Mortgage Ethics and Fraud Prevention — Questions and Answers
Question 1: 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:
- Equity stripping
- Property flipping
- Sales price inflation fraud (Correct answer)
- Straw buyer scheme
Correct 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.
Question 2: Under RESPA, a mortgage broker who receives an unearned fee for referring a borrower to a title company is guilty of:
- An affiliated business arrangement violation
- A kickback violation (Correct answer)
- A yield spread premium abuse
- A TILA disclosure error
Correct answer: A kickback violation
RESPA Section 8 prohibits kickbacks — payments for referrals where no services were actually rendered.
Question 3: Which federal law requires mortgage originators to report suspicious activity that may indicate money laundering?
- TILA
- RESPA
- Bank Secrecy Act (Correct answer)
- ECOA
Correct 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.
Question 4: 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:
- Co-borrower arrangement
- Straw buyer scheme (Correct answer)
- Silent second scheme
- Nominee loan
Correct 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.
Question 5: An appraiser who consistently provides inflated valuations in exchange for continued business from a lender is violating:
- Only state licensing laws
- USPAP and ethical standards (Correct answer)
- TILA only
- RESPA affiliated business rules only
Correct answer: USPAP and ethical standards
Providing inflated appraisals for repeat business violates the Uniform Standards of Professional Appraisal Practice (USPAP), which requires appraiser independence.
Question 6: Which practice involves convincing elderly homeowners to repeatedly refinance their mortgages to generate fees while depleting their home equity?
- Redlining
- Equity stripping through serial refinancing (Correct answer)
- Silent second fraud
- Double selling
Correct 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.
Question 7: A loan officer who processes a loan application knowing the stated income is fabricated is:
- Only liable if the loan defaults
- Potentially criminally liable for mortgage fraud (Correct answer)
- Protected if the borrower signed the application
- Only required to report the borrower to authorities
Correct 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.
Question 8: A scheme where a property is bought and resold quickly at an artificially inflated price, often with a complicit appraiser, is known as:
- Short sale fraud
- Illegal property flipping (Correct answer)
- Deed theft
- Double escrow fraud
Correct 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.
Question 9: When a borrower obtains multiple mortgages on the same property from different lenders simultaneously without disclosing this to any lender, it is called:
- Concurrent fraud / simultaneous closing fraud (Correct answer)
- Double application
- Loan stacking
- Identity theft fraud
Correct 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.
Question 10: Under the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, MLOs are required to disclose which of the following on loan documents?
- Their personal tax ID
- Their NMLS unique identifier (Correct answer)
- Their state bar number
- Their employer's FDIC certificate
Correct answer: Their NMLS unique identifier
The SAFE Act requires mortgage loan originators to include their NMLS unique identifier on all loan documents and advertising.
Question 11: 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:
- Legal product placement
- Reverse redlining / predatory targeting (Correct answer)
- HMDA compliance
- Yield spread optimization
Correct 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.
Question 12: Which document must a borrower sign at closing acknowledging the property will be their primary residence, making misrepresentation of occupancy a federal offense?
- HUD-1 Settlement Statement
- Occupancy affidavit / certification (Correct answer)
- Good Faith Estimate
- Loan Estimate
Correct answer: Occupancy affidavit / certification
The occupancy affidavit or certification signed at closing affirms owner-occupancy intent; falsifying it constitutes federal mortgage fraud.
Question 13: A title company employee who secretly places a second mortgage lien on a property to steal equity from the homeowner is committing:
- Deed theft / title fraud (Correct answer)
- Equity stripping through legitimate means
- A permitted silent second
- A RESPA settlement violation
Correct 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.
Question 14: Which federal agency primarily investigates mortgage fraud cases involving federally insured loans?
- CFPB
- HUD Office of Inspector General (Correct answer)
- FTC
- FDIC
Correct 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.
Question 15: A borrower who claims a rental property as their primary residence to obtain a lower interest rate is committing:
- A minor disclosure oversight
- Occupancy fraud (Correct answer)
- An appraisal violation
- A TILA breach only
Correct answer: Occupancy fraud
Misrepresenting a non-owner-occupied investment property as a primary residence to obtain better loan terms is occupancy fraud.
Question 16: 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:
- Loan-to-value ratio beyond what is disclosed to the lender (Correct answer)
- Property's assessed tax value
- The borrower's credit score
- The title insurance premium
Correct 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.
Question 17: A mortgage professional who discovers a colleague is submitting fraudulent loan files should first:
- Confront the colleague privately and give them a chance to correct it
- Report the activity through proper channels such as compliance or a SAR filing (Correct answer)
- Ignore it as it is not their responsibility
- Wait to see if the loans default before acting
Correct 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.
Question 18: Which type of fraud involves a criminal assuming a homeowner's identity to illegally transfer property title and then obtain a mortgage?
- Short sale fraud
- Equity stripping
- Identity theft / deed fraud (Correct answer)
- Silent second scheme
Correct 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.
Question 19: The Home Mortgage Disclosure Act (HMDA) helps detect potential discriminatory lending practices primarily by requiring lenders to:
- Charge uniform rates to all borrowers
- Collect and report demographic data on loan applicants (Correct answer)
- Limit their geographic service area
- Provide free credit counseling
Correct 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.
Question 20: A mortgage loan originator who charges a borrower an undisclosed fee and pockets it personally is committing:
- A permitted origination practice
- Embezzlement and an undisclosed fee violation (Correct answer)
- A yield spread premium adjustment
- A routine processing error
Correct 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.
Question 21: When evaluating a mortgage application, a loan officer who ignores clear signs of fraudulent documentation to close the loan is said to have practiced:
- Willful blindness / deliberate ignorance (Correct answer)
- Reasonable reliance
- Due diligence
- Prudent underwriting
Correct answer: Willful blindness / deliberate ignorance
Deliberately ignoring red flags of fraud to avoid knowledge is called willful blindness, which does not protect a mortgage professional from criminal liability.
Mortgage Ethics and Fraud Prevention
A borrower asks their loan officer to list a higher purchase price on the sales contract so they can receive extra cash at closing.
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