Mortgage Ethics and Professional Conduct Questions and Answers — Questions and Answers
Question 1: A mortgage loan originator (MLO) is working from home and leaves a borrower's loan file, which contains their Social Security number and bank account details, on their kitchen table. A visiting guest is able to see the documents. This MLO's action is a potential violation of which federal regulation?
- The Real Estate Settlement Procedures Act (RESPA)
- The Fair Housing Act
- The Gramm-Leach-Bliley Act (GLBA) (Correct answer)
- The Home Mortgage Disclosure Act (HMDA)
Correct answer: The Gramm-Leach-Bliley Act (GLBA)
The Gramm-Leach-Bliley Act (GLBA) includes the Safeguards Rule, which requires financial institutions to have a security plan to protect the confidentiality and integrity of personal consumer information (Non-public Personal Information or NPI). Leaving sensitive documents exposed constitutes a failure to properly safeguard NPI, violating the requirements of the GLBA.
Question 2: A mortgage loan originator recommends a specific title insurance company to a borrower. The MLO fails to disclose that they receive a significant monthly fee from this title company for every loan that closes with them, which is not a bona fide payment for services rendered. This arrangement is a violation of:
- The Equal Credit Opportunity Act (ECOA)
- RESPA Section 8 (Correct answer)
- The Homeowners Protection Act (HPA)
- The Fair Credit Reporting Act (FCRA)
Correct answer: RESPA Section 8
Section 8 of the Real Estate Settlement Procedures Act (RESPA) prohibits kickbacks and unearned fees. It is illegal to give or accept any fee, kickback, or thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan. The MLO's undisclosed arrangement to receive a fee for referrals is a classic example of an illegal kickback under RESPA Section 8.
Question 3: A mortgage loan originator receives a call from a potential borrower who wants to purchase a home in a predominantly minority neighborhood. The MLO, believing the property values in that area are likely to decline, tells the borrower, "You have a great income; you could qualify for a much better home in the new suburban development. Let's focus our search there instead." This practice is an example of:
- Steering (Correct answer)
- Redlining
- Blockbusting
- Reverse Redlining
Correct answer: Steering
Steering is the illegal practice of guiding prospective homebuyers toward or away from certain neighborhoods based on their race, religion, ethnicity, or other protected class. In this scenario, the MLO is attempting to influence the borrower's housing choice based on the racial composition of a neighborhood, which is a violation of the Fair Housing Act.
Question 4: Which of the following actions by a mortgage company would most likely be considered an "abusive" act or practice under the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) regulation?
- Charging a standard late fee after the grace period expires.
- Taking unreasonable advantage of a borrower's lack of understanding of the material risks and costs of a loan. (Correct answer)
- Sending monthly statements that clearly outline principal and interest payments.
- Requiring a borrower to have homeowners insurance.
Correct answer: Taking unreasonable advantage of a borrower's lack of understanding of the material risks and costs of a loan.
An abusive act or practice under UDAAP involves, among other things, taking unreasonable advantage of a consumer's lack of understanding of the material risks, costs, or conditions of a product or service. The other options are standard, legal, and non-abusive industry practices.
Question 5: According to the SAFE Act, which of the following individuals would be required to obtain a state mortgage loan originator license?
- An individual who negotiates mortgage terms for an immediate family member.
- A registered loan originator working for a federally insured depository institution.
- An attorney who negotiates loan terms on behalf of a client as an ancillary part of their legal services.
- An employee of a home builder who, for compensation, offers and negotiates the terms of a loan for a buyer of one of the builder's homes. (Correct answer)
Correct answer: An employee of a home builder who, for compensation, offers and negotiates the terms of a loan for a buyer of one of the builder's homes.
The SAFE Act requires individuals who act as a mortgage loan originator (MLO) to be licensed. While there are specific exemptions for individuals acting for immediate family, attorneys providing ancillary services, and registered MLOs at depository institutions, an employee of a home builder who negotiates loan terms for compensation falls under the definition and is required to be licensed.
Question 6: An MLO notices a borrower's stated income on their application seems unusually high for their stated profession and is supported by bank statements with several large, irregular cash deposits. The MLO suspects the income is inflated but decides to submit the loan anyway, hoping the underwriter won't notice. What ethical principle is the MLO most directly violating?
- Confidentiality
- Advertising Standards
- Appraiser Independence
- Duty of Care (Correct answer)
Correct answer: Duty of Care
The MLO's primary duty of care involves exercising reasonable skill, diligence, and ensuring the accuracy of information in a loan application. Knowingly or negligently submitting an application with potentially fraudulent information is a direct breach of this duty, as it fails to protect the lender from risk and undermines the integrity of the lending process.
Mortgage Ethics and Professional Conduct Questions and Answers
A mortgage loan originator (MLO) is working from home and leaves a borrower's loan file, which contains their Social Security number and bank account details, on their kitchen table.
A visiting guest is able to see the documents.
This MLO's action is a potential violation of which federal regulation?