NMLS Professional Ethics and Conduct Questions and Answers — Questions and Answers
Question 1: A mortgage advertisement prominently displays a very low "fixed" monthly payment. In the fine print, it is revealed this payment is for an interest-only period of one year on an adjustable-rate mortgage, after which the payment will substantially increase. This practice is most likely to be considered a violation of what?
- The Home Mortgage Disclosure Act (HMDA)
- The Real Estate Settlement Procedures Act (RESPA)
- The prohibition against Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) (Correct answer)
- The Fair Housing Act
Correct answer: The prohibition against Unfair, Deceptive, or Abusive Acts or Practices (UDAAP)
UDAAP specifically targets misleading representations that can cause consumer harm. Advertising a low payment without clearly and conspicuously disclosing the material terms of the loan, such as the fact that it is an interest-only, adjustable-rate product, is a classic example of a deceptive practice intended to mislead the consumer.
Question 2: While reviewing a loan application, a mortgage loan originator notices that the social security number on the applicant's driver's license does not match the SSN on their application and credit report. According to the Red Flags Rule, what is the MLO's most appropriate immediate action?
- Report the applicant to the local police department for fraud.
- Approve the loan but charge a higher interest rate to cover the risk.
- Contact the applicant to resolve the discrepancy and gather clarifying documentation. (Correct answer)
- Ignore the discrepancy as it is likely a typo.
Correct answer: Contact the applicant to resolve the discrepancy and gather clarifying documentation.
The FACTA Red Flags Rule requires financial institutions to develop and implement a written Identity Theft Prevention Program to detect, prevent, and mitigate identity theft. A suspicious piece of personally identifying information is a defined "red flag." The appropriate response is to investigate the red flag by contacting the customer to resolve the discrepancy before proceeding.
Question 3: An MLO is working on a refinance for a homeowner who needs the property to appraise at a specific value to qualify for the loan. The MLO calls the appraiser and says, "We really need the value to come in at or above $350,000 for this deal to work." This statement is:
- A permissible communication to ensure the appraiser understands the loan parameters.
- An unethical and illegal attempt to influence or coerce an appraiser, violating appraiser independence rules. (Correct answer)
- A standard business practice to help streamline the underwriting process.
- Only a violation if the MLO offers the appraiser a financial incentive.
Correct answer: An unethical and illegal attempt to influence or coerce an appraiser, violating appraiser independence rules.
The Truth in Lending Act (TILA) and its Appraiser Independence Requirements (AIR) prohibit any person with an interest in the transaction from attempting to influence the appraiser's independent judgment. Communicating a target value needed to make the loan work is a direct attempt to influence the outcome and is a serious violation.
Question 4: Which of the following statements made by a mortgage loan originator to a potential borrower would be a violation of professional conduct standards under the SAFE Act?
- "Based on your qualifications, I can offer you a loan program with a 30-year fixed rate."
- "Our company is an FHA-approved lender, which means we are authorized to originate FHA-insured loans."
- "It is important that you provide me with complete and accurate financial information for your application."
- "I can guarantee that your loan will be approved within 24 hours without any documentation." (Correct answer)
Correct answer: "I can guarantee that your loan will be approved within 24 hours without any documentation."
The SAFE Act prohibits MLOs from engaging in any unfair or deceptive practices, which includes making false or deceptive promises. Guaranteeing loan approval, especially within an unrealistic timeframe and without required documentation, is a significant violation of ethical and legal standards.
Question 5: A borrower tells their MLO that they earn extra cash income from a side job but do not declare it on their taxes. The borrower asks the MLO to include this income on the application to help them qualify for a larger loan. What is the MLO's ethical and legal obligation?
- Include the income but make a note in the file that it is undocumented.
- Advise the borrower that only documented and verifiable income can be used for qualification. (Correct answer)
- Suggest the borrower create a fake document to support the income claim.
- Include the income since the borrower stated it was true.
Correct answer: Advise the borrower that only documented and verifiable income can be used for qualification.
Knowingly making any material misstatement or misrepresentation on a loan application constitutes mortgage fraud. An MLO has an ethical and legal duty to ensure all information used for underwriting is accurate and verifiable. Including undocumented income would be participating in fraud. The correct action is to inform the borrower that all income must be properly documented and verifiable.
Question 6: An MLO is working with a client on a purchase transaction. The client's real estate agent asks the MLO for a copy of the client's credit report to "see what they're working with." How should the MLO respond?
- Provide the credit report, as the agent is part of the transaction.
- Refuse the request, explaining that sharing nonpublic personal information with unauthorized third parties violates the Gramm-Leach-Bliley Act (GLBA). (Correct answer)
- Ask the client for verbal permission to share the report with the agent.
- Provide only the credit scores, but not the full report.
Correct answer: Refuse the request, explaining that sharing nonpublic personal information with unauthorized third parties violates the Gramm-Leach-Bliley Act (GLBA).
The Gramm-Leach-Bliley Act (GLBA) requires financial institutions to protect consumers' nonpublic personal information (NPI). A credit report is considered NPI and can only be shared with third parties for specific, legally permissible purposes after providing the consumer with a privacy notice and the opportunity to opt-out. Sharing it with a real estate agent without proper authorization is a violation of the consumer's privacy rights under GLBA.
NMLS Professional Ethics and Conduct Questions and Answers
A mortgage advertisement prominently displays a very low "fixed" monthly payment.
In the fine print, it is revealed this payment is for an interest-only period of one year on an adjustable-rate mortgage, after which the payment will substantially increase.
This practice is most likely to be considered a violation of what?