NMLS MLO Mortgage Loan Origination (SAFE MLO) Exam Exam Practice Test

A mortgage loan originator must only offer rates and terms that are actually available at the time. If a 3.5% rate is only available with 1 discount point, that is the only option the MLO may lawfully present.

“Originators may only quote and offer the rates, terms, and fees actually available from the creditor.”

— Regulation Z, 12 CFR § 1026.25, SAFE MLO National Test Study Guide

The Truth in Lending Act (TILA) Regulation Z requires that if a mortgage advertisement states a specific payment amount, it must also clearly and conspicuously disclose all required terms such as the APR, loan amount, terms of repayment, and interest rate. An ad that only mentions a monthly payment and loan amount—without these other disclosures—is a violation of TILA advertising requirements.

“If an advertisement states the amount of any payment, the amount of any finance charge, or the number of payments or period of repayment, it must also state all required triggering terms, including the APR.”

— 12 CFR § 1026.24(d); Regulation Z, TILA

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

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

— 12 CFR § 1024.14; CFPB RESPA Section 8 Guidance

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

A balloon mortgage is a type of loan where a large portion of the principal is repaid in a lump sum at the end of the loan term. This structure often features smaller, periodic payments during the life of the loan, with the remaining balance (the balloon payment) due at the end of the loan period. Balloon mortgages are typically shorter-term loans, such as 5 or 7 years.

This differs from other loan types:

FHA mortgages (A) are fully amortized loans backed by the government.

Qualified mortgages (C) meet specific ability-to-repay standards and are fully amortized.

Deferred-payment mortgages (D) often refer to reverse mortgages or loans with delayed payment schedules, which are not the same as balloon loans.

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

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

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

The VA funding fee varies based on several factors, including whether the borrower has a service-connected disability, if the borrower is a first-time or subsequent user of VA benefits, and the loan-to-value ratio (LTV). Marital status does NOT affect the funding fee.

“Factors that determine the VA funding fee include: type of veteran, type of loan, down payment amount (LTV), and whether the veteran has previously used entitlement. Marital status does not impact the funding fee.”

— U.S. Department of Veterans Affairs, VA Funding Fee Table

Under TILA-RESPA Integrated Disclosure (TRID) rules, the Loan Estimate (LE) expires after 10 business days from the date it was provided, unless the borrower indicates an intent to proceed with the loan. If the borrower does not confirm their intent within 10 business days, the terms and costs in the Loan Estimate are no longer valid, and the lender may issue a new estimate with updated terms.

An origination charge is considered a finance charge under TILA/Regulation Z and must be included in the calculation of the loan’s APR. Most third-party fees (such as credit report, recording, and transfer taxes) are not considered finance charges if they are bona fide and reasonable.

“Finance charges include all charges payable directly or indirectly by the consumer and imposed as a condition of or an incident to the extension of credit, including origination fees.”

— 12 CFR § 1026.4(a); Regulation Z

Net rental income is considered qualifying income when applying for a mortgage, as it represents income generated from rental properties. Lenders typically calculate net rental income by subtracting property expenses from the total rental income, and they require documentation such as tax returns or lease agreements to verify this income.

Reimbursed expenses (A), family gifts (C), and federal tax refunds (D) are generally not considered qualifying income, as they are one-time or non-recurring sources of funds.

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

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

A subordinate lien (or junior lien) refers to any loan or claim against a property that is secondary to the first lien (the primary mortgage). Examples include second mortgages, home equity loans, or lines of credit.

“A subordinate lien is a mortgage or other lien that has a lower priority than a previous mortgage or lien.”

— SAFE MLO National Test Study Guide

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

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

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

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

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

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

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

Under the SAFE Act, a mortgage loan originator (MLO) cannot be approved for licensure if they have been convicted of a felony within the past seven years, or at any time if the felony involved fraud, dishonesty, breach of trust, or money laundering. This provision ensures that individuals with serious criminal backgrounds are not permitted to operate as MLOs.

Other factors, such as failing the SAFE MLO test (C) or having never been licensed (D), do not automatically disqualify an applicant from obtaining an MLO license.

To prove that an account listed on a credit report has been paid off, the borrower must provide an updated statement showing a zero balance. This is the most direct and verifiable method for a lender to confirm the account has been settled.

Oral confirmation (A) or a letter from the borrower (C) are not acceptable documentation, as they lack third-party verification.

No further documentation would be required if the credit report already reflects the zero balance, but until then, updated documentation is necessary.

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

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

— FTC, National Do Not Call Registry FAQs

The Fair Credit Reporting Act (FCRA) restricts the permissible purposes for which a credit report can be obtained. A mortgage loan originator may only pull a credit report for a bona fide mortgage loan transaction. Pulling a credit report for a non-mortgage transaction, even with the consumer’s consent, is not a permissible purpose.

“A person may obtain a consumer report only if the report is to be used for a permissible purpose under the FCRA. Permissible purposes include credit transactions initiated by the consumer.”

— 15 U.S.C. § 1681b; FCRA

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

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

— SAFE Act, 12 USC § 5102(4)

The Red Flags Rule, under the Fair and Accurate Credit Transactions Act (FACTA), requires lenders and other financial institutions to develop and implement a written Identity Theft Prevention Program. This program must detect, prevent, and mitigate identity theft by identifying “red flags” that signal potential fraud, such as:

Unusual account activity

Inconsistent or mismatched identification information

Suspicious patterns in credit applications

Lenders are required to take steps to verify identities, monitor transactions, and respond to signs of identity theft to protect consumers and minimize fraud risk.

The Home Ownership and Equity Protection Act (HOEPA) applies to certain types of high-cost loans, particularly refinance and home equity loans, that meet specific APR and fee thresholds. HOEPA was enacted to protect consumers from predatory lending practices in loans that carry excessive fees, high interest rates, or abusive terms.

HOEPA mainly covers:

Refinance loans

Home equity loans

Closed-end home equity loans

Certain purchase-money mortgages under specific conditions

Loans like construction loans (B), reverse mortgages (C), and USDA Rural Development loans (D) are generally excluded from HOEPA coverage.

Under the Equal Credit Opportunity Act (ECOA), creditors must notify applicants of action taken (approval, denial, or other) within 30 days of receiving a completed application.

“A creditor shall notify an applicant of action taken within 30 days after receiving a completed application concerning the creditor's approval of, counteroffer to, or adverse action on the application.”

— 12 CFR § 1002.9(a)(1), Regulation B (ECOA)

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

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

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

For subprime mortgages, the credit score of the applicants is a primary factor in determining the interest rate. Subprime loans are designed for borrowers with lower credit scores, typically below 620, and are offered at higher interest rates due to the increased risk of default.

Factors like the loan term (A), property location (B), and sales price (C) may influence other aspects of the loan, but the credit score is the key factor that determines whether a borrower qualifies for a subprime mortgage and the corresponding interest rate.

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

Other options:

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

The Truth in Lending Act (TILA, Regulation Z) applies to consumer credit transactions, which include home equity loans and other loans extended primarily for personal, family, or household purposes. TILA does not cover credit extended for business, commercial, agricultural purposes, or loans to entities rather than natural persons.

“Regulation Z applies to each individual or business that offers or extends credit when four conditions are met:

(1) the credit is offered or extended to consumers,

(2) the offering or extension of credit is done regularly,

(3) the credit is subject to a finance charge or payable by a written agreement in more than four installments, and

(4) the credit is primarily for personal, family, or household purposes.”

— 12 CFR § 1026.1(c); Regulation Z, TILA

Home equity loans are covered; agricultural, business, or commercial credit and credit to entities (not individuals) are excluded.

In an Adjustable-Rate Mortgage (ARM), the index is a benchmark interest rate that can change periodically, and the interest rate on the loan adjusts based on changes to this index, plus a fixed margin. The margin itself remains fixed throughout the life of the loan.

“The interest rate on an ARM is composed of two parts: the index (which fluctuates) and the margin (which is fixed). The interest rate adjusts periodically based on changes in the index.”

— SAFE MLO National Test Study Guide; CFPB’s Consumer Handbook on ARMs

Prepayment penalties can be used as a tool for predatory lending or steering, especially if borrowers are not made aware of them or if such penalties are used to discourage refinancing or early payoff, which may not be in the borrower’s best interest.

“Certain loan terms such as prepayment penalties… may be considered predatory when they are not adequately disclosed or when used to lock borrowers into unfavorable loans.”

— CFPB, Protecting Consumers from Predatory Lending Practices

Cash-out and lowered interest rates are not inherently predatory, and a fixed interest rate is generally a consumer-friendly feature.

Under TILA (Truth in Lending Act), higher-priced mortgage loans (HPMLs) are subject to several regulations, including:

Lenders must verify income and assets to ensure the borrower’s ability to repay the loan (A).

Creditors are required to establish escrow accounts for taxes and property insurance for first-lien mortgages (B).

There are restrictions on prepayment penalties (C).

However, borrowers of HPMLs do not have a five-day right of rescission. The right of rescission is typically three business days and applies to refinances on primary residences, not to HPMLs.

The maximum available flood insurance structure coverage for a residential property under the National Flood Insurance Program (NFIP) is £250,000. The NFIP is a federal program that provides flood insurance to property owners in participating communities.

The £250,000 limit applies specifically to residential property structures. For contents coverage, the maximum is $100,000.

Higher coverage limits, such as $500,000 or $1,000,000, may be available through private insurers, but the NFIP itself caps coverage at $250,000 for structures.

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

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

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

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

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

Disclosure of gift funds (Option B):

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

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

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

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

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

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

The SAFE Act requires states to have systems in place to sanction individuals who act as mortgage loan originators without a valid license or registration. This includes the ability to impose civil money penalties.

“Each state must have… the authority to impose civil money penalties… for failure to comply with licensing requirements, including acting as a mortgage loan originator without a valid license or registration.”

— 12 USC § 5104; SAFE Act Section 1517

Other activities may be sanctionable under different laws (e.g., RESPA, ECOA), but the SAFE Act specifically addresses unlicensed activity.

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

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

The Real Estate Settlement Procedures Act (RESPA) prohibits kickbacks, referral fees, and unearned fees in any transaction involving a federally related mortgage loan. If a real estate broker offers the MLO $500 to obtain a purchase-money mortgage for the broker's client, the MLO must decline the money. Accepting payment for a referral is illegal under Section 8 of RESPA.

Options such as applying the money toward the down payment (B) or including it on the Closing Disclosure (C)** do not make the payment legal, as it would still violate RESPA.

The purpose of an appraisal in mortgage underwriting is to determine the current market value of the property being used as collateral for the loan. This is to ensure the loan amount does not exceed the value of the property and to protect the lender’s interest in case of default.

“An appraisal provides an opinion of the property’s market value, which is essential for the lender to determine if the property adequately secures the loan.”

— Fannie Mae Selling Guide, B4-1.1-03: Appraisal Report Forms and Exhibits

Under Regulation Z (TRID rule), if a written estimate of terms or costs is provided before the Loan Estimate, it must state in 12-point font at the top of the first page:

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

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

— 12 CFR § 1026.19(e)(2)(ii)

First, calculate the monthly interest-only payment:

Loan Amount: $239,500

Interest Rate: 7.25% annual

Monthly Interest: $239,500 × 0.0725 ÷ 12 = $1,447.29

Add escrow for taxes and insurance:

Annual Insurance: $551 ÷ 12 = $45.92

Annual Taxes: $1,773 ÷ 12 = $147.75

Total escrow per month: $45.92 + $147.75 = $193.67

Total monthly payment:

$1,447.29 (interest-only) + $193.67 (escrow) = $1,640.96

Closest answer: C. $1,640.65

The slight difference is likely due to rounding, but C is the best match.

The Equal Credit Opportunity Act (ECOA) prohibits discrimination based on receipt of child support, marital status, and age (provided the applicant is legally able to contract). However, it permits denial based on immigration status if it affects the creditor's ability to enforce legal rights in case of default.

“A creditor may inquire about an applicant’s immigration status and may deny credit if the applicant is not a permanent resident or otherwise not legally in the U.S. and able to contract.”

— 12 CFR § 1002.5(e), Regulation B (ECOA)

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

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

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

Coercion is the act of using force, threats, or pressure to influence another party’s actions or decisions. Imposing arbitrary and unreasonable time limits to force a borrower to act quickly—when such urgency is not legitimate—is considered a form of coercion.

“Coercion includes pressuring consumers to make decisions in haste or under duress, such as requiring immediate action to lock in a loan rate.”

— SAFE MLO National Test Study Guide; CFPB Consumer Protection Resources

This practice is prohibited and unethical.

Under HOEPA (Home Ownership and Equity Protection Act) rules for high-cost mortgages, a creditor may not refinance a high-cost mortgage into another high-cost mortgage within 12 months of the previous transaction unless the new loan is in the borrower’s best interest. This is to prevent loan flipping and predatory lending.

“A creditor may not refinance a high-cost mortgage into another high-cost mortgage within one year unless the new loan is in the borrower’s best interest.”

— 12 CFR § 1026.34(a)(3)

Since the purpose here is a cash-out for a collector car (not generally a “best interest” purpose), the MLO should deny the loan unless a strong case can be made that it is in the borrower’s best interest.

According to Regulation Z (TILA-RESPA Integrated Disclosure Rule, or TRID), lenders and settlement agents are not allowed to charge a fee for the preparation or delivery of the Closing Disclosure. This applies regardless of when or how many times the Closing Disclosure is provided.

“A creditor or other person may not charge any fee for the preparation or delivery of the disclosures required under this section (Closing Disclosure).”

— 12 CFR § 1026.19(f)(5)(i)

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

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

If an MLO suspects fraud, they have an obligation to report it to the company’s compliance officer or appropriate supervisor for investigation. Ignoring, failing to report, or handling it informally is not acceptable.

“If an MLO suspects fraud, the MLO must report it to their company's compliance officer or other responsible person as required by company policy and law.”

— SAFE MLO National Test Study Guide; FFIEC, Guidance on Mortgage Fraud Detection

The main purpose of the secondary market is to fund additional loans by allowing lenders to sell existing mortgages to investors. This process replenishes the lender’s capital, enabling them to originate more loans. The secondary market is where mortgage-backed securities (MBS) are bought and sold, providing liquidity to the mortgage market.

Other options such as funding second mortgages or second home loans are specific transactions that do not capture the overall purpose of the secondary market.

For a purchase transaction, the Loan-to-Value (LTV) ratio is calculated by dividing the loan amount by the lesser of the sales price or the appraised value.

“For purchase transactions, LTV is calculated by dividing the loan amount by the lesser of the property’s sales price or appraised value.”

— Fannie Mae Selling Guide, B2-1.2-03

Here:

Loan Amount: $160,000

Sales Price: $180,000

Appraised Value: $200,000

Lesser of sales price/appraised value: $180,000

LTV = ($160,000 ÷ $180,000) × 100 = 88.89%

However, the options provided are: 80%, 88%, 89%, 90%. The closest, and by rounding convention for mortgage lending, 89% would be correct. However, sometimes the answer is provided as a rounded figure, in which case 89% (C) would be the correct answer.

Let's verify the math:

$160,000 ÷ $180,000 = 0.8888 = 88.9% (rounded to the nearest whole percent, 89%).

So, the correct answer is: C

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

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

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

Under the USA Patriot Act, if a Suspicious Activity Report (SAR) is filed due to potential illegal activities, the MLO (Mortgage Loan Originator) is prohibited from discussing the filing of the SAR with any parties involved in the transaction, including the buyer’s agent, loan processor, or any other party. This prohibition ensures that the investigation is not compromised and that the confidentiality of the report is maintained.

Discussing the SAR with any party is considered a violation of anti-money laundering (AML) rules.

A home equity line of credit (HELOC) is a revolving form of credit secured by the equity in the borrower's home. What is unique about a HELOC, compared to traditional closed-end loans, is that the borrower can take multiple draws or advances up to the credit limit during the draw period.

“A HELOC is a line of credit extended to a homeowner that uses the borrower’s home as collateral. The distinguishing feature of a HELOC is that the borrower may take additional advances at his or her discretion, up to the approved credit limit, during the draw period.”

— SAFE MLO National Test Study Guide

Other answers:

Interest-only payments can occur in some loan types but are not unique to HELOCs.

Borrowing more than the property is worth (being "underwater") is not allowed.

Selling the property without paying off the loan is not permitted; the HELOC must be satisfied at sale.

Under the Equal Credit Opportunity Act (ECOA), creditors must notify applicants of the action taken (approval, counteroffer, or denial) within 30 calendar days of receiving a completed application or additional information related to a counteroffer. This timeline ensures transparency and fairness in the loan application process.

This 30-day window applies both for original applications and responses to counteroffers, allowing the borrower sufficient time to receive and act on the decision.

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

Other options:

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

Option B and Option D describe fair loan presentation practices.

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

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

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

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

Under Regulation Z, which implements the Truth in Lending Act (TILA), creditors offering Adjustable-Rate Mortgages (ARM) are required to provide disclosures that fully describe each variable-rate loan program in which the consumer expresses interest. These disclosures must explain:

How the interest rate and payment could change over time

The frequency of rate changes

The index used to determine the rate

Potential caps and limits on rate increases

These disclosures ensure transparency and protect consumers from unexpected payment shocks.

Other loan types:

FHA loans (B) follow fixed or ARM terms, but the requirement for variable-rate disclosure is specific to ARMs.

Fixed-rate loans (C) don’t have variable rates, so they don’t require such detailed disclosures.

Construction loans (D) may involve different terms but aren’t subject to this particular requirement.

A fixed-rate mortgage (FRM) is a mortgage loan where the interest rate remains constant for the entire term of the loan, regardless of changes in market interest rates. These loans typically come in terms of 15, 20, or 30 years, with 30-year fixed-rate mortgages being the most common in the U.S.

“A fixed-rate mortgage is one in which the interest rate remains the same for the entire term of the loan. The most common term is 30 years. This provides borrowers with a stable and predictable monthly payment over the life of the loan.”

— SAFE Mortgage Loan Originator Test Prep Guide (NMLS-approved)

“Unlike adjustable-rate mortgages, fixed-rate mortgages do not change over time. The interest rate is locked in at the time of loan origination.”

— U.S. Department of Housing and Urban Development (HUD), Mortgage Basics Guide

The other options describe adjustable-rate mortgages (ARMs) or balloon mortgages, which are distinctly different products:

Option A: Describes a type of step-rate mortgage, not a fixed-rate loan.

Option B: Refers to a 10/1 ARM, not a fixed-rate mortgage.

Option C: Refers to a balloon mortgage, where a large payment is due at the end of the term.

Therefore, only Option D accurately describes a true fixed-rate mortgage product.

Prepaid items are costs that a borrower pays in advance at closing, such as interest, property taxes, and homeowners insurance. These are often collected to set up escrow accounts for future payments. Real estate taxes paid at closing are a classic example of a prepaid item.

“Prepaid items are charges that are paid in advance at closing for items such as interest, property taxes, and insurance premiums.”

— CFPB, Your Home Loan Toolkit

The SAFE Act defines a mortgage loan originator (MLO) as someone who takes a residential mortgage loan application and offers or negotiates terms for compensation or gain. An individual who only handles the collection of mortgage payments is not acting as an MLO under the Act.

“Mortgage loan originator means an individual who (i) takes a residential mortgage loan application; and (ii) offers or negotiates terms of a residential mortgage loan for compensation or gain. The term does not include an individual who only performs administrative or clerical tasks or who only collects mortgage payments.”

— SAFE Act, 12 U.S.C. § 5102(4); NMLS Uniform State Content Outline

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

100% of the replacement cost of the structure, or

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

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

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

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

Under RESPA Section 8(b), it is illegal for any person to give or accept any portion, split, or percentage of a settlement service fee other than for services actually performed. This is known as fee splitting or unearned fee splitting.

“No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service other than for services actually performed.”

— 12 USC § 2607(b), RESPA Section 8(b)

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

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

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

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

— 12 CFR § 1024.2, Regulation X

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

The Truth in Lending Act (TILA) Regulation Z requires that advertisements for mortgage credit products that state a rate or terms must be clear and not misleading. Phrases like “with approved credit” are permissible when a specific APR is disclosed and required terms are provided. However, “no closing costs” or “variable rate starting at ___” are considered potentially misleading if not all relevant terms are disclosed.

“If an advertisement states a rate of finance charge, it must state the rate as an annual percentage rate (APR)… Disclosures must not be misleading. Stating ‘with approved credit’ in connection with an APR is permissible.”

— 12 CFR § 1026.24, Regulation Z

Under the SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act), the maximum civil penalty for each violation or failure to comply is $25,000 per act or omission. This applies to mortgage loan originators (MLOs) and others who violate licensing or regulatory requirements under the SAFE Act. Violations can include actions such as failing to obtain proper licensure or engaging in fraudulent lending practices.

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

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

Under the Truth in Lending Act (TILA), a dwelling is defined as any residential structure that includes one to four units, such as an individual condominium unit, single-family home, or townhouse. This definition also includes mobile homes or manufactured homes, as long as they are used as residences.

Unimproved lots (A) are not considered dwellings because they lack a residential structure.

A six-unit apartment complex (B) exceeds the limit of four units for a dwelling under TILA.

Timeshares (D) are typically considered non-residential and do not meet the TILA definition of a dwelling.

When responding to a state regulator’s request regarding a consumer complaint, the company should provide all requested documents, along with an explanation of the facts and what caused the complaint. Regulators have authority to access unredacted information as part of their oversight and investigative powers.

“Regulators have the right to access all pertinent documentation in the course of investigations or examinations. Companies should provide a full and factual response, including all supporting documentation and their explanation of events.”

— SAFE Act, 12 U.S.C. § 5117; NMLS Policy Guidebook

FHA insurance protects the lender if the borrower defaults on the mortgage. The FHA pays a claim to the lender for losses incurred due to non-payment.

“FHA insurance protects the lender against losses if a homeowner defaults on their mortgage.”

— HUD, What is FHA Mortgage Insurance?

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

The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act) establishes federal and state licensing standards for mortgage loan originators (MLOs) and mandates that each state creates a licensing and regulatory agency to oversee mortgage companies. This agency is responsible for investigating, examining, and enforcing compliance with mortgage regulations. The act aims to ensure that mortgage companies and MLOs operate with transparency, competency, and accountability.

The SAFE Act gives regulatory bodies the authority to conduct background checks, examinations, and audits of licensed mortgage companies.

Other Acts:

TILA and RESPA focus on disclosure requirements and fair lending practices but do not specifically regulate state licensing and examinations.

HOEPA regulates high-cost loans and predatory lending practices, not licensing.

Lenders are permitted to accept the employment information provided by the borrower on the initial loan application without asking for a letter of explanation when the borrower has a stable employment history, such as being employed by the same company for three years or more. This provides sufficient documentation of employment stability, reducing the need for further explanation.

Other options (A, B, C) involve situations where the employment status or job stability may raise concerns, thus requiring additional documentation or explanation.