MLO Questions and Answers

Under TRID, a revised Loan Estimate (LE) can be issued if there is a changed circumstance that affects the loan terms or costs. This can include situations such as a natural disaster in the area where the loan will close, which may impact the value of the property or loan costs. Such changes are considered beyond the control of the parties involved and justify a revised estimate.

Market fluctuations (A) on a locked loan and borrower salary increases (B) are not valid reasons for issuing a revised LE.

Changes that the MLO should have known at the time of the original LE (D) do not qualify as a valid changed circumstance.

The Real Estate Settlement Procedures Act (RESPA, Regulation X) applies specifically to loans secured by a 1-4 family residential property (owner-occupied or investment) made by lenders, brokers, or others involved in real estate settlement services. RESPA does not cover auto loans, student loans, or commercial real estate loans.

“RESPA covers loans secured with a mortgage placed on a one-to-four family residential property, including most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit.”

— Consumer Financial Protection Bureau (CFPB): Real Estate Settlement Procedures Act (Regulation X)

Thus, of the choices provided, only residential real estate loans are covered by RESPA.

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.

A best practice in cybersecurity is to set computers to automatically lock, shut down, and require a password or login after a period of inactivity. This helps prevent unauthorized access if the device is left unattended.

“Locking computers when not in use and requiring passwords after periods of inactivity is an essential safeguard to protect sensitive consumer data.”

— FTC, Cybersecurity for Small Business; GLBA Safeguards Rule

Other options are not best practices: laptops may need to leave the office, should not be shared, and passwords should never be shared with anyone.

A corrected Closing Disclosure (CD) requires a new three-day waiting period before consummation if the following major changes occur:

The APR changes beyond the allowable tolerance (which is not the scenario here; hence, Option C is incorrect).

The loan product changes (e.g., switching from a fixed-rate to an adjustable-rate mortgage).

A prepayment penalty is added, which is the correct answer in this case. A prepayment penalty can significantly impact the borrower’s ability to repay the loan early without incurring additional costs, which is why this triggers a new waiting period.

Changes like the addition of an escrow account (A) or revisions to contact information (D) do not typically require the three-day waiting period, as they do not materially alter the terms of the loan in a way that would affect the borrower’s decision to proceed.

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

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

— SAFE Act, 12 USC § 5102(4)

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.

Under the SAFE Act, mortgage loan originators (MLOs) must complete 8 hours of continuing education (CE) each year to maintain their licenses. The required CE topics include:

3 hours of federal law and regulations.

2 hours of ethics, which must include instruction on fraud, consumer protection, and fair lending.

2 hours on nontraditional mortgage lending standards, which refers to loan products that do not have fixed interest rates, such as adjustable-rate mortgages (ARMs) and other alternative loan types.

1 elective hour, which can vary based on state or company preferences.

The focus on nontraditional mortgage lending helps ensure MLOs understand the complexities and risks of nonstandard loan products.

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

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

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

Under RESPA (Real Estate Settlement Procedures Act), Section 8 prohibits any payment, kickback, or unearned fee in exchange for loan referrals. This includes payments to real estate agents or other third parties for referring business to lenders or mortgage brokers. Such payments are illegal because they could inflate the cost of settlement services and are not tied to any actual services rendered.

Payments for actual services (A, D), such as payments to attorneys or contractors for legitimate work, are allowed under RESPA, but paying for loan referrals (B) is strictly prohibited.

A Qualified Mortgage (QM) is a category of loans that has certain, more stable features that help make it more likely that a borrower will be able to afford their loan. QMs cannot have negative amortization, interest-only payments, or balloon payments (with a few rural lender exceptions). They must provide for regular, substantially equal periodic payments of principal and interest.

“A qualified mortgage provides for regular periodic payments that are substantially equal, does not result in negative amortization, does not allow for interest-only payments, and does not generally include balloon payments.”

— 12 CFR § 1026.43(e), Ability-to-Repay/Qualified Mortgage Rule; CFPB

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.

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.

The Uniform Residential Loan Application (URLA/Fannie Mae Form 1003) allows the applicant to select one of the following occupancy types: primary residence, secondary residence, or investment property.

“Occupancy types on the URLA are: Primary Residence, Secondary Residence, Investment Property.”

— Fannie Mae Form 1003: Uniform Residential Loan Application

Illegal fee splitting occurs when a fee is divided among multiple parties and at least one party does not perform any actual work or service to earn the fee. Under RESPA (Real Estate Settlement Procedures Act), Section 8 prohibits fee splitting, kickbacks, and unearned fees in any federally related mortgage loan transaction. If three companies split a fee, but one company did no work, this would constitute an illegal fee split.

Fee splitting (A, C) can be legal if all parties involved provide legitimate services.

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

Unusual account activity

Inconsistent or mismatched identification information

Suspicious patterns in credit applications

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

Under TILA/Regulation Z, a finance charge is any charge payable directly or indirectly by the consumer and imposed as a condition of the extension of credit.

“The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable by the consumer and imposed by the creditor as a condition of or an incident to the extension of credit.”

— 12 CFR § 1026.4(a), Regulation Z

Consumers should dispute errors in writing directly with the credit bureau that is reporting the incorrect information. This written notification triggers an official investigation by the bureau, which must respond within 30 days.

“To dispute an error on your credit report, write a letter to the credit reporting company identifying each item in your report you dispute. Include copies of documents that support your position.”

— Fair Credit Reporting Act (FCRA); CFPB Disputing Errors on Credit Reports

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.

Temporary authority allows certain MLOs to originate loans while their license application is pending. However, this authority only exists if the state participates and grants temporary authority. If a state does not grant temporary authority to transitioning MLOs, the individual cannot legally originate loans in that state under temporary authority.

“Temporary authority to operate applies only in states that have adopted the provisions of the SAFE Act regarding temporary authority. If a state does not grant temporary authority, the MLO cannot operate under it.”

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

Other events listed do not directly cause the loss of temporary authority unless dictated by state law.

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.

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

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

— 15 U.S.C. § 1681b; FCRA

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

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

A title search is performed during the mortgage process to uncover any preexisting claims, liens, judgments, or encumbrances on the property. This ensures that the lender and buyer are aware of any legal interests other parties may have and helps establish clear ownership.

“A title search is a review of public records to determine and confirm a property’s legal ownership, and to find out what claims or liens are on the property.”

— CFPB, Buying a House: Settlement Process Overview

Confirming applicant identity, insurance, or purchase ability are not the primary purposes of a title search.

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.

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

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

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

The statement "Current interest rates as low as 3.50% with an APR of 3.99%. Contact us today!" is permissible under TILA and Regulation Z, provided it accurately reflects the current rates and corresponding Annual Percentage Rate (APR).

Regulation Z requires that if an advertisement states an interest rate, it must also disclose the APR to ensure consumers understand the true cost of the loan, including fees and other finance charges.

The other statements are prohibited due to potential misrepresentation:

B (affiliation with the VA) could be misleading unless it is an actual endorsement, which is rare.

C (no payments with a reverse mortgage) could mislead consumers about the conditions of a reverse mortgage.

D (guaranteed refinancing) could be misleading as future refinancing depends on market conditions and the borrower's qualifications.

When a mortgage loan originator (MLO) is also acting as a real estate broker in the same transaction, an Affiliated Business Arrangement (ABA) Disclosure is required under RESPA. This disclosure ensures that the borrower is made aware of the relationship between the parties involved in the transaction and any potential conflict of interest, especially if the MLO could benefit financially from both roles.

Loan application (A), appraisal disclosure (B), and the special information booklet (C) are separate required disclosures, but they do not address the issue of affiliated businesses.

Regulation Z requires creditors to retain the Closing Disclosure and all related documents for five years after consummation of the loan.

“A creditor must retain copies of the Closing Disclosure (and all related documents) for five years after consummation.”

— 12 CFR § 1026.25(c)

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

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

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

Regulation Z (TILA) and the SAFE Act require that all mortgage loan applications include the MLO's unique identifier, which allows regulators and consumers to identify the MLO involved in the transaction.

“Each loan application must include the mortgage loan originator’s name and unique identifier.”

— 12 CFR § 1026.36(g); SAFE Act

Other listed information is not federally required on every mortgage application.

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

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

— SAFE MLO National Test Study Guide

Other answers:

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

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

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

FHA loans are available for primary residences, including manufactured homes, if they meet HUD standards. FHA loans are not available for vacation homes, investment properties, bed and breakfasts, or commercial real estate.

“FHA will insure mortgages on manufactured homes that are principal residences and meet HUD requirements.”

— HUD 4000.1 FHA Single Family Housing Policy Handbook

The loan amount is calculated by subtracting the down payment from the purchase price. To calculate the loan amount, follow these steps:

Determine the Down Payment:

The borrower is putting 18% down on a purchase price of $249,955.

Down payment = 18% of $249,955 = 0.18 × $249,955 = $44,991.90.

Calculate the Loan Amount:

Loan Amount = Purchase Price − Down Payment

Loan Amount = $249,955 − $44,991.90 = $204,963.10.

So the correct loan amount is $204,963.10. However, based on the answer choices, the closest and correct answer is A. $204,693.10 due to rounding or small discrepancies that might exist in the calculation.

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

Other options:

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

Redlining is the illegal practice of refusing to lend or offering less favorable terms to residents of certain geographic areas, often based on the racial or ethnic composition of those areas.

“Redlining is the practice of denying or restricting financial services to certain neighborhoods based on race or ethnicity.”

— CFPB, What is redlining?

Section 8(a) of the Real Estate Settlement Procedures Act (RESPA) strictly prohibits giving or accepting any fee, kickback, or thing of value in exchange for the referral of settlement service business related to a federally related mortgage loan.

“No person shall give and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

— 12 U.S.C. § 2607(a); 12 CFR § 1024.14(b), Regulation X

This means it is illegal for a mortgage loan originator (MLO) to pay a real estate agent for referring clients, regardless of client notification, consent, or limitation to business expenses. Minor items of minimal value (e.g., pens, promotional items) may be allowed if not given in exchange for referrals, but any compensation for referrals is a prohibited kickback.

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

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

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

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

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

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

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

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

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

The income approach (sometimes called the capitalization approach) is a method used to estimate the value of income-producing properties. This method divides the net operating income (rent collected, less expenses) by the capitalization rate (cap rate) to determine value.

“The income approach to value is used to estimate the value of properties that generate income. The appraiser divides net operating income by a capitalization rate to derive the value.”

— Fannie Mae Appraisal Guidelines; SAFE MLO National Test Study Guide

In this situation, the most compliant action is to provide timely initial disclosures to the borrower within the required timeframe, even if the figures may be adjusted later when additional information is obtained. This is in accordance with TILA-RESPA Integrated Disclosure (TRID) rules, which mandate that the Loan Estimate (LE) must be provided within three business days after receiving an application, even if all details are not yet finalized.

Holding off on processing (Option A) or waiting until additional information is obtained (Option D) is non-compliant, as this could violate the timely disclosure requirements.

While documenting attempts to gather information (Option B) is good practice, it does not fulfill the regulatory obligation to provide disclosures promptly.

By issuing initial disclosures, even if the numbers are subject to change, the creditor remains compliant with the Consumer Financial Protection Bureau (CFPB) guidelines. Corrections can be made in subsequent disclosures.

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.

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.

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

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

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

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

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

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

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

If the mortgage loan originator (MLO) becomes aware of a potential change in the borrower’s employment status, such as the company closing and the borrower being laid off, the MLO must notify the underwriter. The borrower's ability to repay the loan could be impacted by the job loss, and failing to update the underwriter would be a violation of proper lending practices.

Ignoring the information or withholding it (Options A and B) could lead to loan default and is unethical.

Homeownership counseling (C) is beneficial but not relevant to the immediate concern of loan approval and repayment ability.

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

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

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

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.

The primary mortgage market is where borrowers and lenders (such as banks, credit unions, and mortgage companies) come together to negotiate and complete mortgage transactions. The secondary market is where existing mortgages are bought and sold between investors.

“The primary mortgage market is composed of lenders who originate mortgage loans directly to consumers.”

— SAFE MLO National Test Study Guide

When there is no tax return history for a rental property, FHA guidelines require lenders to reduce the gross rental income by 25% to account for vacancies and maintenance.

“If there is no history of rental income on the borrower’s tax returns, the lender must reduce the market rent by 25% before considering it as effective income.”

— HUD 4000.1 FHA Single Family Housing Policy Handbook

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

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

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.

Lenders are permitted to verify employment status as part of underwriting and evaluating an applicant’s ability to repay. However, lenders are prohibited by ECOA and Fair Housing Act from making inquiries about sex, religion, or childbearing intentions.

“A creditor may request information regarding the applicant’s employment status, income, and other credit qualifications, but may not inquire about an applicant’s sex, religion, or childbearing intentions.”

— 12 CFR § 1002.5(b); Regulation B (ECOA)

The index for an adjustable-rate mortgage (ARM) is tied to a published benchmark (such as LIBOR, SOFR, or U.S. Treasury securities). Index rates fluctuate over time as the general level of interest rates in the market changes.

“The index is a published interest rate to which the interest rate on an ARM is tied. The index rate changes over time, usually in line with general market rates.”

— CFPB, Consumer Handbook on Adjustable-Rate Mortgages (CHARM)

Interest-only mortgages are considered higher risk compared to traditional mortgages because the borrower’s scheduled payments only cover the interest on the loan, and none of the principal balance is reduced during the interest-only period. As a result, the loan balance remains unchanged, which increases the risk for both the borrower and lender if the value of the home decreases or if the borrower cannot make larger payments when the principal becomes due.

Other risks, such as exceeding the APOR (Average Prime Offer Rate) by a certain margin (C, D), apply to high-cost mortgages, not specifically interest-only loans.

The Equal Credit Opportunity Act (ECOA) Valuations Rule (Regulation B) requires creditors to provide a written notice to applicants within three business days of application stating their right to receive a copy of any appraisal report developed in connection with their application.

“A creditor must deliver or mail a notice of the applicant’s right to receive a copy of all appraisals or valuations developed in connection with the application within three business days of receiving an application.”

— 12 CFR § 1002.14(a)(2), Regulation B

Applicants do not have the right to select their appraiser.

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

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

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

First, calculate the monthly interest-only payment:

Loan Amount: $239,500

Interest Rate: 7.25% annual

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

Add escrow for taxes and insurance:

Annual Insurance: $551 ÷ 12 = $45.92

Annual Taxes: $1,773 ÷ 12 = $147.75

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

Total monthly payment:

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

Closest answer: C. $1,640.65

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

A quit claim deed is a legal document used in real estate transactions to convey ownership or interest in a property from one party to another. It transfers the grantor’s interest in the property without any warranties or guarantees about the property’s title.

Promissory notes (B) represent a borrower’s promise to repay a loan.

Mortgage instruments (C) create a lien on the property but do not convey ownership.

Occupancy certificates (D) certify that a property complies with regulations for occupancy but are not involved in transferring ownership.

Real estate brokerage activities are not a primary function of a mortgage loan originator (MLO). The MLO’s primary role is to assist consumers in taking an application (A), offering or negotiating credit terms (B), and helping consumers apply for credit (C).

Real estate brokerage activities, such as negotiating real estate transactions, are separate from the loan origination process and require different licensing and qualifications.

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

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

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

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

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

Under 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.