Mortgage Loan Origination Activities 4 — Questions and Answers
Question 1: A borrower applies for a mortgage but provides falsified income documents. The MLO suspects fraud but submits the application anyway. Under federal law, this MLO could be charged with:
- A RESPA violation only
- Mortgage fraud under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) (Correct answer)
- A minor ECOA infraction
- A TILA disclosure violation only
Correct answer: Mortgage fraud under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
Knowingly participating in mortgage fraud, including submission of false documentation, can result in federal prosecution under FIRREA, which carries up to 30 years imprisonment.
Question 2: What is 'loan flipping' in the context of mortgage origination?
- Selling a mortgage loan on the secondary market immediately after origination
- Repeatedly refinancing a borrower's loan primarily to generate fees rather than benefit the borrower (Correct answer)
- Converting an adjustable-rate mortgage to a fixed-rate loan
- Transferring servicing rights from one lender to another
Correct answer: Repeatedly refinancing a borrower's loan primarily to generate fees rather than benefit the borrower
Loan flipping is a predatory practice of repeatedly refinancing a borrower's loan to collect new fees, with little or no benefit to the borrower.
Question 3: Under HMDA, which lenders are required to report mortgage data to federal regulators?
- Only federally chartered banks with assets over $500 million
- Depository institutions meeting asset thresholds and non-depository lenders meeting volume thresholds (Correct answer)
- All real estate brokers who facilitate mortgage referrals
- Only lenders operating in metropolitan statistical areas (MSAs)
Correct answer: Depository institutions meeting asset thresholds and non-depository lenders meeting volume thresholds
HMDA requires reporting by covered depository institutions above asset thresholds and non-depository lenders that meet origination volume thresholds in MSAs.
Question 4: During origination, what distinguishes a 'prequalification' from a 'preapproval'?
- Prequalification involves a hard credit pull; preapproval uses only a soft pull
- Prequalification is an informal estimate; preapproval involves verified documentation and underwriting review (Correct answer)
- Prequalification is issued only by banks; preapproval is issued by mortgage brokers
- There is no legal distinction between the two terms
Correct answer: Prequalification is an informal estimate; preapproval involves verified documentation and underwriting review
Prequalification is a quick informal assessment based on unverified information, while preapproval involves income/asset verification and often a credit pull with a more formal review.
Question 5: A borrower wants to use gift funds for their entire down payment on a conventional loan. Which statement is correct?
- Gift funds are never permitted on conventional loans
- Gift funds are permitted if accompanied by a gift letter and the donor is an acceptable source (Correct answer)
- Gift funds require an additional 10% origination fee
- Gift funds are only allowed if the loan-to-value is under 80%
Correct answer: Gift funds are permitted if accompanied by a gift letter and the donor is an acceptable source
Fannie Mae and Freddie Mac guidelines allow gift funds from acceptable donors (family members, employers, etc.) provided a gift letter is obtained and no repayment is expected.
Question 6: Which index is most commonly used as the benchmark for adjustable-rate mortgages (ARMs) originated today?
- London Interbank Offered Rate (LIBOR)
- Secured Overnight Financing Rate (SOFR) (Correct answer)
- 11th District Cost of Funds Index (COFI)
- Prime Rate published by the Wall Street Journal
Correct answer: Secured Overnight Financing Rate (SOFR)
Following the phase-out of LIBOR, SOFR has become the primary benchmark index for new ARM originations in the U.S.
Question 7: When an MLO originates a loan through a mortgage broker arrangement, who is the MLO's employer of record for SAFE Act licensing purposes?
- The wholesale lender funding the loan
- The mortgage broker company (the sponsoring entity) (Correct answer)
- The borrower, since the MLO represents their interests
- The state licensing authority in the state of origination
Correct answer: The mortgage broker company (the sponsoring entity)
Under the SAFE Act, an MLO must be employed by and registered or licensed through a sponsoring entity — in a broker arrangement, that sponsor is the mortgage broker company.
Mortgage Loan Origination Activities 4
A borrower applies for a mortgage but provides falsified income documents.
The MLO suspects fraud but submits the application anyway.
Under federal law, this MLO could be charged with: