National and UST Mortgage Practice Exam 1
Which of the following would be equal to one half of one discount point (.005) on a loan amount of $250,000?
The answer is $1,250. One discount point is equal to 1% (.01) of the loan amount. Therefore, a charge of 0.005 (one half of one point) on a $250,000 loan is 0.5% (.005) × $250,000 = $1,250.
A borrower receives $1,000 per month in rental income. How much of the income may be used to qualify the borrower for a loan?
The answer is $750. Generally, 75% of rental income may be used to qualify a borrower for a loan. This formula is based on an industry standard that taxes, insurance, and maintenance costs will equal about 25% of the income that a property generates. In this case, 75% × $1,000 = $750.
What is the tolerance allowed for variances in the APR disclosure required by the Truth-in-Lending Act in a regular transaction?
The answer is .125% (one eighth of one percent). The APR is considered accurate if it is not more than one eighth of one percentage point above or below the APR determined in accordance with legal requirements (i.e., in accordance with the actuarial method or the United States Rule method), or if it is not more than .25% (one quarter of one percentage point) above or below the APR for an irregular transaction.
On the Loan Estimate, fees related to third-party service providers chosen from the provider list and not affiliated with the creditor are grouped with the recording fees and subject to a:
The answer is 10% tolerance. In regard to tolerances related to settlement costs, fees related to third-party service providers and recording fees are grouped together and subject to a 10% tolerance. The creditor may charge more for a particular service or recording fee than initially disclosed as long as the total for all such charges, when added together, does not exceed 10% of the amount disclosed.
When must a borrower receive notification of a servicing transfer?
The answer is 15 days prior to the effective date of the transfer. Under RESPA, when a loan servicer sells or assigns loan servicing rights to another loan servicer, the borrower must be sent a servicing transfer statement (showing the new servicer's name, address, and toll-free telephone numbers and showing the date the new servicer will begin accepting payments) at least 15 days before the effective date of the servicing transfer.
Under the S.A.F.E. Act, mortgage loan originator license applicants must complete how many hours of pre-licensing education?
The answer is 20. In order to obtain a mortgage loan originator license, an individual must complete required pre-licensing education consisting of at least 20 hours of NMLS-approved education. The S.A.F.E. Act specifies that the education must include at least three hours of federal laws and regulations, three hours of ethics, and two hours of training related to lending standards for nontraditional mortgage products.
A borrower makes $60,000 per year. The borrower's spouse makes $3,000 per month. The borrowers' monthly housing expense is $1,500. They have a car payment of $500, a boat payment of $350, a phone bill of $150, and a car insurance payment of $100. What is the couple's back-end DTI?
The answer is 29.38%. Monthly Housing Costs + Monthly Liabilities / Gross Monthly Income = Debt-to-Income Ratio. Borrower 1's annual income is $60,000, divided by 12 = $5,000. The spouse's gross monthly income of $3,000 is added to $5,000, for a total monthly income of $8,000. The monthly housing expense ($1,500) is added to the car payment ($500) and the boat payment ($350), totaling $2,350. This figure, divided by $8,000, equals 29.38%. Typical living expenses, such as a phone bill or car insurance, are not included when calculating DTI.
A borrower owes $200,000 on a first mortgage, and $50,000 on a line of credit with a maximum amount of $100,000. If the property appraises for $500,000, what is the CLTV?
The answer is 50%. When secondary financing is a line of credit, the loan balance plus any draw amount is used to calculate the combined loan-to-value ratio (CLTV). In this case, the CLTV would be $200,000 + $50,000 / $500,000 = 50%.
For an FHA loan, how much may the seller contribute toward the borrower's closing costs?
The answer is 6% of the sales price. The FHA allows the seller to contribute up to 6% of the purchase price toward the buyer's actual closing costs, prepaid taxes and insurance, discount points, buydown fees, mortgage insurance premiums, and other financing concessions, but nothing toward the down payment.
A borrower obtains a one-year ARM which starts at 4.0% and has a margin of 3.0% and 2/6 caps. At the end of the first year, the index is 5.0%. What is the interest rate after the first adjustment?
The answer is 6. When the interest rate adjusts, the new rate is the lower of index + margin (in this case, 5 + 3 = 8) and the current rate + cap (in this case, 4 + 2 = 6). Therefore, after the first adjustment, the interest rate would be 6%.
A loan originator license applicant must pass the NMLS-required examination with a score of at least __ percent.
The answer is 75. Mortgage loan originator license applicants must pass an exam developed by NMLS and administered by an approved test provider with a score of at least 75%.
A borrower obtains a one-year ARM, which starts at 4.0% and has a margin of 3.0%. At the end of the first year, the index is 5.0%.
The answer is 8%. When the rate adjusts, the new fully-indexed rate is equal to the index plus margin. In this case: 5 + 3 = 8.
If a borrower has an $80,000 first mortgage, a $20,000 second HELOC on which they have $5,000 in remaining credit, and the property appraises for $100,000, what is the CLTV?
The answer is 95%. CLTV stands for combined loan-to-value, which is a ratio used when there are multiple loans secured by the same property. This is calculated by combining the amounts of the loans secured by the property, then dividing by the property value or sales price (whichever is less). In this case, $80,000 + ($20,000 - $5,000)/$100,000 = 95%.
Which of the following types of mortgages typically carries two different types of mortgage insurance?
The answer is FHA. In FHA loans, the FHA insures the issuing lender against loss in the event of default. The FHA funds the insurance from a mortgage insurance premium (MIP) charged to the borrower. Most FHA mortgages require payment of an upfront mortgage insurance premium (UFMIP). The UFMIP is nonrefundable (except to the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within three years). In addition, most FHA loans require payment of an annual mortgage insurance premium, payable monthly as part of the mortgage payment. This premium is based on the loan program, the loan term, and the LTV.
Which of the following entities was formed by the federal government in order to facilitate home ownership, but is a publicly held corporation now separate from the federal government?
The answer is Fannie Mae. The Federal National Mortgage Association (FNMA), or Fannie Mae, was established in 1938 by amendments to the National Housing Act, in order to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. It is a government-sponsored enterprise (GSE) and, since 1968, a publicly traded company.
What does "FHA" stand for, when referring to the agency which oversees the FHA loan program?
The answer is Federal Housing Administration. "FHA" stands for Federal Housing Administration.
Which of the following is a government-owned entity which facilitates home ownership in the United States?
The answer is Ginnie Mae. The GNMA, also known as Ginnie Mae, is a government corporation within HUD. Its purpose is to facilitate home ownership in the United States and increase the supply of credit available for housing, by directing funds from the securities market into the mortgage market. It does this by guaranteeing mortgage loans made by private lenders and insured by the FHA or guaranteed by the VA or the USDA, which are then placed into mortgage-backed securities and issued by the private party that holds them.
A loan which allows the borrower to take a lump sum distribution without any monthly repayment requirements is a(n):
The answer is HECM. The FHA's home equity conversion mortgage (HECM) is a reverse mortgage that enables an individual aged 62 or older to convert some of the equity in his/her primary residence to cash to pay living expenses, or to purchase a primary residence if he/she has the cash for a down payment and closing costs. The HECM requires no repayment until either the property is sold or the owner dies, permanently moves, fails to live in the house for 12 consecutive months, or fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).
What is Freddie Mac's automated underwriting system called?
The answer is Loan Product Advisor. Freddie Mac's automated underwriting system is called Loan Product Advisor (formerly known as Loan Prospector), while Fannie Mae's is called Desktop Underwriter.
Which of the following deals most specifically with representations made in mortgage advertising?
The answer is MAP Rule. The Mortgage Acts and Practices Rule (MAP Rule or Regulation N) deals specifically with prohibited material misrepresentations in any commercial communication, including advertising, regarding the terms of mortgage credit products.
Which of the following is intended to ensure that consumers are provided with information on the nature and costs of the settlement process?
The answer is RESPA. The purpose of RESPA and Regulation X is to help consumers become better shoppers for settlement (closing) services by providing them with information on the nature and costs of the settlement process. RESPA and Regulation X are also intended to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services.
Which of the following federal regulations prohibits discrimination based on race, color, religion, sex, marital status, or national origin in a credit transaction?
The answer is Regulation B. Regulation B implements the provisions of the Equal Credit Opportunity Act (ECOA), which ensures that all persons, consumers, and businesses are given an equal chance to obtain credit by prohibiting discrimination based on criteria including race, color, religion, national origin, sex, marital status, and age (provided the individual is of age to enter into a contract).
A disclosure that allows a consumer to more easily compare loan options is required under which regulation?
The answer is Regulation Z. The TILA-RESPA Rule, included in Regulation Z, outlines the requirements for use of the Loan Estimate and the Closing Disclosure, intended to facilitate the ability of consumers to determine whether they can afford a particular loan, and/or compare specific loan products, including their costs over the life of the loan.
Which of these replaces the HUD-1 Settlement Statement and the final TIL Disclosure?
The answer is The Closing Disclosure. The Closing Disclosure replaces the HUD-1 Settlement Statement and the final TIL Disclosure. It sets forth the actual costs of the subject mortgage lending transaction in a clear and understandable manner.
The 1003 is also known as the:
The answer is Uniform Residential Loan Application. A Uniform Residential Loan Application, also called Form 1003, is used when the loan is to be sold to Freddie Mac or Fannie Mae, insured by the Federal Housing Administration (FHA), or guaranteed by the Department of Veterans Affairs (VA).
A loan which does not require payments during the life of the loan is most likely:
The answer is a HECM. The FHA's home equity conversion mortgage (HECM) is a reverse mortgage that enables individuals aged 62 or older to convert some of the equity in their primary residence to cash to pay living expenses, or to purchase a primary residence if they have the cash to pay the down payment and closing costs. It requires no repayment until either the property is sold or the owner dies, permanently moves, fails to live in the house for 12 consecutive months, or fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).
Under which of the following circumstances could a borrower be charged a fee for the preparation of a settlement statement?
The answer is a borrower may not be charged a fee for the preparation of a settlement statement. Section 12 of RESPA provides that no fee can be charged by a lender for the preparation and distribution of documents required in connection with the making of a federally-related mortgage loan.
