Final Final

Question 1

Which of the following circumstances is least likely to lead to a determination that two entities are operating a sham affiliated business arrangement under RESPA?

The same person owns both entities
One entity shares office space with the other entity
One entity’s business comes exclusively from referrals from another entity
Both entities share the same employees

Answer 1

The answer is the same person owns both entities. An affiliated business arrangement is an arrangement in which a person or his or her associate is in a position to refer real estate settlement service business for a federally-related mortgage loan and has either an affiliate relationship with, or ownership interest of more than 1% in, a provider of settlement services and refers business to or influences the selection of that provider. As ownership in an affiliated business is part of the definition of an affiliated business relationship, such ownership does not necessarily point to a sham operation.

Question 2

A borrower receives a document which contains a list of all closing costs, a disclosure of the borrower credits received on the transaction, an estimate of the cash the borrower needs to bring in to closing, and the sales price. Which of the following best identifies this document?

Loan Closure
Closing Disclosure
Itemization of Amount Financed
Loan Estimate

Answer 2

The answer is Loan Estimate. The Loan Estimate provides an “estimate” only of closing costs. The Closing Disclosure sets forth the” actual” costs of the subject mortgage lending transaction in a clear and understandable manner.

Question 3

According to ECOA, discrimination is:

Never allowed
Allowed if based on income
Allowed if based on sex
Allowed if based on marital status

Answer 3

The answer is never allowed. A creditor may not discriminate against an applicant in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, or age, because all or part of his or her income derives from a public assistance program, or because he or she has, in good faith, exercised any right under the Consumer Credit Protection Act. The amount and probable continuance of income may be considered in evaluating an applicant’s creditworthiness; however, making a lending decision based wholly or in part on income is not discrimination.

Question 4

Which line of the Loan Estimate would reflect any lender credits?

Funds for Borrower
Closing Costs Financed
Adjustments and Other Credits
Total Closing Costs

Answer 4

The answer is Total Closing Costs. The Total Closing Costs section totals the Loan Costs and Other Costs tables, plus the amount of any lender credits, on the Loan Estimate.

Question 5

A lender mails the Loan Estimate on Monday. Assuming no holidays and the lender is open on Saturdays, what is the earliest day on which the transaction may be consummated?

Tuesday of the following week
The following Monday
Wednesday of the following week
The following Thursday

Answer 5

The answer is Tuesday of the following week. A Loan Estimate must be provided to the loan applicant no more than three business days after receipt of an application and no less than seven business days prior to loan consummation. A business day is defined for Loan Estimate purposes as all calendar days except Sundays and legal public holidays. Using this information, the transaction could not be consummated earlier than Tuesday of the following week.

Question 6

A mortgage loan in the amount of $18,000 is a high-cost home loan if it has points and fees that exceed:

5% of the loan amount
6% of the loan amount
$1,148
$1,440

Answer 6

The answer is $1,148. A loan may be a high-cost home loan if it exceeds a points and fees threshold. For a transaction like this one, which has a loan amount of less than $22,969, the loan is high-cost if its points and fees equal the lesser of 8% of the total loan amount or $1,148. In this case, $18,000 × 8% = 1,440. $1,148 is less than 8% of the loan amount, meaning that if its points and fees exceeded $1,148, it would be high-cost.

Question 7

Which of the following would not need to be contained in a privacy notice?

Categories of information collected
Categories of affiliates with whom information is shared
Names of affiliates with whom information is shared
Categories of information disclosed

Answer 7

The answer is names of affiliates with whom information is shared. A privacy notice must clearly, conspicuously, and accurately state the company’s privacy practices, including what information the company collects and discloses about its consumers and customers, the types of entities with which it shares the information, and how it protects or safeguards the information.

Question 8

Under the PATRIOT Act, covered entities must have a CIP, which stands for:

Customer Identification Program
Consumer Identification Protocol
Corrected Information Protocol
Correspondent Information Program

Answer 8

The answer is Customer Identification Program. The PATRIOT Act requires covered entities to have and use Customer Identification Programs, or CIPs, to help verify consumer identities and combat identity theft, money laundering, and terrorist financing activities.

Question 9

All of the following are mortgage loans subject to coverage under the Home Mortgage Disclosure Act, except:

A loan to purchase a condominium unit
A home improvement loan made for the purpose of repairing, rehabilitating, or remodeling a dwelling
A home equity loan used to pay off outstanding medical bills
A loan to purchase a mobile home or multi-family dwelling

Answer 9

The answer is a home equity loan used to pay off outstanding medical bills. Loans subject to the Home Mortgage Disclosure Act (HMDA) include home purchase loans for any residential dwelling, home improvements loans made for the purpose of repair, rehabilitation or remodeling a dwelling, and refinance loans of a loan previously covered by HMDA.

Question 10

The Interagency Guidance on Nontraditional Mortgage Products applies to:

Any adjustable-rate mortgage
Any mortgage with a prepayment penalty
Any mortgage that requires a determination of ability to repay
Any mortgage which allows the deferment of principal or interest

Answer 10

The answer is any mortgage which allows the deferment of principal or interest. Under the Guidance, the term “nontraditional mortgage product” refers to a closed-end residential mortgage loan product that allows a borrower to defer payment of principal and sometimes interest.

Question 11

Which of the following transactions would carry monthly mortgage insurance?

VA 100% LTV, 30-year fixed
Conventional 80% first, 15% second; combined LTV of 95%
Conventional 30-year fixed, 72% LTV
FHA 30-year fixed, 20% down

Answer 11

The answer is FHA 30-year fixed, 20% down. For all FHA insured mortgages involving an original principal obligation less than or equal to 90% LTV, regardless of amortization terms, an annual mortgage insurance premium will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.

Question 12

Which of the following is true of the repayment of a construction loan?

Principal is repaid when all the work is completed
Interest is paid upfront, when the funds are released
Principal and interest are paid in installments until the work is completed
Principal is repaid in installments until the work is completed

Answer 12

The answer is principal is repaid when all the work is completed. Repayment of the principal of a construction loan is required at the time work is concluded. Interest is charged on funds as they are released and repaid in interest-only installments while work is ongoing.

Question 13

Subordinate financing relates to:

Seller financing
Second mortgages
Financing in the secondary mortgage market
Subprime loans

Answer 13

The answer is second mortgages. Subordinate financing relates to the making of a loan that is secondary to one or more other loans on the property. A mortgage is a second mortgage when it is recorded after another mortgage that is still outstanding on the same property, or it has a subordination clause specifying that it has lower priority or will remain subordinate in the event that the first mortgage is refinanced.

Question 14

Which of the following best describes the tolerance applicable to the escrow account?

Tolerance depends on certain factors
Zero tolerance
No tolerance requirement
10% tolerance

Answer 14

The answer is No tolerance requirement. There is no tolerance requirement for an escrow account. In other words, the creditor may charge more than it discloses in the Loan Estimate as long as the original estimate was based on the best available information at the time. Other charges that do not have a tolerance limitation include prepaid interest and property insurance premiums.

Question 15

Which of the following lists contains a piece of information which will usually not be found on the 1003?

Mortgage type, borrower’s housing expenses, purchase price
Borrower’s name, borrower’s Social Security Number, underwriter’s name
Subject property address, PMI, closing costs paid by the seller
Borrower’s income, interest rate, loan term

Answer 15

The answer is Borrower’s name, borrower’s Social Security Number, underwriter’s name. The underwriter’s name is not included in the 1003.

Question 16

If a consumer pays more at consummation than what was disclosed in the Loan Estimate and the amounts exceed the tolerances allowed by law, the creditor must:

Refund the excess within 60 calendar days of consummation
Provide an additional disclosure acknowledging this fact
Waive all application fees
Refund the excess within five business days of providing the Closing Disclosure

Answer 16

The answer is refund the excess within 60 calendar days of consummation. If a consumer pays more at consummation than what was disclosed in the Loan Estimate and the amount paid exceeded the allowable tolerances, the creditor must refund the excess to the consumer within 60 calendar days of consummation. For those charges subject to zero tolerance, the full amount in excess of the amount disclosed must be refunded. For charges subject to the 10% tolerance, to the extent the total sum of the charges added together exceeds the sum of all such charges disclosed on the Loan Estimate by more than 10%, the difference must be refunded to the consumer.

Question 17

Which of the following best describes a lender’s obligation under the Ability-to-Repay Rule?

Lenders may not close loans with a debt-to-income ratio above 43%
Lenders must always require two years of tax returns in order to assess income
Lenders must make a reasonable determination regarding the borrower’s ability to repay the loan
Lenders must guarantee the borrower’s payments for the first 24 months of the loan

Answer 17

The answer is Lenders must make a reasonable determination regarding the borrower’s ability to repay the loan. Under the Ability-to-Repay Rule, a creditor must make a good faith determination that the borrower will be able to repay the mortgage loan according to its terms. Such a determination must be made based on a periodic payment amount, calculated at the fully-indexed rate and a schedule that fully amortizes the loan.

Question 18

If required, the amount of flood insurance must be the lower of:

80% of the replacement cost or the unpaid principal balance of the loan
The insurable value or the unpaid balance of the loan
The insurable value or the appraised value
100% of the replacement cost or the unpaid balance of the loan

Answer 18

The answer is 100% of the replacement cost or the unpaid balance of the loan. A lender may not make, increase, extend, or renew a loan that is secured by improved real estate or a mobile home located in an area designated by the government as a Special Flood Hazard Area (SFHA), unless the building or mobile home and any personal property securing the loan are covered by flood insurance for the entire loan term with a limit of the lesser of the outstanding principal loan balance or 100% of the replacement cost of the property, less the value of the land.

Question 19

A borrower is claiming capital gain income on their tax returns. Which of the following is most accurate with regard to using the income to qualify for a mortgage loan?

The income can be used, as long as the borrower provides an explanation for the income
The income can be used, as long as the borrower can show a history of receiving the income and document that the income will continue
Capital gain income can never be used in qualifying a borrower
The income can be used, as long as the borrower has reported capital gain income for the last two years on their tax returns

Answer 19

The answer is the income can be used, as long as the borrower can show a history of receiving the income and document that the income will continue. To qualify a borrower for a conforming loan, stable monthly income can include secondary sources of income that may vary in terms of quantity, quality, and durability. The average of capital gains income can be counted as a source of income if the applicant has consistently turned over assets over a sustained period of time (e.g., two years) and owns additional property or assets that can be sold to make future mortgage payments.

Question 20

An underwriter may require _____ in order to document the income of a commissioned borrower.

Two years’ tax returns if the borrower’s commissions represent 20% of his/her income
1099s from the previous year
Profit and loss statement and two years’ tax returns
Two years’ tax returns and all schedules if the commission income is more than 25% of income

Answer 20

The answer is two years’ tax returns and all schedules if the commission income is more than 25% of income. Commissioned borrowers may be required to show two years’ tax returns if their commission income is more than 25% of their total income.

Question 21

Which of the following would not be considered a prepaid finance charge?

Title insurance premium
Flood certification fee
Discount points
Upfront mortgage insurance premium

Answer 21

The answer is title insurance premium. A prepaid finance charge is any finance charge paid separately, in cash or by check, before or at consummation of the loan or withheld from the proceeds. They include loan origination, discount, and commitment fees, any prepaid private mortgage insurance premium, upfront mortgage insurance premium, VA funding fee, or USDA guaranty fee, underwriting, processing, and courier fees, if paid to the creditor, buydown funds, and prepaid interest. The cost of a title insurance premium is NOT a prepaid finance charge.

Question 22

If a borrower has a fixed-rate mortgage and her taxes and insurance are included in her monthly payments, which of the following does not change over the life of the loan?

Principal amount combined with interest amount in payment
Interest amount in payment
Tax amount in payment
Principal amount in payment

Answer 22

The answer is principal amount combined with interest amount in payment. The payment amount related to principal and interest on a fixed-rate mortgage loan will not change. However, if the borrower is paying property taxes and/or insurance through an escrow account established by the lender, if either of those mortgage-related expenses increase or decrease, the monthly payment amount will change accordingly.

Question 23

A borrower closes in April. His first payment is due June 1. If his insurance is due on November 1st, how many months of insurance premiums must be collected at closing to properly fund the escrow account (not accounting for any cushion)?

Six
Five
Four
Seven

Answer 23

The answer is seven. In order to ensure that the escrow account has a full year’s worth of money by November 1st, the account needs to be “front loaded” at closing with the number of months needed to total 12 months.

Let’s assume that the annual premium is $1200.
Each month, $100 is going into the account starting June 1.
Here’s how much will be in the escrow account month by month:
JUNE 1 = $100
JULY 1 = $200
AUG 1 = $300
SEPT 1 = $400
OCT 1 = $500
NOV 1 = (-) 1200 ***This is how much is needed by 11/1. Since there will be $500 in the account by that time, the borrower will need to bring $700 or 7 months’ worth of insurance to the closing to ensure that there is enough in the account to pay for the insurance premium.

Question 24

Which of the following would not be covered by the GLB Act?

Processor
Loan broker
Title company
Appraiser

Answer 24

The answer is Appraiser. The Gramm-Leach-Bliley Act requires financial institutions to give privacy notices to consumers, explaining their information-sharing policies. The GLB Act applies to financial institutions that offer financial products and services to individuals. Persons covered would include loan processors and loan brokers. Since title companies also handle consumers’ personal information, such entities would be covered as well. Appraisers are not covered under the GLB Act.

Question 25

Each of the following may be associated with contract kiting, or double-contract fraud, except:

A silent second
An inflated purchase price
A cash-back transaction
An under-secured loan

Answer 25

The answer is a silent second. Contract kiting (also known as double contract or dual contract) occurs when a seller agrees to create a second, falsified sales agreement with an inflated purchase price so the buyer can obtain a larger loan from a lender. This would result in the buyer obtaining all the funds necessary to pay off the seller’s lower actual selling price from the loan proceeds, possibly getting cash back, and the lender being under-secured and subject to greater loss in the event of default.

Question 26

The Privacy of Consumer Financial Information Rule:

Was authorized by the Truth-in-Lending Act
Governs the collection and disclosure of consumers’ personal financial information by financial institutions
Requires financial institutions to implement programs to guard against identity theft
Allows a financial institution to share nonpublic personal information of a customer only if it obtains written permission from the customer

Answer 26

The answer is governs the collection and disclosure of consumers’ personal financial information by financial institutions. The Privacy of Consumer Financial Information Rule, arising from the Gramm-Leach-Bliley Act, governs the collection and disclosure of customers’ personal financial information by financial institutions. It requires financial institutions to provide privacy notices to their customers, setting forth their privacy practices with regards to information collected and shared, and to offer customers the right to opt out of allowing their information to be shared.

Question 27

All of the following are red flags that broker-facilitated fraud is likely to occur or is occurring, except:

The lender is not provided with original documents within a reasonable time
Numerous applications from a particular loan originator have unique similarities
A sharp decrease in the overall volume of loans processed by a particular loan originator during a short time period
An unusually-high volume of loans with maximum loan-to-value limits from one loan originator

Answer 27

The answer is a sharp decrease in the overall volume of loans processed by a particular loan originator during a short time period. Broker-facilitated fraud can be fraud for housing, fraud for profit, or a combination of both. Warning signs may include, among other things, the following: the lender is not provided with original documents within a reasonable time; one mortgage loan originator has originated an unusually-high volume of loans with maximum loan-to-value limits; numerous applications from a particular mortgage loan originator have unique similarities; a high volume of loans exists in the name of trustees, holding companies, or offshore companies; an unusually large number of repurchases, foreclosures, delinquencies, early payment defaults, prepayments, missing documents, high-risk characteristics, quality control findings, or compliance problems is noted on loans processed by a particular mortgage loan originator; and an unusually-large increase in the overall volume of loans processed by a particular mortgage loan originator during a short time period.

Question 28

When may a mortgage loan originator give preferential treatment to a borrower?

Any time
Never
Never, unless the borrower is a member of a minority race
At any time, as long as it is not based on a class covered by the Equal Credit Opportunity Act

Answer 28

The answer is At any time, as long as it is not based on a class covered by the Equal Credit Opportunity Act. The Equal Credit Opportunity Act (ECOA) was enacted in 1974 with the goal of ensuring that all persons, consumers, and businesses are given an equal chance to obtain credit. A creditor cannot discriminate against, or give preferential treatment to, an applicant in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, or age, because all or part of income derives from a public assistance program, or because he or she has in good faith exercised any right under the Consumer Credit Protection Act.

Question 29

Which of the following would not be considered a valid changed circumstance for the issuance of a revised Loan Estimate?

Inaccurate information
Technical error on the disclosure
Natural disaster
New information

Answer 29

The answer is technical error on the disclosure. A revised Loan Estimate may be issued if a valid “changed circumstance” occurs or information previously provided and upon which the loan originator offered the original Loan Estimate changes or was inaccurate and causes a change in a settlement charge. Changed circumstances that may affect settlement costs and provide an acceptable reason to issue a revised Loan Estimate include a natural disaster, the title insurer whose fees for title insurance are disclosed goes out of business, or new information arises that reveals a pending property boundary dispute.

Question 30

A property flipping scheme may involve any of the following, except:

A buyer purchasing a property with the intent to reside there for only two years
A seller who is not the owner of record of the property
A notable increase in the value of the property with no known improvements made
The use of unusual comparable properties

Answer 30

The answer is a buyer purchasing a property with the intent to reside there for only two years. A property flipping scheme may involve an inflated sale price, the result of a fraudulent appraisal based on unusual comparables, or a higher sale price without any accompanying improvements to the property. The borrower may not be the owner of record. Property flipping schemes involve the quick turnover of a property, with each sale at a higher price. A borrower planning to live in the property for two years would not be a flag for a property flipping scheme. The Higher-Priced Mortgage Loan Rule provides protection against flipping schemes, requiring two written appraisals before a property can be resold within 90 to 180 days at a price 10% to 20% higher than the purchase price.

Question 31

In an adjustable-rate mortgage loan, recast:

Is the time in the loan term where periodic payments must be of sufficient amount to fully amortize the loan within the remaining term
Occurs when the terms of a mortgage loan are modified
Is the time during which interest-only payments may be made on a loan
Is a provision allowing the borrower to change the amount of principal owing each month

Answer 31

The answer is is the time in the loan term where periodic payments must be of sufficient amount to fully amortize the loan within the remaining term. Recast is the time within a loan’s term at which payments that will fully amortize the loan over its remaining term are required. In other words, recast occurs at the end of the period during which payments on an adjustable-rate mortgage are based on a low introductory rate. Interest-only payments may be made on an interest-only loan, or negatively-amortizing payments may be made on a negative amortization loan.

Question 32

To qualify for licensing or registration as a state-licensed loan originator, an applicant must meet certain minimum standards. Among these is a requirement to:

Meet a net worth or surety bond requirement
Pay an amount equaling 2% of the dollar value of loans originated as a first-time application fee
Have completed high school
Be at least 21 years of age

Answer 32

The answer is meet a net worth or surety bond requirement. To qualify for licensing or registration as a state-licensed mortgage loan originator, an applicant must meet certain minimum standards. These include education and testing standards and minimum financial responsibility requirements. Such requirements may include a minimum net worth, surety bond acquisition requirements, or establishment of a recovery fund paid into by mortgage loan originators.

Question 33

Which of the following is NOT true about the Consumer Financial Protection Bureau (CFPB)?

The CFPB was authorized under the Dodd-Frank Act
The CFPB provides approval for loan originator education content
The CFPB promotes education about financial issues for consumers
The CFPB is the federal agency that takes complaints from consumers who feel they have been harmed by a mortgage licensee

Answer 33

The answer is The CFPB provides approval for loan originator education content. The Consumer Financial Protection Bureau (CFPB) was authorized under the federal Dodd-Frank Act. The mission of the CFPB is to make markets for consumer financial products and services safe for Americans. The CFPB is charged with overseeing federal consumer financial laws by, among other things, writing rules and enforcing federal consumer financial protection laws, restricting unfair, deceptive, or abusive acts or practices, taking consumer complaints, promoting financial education, and monitoring financial markets for new risks to consumers. The NMLS provides the approval for education content and licensing examinations.

Question 34

State supervisory authority includes all of the following, except:

Conducting annual examinations of mortgage loan originators
Issuing licenses in a form approved by the NMLS
Reporting violations of state law related to origination activities to the NMLS
Maintaining individual databases

Answer 34

The answer is maintaining individual databases. Under the S.A.F.E. Act, a state agency has a duty to enact licensing standards that meet S.A.F.E. Act requirements, including pre-licensing education courses, conducting pre-license testing, and issuing licenses. While the state agency must report violations of mortgage law to the NMLS, it is not required to maintain other individual databases related to mortgage professionals outside of the NMLS.

Question 35

Which of the following would be considered material information when soliciting or originating a residential mortgage loan?

The length of time the loan originator has been licensed
Whether the loan product provides for a prepayment penalty
The number of lenders with which a loan originator works
An explanation of how title will be held

Answer 35

The answer is Whether the loan product provides for a prepayment penalty. A representation, omission, act, or practice is material if it is likely to affect a consumer’s choice of or conduct regarding the product or service. Information about a loan product’s terms, including whether the loan provides for a prepayment penalty, would be considered material information.

Question 36

If mortgage loan originator Edna Eager produces an ad, which of the following would NOT require additional disclosures?

A “5% down payment” promotion
A loan with a payment of $500
A loan with 100% financing
A loan with “low finance charges”

Answer 36

The answer is A loan with 100% financing. Trigger terms used in advertisement for mortgage products require additional disclosures regarding the promotion. Trigger terms in closed end loans include the number of payments, payment amount, down payment and finance charges. Since a loan with 100% financing would require no down payment, there is nothing further to disclose.