Mortgage Loan Originator MLO 2 — Questions and Answers
Question 1: Under RESPA, a 'controlled business arrangement' (now called an 'affiliated business arrangement') requires the lender to provide the borrower with a disclosure at or before the time of referral. What must this disclosure include?
- The nature of the relationship between the providers and an estimate of the second provider's charges (Correct answer)
- Only the name and address of the affiliated business
- A guarantee that the borrower will receive a lower rate by using the affiliated business
- The lender's profit margin from the arrangement
Correct answer: The nature of the relationship between the providers and an estimate of the second provider's charges
RESPA requires affiliated business arrangement disclosures to describe the relationship between providers and give an estimate of charges so borrowers can make informed decisions.
Question 2: A borrower's loan application is denied due to information found in a consumer report. Under the Fair Credit Reporting Act (FCRA), which action must the lender take?
- Provide an adverse action notice identifying the consumer reporting agency used (Correct answer)
- Destroy the consumer report immediately after denial
- Notify the credit bureau to remove the negative item
- Only verbally inform the borrower of the reason for denial
Correct answer: Provide an adverse action notice identifying the consumer reporting agency used
FCRA requires lenders to send an adverse action notice that identifies the consumer reporting agency whose report was used so the borrower can obtain a free copy and dispute inaccuracies.
Question 3: Which of the following loan types is EXEMPT from RESPA coverage?
- A loan secured by a 25-acre farm property used primarily for agricultural purposes (Correct answer)
- A refinance of a primary residence
- A home equity line of credit on a condominium
- A purchase loan on a second home
Correct answer: A loan secured by a 25-acre farm property used primarily for agricultural purposes
RESPA exempts loans on properties of 25 acres or more that are used primarily for agricultural purposes from its coverage requirements.
Question 4: The Homeowners Protection Act (HPA) requires automatic cancellation of private mortgage insurance (PMI) when the borrower's loan balance reaches what percentage of the original property value?
- 78% (Correct answer)
- 80%
- 85%
- 90%
Correct answer: 78%
Under the HPA, lenders must automatically cancel PMI when the loan-to-value ratio reaches 78% of the original value based on the amortization schedule, provided the borrower is current on payments.
Question 5: A borrower asks an MLO about a 5/1 ARM. Which statement best describes how this product works?
- The rate is fixed for 5 years, then adjusts annually based on an index plus a margin (Correct answer)
- The rate adjusts every 5 months for the first year, then is fixed
- The borrower has 5 rate cap options to choose from each year
- The rate is fixed for 1 year, then adjusts every 5 years
Correct answer: The rate is fixed for 5 years, then adjusts annually based on an index plus a margin
A 5/1 ARM has a fixed interest rate for the first 5 years and then adjusts once per year based on a specified index plus a margin, subject to periodic and lifetime caps.
Question 6: Under TILA, a borrower's right of rescission on a refinance of their primary residence expires how many business days after the latest of consummation, delivery of the rescission notice, or delivery of the required disclosures?
- 3 business days (Correct answer)
- 5 business days
- 7 business days
- 10 business days
Correct answer: 3 business days
TILA grants borrowers a 3-business-day right of rescission on non-purchase, non-construction loans secured by their principal dwelling, beginning from the latest of three triggering events.
Question 7: Which type of income is LEAST likely to be considered stable and recurring for qualifying purposes on a conventional loan?
- Lottery winnings received as a lump sum (Correct answer)
- Base salary from a 2-year salaried position
- Self-employment income averaged over 2 years
- Social Security retirement benefits
Correct answer: Lottery winnings received as a lump sum
Lottery winnings paid as a lump sum are not considered recurring income; only annuitized lottery payments lasting at least 3 years may be counted in underwriting.
Mortgage Loan Originator MLO 2
Under RESPA, a 'controlled business arrangement' (now called an 'affiliated business arrangement') requires the lender to provide the borrower with a disclosure at or before the time of referral.
What must this disclosure include?