MLO Test Ready Flashcards
When ordering an appraisal, it is illegal to. . .
Request that the appraiser return a minimum or specific value. Mortgage professionals are permitted to communicate their own or the borrower’s opinion when ordering an appraisal; however, requesting a specific or minimum value is considered improper influence of an appraiser and is a serious ethical and legal violation.
Borrower credit is…
An amount paid by the lender to borrower for locking an interest rate at a rate higher than the par rate. The borrower credit is used to help the borrower subsidize closing costs in exchange for taking the higher rate.
MAP Rule implementing regulations…
Regulation N
Equity stripping is…
The unethical practice of basing a loan approval on only the appraised value of the property. The practice does not consider repayment ability. Some states have passed regulations aimed at prohibiting the practice.
Three conditions that an affiliated business must meet to satisfy referral requirements…
Disclosure of the relationship
No required use of the referred entity
Limitations on the “things of value” resulting from the arrangement
Regulation Z prohibits advertising…
An attractive interest rate or loan term that is not actually available. TILA and Regulation Z include a number of prohibitions and requirements against deceptive advertising practices.
The Safeguards Rule and Disposal Rule are concerned with…
Preserving the confidentiality of personal financial information. The FTC’s Disposal Rule and the Gramm-Leach-Bliley Act Safeguards Rule outline the manner in which financial information must be protected while being maintained by an entity and during the process of record disposal.
“Fiduciary duty” means…
One person (agent) is acting in the best interests of another. It requires loyalty, good faith, and an obligation of the agent to consider the interests of the other person before their own.
An air loan is…
A fraudulent transaction where a fictitious borrower obtains a mortgage and secures it with fictitious property. Air loans may also include fictitious employers, appraisers, and credit agencies in order to obtain verifications necessary to process the loan application.
Equity-based lending occurs when…
A lending decision is based on the equity available in the borrower’s home rather than creditworthiness and ability to repay.
Yield spread premiums are now known as…
Borrower credits.
What are the penalties for violation of RESPA/Section 8?
Section 8 of RESPA prohibits referral fees and other forms of kickbacks/fee splitting. Penalties include fines of up to $10,000 and up to one year in prison.
Disclosures due within three business days of loan application…
Loan Estimate
Your Home Loan Toolkit: A Step-by-Step Guide
CHARM Booklet
Variable-rate program disclosures
Home equity plan disclosures
Notice of Right to Receive an Appraisal Report
What can result in a $1,000,000 fine and 30 years in prison?
Acts of mortgage fraud.
Definition of the term “creditor”
The Equal Credit Opportunity Act (ECOA), the Fair Credit Reporting Act (FCRA), and the Fair and Accurate Credit Transactions Act (FACTA) all use the same definition of creditor. A creditor is any person who regularly extends, renews, or continues credit. Loan originators, lenders, and other mortgage professionals are included in this definition.
Transactions reported under HMDA…
Purchases
Refinances
Home improvement loans
Pre-qualifications must also be reported, along with their disposition
When a borrower’s LTV reaches 80%…
He/she is permitted to request cancellation of PMI. The Homeowners Protection Act sets the requirements for cancellation of PMI. It is at the lender’s discretion to permit cancellation – the borrower must be current on payments.
An initial privacy notice is due…
At the time that a customer relationship is established. The Gramm-Leach-Bliley Act requires financial institutions (including mortgage brokers) to provide an initial privacy notice “…not later than when you establish a customer relationship…” The initial privacy notice should also be accompanied by the opt-out notice.
HMDA requires loan originators to…
Request information on an applicant’s race, ethnicity, and sex. The applicant may decline to answer, in which case the loan originator must make a best guess based on visual observation. This information is necessary to meet the reporting requirements of HMDA.
A permissible purpose is required…
When obtaining a credit report. Under FCRA, lenders and mortgage professionals must provide the consumer reporting agency with a certification of permissible purpose in order to pull credit. Loan qualification is considered a permissible purpose.
The Gramm-Leach-Bliley Act does not protect…
Publicly-available information. This includes information that can be found in government real estate records, information available from the phonebook, and information included on a public, unrestricted website.
The Loan Estimate must be provided…
No later than three business days after receiving a completed application
No later than seven business days prior to consummation
The Closing Disclosure must be provided…
At least three business days prior to consummation
Exceptions to ECOA prohibited inquiries…
Although ECOA prohibits inquiries about protected personal characteristics, mortgage professionals are permitted to ask about race, ethnicity, and sex for the purposes of compliance with government monitoring programs (such as HMDA). Inquiries about protected characteristics may also be used to determine eligibility for special-purpose credit, such as assistance programs through non-profits.
The purpose of the Homeowners Protection Act is to…
Facilitate the cancellation of private mortgage insurance (PMI). Borrowers can request cancellation when their loan reaches 80% loan-to-value (20% equity), but the law requires automatic termination of PMI at 78% LTV (22% equity).
Advertising trigger terms for closed-end loans under TILA include…
Amount or percentage of any down payment
Number of payments or period of repayment
Amount of any payment
Amount of any finance charge
Use of trigger terms in advertisements requires disclosure of:
Amount and percentage of the down payment
Terms of repayment, such as inclusion of a balloon payment
Annual percentage rate
The TRID Rule does not apply to…
HELOCs
Reverse mortgages
Mortgages secured by a mobile home or dwelling not attached to real property
Fee splitting is illegal when…
One or both settlement service providers fail to perform enough work to earn the fee.
“Low monthly payments” is an example of…
An advertising trigger term under Regulation Z. TILA/Regulation Z requires additional information to be provided in an advertisement that contains trigger terms. Most commonly, APR must be provided if the advertisement includes the note rate.
Regulation B…
Is the regulation that issues the rules for the Equal Credit Opportunity Act.
Credit not covered by TILA…
Business or agricultural credit
Credit in excess of $25,000, unless it is secured by a dwelling/real property
Public utility credit
Student loans
Home fuel budget plans
When a borrower reaches a 20% equity position…
He/she is permitted to request cancellation of PMI (private mortgage insurance). The Homeowners Protection Act sets the requirements for cancellation of PMI. It is at the lender’s discretion to permit the cancellation at 80% LTV – the borrower must be current on payments.
The PATRIOT Act requires…
Financial institutions to verify the identity of a person applying for a loan, maintain a record of the information used for verification, and determine whether a potential borrower appears on known terrorist lists.
Nonpublic personal information is…
Information derived from a credit report or provided with respect to loan application. Examples might include loan balances, account numbers, unlisted phone numbers, etc. Nonpublic personal information is protected by the provisions of the Gramm-Leach-Bliley Act.
Where is borrower credit disclosed?
Borrower credit – an amount paid to a mortgage loan originator by a lender for locking a loan in at an interest rate above the par rate – must be disclosed on the Loan Estimate and Closing Disclosure. Updated versions of the forms are intended to make disclosure of borrower credit clearer to borrowers.
What purpose does escrow analysis serve?
An aggregate escrow analysis (Annual Escrow Statement) is provided to borrowers annually, pursuant to Section 10 of RESPA. Its purpose is to prevent escrow overages. According to Section 10, the cushion of funds maintained in the escrow account cannot exceed one sixth (two months) of the annual cost of taxes and insurance.
Regulation X…
Is the regulation that issues the rules for the Real Estate Settlement Procedures Act.
Who issues and enforces regulations for TILA?
The CFPB
When must APR be initially disclosed?
APR must be initially disclosed within three business days of application.
Following initial disclosure of APR, when can the transaction proceed to closing?
The transaction can proceed to closing after seven business days have elapsed from issuance of the initial Loan Estimate.
Protected characteristics under ECOA include…
Race
Color
Religion
National origin
Sex
Marital status
Age
Receipt of income from a public assistance program
Exercise of rights under the Consumer Credit Protection Act, including the Truth-in-Lending Act
Purpose of HMDA…
The Home Mortgage Disclosure Act is a reporting law that helps the federal government identify discriminatory lending practices. It also ensures that depository institutions are meeting the needs of their communities. HMDA requires mortgage professionals to report information about loan transactions and demographics (race, sex, etc.) of applicants.
When multiple parties have rescission rights…
Any one of them may exercise the right to terminate the transaction. Under TILA/Regulation Z, an individual has rescission rights when he/she has an ownership interest in the property. The individual does not necessarily have to be a party to the loan transaction.
A revised Loan Estimate is required…
If a floating rate is locked.
The definition of a business day that applies to deadlines for providing the Loan Estimate is…
Any day on which the creditor’s offices are open to the public for carrying out substantially all business functions.
What is the Servicing Transfer Statement?
Required under Section 6 of RESPA, the Servicing Transfer Statement advises a borrower when their loan has been transferred to another servicer. It must be provided 15 days prior to the servicing transfer. The new servicer must also provide notice within 15 days after the transfer and may not assess late fees for a period of 60 days following the transfer.
A revised Loan Estimate is due…
Within three business days of receiving information prompting the change and at least four business days prior to consummation.
TILA covers loans when…
The borrower’s dwelling secures the mortgage debt
The homeowner uses the proceeds of the loan for personal, family, or household purposes
Prohibitions under ECOA include…
Inquiries about protected characteristics
Discouraging applicants from applying for a loan
Refusing to consider public assistance, alimony/child support, or pension/retirement benefits as income
Assumptions, inquiries, or credit decisions based on childbearing or child-rearing plans
What is PMI?
Private mortgage insurance is required by conventional lenders when a borrower makes a down payment of less than 20% (or has less than 20% equity). It is governed by the Homeowners Protection Act and must be discontinued when the loan reaches 78% loan-to-value (22% equity), assuming the borrower has met the terms of the agreement to that point.
Borrower identity verification is required under…
The USA PATRIOT Act. The Act requires financial institutions to verify the identity of persons involved in financial transactions, as a counter-terrorism measure.
Regulation Z…
Is the regulation that issues the rules for the Truth-in-Lending Act.
What is the Notice of Right to Cancel?
It is a disclosure providing notice of the right to rescind certain lending transactions. It is due at closing for refinances and other types of home equity loans, such as HELOCs. Two copies must be provided to each person with ownership interest in the property.
When is the Mortgage Servicing Disclosure provided?
It is included on the Loan Estimate, which is due within three business days following application. If the loan application is for a reverse mortgage, open end mortgage or for a temporary loan, the disclosure is due within 3 business days following a loan application.
Requirements for “Your Home Loan Toolkit: A Step-by-Step Guide” include:
Only one copy is required for multiple borrowers
The booklet can be reproduced in any form
The booklet can be translated into other languages
The booklet can be stamped with a business/mortgage professional’s name
The booklet cannot be made part of other, larger documents
What is APR?
The annual percentage rate is the cost of credit expressed as a percentage. It includes the interest on the loan as well as any finance charges. It must be disclosed to a consumer within three business days of loan application, along with the finance charge, and must be accurate within one eighth of 1%.
Loans not covered by RESPA include…
Loans for:
Business, commercial, or agricultural purposes
Temporary financing (bridge loans)
Vacant land
Loan conversions
The Closing Disclosure is due…
No later than three business days prior to consummation.
What are the penalties for violations of ECOA?
Violators of ECOA can face civil penalties of $5,000 per day. A pattern of misconduct can result in civil penalties of $25,000. Punitive damages can result in fines of up to $10,000 in individual actions or the lesser of $500,000 or 1% of the violator’s net worth.
The purpose of FCRA is…
The Fair Credit Reporting Act (FCRA) is aimed at ensuring the accuracy, fairness, and privacy of consumers’ personal information that is assembled and used by consumer reporting agencies.
An Opt-Out Notice is due…
At the same time as the Initial Privacy Notice - i.e., when a customer relationship is established. The Gramm-Leach-Bliley Act requires financial institutions (including mortgage brokers) to provide an Opt-Out Notice with a method for customers to opt out of the sharing of their personal information.
Phone numbers remain on the Do-Not-Call Registry….
Indefinitely. Amendments to the Telemarketing Sales Act in 2007 permit consumers to place their telephone numbers on the Registry indefinitely.
Responsibility for delivering the Closing Disclosure belongs to the…
Creditor.
A revised Closing Disclosure may be provided…
At or before consummation.
After loan servicing is transferred…
The new servicer cannot assess late fees for a period of 60 days.
What is the finance charge?
The finance charge is the cost of credit expressed as a dollar amount. Finance charges include interest and other fees paid in conjunction with the loan transaction, such as broker fees and points. It must be disclosed to a consumer within three business days of loan application, along with the APR, and must not be understated by more than $100
Who has the right to rescind a loan transaction?
Anyone with an ownership interest in the property.
Civil action under ECOA…
Must be taken by consumers within five years of a violation. An exception exists in that if an Attorney General initiates action, the aggrieved consumer may take action within one year of the initiation of proceedings.
The purpose of FACTA is…
The Fair and Accurate Credit Transactions Act (FACTA) was passed as an amendment to the FCRA. It includes provisions to address identity theft, facilitate consumers’ access to the information retained by CRAs, and improve the accuracy of consumer reports.
The disclosure due at least seven business days prior to closing is the…
Loan Estimate
Changes in the Closing Disclosure that require a new three-day waiting period include…
A change in the APR
A change in the loan product
Addition of a prepayment penalty
Fees charged for preparation of a Closing Disclosure…
Are prohibited
ECOA’s purpose is…
To promote the availability of credit to all creditworthy applicants, regardless of their race, color, religion, national origin, sex, marital status, or age. It also prohibits discrimination against credit applicants based on receipt of public assistance or participation in credit counseling programs (exercise of rights under the Consumer Credit Protection Act).
Government charges include…
Charges to record the mortgage
Transfer tax
Other charges established by the state or municipality
What are “things of value”?
Under RESPA, “things of value” are any payment, advance, loan, or service, including: money, discounts, commissions, salaries, stock, opportunities to participate in a money-making program, special banking terms, tickets to theatre or sporting events, services at special rates, and trips at another’s expense. Things of value are illegal when they are provided in exchange for referrals.
Payment of referral fees is…
A violation of RESPA/Regulation X. Referral fees are considered unearned fees under RESPA. Any “thing of value” (money, gifts, discounts, etc.) given in exchange for a business referral is illegal under Section 8 of RESPA.
The Notice of Right to Rescind is required…
For refinances and other home equity loans, such as HELOCs. The loan must be secured by the borrower’s principal residence. The right to rescind the loan generally must be exercised within three business days of closing.
What is the Notice of Adverse Action?
Under ECOA, loan applicants must be advised of the status of their application within 30 days of application. If their application is turned down, they must receive a Notice of Adverse Action advising them of the reason for denial as well as a number of other rights.
Historically, what was YSP?
Yield spread premiums were fees paid by a lender to a mortgage loan originator for originating a loan at a rate higher than the par rate. It was intended to provide a resource for originators to subsidize borrower closing costs. Now referred to as borrower credit, these fees are applied to the costs of closing, to benefit the borrower.
What must occur within 20 days of rescission?
The lender must return any money or property paid by the borrower in connection with the loan. This might include broker fees, application fees, and third-party settlement fees.
Page Five of the Closing Disclosure shows the…
Total of payments
Finance charge
Amount financed
APR
Total interest percentage
Other disclosures (appraisal, contract details, liability after foreclosure, refinance, tax deductions)
Questions? box
Contact information
Confirm receipt box (signature of borrower[s])
Accepting a referral fee can lead to…
Fines of up to $10,000 and one year in prison. Accepting a fee in exchange for a referral is a violation of RESPA/Regulation X.
The purpose of TILA is…
The Truth-in-Lending Act is a consumer protection law aimed at providing consumers with disclosure of the cost and terms of credit. It also ensures that advertisements are truthful and allows borrowers to rescind (cancel) certain types of transactions.
The purpose of Do-Not-Call provisions…
The Do-Not-Call Implementation Act was passed under the Telemarketing Consumer Fraud and Abuse Prevention Act/Telemarketing Sales Rule. It is a consumer protection law that permits consumers to restrict unwanted sales calls to their homes.
What is “Your Home Loan Toolkit: A Step-by-Step Guide”?
“Your Home Loan Toolkit: A Step-by-Step Guide” provides information on the settlement process, explains consumer rights under RESPA, and warns against the use of false information on the loan application. It applies to purchase transactions only and is due within three business days of application.
The purpose of the Red Flags Rule is…
The Red Flags Rule was created by the Federal Trade Commission under FACTA. The purpose is to address identity theft by focusing on methods of detecting a security breach.
Page Three of the Closing Disclosure shows the…
“Calculating Cash to Close” table
Summaries of transactions
What are the penalties for violation of the GLB Act?
The Gramm-Leach-Bliley Act does not include any specific penalties, but authorizes regulating agencies to bring enforcement actions and impose penalties. The FTC can bring action against mortgage brokers under the Federal Trade Commission Act. This Act provides for penalties of up to $10,000.
Page Two of the Loan Estimate includes the…
Loan Costs table
Other Costs table
Calculating Cash to Close table
Adjustable Payment table
Adjustable Interest Rate table
Who regulates RESPA?
The CFPB
What disclosure is due at the time of making a referral?
The Affiliated Business Arrangement Disclosure. Required by RESPA, it advises loan applicants that an affiliated business arrangement exists and lets them know that they are not required to use the referred entity.
The Red Flags Rule requires…
Creditors to create a policy to identify and mitigate the risks of identity theft. The Red Flags Rule was created by the FTC pursuant to FACTA.
What are the penalties for violations of TILA?
TILA does not address penalty amounts for open-end mortgage loans. For closed-end loans secured by a dwelling, the civil penalty is at least $400 and up to $4,000. The criminal penalty includes a fine of up to $5,000, imprisonment for up to one year, or both.
RESPA applies to…
Federally-regulated mortgage loans. This includes first and second liens and is such a broad definition that RESPA applies to virtually all residential mortgages secured by real property.
What fees are never included in finance charges?
Title insurance and title examination fees, doc prep fees, notary fees, seller’s points, and appraisal/credit report fees (if they are charged to all applicants as part of loan application).
What is the Notice of Right to Receive an Appraisal Report?
Under ECOA, loan applicants who have been turned down (adverse action) have the right to receive a copy of their appraisal report. They must be provided with disclosure of this right using the Notice of Right to Receive an Appraisal Report. The notice is due no later than three business days after a creditor receives an application for a loan secured by a first lien on a dwelling.
The regulations requiring the Loan Estimate and Closing Disclosure are known as the…
TILA-RESPA Integrated Disclosure Rule
When is the Affiliated Business Arrangement Disclosure provided?
At the time of the referral. The Affiliated Business Arrangement Disclosure is required only if customers are referred to a settlement service provider that is an affiliated business.
What fees are included in finance charges?
Finance charges include: interest, loan origination fees and points, mortgage broker fees, and credit life insurance fees (when insurance is required). Appraisal and credit report fees are not included if they are part of application fees which are charged to all applicants.
What happens when a loan is rescinded?
Each party to the transaction is restored to their previous position. The transaction is canceled and funds and property must be returned.
The three-year right to rescind exists for…
Borrowers who did not receive a notice of the right to rescind or accurate disclosures as required by law.
HOEPA high-cost home loan thresholds…
APR threshold
Points and fees threshold
Prepayment penalty threshold
Interest is defined as…
Money that a lender earns from a loan. The rate of interest depends on the market rates for the type of loan and the qualifications of the borrower.
Seller concessions for conforming loans with an LTV of greater than 90% are…
Limited to 3%. Limitations for seller financing – or seller concessions – are established by Fannie Mae and Freddie Mac for conforming loans. Limits are based on the down payment or loan-to-value (LTV) ratio.
“PFC” stands for…
Prepaid finance charge. Prepaid finance charges are items paid at closing, such as discount points, prepaid interest, etc.
FHA loans are beneficial because…
They are insured by the federal government. This provides security for the lender in the event that the borrower defaults on payments.
A deed of trust is…
A document used in place of a mortgage to secure the payment of a promissory note. This method is used in many states.
“COFI” stands for…
The Cost of Funds Index. COFI is a common index used to determine rate adjustments on adjustable-rate programs.
Option ARMs offer payment choices such as…
Principal and interest
Interest-only
Minimum payment of the loan amount
These flexible payment options made option ARMs popular products, but were often misunderstood by borrowers, leading to negative amortization.
“APR” means…
Annual percentage rate. This is the cost of credit expressed as a percentage. The Truth-in-Lending Act requires disclosure of this amount to loan applicants.
A nonconforming loan…
Is one that exceeds Fannie Mae and Freddie Mac’s loan limits or underwriting standards.
A reconveyance clause…
Is the method used to transfer title for a property following full payment of a loan. Reconveyance is typically used with a deed of trust.
MIP is mandatory when a loan is…
An FHA loan. FHA loans require both upfront MIP (UFMIP), calculated at a rate of 1.75%, and annual MIP.
A reverse mortgage is…
A type of loan program that provides the borrower with funds based on equity. They do not have to repay the loan as long as they live in the home. Reverse mortgages are only available to borrowers who meet a certain minimum age (generally 62 years of age or older).
A subordinate lien is…
The same as a second mortgage. It may also be called a junior lien.
A HECM is…
A reverse mortgage. The Home Equity Conversion Mortgage is specifically a government reverse mortgage program.
What is a mortgage?
A legal document that connects a promissory note with the collateral used to secure the note. In the case of a mortgage, the collateral is the subject property.
A loan with a balloon payment provision…
Is made up of a series of smaller periodic payments with a larger lump sum due at maturity. Many of these loans include a refinance provision so that the borrower can avoid the larger payment and start a new amortization schedule on the remaining loan amount.
A deed is…
A legal instrument that conveys title to real property.
An amortization schedule…
Is a table providing the periodic payments needed to pay off a loan by the end of its term. The payments include principal and interest.
Fannie Mae’s purpose is to…
Provide sources of funds for lenders. This is accomplished in the secondary market through securitization.
The Federal Housing Administration…
Insures loans. FHA loans are insured by the federal government against borrower default.
What is foreclosure?
The sale of a property after a borrower has defaulted on payments to the lender. The exact procedure for handling foreclosure varies from state to state.
Option ARMs can result in…
Negative amortization. This occurs when the borrower makes payments at an introductory rate which are not sufficient to pay the interest on the loan. The unpaid amount is added to the loan balance resulting in negative amortization.
Mortgage-backed securities are products of…
The secondary market. Mortgage-backed securities are an investment vehicle used to generate revenue based on an underlying pool of loans. This revenue provides renewable access to funds for lenders.
Negative amortization occurs when…
A loan program permits a borrower to pay less than the required amount of interest on the loan. The unpaid interest is added to the loan balance and eventually results in a balance greater than the original loan amount.
A funding fee is required on…
VA loans. The VA program requires a funding fee for participation in the program. The amount is used to support the guaranty against borrower default. USDA loans charge a similar fee, called a guarantee fee.
The note rate is…
The stated interest rate on a mortgage or loan agreement.
Conventional conforming loans are…
Made by Fannie Mae and Freddie Mac. Unlike FHA or VA loans, they are not insured or guaranteed by a government agency.
A second mortgage is also known as a…
Subordinate lien. Subordinate liens sit in second (or third, etc.) place behind a first or primary lien. In the event of foreclosure, subordinate liens are satisfied only after the first lien is satisfied.
Qualified mortgages may not have terms exceeding…
30 years
To make a balloon payment qualified mortgage, a creditor must:
Be serving a rural or underserved area
Hold the loan in its portfolio for at least three years or sell the loan to another small creditor
Seller concessions for conforming loans with an LTV under 90% are…
Limited to 6% between 90% - 75.1%. At 75% or less concessions are up to 9%. Limitations for seller concessions are established by Fannie Mae and Freddie Mac for conforming loans. Limits are based on the down payment or loan-to-value (LTV) ratio.
Nontraditional ARMs are risky when they include:
No rate caps
A low introductory rate that expires after a short period
Limited documentation for loan approval
Prepayment penalties
In a bi-weekly mortgage program, the borrower…
Effectively makes an extra mortgage payment every year. By making payments every two weeks (26 payments), the borrower technically pays 13 months of mortgage payments in a calendar year.
“Margin” is defined as…
The amount above the index that an interest rate can adjust for an ARM. The margin is set by the lender and is the amount above the index that the interest rate can adjust. Index plus margin is the formula used to determine a new interest rate on an adjustable-rate mortgage.
The debt-to-income ratio…
Is analyzed to determine the size of the borrower’s existing debt load. It is a primary factor in the lender’s analysis of the borrower’s ability to repay a loan.
Jumbo loans are used to…
Finance properties in amounts that exceed conforming guidelines. Jumbo loans are loans that exceed Fannie Mae/Freddie Mac loan limits; however, there are GSE-eligible loans available.
Index and margin are used to…
Determine the interest rate change on an ARM. The index is the basis for future rate changes. The margin is set by the lender and is the amount above the index that the interest rate can adjust at the time of the rate change.
The conforming loan limit for one-family properties in most areas of the country is…
$726,200. This amount is set annually by the Federal Housing Finance Agency – the agency which oversees Fannie Mae and Freddie Mac.
High-cost areas are…
Areas of the country with higher conforming loan limits. High-cost areas exist all over the country, with the exception of the Midwest.
Income documentation for salaried borrowers includes…
Paystubs for the most recent 30-day period and W-2s for the most recent two-year period.
MIP is required for FHA loans….
With an LTV of less than or equal to 90%, for the first 11 years of the loan term or until the end of the loan term, whichever comes first. With an LTV of greater than 90%, for the first 30 years of the loan term or until the end of the loan term, whichever comes first.
“APR” is defined as…
A uniform measurement of the cost of a loan, including interest and financed closing costs, expressed as a percentage.
Borrowers earning more than 25% commission must…
Provide up to two years of tax returns for income qualification.
USDA makes loans for properties located in…
Rural areas. Loans under the USDA’s Rural Development Housing & Community Facilities Programs are made for the purpose of assisting low-income borrowers to purchase homes in rural areas.
A review of a borrower’s credit history looks at…
Credit capacity and credit character. These answer the questions of whether the borrower is both willing and able to repay the loan.
VA direct loans are…
Safe harbor qualified mortgages.
YSP is historically defined as…
A payment made by a lender to a loan originator for originating a loan at a rate higher than the par rate.
What is the marketplace for mortgage-backed securities?
The secondary market. The secondary market helps fund the primary market where loans are made to borrowers.
FHA loans require a minimum borrower investment of…
3.5%. FHA loans also require upfront and annual MIP.
FHA’s primary fixed-rate program is…
Called 203(b). It is used to purchase or refinance one- to four-unit family dwellings.
What is a note?
A legal document that obligates a borrower to repay a loan. It specifies the terms by which the repayment will occur. It may also be called a promissory note.
The Department of Veterans Affairs…
Guarantees loans. VA loans provide a guaranty to lenders for a certain percentage of the loan amount.
FHA 2-1 buy-downs require borrowers to…
Qualify at the note rate. However, funds placed in an escrow account will allow them to pay a discounted monthly payment based on a lower interest rate for two years - 2% in the first year and 1% the second year.
To qualify for a VA loan, a veteran must obtain a…
Certificate of Eligibility. Eligibility is based on length of service. COEs are not issued to veterans who are dishonorably discharged.
The amount of the VA funding fee depends on…
The type of loan and whether the veteran’s eligibility has been used before. Disabled veterans are generally exempt from paying the funding fee.
Origination fees on VA loans are…
Limited to 1%. There are limitations on certain types of charges, and closing costs cannot be financed in purchase transactions.
VA underwriters use a debt ratio of…
41%. The VA only looks at the total debt ratio. However, underwriters do look at the veteran’s residual income for qualification purposes.
What are discount points?
Discount points are used to adjust the price of a loan. One discount point is equal to 1% of the loan amount.
The VA loan guaranty is based on a veteran’s…
Entitlement. VA guarantees a loan amount four times greater than the eligibility listed on the veteran’s Certificate of Eligibility.
USDA loans are made for a term of…
30 years, offered in a fixed rate only. They do not require a down payment, but lenders must use debt ratios to ensure the borrower can repay the loan.
Alt-A loans are…
Used for consumers who do not represent the credit risk of subprime borrowers but who do not meet the underwriting requirements for conforming prime rate loans.
Subprime loans are…
Loans with higher interest rates made to borrowers with blemished credit or other qualification issues. The loans do not conform with Fannie Mae and Freddie Mac underwriting requirements.
Nontraditional mortgage products are defined as…
Any mortgage product other than a 30-year fixed-rate mortgage loan.
FHA’s adjustable-rate program is…
Called 251. It is based on the 203(b) program and offers a number of adjustment options ranging from one to ten year(s).
In a fixed-rate mortgage…
The interest rate is set at the time of settlement and does not change during the life of the loan. Monthly payments would only change if the loan servicer finds a shortage or surplus in the escrow amount (i.e., taxes and insurance premiums).
In an adjustable-rate mortgage…
The interest rate may change one or more times over the life of the loan. ARMs are often initially made at lower interest rates than fixed rate mortgages.
An initial rate cap is…
A limit on the amount that the interest rate can increase during the first adjustment period for an ARM.
A periodic rate cap is…
A limit on the amount that an interest rate can change during any adjustment period for an ARM, with exception of the initial adjustment, assuming an initial cap is in place on that particular product.
A lifetime rate cap is…
The limit on the amount by which an interest rate can change over the life of an ARM. It is also known as a rate ceiling.
The adjustment frequency establishes…
How often an interest rate adjustment can occur on an ARM. The frequency can be annually, every few years, or even monthly.
Discount points are paid…
To the lender at closing to reduce the note rate of the loan.
Securitization is used to…
Pool similar types of loans to create mortgage-backed securities for sale on the secondary mortgage market. These securities are used to create a renewable source of funds for lenders.
The index for an ARM must be disclosed…
On the early ARM disclosure provided at application and on the promissory note when the loan goes to closing.
The risk of a balloon mortgage can be minimized if…
The loan agreement contains a conditional refinance provision. This gives the borrower the option to convert the loan to a regular fixed-rate loan at its maturity date.
A home equity loan is an example of…
Closed-end credit. A cash-out refinance is an example of a home equity loan.
Borrowers owning more than 25% of a business must…
Provide up to two years of tax returns for income qualification.
A HELOC is an example of…
Open-end credit. In a HELOC, a borrower pays off the principal and can then continue to make withdrawals. This is similar to a credit card.
An 80-10-10 loan is an example of…
A piggyback loan. In a piggyback loan scenario, a borrower takes a simultaneous second mortgage. In an 80-10-10 loan, the first lien is 80% LTV, the second is 10% LTV and the borrower makes a 10% down payment.
A construction loan is…
An interim loan used to pay for the construction of a home. They are short-term financing and often handled as interest-only transactions. A construction loan can be considered a type of “bridge loan.”
Borrowers who obtain interest-only loans…
Pay only the monthly interest due on the loan, which keeps monthly payments low. However, at the end of the term, the borrower still owes the principal amount of the loan.
Conforming loans meet…
Loan limits and underwriting standards established by Fannie Mae and Freddie Mac.
A promissory note includes…
Identification of the borrower and the lender
The borrower’s promise to repay the loan
Amount of the loan
Interest rate charged on the unpaid principal
Period of the term for repayment of the loan
Reference to the real estate used to secure the loan
Provisions for the imposition of late charges for overdue payments
Signature(s) of borrower(s)
Social Security income can be…
Grossed up by as much as 25% for income qualification purposes. Other non-taxed income, such as disability and public assistance, may be grossed up as well.
Closing costs include…
Origination fees
Property taxes
Title insurance
Escrow costs
Appraisal fees
Taxes
Fees owed to state and local government
The debt-to-income ratio is…
The relationship between a borrower’s monthly debt obligations and his/her gross monthly income. It is expressed as a percentage.
“Equity” is defined as…
The difference between the fair market value of a property and the current balances of any liens against the property.
Strategies for paying off a fixed-rate loan more quickly include…
Prepayment and bi-weekly payments. Prepayment allocates more funds to the loan principal as time goes by. A bi-weekly plan amounts to an additional mortgage payment every year.
Borrowers cannot secure an FHA loan without paying…
UFMIP (upfront mortgage insurance premiums) and annual MIPs (annual mortgage insurance premiums)
Ability to Repay Rule requires ARM qualification based on…
The fully-indexed rate. This requirement applies to all ARM transactions except for open-end home equity loans.
Balloon payments are prohibited for…
Qualified mortgages, unless the loan is a balloon payment qualified mortgage from a small creditor. Balloon payments are also generally prohibited for loans covered by HOEPA.
Qualified Mortgage Rule creates…
Presumption of compliance with ability-to-repay standards and a safe harbor from liability for loan originators making qualified mortgages.
QM Rule creates a conclusive presumption of compliance for…
Prime mortgages, not subprime or higher-priced mortgage loans.
QM Rule creates a rebuttable presumption of compliance for…
Higher-priced mortgage loans.
Qualified mortgage prerequisites…
No negative amortization
No deferment of principal (e.g., no interest-only payments)
No balloon payment feature (unless a small creditor balloon payment QM)
Term does not exceed 30 years
Points and fees do not exceed 3% total loan amount
APR does not exceed APOR for a comparable transaction by more than 2.25%
Balloon payment qualified mortgage requirements…
No negative amortization
Term of at least five years; does not exceed 30 years
Compliance with 3% points and fees cap
Verification of consumer’s income and assets
Determination of consumer’s DTI (43% limit does not apply)
Loan has a fixed rate
Loan will be held by the creditor for at least three years
Creditor is a small creditor in a rural/underserved area
Nontraditional loans made illegal by the ATR Rule include…
No Ratio
No Income, No Assets (NINA)
Stated Income, Stated Assets (SISA)
No Income, Verified Assets (NIVA)
Stated Income, Verified Assets (SIVA)
No Doc
A non-qualified mortgage may include…
Interest-only payments
Negative amortization
A payment-option feature
Balloon payments
FHA seller concessions…
Limited to 6% of sales price
VA maximum guaranty amount for veteran with full entitlement…
25% of the loan amount, for a loan greater than $144,000
The 1003 is also known as…
The Uniform Residential Loan Application (URLA). 1003 is Fannie Mae’s form number. Freddie Mac refers to the same form as Form 65.
A borrower must obtain flood insurance…
If the appraiser notes that the property is located in a flood zone. Zones A and V require mandatory flood insurance.
Providing demographic information on the 1003 is…
Voluntary for loan applicants. If they decline to provide the demographic information requested on the 1003, loan originators should make a best guess based on visual observation and note that they have done so.
Back-end DTI is concerned with…
A borrower’s ability to meet monthly housing and other fixed debt expenses based on monthly income.
Credit reports include…
Information available in public records and data reported by creditors (including derogatory information, such as late payments).
Credit scoring was designed by…
Fair, Isaac and Company - now the Fair Isaac Corporation (FICO). Credit scores are often known as FICO scores.
How is annual MIP determined?
Based on loan amount, loan term, and loan-to-value. The mortgage insurance premium required on all FHA loans is collected as an upfront premium (UFMIP) and on a monthly basis (annual MIP, divided into 12 equal parts).
The sales comparison approach is…
An appraisal method which compares the subject property to recently-sold comparable properties in close proximity. It is also called the “market approach.”
LTV is…
The ratio of the principal loan balance to the appraised value of the property. Loan-to-value is used in borrower qualification to assess risk.
Credit report red flags may include…
Recently opened accounts
Misspellings and errors
Uncharacteristic use or sudden increase in use of credit
Large number of recent inquiries
Credit history that does not match what the originator knows about the applicant
The total debt ratio is also called…
The back-end ratio. The back-end ratio looks at the percentage of a borrower’s housing debt plus other consumer debts compared to his/her monthly gross income.
Conventional/conforming loans generally use a back-end ratio of…
50%. The back-end ratio (or total debt ratio) is a comparison of all monthly debts (including housing) to the applicant’s monthly income.
A “point” equals…
1% of the loan amount. Discount points are often used to buy down the interest rate on a loan.
The size of a borrower’s debt burden determines…
The ability to meet the financial demands of loan repayment. Existing debt and its ratio to a borrower’s income – also known as the debt-to-income ratio – is a primary factor in a lender’s analysis of a borrower’s ability to repay a loan.
FHA loans use a back-end ratio of…
43%. The back-end ratio (or total debt ratio) is a comparison of all monthly debts (including housing) to the applicant’s monthly income.
The Adjustable-Rate Mortgage Disclosure…
States that a loan has payment or loan terms that can change. When a borrower obtains an ARM which is secured by their principal dwelling and has a term of more than one year, creditors must provide the special disclosures for variable-/adjustable-rate mortgages.
“Your Home Loan Toolkit: A Step-by-Step Guide” is used…
For new home purchases. It explains the settlement process and the borrower’s rights under RESPA.
VA loans generally use a back-end ratio of…
41%. The back-end ratio (or total debt ratio) is a comparison of all monthly debts (including housing) to the applicant’s monthly income. VA programs only use the back-end ratio – they do not consider the front-end ratio.
The underwriter is responsible for…
Determining loan approval based on lender guidelines and borrower qualifications. The underwriter is responsible for making sure a loan applicant and subject property meet the requirements for a specific loan program.
The 1004 is also known as the…
Uniform Residential Appraisal Report (URAR). It is the standard form appraisers use to document the findings from an appraisal.
The purpose of the application interview is to…
Capture information from the applicant in order to complete the loan application. It may take place in person, over the phone, or online.
CLTV is…
A loan-to-value ratio used when dealing with second liens. CLTV is calculated by combining the cost of all mortgages on a home and comparing the combined cost to the value of the home securing the loans.
Section 1 of the 1003 is called…
“Borrower Information.” It is used to collect basic identifying information about the potential borrower and the type of credit they are seeking.
After completing a loan application…
The applicant will be asked to provide supporting documentation. The documentation supports information disclosed on the application and may include employment verification, tax and income documents, etc.
A VOE is…
A verification of employment. It is one form of loan application documentation used for applicants who are not self-employed.
Overtime and bonus pay…
Must be consistently received for a period of two years in order to be used for income qualification. The employer must verify that the additional income is likely to continue.
“Loan suitability” means…
Loan programs are diligently matched to the current financial circumstances of each customer. Some states have passed laws making loan suitability a regulated standard.
The cost approach to appraisal…
Considers the replacement value of the property. It is often used for new properties and analyzes what it would cost to build a substitute residence, plus the value of the land.
Refinance transactions must have a…
Tangible net benefit.
Assets include…
Cash reserves
Gift funds
Stocks and bonds
IRA/401K Accounts
Other real estate
Cash surrender value of life insurance
Value of automobiles
Many underwriting decisions are made by…
Automated underwriting systems (AUSs). Fannie Mae’s system is called Desktop Underwriter, and Freddie Mac’s system is known as Loan Product Advisor. FHA and VA also have their own proprietary systems.
A borrower’s front-end ratio…
Only considers the housing debt. Debt ratios look at the percentage of debt to monthly income. The front-end or housing ratio only takes the mortgage payment (or rental payment) into consideration.
The “market approach” to appraisal is also known as the…
Sales comparison approach.
The underwriter uses the appraisal to…
Determine the value of the property. The appraisal is also used to establish any deficiencies that affect the marketability of the property.
Borrower income is…
An important consideration for most loan programs. In the past, nontraditional programs did not always verify income. However, today, lenders take a close look at a borrower’s ability to repay a loan.
Income documentation for salaried loan applicants typically includes…
Paystubs for the last 30-day period and W-2s for the last two-year period.
An example of a voluntary lien is…
An example of a voluntary lien is…
Liabilities include…
Promissory notes payable to financial institutions and other creditors/lenders
Credit accounts with outstanding balances
Unpaid income taxes and interest
Child support and alimony
Previous bankruptcies
Non-taxable income may be grossed up by as much as…
25%. This type of income typically includes Social Security, public assistance, and disability. Loan applicants must still provide comprehensive documentation for these types of income.
FHA loans require a minimum borrower investment of…
3.5%. This amount is based on the sales price or appraised value of the property and can be the borrower’s own funds, gift funds, or a grant.
What percentage of rental income may be used for qualification?
75%. Investment properties generating rental income are just one type of special income that cannot be used at 100% for qualification purposes.
IRS 4506-C is used to…
Obtain a transcript of a loan applicant’s tax returns. Lenders use this to perform an independent verification of tax documentation. Form 8821 is also used to authorize release of other tax information.
Income calculation for hourly pay…
{base rate} x {hours} = {weekly income}
{weekly income} × {weeks worked} = {annual income}
{annual income} ÷ 12 = {monthly income}
Section 1b of the 1003…
Is called “Current Employment/Self-Employment and Income.” It is used to collect information about the applicant’s employment status and accompanying details. It is followed by Section 1c and 1d, which collect the same information if the consumer has more than one source.
Income calculation for bi-weekly pay…
{bi-weekly salary} × 26 = {annual income}
{annual income} ÷ 12 = {monthly income}
Self-employed and commissioned income is…
Usually averaged over a two-year period. Self-employed income would come from the tax return; commissioned income may be taken from W-2s or tax returns.
Bankruptcies stay on a credit report for up to…
Ten years. This is longer than standard credit account information, which is purged after seven years.
Self-employment/commission income requires caution when…
Evaluating the capacity of the borrowers’ ability to repay a loan. This is because these forms of income are often less stable than traditional salaried employees
Section 2 of the 1003 is called…
“Financial Information - Assets and Liabilities.” It is used to capture information about the potential borrower’s financial circumstances, including their assets, accounts, and existing debts.
Information on consumer credit is…
Gathered and sold by consumer reporting agencies. The credit report (or consumer report) is the method for obtaining credit information.
Credit scores are developed…
Using a statistically-validated system. This is required by consumer protection laws such as ECOA and FCRA.
Account information on a credit report is…
Generally reported for a period of seven years. There are some exceptions for information that may be reported for a longer period.
Section 3 of the 1003 is called…
“Financial Information - Real Estate.” It is used to capture information about any properties that the applicant currently owns, if any, and what they owe on them. For potential borrowers who do not currently own any real estate, this section would not apply.
Child support and alimony…
May be used for income qualification if they are court-ordered. The loan applicant must be able to show a stable history of receiving the payments.
Section 4 of the 1003 is called…
“Loan and Property Information.” It is used to find out more about the purpose of the loan that the applicant is seeking and the property that will secure it. Section 4b also collects information about other loans secured by the same property (for example, a piggyback loan to finance a down payment).
Credit accounts on a consumer report usually provide…
The company name
Date the account was opened
Date any information for the account was reported
Months reviewed/date of last activity
Credit limit (“high credit”)
Balance and past due amounts
Timeliness of payments
The “Big Three” CRAs are…
Equifax, Experian, and TransUnion. Not all creditors report to all three agencies.
Nontraditional credit includes…
Payments for items such as rent and utilities. First-time homebuyers or consumers with little credit history may sometimes use nontraditional credit to establish creditworthiness.
Section 5 of the 1003 is called…
“Declarations.” It is used to ask the applicant specific questions about the property they wish to buy or refinance, the funding they are using, and their financial history.
Conventional/conforming loans use a front-end ratio of…
28%. The front-end ratio (or housing ratio) is the comparison of housing debt to the applicant’s monthly income.
Section 6 of the 1003 is called…
“Acknowledgments and Agreements.” In this section, the consumer is informed of the legal obligations they take on by signing the application, and they are prompted to give their signature. Primarily, this prompts the consumer to affirm that the information they provided was truthful and to acknowledge their understanding that lying on the application can have criminal consequences.
FHA loans use a front-end ratio of…
31%. The front-end ratio (or housing ratio) is the comparison of housing debt to the applicant’s monthly income.
Section 7 of the 1003 is called…
“Military Service of Borrower.” This section contains questions about the applicant’s military service, if they are serving or have served. Some loan products (e.g., VA loans) are meant for and only available to servicemembers, and the URLA can be used to apply for these loans. If this section is not applicable to the applicant, it is not required.
Section 8 of the 1003 is called…
“Demographic Information.” Here, consumers are prompted to self-identify demographic data. This data is collected for reporting purposes in compliance with HMDA, to ensure fair lending practices. Consumers may choose not to self-identify, in which case the loan originator must use broad categories to attempt identification based on visual observation and surname only, and must indicate that they did this.
LTV is calculated by…
Dividing the amount of the mortgage by the appraised value or purchase price of the home, whichever is less. Loan-to-value ratio determines the loan program an applicant may qualify for.
A lock-in agreement is used to…
Contractually hold the interest rate and points for a loan. They are usually made in writing and the lender is bound to honor the rate at closing.
Section 9 of the 1003 is called…
“Loan Originator Information.” Here, the loan originator gives the name of their employer, its address, and its NMLS unique identifier and state license ID. The loan originator must also add their own individual name, unique identifier, state license ID, and signature, as well as the date.
Past credit performance is considered an indicator of…
A borrower’s attitude toward credit obligations and a prediction of his/her future actions. Creditors/lenders assume that if an individual has met his/her obligations in the past, he/she will continue to do so in the future.
To evaluate income consistency, underwriters review…
W-2s and 1040s. Substantial income increases and decreases must be addressed.
To ensure that a property meets lender guidelines…
The underwriter will review:
The appraisal report
The preliminary title report
Any inspections requested by the borrower or required by the lender
A lender is concerned with property marketability…
In case the borrower defaults and the lender is required to foreclose.
When underwriters review derogatory credit information…
They are looking for an explanation of the derogatory credit. Without an explanation or documentation that makes sense, the derogatory information can be used as the basis for loan denial.
Underwriting for qualified mortgages must consider…
Current and reasonably-expected income or assets
Employment
Credit history
Current debt obligations
Mortgage-related obligations
Payments on any simultaneous loans
Lenders rely on property appraisals to…
Ensure that the value of the property is adequate to serve as security – or collateral – for the loan. For this reason, a licensed appraiser must conduct the appraisal.
The income approach to appraisal is used…
For investment properties. It would generally not be used for a single-family home being used as a borrower’s primary residence.
Homeowner’s title insurance…
Provides protection for the borrower for potential title liabilities. These include mechanic’s liens, unreleased mortgages, and other third-party rights. Obtaining this type of policy is voluntary on the part of the homeowner.
A lender’s title policy…
Protects the lender from title defects or undisclosed liens that should have been cleared up prior to closing. Lenders typically make this type of policy mandatory; the borrower is required to cover the cost of obtaining it.
Real property is defined as…
Land and anything that is permanently affixed to it. Personal property includes items that can be moved.
Liens are…
Monetary claims that provide a creditor with the right to foreclose. A mortgage is an example of a lien.
Involuntary liens may include…
Tax liens
Mechanic’s liens
Judgments
Attachments
Lien priority is defined as…
The chronological order in which liens are filed against a property. The order establishes the priority of the liens in the event the property is foreclosed. Lenders want first priority for the mortgage on a property.
Private mortgage insurance is used to…
Provide security to the lender in the event of default. PMI also allows the borrower to make a smaller down payment.
Upfront MIP is collected on…
All FHA loans.
Fee simple is…
The desired form of holding ownership to property because it has the fewest restrictions. Almost all residential mortgage loan transactions involve an estate held in fee simple.
An estate held in fee simple means that…
The owner is entitled to the entire property and has “unconditional power of disposition” during his/her lifetime, and the property will descend to his/her heirs upon death.
Counseling is required for…
Any borrower accepting a high-cost home loan
First-time borrowers accepting a negative amortization loan
Any borrower seeking a reverse mortgage loan from the FHA
Counseling is encouraged for any borrowers choosing an ARM instead of a fixed-rate loan
The ATR Rule and QM Rule became effective…
In January 2014
The ATR Rule requires verification of income using…
Reasonably-reliable third-party documents, such as tax returns, W-2 forms, payroll statements, bank statements, etc.
Loans excluded from the ATR Rule…
Open-end credit plans
Timeshare plans
Reverse mortgage loans
Temporary/bridge loans with terms of 12 months or less
Construction phase of 12 months or less in a construction-to-permanent loan
Designated extensions of credit from certain entities/agencies
Reasonable, good faith determination of ability to repay considers…
Current/reasonably-expected income/assets (not including equity)
Current employment status
Monthly mortgage payments
Monthly payments on any simultaneous loans secured by the property
Monthly payments for property taxes/insurance, other property-related obligations
Debts/alimony/child support
Monthly DTI or residual income
Credit history
In title theory states…
The borrower gives legal title to the lender, but retains equitable title. The lender “owns” the property via a deed of trust. The lender has a right to possession of the property in the event of default. Legal title is returned to the borrower upon repayment and satisfaction of the debt.
In lien theory states…
The borrower retains legal and equitable title to the property. The mortgage is a lien against the property. In the event of default, the lender must institute a foreclosure proceeding to obtain legal title.
“Table funding” is…
A process in which a broker originates and closes a loan in his/her own name, then transfers the loan to a lender at closing. The lender provides funds for disbursement.
Dry settlement occurs when…
Parties meet to execute documents, but funds are not disbursed and property is not conveyed until certain specified conditions are met.
Wet settlement occurs when…
Parties meet to execute documents and funds are subsequently disbursed. Lenders involved in purchase transactions are required to ensure that the closing agent has adequate funds to close.
Loan applicants that make a false statement on the 1003…
May face a five-year jail term
Liquid assets include…
Deposit or “earnest money” held in escrow
Cash
Checking/savings accounts, with account numbers
Stocks and bonds
Cash value of life insurance policies
Non-liquid assets include…
Real estate
Retirement accounts
Net worth of businesses
Automobiles
Real estate
Retirement accounts
Net worth of businesses
Automobiles
At least three business days before closing, any time the APR varies by more than one eighth of 1% (0.125%).
Notice of Right to Receive Appraisal Report is due…
No later than three business days after receiving an application for credit secured by a first lien on a dwelling.
Property flipping occurs when…
A property is bought and resold within a very short period of time. The resale usually involves the use of an inflated appraisal of the property’s value. The HPML Rule works to curb property flipping by creating second appraisal requirements for certain transactions.
Service release premiums are…
Fees lenders can earn when selling loans in the secondary market. They are often cited in the controversy over yield spread premiums earned by mortgage loan originators before the establishment of borrower credit requirements.
Mark-ups are the practice of…
Unilaterally increasing the charges of another settlement service provider and retaining the difference. HUD considers mark-ups a form of illegal fee-splitting and a violation of RESPA.
A straw buyer is…
A person who accepts a fee for the use of his/her Social Security Number and other personal information on a mortgage application. Straw buyers are often unaware that they are liable for fraud and for making false statements to the government.
The Gramm-Leach-Bliley Act requires…
Financial institutions to provide customers with a privacy notice as well as an opt-out notice. This is aimed at protecting their nonpublic personal information.
Adverse action occurs when…
A creditor makes an unfavorable decision. An example would be a lender rejecting a loan application. ECOA requires notice of adverse action within 30 days of application
Legal and ethical ways of providing disclosures include…
In person, via U.S. mail, or via facsimile. Email and secure document handling are also becoming acceptable means. Providing the information verbally or via a public posting are not acceptable methods for most disclosures.
With regard to fraud, loan originators are required to…
Be on the lookout for and report anything that could indicate fraudulent behavior.
Inflated appraisals occur when…
An appraiser places a much higher value on a property than can be justified. This practice has been commonly used in conjunction with other forms of mortgage fraud.
A straw seller is…
An individual who accepts a fee to falsely claim ownership to a property. Straw sellers are sometimes used in conjunction with straw buyers in elaborate mortgage fraud schemes.
An advertisement saying “Refinance today and wipe debt clean!”…
Violates the Federal Reserve’s Staff Commentary on Regulation Z revisions. This example is considered a misleading claim of debt elimination.
Goals of the Fair Housing Act include…
Providing fair housing throughout the United States
Prohibiting discrimination in the sale and renting of housing
Prohibiting discrimination in mortgage lending transactions
The most common type of fraud involving borrowers is…
Falsified applications. Generally, they are trying to obtain a loan they do not qualify for, but for the most part do intend to repay the loan.
Income qualification should always use…
Factual data. Loan programs such as stated income loans (also called liar’s loans) led to an increase in loan applicant fraud. This has been blamed for increased foreclosures.
A sign of fraud on a sales contract is…
The purchase price being higher than the list price. This could be a sign that a legitimate buyer is not involved in the transaction.
Identity theft is the practice of…
Using another person’s name, Social Security Number, and other personal information to secure credit or make purchases. It often figures into elaborate mortgage fraud schemes.
The LO Compensation Rule prohibits…
Compensation based on transaction terms
Dual compensation
Steering
The MAP Rule prohibits…
Any material misrepresentation, express or implied, in any commercial communication regarding any term of a mortgage credit product.
HOEPA prepayment penalty threshold…
If a loan features a prepayment penalty in force for more than 36 months or exceeding 2% of the amount prepaid, the loan is subject to HOEPA and the penalty is prohibited.
HOEPA applies to…
Closed-end loans, open-end loans, and purchase money mortgages secured by the borrower’s principal dwelling.
Reverse redlining is…
The practice of targeting neighborhoods that are primarily occupied by members of vulnerable and/or protected classes and offering expensive, risky loan products.
Ginnie Mae is…
Government-owned, not stockholder-owned
Primarily intended to guarantee securities backed by FHA, VA, RHS loans (does not buy loans)
Not involved in guaranteeing or dealing with conventional mortgages
A mortgage broker serves as the…
Agent for the borrower and owes them fiduciary duties, including loyalty, good faith, and an obligation to put the borrower’s interests ahead of the broker’s.
Implementing regulations for the S.A.F.E. Act…
Regulations G and H
Purposes of the S.A.F.E. Act include…
Increase uniformity
Reduce regulatory burden
Enhance consumer protection
Reduce fraud
Effective supervision by a state regulator includes…
Participating in the NMLS
Writing rules and regulations or adopting procedures
Conducting background checks
Setting and accepting licensing fees
Setting or resetting renewal or reporting dates
Approving or denying loan originator applications and renewals
Implementing laws for amending or surrendering licenses
Bringing enforcement actions
State supervisory authority includes…
- Establishing a process to verify licensure
- Examining books, papers, records, or other data
- Summoning persons to appear and produce records
- Administering oaths and affirmations
- Examining, taking, and preserving testimony
- Reporting violations of law
Additional state supervisory authority…
- Providing procedures for challenging information
- Requiring loans to be included in reports of condition
- Entering cease and desist orders
- Suspending, terminating, and refusing renewal of licenses
- Ordering the removal and ban of individuals from employment
- Imposing civil penalties
Regulatory agencies have authority to examine…
- Any licensed loan originator
- Any individual required to have a loan originator license
Regarding examinations, it is a violation to knowingly…
Withhold, abstract, remove, mutilate, destroy, or secrete books, records, or other information
Regulatory agencies may conduct examinations for…
Initial licensing or license renewal
License suspension, conditioning, revocation, or termination
Determining compliance with the law
Regarding examinations, regulatory agencies may access…
- Criminal, civil, and administrative history information
- Personal history and experience information
- Any other documents or evidence relevant to an investigation
Regulatory authority may require reports including…
- Account compilations
- Information lists
- Data concerning loan transactions
In conducting examinations, regulatory authority authorized to…
- Administer oaths
- Subpoena witnesses
- Require the production of relevant documents
- Control access to records of person under investigation
Administer oaths
Subpoena witnesses
Require the production of relevant documents
Control access to records of person under investigation
Remove the records without a court order or the regulatory agency’s consent
During period of control of records, owner of records may…
Access them in order to conduct regular business affairs
Regarding examinations, regulatory agencies may also…
- Retain attorneys, accountants, or other professionals to assist with examination
- Enter into agreements with other government officials to reduce regulatory burden
- Use, hire, contract, or employ analytical systems, methods, or software
- Accept or rely on reports from other government officials or audit reports by independent CPA
Information provided to NMLS may be…
Shared with other state and federal officials involved with mortgage industry oversight without the loss of privilege and confidentiality protections provided by law
Information provided to NMLS is not subject to…
- Disclosure under federal or state law allowing for disclosure to the public of information held by a government officer or agency
- Subpoena, discovery, or admission into evidence in civil action or administrative process
Information not protected by confidentiality…
- Employment history
- Disciplinary and enforcement actions
NMLS stands for…
Nationwide Multistate Licensing System
Definition of “state” …
Any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, the Trust Territory of the Pacific Islands, the Virgin Islands, and the Northern Mariana Islands
Definition of “individual” …
A natural person
Definition of “person” …
A natural person, corporation, company, limited liability company, partnership, or association
“Loan originator” includes individuals who for compensation
- Take a residential mortgage loan application, or
- Offer or negotiate the terms of a residential mortgage loan
Definition of “application” …
Request for an offer of residential mortgage loan terms and the information about the borrower that is necessary in a decision on whether to make such an offer.
Definition of “residential mortgage loan” …
Any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other security interest on a dwelling or residential real estate upon which is constructed or intended to be constructed a dwelling
A “dwelling” is a residential structure that…
Contains one to four units, whether or not the structure is attached to real property
Definition of “residential real estate” …
Any real property located in a state upon which is constructed or intended to be constructed a dwelling.
“Assisting a consumer in obtaining a loan” includes…
- Advising on loan terms
- Preparing loan packages
- Collecting information on behalf of the consumer
“Assisting a consumer in obtaining a loan” does not include…
- Individuals engaged solely as loan processors/underwriters performing clerical tasks
- Persons or entities only performing real estate brokerage activities, unless compensated by a mortgage professional
- Persons or entities solely involved in extensions of credit relating to timeshare plans
Definition of “real estate brokerage activity” …
- Acting as a real estate agent/broker for a buyer, seller, lessor, or lessee of real property
- Bringing together parties interested in the sale, purchase, lease, rental, or exchange of real property
- Negotiating any portion of a contract relating to the sale, purchase, leaser, rental, or exchange of real property
- Engaging in any activity for which a person engaged in the activity is required to be licensed as a real estate agent/broker
Definition of “loan processor” or “underwriter” …
Individual who performs clerical or support duties at the direction of and subject to the supervision of a licensed loan originator.
Definition of “clerical or support duties” …
- The receipt, collection, distribution, and analysis of information used for the processing and underwriting of a loan
- Communicating with a consumer to obtain information necessary for the processing and underwriting of a loan
Loan processors/underwriters may not…
- Offer or negotiate loan rates or terms
- Counsel consumers about loan rates or terms
- Represent to the public that they can perform the activities of a loan originator
“Origination of a residential mortgage loan” involves…
All residential mortgage loan-related activities from the taking of a loan application through the completion of all loan closing documents and funding of the loan.
A “registered loan originator” is an individual who…
- Meets the definition of a loan originator
- Is an employee of a depository institution or an institution regulated by the Farm Credit Administration
- Is registered with, and maintains a unique identifier through, the NMLS
An “employee” is an individual whose…
- Manner and means of performance of work are subject to the right of control of a person
- Compensation for federal income tax purposes is reported on a W-2 form issued by the controlling person
A “federal banking agency” includes the…
- Board of Governors of the Federal Reserve System
- Comptroller of the Currency
- National Credit Union Administration
- Federal Deposit Insurance Corporation
A “state-licensed loan originator” is any individual who is…
- A loan originator
- Not an employee of a depository institution, a subsidiary owned and controlled by a depository institution and regulated by a federal banking agency, or an institution regulated by the Farm Credit Administration
- Licensed by a state or by the CFPB and maintains a unique identifier
A “unique identifier” is a number that…
- Permanently identifies a loan originator
- Is assigned by the NMLS to track and identify loan originators
Is assigned by the NMLS to track and identify loan originators
- Residential mortgage loan application forms
- Solicitations or advertisements, including business cards and websites
- Other documents established by rule or order of the licensing agenc
Business of a mortgage loan originator includes…
- Taking a residential mortgage loan application
- Offering or negotiating the terms of a residential mortgage loan for compensation or gain
- Representing to the public that he/she can or will perform these activities
“Taking a residential mortgage loan application” means…
Receiving an application for the purpose of facilitating a decision whether to extend an offer of residential mortgage loan terms to a borrower.
“Offering or negotiating loan terms” includes…
- Presenting for consideration particular loan terms
- Communicating with a borrower or prospective borrower to reach a mutual understanding of loan terms
- Recommending, referring, or steering a borrower or prospective borrower to a particular lender or loan terms
- Receiving payment of any thing of value in connection with these activities
An “independent contractor” cannot…
Engage in residential mortgage loan activities as a loan processor/underwriter unless a state-licensed loan originator
Loan originator exemptions…
- Loan processor/underwriter
- Registered loan originator employee of a bank/credit union
- Only real estate brokerage activities
- Only extensions of credit related to timeshare plans
- For an immediate family member
- For a dwelling that served as the individual’s residence
- Licensed attorney negotiating on behalf of a client
- Employee of a government agency or housing finance agency
- Employee of a nonprofit organization
“Immediate family member” includes…
- Spouse
- Child
- Sibling
- Parent
- Grandparent and grandchild
- Stepparent, stepchild, and stepsibling
- Adoptive relationship
“Housing finance agency” is any authority…
- Chartered by a state to help meet affordable housing needs of residents
- Supervised by the state government
- Subject to audit and review by the state
- Whose activities make it eligible to be a member of the National
- Council of State Housing Agencies (NCSHA)
For a bona fide nonprofit, state must…
- Periodically examine its books and activities
- Revoke its status if it doesn’t continue to meet criteria
Background checks include…
- Fingerprints
- Personal history and experience
Minimum pre-licensing education requirement…
20 hours
20 hours of pre-licensing education must include…
- Three hours of federal law and regulation
- Three hours of ethics
- Two hours of nontraditional mortgage products
Written test measures knowledge of…
- Ethics
- Federal and state law and regulation relating to mortgage origination
- Fraud, consumer protection, nontraditional mortgages, and fair lending
Passing exam score…
75%
If an applicant fails initial test attempt…
He/she may retake twice with at least 30 days between each attempt
After failing an exam three times, an individual must…
Wait at least six months before re-testing
Each loan originator must be covered by…
A surety bond
Surety bond amount must reflect…
The dollar amount of loans originated
Some states require a minimum…
Net worth in an amount that reflects the dollar amount of loans originated
A state fund makes funds available for…
Claims resulting from violations of state or federal laws and regulations
Minimum licensing requirements…
- No prior license revocation
- No felony conviction or guilty/nolo contendere plea during the seven-year period preceding application date, or at any time if the felony involved fraud, dishonesty, a breach of trust, or money laundering
- Completion of pre-licensing education
- Passage of the written test
- Satisfaction of the surety bond/net worth/state fund requirements
- Demonstration of financial responsibility, character, and general fitness
Lack of financial responsibility includes…
- Current outstanding judgments
- Current outstanding tax liens
- Foreclosures or pattern of seriously delinquent accounts in past three years
Minimum continuing education requirement…
Eight hours
Eight hours of continuing education must include…
- Three hours of federal law and regulation
- Two hours of ethics
- Two hours of nontraditional mortgage products
Regarding continuing education, loan originator may…
- Only receive credit for a course in the year which the course was taken
- Not take the same approved course in the same or successive years
Instructor may receive CE credit at the rate of…
Two hours for every one hour taught
License renewal requirements…
- Continue to meet minimum standards for initial licensure
- Satisfy annual continuing education requirement
- Pay required fees
Failure to satisfy renewal requirements will result in…
An expired license
Reports of condition are also referred to as…
Mortgage Call Reports
Registration system required for originators employed by…
- Depository institutions
- Subsidiaries controlled by depository institutions
- Institutions regulated by the Farm Credit Administration
The S.A.F.E. Act addresses compliance by establishing…
- Requirements for individuals to obtain a license before engaging in loan origination activities
- Authority for the CFPB to determine whether a state licensing program for loan originators meets the standards established in the S.A.F.E. Act
Prohibited practices for loan originators…
- Defraud or mislead borrowers or lenders
- Engage in unfair or deceptive practices
- Obtain property by fraud or misrepresentation
- Enter into a contract providing for fees earned through “best efforts”
- Enter into a contract for specific loan terms that are not actually available
- Conduct business without a valid license
- Fail to make required disclosures
More prohibited practices for loan originators…
- Fail to comply with state or federal laws
- Make false or deceptive statements or representations
- Knowingly make omission of material fact
- Make payment, threat, or promise for the purpose of influencing a person’s independent judgment
- Collect or charge prohibited fees
- Require excessive property insurance coverage
- Fail to truthfully account for fund
To enforce the S.A.F.E. Act, regulatory agency may…
- Deny, suspend, revoke, condition, or decline to renew a license
- Order a restitution
- Impose fines
- Issue orders or directives
The maximum civil penalty for each violation of the S.A.F.E. Act…
$25,000
Each failure to comply is a…
Separate and distinct violation
Regulation H establishes a procedure for…
The CFPB to follow if it determines that a state has not adopted laws satisfying the S.A.F.E. Act’s licensing requirements
