Mortgage Ethics and Professional Conduct 2 — Questions and Answers
Question 1: A mortgage loan originator (MLO) discovers mid-process that a borrower's income was overstated on the application. What is the MLO's ethical obligation?
- Continue processing since the loan is nearly complete
- Correct the application and notify the lender of the discrepancy (Correct answer)
- Ask the borrower to provide higher income documentation retroactively
- Close the loan and correct the file afterward
Correct answer: Correct the application and notify the lender of the discrepancy
MLOs must ensure all information in loan applications is accurate and must correct any misrepresentations discovered during processing.
Question 2: Which federal law specifically prohibits mortgage professionals from accepting kickbacks or unearned fees in connection with real estate settlement services?
- Truth in Lending Act (TILA)
- Equal Credit Opportunity Act (ECOA)
- Real Estate Settlement Procedures Act (RESPA) (Correct answer)
- Home Mortgage Disclosure Act (HMDA)
Correct answer: Real Estate Settlement Procedures Act (RESPA)
RESPA Section 8 explicitly prohibits kickbacks, referral fees, and unearned fees among settlement service providers.
Question 3: A borrower asks their MLO to recommend a specific title company owned by the MLO's spouse. What must the MLO do first?
- Decline to make any recommendation at all
- Disclose the affiliated business relationship in writing to the borrower (Correct answer)
- Refer the borrower to a competitor title company
- Obtain approval from the state regulator before referring
Correct answer: Disclose the affiliated business relationship in writing to the borrower
RESPA requires written disclosure of affiliated business arrangements before making any referral to a related settlement service provider.
Question 4: Under the SAFE Act, an MLO who moves to a new state must:
- Immediately begin originating loans and apply for licensure within 60 days
- Obtain a license in the new state before originating loans there (Correct answer)
- Transfer their existing license automatically through the NMLS system
- Operate under a temporary federal license for up to one year
Correct answer: Obtain a license in the new state before originating loans there
The SAFE Act requires MLOs to be licensed in each state where they originate loans; licenses do not automatically transfer between states.
Question 5: An MLO steers a creditworthy borrower toward a high-cost loan because it pays a higher commission. This practice is best described as:
- Yield spread premium compliance
- Predatory lending (Correct answer)
- Rate lock extension
- Mortgage fraud by omission
Correct answer: Predatory lending
Steering borrowers to higher-cost products for the originator's financial benefit rather than the borrower's interest is a classic form of predatory lending.
Question 6: A mortgage professional who willfully violates the SAFE Act licensing requirements may face:
- A written warning on the first offense only
- Civil penalties of up to $25,000 per day of violation (Correct answer)
- Mandatory retraining with no monetary penalty
- Suspension of license for 30 days maximum
Correct answer: Civil penalties of up to $25,000 per day of violation
Willful violations of the SAFE Act can result in civil money penalties of up to $25,000 per day per violation.
Question 7: Which behavior best exemplifies the 'fiduciary duty' concept as applied to mortgage brokerage relationships?
- Processing loans as quickly as possible to maximize volume
- Placing the borrower's financial interests above the broker's own interests (Correct answer)
- Offering the lender's most profitable product to every borrower
- Maintaining confidentiality of the lender's rate sheet
Correct answer: Placing the borrower's financial interests above the broker's own interests
Fiduciary duty requires the mortgage broker to act in the best interest of the borrower, prioritizing the client's needs over personal gain.
Mortgage Ethics and Professional Conduct 2
A mortgage loan originator (MLO) discovers mid-process that a borrower's income was overstated on the application.
What is the MLO's ethical obligation?