have to take the 20-hour PE course
(3-year expiration) and possibly retake eh NMLS test (5-year expiration).
• Within ten (10) business days from any change in your contact, legal or credit situation,
you must go into you MU4 and make the changes. The state may fine or suspend if you
do not keep your account up to date.
• Disqualifications for Licensure include:
o License revocation in another state.
o Lack of financial responsibility.
o Felony’s in the past 7 years (or at any time for specific reasons – like fraud); and
o Failure to complete any of the necessary requirements.

Question 32

Maintaining a License as an MLO:

Answer 32

• MLOs (and company licensees) have to renew their licenses yearly by December 31.
• If you miss renewal, your state may allow you could have the option to apply for
reinstatement (this is not true for all states).
• To be eligible for renewal you must:
o Complete Continuing Education (CE) – 8 hours annually plus any state required
law.
▪ 3 hours of federal law.
▪ 2 hours of ethics.
▪ 2 hours of non-traditional.
▪ 1 hour of elective or state specific education.
o Pay your renewal fee (varies by state)
o Continue to meet the requirements for initial licensure (i.e. remain financially
responsible, have a clean criminal record and no license revocations)

Question 33

Prohibited Acts:

• Avoid things like:

Answer 33

o Fraud
o Collecting a fee for best efforts
o Threatening, bribing or refusing to pay a third party (like an appraiser, an
underwriter your borrower)
o Don’t forget all the disclosures
o Make sure what your advertising is actually available and avoid bait and
switch tactics
o Unlicensed activity is prohibited
o Always account for your borrower’s money – don’t use it to pay your car
payment!

Question 34

Disciplinary Action & Enforcement:

Answer 34

• The NMLS and CFPB have authority to audit and exam any company or MLO, that they
feel is putting the consumer at risk.
• Each state has a Commissioner and state regulatory authority who can examine or
investigate a license
• Examination = routine audit for compliance
• Investigation = triggered by a complaint or belief that violations are occurring
• The maximum fine is $25,000 per violation per the SAFE Act

Question 35

Loan Originator Compensation:

Answer 35

• Passed in 2014; mandated by the Dodd-Frank Act.
• No loan originator compensation based on “terms” or a proxy for a term.
• No steering.
• No dual compensation.
• Keep records on compensation for three (3) years.
• NMLS ID #’s must appear on applications.
• The MLO shows the consumer’s loan offers for each type of transaction that the consumer expresses interest in, and the loan options presented to the consumer include
the following:
o The lowest interest rate for which the consumer qualifies.
o The lowest points and origination fees, and
o The lowest rate the consumer qualifies for a loan with no risky features, such
as a prepayment penalty, negative amortization, or a balloon payment in the
first seven years.
• There are permissible bonuses and contributions to a designed tax advantage plan