Mortgage Ethics and Fraud Prevention 2 — Questions and Answers
Question 1: A borrower asks their loan officer to list a higher purchase price on the sales contract so they can receive extra cash at closing. This is an example of:
- Equity stripping
- Property flipping
- Sales price inflation fraud (Correct answer)
- Straw buyer scheme
Correct answer: Sales price inflation fraud
Inflating the sales price to extract additional cash at closing is sales price inflation fraud, a common mortgage fraud scheme.
Question 2: Under RESPA, a mortgage broker who receives an unearned fee for referring a borrower to a title company is guilty of:
- An affiliated business arrangement violation
- A kickback violation (Correct answer)
- A yield spread premium abuse
- A TILA disclosure error
Correct answer: A kickback violation
RESPA Section 8 prohibits kickbacks — payments for referrals where no services were actually rendered.
Question 3: Which federal law requires mortgage originators to report suspicious activity that may indicate money laundering?
- TILA
- RESPA
- Bank Secrecy Act (Correct answer)
- ECOA
Correct answer: Bank Secrecy Act
The Bank Secrecy Act requires financial institutions and their employees to file Suspicious Activity Reports (SARs) for transactions that may involve money laundering.
Question 4: A borrower who has poor credit uses a relative with excellent credit to apply for the mortgage, intending for the relative to have no ownership stake. This is called a:
- Co-borrower arrangement
- Straw buyer scheme (Correct answer)
- Silent second scheme
- Nominee loan
Correct answer: Straw buyer scheme
A straw buyer scheme involves using someone else's identity and credit profile to obtain a loan for a property the straw buyer will not actually own or occupy.
Question 5: An appraiser who consistently provides inflated valuations in exchange for continued business from a lender is violating:
- Only state licensing laws
- USPAP and ethical standards (Correct answer)
- TILA only
- RESPA affiliated business rules only
Correct answer: USPAP and ethical standards
Providing inflated appraisals for repeat business violates the Uniform Standards of Professional Appraisal Practice (USPAP), which requires appraiser independence.
Question 6: Which practice involves convincing elderly homeowners to repeatedly refinance their mortgages to generate fees while depleting their home equity?
- Redlining
- Equity stripping through serial refinancing (Correct answer)
- Silent second fraud
- Double selling
Correct answer: Equity stripping through serial refinancing
Serial refinancing targeting equity-rich borrowers — especially seniors — to generate origination fees while draining equity is a predatory and fraudulent practice.
Question 7: A loan officer who processes a loan application knowing the stated income is fabricated is:
- Only liable if the loan defaults
- Potentially criminally liable for mortgage fraud (Correct answer)
- Protected if the borrower signed the application
- Only required to report the borrower to authorities
Correct answer: Potentially criminally liable for mortgage fraud
Knowingly processing a fraudulent application makes the loan officer a participant in mortgage fraud, which carries criminal penalties under federal law.
Mortgage Ethics and Fraud Prevention 2
A borrower asks their loan officer to list a higher purchase price on the sales contract so they can receive extra cash at closing.
This is an example of: