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.
NMLS Mortgage Fraud Prevention and Risk Management 2
What does 'appraisal fraud' involve in a mortgage transaction?