Ethics and Fraud Prevention Flashcards

A borrower asks their loan officer to list a higher purchase price on the sales contract so they can receive extra cash at closing. This is an example of:

Answer: Sales price inflation fraud

Inflating the sales price to extract additional cash at closing is sales price inflation fraud, a common mortgage fraud scheme.

Under RESPA, a mortgage broker who receives an unearned fee for referring a borrower to a title company is guilty of:

Answer: A kickback violation

RESPA Section 8 prohibits kickbacks — payments for referrals where no services were actually rendered.

Which federal law requires mortgage originators to report suspicious activity that may indicate money laundering?

Answer: Bank Secrecy Act

The Bank Secrecy Act requires financial institutions and their employees to file Suspicious Activity Reports (SARs) for transactions that may involve money laundering.

A borrower who has poor credit uses a relative with excellent credit to apply for the mortgage, intending for the relative to have no ownership stake. This is called a:

Answer: Straw buyer scheme

A straw buyer scheme involves using someone else's identity and credit profile to obtain a loan for a property the straw buyer will not actually own or occupy.

An appraiser who consistently provides inflated valuations in exchange for continued business from a lender is violating:

Answer: USPAP and ethical standards

Providing inflated appraisals for repeat business violates the Uniform Standards of Professional Appraisal Practice (USPAP), which requires appraiser independence.

Which practice involves convincing elderly homeowners to repeatedly refinance their mortgages to generate fees while depleting their home equity?

Answer: Equity stripping through serial refinancing

Serial refinancing targeting equity-rich borrowers — especially seniors — to generate origination fees while draining equity is a predatory and fraudulent practice.

A loan officer who processes a loan application knowing the stated income is fabricated is:

Answer: Potentially criminally liable for mortgage fraud

Knowingly processing a fraudulent application makes the loan officer a participant in mortgage fraud, which carries criminal penalties under federal law.

A scheme where a property is bought and resold quickly at an artificially inflated price, often with a complicit appraiser, is known as:

Answer: Illegal property flipping

Illegal property flipping involves purchasing a property and quickly reselling it at a fraudulently inflated price, often using a corrupt appraisal.

When a borrower obtains multiple mortgages on the same property from different lenders simultaneously without disclosing this to any lender, it is called:

Answer: Concurrent fraud / simultaneous closing fraud

Obtaining multiple loans on the same property from different lenders at the same time without disclosure is concurrent fraud or simultaneous closing fraud.

Under the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, MLOs are required to disclose which of the following on loan documents?

Answer: Their NMLS unique identifier

The SAFE Act requires mortgage loan originators to include their NMLS unique identifier on all loan documents and advertising.

A loan officer who steers a creditworthy minority borrower to a higher-cost subprime loan rather than a prime loan for which they qualify is engaging in:

Answer: Reverse redlining / predatory targeting

Steering qualified minority borrowers to more expensive products based on race or national origin is reverse redlining, a form of illegal predatory lending.

Which document must a borrower sign at closing acknowledging the property will be their primary residence, making misrepresentation of occupancy a federal offense?

Answer: Occupancy affidavit / certification

The occupancy affidavit or certification signed at closing affirms owner-occupancy intent; falsifying it constitutes federal mortgage fraud.

A title company employee who secretly places a second mortgage lien on a property to steal equity from the homeowner is committing:

Answer: Deed theft / title fraud

Fraudulently placing unauthorized liens or transferring title without the owner's knowledge is deed theft or title fraud, a serious criminal offense.

Which federal agency primarily investigates mortgage fraud cases involving federally insured loans?

Answer: HUD Office of Inspector General

The HUD Office of Inspector General (OIG) is the primary federal investigative agency for fraud involving FHA-insured and other HUD-backed loans.

A borrower who claims a rental property as their primary residence to obtain a lower interest rate is committing:

Answer: Occupancy fraud

Misrepresenting a non-owner-occupied investment property as a primary residence to obtain better loan terms is occupancy fraud.

In a 'builder bailout' scheme, a real estate developer secretly provides down payment funds to buyers while falsely certifying the buyer provided funds themselves. This inflates the:

Answer: Loan-to-value ratio beyond what is disclosed to the lender

Builder bailout schemes hide the true source of down payment funds, causing the lender to underestimate the real LTV ratio and assume more risk than disclosed.

A mortgage professional who discovers a colleague is submitting fraudulent loan files should first:

Answer: Report the activity through proper channels such as compliance or a SAR filing

Mortgage professionals have a legal and ethical duty to report known fraud through proper channels, including internal compliance and Suspicious Activity Reports.

Which type of fraud involves a criminal assuming a homeowner's identity to illegally transfer property title and then obtain a mortgage?

Answer: Identity theft / deed fraud

Identity theft combined with deed fraud occurs when a criminal uses a stolen identity to forge a deed transfer and subsequently extract equity through fraudulent loans.

The Home Mortgage Disclosure Act (HMDA) helps detect potential discriminatory lending practices primarily by requiring lenders to:

Answer: Collect and report demographic data on loan applicants

HMDA requires lenders to collect and report applicant demographic data, enabling regulators to identify patterns of potential lending discrimination.

A mortgage loan originator who charges a borrower an undisclosed fee and pockets it personally is committing:

Answer: Embezzlement and an undisclosed fee violation

Charging a borrower an undisclosed fee and retaining it personally constitutes embezzlement and violates RESPA's requirement for transparent fee disclosure.