SAFE Ethical Practices & Fair Lending 3 — Questions and Answers
Question 1: The Community Reinvestment Act (CRA) was enacted to encourage financial institutions to:
- Reduce interest rates for first-time homebuyers
- Meet the credit needs of all communities, including low- and moderate-income areas (Correct answer)
- Increase competition among mortgage lenders
- Standardize mortgage application forms nationwide
Correct answer: Meet the credit needs of all communities, including low- and moderate-income areas
The CRA encourages depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods.
Question 2: An MLO discovers that a borrower's loan file contains false information that the borrower submitted. The MLO's ethical obligation is to:
- Proceed with the loan since the MLO did not create the false information
- Inform the borrower privately but submit the application anyway
- Refuse to process the application and report the fraud as required (Correct answer)
- Correct the information without notifying the lender
Correct answer: Refuse to process the application and report the fraud as required
MLOs have an ethical and legal obligation to refuse to process applications containing false information and to report mortgage fraud as required by their employer and applicable laws.
Question 3: Under the concept of disparate impact in fair lending, a lender can be found liable for discrimination even without discriminatory intent when:
- All applicants are treated identically regardless of outcome
- A neutral policy disproportionately affects members of a protected class without business justification (Correct answer)
- The lender serves a predominantly minority community
- A borrower from a protected class is denied a loan
Correct answer: A neutral policy disproportionately affects members of a protected class without business justification
Disparate impact occurs when a facially neutral policy disproportionately affects a protected class and the lender cannot demonstrate business necessity.
Question 4: Which of the following is an example of disparate treatment in mortgage lending?
- Requiring all applicants to have a minimum credit score of 620
- Charging higher interest rates to African American applicants than to similarly qualified white applicants (Correct answer)
- Using an automated underwriting system for all applications
- Denying loans in flood zones due to insurance requirements
Correct answer: Charging higher interest rates to African American applicants than to similarly qualified white applicants
Disparate treatment occurs when similarly qualified applicants are treated differently based on a protected characteristic, such as race.
Question 5: An MLO's duty of good faith and fair dealing with clients requires the MLO to:
- Always recommend the loan product with the highest yield spread premium
- Disclose all material information relevant to the borrower's loan decision (Correct answer)
- Avoid recommending any government loan programs
- Refer all clients to affiliated service providers only
Correct answer: Disclose all material information relevant to the borrower's loan decision
The duty of good faith requires MLOs to disclose all material information that could affect a borrower's ability to make an informed decision about their mortgage loan.
Question 6: Under the Dodd-Frank Act's anti-steering provisions, MLOs are prohibited from receiving compensation that varies based on:
- The loan amount
- The loan terms, such as interest rate or fees (Correct answer)
- The borrower's state of residence
- The property type
Correct answer: The loan terms, such as interest rate or fees
Dodd-Frank prohibits MLO compensation that varies based on the terms of the loan, such as interest rate, to prevent steering borrowers into higher-cost products.
Question 7: A loan originator who uses a borrower's loan as a vehicle to generate excessive fees through repeated refinancing without benefit to the borrower is engaging in:
- Blockbusting
- Loan flipping or churning (Correct answer)
- Predatory pricing
- Yield spread manipulation
Correct answer: Loan flipping or churning
Loan flipping (churning) involves repeatedly refinancing a borrower's loan primarily to generate fees, without providing the borrower a net tangible benefit.
SAFE Ethical Practices & Fair Lending 3
The Community Reinvestment Act (CRA) was enacted to encourage financial institutions to: