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NMLS Exam > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

Which of the following is intended to ensure that consumers are provided with information on the nature and costs of the settlement process?

FCRA
HPA
HOEPA
RESPA

A

The answer is RESPA. The purpose of RESPA and Regulation X is to help consumers become better shoppers for settlement (closing) services by providing them with information on the nature and costs of the settlement process. RESPA and Regulation X are also intended to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.

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2
Q

Which of the following best describes a loan with a principal balance exceeding Fannie Mae or Freddie Mac guidelines?

  1. Subprime
  2. Jumbo
  3. Illegal
  4. Balloon
A

The answer is jumbo. Conventional loans that conform to the eligibility guidelines for purchase by Fannie Mae or Freddie Mac are considered conforming loans. Fannie Mae and Freddie Mac have a maximum loan limit for loans they will purchase, which is adjusted annually. Loans to persons with satisfactory credit but that exceed this loan limit are called jumbo loans or nonconforming loans. Because these loans cannot be sold to Fannie Mae or Freddie Mac, they often have a higher interest rate than conforming loans.

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3
Q

A borrower receives $1,000 per month in rental income. How much of the income may be used to qualify the borrower for a loan?

  1. $1,000
  2. $800
  3. $750
  4. $1,250
A

The answer is $750. Generally, 75% of rental income may be used to qualify a borrower for a loan. This formula is based on an industry standard that taxes, insurance, and maintenance costs will equal about 25% of the income that a property generates. In this case, 75% × $1,000 = $750.

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4
Q

Assume a borrower completes an online loan application, including all six required elements, but never hits “submit.” Which of the following is true regarding the lender’s obligation to issue a Loan Estimate?

  1. The lender must issue a Loan Estimate within three days of the borrower’s submission of the last required piece of information
  2. The lender is not required to issue a Loan Estimate
  3. The lender is required to issue a Loan Estimate once it realizes all six pieces of information have been submitted
  4. The lender is required to contact the borrower
A

The answer is the lender is not required to issue a Loan Estimate. A lender must provide the Loan Estimate either in person or by placing it in the mail no more than three business days after receipt of the consumer’s application AND no later than seven business days prior to consummation. If a loan application has not been submitted, a lender is not required to issue a Loan Estimate.

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5
Q

The Red Flags Rule identifies all of the following as possible red flags, except:

  1. The borrower is buying an investment property
  2. The borrower fails to respond to a request for additional information
  3. The borrower’s identification looks altered
  4. The borrower’s address is invalid
A

The answer is the borrower is buying an investment property. The Red Flags Rule requires financial institutions (including mortgage lenders) that hold any consumer account, or other account for which there is a reasonably foreseeable risk of identity theft, to develop and implement an Identity Theft Prevention Program. Signs indicating possible identity theft include presentation of suspicious documents and personal identifying information (e.g., an address that does not match any address in the consumer report). Buying an investment property is not, in itself, a red flag.

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6
Q

Under which of the following circumstances would the lender on a conventional loan be required to drop the mortgage insurance?

  1. The appraised value has increased, giving the borrower 20% equity, and the borrower has made their first 12 consecutive payments
  2. The appraised value has increased, giving the borrower 10% equity, and the borrower has made their first 24 consecutive payments
  3. The loan reaches 78% LTV based on the original purchase price
  4. The loan reaches 70% LTV based on a new appraisal, and the borrower requests cancellation
A

The answer is the loan reaches 78% LTV based on the original purchase price. Generally, a conventional loan of up to 80% of the property’s value will be made without private mortgage insurance. The annual premiums and the insurance stop automatically once the loan is paid down to 78%, or may be canceled at the borrower’s request once the loan balance reaches 80% of the value of the property at the time the loan was made.

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7
Q

The S.A.F.E. Act applies to mortgage loan originators who take applications for, or offer or negotiate terms of, residential mortgage loans, which would include:

  1. Land to be used for agricultural purposes
  2. An apartment building with 30 units
  3. A dwelling not secured by a mortgage or trust deed
  4. A mobile home to be used as a residence, even if it is not attached to the land
A

The answer is a mobile home to be used as a residence, even if it is not attached to the land. The S.A.F.E. Act defines a mortgage loan originator as an individual who takes residential mortgage loan applications, or offers or negotiates terms of residential mortgage loans for compensation or gain. The S.A.F.E. Act’s definition of “residential mortgage loan” includes a loan secured by a consensual security interest on a dwelling and cross-references the definition of the term “dwelling” in the Truth-in-Lending Act (TILA). Regulation Z, which implements TILA, defines a dwelling as a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.

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8
Q

What is Freddie Mac’s automated underwriting system called?

  1. Desktop Originator
  2. Underwriter Assistant
  3. Loan Product Advisor
  4. AUS
A

The answer is Loan Product Advisor. Freddie Mac’s automated underwriting system is called Loan Product Advisor (formerly known as Loan Prospector), while Fannie Mae’s is called Desktop Underwriter.

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9
Q

Which of the following situations would be acceptable under RESPA?

  1. A mortgage loan originator requires all borrowers to use an appraisal company which is owned by the mortgage loan originator’s mortgage company, though this ownership is not disclosed
  2. A mortgage loan originator requires all borrowers to use his son’s title company and takes an undisclosed share in profits from that company
  3. A mortgage loan originator refers all borrowers to use the title company which is located in the same building as the mortgage loan originator, but with which the mortgage loan originator or the mortgage loan originator’s company has no other relationship
  4. A mortgage loan originator does not require the use of a certain title company, but receives a financial bonus from a certain title company if the borrowers that she refers use that provider
A

The answer is a mortgage loan originator refers all borrowers to use the title company which is located in the same building as the mortgage loan originator, but with which the mortgage loan originator or the mortgage loan originator’s company has no other relationship. An affiliate relationship exists when one company controls, is controlled by, or is under common control of another company. Under RESPA, when a settlement service provider refers a borrower to one or more affiliates with whom it has an ownership or other beneficial interest, an Affiliated Business Arrangement (AfBA) Disclosure Statement must be given on a separate piece of paper to the borrower. Among other things, the AfBA Disclosure informs the borrower that he/she is generally not required to use the affiliate and is free to shop for other providers. Kickbacks and referral fees are also prohibited under RESPA.

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10
Q

Which of the following contains only items which should be used in calculating a borrower’s debt-to-income ratio?

  1. Monthly rent expense on current home, credit card payment, car insurance
  2. Car payment, boat payment, child support obligations
  3. Property tax payment, utility payment, cable bill
  4. Mortgage insurance payment, average grocery costs, electric bill
A

The answer is car payment, boat payment, child support obligations. A debt-to-income ratio compares an applicant’s total monthly debt to his or her total monthly income. Total monthly debt would include simultaneous loans, debt obligations, alimony, and child support. Typical living expenses (e.g., utilities, health and disability insurance, food, phone or cable bills, etc.) are not included when calculating DTI.

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11
Q

Which of the following would NOT be required if a mortgage company wishes to utilize electronic signatures on required disclosures?

  1. Borrowers must be given the option to receive the disclosures in paper form
  2. Borrowers must be able to withdraw their consent to receive the disclosures electronically
  3. The company must record the IP address from which the documents were accessed
  4. The company must disclose hardware and software requirements to borrowers
A

The answer is the company must record the IP address from which the documents were accessed. Under the Electronic Signatures in Global and National Commerce Act (the E-SIGN Act), before obtaining a consumer’s consent, a financial institution must provide a clear and conspicuous statement to consumers, informing them of their right or option to have the record provided or made available on paper or in a non-electronic form. The statement must also explain the consumer’s right to withdraw consent, including applicable conditions, consequences, and fees. Consumers must also be provided with information about the hardware and software required to allow them to access and retain the electronic records.

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12
Q

A loan originator is discussing the features of a home equity consolidation loan with an applicant. In doing so, he relays to the applicant that the interest on the loan is tax deductible. This is:

  1. Permissible, as the interest on any loan secured by real estate is tax deductible
  2. Permissible, as the interest on any home equity loan is tax deductible
  3. Not permissible, as the advice is wrong
  4. Not permissible, as the loan originator is not qualified to provide tax advice
A

The answer is not permissible, as the loan originator is not qualified to provide tax advice. From an ethical and legal standpoint, loan originators must take care not to provide borrowers advice on topics for which they lack the required qualifications, such as tax advice and other legal matters.

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13
Q

A loan which allows the borrower to take a lump sum distribution without any monthly repayment requirements is a(n):

  1. HECM
  2. HELOC
  3. Pay-option mortgage
  4. Equity mortgage
A

The answer is HECM. The FHA’s home equity conversion mortgage (HECM) is a reverse mortgage that enables an individual aged 62 or older to convert some of the equity in his/her primary residence to cash to pay living expenses, or to purchase a primary residence if he/she has the cash for a down payment and closing costs. The HECM requires no repayment until either the property is sold or the owner dies, permanently moves, fails to live in the house for 12 consecutive months, or fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).

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14
Q

Under the S.A.F.E. Act, a licensed loan originator’s responsibilities with regard to recordkeeping include all of the following, except:

  1. Not knowingly withholding, removing, or destroying any books or records
  2. Making all of the licensee’s records available to borrowers upon demand
  3. Permitting interviews of principals, loan originators, and independent contractors by state regulators
  4. Making records and books available to the state regulator
A

The answer is making all of the licensee’s records available to borrowers upon demand. Licensed loan originators and those required to be licensed must make records and books available to their state regulator and permit interviews of officers, principals, employees, independent contractors, agents, and customers. They may not knowingly withhold, abstract, remove, mutilate, destroy, or secrete any books, records, or other information during an investigation or examination. Loan originators are not required to make all of their records available to borrowers upon demand.

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15
Q

Which of the following pieces of information is NOT found on the 1003?

  1. Appraised property value
  2. Underwriter’s name
  3. Borrower’s Social Security Number
  4. Subject property address
A

The answer is underwriter’s name. Categories of information required on the Uniform Residential Loan Application, or Form 1003, include mortgage type and loan terms, property information and loan purpose, and borrower information. It includes information about the subject property and the borrower (such as Social Security Number and appraised property values), but the underwriter’s name is not a required part of the application and is unlikely to appear.

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16
Q

Which of the following federal regulations prohibits discrimination based on race, color, religion, sex, marital status, or national origin in a credit transaction?

  1. Regulation C
  2. Regulation B
  3. Regulation Z
  4. Regulation G
A

The answer is Regulation B. Regulation B implements the provisions of the Equal Credit Opportunity Act (ECOA), which ensures that all persons, consumers, and businesses are given an equal chance to obtain credit by prohibiting discrimination based on criteria including race, color, religion, national origin, sex, marital status, and age (provided the individual is of age to enter into a contract).

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17
Q

According to the standard deed of trust, how soon must a borrower on an owner-occupied loan occupy the property?

  1. Within 30 days of closing
  2. Within 90 days of closing
  3. Within 60 days of closing
  4. Within 15 days of closing
A

The answer is within 60 days of closing. Under most deeds of trust, including most FHA and VA loans, a borrower who intends to occupy the property as his/her residence must move in within 60 days after closing.

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18
Q

Which of the following deals most specifically with representations made in mortgage advertising?

  1. Regulation X
  2. HMDA
  3. MAP Rule
  4. E-SIGN Act
A

The answer is MAP Rule. The Mortgage Acts and Practices Rule (MAP Rule or Regulation N) deals specifically with prohibited material misrepresentations in any commercial communication, including advertising, regarding the terms of mortgage credit products.

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19
Q

All of the following would be common activities in fraud for housing, except:

  1. Flipping
  2. Asset fraud
  3. Income and employment fraud
  4. Silent second
A

The answer is flipping. Asset fraud, income and employment fraud, and silent seconds (in which a borrower secretly borrows needed funds from the seller secured by an undisclosed and unrecorded second mortgage) are all associated with fraud for housing. In contrast, flipping is usually associated with predatory lending, rather than property fraud.

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20
Q

A mortgage in which a large, one-time payment is made at the end of a loan term is known as a:

  1. Fixed-rate loan
  2. Hybrid ARM
  3. Fully-amortized loan
  4. Balloon mortgage
A

The answer is balloon mortgage. In a balloon mortgage, a large portion of the borrowed principal is repaid in a single payment at the end of the loan period.

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21
Q

A loan originator license applicant must pass the NMLS-required examination with a score of at least __ percent.

  1. 70
  2. 80
  3. 85
  4. 75
A

The answer is 75. Mortgage loan originator license applicants must pass an exam developed by NMLS and administered by an approved test provider with a score of at least 75%.

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22
Q

In a mortgage transaction subject to RESPA that is secured by the consumer’s dwelling, a Loan Estimate must be delivered or mailed within three business days after receipt of a written application and no later than:

  1. Three business days before the transaction is consummated
  2. The fifth business day before the transaction is consummated
  3. The seventh business day before the transaction is consummated
  4. The date the transaction is consummated
A

The answer is the seventh business day before the transaction is consummated. A creditor must provide the Loan Estimate no later than three business days after receipt of the consumer’s application AND at least seven business days prior to consummation.

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23
Q

What is the tolerance allowed for variances in the APR disclosure required by the Truth-in-Lending Act in a regular transaction?

  1. 1%
  2. 0.125%
  3. .25%
  4. $200
A

The answer is .125% (one eighth of one percent). The APR is considered accurate if it is not more than one eighth of one percentage point above or below the APR determined in accordance with legal requirements (i.e., in accordance with the actuarial method or the United States Rule method), or if it is not more than .25% (one quarter of one percentage point) above or below the APR for an irregular transaction.

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24
Q

Which of the following would convey a property?

  1. Deed rider
  2. Warranty deed
  3. Note
  4. Deed of trust
A

The answer is warranty deed. A warranty deed conveys full ownership of land, and is commonly used in purchase and sales transactions of real estate. In addition to conveying property ownership, a warranty deed contains the promise of clear title, meaning the property is free of encumbrances.

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25
Q

With respect to FHA loans, the FHA:

  1. Guarantees the loans, thereby protecting the lender
  2. Acts as the lender
  3. Issues private mortgage insurance
  4. Insures the loans, thereby protecting the lender
A

The answer is insures the loans, thereby protecting the lender. FHA loans are loans that meet FHA program criteria and are made by approved lenders. For these loans, the FHA insures the issuing lender against loss in the event of default. Under the FHA program, the lender can charge whatever points and interest a borrower is willing to pay, as the cost of the loan is negotiable. The advantage to the borrower is that the lender will make the loan with a very high loan-to-value ratio because it is insured.

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26
Q

A mortgage broker and mortgage loan originator’s duties to the lender include all of the following, except:

  1. Expediting processing so the loan can close within the period of any rate-lock
  2. Processing applications based on the lender’s underwriting guidelines
  3. Originating loans only for those applicants which promise most profit for the lender
  4. Guarding against mortgage loan fraud and other practices that may harm the lender
A

The answer is originating loans only for those applicants which promise most profit for the lender. Mortgage brokers and mortgage loan originators must diligently perform the services expected by the lender, including processing applications based on the lender’s underwriting guidelines, following up to ensure conditions contained in commitment letters are satisfied in a timely manner, expediting processing so the loan can close within the period of any rate-lock, carrying out any cancellation procedures competently and professionally, and guarding against mortgage loan fraud and other practices that may harm the lender or investor purchasing the loan.

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27
Q

If a borrower’s reserve account for taxes and insurance is found to be short or deficient by an amount in excess of one month’s worth of deposits, which of the following is true?

  1. The escrow account will be cancelled
  2. The lender can require the borrower to make up the shortage over the next 12 months
  3. The lender can require the borrower to make up the shortage over the next six months
  4. The borrower must remit the shortage to the lender within 90 days of notice of the shortage
A

The answer is the lender can require the borrower to make up the shortage over the next 12 months. If the escrow account is short by more than 1 month, the lender can choose to do nothing or require repayment of the shortage over a minimum of 12 months.

If an escrow account analysis discloses a shortage of less than one month’s escrow account payment, the lender or servicer may allow the shortage to exist and do nothing to change it, require the borrower to repay the shortage amount within 30 days, or require the borrower to repay the shortage amount in 2 or more equal monthly payments.

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28
Q

A licensed mortgage loan originator:

  1. Performs clerical and support duties for his/her sponsoring broker
  2. Advises loan applicants on current rates and loan terms
  3. May take responsibility for servicing a loan after it has been consummated
  4. Negotiates the sale and purchase of residential real estate
A

The answer is advises loan applicants on current rates and loan terms. The S.A.F.E. Act defines a mortgage loan originator as an individual who takes a residential mortgage loan application, or offers or negotiates terms of a residential mortgage loan for compensation or gain. The S.A.F.E. Act provides that an individual assists a consumer in obtaining or applying to obtain a residential mortgage loan by, among other things, advising on loan terms, including rates, fees, and other costs; preparing loan packages; or collecting information on behalf of the consumer with regard to a residential mortgage loan.

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29
Q

Which of the approaches to appraisal compares the subject property to similar properties in order to arrive at a value?

  1. Income approach
  2. Market approach
  3. Cost approach
  4. Regression approach
A

The answer is market approach. The market or market data approach, also called the sales comparison approach, bases the value of a property on the prices paid for similar, or comparable, properties in the area that have sold recently. It is the most reliable method for appraising single-family homes and land.

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30
Q

A lender originally discloses an APR of 6.08%. When the lender begins to prepare closing documents, they realize the actual APR is 6.135%. Which of the following is true?

  1. The lender must re-disclose and wait three business days from mailing the disclosures before closing the transaction
  2. The lender must re-disclose and wait three business days from the borrower’s receipt of the disclosures before closing the transaction
  3. The lender must re-disclose and wait six calendar days from mailing the disclosures before closing the transaction
  4. The lender has no obligation to re-disclose
A

The answer is the lender has no obligation to re-disclose. The APR is considered accurate if it is not more than one eighth of one percentage point (.125%) above or below the APR determined in accordance with legal requirements, or if it is not more than one quarter of one percentage point (.25%) above or below the APR for an irregular transaction. In this case, the difference between the disclosed APR and the actual APR is within the limits of this tolerance, and does not require re-disclosure.

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31
Q

A borrower obtains a one-year ARM which starts at 4.0% and has a margin of 3.0% and 2/6 caps. At the end of the first year, the index is 5.0%. What is the interest rate after the first adjustment?

  1. 7%
  2. 6%
  3. 8%
  4. 9%
A

The answer is 6. When the interest rate adjusts, the new rate is the lower of index + margin (in this case, 5 + 3 = 8) and the current rate + cap (in this case, 4 + 2 = 6). Therefore, after the first adjustment, the interest rate would be 6%.

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32
Q

Combining stated income with a nontraditional mortgage product is an example of:

  1. Risk optimization
  2. Risk premium
  3. Risk layering
  4. Risk enhancement
A

The answer is risk layering. Risk layering refers to combining, or layering, high-risk loan features, which might include an interest-only or other non-conventional loan, reduced documentation, and a simultaneous second-lien loan.

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33
Q

Ethics:

  1. Is a branch of philosophy dealing with legal behavior
  2. Provides a guideline for answering questions when a choice of actions is available
  3. Defines how a person must act
  4. Is set out in law
A

The answer is provides a guideline for answering questions when a choice of actions is available. Ethics goes beyond what is required under the law, so ethical rules extend beyond the minimum legal standards in providing guidance for one’s actions. Ethics goes into the realm of what should be done, providing guidelines for answering questions when a choice of actions is available. As a result, ethical rules are often not as clear-cut as the legal rules.

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34
Q

Which of the following is true of the Loan Estimate?

  1. It should only be used for reverse mortgages
  2. It replaces the HUD-1 Settlement Statement and the final TIL Disclosure
  3. It replaces the GFE and the early TIL Disclosure for most transactions
  4. It is always identical to the Closing Disclosure
A

The answer is it replaces the GFE and the early TIL Disclosure for most transactions. The Loan Estimate replaces RESPA’s GFE and the early TIL Disclosure for most transactions. It combines the information provided by these two disclosures and is designed to help the consumer understand the key features, costs, and risks of the loan for which they are applying. It is not identical to the Closing Disclosure, which sets forth the actual costs of the subject mortgage lending transaction, rather than estimates.

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35
Q

Which of the following would be equal to one half of one discount point (.005) on a loan amount of $250,000?

  1. $5,000
  2. $1,250
  3. $2,500
  4. $1,000
A

The answer is $1,250. One discount point is equal to 1% (.01) of the loan amount. Therefore, a charge of 0.005 (one half of one point) on a $250,000 loan is 0.5% (.005) × $250,000 = $1,250.

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36
Q

Which of the following types of mortgages typically carries two different types of mortgage insurance?

  1. VA
  2. Conventional
  3. Subprime
  4. FHA
A

The answer is FHA. In FHA loans, the FHA insures the issuing lender against loss in the event of default. The FHA funds the insurance from a mortgage insurance premium (MIP) charged to the borrower. Most FHA mortgages require payment of an upfront mortgage insurance premium (UFMIP). The UFMIP is nonrefundable (except to the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within three years). In addition, most FHA loans require payment of an annual mortgage insurance premium, payable monthly as part of the mortgage payment. This premium is based on the loan program, the loan term, and the LTV.

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37
Q

Under the S.A.F.E. Act, a loan originator:

  1. Can be an individual or a business entity
  2. Is any person who takes loan applications secured by personal property
  3. Is an individual who takes residential mortgage loan applications
  4. Is any individual who takes loan applications secured by either real estate or personal property
A

The answer is is an individual who takes residential mortgage loan applications. The S.A.F.E. Act defines a mortgage loan originator as an individual who takes residential mortgage loan applications, or offers or negotiates terms of residential mortgage loans for compensation or gain.

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38
Q

Unlike other parties to a mortgage transaction, in general, _____ have no long-term financial interest in the performance of the loan.

  1. The borrower and mortgage loan originator
  2. The mortgage broker and mortgage loan originator
  3. The borrower and lender
  4. The lender and mortgage broker
A

The answer is the mortgage broker and mortgage loan originator. Because brokers and loan originators are compensated for originating a loan as long as the lender accepts it, and may not be penalized if they do not actually commit any misrepresentation and the borrower defaults later in the term of the loan, they might be less concerned with the suitability and long-term performance of the loan for the borrower. A relative lack of consequences for a lender’s agent subjects the mortgage delivery system to what economists and political scientists call the principal-agent problem.

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39
Q

The acronym LIBOR represents a:

  1. Federal agency
  2. Possible ARM index
  3. Federal law
  4. State law
A

The answer is a possible ARM index. The LIBOR, which stands for London Interbank Offered Rate, is a standard financial index used in U.S. capital markets.

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40
Q

Matt is a mortgage broker who has an ownership interest in a local title insurance company. When his clients apply for loans and request referrals to a title company, Matt must:

  1. Offer a list of title companies that does not include the company in which he has an ownership interest
  2. Immediately provide an affiliated business arrangement disclosure if he refers them to the title company in which he has an ownership interest
  3. Explain to the loan applicants that he cannot refer them to a particular company
  4. Offer a list of all local title companies without steering loan applicants towards a particular one
A

The answer is immediately provide an affiliated business arrangement disclosure if he refers them to the title company in which he has an ownership interest. Many service providers have a business relationship and an ownership interest in other settlement service providers. For example, a mortgage company may have an ownership interest in a title company. Profit-sharing by these affiliated companies is permissible under RESPA. This relationship must be disclosed to a borrower through an “affiliated business arrangement disclosure.”

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41
Q

According to conventional underwriting guidelines, when analyzing income from a borrower who is self-employed, an underwriter should:

  1. Average the last six months’ worth of pay stubs from the borrower
  2. Average the income shown on the 1040s for the past two years
  3. Use the income shown on the borrower’s most recent two pay stubs
  4. Average the income showing on the W-2s for the past two years
A

The answer is average the income shown on the 1040s for the past two years. When analyzing a borrower’s income for loan qualification, self-employed or commissioned income is averaged over a two-year period, using tax forms such as Form 1040, U.S. Individual Income Tax Return. When commission income is at least 25% of the borrower’s income, the most recent two years’ personal tax returns may be required.

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42
Q

The NMLS may best be described as a:

  1. Licensing system utilized by all U.S. states and territories
  2. Licensing system available for use by all states but not actually utilized by all states
  3. Federal agency
  4. National mortgage regulator
A

The answer is a licensing system utilized by all U.S. states and territories. The NMLS is a mortgage licensing system developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators for licensing and registering loan originators. It is utilized by all U.S. states and territories.

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43
Q

Which of the following is not a required element of a company’s safeguard policy, as required by the GLB Act?

  1. Designate one or more employees to coordinate safeguards
  2. Evaluate and adjust procedures in light of relevant circumstances
  3. Select appropriate service providers and contract with them to implement safeguards
  4. Contract with a federally-insured company to destroy documents
A

The answer is contract with a federally-insured company to destroy documents. Under the GLB Act, a financial institution must have a written information security program that is appropriate to its size and complexity, to the nature and scope of its activities, and to the sensitivity of the customer information it handles. As part of its program, the financial institution must assign one or more employees to oversee the program; conduct a risk assessment; put safeguards in place to control the risks identified in the assessment and regularly test and monitor them; require service providers, by written contract, to protect customers’ personal information; and periodically update its security program. There is no requirement to contract with any external company to handle information security issues of any kind.

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44
Q

A mortgage which has a fixed interest rate for the first three to five years, and then a rate that adjusts at intervals based on an index and margin, is known as a(n):

  1. Hybrid ARM
  2. Interval mortgage
  3. Graduated payment mortgage (GPM)
  4. Static ARM
A

The answer is hybrid ARM. A hybrid ARM has a rate that does not adjust during the first three to five years of the loan term, but is thereafter adjusted periodically (often annually) based on a specific index and margin.

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45
Q

Under Regulation X, the term “loan originator” applies to a:

  1. Loan processor
  2. Mortgage broker only
  3. Mortgage broker or lender
  4. Mortgage lender only
A

The answer is mortgage broker or lender. Regulation X defines a loan originator to include a lender or mortgage broker.

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46
Q

The 1003 is also known as the:

  1. Uniform Residential Loan Application
  2. Appraisal
  3. Mortgage Credit Analysis Worksheet
  4. Uniform Underwriting and Transmittal Summary
A

The answer is Uniform Residential Loan Application. A Uniform Residential Loan Application, also called Form 1003, is used when the loan is to be sold to Freddie Mac or Fannie Mae, insured by the Federal Housing Administration (FHA), or guaranteed by the Department of Veterans Affairs (VA).

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47
Q

Which of the following is most likely to be considered a violation of Regulation B?

  1. Charging a minority borrower a higher interest rate due to a low down payment
  2. Declining a loan for a single woman due to a low credit score
  3. Charging a minority borrower a higher interest rate than a similarly situated non-minority borrower
  4. Declining a loan for a borrower who is 75 due to a high debt-to-income ratio
A

The answer is charging a minority borrower a higher interest rate than a similarly situated non-minority borrower. Regulation B prohibits discrimination in credit transactions based on criteria such as race, color, religion, national origin, sex, marital status, and age. An example of such discrimination would be charging a minority borrower a higher interest rate than a similarly situated non-minority borrower. Decisions based on creditworthiness, rather than discriminatory criteria, are not prohibited under Regulation B.

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48
Q

Insurance which guarantees a lender a certain lien position on the title to a property free from undisclosed encumbrances is called:

  1. Guarantee against encumbrances
  2. Lender’s title policy
  3. Owner’s policy
  4. Forced policy
A

The answer is lender’s title policy. A lender’s title insurance policy insures the lender or mortgagee against loss caused by a borrower’s invalid title or loss of priority of the mortgage or deed of trust, due to legal claims based on undisclosed encumbrances.

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49
Q

Under the Gramm-Leach-Bliley Act, the Safeguards Rule and Financial Privacy Rule apply to which of the following?

  1. All commercial institutions
  2. Financial institutions
  3. Educational institutions
  4. Mortgage lenders only
A

The answer is financial institutions. The Gramm-Leach-Bliley Act’s Safeguards Rule requires all financial institutions to design, implement, and maintain safeguards to ensure the security and confidentiality of customer information and protect customer information against unauthorized access. Financial institutions covered by the rule include lenders and other traditional institutions, as well as payday lenders, check-cashing businesses, professional tax preparers, auto dealers engaged in financing or leasing, electronic funds transfer networks, mortgage brokers, credit counselors, real estate settlement companies, and retailers that issue credit cards to consumers. The Financial Privacy Rule of the GLB Act governs the collection and disclosure of customers’ personal financial information by financial institutions.

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50
Q

For a mortgage licensee, paying compensation for referrals is:

  1. Unethical, and a violation of federal law
  2. Neither unethical nor illegal
  3. Unethical, but not illegal
  4. Unethical, and may be prohibited in some states, but not a violation of federal law
A

The answer is unethical, and a violation of federal law. Under Section 8 of RESPA, it is illegal to give or accept any fee, kickback, or other thing of value under any agreement or understanding, oral or otherwise, that business relating to or part of a settlement service involving a federally-related mortgage loan will be referred to any person.

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51
Q

A loan which does not require payments during the life of the loan is most likely:

  1. Illegal
  2. A modified mortgage
  3. A pay-option mortgage
  4. A HECM
A

The answer is a HECM. The FHA’s home equity conversion mortgage (HECM) is a reverse mortgage that enables individuals aged 62 or older to convert some of the equity in their primary residence to cash to pay living expenses, or to purchase a primary residence if they have the cash to pay the down payment and closing costs. It requires no repayment until either the property is sold or the owner dies, permanently moves, fails to live in the house for 12 consecutive months, or fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).

52
Q

All of the following are considered immediate family members, and therefore a mortgage loan originator may negotiate a mortgage loan on their behalf without needing to be licensed, EXCEPT a(n):

  1. Stepparent
  2. Aunt
  3. Adopted sibling
  4. Grandparent
A

The answer is aunt. Despite the broad definition of a mortgage loan originator in the SAFE Act, there are some limited circumstances in which offering or negotiating residential mortgage loan terms would not make an individual a mortgage loan originator. These include an individual who offers or negotiates terms of a residential mortgage loan with or on behalf of an immediate family member, including a spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.

53
Q

A disclosure advising the borrower of their right to receive a copy of the appraisal must be delivered:

  1. At the time of application
  2. Within three business days of the application
  3. Any time during the processing of the loan
  4. Only if the loan is declined
A

The answer is within three business days of the application. Under the ECOA Valuations Rule, no later than the third business day after receipt of an application for credit to be secured by a first lien on a dwelling, the creditor must mail or provide a notice of the applicant’s right to receive a copy of all written appraisals developed in connection with the application.

54
Q

The purpose of the Truth-in-Lending Act is to do which of the following?

  1. Ensure meaningful disclosure of credit terms to consumers
  2. Prevent lenders from charging interest rates that are unfair to consumers
  3. Protect consumers from abusively high interest rates
  4. Require consumers be provided with a good faith estimate of closing costs at the time of loan application
A

The answer is ensure meaningful disclosure of credit terms to consumers. The purposes of TILA include assuring a meaningful disclosure of credit terms so that the consumer will be able to more readily compare the various credit terms available to him or her and avoid uninformed use of credit.

55
Q

Which of the following best describes a note (i.e., a promissory note)?

  1. It is given by the lender to the buyer
  2. It is both a promise to repay the money borrowed with interest and evidence of the debt
  3. It is identical to a mortgage
  4. It replaces the security instrument
A

The answer is it is both a promise to repay the money borrowed with interest and evidence of the debt. In the typical real estate sales transaction, the seller gives the buyer a deed at closing and the buyer gives the lender a promissory note and a security instrument (i.e., a mortgage or trust deed) that creates a lien on the property. The promissory note is both a promise to repay the money borrowed with interest and evidence of the debt.

56
Q

Which of the following terms would apply when calculating the maximum loan amount available to a VA borrower?

  1. UFMIP
  2. Insured amount
  3. Entitlement
  4. Guarantee fee
A

The answer is entitlement. The VA limits the amount that it can guarantee to repay a lender in the event of a default on the loan. The amount that the government will guarantee to a lender is known as a veteran’s entitlement.

57
Q

All of the following are examples of prohibited misleading advertising, EXCEPT:

  1. A mailed flyer with a mortgage loan refinancing offer in an envelope stating “Preapproved!” although, in fact, there is no preapproval in place for the consumer
  2. An ad that refers a consumer to a consumer protection website which is not operated by the lender in order to compare average mortgage loan rates
  3. A commercial communication that claims to originate from the consumer’s current mortgage lender, although it is actually from a different lender
  4. A mailer that attempts to create a visual impression that it is sent from a government agency, though it is in fact generated by a commercial mortgage lender
A

The answer is an ad that refers a consumer to a consumer protection website which is not operated by the lender in order to compare average mortgage loan rates. Under the Mortgage Acts and Practices Rule (MAP Rule or Regulation N), it is a violation of the advertising regulations for any person to make a material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product, including misrepresenting loan terms (claiming a loan product is preapproved when it is not) and misrepresenting the source of a loan offer (claiming it originates from the consumer’s current mortgage lender or from a government agency when this is not the case). Referring a consumer to a consumer protection website which is not operated by the lender is not misleading nor is it a violation of the law.

58
Q

When must a borrower receive notification of a servicing transfer?

  1. 15 days prior to the effective date of the transfer
  2. Ten days prior to the effective date of the transfer
  3. Within 30 days of the effective date of the transfer
  4. With the borrower’s next payment coupon
A

The answer is 15 days prior to the effective date of the transfer. Under RESPA, when a loan servicer sells or assigns loan servicing rights to another loan servicer, the borrower must be sent a servicing transfer statement (showing the new servicer’s name, address, and toll-free telephone numbers and showing the date the new servicer will begin accepting payments) at least 15 days before the effective date of the servicing transfer.

59
Q

In regard to obtaining property, the S.A.F.E. Act states that loan originators:

  1. May do so in any way they see fit
  2. May not do so in the course of their professional duties
  3. Must not do so by fraud or misrepresentation
  4. Must not do so without using the services of a real estate licensee
A

The answer is must not do so by fraud or misrepresentation. Under the S.A.F.E. Act, it is prohibited for any person, when engaging in mortgage loan origination activity, to obtain property by fraud or misrepresentation.

60
Q

Co-borrower information must be provided on the 1003 when the co-borrower:

  1. Is a minor
  2. Has income being used for loan qualification
  3. Is the borrower’s spouse
  4. Has a credit score that is below average
A

The answer is has income being used for loan qualification. Co-borrower information is needed on the1003 when the income or assets of a person other than the borrower (e.g., the borrower’s spouse) are to be used as a basis for loan qualification.

61
Q

Loan originator compensation records must be retained for at least:

  1. Three years
  2. Two years
  3. Four years
  4. Five years
A

The answer is three years. A creditor must maintain, for three years after the date of payment, sufficient records to evidence all compensation it pays to a loan originator, and the compensation agreement that governs those payments.

62
Q

A borrower owes $200,000 on a first mortgage, and $50,000 on a line of credit with a maximum amount of $100,000. If the property appraises for $500,000, what is the CLTV?

  1. 50%
  2. 60%
  3. 70%
  4. 40%
A

The answer is 50%. When secondary financing is a line of credit, the loan balance plus any draw amount is used to calculate the combined loan-to-value ratio (CLTV). In this case, the CLTV would be $200,000 + $50,000 / $500,000 = 50%.

63
Q

According to the Interagency Guidance on Nontraditional Mortgage Product Risks, relying on an individual’s capacity to repay the loan as structured from resources other than monthly income is:

  1. Considered unsafe and unsound
  2. A strong mitigating factor
  3. Acceptable only with property securitization
  4. Acceptable only with proper disclosure
A

The answer is considered unsafe and unsound. The Interagency Guidance on Nontraditional Mortgage Product Risks emphasizes the importance of establishing a borrower’s ability to repay a loan based on the borrower’s existing resources, primarily monthly income, rather than the value of the collateral pledged. Loans to borrowers who do not demonstrate the capacity to repay the loan from sources other than the collateral pledged are generally considered unsafe and unsound.

64
Q

ABC Financing grants a loan to a borrower, believing the borrower has invested his own money in the down payment and closing costs. However, the borrower has actually borrowed the needed funds from the seller, secured by an undisclosed and unrecorded second mortgage. One name for this second mortgage is:

  1. Silent second
  2. Double escrow
  3. Package money
  4. Open-end
A

The answer is silent second. In the fraudulent activity termed “silent second,” a primary lender grants a loan to a borrower who the lender believes has invested his/her own money in the down payment and closing costs. However, the borrower has actually borrowed the needed funds from the seller secured by an undisclosed and unrecorded (i.e., silent) second mortgage.

65
Q

Which of the following entities was formed by the federal government in order to facilitate home ownership, but is a publicly held corporation now separate from the federal government?

  1. Ginnie Mae
  2. Vinnie Mac
  3. Fannie Mae
  4. Federal Housing Administration
A

The answer is Fannie Mae. The Federal National Mortgage Association (FNMA), or Fannie Mae, was established in 1938 by amendments to the National Housing Act, in order to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. It is a government-sponsored enterprise (GSE) and, since 1968, a publicly traded company.

66
Q

Andy Agent likes to refer clients to Larry Lender, because Larry will frequently send Andy a gift certificate for the referrals. Which of the following is most true?

  1. Larry could be fined up to $1,000,000, imprisoned for up to 30 years, or both for violating RESPA
  2. Both Andy and Larry could be fined up to $10,000, imprisoned for up to 1 year, or both for each incidence, because they are both violating RESPA
  3. As long as the gift certificate is for $50 or less and is not solicited by Andy, neither party is violating federal law
  4. Only Larry is violating RESPA and is subject to the maximum statutory penalty
A

The answer is both Andy and Larry could be fined up to $10,000, imprisoned for up to 1 year, or both for each incidence, because they are both violating RESPA. Under Section 8 of RESPA, it is illegal to give or accept any fee, kickback, or other thing of value under any agreement or understanding, oral or otherwise, that business relating to or part of a settlement service involving a federally-related mortgage loan will be referred to any person. Since a gift certificate is a thing of value, both Larry and Andy are guilty of violating RESPA and may suffer the legal consequences of this violation.

67
Q

When would business tax returns be required as documentation of income for a borrower?

  1. If the borrower owns 15% of a company
  2. If the borrower owns more than 25% of a company
  3. If the borrower receives a K-1 from a company
  4. If the borrower is an officer of a company
A

The answer is if the borrower owns more than 25% of a company. A self-employed borrower (i.e., one who owns 25% or more of a business) may need to verify his/her employment with a copy of a current business license, a year-to-date profit-and-loss statement prepared by an accountant, and balance sheets and personal and/or business tax returns for the past two years.

68
Q

Mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities in the:

  1. Secondary mortgage market
  2. Capital market
  3. Primary mortgage market
  4. Federal reserve market
A

The answer is secondary mortgage market. The secondary mortgage market is where mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities. It is comprised of investors and lenders that buy and sell real estate mortgages or guarantee loans from primary market lenders.

69
Q

Which of the following is a government-owned entity which facilitates home ownership in the United States?

  1. Georgie Mac
  2. Ginnie Mae
  3. Freddie Mac
  4. Fannie Mae
A

The answer is Ginnie Mae. The GNMA, also known as Ginnie Mae, is a government corporation within HUD. Its purpose is to facilitate home ownership in the United States and increase the supply of credit available for housing, by directing funds from the securities market into the mortgage market. It does this by guaranteeing mortgage loans made by private lenders and insured by the FHA or guaranteed by the VA or the USDA, which are then placed into mortgage-backed securities and issued by the private party that holds them.

70
Q

According to ECOA, when could a lender ask a borrower about their race?

  1. If they ask for monitoring purposes
  2. Never
  3. If the borrower’s race is not evident
  4. If the loan is not federally-regulated
A

The answer is if they ask for monitoring purposes. Under ECOA and the Home Mortgage Disclosure Act (HMDA), in order for the government to be able to monitor compliance with fair lending laws, it is permissible for a mortgage licensee to ask applicants for information about their marital status, age, ethnicity, race, and sex.

71
Q

Which of the following best describes the federal limitation on the shortest adjustment period allowed on an ARM?

  1. No limit
  2. One month
  3. Three months
  4. Six months
A

The answer is no limit. Federal law does not place general restrictions on the adjustment period allowed on an ARM.

72
Q

Under the S.A.F.E. Act, mortgage loan originator license applicants must complete how many hours of pre-licensing education?

  1. 20
  2. 10
  3. 25
  4. 30
A

The answer is 20. In order to obtain a mortgage loan originator license, an individual must complete required pre-licensing education consisting of at least 20 hours of NMLS-approved education. The S.A.F.E. Act specifies that the education must include at least three hours of federal laws and regulations, three hours of ethics, and two hours of training related to lending standards for nontraditional mortgage products.

73
Q

A mortgage broker originates and closes a mortgage loan, but it is funded by the lender who is purchasing the loan from the originating broker. This is an example of:

  1. Warehouse lending
  2. Mortgage brokering
  3. Table funding
  4. Wholesale lending
A

The answer is table funding. In table funding arrangements, a mortgage broker will originate, process, and close in its own name a loan underwritten and funded by a secondary lender, but will then assign the loan to the funding lender at the closing table.

74
Q

Which of the following is most likely to be a violation of the Equal Credit Opportunity Act?

  1. Failing to give a borrower notice of the right to rescind
  2. Denying an application based on economic characteristics
  3. Requiring a borrower to verify residency or citizenship status
  4. Declining a loan due to the borrower’s race
A

The answer is declining a loan due to the borrower’s race. The Equal Credit Opportunity Act (ECOA) ensures that all persons, consumers, and businesses are given an equal chance to obtain credit by prohibiting discrimination based on criteria including race, color, religion, national origin, sex, marital status, and age (provided the individual is of age to enter into a contract). Declining a loan due to the borrower’s race is a violation of ECOA.

75
Q

Which of the following borrowers would be considered self-employed for underwriting purposes?

  1. A borrower who is a vice president for a company, of which she is a 20% owner
  2. A borrower who receives only commission reported on a W-2
  3. A borrower who files Form 2106 with her tax returns
  4. A borrower who is a salesperson for a company, of which she is a 30% owner
A

The answer is borrower who is a salesperson for a company, of which she is a 30% owner. A self-employed borrower is one who owns 25% or more of a business.

76
Q

Which of the following is least likely to be considered nonpublic personal information?

  1. Borrower’s home phone number
  2. Employer’s phone number
  3. Borrower’s job title
  4. Borrower’s income
A

The answer is employer’s phone number. Nonpublic personal information (NPI) is any personally identifiable financial information that a financial institution collects about an individual in connection with providing a financial product or service. NPI does not include information where there is reasonable basis to believe it is lawfully made publicly available, such as an employer’s phone number.

77
Q

Which term is used to describe knowingly advertising or offering one set of terms that is very appealing but is not readily available and then pressuring a person into signing a contract with other, more expensive terms?

  1. Bait and switch
  2. Cut and run
  3. Steering
  4. Nonconforming
A

The answer is bait and switch. Bait and switch advertising involves advertising a loan at very attractive terms and then informing potential customers that, while the advertised loan is not available, a substitute, usually more expensive or involving less appealing terms, is.

78
Q

A 180 / 360 loan is considered a(n) ___________________ mortgage.

  1. Adjustable-rate
  2. Pay-option
  3. Hybrid
  4. Balloon
A

The answer is balloon mortgage. A partially-amortized or balloon mortgage provides for some, but not total, amortization during the mortgage term. It has payments that are equal and regular in nature. However, the loan term is shorter than the time needed to repay the full loan balance by making those payments. Therefore, at the end of the loan term, a large balloon payment is needed to pay off the remaining balance. The loan would be labeled by indicating the loan term in months (in this case, 180) and the amortization period in months (in this case, 360).

79
Q

Arabella Ash works for and is supervised by loan originator Jerry Jenkins, collecting and analyzing data related to residential mortgage loans. She communicates with borrowers, but does not offer or negotiate loan rates or terms or advise consumers about residential mortgage loan rates or terms. Under S.A.F.E. Act definitions, Arabella is:

  1. A loan originator
  2. A real estate broker
  3. A loan processor
  4. Required to be licensed
A

The answer is a loan processor. A loan processor or underwriter is an individual who performs clerical or support duties at the direction of and subject to the supervision and instruction of a state-licensed loan originator or a registered loan originator. Clerical or support duties include the receipt, collection, distribution, and analysis of information common for the processing and underwriting of a residential mortgage loan. These duties also include communicating with a consumer to obtain the information necessary for processing and underwriting a loan as long as such communication does not include offering or negotiating loan rates or terms or counseling consumers about residential mortgage loan rates or terms. A person working solely as a loan processor or underwriter is not required to be licensed under the S.A.F.E. Act.

80
Q

For an FHA loan, how much may the seller contribute toward the borrower’s closing costs?

  1. Nothing
  2. 6% of the sales price
  3. 3% of the sales price
  4. 3% of the loan amount
A

The answer is 6% of the sales price. The FHA allows the seller to contribute up to 6% of the purchase price toward the buyer’s actual closing costs, prepaid taxes and insurance, discount points, buydown fees, mortgage insurance premiums, and other financing concessions, but nothing toward the down payment.

81
Q

A disclosure that allows a consumer to more easily compare loan options is required under which regulation?

  1. Regulation B
  2. Regulation Z
  3. Regulation V
  4. Regulation H
A

The answer is Regulation Z. The TILA-RESPA Rule, included in Regulation Z, outlines the requirements for use of the Loan Estimate and the Closing Disclosure, intended to facilitate the ability of consumers to determine whether they can afford a particular loan, and/or compare specific loan products, including their costs over the life of the loan.

82
Q

Which of the following is most true concerning a VA funding fee?

  1. It is always refundable
  2. It is nonrefundable
  3. It is not charged to veterans
  4. It is not charged to active members of the military
A

The answer is it is nonrefundable. VA loans are made by approved lenders and guaranteed by the U.S. Department of Veterans Affairs. The guarantee is similar to mortgage insurance in that it limits the lender’s exposure to loss in the event of a borrower’s default that results in foreclosure. However, the veteran borrower is charged a nonrefundable upfront funding fee that can be financed, instead of a mortgage insurance premium for the guarantee. A veteran receiving VA compensation for a service-connected disability is exempt from the fee requirement.

83
Q

Under HOEPA, a high-cost loan may have a balloon payment under all of the following circumstances, EXCEPT:

  1. The loan satisfies the requirements of a balloon payment qualified mortgage
  2. A nine-month bridge loan is obtained for the construction of the borrower’s primary dwelling
  3. The borrower’s income is seasonal
  4. The borrower signs a waiver consenting to the balloon payment
A

The answer is the borrower signs a waiver consenting to the balloon payment. A high-cost loan may not provide for a payment schedule with regular periodic payments that result in a balloon payment, unless the payment schedule is adjusted for the irregular or seasonal income of the borrower; the loan is a bridge loan with a term of 12 months or less, taken in connection with the acquisition or construction of a dwelling that will be the borrower’s principal residence; or the loan satisfies the requirements of a balloon payment qualified mortgage.

84
Q

The number one ethical problem cited in surveys of professionals and managers is:

  1. False or misleading representation of products or services in marketing, advertising, or sales
  2. Lack of sufficient disclosures
  3. Inaccuracies and lack of documentation in handling client/customer funds
  4. Deliberate attempts at fraud and misrepresentation in face-to-face meetings
A

The answer is false or misleading representation of products or services in marketing, advertising, or sales. The number one ethical problem cited in surveys of professionals and managers is false or misleading representation of products or services in marketing, advertising, or sales efforts, usually involving various aspects of loan terms. This includes use of false or misleading advertising, use of truthful advertising in a deceptive or misleading manner, and concealing the limitations of the programs or terms being promoted.

85
Q

When would ARM disclosures be required?

  1. If the initial term on an ARM is more than one year
  2. If the initial term on an ARM is less than five years
  3. For all ARMs
  4. If the initial term on an ARM is less than one year
A

The answer is for all ARMs. For an ARM, the interest rate will change periodically, based on an index to which the rate is tied and the margin added to cover the creditor’s expenses and profit. Therefore, the borrower must be given information about the index, the margin, and the frequency of rate adjustments, in addition to other pertinent facts about the loan. For an ARM secured by a borrower’s principal residence with a term exceeding one year, additional disclosures must be provided either at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier.

86
Q

In order to meet the annual continuing education requirement, a state-licensed loan originator must complete at least _____ hours of NMLS-reviewed and -approved coursework.

  1. Six
  2. Eight
  3. Ten
  4. Twelve
A

The answer is eight. A state-licensed mortgage loan originator must renew his/her license annually and must satisfy the continuing education requirement of at least eight hours of courses that have been reviewed and approved by the NMLS.

87
Q

On the Loan Estimate, fees related to third-party service providers chosen from the provider list and not affiliated with the creditor are grouped with the recording fees and subject to a:

  1. No tolerance limitation
  2. 10% tolerance
  3. 15% tolerance
  4. Zero tolerance
A

The answer is 10% tolerance. In regard to tolerances related to settlement costs, fees related to third-party service providers and recording fees are grouped together and subject to a 10% tolerance. The creditor may charge more for a particular service or recording fee than initially disclosed as long as the total for all such charges, when added together, does not exceed 10% of the amount disclosed.

88
Q

Which of the following is least likely to be considered a proxy for a loan term or condition under the Loan Originator Compensation Rule?

  1. The state in which the property is located
  2. The amortization term of the loan
  3. Whether or not the loan is an ARM or a fixed-rate loan
  4. The loan program
A

The answer is the state in which the property is located. If a loan originator’s compensation is based in whole or in part on a factor that is not an actual loan term but acts as a proxy for a term of transaction (such as the term and/or rate of the loan determining whether it is held in the lender’s portfolio or sold), the originator’s compensation is based on a term of the transaction and is prohibited. A factor is a proxy if the loan originator has the ability to add, drop or change it when originating the loan. Since the loan originator cannot change the state in which the property is located, it is not likely to be considered a proxy for a loan term or condition.

89
Q

A borrower obtains a one-year ARM, which starts at 4.0% and has a margin of 3.0%. At the end of the first year, the index is 5.0%. What is the fully-indexed rate when the loan adjusts?

  1. 8%
  2. 7%
  3. 6%
  4. 9%
A

The answer is 8%. When the rate adjusts, the new fully-indexed rate is equal to the index plus margin. In this case: 5 + 3 = 8.

90
Q

What does “FHA” stand for, when referring to the agency which oversees the FHA loan program?

  1. Federal Housing Authority
  2. Federal Housing Agency
  3. Federal Housing Association
  4. Federal Housing Administration
A

The answer is Federal Housing Administration. “FHA” stands for Federal Housing Administration.

91
Q

Mike B. Leeve is a dreamer. He loves to invent borrowers and properties, establish fake accounts for payments, and maintain custodial accounts for escrows. He has even set up an office with a bank of telephones, with one phone representing the employer, another the appraiser, another the credit agency, etc., so he can take money from lenders and then go on a long international vacation. The loans Mike is getting are called:

  1. Cash-outs
  2. No cash-outs
  3. Subprime
  4. Air loans
A

The answer is air loans. Air loans are loans secured by nonexistent property which leave the lender without collateral. The schemer invents borrowers and properties, establishes fake accounts for payments, and maintains custodial accounts for escrows. He may even set up an office with a bank of telephones for verification purposes, with each phone representing the employer, appraiser, credit agency, etc.

92
Q

Which of these replaces the HUD-1 Settlement Statement and the final TIL Disclosure?

  1. The Loan Estimate
  2. The Closing Disclosure
  3. The Affiliated Business Arrangement Disclosure Statement
  4. The Mortgage Servicing Disclosure Statement
A

The answer is The Closing Disclosure. The Closing Disclosure replaces the HUD-1 Settlement Statement and the final TIL Disclosure. It sets forth the actual costs of the subject mortgage lending transaction in a clear and understandable manner.

93
Q

Which of the following is NOT true about the financial responsibility of a mortgage loan originator?

  1. The penal sum of a surety bond must reflect the dollar amount of loans originated
  2. A sponsored mortgage loan originator may be covered under the sponsoring licensee’s surety bond
  3. If a mortgage loan originator pays into a state fund established to pay claims of consumers, he or she is not required to maintain a surety bond
  4. A mortgage loan originator must always have his or her own surety bond in an amount that reflects the dollar value of loans originated in the previous year
A

The answer is a mortgage loan originator must always have his or her own surety bond in an amount that reflects the dollar value of loans originated in the previous year. Each mortgage loan originator must be covered by a surety bond. If he or she is an employee or exclusive agent of a mortgage licensee, the surety bond of the employing licensee may be used to satisfy the loan originator surety bond requirement. The penal sum of the surety bond must reflect the dollar amount of loans originated. If the loan originator’s licensing state has developed and administers a fund specifically to provide protection to consumers by making funds available for claims resulting from violations of state or federal laws and regulations, in lieu of a surety bond or net worth requirement, the state may instead require the loan originator to pay a certain amount into the state fund.

94
Q

A borrower makes $60,000 per year. The borrower’s spouse makes $3,000 per month. The borrowers’ monthly housing expense is $1,500. They have a car payment of $500, a boat payment of $350, a phone bill of $150, and a car insurance payment of $100. What is the couple’s back-end DTI?

  1. 30.6%
  2. 31.25%
  3. 32.5%
  4. 29.38%
A

The answer is 29.38%. Monthly Housing Costs + Monthly Liabilities / Gross Monthly Income = Debt-to-Income Ratio. Borrower 1’s annual income is $60,000, divided by 12 = $5,000. The spouse’s gross monthly income of $3,000 is added to $5,000, for a total monthly income of $8,000. The monthly housing expense ($1,500) is added to the car payment ($500) and the boat payment ($350), totaling $2,350. This figure, divided by $8,000, equals 29.38%. Typical living expenses, such as a phone bill or car insurance, are not included when calculating DTI.

95
Q

Which of the following terms describes the fee charged to the borrower to insure an FHA loan?