The NMLS may best be described as a:
The answer is a licensing system utilized by all U.S. states and territories. The NMLS is a mortgage licensing system developed and maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators for licensing and registering loan originators. It is utilized by all U.S. states and territories.
Arabella Ash works for and is supervised by loan originator Jerry Jenkins, collecting and analyzing data related to residential mortgage loans. She communicates with borrowers, but does not offer or negotiate loan rates or terms or advise consumers about residential mortgage loan rates or terms. Under S.A.F.E. Act definitions, Arabella is:
The answer is a loan processor. A loan processor or underwriter is an individual who performs clerical or support duties at the direction of and subject to the supervision and instruction of a state-licensed loan originator or a registered loan originator. Clerical or support duties include the receipt, collection, distribution, and analysis of information common for the processing and underwriting of a residential mortgage loan. These duties also include communicating with a consumer to obtain the information necessary for processing and underwriting a loan as long as such communication does not include offering or negotiating loan rates or terms or counseling consumers about residential mortgage loan rates or terms. A person working solely as a loan processor or underwriter is not required to be licensed under the S.A.F.E. Act.
The S.A.F.E. Act applies to mortgage loan originators who take applications for, or offer or negotiate terms of, residential mortgage loans, which would include:
The answer is a mobile home to be used as a residence, even if it is not attached to the land. The S.A.F.E. Act defines a mortgage loan originator as an individual who takes residential mortgage loan applications, or offers or negotiates terms of residential mortgage loans for compensation or gain. The S.A.F.E. Act's definition of "residential mortgage loan" includes a loan secured by a consensual security interest on a dwelling and cross-references the definition of the term "dwelling" in the Truth-in-Lending Act (TILA). Regulation Z, which implements TILA, defines a dwelling as a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.
Which of the following is NOT true about the financial responsibility of a mortgage loan originator?
The answer is a mortgage loan originator must always have his or her own surety bond in an amount that reflects the dollar value of loans originated in the previous year. Each mortgage loan originator must be covered by a surety bond. If he or she is an employee or exclusive agent of a mortgage licensee, the surety bond of the employing licensee may be used to satisfy the loan originator surety bond requirement. The penal sum of the surety bond must reflect the dollar amount of loans originated. If the loan originator's licensing state has developed and administers a fund specifically to provide protection to consumers by making funds available for claims resulting from violations of state or federal laws and regulations, in lieu of a surety bond or net worth requirement, the state may instead require the loan originator to pay a certain amount into the state fund.
Which of the following situations would be acceptable under RESPA?
The answer is a mortgage loan originator refers all borrowers to use the title company which is located in the same building as the mortgage loan originator, but with which the mortgage loan originator or the mortgage loan originator's company has no other relationship. An affiliate relationship exists when one company controls, is controlled by, or is under common control of another company. Under RESPA, when a settlement service provider refers a borrower to one or more affiliates with whom it has an ownership or other beneficial interest, an Affiliated Business Arrangement (AfBA) Disclosure Statement must be given on a separate piece of paper to the borrower. Among other things, the AfBA Disclosure informs the borrower that he/she is generally not required to use the affiliate and is free to shop for other providers. Kickbacks and referral fees are also prohibited under RESPA.
The acronym LIBOR represents a:
The answer is a possible ARM index. The LIBOR, which stands for London Interbank Offered Rate, is a standard financial index used in U.S. capital markets.
A licensed mortgage loan originator:
The answer is advises loan applicants on current rates and loan terms. The S.A.F.E. Act defines a mortgage loan originator as an individual who takes a residential mortgage loan application, or offers or negotiates terms of a residential mortgage loan for compensation or gain. The S.A.F.E. Act provides that an individual assists a consumer in obtaining or applying to obtain a residential mortgage loan by, among other things, advising on loan terms, including rates, fees, and other costs; preparing loan packages; or collecting information on behalf of the consumer with regard to a residential mortgage loan.
Mike B. Leeve is a dreamer. He loves to invent borrowers and properties, establish fake accounts for payments, and maintain custodial accounts for escrows. He has even set up an office with a bank of telephones, with one phone representing the employer, another the appraiser, another the credit agency, etc., so he can take money from lenders and then go on a long international vacation. The loans Mike is getting are called:
The answer is air loans. Air loans are loans secured by nonexistent property which leave the lender without collateral. The schemer invents borrowers and properties, establishes fake accounts for payments, and maintains custodial accounts for escrows. He may even set up an office with a bank of telephones for verification purposes, with each phone representing the employer, appraiser, credit agency, etc.
All of the following are examples of prohibited misleading advertising, EXCEPT:
The answer is an ad that refers a consumer to a consumer protection website which is not operated by the lender in order to compare average mortgage loan rates. Under the Mortgage Acts and Practices Rule (MAP Rule or Regulation N), it is a violation of the advertising regulations for any person to make a material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product, including misrepresenting loan terms (claiming a loan product is preapproved when it is not) and misrepresenting the source of a loan offer (claiming it originates from the consumer's current mortgage lender or from a government agency when this is not the case). Referring a consumer to a consumer protection website which is not operated by the lender is not misleading nor is it a violation of the law.
Once the Closing Disclosure is delivered, which of the following would require a new Closing Disclosure to be delivered to the borrower and a new waiting period before closing?
The answer is an increase in the APR by more than .125%. A new three-business-day waiting period applies to a corrected disclosure if there are changes or corrections that relate to the annual percentage rate, the loan product, or the addition of a prepayment penalty. For other types of changes, the corrected disclosure may be provided at or before consummation. The APR is generally considered to be accurate if it is not more than one eighth of one percentage point (0.125%) above or below the APR determined in accordance with legal requirements (i.e., in accordance with the actuarial method or the United States Rule method); or in an irregular transaction, if it is not more than one quarter of one percentage point above or below the annual percentage rate determined in accordance with legal requirements.
All of the following are considered immediate family members, and therefore a mortgage loan originator may negotiate a mortgage loan on their behalf without needing to be licensed, EXCEPT a(n):
The answer is aunt. Despite the broad definition of a mortgage loan originator in the SAFE Act, there are some limited circumstances in which offering or negotiating residential mortgage loan terms would not make an individual a mortgage loan originator. These include an individual who offers or negotiates terms of a residential mortgage loan with or on behalf of an immediate family member, including a spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.
According to conventional underwriting guidelines, when analyzing income from a borrower who is self-employed, an underwriter should:
The answer is average the income shown on the 1040s for the past two years. When analyzing a borrower's income for loan qualification, self-employed or commissioned income is averaged over a two-year period, using tax forms such as Form 1040, U.S. Individual Income Tax Return. When commission income is at least 25% of the borrower's income, the most recent two years' personal tax returns may be required.
Which term is used to describe knowingly advertising or offering one set of terms that is very appealing but is not readily available and then pressuring a person into signing a contract with other, more expensive terms?
The answer is bait and switch. Bait and switch advertising involves advertising a loan at very attractive terms and then informing potential customers that, while the advertised loan is not available, a substitute, usually more expensive or involving less appealing terms, is.
A 180 / 360 loan is considered a(n) ___________________ mortgage.
The answer is balloon mortgage. A partially-amortized or balloon mortgage provides for some, but not total, amortization during the mortgage term. It has payments that are equal and regular in nature. However, the loan term is shorter than the time needed to repay the full loan balance by making those payments. Therefore, at the end of the loan term, a large balloon payment is needed to pay off the remaining balance. The loan would be labeled by indicating the loan term in months (in this case, 180) and the amortization period in months (in this case, 360).
A mortgage in which a large, one-time payment is made at the end of a loan term is known as a:
The answer is balloon mortgage. In a balloon mortgage, a large portion of the borrowed principal is repaid in a single payment at the end of the loan period.
Which of the following borrowers would be considered self-employed for underwriting purposes?
The answer is borrower who is a salesperson for a company, of which she is a 30% owner. A self-employed borrower is one who owns 25% or more of a business.
Andy Agent likes to refer clients to Larry Lender, because Larry will frequently send Andy a gift certificate for the referrals. Which of the following is most true?
The answer is both Andy and Larry could be fined up to $10,000, imprisoned for up to 1 year, or both for each incidence, because they are both violating RESPA. Under Section 8 of RESPA, it is illegal to give or accept any fee, kickback, or other thing of value under any agreement or understanding, oral or otherwise, that business relating to or part of a settlement service involving a federally-related mortgage loan will be referred to any person. Since a gift certificate is a thing of value, both Larry and Andy are guilty of violating RESPA and may suffer the legal consequences of this violation.
Which of the following contains only items which should be used in calculating a borrower's debt-to-income ratio?
The answer is car payment, boat payment, child support obligations. A debt-to-income ratio compares an applicant's total monthly debt to his or her total monthly income. Total monthly debt would include simultaneous loans, debt obligations, alimony, and child support. Typical living expenses (e.g., utilities, health and disability insurance, food, phone or cable bills, etc.) are not included when calculating DTI.
Which of the following is most likely to be considered a violation of Regulation B?
The answer is charging a minority borrower a higher interest rate than a similarly situated non-minority borrower. Regulation B prohibits discrimination in credit transactions based on criteria such as race, color, religion, national origin, sex, marital status, and age. An example of such discrimination would be charging a minority borrower a higher interest rate than a similarly situated non-minority borrower. Decisions based on creditworthiness, rather than discriminatory criteria, are not prohibited under Regulation B.
According to the Interagency Guidance on Nontraditional Mortgage Product Risks, relying on an individual's capacity to repay the loan as structured from resources other than monthly income is:
The answer is considered unsafe and unsound. The Interagency Guidance on Nontraditional Mortgage Product Risks emphasizes the importance of establishing a borrower's ability to repay a loan based on the borrower's existing resources, primarily monthly income, rather than the value of the collateral pledged. Loans to borrowers who do not demonstrate the capacity to repay the loan from sources other than the collateral pledged are generally considered unsafe and unsound.
Which of the following would not be considered an established business relationship under the Do-Not-Call rules?
The answer is consumer inquiry into the purchase of an item six months ago. Under the Telemarketing Sales Rule, a company engaging in telemarketing is prohibited from making interstate or intrastate calls to anyone whose number is listed on the Registry, unless an "established business relationship" exists. An established business relationship means a relationship between the company and a consumer based on the consumer's purchase, rental, or lease of the seller's goods or services, or a financial transaction between the consumer and seller, within the 18 months immediately preceding the date of a telemarketing call, or the consumer's inquiry or application regarding an offered product or service within the three months immediately preceding the date of a telemarketing call. However, if such a consumer asks not to be contacted, the company must enter him or her on their own do-not-call list of such consumers.
Which of the following is not a required element of a company's safeguard policy, as required by the GLB Act?
The answer is contract with a federally-insured company to destroy documents. Under the GLB Act, a financial institution must have a written information security program that is appropriate to its size and complexity, to the nature and scope of its activities, and to the sensitivity of the customer information it handles. As part of its program, the financial institution must assign one or more employees to oversee the program; conduct a risk assessment; put safeguards in place to control the risks identified in the assessment and regularly test and monitor them; require service providers, by written contract, to protect customers' personal information; and periodically update its security program. There is no requirement to contract with any external company to handle information security issues of any kind.
Which of the following is most likely to be a violation of the Equal Credit Opportunity Act?
The answer is declining a loan due to the borrower's race. The Equal Credit Opportunity Act (ECOA) ensures that all persons, consumers, and businesses are given an equal chance to obtain credit by prohibiting discrimination based on criteria including race, color, religion, national origin, sex, marital status, and age (provided the individual is of age to enter into a contract). Declining a loan due to the borrower's race is a violation of ECOA.
In order to meet the annual continuing education requirement, a state-licensed loan originator must complete at least _____ hours of NMLS-reviewed and -approved coursework.
The answer is eight. A state-licensed mortgage loan originator must renew his/her license annually and must satisfy the continuing education requirement of at least eight hours of courses that have been reviewed and approved by the NMLS.
Which of the following is least likely to be considered nonpublic personal information?
The answer is employer's phone number. Nonpublic personal information (NPI) is any personally identifiable financial information that a financial institution collects about an individual in connection with providing a financial product or service. NPI does not include information where there is reasonable basis to believe it is lawfully made publicly available, such as an employer's phone number.
The purpose of the Truth-in-Lending Act is to do which of the following?
The answer is ensure meaningful disclosure of credit terms to consumers. The purposes of TILA include assuring a meaningful disclosure of credit terms so that the consumer will be able to more readily compare the various credit terms available to him or her and avoid uninformed use of credit.
Which of the following terms would apply when calculating the maximum loan amount available to a VA borrower?
The answer is entitlement. The VA limits the amount that it can guarantee to repay a lender in the event of a default on the loan. The amount that the government will guarantee to a lender is known as a veteran's entitlement.
The number one ethical problem cited in surveys of professionals and managers is:
The answer is false or misleading representation of products or services in marketing, advertising, or sales. The number one ethical problem cited in surveys of professionals and managers is false or misleading representation of products or services in marketing, advertising, or sales efforts, usually involving various aspects of loan terms. This includes use of false or misleading advertising, use of truthful advertising in a deceptive or misleading manner, and concealing the limitations of the programs or terms being promoted.
Under the Gramm-Leach-Bliley Act, the Safeguards Rule and Financial Privacy Rule apply to which of the following?
The answer is financial institutions. The Gramm-Leach-Bliley Act's Safeguards Rule requires all financial institutions to design, implement, and maintain safeguards to ensure the security and confidentiality of customer information and protect customer information against unauthorized access. Financial institutions covered by the rule include lenders and other traditional institutions, as well as payday lenders, check-cashing businesses, professional tax preparers, auto dealers engaged in financing or leasing, electronic funds transfer networks, mortgage brokers, credit counselors, real estate settlement companies, and retailers that issue credit cards to consumers. The Financial Privacy Rule of the GLB Act governs the collection and disclosure of customers' personal financial information by financial institutions.
All of the following would be common activities in fraud for housing, except:
The answer is flipping. Asset fraud, income and employment fraud, and silent seconds (in which a borrower secretly borrows needed funds from the seller secured by an undisclosed and unrecorded second mortgage) are all associated with fraud for housing. In contrast, flipping is usually associated with predatory lending, rather than property fraud.
When would ARM disclosures be required?
The answer is for all ARMs. For an ARM, the interest rate will change periodically, based on an index to which the rate is tied and the margin added to cover the creditor's expenses and profit. Therefore, the borrower must be given information about the index, the margin, and the frequency of rate adjustments, in addition to other pertinent facts about the loan. For an ARM secured by a borrower's principal residence with a term exceeding one year, additional disclosures must be provided either at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier.
On an ARM loan, which of the following will not be found on the note?
The answer is fully-indexed rate after one year. The promissory note is both a promise to repay the money borrowed with interest and evidence of the debt. For an ARM loan, it will typically identify the index, specify the margin, and list adjustment parameters, but will not specify the fully-indexed rate after one year.
Co-borrower information must be provided on the 1003 when the co-borrower:
The answer is has income being used for loan qualification. Co-borrower information is needed on the1003 when the income or assets of a person other than the borrower (e.g., the borrower's spouse) are to be used as a basis for loan qualification.
A mortgage which has a fixed interest rate for the first three to five years, and then a rate that adjusts at intervals based on an index and margin, is known as a(n):
The answer is hybrid ARM. A hybrid ARM has a rate that does not adjust during the first three to five years of the loan term, but is thereafter adjusted periodically (often annually) based on a specific index and margin.
When would business tax returns be required as documentation of income for a borrower?
The answer is if the borrower owns more than 25% of a company. A self-employed borrower (i.e., one who owns 25% or more of a business) may need to verify his/her employment with a copy of a current business license, a year-to-date profit-and-loss statement prepared by an accountant, and balance sheets and personal and/or business tax returns for the past two years.
According to ECOA, when could a lender ask a borrower about their race?
The answer is if they ask for monitoring purposes. Under ECOA and the Home Mortgage Disclosure Act (HMDA), in order for the government to be able to monitor compliance with fair lending laws, it is permissible for a mortgage licensee to ask applicants for information about their marital status, age, ethnicity, race, and sex.
Matt is a mortgage broker who has an ownership interest in a local title insurance company. When his clients apply for loans and request referrals to a title company, Matt must:
The answer is immediately provide an affiliated business arrangement disclosure if he refers them to the title company in which he has an ownership interest. Many service providers have a business relationship and an ownership interest in other settlement service providers. For example, a mortgage company may have an ownership interest in a title company. Profit-sharing by these affiliated companies is permissible under RESPA. This relationship must be disclosed to a borrower through an "affiliated business arrangement disclosure."
With respect to FHA loans, the FHA:
The answer is insures the loans, thereby protecting the lender. FHA loans are loans that meet FHA program criteria and are made by approved lenders. For these loans, the FHA insures the issuing lender against loss in the event of default. Under the FHA program, the lender can charge whatever points and interest a borrower is willing to pay, as the cost of the loan is negotiable. The advantage to the borrower is that the lender will make the loan with a very high loan-to-value ratio because it is insured.
Under the S.A.F.E. Act, a loan originator:
The answer is is an individual who takes residential mortgage loan applications. The S.A.F.E. Act defines a mortgage loan originator as an individual who takes residential mortgage loan applications, or offers or negotiates terms of residential mortgage loans for compensation or gain.
Which of the following best describes a note (i.e., a promissory note)?
The answer is it is both a promise to repay the money borrowed with interest and evidence of the debt. In the typical real estate sales transaction, the seller gives the buyer a deed at closing and the buyer gives the lender a promissory note and a security instrument (i.e., a mortgage or trust deed) that creates a lien on the property. The promissory note is both a promise to repay the money borrowed with interest and evidence of the debt.
Which of the following is most true concerning a VA funding fee?
The answer is it is nonrefundable. VA loans are made by approved lenders and guaranteed by the U.S. Department of Veterans Affairs. The guarantee is similar to mortgage insurance in that it limits the lender's exposure to loss in the event of a borrower's default that results in foreclosure. However, the veteran borrower is charged a nonrefundable upfront funding fee that can be financed, instead of a mortgage insurance premium for the guarantee. A veteran receiving VA compensation for a service-connected disability is exempt from the fee requirement.
Which of the following is true of the Loan Estimate?
The answer is it replaces the GFE and the early TIL Disclosure for most transactions. The Loan Estimate replaces RESPA's GFE and the early TIL Disclosure for most transactions. It combines the information provided by these two disclosures and is designed to help the consumer understand the key features, costs, and risks of the loan for which they are applying. It is not identical to the Closing Disclosure, which sets forth the actual costs of the subject mortgage lending transaction, rather than estimates.
Which of the following best describes a loan with a principal balance exceeding Fannie Mae or Freddie Mac guidelines?
The answer is jumbo. Conventional loans that conform to the eligibility guidelines for purchase by Fannie Mae or Freddie Mac are considered conforming loans. Fannie Mae and Freddie Mac have a maximum loan limit for loans they will purchase, which is adjusted annually. Loans to persons with satisfactory credit but that exceed this loan limit are called jumbo loans or nonconforming loans. Because these loans cannot be sold to Fannie Mae or Freddie Mac, they often have a higher interest rate than conforming loans.
Insurance which guarantees a lender a certain lien position on the title to a property free from undisclosed encumbrances is called:
The answer is lender's title policy. A lender's title insurance policy insures the lender or mortgagee against loss caused by a borrower's invalid title or loss of priority of the mortgage or deed of trust, due to legal claims based on undisclosed encumbrances.
Under the S.A.F.E. Act, a licensed loan originator's responsibilities with regard to recordkeeping include all of the following, except:
The answer is making all of the licensee's records available to borrowers upon demand. Licensed loan originators and those required to be licensed must make records and books available to their state regulator and permit interviews of officers, principals, employees, independent contractors, agents, and customers. They may not knowingly withhold, abstract, remove, mutilate, destroy, or secrete any books, records, or other information during an investigation or examination. Loan originators are not required to make all of their records available to borrowers upon demand.
Which of the approaches to appraisal compares the subject property to similar properties in order to arrive at a value?
The answer is market approach. The market or market data approach, also called the sales comparison approach, bases the value of a property on the prices paid for similar, or comparable, properties in the area that have sold recently. It is the most reliable method for appraising single-family homes and land.
Under Regulation X, the term "loan originator" applies to a:
The answer is mortgage broker or lender. Regulation X defines a loan originator to include a lender or mortgage broker.
In regard to obtaining property, the S.A.F.E. Act states that loan originators:
The answer is must not do so by fraud or misrepresentation. Under the S.A.F.E. Act, it is prohibited for any person, when engaging in mortgage loan origination activity, to obtain property by fraud or misrepresentation.
Which of the following best describes the federal limitation on the shortest adjustment period allowed on an ARM?
The answer is no limit. Federal law does not place general restrictions on the adjustment period allowed on an ARM.
A loan originator is discussing the features of a home equity consolidation loan with an applicant. In doing so, he relays to the applicant that the interest on the loan is tax deductible. This is:
The answer is not permissible, as the loan originator is not qualified to provide tax advice. From an ethical and legal standpoint, loan originators must take care not to provide borrowers advice on topics for which they lack the required qualifications, such as tax advice and other legal matters.
A mortgage broker and mortgage loan originator's duties to the lender include all of the following, except:
The answer is originating loans only for those applicants which promise most profit for the lender. Mortgage brokers and mortgage loan originators must diligently perform the services expected by the lender, including processing applications based on the lender's underwriting guidelines, following up to ensure conditions contained in commitment letters are satisfied in a timely manner, expediting processing so the loan can close within the period of any rate-lock, carrying out any cancellation procedures competently and professionally, and guarding against mortgage loan fraud and other practices that may harm the lender or investor purchasing the loan.
Ethics:
The answer is provides a guideline for answering questions when a choice of actions is available. Ethics goes beyond what is required under the law, so ethical rules extend beyond the minimum legal standards in providing guidance for one's actions. Ethics goes into the realm of what should be done, providing guidelines for answering questions when a choice of actions is available. As a result, ethical rules are often not as clear-cut as the legal rules.
Combining stated income with a nontraditional mortgage product is an example of:
The answer is risk layering. Risk layering refers to combining, or layering, high-risk loan features, which might include an interest-only or other non-conventional loan, reduced documentation, and a simultaneous second-lien loan.
Mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities in the:
The answer is secondary mortgage market. The secondary mortgage market is where mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities. It is comprised of investors and lenders that buy and sell real estate mortgages or guarantee loans from primary market lenders.
ABC Financing grants a loan to a borrower, believing the borrower has invested his own money in the down payment and closing costs. However, the borrower has actually borrowed the needed funds from the seller, secured by an undisclosed and unrecorded second mortgage. One name for this second mortgage is:
The answer is silent second. In the fraudulent activity termed "silent second," a primary lender grants a loan to a borrower who the lender believes has invested his/her own money in the down payment and closing costs. However, the borrower has actually borrowed the needed funds from the seller secured by an undisclosed and unrecorded (i.e., silent) second mortgage.
A mortgage broker originates and closes a mortgage loan, but it is funded by the lender who is purchasing the loan from the originating broker. This is an example of:
The answer is table funding. In table funding arrangements, a mortgage broker will originate, process, and close in its own name a loan underwritten and funded by a secondary lender, but will then assign the loan to the funding lender at the closing table.
The Red Flags Rule identifies all of the following as possible red flags, except:
The answer is the borrower is buying an investment property. The Red Flags Rule requires financial institutions (including mortgage lenders) that hold any consumer account, or other account for which there is a reasonably foreseeable risk of identity theft, to develop and implement an Identity Theft Prevention Program. Signs indicating possible identity theft include presentation of suspicious documents and personal identifying information (e.g., an address that does not match any address in the consumer report). Buying an investment property is not, in itself, a red flag.
Under HOEPA, a high-cost loan may have a balloon payment under all of the following circumstances, EXCEPT:
The answer is the borrower signs a waiver consenting to the balloon payment. A high-cost loan may not provide for a payment schedule with regular periodic payments that result in a balloon payment, unless the payment schedule is adjusted for the irregular or seasonal income of the borrower; the loan is a bridge loan with a term of 12 months or less, taken in connection with the acquisition or construction of a dwelling that will be the borrower's principal residence; or the loan satisfies the requirements of a balloon payment qualified mortgage.
Which of the following would NOT be required if a mortgage company wishes to utilize electronic signatures on required disclosures?
The answer is the company must record the IP address from which the documents were accessed. Under the Electronic Signatures in Global and National Commerce Act (the E-SIGN Act), before obtaining a consumer's consent, a financial institution must provide a clear and conspicuous statement to consumers, informing them of their right or option to have the record provided or made available on paper or in a non-electronic form. The statement must also explain the consumer's right to withdraw consent, including applicable conditions, consequences, and fees. Consumers must also be provided with information about the hardware and software required to allow them to access and retain the electronic records.
If a borrower's reserve account for taxes and insurance is found to be short or deficient by an amount in excess of one month's worth of deposits, which of the following is true?
The answer is the lender can require the borrower to make up the shortage over the next 12 months. If the escrow account is short by more than 1 month, the lender can choose to do nothing or require repayment of the shortage over a minimum of 12 months. If an escrow account analysis discloses a shortage of less than one month's escrow account payment, the lender or servicer may allow the shortage to exist and do nothing to change it, require the borrower to repay the shortage amount within 30 days, or require the borrower to repay the shortage amount in 2 or more equal monthly payments.
A lender originally discloses an APR of 6.08%. When the lender begins to prepare closing documents, they realize the actual APR is 6.135%. Which of the following is true?
The answer is the lender has no obligation to re-disclose. The APR is considered accurate if it is not more than one eighth of one percentage point (.125%) above or below the APR determined in accordance with legal requirements, or if it is not more than one quarter of one percentage point (.25%) above or below the APR for an irregular transaction. In this case, the difference between the disclosed APR and the actual APR is within the limits of this tolerance, and does not require re-disclosure.
Assume a borrower completes an online loan application, including all six required elements, but never hits "submit." Which of the following is true regarding the lender's obligation to issue a Loan Estimate?
The answer is the lender is not required to issue a Loan Estimate. A lender must provide the Loan Estimate either in person or by placing it in the mail no more than three business days after receipt of the consumer's application AND no later than seven business days prior to consummation. If a loan application has not been submitted, a lender is not required to issue a Loan Estimate.
Under which of the following circumstances would the lender on a conventional loan be required to drop the mortgage insurance?
The answer is the loan reaches 78% LTV based on the original purchase price. Generally, a conventional loan of up to 80% of the property's value will be made without private mortgage insurance. The annual premiums and the insurance stop automatically once the loan is paid down to 78%, or may be canceled at the borrower's request once the loan balance reaches 80% of the value of the property at the time the loan was made.
Unlike other parties to a mortgage transaction, in general, _____ have no long-term financial interest in the performance of the loan.
The answer is the mortgage broker and mortgage loan originator. Because brokers and loan originators are compensated for originating a loan as long as the lender accepts it, and may not be penalized if they do not actually commit any misrepresentation and the borrower defaults later in the term of the loan, they might be less concerned with the suitability and long-term performance of the loan for the borrower. A relative lack of consequences for a lender's agent subjects the mortgage delivery system to what economists and political scientists call the principal-agent problem.
In a mortgage transaction subject to RESPA that is secured by the consumer's dwelling, a Loan Estimate must be delivered or mailed within three business days after receipt of a written application and no later than:
The answer is the seventh business day before the transaction is consummated. A creditor must provide the Loan Estimate no later than three business days after receipt of the consumer's application AND at least seven business days prior to consummation.
Which of the following is least likely to be considered a proxy for a loan term or condition under the Loan Originator Compensation Rule?
The answer is the state in which the property is located. If a loan originator's compensation is based in whole or in part on a factor that is not an actual loan term but acts as a proxy for a term of transaction (such as the term and/or rate of the loan determining whether it is held in the lender's portfolio or sold), the originator's compensation is based on a term of the transaction and is prohibited. A factor is a proxy if the loan originator has the ability to add, drop or change it when originating the loan. Since the loan originator cannot change the state in which the property is located, it is not likely to be considered a proxy for a loan term or condition.
Loan originator compensation records must be retained for at least:
The answer is three years. A creditor must maintain, for three years after the date of payment, sufficient records to evidence all compensation it pays to a loan originator, and the compensation agreement that governs those payments.
Which of the following pieces of information is NOT found on the 1003?
The answer is underwriter's name. Categories of information required on the Uniform Residential Loan Application, or Form 1003, include mortgage type and loan terms, property information and loan purpose, and borrower information. It includes information about the subject property and the borrower (such as Social Security Number and appraised property values), but the underwriter's name is not a required part of the application and is unlikely to appear.
For a mortgage licensee, paying compensation for referrals is:
The answer is unethical, and a violation of federal law. Under Section 8 of RESPA, it is illegal to give or accept any fee, kickback, or other thing of value under any agreement or understanding, oral or otherwise, that business relating to or part of a settlement service involving a federally-related mortgage loan will be referred to any person.
Which of the following terms describes the fee charged to the borrower to insure an FHA loan?
The answer is upfront mortgage insurance premium. The FHA funds the insurance from a mortgage insurance premium (MIP) charged to the borrower. FHA loans require payment of an upfront mortgage insurance premium (UFMIP). The UFMIP is nonrefundable (except to the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within three years).
Which of the following would convey a property?
The answer is warranty deed. A warranty deed conveys full ownership of land, and is commonly used in purchase and sales transactions of real estate. In addition to conveying property ownership, a warranty deed contains the promise of clear title, meaning the property is free of encumbrances.
According to the standard deed of trust, how soon must a borrower on an owner-occupied loan occupy the property?
The answer is within 60 days of closing. Under most deeds of trust, including most FHA and VA loans, a borrower who intends to occupy the property as his/her residence must move in within 60 days after closing.
A disclosure advising the borrower of their right to receive a copy of the appraisal must be delivered:
The answer is within three business days of the application. Under the ECOA Valuations Rule, no later than the third business day after receipt of an application for credit to be secured by a first lien on a dwelling, the creditor must mail or provide a notice of the applicant's right to receive a copy of all written appraisals developed in connection with the application.
