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MLO Practice Questions

Question # 1
Which of the following loans is subject to the Real Estate Settlement Procedures Act (RESPA)?
A. Federally related mortgage loan
B. Standard county related mortgage loan
C. State registration related mortgage loan
D. Unified commerce related mortgage loan


A. Federally related mortgage loan

Explanation:

The Real Estate Settlement Procedures Act (RESPA) applies to federally related mortgage loans, which include:

Loans made by lenders insured by a federal agency (such as FHA or VA loans)

Loans intended for sale to Fannie Mae or Freddie Mac

Loans from lenders that are federally regulated or insured

RESPA's goal is to protect consumers by requiring disclosures related to the costs of real estate transactions, preventing kickbacks, and ensuring transparency in the settlement process. It applies to most residential mortgage loans.

Other options:

County-related mortgage loans (B), state registration loans (C), and unified commerce loans (D) are not standard terms under RESPA.

References:

Real Estate Settlement Procedures Act (RESPA)

12 CFR Part 1024, Regulation X


Question # 2
The SAFE Act prohibits individuals from engaging in the business of a residential mortgage loan originator without first obtaining a:
A. unique identifier
B. compliance plan.
C. high school diploma.
D. originator counseling certificate.


A. unique identifier

Explanation:

The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act) requires all mortgage loan originators (MLOs) to obtain a unique identifier through the Nationwide Multistate Licensing System (NMLS) before engaging in the business of residential mortgage loan origination. This identifier is used to track MLOs across state lines and ensure accountability and transparency in the mortgage industry.

A compliance plan (B) or other qualifications like a high school diploma (C) or counseling certificate (D) are not specific SAFE Act requirements for engaging in mortgage origination.

References:

SAFE Act, 12 USC §5101

NMLS Licensing Requirements


Question # 3
Which of the following property value approaches does an appraiser use on a rental property?
A. Cost approach
B. Income approach
C. Annual approach
D. Sales comparison approach


B. Income approach

Explanation:

For rental properties, an appraiser will typically use the Income Approach to estimate the property's value. This method is based on the income-generating potential of the property, which is most relevant for investment properties, including rentals.

The Income Approach assesses the property's ability to generate future cash flow by evaluating the income that can be derived from renting it. The formula often involves determining the net operating income (NOI) and applying a capitalization rate (cap rate) to estimate value.

This method is most appropriate for rental properties because their value is inherently tied to their profitability.

Other methods:

Cost approach: More suited for unique properties or new construction.

Sales comparison approach: Often used for owner-occupied properties, comparing recent sales of similar properties.

References:

Uniform Standards of Professional Appraisal Practice (USPAP)

Fannie Mae's Appraisal Guidelines for Rental Properties


Question # 4
A mortgage loan originator (MLO) received a salary of 1% per loan plus a bonus of $5,000 for closing the most loans in the office last year. In addition, he received a trip to Hawaii based on closing 100 or more transactions with an interest rate of 5% or higher. Is the MLO's compensation prohibited?
A. His compensation is permitted as compensation only includes salary and his salary is not based on loan terms.
B. His compensation is permitted as compensation only includes salary and bonuses and his salary and bonus is not based on loan terms.
C. His compensation is not permitted as compensation only includes salary and his salary is based on loan terms.
D. His compensation is not permitted as compensation includes all financial incentives and his trip was awarded based on closing the most loans with certain loan terms.


D. His compensation is not permitted as compensation includes all financial incentives and his trip was awarded based on closing the most loans with certain loan terms.

Explanation:

Under Dodd-Frank Act regulations and Regulation Z (TILA), mortgage loan originators (MLOs) cannot be compensated based on the terms of the loan, such as interest rates, loan amount, or product type. This includes any financial incentives, like bonuses or rewards, tied to loan terms. In this case:

The trip to Hawaii was awarded based on closing loans with an interest rate of 5% or higher, which directly ties the MLO's compensation to a specific loan term (the interest rate).

This violates the Loan Originator Compensation Rule, which prohibits compensating MLOs based on the terms or conditions of a loan, in order to protect borrowers from steering into unfavorable loan products.

Therefore, all forms of compensation—including bonuses, trips, or other rewards—are scrutinized if they are tied to loan terms, making the MLO's trip to Hawaii an illegal incentive under current law.

References:

Dodd-Frank Act - Loan Originator Compensation Rules

TILA/Regulation Z - Anti-Steering and Loan Terms Compensation Rules


Question # 5
During the closing the borrower notices that the interest rate increased from 3.250% to 3.875%. The lender must:
A. tell the borrower to close the loan.
B. close the loan, then re-disclose after the loan funds.
C. postpone the closing, re-disclose and wait three days.
D. postpone the closing, re-disclose and wait three business days.


D. postpone the closing, re-disclose and wait three business days.

Explanation:

Under the TILA-RESPA Integrated Disclosure (TRID) rules, any significant change to the Annual Percentage Rate (APR) beyond the allowed tolerance before closing requires the lender to provide a revised Closing Disclosure (CD). If the APR increases by more than 0.125% for fixed-rate loans, the lender must re-disclose the CD and provide the borrower with at least three business days to review the updated terms before consummation (closing).

In this case, the interest rate increase from 3.250% to 3.875% is a significant change that impacts the APR, triggering the need for re-disclosure and the mandatory three-business-day waiting period.

The lender must postpone the closing until the new three-day waiting period passes to ensure compliance with TRID regulations.

References:

TILA-RESPA Integrated Disclosure Rule (TRID), 12 CFR §1026.19(f)

CFPB TRID Guidelines


Question # 6
Which of the following responses describes the main purpose of the secondary market?

A. To fund additional loans
B. To fund a second home loan
C. To fund second mortgage loans
D. To service second mortgage loans


A. To fund additional loans

Explanation:

The main purpose of the secondary market is to fund additional loans by allowing lenders to sell existing mortgages to investors. This process replenishes the lender’s capital, enabling them to originate more loans. The secondary market is where mortgage-backed securities (MBS) are bought and sold, providing liquidity to the mortgage market.

Other options such as funding second mortgages or second home loans are specific transactions that do not capture the overall purpose of the secondary market.

References:

Fannie Mae and Freddie Mac Secondary Market Guidelines

HUD Secondary Mortgage Market Overview


Question # 7
A mortgage loan originator (MLO) takes an application for a borrower who is obtaining an owner-occupied maximum amount refinance loan. The borrower also asks for a loan application for a new house that they are purchasing that will not be finished until 60 days after the refinance loan closes. Although the MLO advises the borrower that the terms of the refinance loan require that they occupy the property for 12 months, the borrower says that the new purchase loan will not close until after the refinance loan has closed. The MLO must:
A. refer the purchase loan to another MLO in their company to obtain a referral fee.
B. refer the borrower to another lender for the purchase loan so that the MLO is permitted to get a commission on the refinance loan.
C. take both applications and do one loan "in house" and broker the second loan to another lender.
D. advise the borrower that the MLO can do the refinance loan as a non-owner-occupied loan and the purchase loan as an owner-occupied loan.


D. advise the borrower that the MLO can do the refinance loan as a non-owner-occupied loan and the purchase loan as an owner-occupied loan.

Explanation:

The MLO must advise the borrower that if they plan to purchase a new home shortly after refinancing, they must disclose this information upfront. Since the terms of the refinance loan require that the borrower occupy the property for 12 months, the MLO should suggest refinancing the current property as a non-owner-occupied loan if the borrower does not intend to stay in the home. This approach ensures compliance with the loan terms and avoids potential mortgage fraud.

Other options (A, B, C) involve potential conflicts of interest or violations of the loan terms.

References:

Fannie Mae Guidelines on occupancy requirements

CFPB Guidelines on owner-occupied versus non-owner-occupied loans


Question # 8
Which of the following acts provides a state licensing and regulatory agency to investigate and examine a mortgage company?
A. SAFE Act
B. Truth in Lending Act (TILA)
C. Real Estate Settlement Procedures Act (RESPA)
D. Home Ownership and Equity Protection Act (HOEPA)


A. SAFE Act

Explanation:

The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act) establishes federal and state licensing standards for mortgage loan originators (MLOs) and mandates that each state creates a licensing and regulatory agency to oversee mortgage companies. This agency is responsible for investigating, examining, and enforcing compliance with mortgage regulations. The act aims to ensure that mortgage companies and MLOs operate with transparency, competency, and accountability.

The SAFE Act gives regulatory bodies the authority to conduct background checks, examinations, and audits of licensed mortgage companies.

Other Acts:

TILA and RESPA focus on disclosure requirements and fair lending practices but do not specifically regulate state licensing and examinations.

HOEPA regulates high-cost loans and predatory lending practices, not licensing.

References:

SAFE Act, 12 USC §5101

NMLS Licensing and Registration Requirements


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NMLS MLO Exam Dumps

Exam Name: Mortgage Loan Origination (SAFE MLO)
Certification Name: SAFE MLO

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  • Total Questions: 120
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