Mortgage Ethics and Fraud Prevention Questions and Answers — Questions and Answers
Question 1: An investor applies for a mortgage on a rental property, but intentionally states on the application that they will occupy the home as their primary residence to secure a lower interest rate. This illegal act is best known as:
- An air loan
- Occupancy fraud (Correct answer)
- A silent second
- Property flipping
Correct answer: Occupancy fraud
Occupancy fraud occurs when a borrower misrepresents the intended use of a property, typically stating it will be owner-occupied to obtain more favorable loan terms, such as a lower down payment or interest rate, when the actual intention is to use it as an investment property. [5, 6, 8]
Question 2: A mortgage company is required by which of the following federal laws to develop, implement, and maintain a comprehensive written information security program to protect its customers' nonpublic personal information?
- Real Estate Settlement Procedures Act (RESPA)
- Truth in Lending Act (TILA)
- Home Mortgage Disclosure Act (HMDA)
- Gramm-Leach-Bliley Act (GLBA) (Correct answer)
Correct answer: Gramm-Leach-Bliley Act (GLBA)
The Gramm-Leach-Bliley Act (GLBA) includes the Safeguards Rule, which requires financial institutions, including mortgage companies, to have a written plan in place to protect the security, confidentiality, and integrity of customer information. [14, 17, 21, 23]
Question 3: Which of the following scenarios best describes the use of a "straw buyer" in a mortgage fraud scheme?
- A borrower knowingly overstates their annual income on a loan application to qualify for a larger mortgage.
- A real estate agent and appraiser collude to artificially inflate the value of a property to increase their commissions.
- An individual with a good credit history is paid to apply for a loan on behalf of another person who cannot qualify. (Correct answer)
- A lender steers a borrower towards a high-cost loan when the borrower could have qualified for a more affordable option.
Correct answer: An individual with a good credit history is paid to apply for a loan on behalf of another person who cannot qualify.
A straw buyer is a person who makes a purchase on behalf of another individual. In mortgage fraud, this involves someone with good credit being used to obtain a loan for the actual, unqualified buyer, thereby concealing the true identity of the purchaser from the lender. [1, 2, 9, 12]
Question 4: A loan originator is working with a client who admits their down payment is from an undisclosed, unseasoned cash loan from a friend. The MLO knows this will be an issue for underwriting. Which of the following actions represents the most unethical course of action?
- Advising the client to deposit the cash into their bank account and provide a falsified "gift letter." (Correct answer)
- Informing the client that the lender requires all funds to be properly sourced and seasoned.
- Refusing to proceed with the application unless the client can provide acceptable documentation for the funds.
- Documenting the source of funds in the loan file and submitting it to the underwriter for a decision.
Correct answer: Advising the client to deposit the cash into their bank account and provide a falsified "gift letter."
Advising a client to falsify documents, such as creating a fake gift letter to disguise a loan, is an act of fraud. This action involves actively counseling and participating in the misrepresentation of material facts to the lender, which is highly unethical and illegal.
Question 5: A group of industry insiders, including a loan officer, an appraiser, and a title agent, conspire to create fraudulent loans on non-existent properties and keep the loan proceeds. This type of scheme is best categorized as:
- Fraud for housing
- Fraud for profit (Correct answer)
- Occupancy fraud
- Benign fraud
Correct answer: Fraud for profit
Fraud for profit schemes typically involve industry insiders who collude to steal money and equity from lenders or homeowners. This is distinct from fraud for housing, where a borrower misrepresents information simply to acquire a home they intend to live in. [4, 7, 9, 13]
Question 6: During the application process, an underwriter notes several inconsistencies: the applicant's Social Security Number was issued only three months ago, the provided address is a mail drop, and the stated employer cannot be verified. Under the Fair and Accurate Credit Transactions Act (FACTA), these warning signs are collectively known as:
- Compensating factors
- Changed circumstances
- Red Flags (Correct answer)
- Permissible underwriting variances
Correct answer: Red Flags
The FACTA Red Flags Rule requires financial institutions and creditors to implement a written Identity Theft Prevention Program to detect, prevent, and mitigate identity theft. The suspicious patterns and inconsistencies identified are examples of "Red Flags" that would trigger the program's response procedures. [19, 22, 24, 26]
Mortgage Ethics and Fraud Prevention Questions and Answers
An investor applies for a mortgage on a rental property, but intentionally states on the application that they will occupy the home as their primary residence to secure a lower interest rate.
This illegal act is best known as: