NMLS Mortgage Fraud Prevention and Risk Management 2 — Questions and Answers
Question 1: What does 'appraisal fraud' involve in a mortgage transaction?
- Deliberately inflating or deflating a property's appraised value to benefit a party in the transaction (Correct answer)
- Using an unlicensed appraiser to evaluate a property
- Failing to disclose known structural defects to the appraiser
- Hiring a home inspector in place of a licensed appraiser
Correct answer: Deliberately inflating or deflating a property's appraised value to benefit a party in the transaction
Appraisal fraud intentionally misrepresents a property's value—either to help a borrower qualify for a larger loan or to deceive a lender about the actual collateral securing the mortgage.
Question 2: 'Equity stripping' is a predatory mortgage fraud scheme in which:
- Excessive fees and charges are loaded onto a loan, systematically depleting the borrower's home equity (Correct answer)
- A lender improperly seizes equity during a foreclosure sale
- A borrower takes out an undisclosed second mortgage on the property
- A property's equity is transferred to a shell company without fair compensation
Correct answer: Excessive fees and charges are loaded onto a loan, systematically depleting the borrower's home equity
Equity stripping involves predatory lenders piling on fees and refinancing costs that consume a homeowner's accumulated equity, leaving them financially worse off.
Question 3: Under the Bank Secrecy Act, Currency Transaction Reports (CTRs) must be filed for cash transactions exceeding:
- $10,000 (Correct answer)
- $5,000
- $25,000
- $50,000
Correct answer: $10,000
Financial institutions must file a CTR for any cash transaction exceeding $10,000 in a single business day to help federal agencies detect money laundering.
Question 4: In mortgage fraud, 'chunking' refers to:
- Convincing investors to purchase multiple properties simultaneously using fraudulent loans and concealed kickbacks (Correct answer)
- Breaking large cash deposits into smaller amounts to avoid reporting thresholds
- Bundling mortgages together into mortgage-backed securities
- Dividing a parcel of land into smaller lots before sale
Correct answer: Convincing investors to purchase multiple properties simultaneously using fraudulent loans and concealed kickbacks
Chunking involves a perpetrator recruiting investors to buy multiple properties at once, using inflated appraisals and hidden kickbacks, leaving investors holding properties worth far less than the loan amounts.
Question 5: Which action constitutes 'structuring' under federal anti-money laundering laws?
- Breaking up large cash transactions into smaller amounts specifically to avoid the $10,000 CTR reporting threshold (Correct answer)
- Creating a complex loan structure to minimize the borrower's interest payments
- Organizing a mortgage into multiple tranches for the secondary market
- Dividing loan repayment responsibilities between co-borrowers
Correct answer: Breaking up large cash transactions into smaller amounts specifically to avoid the $10,000 CTR reporting threshold
Structuring (also called 'smurfing') is the illegal act of deliberately keeping transactions below reporting thresholds to avoid Currency Transaction Report filing requirements.
Question 6: Which federal law makes it a crime to use interstate wire communications in a scheme to defraud mortgage lenders?
- The Wire Fraud Statute (18 U.S.C. § 1343) (Correct answer)
- The Truth in Lending Act (TILA)
- The Real Estate Settlement Procedures Act (RESPA)
- The Dodd-Frank Wall Street Reform and Consumer Protection Act
Correct answer: The Wire Fraud Statute (18 U.S.C. § 1343)
The Wire Fraud Statute makes it a federal felony to use wire communications—including phone, email, or internet—as part of any scheme to defraud, including mortgage fraud.
Question 7: What is a 'builder bailout' mortgage fraud scheme?
- A builder inflates sales prices and provides secret concessions to buyers, deceiving lenders about the property's true market value (Correct answer)
- A legitimate government program assisting builders during economic recessions
- A scheme where builders deliberately default on construction loans to collect insurance
- A bank program allowing builders to exchange unsold inventory for credit
Correct answer: A builder inflates sales prices and provides secret concessions to buyers, deceiving lenders about the property's true market value
In a builder bailout, developers sell overpriced properties with concealed financial incentives to straw buyers, causing lenders to believe the collateral is worth significantly more than its actual value.
