22 Ethics, Fair Lending & Fraud Practice Questions & Answers

1. 1. An applicant with three young children asks about a condominium loan. The MLO responds, "Honestly, the lender would rather not place families with small kids in that project." Which federal statute's protected class does this remark most directly implicate?

   • A.ECOA and Regulation B, because familial status is one of Regulation B's prohibited bases
   • B.ECOA only, because the remark concerns the applicant's marital status
   • C.No federal law, because families with children are not a protected group in mortgage lending
   • D.The Fair Housing Act, because familial status is a protected class under that statute✓ Answer

   Familial status (households with children under 18, and pregnant persons or those obtaining custody) is protected by the Fair Housing Act, not by ECOA. Regulation B's prohibited bases are race, color, religion, national origin, sex, marital status, age, receipt of public assistance income, and good-faith exercise of Consumer Credit Protection Act rights — familial status and handicap/disability appear only in the Fair Housing Act, which is the classic distinction tested here.

   Source: Fair Housing Act, 42 U.S.C. 3604; ECOA/Regulation B prohibited bases, 12 CFR 1002.2(z)Report a problem with this question

2. 2. A lender adopts a policy of not originating any mortgage below a set minimum loan amount. The policy is applied to every applicant without exception, but in practice it screens out nearly all applicants from one predominantly minority neighborhood of modestly priced homes. There is no evidence of intent to exclude anyone. How is this best characterized?

   • A.Disparate impact, because a facially neutral policy disproportionately burdens a protected class and no intent is required✓ Answer
   • B.Redlining, which is established only by proving the lender intended to avoid the neighborhood
   • C.No fair lending issue, because the policy is applied identically to every applicant
   • D.Disparate treatment, because a protected class was intentionally singled out

   Disparate impact arises when a facially neutral, uniformly applied policy produces a disproportionately adverse effect on a protected class and cannot be justified by business necessity or achieved through a less discriminatory alternative. Because liability rests on the effect rather than the lender's state of mind, uniform application and absence of intent are not defenses — that is exactly what separates disparate impact from disparate treatment.

   Source: ECOA/Regulation B, 12 CFR 1002.4(a); Interagency Fair Lending Examination Procedures (effects test)Report a problem with this question

3. 3. A mortgage company actively solicits in a predominantly Hispanic neighborhood, but in that neighborhood it markets only a high-rate product carrying elevated origination fees and a prepayment penalty, while offering its standard-priced products in surrounding neighborhoods to similarly qualified borrowers. This practice is best described as:

   • A.Lawful risk-based pricing, because credit was in fact extended in the neighborhood
   • B.Redlining
   • C.Reverse redlining✓ Answer
   • D.Blockbusting

   Reverse redlining is the targeting of a protected neighborhood with predatory or materially more expensive terms; redlining is the opposite — refusing or discouraging lending in an area because of its racial or ethnic composition. Blockbusting is inducing owners to sell by suggesting that people of a particular protected class are moving in. Because the pricing difference tracks neighborhood composition rather than the borrowers' credit risk, it is not lawful risk-based pricing.

   Source: Fair Housing Act, 42 U.S.C. 3604-3605; ECOA/Regulation B, 12 CFR 1002.4(a)Report a problem with this question

4. 4. A woman calls about a purchase loan. She is on paid parental leave and her employer has provided written verification of her guaranteed return date and the salary she will resume. The MLO tells her, "Call me back once you're actually back at work," and does not take an application. This is:

   • A.Proper, because the applicant is not receiving her full salary on the date of application
   • B.A violation of ECOA/Regulation B: the MLO discouraged an application on a prohibited basis and must take the application and evaluate the documented return-to-work income✓ Answer
   • C.A violation of the Fair Housing Act only, because ECOA does not reach parental leave
   • D.Proper, provided the MLO documents that no application was ever taken

   Regulation B prohibits a creditor from making any oral or written statement that would discourage a reasonable person from pursuing an application, and discrimination on the basis of sex includes treating an applicant unfavorably because she is on maternity or parental leave. Where the employer documents a guaranteed return date and post-leave salary, that income must be evaluated; refusing to take the application at all is itself the violation, and it occurs before any credit decision is made.

   Source: ECOA/Regulation B, 12 CFR 1002.4(b) (discouragement) and 1002.6(b)(5) (evaluation of income)Report a problem with this question

5. 5. An applicant's qualifying income consists partly of long-term, verifiable public assistance benefits. The MLO tells her, "We can't use that kind of income, so there's really no point in you applying." Which statement is correct?

   • A.It is acceptable, because public assistance income is never guaranteed to continue
   • B.It violates ECOA, which forbids discrimination because all or part of an applicant's income derives from a public assistance program; verified, reliable public assistance income must be considered✓ Answer
   • C.It violates the Fair Housing Act, which lists receipt of public assistance as a protected class
   • D.It is acceptable so long as the lender treats every public assistance recipient the same way

   Receipt of income from any public assistance program is an ECOA prohibited basis, and Regulation B requires a creditor to consider such income to the extent of its likely continuance, exactly as it would any other income. Discouraging the consumer from applying compounds the violation, and public assistance income is an ECOA basis only — it is not one of the Fair Housing Act's protected classes.

   Source: ECOA, 15 U.S.C. 1691(a)(2); Regulation B, 12 CFR 1002.2(z) and 1002.6(b)(2)Report a problem with this question

6. 6. During a face-to-face application for a loan secured by a dwelling, the applicant declines to provide her ethnicity, race, and sex for government monitoring purposes. What must the MLO do?

   • A.Note that the applicant declined and complete ethnicity, race, and sex on the basis of visual observation or surname✓ Answer
   • B.Ask the applicant to pick any category so that the file is complete
   • C.Leave the ethnicity, race, and sex fields blank and simply note that the applicant refused
   • D.Hold the application without processing it until the applicant supplies the information

   For dwelling-secured applications taken face-to-face (including by video), Regulation B requires the creditor to note that the applicant declined and then to record ethnicity, race, and sex on the basis of visual observation or surname. Leaving the fields blank or refusing to proceed with the application are both incorrect; the observation rule does not apply to applications taken entirely by mail, telephone, or internet, where guessing is prohibited.

   Source: Regulation B, 12 CFR 1002.13(b)Report a problem with this question

7. 7. Which of the following requires the creditor to send an adverse action notice under Regulation B?

   • A.An application missing income verification, for which the creditor sends a notice of incompleteness
   • B.A counteroffer for a smaller loan amount that the applicant accepts and closes
   • C.An application the applicant withdraws before the creditor makes any decision
   • D.A denial of the application as submitted, where the applicant accepts no counteroffer✓ Answer

   Adverse action means a denial, a termination, or an unfavorable change in the terms of an existing account; a counteroffer that the applicant accepts is not adverse action, an incomplete application is handled with a notice of incompleteness, and a withdrawal is not a creditor decision. Notice of action taken is due within 30 days of receiving a completed application, and an adverse action notice must state the specific principal reasons (or the right to request them), the ECOA notice, and the federal enforcement agency.

   Source: Regulation B, 12 CFR 1002.2(c) and 1002.9(a)(1)Report a problem with this question

8. 8. An MLO agrees to pay the full cost of a real estate agent's monthly newspaper advertisement, which features only the agent's own listings and does not mention the MLO. In exchange, the agent sends the MLO her buyer clients. Under RESPA, this arrangement is:

   • A.Permitted, as long as the payment is itemized on the borrower's Closing Disclosure
   • B.Prohibited: paying the agent's advertising cost is a 'thing of value' given pursuant to an understanding that settlement business will be referred, and both the giver and the receiver are liable✓ Answer
   • C.Permitted, because the MLO paid a third-party publisher rather than paying the agent directly
   • D.Permitted, because normal promotional and educational activities are excepted from Section 8

   RESPA Section 8(a) bars giving or accepting any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that settlement service business on a federally related mortgage loan be referred. Defraying an expense the agent would otherwise incur is a thing of value even though no cash passes between them and even though the check goes to the publisher, and the promotional-activities exception does not apply because the payment is conditioned on referrals. Disclosing a kickback does not make it lawful.

   Source: RESPA Section 8(a); 12 CFR 1024.14(b) and (g)(1)(vi)Report a problem with this question

9. 9. Which of the following payments falls within a recognized RESPA Section 8 exception and is therefore permitted?

   • A.An MLO gives the closing agent gift cards each quarter to thank her for the closings she refers
   • B.An MLO rents a desk inside a real estate office at twice the market rent for comparable space
   • C.A mortgage lender pays its own salaried employee a bonus for referring customers to the employer✓ Answer
   • D.A title agency pays a real estate brokerage a set monthly amount for each buyer the brokerage sends it

   Section 8(c) expressly permits an employer's payment to its own employees for referral activities, because the referral fee stays inside the employment relationship rather than flowing to an outside settlement service provider. Payments to an outside brokerage for referrals, non-cash gifts such as gift cards to a settlement agent, and above-market desk rent (the excess being an unearned payment for referrals) are all prohibited things of value.

   Source: RESPA Section 8(c); 12 CFR 1024.14(g)(1)(vii)Report a problem with this question

10. 10. A mortgage broker orders a tri-merge credit report from the bureau and charges the borrower an amount noticeably higher than what the bureau charged the broker, keeping the difference as additional revenue. This is:

    • A.Permissible, because the amount is disclosed to the borrower on the Loan Estimate
    • B.Prohibited as an unearned fee: charging more than the actual cost of a third-party service is a markup for which no additional service was performed✓ Answer
    • C.Permissible, provided the total charge is within the range other brokers charge
    • D.Permissible, because credit reporting charges fall outside the scope of RESPA

    RESPA Section 8(b) prohibits accepting any portion of a charge for a settlement service other than for services actually performed, and the implementing rule treats marking up a third-party charge without providing additional services as an unearned fee. Disclosure on the Loan Estimate, market comparability, and the small size of the markup are irrelevant — the defect is that no service was rendered for the extra amount.

    Source: RESPA Section 8(b); 12 CFR 1024.14(c)Report a problem with this question

11. 11. A mortgage brokerage and a title agency are under common ownership, and the brokerage routinely refers its borrowers to the affiliated title agency. The arrangement qualifies as a permissible affiliated business arrangement only if:

    • A.The referral relationship is disclosed to the borrower at the closing table
    • B.The relationship is disclosed at or before the time of referral, the borrower is not required to use the affiliate, and the only thing of value received is a return on ownership interest✓ Answer
    • C.The affiliate pays the referring company an amount above market value, and both companies hold the required licenses
    • D.The borrower is required to use the affiliate in order to receive a rate discount

    RESPA permits an affiliated business arrangement only when written disclosure of the relationship and an estimate of the affiliate's charges is given at or before the referral, the consumer is not required to use the affiliate (narrow exceptions exist for an attorney, credit reporting agency, or appraiser selected by the lender), and the sole thing of value received is a return on ownership interest. Disclosure delayed to closing is too late, and any payment exceeding a bona fide return on ownership is an illegal kickback.

    Source: RESPA Section 8(c)(4); 12 CFR 1024.15Report a problem with this question

12. 12. Under Regulation Z's loan originator compensation rule, which of the following is a permissible basis for paying an individual loan originator?

    • A.A higher percentage on loans that carry a higher loan-to-value ratio
    • B.A fixed percentage of the loan amount, subject to a stated minimum and maximum dollar amount✓ Answer
    • C.An extra payment on loans that include a prepayment penalty
    • D.A bonus tied to how far above par the borrower's interest rate is set

    Compensation may not be based on a term of the transaction or on a proxy for a term — a factor that consistently varies with a term over many transactions and that the originator can manipulate. Loan-to-value ratio, the presence of a prepayment penalty, and the interest rate are all terms or proxies, while the loan amount is expressly permitted, including with a minimum and maximum dollar figure; hourly pay, per-loan volume, and pull-through rate are also permitted.

    Source: Regulation Z, 12 CFR 1026.36(d)(1)Report a problem with this question

13. 13. A borrower pays a mortgage broker's origination fee directly out of pocket at closing. The creditor then offers to pay the same broker an additional commission on that same loan. Under Regulation Z, this is:

    • A.Prohibited: when the consumer pays the loan originator directly, no other person may compensate that originator on the same transaction✓ Answer
    • B.Permitted, if the total compensation is reasonable for the market
    • C.Permitted, if both payments appear on the Closing Disclosure
    • D.Permitted, if the borrower signs a written consent to both payments

    The dual compensation prohibition is absolute: if the consumer pays the loan originator directly, no creditor or other person may also compensate that originator in connection with the same transaction, and an originator compensated by the creditor may not also collect from the consumer. The rule exists to prevent double charging that the consumer cannot see; consent, disclosure, and reasonableness of the total do not cure it.

    Source: Regulation Z, 12 CFR 1026.36(d)(2)Report a problem with this question

14. 14. A consumer tells an MLO she wants to compare both fixed-rate and adjustable-rate options. To fall within Regulation Z's anti-steering safe harbor, the MLO must present:

    • A.For each type of transaction in which the consumer expressed interest, at least three options: the lowest interest rate; the lowest interest rate without risky features; and the lowest total dollar amount of discount points, origination points and origination fees✓ Answer
    • B.Three options in total, drawn from whichever product type is easiest to approve
    • C.For the fixed-rate request only: the lowest rate, the second-lowest rate, and the lowest monthly payment
    • D.Three options showing the lowest closing costs, the lowest APR, and the smallest down payment

    The safe harbor requires the three specified options for each transaction type the consumer expressed interest in, obtained from a significant number of the creditors with whom the originator regularly does business, and the originator must have a good-faith belief the consumer likely qualifies for them. The 'risky features' option must exclude negative amortization, prepayment penalties, interest-only payments, balloon payments in the first seven years, demand features, and shared equity or shared appreciation; the third option turns on total points and origination fees, not on closing costs or APR.

    Source: Regulation Z, 12 CFR 1026.36(e)(2) and (e)(3)Report a problem with this question

15. 15. An appraisal comes in below the contract price and the MLO wants to contact the appraiser. Which communication is permitted under the appraiser independence requirements?

    • A.Telling the appraiser what value the file needs in order for the loan to close
    • B.Asking the appraiser to consider additional comparable sales and to correct an objective factual error in the report✓ Answer
    • C.Reminding the appraiser that future assignments depend on supporting the contract price
    • D.Advising the appraiser that payment will be released only once the value is revised upward

    TILA's appraiser independence rule bars coercion, bribery, intimidation, compensation manipulation, or any inducement intended to cause an appraiser to reach a predetermined value, which is exactly what a target value, a withheld fee, or a threat about future work amounts to. It expressly permits asking the appraiser to consider additional appropriate property information, to correct factual errors, or to provide further detail or explanation supporting the valuation.

    Source: TILA Section 129E; Regulation Z, 12 CFR 1026.42(c)Report a problem with this question

16. 16. A wage earner inflates his stated income and submits an altered pay stub so that he can qualify for a home he and his family will move into. No MLO, appraiser, or closing agent is involved in the deception. This is best classified as:

    • A.Fraud for housing (fraud for property), because the borrower misrepresented in order to obtain a residence he intends to occupy✓ Answer
    • B.Occupancy fraud, because the misrepresentation relates to the subject property
    • C.Not fraud at all, because the borrower fully intends to make every payment
    • D.Fraud for profit, because a lender always loses money when a loan is misrepresented

    Fraud for housing (fraud for property) is committed by a borrower who misstates income, assets, employment, or debts to obtain a home he genuinely intends to occupy, while fraud for profit involves insiders conspiring to extract money from the transaction. The intent to repay does not cure the offense — knowingly submitting a false document to influence a federally insured institution is a federal crime regardless of the borrower's payment intentions, and occupancy fraud concerns a false claim of owner-occupancy, which is not what happened here.

    Source: Mortgage fraud typology (fraud for property vs. fraud for profit); 18 U.S.C. 1014 (false statements to a federally insured institution)Report a problem with this question

17. 17. An MLO, an appraiser, and a closing agent arrange for a credit-worthy cousin to apply and take title to a property, although the real purchaser — who could not qualify — will occupy it, control it, and receive cash disbursed at closing. This scheme is best identified as:

    • A.A straw buyer scheme, a form of fraud for profit✓ Answer
    • B.A silent second
    • C.Fraud for housing
    • D.An air loan

    A straw buyer scheme uses a credit-worthy person's name and credit to front for a hidden true purchaser, and the participation of industry insiders who extract cash from the closing makes it fraud for profit. An air loan involves a nonexistent borrower and/or a nonexistent property, and a silent second is an undisclosed junior lien used to cover the down payment — neither matches these facts, where both the buyer and the property are real.

    Source: Mortgage fraud typology: straw buyer / fraud for profit schemesReport a problem with this question

18. 18. While reviewing a file, an MLO notices that the fonts on the borrower's W-2 differ between pages, the employer's address is a mailbox rental store, and the verification-of-employment phone number rings a personal cell phone. What is the MLO's BEST course of action?

    • A.Quietly withdraw the application without documenting or reporting the concerns
    • B.Ask the borrower to bring in a cleaner copy of the W-2 and keep processing the file
    • C.Stop, decline to submit the file, and escalate the findings to the company's compliance or fraud unit under its written procedures✓ Answer
    • D.Submit the file and let the underwriter decide whether the documents are genuine

    Inconsistent document formatting, a mail-drop employer address, and a verification number answering as a personal cell are classic fraud red flags, and knowingly submitting false information to a federally insured lender is a federal crime. An originator's anti-money-laundering program requires internal escalation so the institution can evaluate whether a suspicious activity report is warranted; letting the borrower supply a substitute document, passing the problem to underwriting, and quietly withdrawing all defeat that reporting duty.

    Source: 31 CFR 1029.210 (AML program for residential mortgage lenders and originators); 18 U.S.C. 1014Report a problem with this question

19. 19. After the company files a suspicious activity report concerning a borrower's transaction, the borrower calls the MLO and demands to know why his file has stalled. The MLO must:

    • A.Tell the borrower his file was flagged, so that he has a chance to supply corrected documents
    • B.Disclose nothing about the report to the borrower or to anyone else not authorized, because revealing a SAR or its existence is itself a federal violation✓ Answer
    • C.Tell the borrower a report was filed, since the information concerns him
    • D.Tell the borrower's real estate agent, but not the borrower himself

    A suspicious activity report, and any information that would reveal its existence, is confidential by federal law, so 'tipping off' the subject — or anyone not authorized to know — is a separate offense independent of the underlying suspicion. Institutions and their employees who file receive a safe harbor from civil liability for the disclosure to the government, and supporting records must be retained for five years.

    Source: 31 U.S.C. 5318(g)(2); 31 CFR 1029.320(d) (SAR confidentiality)Report a problem with this question

20. 20. A residential mortgage lender's compliance officer determines that a transaction is reportable as suspicious, but no suspect has yet been identified. What is the filing deadline?

    • A.Within 90 calendar days of initial detection
    • B.Within 30 calendar days of initial detection; if no suspect has been identified the deadline may be extended, but filing must occur no later than 60 calendar days after initial detection✓ Answer
    • C.There is no deadline, provided the report is filed before the loan closes
    • D.Within 15 business days of initial detection, with no extension available

    The BSA rules for loan or finance companies require a suspicious activity report to be filed within 30 calendar days after initial detection of the facts that constitute a basis for filing. If no suspect can be identified, the institution may take an additional 30 days to identify one, but filing may never be delayed beyond 60 calendar days from initial detection, and the duty applies to attempted as well as completed transactions.

    Source: 31 CFR 1029.320(b)(3) (SAR filing deadlines for loan or finance companies)Report a problem with this question

21. 21. A privately owned mortgage brokerage mails a flyer headlined "Federal Homeowner Relief Program — guaranteed approval, cut your payment in half." The brokerage has no government affiliation, no approval is guaranteed, and the payment claim is not achievable for most recipients. The flyer is:

    • A.Is acceptable, provided the company keeps a copy of the flyer in its advertising file
    • B.Violates the Mortgage Acts and Practices rule (Regulation N), which bars material misrepresentations in commercial communications, including false government affiliation and misleading payment claims✓ Answer
    • C.Is acceptable puffery, because no specific interest rate is quoted
    • D.Becomes a concern only if a consumer actually applies and is then denied

    Regulation N prohibits any material misrepresentation in a commercial communication about a mortgage credit product, and it names among the prohibited subjects the amount of the payment, the likelihood of obtaining a loan or modification, and any claim that the product is a government program or is endorsed by or affiliated with a government agency. The violation is complete upon dissemination; retaining records — required for twenty-four months from last use — is a separate obligation that does not cure a deceptive ad, and bait-and-switch advertising is independently a prohibited act.

    Source: Mortgage Acts and Practices Rule (Regulation N), 12 CFR 1014.3 and 1014.5Report a problem with this question

22. 22. The buyer's real estate agent calls an MLO and asks for the borrower's credit score, monthly debts, and the reason the file is taking so long. The borrower has signed no authorization to release information to the agent. The MLO should:

    • A.Provide the credit score only, since the full report is the confidential item
    • B.Provide the information, because the agent is a party to the same transaction
    • C.Decline to release any of it without the borrower's written authorization, because it is nonpublic personal information and consumer report information✓ Answer
    • D.Provide the information because the agent is the one who referred the borrower

    The Gramm-Leach-Bliley Act and its privacy rule restrict sharing a customer's nonpublic personal information with nonaffiliated third parties, and the Fair Credit Reporting Act allows use or disclosure of consumer report information only for a permissible purpose tied to a transaction the consumer initiated. Being a party to the sale, or having referred the borrower, is not a permissible purpose or a substitute for the borrower's written authorization, and a credit score derived from the report is protected just as the report is.

    Source: GLBA/Regulation P, 12 CFR Part 1016; FCRA permissible purpose, 15 U.S.C. 1681bReport a problem with this question

Practice questions written to the published NMLS content outline for the SAFE MLO National Test Component with Uniform State Content, and to the underlying federal regulations (TILA/Regulation Z, RESPA/Regulation X, ECOA/Regulation B, HMDA, FCRA, GLBA, the Fair Housing Act, and the S.A.F.E. Mortgage Licensing Act). NMLS is a service of the Conference of State Bank Supervisors; this site is not affiliated with or endorsed by NMLS, the CSBS, the CFPB, or any state regulator. Dollar thresholds, loan limits, mortgage insurance factors, funding fees, license fees and bond amounts are adjusted periodically and are deliberately not tested here — confirm current figures and your own state's requirements with your state regulator before testing. Nothing here is legal or financial advice. About the NMLS SAFE MLO test →