  1. Upfront mortgage insurance premium
  2. Guaranty fee
  3. Insuring fee
  4. Funding fee
A

The answer is upfront mortgage insurance premium. The FHA funds the insurance from a mortgage insurance premium (MIP) charged to the borrower. FHA loans require payment of an upfront mortgage insurance premium (UFMIP). The UFMIP is nonrefundable (except to the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within three years).

96
Q

Under which of the following circumstances could a borrower be charged a fee for the preparation of a settlement statement?

  1. The borrower requests a copy of the settlement statement 24 hours prior to closing
  2. A borrower may not be charged a fee for the preparation of a settlement statement
  3. The borrower requests a copy of the settlement statement 48 hours prior to closing
  4. The borrower requests the lender prepare the settlement statement rather than the escrow agent
A

The answer is a borrower may not be charged a fee for the preparation of a settlement statement. Section 12 of RESPA provides that no fee can be charged by a lender for the preparation and distribution of documents required in connection with the making of a federally-related mortgage loan.

97
Q

If a borrower has an $80,000 first mortgage, a $20,000 second HELOC on which they have $5,000 in remaining credit, and the property appraises for $100,000, what is the CLTV?

  1. 100%
  2. 80%
  3. 75%
  4. 95%
A

The answer is 95%. CLTV stands for combined loan-to-value, which is a ratio used when there are multiple loans secured by the same property. This is calculated by combining the amounts of the loans secured by the property, then dividing by the property value or sales price (whichever is less). In this case, $80,000 + ($20,000 - $5,000)/$100,000 = 95%.

98
Q

Once the Closing Disclosure is delivered, which of the following would require a new Closing Disclosure to be delivered to the borrower and a new waiting period before closing?

  1. An increase of more than 1% in cash required to close
  2. A change in the loan amount
  3. An increase in the APR by more than .125%
  4. The addition of any costs to the borrower
A

The answer is an increase in the APR by more than .125%. A new three-business-day waiting period applies to a corrected disclosure if there are changes or corrections that relate to the annual percentage rate, the loan product, or the addition of a prepayment penalty. For other types of changes, the corrected disclosure may be provided at or before consummation. The APR is generally considered to be accurate if it is not more than one eighth of one percentage point (0.125%) above or below the APR determined in accordance with legal requirements (i.e., in accordance with the actuarial method or the United States Rule method); or in an irregular transaction, if it is not more than one quarter of one percentage point above or below the annual percentage rate determined in accordance with legal requirements.

99
Q

Which of the following would not be considered an established business relationship under the Do-Not-Call rules?

  1. A consumer purchases a service from a seller
  2. A financial transaction between a consumer and a seller
  3. A consumer inquiry into the purchase of an item six months ago
  4. A consumer purchases an item from a seller
A

The answer is consumer inquiry into the purchase of an item six months ago. Under the Telemarketing Sales Rule, a company engaging in telemarketing is prohibited from making interstate or intrastate calls to anyone whose number is listed on the Registry, unless an “established business relationship” exists. An established business relationship means a relationship between the company and a consumer based on the consumer’s purchase, rental, or lease of the seller’s goods or services, or a financial transaction between the consumer and seller, within the 18 months immediately preceding the date of a telemarketing call, or the consumer’s inquiry or application regarding an offered product or service within the three months immediately preceding the date of a telemarketing call. However, if such a consumer asks not to be contacted, the company must enter him or her on their own do-not-call list of such consumers.

100
Q

On an ARM loan, which of the following will not be found on the note?

  1. Fully-indexed rate after one year
  2. Margin
  3. Adjustment parameters
  4. Identification of index
A

The answer is fully-indexed rate after one year. The promissory note is both a promise to repay the money borrowed with interest and evidence of the debt. For an ARM loan, it will typically identify the index, specify the margin, and list adjustment parameters, but will not specify the fully-indexed rate after one year.

101
Q

The NMLS was established by:

  1. HUD
  2. The Federal Reserve
  3. Each state regulator
  4. The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators
A

The answer is the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. The Nationwide Multistate Licensing System and Registry (NMLS) is a mortgage licensing system developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators for licensing and registering loan originators.

102
Q

Which of the following statements most accurately describes the term “predominant value”?

  1. The final value an appraiser reports on an appraisal
  2. The most common sales price for the neighborhood
  3. The highest sales price in the neighborhood
  4. The average sales price for the neighborhood
A

The answer is the most common sales price for the neighborhood. In the context of an appraisal, the term “predominant value” refers to the price or price range appearing most frequently in the market area defined by the appraiser in the report, based on comparable sales.

103
Q

Which of the following is true regarding a creditor’s duty to give a copy of an appraisal to a borrower?

  1. The lender is always required to provide a copy of the appraisal promptly upon completion
  2. The lender is only required to give a copy of the appraisal for closed-end credit
  3. The lender is never required to give a copy of the appraisal to the borrower
  4. The lender is required to provide a copy of the appraisal promptly upon completion or three business days prior to consummation for closed-end credit, whichever is earlier
A

The answer is The lender is always required to provide a copy of the appraisal promptly upon completion or three days prior to consummation for closed-end credit, whichever is earlier. A creditor is required to provide an applicant with a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. A copy of each appraisal or other written valuation must be provided the earlier of promptly upon completion, or three business days prior to consummation of the transaction for closed-end credit or account opening for open-end credit.

104
Q

A change in the value of a comparable property, made when comparing the features of the comparable property to the subject property, is known as a(n):

  1. Adjustment
  2. Inflation
  3. Concession
  4. Inspection
A

The answer is adjustment. Adjustments are made when comparable properties are compared to the subject property in a mortgage loan transaction. Adjustments assign positive or negative values to certain property features to help gauge value.

105
Q

Redlining is addressed in which federal law?

  1. RESPA
  2. HOEPA
  3. FCRA
  4. ECOA
A

The answer is ECOA. The Equal Credit Opportunity Act (ECOA) prohibits discrimination in extension of credit based on race, color, religion, national origin, sex, marital status, age, potential to have or raise children, the fact that the applicant receives income from a public assistance program, or the fact that the applicant has exercised his or her rights under the Consumer Credit Protection Act. This includes the discriminatory lending pattern of redlining, in which a lender refuses to provide lending products and services on an equal basis to residents of minority neighborhoods (the term is derived from the practice of drawing red lines around minority areas on a map.)

106
Q

Extension of credit to borrowers who cannot afford it on the terms being offered is considered by most regulators to be:

  1. A wise business tactic
  2. Ethical, but not legal
  3. Predatory lending
  4. Nontraditional lending
A

The answer is predatory lending. Most regulators consider predatory lending to be the extension of credit to borrowers who cannot afford it on the terms being offered. Predatory loans can be recognized by its use of features designed to “strip away” or reduce a borrower’s equity in the collateral and increase the likelihood of foreclosure. Such conduct is considered unethical, and many of the features it utilizes are illegal.

107
Q

A mortgage which is amortized for a longer period than the actual term of the loan can best be described as what type of mortgage?

  1. Balloon mortgage
  2. Hybrid ARM
  3. Graduated Payment Mortgage (GPM)
  4. Fixed period ARM
A

The answer is balloon mortgage. A partially amortized or balloon mortgage provides for some, but not total, amortization during the mortgage term. It has payments that are equal and regular in nature. However, the loan term is shorter than the time needed to repay the full loan balance by making those payments. Therefore, at the end of the loan term, a large balloon payment is needed to pay off the remaining balance.

108
Q

Information held by the NMLS relating to the employment history or disciplinary actions taken against a mortgage loan originator:

  1. Is not confidential, but is not available for public access
  2. Is confidential and is not available for public access
  3. Is not confidential and is available for public access
  4. Is confidential, but is available for public access
A

The answer is is not confidential and is available for public access. The requirements under any federal and/or state law regarding the privacy or confidentiality of any information or material provided to the NMLS continue to apply after such information has been disclosed to the NMLS. However, information or material held by the NMLS relating to the employment history and/or disciplinary and enforcement actions taken against a mortgage loan originator, is not protected by confidentiality and is available for public access.

109
Q

In the Closing Disclosure, which of the following questions is the loan originator required to answer about each of the items in the Loan Terms table?

  1. “Has this information been verified?”
  2. “Can this amount increase after closing?”
  3. “Is this payment subject to a late fee?”
  4. “Has this information changed from the Loan Estimate?”
A

The answer is “Can this amount increase after closing?” The first table on page 1 of the Closing Disclosure is the Loan Terms table, which lists the same information given in the Loan Estimate’s Loan Terms table (i.e., loan amount, interest rate, the monthly principal and interest, and space to indicate whether the product has a prepayment penalty or balloon payment). This information is updated to reflect the terms that will be in place at consummation, and the loan originator must answer the question “Can this amount increase after closing?” for each item.

110
Q

Inquiring as to whether income is derived from alimony, child support, or separate maintenance is prohibited by which of the following?

  1. Regulation C
  2. Regulation Z
  3. Regulation D
  4. Regulation B
A

The answer is Regulation B. Under Regulation B, a loan originator may not ask whether an applicant receives alimony, child support, or separate maintenance payments not needed in order to get credit, unless he or she is first told that this information does not have to be provided. If regular alimony, child support, or separate maintenance payments need to be counted as income to qualify for credit, an applicant may be asked to prove that it has been received consistently.

111
Q

Which of the following best describes the order in which payments will be applied according to the standard deed of trust?

  1. Interest, escrow, principal
  2. Principal, escrow, interest
  3. Late fees, principal, interest
  4. Interest, principal, escrow
A

The answer is interest, principal, escrow. In a standard deed of trust, payments are applied to interest first, then to principal, and then to escrow items, such as tax and insurance payments.

112
Q

Under the Bank Secrecy Act, each institution must develop a written _____ compliance program, which must be approved by the institution’s board of directors.

  1. Anti-money laundering
  2. Anti-trust account fraud
  3. Anti-terrorist financing
  4. Anti-discrimination
A

The answer is anti-money laundering. Under the Bank Secrecy Act, financial institutions are required to develop a written anti-money laundering compliance program, which must be approved by the institution’s board of directors. Minimum requirements for the program include internal controls and metrics to ensure compliance; independent auditing of compliance; the designation of individuals responsible for managing compliance; and staff training for compliance.

113
Q

A person who allows the use of their personal identifying information (usually in exchange for a fee) by another individual to take out a loan is known as a:

  1. Straw buyer
  2. Identity thief
  3. Flipper
  4. Flapper
A

The answer is straw buyer. A straw buyer is a person who allows the use of their personal identifying information (usually in exchange for a fee) by another individual to take out a loan.

114
Q

Which of the following labels is most likely for a balloon loan?

  1. 180/360
  2. 1-Mar
  3. 5/2/2005
  4. 1-May
A

The answer is 180/360. A partially amortized or balloon mortgage provides for some, but not total, amortization during the mortgage term. It has payments that are equal and regular in nature. However, the loan term is shorter than the time needed to repay the full loan balance by making those payments. Therefore, at the end of the loan term, a large balloon payment is needed to pay off the remaining balance. The loan would be labeled by indicating the loan term in months (in this case, 180) and the amortization period in months (in this case, 360).

115
Q

The penal sum of a loan originator’s required surety bond must be maintained:

  1. In an amount that reflects the dollar amount of loans originated
  2. In a flat-rate amount determined by each state
  3. In an amount that reflects the number of loans originated
  4. In an amount that reflects the originator’s years of professional experience
A

The answer is in an amount that reflects the dollar amount of loans originated. Each mortgage loan originator must be covered by a surety bond. If he or she is an employee or exclusive agent of a mortgage licensee, the surety bond of the employing licensee may be used to satisfy the loan originator surety bond requirement. The penal sum of the surety bond must reflect the dollar amount of loans originated.

116
Q

The section of the Uniform Residential Loan Application titled “Information for Government Monitoring Purposes”:

  1. Must note the applicant’s sex, race, and ethnicity, based on the lender’s visual observation or the applicant’s surname if the applicant refuses to provide the information
  2. Is included to aid the federal government in monitoring compliance with the Mortgage Acts and Practices Rule
  3. Is mandatory by the applicant, to ensure compliance with federal laws
  4. Is required to be completed only if the applicant is in a protected class
A

The answer is must note the applicant’s sex, race, and ethnicity, based on the lender’s visual observation or the applicant’s surname if the applicant refuses to provide the information. The section titled “Information for Government Monitoring Purposes” is required by the Home Mortgage Disclosure Act to aid the federal government in monitoring compliance with federal fair lending laws. The applicant should be informed that providing this information is strictly voluntary. If the applicant chooses not to provide this information, an originator taking the application on a face-to-face basis must note the applicant’s sex, race, and ethnicity on the form based on visual observation and/or the applicant’s surname.

117
Q

Which of the following would not count as a business day for the purposes of rescission under TILA?

  1. Monday
  2. Saturday
  3. Sunday
  4. Day after closing
A

The answer is Sunday. TILA gives consumers a right of rescission, allowing them to cancel the loan contract within a specified period of time for any reason in some loan transactions. In order to rescind, the consumer must forward a completed rescission form to the creditor no later than midnight of the third business day after the last of certain events occur, including consummation of the transaction, delivery of all material TILA disclosures, or delivery of notice of the right to rescind. For rescission purposes, business days include Saturdays, but not Sundays or legal public holidays.

118
Q

A borrower makes $20 per hour and works 35 hours per week. If their loan program allows a front-end debt ratio of 31%, what is the maximum housing payment for which they can qualify?

  1. $940.33
  2. $868.33
  3. $1,074.67
  4. $956.34
A

The answer is $940.33. To calculate the borrower’s monthly income, earnings per hour ($20) are multiplied by hours per week (35) and weeks per year worked (52). This is divided by 12, totaling $3,033.33. To calculate the maximum housing payment (PITI), multiply monthly income by the allowable front-end ratio: $3,033.33 × 31%.(.31) = $940.33.

119
Q

Which of the following is used to describe a loan amount which exceeds conforming loan limits?

  1. Subprime
  2. Jumbo
  3. Interest-only
  4. No documentation
A

The answer is Jumbo. Conventional loans that conform to the eligibility guidelines for purchase by Fannie Mae or Freddie Mac are considered conforming loans. Fannie Mae and Freddie Mac have a maximum loan limit for loans they will purchase, which is adjusted annually. Loans to persons with satisfactory credit but that exceed this loan limit are called jumbo loans or nonconforming loans. Because these loans cannot be sold to Fannie Mae or Freddie Mac, they often have a higher interest rate than conforming loans

120
Q

A misleading representation, omission, act, or practice is considered deceptive when, among other conditions, it is:

  1. Malicious
  2. Repeated
  3. Intentional
  4. Material
A

The answer is material. A representation, omission, act, or practice is deceptive when it misleads or is likely to mislead the consumer; the consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and the misleading representation, omission, act, or practice is material.

121
Q

The APR factors in the effects of all of the following expenses, except:

  1. Hazard insurance premium
  2. Processing fee
  3. Origination fee
  4. Mortgage insurance premium
A

The answer is hazard insurance premium. The annual percentage rate (APR) represents the relationship of the total finance charge to the total amount financed, as a yearly rate. It is not the same as the nominal rate (i.e., the interest rate shown in the note), as it includes all finance charges, not just interest. Among other charges, finance charges include points, loan fees, and mortgage insurance premiums, but not hazard insurance premiums.

122
Q

Homes for All considers itself a nonprofit organization. In order for its employees to be exempt from the licensing requirements of the S.A.F.E. Act, each of the following must be true about Homes, except:

  1. It has tax-exempt status under the Internal Revenue Code
  2. Its employee compensation package does not encourage an employee to act in his or her own interests over that of his or her clients
  3. It promotes affordable housing
  4. It may engage in both nonprofit and for-profit activities
A

The answer is it may engage in both nonprofit and for-profit activities. The S.A.F.E. Act provides an exemption for the licensing of loan originators that are employees of a bona fide nonprofit organization. This exemption would not apply to any for-profit activities.

123
Q

Under Fannie Mae guidelines, the amount of hazard insurance must be equal to:

  1. The appraised value
  2. The purchase price
  3. The lower of the replacement cost or the unpaid loan amount
  4. 80% of the replacement cost
A

The answer is the lower of the replacement cost or the unpaid loan amount. Fannie Mae requires that for any first-lien mortgage (excluding a reverse mortgage), the minimum hazard insurance coverage required is the lesser of 100% of the insurable value of the improvements, as established by the property insurer, or the unpaid principal balance of the mortgage, as long as it equals the minimum amount (80% of the insurable value of the improvements) required to compensate for damage or loss on a replacement cost basis. If it does not, then the coverage that does provide the minimum required amount must be obtained.

124
Q

Assume a Loan Estimate is mailed on Monday. The borrower receives the Loan Estimate on Wednesday, and calls the originator that day to let them know it was received and they would like to move forward, and signs and returns it to the lender. What is the earliest date the lender could charge the borrower for the appraisal?

  1. Saturday
  2. Thursday
  3. Wednesday
  4. Friday
A

The answer is Wednesday. A consumer may not be charged any fee in connection with a mortgage loan application, except a reasonable and bona fide credit report fee, before receipt of the Loan Estimate and prior to indicating that he or she wishes to proceed with the loan. Once this occurs, there is no additional waiting period before the lender may charge a fee, such as an appraisal fee.

125
Q

Mortgage interest rates are influenced by all of the following, except:

  1. Foreclosure rates
  2. Regional property tax rates
  3. Loan fraud
  4. Federal Reserve activitie
A

The answer is regional property tax rates. Interest rates on long-term debt instruments, such as residential mortgages, are influenced by changes in such economic indicators as the gross domestic product (GDP), which measures the amount of goods and services produced in the United States, and the Consumer Price Index (CPI), which measures the average change in prices of consumer goods and services. Features of the economic climate, such as loan fraud, loan payoff rates, and foreclosure rates, will all have an impact on interest rates. Rates are also affected by actions taken by the Federal Reserve (the Fed), which controls the country’s monetary policy, though the Fed does not itself directly set the interest rates that individual lenders will charge borrowers. Each lender will set its own prime rates (i.e., the lowest rates it charges for its best customers), as well as rates for loans to other customers based on its costs and desired profit margin. Regional property tax rates will impact monthly payments, but they do not have a direct relationship with the interest rates set for mortgage loans.

NMLS Exam (8 decks)

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