Mortgage Ethics and Professional Conduct 5 — Questions and Answers
Question 1: An MLO discovers that a referral partner is paying illegal kickbacks to another originator at the same company. The ethical response is to:
- Ignore it as it does not involve their own transactions
- Report the conduct to their compliance department or supervisor (Correct answer)
- Confront the referral partner directly and resolve it privately
- Wait to see if regulators discover it on their own
Correct answer: Report the conduct to their compliance department or supervisor
Ethical mortgage professionals have an obligation to report known RESPA violations to their compliance department, not to conceal or ignore them.
Question 2: Which of the following best defines 'churning' in the mortgage industry?
- Rapidly processing multiple loan applications to meet quotas
- Repeatedly refinancing a borrower's loan to generate unnecessary fees (Correct answer)
- Switching borrowers between lenders to obtain better rates
- Originating loans above the conforming loan limit consistently
Correct answer: Repeatedly refinancing a borrower's loan to generate unnecessary fees
Churning refers to the unethical practice of convincing borrowers to refinance repeatedly to generate originator fees without a genuine benefit to the borrower.
Question 3: A lender requires a borrower to purchase insurance from a specific provider as a condition of loan approval. This practice is called:
- Force-placed insurance mandate
- Tying arrangement (Correct answer)
- Hazard insurance bundling
- Collateral protection requirement
Correct answer: Tying arrangement
A tying arrangement, prohibited under RESPA and banking regulations, occurs when a lender conditions loan approval on the borrower purchasing a product from a specific affiliated provider.
Question 4: Under the Dodd-Frank Act's ability-to-repay (ATR) rule, lenders must verify a borrower's ability to repay primarily through:
- The borrower's self-certification of income
- Documented income, assets, employment, and debt obligations (Correct answer)
- The property's appraised value as collateral
- The borrower's credit score alone
Correct answer: Documented income, assets, employment, and debt obligations
The ATR rule requires lenders to make a good-faith determination using verified income, assets, employment, credit history, and debt obligations.
Question 5: A mortgage servicer fails to apply a borrower's payment correctly and reports the borrower as late to the credit bureaus. The borrower's remedy under the Real Estate Settlement Procedures Act includes:
- Immediate cancellation of the mortgage contract
- Submitting a qualified written request (QWR) to the servicer (Correct answer)
- Filing a claim directly with the credit bureaus only
- Withholding future payments until the error is corrected
Correct answer: Submitting a qualified written request (QWR) to the servicer
RESPA allows borrowers to submit a Qualified Written Request to dispute servicer errors, requiring the servicer to acknowledge and investigate the complaint.
Question 6: An MLO fails to disclose a material change in loan terms before closing. This violates:
- Only the lender's internal policies
- TRID disclosure requirements under TILA and RESPA (Correct answer)
- The Fair Credit Reporting Act (FCRA)
- The Community Reinvestment Act (CRA)
Correct answer: TRID disclosure requirements under TILA and RESPA
TRID requires that borrowers receive a revised Closing Disclosure reflecting material changes at least three business days before consummation.
Question 7: Which of the following is the MOST appropriate action when an MLO suspects a borrower may be a victim of elder financial abuse in a mortgage transaction?
- Complete the transaction since the borrower appears willing
- Pause the transaction and report concerns to the appropriate authorities or Adult Protective Services (Correct answer)
- Require additional documentation and proceed if provided
- Refer the case to the lender's underwriting department only
Correct answer: Pause the transaction and report concerns to the appropriate authorities or Adult Protective Services
MLOs who suspect elder financial abuse should halt the transaction and report concerns to authorities such as Adult Protective Services or law enforcement.
Mortgage Ethics and Professional Conduct 5
An MLO discovers that a referral partner is paying illegal kickbacks to another originator at the same company.
The ethical response is to: