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MLO Practice Questions

Question # 1
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


Question # 2
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 # 3
Which of the following sources of funds is acceptable to utilize for down payments, closing costs or financial reserves?
A. Virtual currency funds
B. Community second funds
C. Personal unsecured loans
D. Foreign assets located outside of the U.S. or its territories


B. Community second funds

Explanation:

Community second funds are an acceptable source of funds for down payments, closing costs, or financial reserves. These are subordinate loans provided by housing finance agencies, nonprofits, or government entities to help borrowers meet the required down payment or closing costs. These funds are often offered to low-to-moderate income borrowers or first-time homebuyers as part of affordable housing programs.

Virtual currency (A), such as Bitcoin, is not an acceptable source due to its volatility and challenges in verifying its stability.

Personal unsecured loans (C) are generally not allowed, as they increase the borrower’s debt and reduce their financial stability.

Foreign assets outside of the U.S. (D) are not typically acceptable unless they can be easily liquidated and transferred to the U.S.

References:

Fannie Mae Selling Guide on acceptable sources of funds

Freddie Mac Guidelines for down payment and closing costs


Question # 4
Which of the following federal laws requires mortgage lenders to adopt and follow anti-money laundering (AML) rules and regulations?
A. The National Bank Act
B. The National Currency Act
C. The Bank Secrecy Act
D. The Real Estate Settlement Procedures Act


C. The Bank Secrecy Act

Explanation:

The Bank Secrecy Act (BSA) requires mortgage lenders and other financial institutions to adopt anti-money laundering (AML) policies to detect and prevent money laundering and other financial crimes. Under BSA, lenders must:

Implement a written AML compliance program.

Report suspicious activities using Suspicious Activity Reports (SARs).

Maintain records and report large cash transactions to prevent illegal financial activities such as money laundering and fraud.

Other laws mentioned:

The National Bank Act and National Currency Act focus on the regulation of national banks.

The Real Estate Settlement Procedures Act (RESPA) addresses settlement and disclosure requirements but does not cover AML rules.

References:

Bank Secrecy Act (BSA)

Financial Crimes Enforcement Network (FinCEN) guidelines


Question # 5
According to the Equal Credit Opportunity Act (ECOA), which of the following terms is defined as a refusal to grant credit based on the requested loan terms, an unfavorable change in loan terms, or a termination of an account/application?
A. Adverse action
B. Account closure
C. Credit closure
D. Denial of credit


A. Adverse action

Explanation:

Under the Equal Credit Opportunity Act (ECOA), the term adverse action is defined as a refusal to grant credit based on the requested loan terms, an unfavorable change in loan terms, or a termination of an account/application. This can include:

Denying a credit application.

Offering credit on terms different from those requested.

Closing an existing credit account.

Lenders must provide a formal notice of adverse action, explaining the reasons for the denial or change in terms, to comply with ECOA’s requirements for transparency and fairness.

Other options:

Account closure (B) and credit closure (C) are not specific ECOA terms.

Denial of credit (D) is a form of adverse action but does not cover all situations like a change in loan terms.

References:

Equal Credit Opportunity Act (ECOA), 15 U.S.C. §1691(d)

Regulation B (12 CFR Part 1002)


Question # 6
The debt-to-income analysis should assess a borrower's total monthly housing related payments as a percentage of the:
A. net monthly income
B. gross monthly income.
C. taxable income.
D. loan amount.


B. gross monthly income.

Explanation:

In a debt-to-income (DTI) analysis, the borrower’s total monthly housing-related payments (including principal, interest, taxes, insurance, and any homeowner association fees) are assessed as a percentage of their gross monthly income. Lenders use the gross income, which is the borrower’s income before taxes and deductions, to determine affordability and creditworthiness.

Net monthly income (A) and taxable income (C) are not used in standard DTI calculations.

The loan amount (D) is unrelated to the DTI calculation.

References:

Fannie Mae and Freddie Mac Guidelines on DTI ratios

CFPB Guidelines on Ability-to-Repay and DTI


Question # 7
A mortgage loan originator (MLO) cannot be approved for licensure if the applicant has:
A. been convicted of a felony within the past seven years.
B. had an MLO license suspended in any governmental jurisdiction.
C. taken and failed the SAFE MLO National Test three times within the last year.
D. never been licensed or registered as an MLO in any governmental jurisdiction.


A. been convicted of a felony within the past seven years.

Explanation:

Under the SAFE Act, a mortgage loan originator (MLO) cannot be approved for licensure if they have been convicted of a felony within the past seven years, or at any time if the felony involved fraud, dishonesty, breach of trust, or money laundering. This provision ensures that individuals with serious criminal backgrounds are not permitted to operate as MLOs.

Other factors, such as failing the SAFE MLO test (C) or having never been licensed (D), do not automatically disqualify an applicant from obtaining an MLO license.

References:

SAFE Act, 12 USC §5104

NMLS Licensing Requirements


Question # 8
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


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NMLS MLO Exam Dumps

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

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