Mortgage Ethics and Fraud Prevention 4 — Questions and Answers
Question 1: A borrower who claims a rental property as their primary residence to obtain a lower interest rate is committing:
- A minor disclosure oversight
- Occupancy fraud (Correct answer)
- An appraisal violation
- A TILA breach only
Correct answer: Occupancy fraud
Misrepresenting a non-owner-occupied investment property as a primary residence to obtain better loan terms is occupancy fraud.
Question 2: In a 'builder bailout' scheme, a real estate developer secretly provides down payment funds to buyers while falsely certifying the buyer provided funds themselves. This inflates the:
- Loan-to-value ratio beyond what is disclosed to the lender (Correct answer)
- Property's assessed tax value
- The borrower's credit score
- The title insurance premium
Correct answer: Loan-to-value ratio beyond what is disclosed to the lender
Builder bailout schemes hide the true source of down payment funds, causing the lender to underestimate the real LTV ratio and assume more risk than disclosed.
Question 3: A mortgage professional who discovers a colleague is submitting fraudulent loan files should first:
- Confront the colleague privately and give them a chance to correct it
- Report the activity through proper channels such as compliance or a SAR filing (Correct answer)
- Ignore it as it is not their responsibility
- Wait to see if the loans default before acting
Correct answer: Report the activity through proper channels such as compliance or a SAR filing
Mortgage professionals have a legal and ethical duty to report known fraud through proper channels, including internal compliance and Suspicious Activity Reports.
Question 4: Which type of fraud involves a criminal assuming a homeowner's identity to illegally transfer property title and then obtain a mortgage?
- Short sale fraud
- Equity stripping
- Identity theft / deed fraud (Correct answer)
- Silent second scheme
Correct answer: Identity theft / deed fraud
Identity theft combined with deed fraud occurs when a criminal uses a stolen identity to forge a deed transfer and subsequently extract equity through fraudulent loans.
Question 5: The Home Mortgage Disclosure Act (HMDA) helps detect potential discriminatory lending practices primarily by requiring lenders to:
- Charge uniform rates to all borrowers
- Collect and report demographic data on loan applicants (Correct answer)
- Limit their geographic service area
- Provide free credit counseling
Correct answer: Collect and report demographic data on loan applicants
HMDA requires lenders to collect and report applicant demographic data, enabling regulators to identify patterns of potential lending discrimination.
Question 6: A mortgage loan originator who charges a borrower an undisclosed fee and pockets it personally is committing:
- A permitted origination practice
- Embezzlement and an undisclosed fee violation (Correct answer)
- A yield spread premium adjustment
- A routine processing error
Correct answer: Embezzlement and an undisclosed fee violation
Charging a borrower an undisclosed fee and retaining it personally constitutes embezzlement and violates RESPA's requirement for transparent fee disclosure.
Question 7: When evaluating a mortgage application, a loan officer who ignores clear signs of fraudulent documentation to close the loan is said to have practiced:
- Willful blindness / deliberate ignorance (Correct answer)
- Reasonable reliance
- Due diligence
- Prudent underwriting
Correct answer: Willful blindness / deliberate ignorance
Deliberately ignoring red flags of fraud to avoid knowledge is called willful blindness, which does not protect a mortgage professional from criminal liability.
Mortgage Ethics and Fraud Prevention 4
A borrower who claims a rental property as their primary residence to obtain a lower interest rate is committing: