28 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 a remark about young children in the household 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 can be established only by proving the lender deliberately set the minimum in order to avoid that neighborhood
   • C.No fair lending issue, because a policy applied identically to every applicant cannot discriminate as a matter of law
   • D.Disparate treatment, because the lender intentionally singled out a protected class when it chose the minimum amount

   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 an MLO may rely only on income the applicant is actually receiving on the date of application, and a salary that resumes only after her leave ends remains speculative
   • 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 parental leave falls under familial status, which that Act covers but ECOA and Regulation B do not reach
   • D.Proper, provided the MLO documents that no application was ever taken, because Regulation B's obligations attach only once a completed application has been received

   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 benefits are granted for limited periods and can be reduced or terminated at any time, making them too unstable to ever support a mortgage payment
   • 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 among its protected classes, so the discrimination analysis belongs under that statute rather than under ECOA
   • D.It is acceptable so long as the lender applies the same rule to every public assistance recipient, because uniform treatment of all such applicants defeats any claim of discrimination

   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 the closest category, because the monitoring section cannot be left incomplete
   • C.Leave the ethnicity, race, and sex fields blank and note that the applicant refused, because recording guesses about her is prohibited
   • D.Hold the application without processing it until the applicant supplies the information the file requires

   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, because RESPA targets hidden charges and a disclosed arrangement cannot function as a kickback
   • 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's check goes to the third-party publisher rather than to the agent, and Section 8 reaches only things of value handed directly to the person making referrals
   • D.Permitted, because paying for a real estate agent's advertising is a normal promotional activity, and Section 8 excepts normal promotional and educational activities from its reach

   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 on the Loan Estimate, and a charge the borrower can see and shop against is not a hidden fee
    • 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 stays within the range other brokers charge for a credit report, because overall reasonableness of the price is what Section 8 tests
    • D.Permissible, because charges for obtaining a credit report are lender-side costs that fall outside the settlement services RESPA covers

    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 and common ownership are disclosed to the borrower at the closing table, while the borrower can still decline to use the affiliate before signing
    • 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 a fee reflecting the fair market value of each referral it receives, and both companies hold every license their states require for settlement business
    • D.The borrower is required to use the affiliate, but only in exchange for a documented rate discount that leaves the borrower better off than shopping separately

    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 carrying a higher loan-to-value ratio, given the added risk
    • B.A fixed percentage of the loan amount, subject to a stated minimum and maximum dollar amount✓ Answer
    • C.An extra payment on loans carrying a prepayment penalty, since those loans are worth more
    • D.A bonus tied to how far above par the borrower's rate is set, up to a fixed dollar cap

    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 combined compensation is reasonable for the market, because Regulation Z polices the amount of originator pay rather than its source
    • C.Allowed, provided both payments appear on the Closing Disclosure, since itemization shows the borrower exactly who paid the broker
    • D.Lawful, when the borrower signs a written consent to both payments, because an informed borrower may waive the rule's protection

    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 across all product types combined, drawn from whichever loan program is easiest for the consumer to be approved for, because the safe harbor is meant to guarantee a set of approvable choices rather than a separate menu for every product type
    • C.For the fixed-rate request only: the loan with the lowest interest rate, the loan with the second-lowest interest rate, and the loan with the lowest monthly payment, because the adjustable-rate request drops out once the consumer expresses interest in a fixed-rate product as well
    • D.Three options showing the loan with the lowest total closing costs, the loan with the lowest annual percentage rate, and the loan with the smallest down payment, because those are the price measures Regulation Z treats as material to comparison shopping

    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 the value the file needs in order to close, so she can judge for herself whether the market data supports it
    • 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 how well her valuations support contract prices
    • D.Advising the appraiser that her fee will be released once the revised report arrives, as payment may be tied to completion

    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 was made in connection with the home the borrower and his family will occupy
    • C.Not fraud at all, because the borrower fully intends to occupy the home and to make every scheduled payment on time
    • D.Fraud for profit, because a lender inevitably loses money whenever a borrower misrepresents anything on a loan file

    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, since financing was concealed from the lender
    • C.Fraud for housing, because the true purchaser will occupy the home
    • D.An air loan, because the named borrower is only a stand-in

    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 the concerns, so the company never submits a file it cannot stand behind
    • B.Ask the borrower to bring in a cleaner, complete copy of the W-2 and keep processing, since scanning artifacts often explain font differences
    • 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 with a note for the underwriter to decide whether the documents are genuine, because authenticating documents is underwriting's role

    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.Explain to the borrower that his file was flagged for additional review, so that he has a fair chance to supply corrected documents before any final decision is made
    • 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 in general terms that a report was filed, since information about his own transaction is his to request under federal privacy law
    • D.Notify the borrower's real estate agent rather than the borrower himself, because the confidentiality rule covers only the subject of the report

    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, because the rule gives loan and finance companies a single extended filing window that already builds in time to identify a suspect
    • 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 fixed deadline, provided the report is filed before the loan closes, because the point of the filing is to keep a suspicious transaction from being completed
    • D.Within 15 business days of initial detection with no extension available, because suspicious-activity reporting deadlines run from detection and cannot be tolled while a suspect is being sought

    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 and its distribution records in its advertising file for the full retention period, because the rule is enforced through recordkeeping
    • 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 or APR is quoted, and broad claims about approval odds and savings are ordinary salesmanship consumers are expected to discount
    • D.Becomes a concern only if a consumer actually applies in reliance on the flyer and is then denied, because a misrepresentation requires a consumer who was actually harmed by it

    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.Share only the borrower's credit score, since the score is a single number and the full report is the item the FCRA treats as confidential
    • B.Provide the information, because the agent is a party to the same purchase transaction and everyone working the deal has a legitimate need to know its status
    • 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.Release it to the agent as a courtesy, because she referred the borrower and referral partners routinely coordinate on a shared client's file

    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

23. 23. A borrower applies for an owner-occupied loan on a property 90 minutes from his job. He already owns a home near his workplace, is not selling it, and during processing the MLO finds the new property advertised online as a rental. These red flags most strongly suggest which scheme?

    • A.Identity theft
    • B.Occupancy fraud✓ Answer
    • C.Air loan fraud
    • D.Straw buyer fraud

    Claiming a property will be a primary residence in order to get the better pricing and terms reserved for owner-occupants, while actually intending to rent it out, is occupancy fraud. Classic red flags include an implausible commuting distance, keeping the current home near the job, and rental listings for the subject property. A straw buyer conceals the true purchaser, and an air loan is a loan on a property or borrower that does not exist — neither fits these facts.

    Source: FFIEC/FBI mortgage fraud typologies — occupancy fraud; 18 U.S.C. § 1014 (false statements on a loan application)Report a problem with this question

24. 24. While reviewing bank statements, an MLO sees that the borrower made six cash deposits of $9,500 each on consecutive business days. The borrower explains he split the money up 'so the bank wouldn't have to file its paperwork.' This pattern is best described as:

    • A.Normal seasoning of funds over the statement cycle
    • B.A gift deposit that needs only a signed gift letter
    • C.Structuring to evade currency-reporting rules✓ Answer
    • D.Routine cash handling with no compliance concern

    Deliberately breaking cash into deposits under $10,000 to prevent the filing of Currency Transaction Reports is structuring, a federal crime under the Bank Secrecy Act (31 U.S.C. § 5324). The evasive intent itself makes the activity suspicious and reportable through the company's AML program, regardless of whether the underlying money is legitimate — seasoning and gift documentation cannot cure it.

    Source: Bank Secrecy Act, 31 U.S.C. § 5324 (structuring); FinCEN SAR rules for RMLOs, 31 CFR § 1029.320Report a problem with this question

25. 25. Over three years, an MLO refinances the same homeowner four times. Each refinance rolls new origination charges into the loan balance, while the borrower's rate and monthly payment stay essentially unchanged. Which predatory practice does this illustrate?

    • A.Loan flipping✓ Answer
    • B.Bait and switch
    • C.Fee packing
    • D.Equity stripping

    Repeatedly refinancing a loan to generate new fees when the transactions provide no tangible net benefit to the borrower is loan flipping (churning). Each refinance here finances fresh charges without improving the rate or payment. Equity stripping is lending against home equity without regard to ability to repay, fee packing is loading a single loan with unnecessary charges, and bait and switch is an advertising deception.

    Source: HUD-Treasury predatory lending typologies — loan flipping / tangible net benefit; SAFE MLO National Test outline, Ethics (predatory lending)Report a problem with this question

26. 26. An MLO's brokerage receives higher compensation on loans placed with Lender B. A borrower qualifies for a comparable loan from Lender A at a lower rate and lower fees, but the MLO submits the file to Lender B anyway. Under federal rules, the MLO's conduct:

    • A.Is a kickback violation of RESPA Section 8
    • B.Is prohibited steering under Regulation Z✓ Answer
    • C.Is allowed if the borrower signs a disclosure
    • D.Is allowed because creditors set their own pricing

    Regulation Z's loan originator compensation rule (12 CFR § 1026.36(e)) prohibits steering — directing a consumer to a transaction because it will pay the originator more, unless the transaction is in the consumer's interest. A signed disclosure does not cure steering, and RESPA Section 8 governs kickbacks and referral fees among settlement service providers, not an originator's choice among creditors based on his own pay.

    Source: Regulation Z loan originator compensation rule, 12 CFR § 1026.36(e) (anti-steering)Report a problem with this question

27. 27. A brokerage runs ads featuring an eye-catching fixed rate that was never actually available, and its MLOs are trained to move every caller into higher-priced loan programs. This advertising practice is best characterized as:

    • A.Only a TILA trigger-term disclosure violation
    • B.Bait-and-switch advertising banned by Regulation N✓ Answer
    • C.Lawful puffery that is common in loan marketing
    • D.Lawful so long as a footnote discloses the APR

    Advertising loan terms that are not actually available in order to draw consumers in and then switch them to costlier products is bait-and-switch, a deceptive practice prohibited by the Mortgage Acts and Practices — Advertising rule (Regulation N, 12 CFR Part 1014) and actionable as a deceptive act under UDAAP. Because the advertised rate never existed, this goes beyond a TILA trigger-term issue, and no footnote can cure a misrepresentation of availability.

    Source: Regulation N (MAP Rule), 12 CFR Part 1014; Dodd-Frank UDAAP, 12 U.S.C. §§ 5531, 5536Report a problem with this question

28. 28. A sales contract shows the buyer making a 10% down payment from his own funds. Before closing, the MLO learns the seller will secretly lend the buyer the entire down payment through an unrecorded second mortgage that the first-lien lender knows nothing about. This arrangement is called:

    • A.A seller concession
    • B.A gift of equity
    • C.A piggyback loan
    • D.A silent second✓ Answer

    A silent second is an undisclosed second mortgage — often funding the down payment — hidden from the first-lien lender, so the file misrepresents the borrower's own investment and true debt load. By contrast, a piggyback second is disclosed and underwritten with the first lien, seller concessions are capped and shown on the closing documents, and a gift of equity must be documented with a gift letter. The MLO must disclose the arrangement to the lender, not close over it.

    Source: FBI/FFIEC mortgage fraud scheme definitions — silent second; Fannie Mae Selling Guide fraud red flags (undisclosed liens/borrower investment)Report 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 →