MLO Mortgage Loan Origination (SAFE MLO) Exam Question and Answers

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.

References:

Truth in Lending Act (TILA), specifically for Adjustable-Rate Mortgages

12 CFR Part 1026, Regulation Z

Under TILA, the term finance charge includes any fees related to the cost of borrowing, such as daily or per diem interest paid by the borrower. The finance charge encompasses all charges imposed by the creditor as a condition of extending credit, including interest, points, and loan origination fees.

Seller's points (B) are not part of the finance charge because they are paid by the seller.

Standard application fees (C) and document preparation fees (D) are typically excluded unless they are specifically tied to the cost of obtaining credit.

References:

Truth in Lending Act (TILA), 12 CFR §1026.4

CFPB Finance Charge Definition

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.

References:

SAFE Act, 12 USC §5101

NMLS Licensing and Registration Requirements

The Real Estate Settlement Procedures Act (RESPA) requires disclosures intended to prevent lenders and mortgage loan originators (MLOs) from increasing fees during the loan origination process. RESPA mandates the disclosure of estimated fees through the Loan Estimate (LE) and ensures that fees do not change substantially from the Loan Estimate to the final Closing Disclosure (CD) unless specific conditions justify the changes. This protects borrowers from "fee increases" during the settlement process.

While TILA (A) deals with disclosure of loan terms and APR, RESPA (D) focuses specifically on fees and closing costs during origination.

References:

RESPA (Real Estate Settlement Procedures Act), 12 USC §2601

CFPB RESPA Guidelines on fee tolerances

Under TILA-RESPA Integrated Disclosure (TRID) rules, if a lender overcharges the borrower by more than the allowable 10% aggregate tolerance on certain closing costs, the lender must refund the excess amount to the borrower within 60 days of loan consummation. The 10% tolerance applies to certain fees like title insurance and government recording fees, ensuring that the lender provides accurate estimates on the Loan Estimate (LE) and does not exceed allowable variances at closing.

References:

TILA-RESPA Integrated Disclosure Rule (TRID), 12 CFR §1026.19(f)

CFPB Guidelines on refund timelines

An origination charge is an allowable closing cost typically found on the Closing Disclosure (CD). This fee is charged by the lender for processing the mortgage application and creating the loan. It may include administrative fees, underwriting fees, and other costs related to loan origination.

Referral fees (B) are illegal under RESPA.

Servicing fees (C) are not typically listed as closing costs but are part of ongoing loan maintenance.

Yield-to-loan fees (D) are not a standard item on a Closing Disclosure.

References:

TILA-RESPA Integrated Disclosure (TRID) Rule

RESPA (Real Estate Settlement Procedures Act) Section 8

If a mortgage loan includes a prepayment penalty, it must be disclosed on both the Loan Estimate (LE) and the Closing Disclosure (CD). These disclosures, mandated under the TILA-RESPA Integrated Disclosure (TRID) rule, ensure that borrowers are aware of any penalties they may face for paying off the loan early. The prepayment penalty must be clearly stated to comply with TILA (Truth in Lending Act) requirements.

The Loan Estimate provides an early overview of loan terms, and the Closing Disclosure finalizes those terms.

References:

TILA-RESPA Integrated Disclosure Rule (TRID), 12 CFR §1026.38

CFPB Guidelines on prepayment penalties

Under the Truth in Lending Act (TILA), for mortgage rescission purposes, a business day is defined as every day except Sunday and legal holidays. This definition applies to the three-business-day right of rescission period, during which a borrower can cancel certain refinance or home equity transactions.

The right of rescission allows the borrower three business days after signing the loan documents to cancel the loan without penalty.

References:

Truth in Lending Act (TILA), 12 CFR §1026.2(a)(6)

CFPB Guidelines on rescission rights

For an FHA loan, the loan-to-value (LTV) ratio is calculated by dividing the loan amount by the lesser of the purchase price or appraised value of the property. This ensures that the loan amount is based on the lower of the two figures, protecting the lender from over-lending on a property that may not appraise at the agreed purchase price.

This method is consistent with FHA guidelines, ensuring that the loan is adequately secured by the property’s value.

References:

FHA Single Family Housing Policy Handbook

HUD Guidelines for FHA LTV calculations

Under the TILA-RESPA Integrated Disclosure (TRID) rules, any significant change to the Annual Percentage Rate (APR) beyond the allowed tolerance before closing requires the lender to provide a revised Closing Disclosure (CD). If the APR increases by more than 0.125% for fixed-rate loans, the lender must re-disclose the CD and provide the borrower with at least three business days to review the updated terms before consummation (closing).

In this case, the interest rate increase from 3.250% to 3.875% is a significant change that impacts the APR, triggering the need for re-disclosure and the mandatory three-business-day waiting period.

The lender must postpone the closing until the new three-day waiting period passes to ensure compliance with TRID regulations.

References:

TILA-RESPA Integrated Disclosure Rule (TRID), 12 CFR §1026.19(f)

CFPB TRID Guidelines

According to the Telemarketing Sales Rule (TSR) and the National Do Not Call Registry requirements, nonexempt telemarketing entities must check their call lists against the National Do Not Call Registry at least every 31 days. This ensures that they do not call individuals who have opted out of receiving telemarketing calls.

The 31-day rule helps ensure compliance and reduces the likelihood of violating the Do Not Call regulations.

References:

Telemarketing Sales Rule (TSR), 16 CFR Part 310

Federal Trade Commission (FTC) Guidelines

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.

References:

RESPA (Real Estate Settlement Procedures Act), Section 8

CFPB RESPA Guidelines on fee splitting and kickbacks

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.

References:

Truth in Lending Act (TILA), 12 CFR §1026.2(a)(19)

CFPB Guidelines on TILA’s definition of a dwelling

A salaried W-2 position is an example of non-fluctuating income because the borrower receives a consistent, fixed salary each pay period. This type of income is easy to verify and predict, making it ideal for mortgage qualification.

Other types of fluctuating income:

Self-employed income (B) and commission-based income (C) vary based on the nature of work and can fluctuate month to month.

Part-time work with irregular hours (D) also fluctuates due to varying work hours, making it inconsistent.

References:

Fannie Mae Selling Guide for income verification

Freddie Mac's Loan Product Advisor for employment income documentation

Under the Equal Credit Opportunity Act (ECOA), the term adverse action is defined as a refusal to grant credit based on the requested loan terms, an unfavorable change in loan terms, or a termination of an account/application. This can include:

Denying a credit application.

Offering credit on terms different from those requested.

Closing an existing credit account.

Lenders must provide a formal notice of adverse action, explaining the reasons for the denial or change in terms, to comply with ECOA’s requirements for transparency and fairness.

Other options:

Account closure (B) and credit closure (C) are not specific ECOA terms.

Denial of credit (D) is a form of adverse action but does not cover all situations like a change in loan terms.

References:

Equal Credit Opportunity Act (ECOA), 15 U.S.C. §1691(d)

Regulation B (12 CFR Part 1002)

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.

References:

Fannie Mae Selling Guide on qualifying income

Freddie Mac Guidelines for rental income

Consumer complaints and their analysis are critical for identifying weaknesses in a company's compliance management system (CMS) and internal controls. The CFPB (Consumer Financial Protection Bureau) emphasizes that analyzing complaints helps companies spot patterns of non-compliance, risks, or failures in managing regulatory requirements. By reviewing consumer feedback, businesses can identify gaps in their compliance practices, including weaknesses in training programs and internal systems, that may lead to violations of laws like RESPA, TILA, and ECOA.

Complaints may reveal issues with loan disclosures, error resolution, unfair lending practices, or lack of training in regulatory updates.

Regular analysis helps reinforce internal controls and improve compliance processes.

References:

CFPB Compliance Management Review Guidelines

TILA and RESPA regulations on consumer protection

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.

References:

USA Patriot Act, Anti-Money Laundering Provisions

FinCEN Guidelines on SAR Confidentiality

Under TILA-RESPA Integrated Disclosure (TRID) Rule, fees paid to affiliates of the lender (e.g., title companies, appraisers) must remain the same on the Loan Estimate (LE) unless there is a valid changed circumstance (such as a significant change in the loan terms or property value). These fees fall under the zero-tolerance category, meaning they cannot increase from the amount disclosed on the LE unless a change in circumstance justifies the increase.

Other costs like per diem interest (A), homeowner's insurance (B), and owner's title insurance premiums (C) can change, as they are not subject to the same zero-tolerance rules.

References:

TILA-RESPA Integrated Disclosure Rule (TRID), 12 CFR §1026.19

CFPB TRID Guidelines on fee tolerance

A borrower who knowingly makes false statements on a federally related mortgage loan to obtain property can face severe penalties under federal law. The penalties can include:

A fine of up to $1 million.

Imprisonment for up to 30 years.

These penalties fall under federal statutes such as 18 U.S.C. § 1014, which covers fraud and false statements related to loan applications. This is a serious offense, and the law is designed to deter fraud in federally related mortgage transactions.

References:

18 U.S.C. § 1014 - Penalties for False Statements

Fraud Enforcement and Recovery Act (FERA)

To verify a borrower's income for the ability-to-repay (ATR) requirements, lenders must rely on verified documentation, such as:

Electronic paystubs

W-2 forms

Tax returns

An electronic paystub is acceptable as it provides detailed proof of the borrower's income, including salary, deductions, and other compensation.

Items like a check register (B), the income stated on the loan application (C), or a borrower’s attestation (D) without documentation are not considered valid forms of income verification.

References:

Dodd-Frank Act - Ability-to-Repay Rule

CFPB Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule

Fee splitting is the illegal practice where a mortgage loan originator (MLO) and another party, such as an appraiser, share fees in exchange for referrals or future business. This is prohibited under the Real Estate Settlement Procedures Act (RESPA), which bans kickbacks, referral fees, and unearned fees between settlement service providers.

In this case, the appraiser offering to give the MLO half of her appraisal fees in exchange for future business is a clear violation of RESPA’s anti-kickback provisions. Fee splitting can lead to inflated costs for consumers and undermines the integrity of the mortgage process.

Other options:

Redlining (A) refers to discriminatory lending practices based on geography.

Blockbusting (C) refers to discriminatory real estate practices.

Paying it forward (D) is not a term in the context of mortgage lending.

References:

RESPA (Real Estate Settlement Procedures Act), Section 8

CFPB RESPA guidelines

The TILA-RESPA Integrated Disclosure (TRID) rule applies to most closed-end consumer credit transactions secured by real property, including the refinance of a condominium property. TRID mandates specific disclosures, like the Loan Estimate (LE) and Closing Disclosure (CD), to ensure transparency in the loan process.

TRID does not apply to reverse mortgages (A) or home equity lines of credit (HELOCs) (B), which are covered by other regulations.

Loans secured by a mobile home on a leased lot (D) are also generally excluded from TRID.

References:

TILA-RESPA Integrated Disclosure Rule (TRID)

CFPB Guidelines on TRID applicability

Under Federal Reserve Regulation Z, which implements the Truth in Lending Act (TILA), interest is classified as a finance charge because it represents the cost of borrowing the funds over the life of the loan. Finance charges include any fee that a borrower pays as a condition of obtaining the loan, such as interest, points, and certain fees.

Notary fees (A), credit report fees (C), and title insurance (D) are not considered finance charges because they are third-party fees not directly related to the cost of borrowing.

References:

Truth in Lending Act (TILA), 12 CFR §1026.4

CFPB Regulation Z Guidelines

An easement is a legal right granted to one party to cross or use another party's land for a specific purpose, such as for utility lines, access roads, or water drainage. Easements are commonly granted in property transactions and are recorded in the public records.

Easements are unrelated to mortgage modifications (A) or payment reductions (D).

References:

Real Estate Law on property easements

HUD Guidelines on easements in property transactions

The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act) requires all mortgage loan originators (MLOs) to obtain a unique identifier through the Nationwide Multistate Licensing System (NMLS) before engaging in the business of residential mortgage loan origination. This identifier is used to track MLOs across state lines and ensure accountability and transparency in the mortgage industry.

A compliance plan (B) or other qualifications like a high school diploma (C) or counseling certificate (D) are not specific SAFE Act requirements for engaging in mortgage origination.

References:

SAFE Act, 12 USC §5101

NMLS Licensing Requirements

To qualify as a Safe Harbor Qualified Mortgage (QM), the APR must be less than 1.5% above the Average Prime Offer Rate (APOR) for first-lien loans. This threshold is set by the Qualified Mortgage Rule under the Dodd-Frank Act to ensure that Safe Harbor QMs offer fair and affordable loan terms, protecting borrowers from predatory lending practices.

Safe Harbor QMs are considered the most consumer-friendly loans and are protected from liability under the Ability-to-Repay Rule (ATR).

References:

Dodd-Frank Act, Qualified Mortgage Rule

CFPB Ability-to-Repay and Qualified Mortgage Standards

Flood insurance coverage is required to cover the lesser of:

The outstanding principal balance of the loan, or

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

The purpose of flood insurance is to protect the lender's interest in the property, ensuring that the loan amount is covered in the event of a flood.

The appraised value of the home (A) and the property value on file with the county (D) are irrelevant in determining flood insurance requirements.

References:

National Flood Insurance Program (NFIP)

FEMA Flood Insurance Guidelines

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.

References:

Fannie Mae and Freddie Mac Mortgage Guidelines on balloon loans

Truth in Lending Act (TILA) definitions of mortgage types

Under Regulation Z (TILA), when mortgage loan originators (MLOs) advertise mortgage services, including payment amounts, they must disclose the Annual Percentage Rate (APR). The APR reflects the total cost of the loan, including interest and certain fees, and provides a clear picture of the loan's true cost over time.

Failure to include the APR in an advertisement that mentions payment amounts, interest rates, or other specific loan terms is considered a violation of TILA’s advertising requirements.

Other details (B, C, D), such as the MLO's website or the number of days the rate is available, are not mandatory in all advertisements, but the APR is required.

References:

Truth in Lending Act (TILA), 12 CFR Part 1026 (Regulation Z)

CFPB Advertising Rules for Mortgage Services

For FHA loans, borrowers are required to pay a Mortgage Insurance Premium (MIP). This insurance protects the lender in case of default or foreclosure. FHA loans are backed by the Federal Housing Administration, and MIP is mandatory for borrowers due to the lower down payment requirements and increased risk to lenders.

Mortgage Insurance Premium (MIP): FHA loans require an upfront MIP at closing (usually 1.75% of the loan amount) and annual MIP, which is divided into monthly installments and added to the mortgage payment.

The MIP protects lenders by providing insurance coverage in the event the borrower defaults, reducing the lender’s loss.

Other options:

Down payment (A) is required but does not protect the lender.

Hazard insurance premium (B) protects the property, not the lender in foreclosure.

Homeowners association dues (D) are unrelated to lender protection.

References:

FHA Single-Family Housing Policy Handbook

U.S. Department of Housing and Urban Development (HUD) guidelines

An individual who is an independent contractor and performs loan processing or underwriting activities must maintain a state originator license if they collect, receive, or distribute information in connection with making a credit decision. This is because independent contractors are not considered supervised employees, and their work directly impacts the loan approval process.

In contrast, employees of a mortgage lender who perform clerical duties (A) under supervision do not need a state license, nor do those who do not interact with consumers (B).

References:

SAFE Act, 12 USC §5101

NMLS Licensing Guidelines for loan processors and underwriters

In an 80/20 loan structure, the borrower obtains two loans: an 80% first mortgage and a 20% second mortgage, often referred to as a "piggyback loan." The 20% loan has second lien priority, meaning it is subordinate to the 80% loan. If the borrower defaults and the property is foreclosed, the lender holding the first mortgage (80%) is paid first, and the second mortgage (20%) is paid from any remaining proceeds.

The first lien is always the larger 80% loan, and the second lien covers the smaller 20% loan.

References:

Fannie Mae Guidelines on piggyback loans

Freddie Mac Loan Priority Rules