1/27/20

Mortgage Loan Originator (MLO)

SAFE Act Manual
7th Edition (January 2020)

Copyright© 2020, by Affinity Real Estate & Mortgage Training

ISBN-10: 0578429993
ISBN-13: 978-0578429991
1/27/2020

All rights reserved. No part of this book may be reproduced, stored in a retrieval
system or transcribed in any form or by any means (electronic, mechanical, photocopy,
recording or otherwise) without the prior written permission of Affinity Real Estate
& Mortgage Training.

A considerable amount of care has been taken to provide accurate and timely
information. However, any ideas, suggestions, opinions or general knowledge
presented in this text are those of the author and other contributors, and are subject to
local, state and federal laws and regulations, court cases, and any revisions of the same.
The reader is encouraged to consult legal counsel concerning any points of law. This
book should not be used as an alternative to competent legal counsel.

Printed in the United States of America.

All inquiries should be addressed to:

Affinity Real Estate & Mortgage Training

10070 Rosecrans Blvd
Bellflower, CA 90706
(800) 991-6097 Ext 1
www.mlotrainingacademy.com
artricia@affinityreservices.com

1|Page
 Preface
The mortgage industry has radically changed since the implementation of the SAFE Act, a
component of the Housing and Economic Recovery Act signed into law in 2008. The industry
prior to the SAFE Act was generally unregulated on a national basis and many states had limited
regulatory control over the individuals involved in residential mortgage lending. The SAFE Act
mandated that a national registry be established for individuals and companies engaged in the
business of residential mortgage lending. The Act also requires certain individuals to become
state licensed and meet certain requirements before actively engaging in the activities of taking
loan applications and negotiating terms and rates for compensation, an activity referred to as
“loan origination”. Individuals that perform these activities are defined as Mortgage Loan
Originators (MLO).

Education and testing are two of the components that are required to meet the state MLO
licensing requirements. Affinity Real Estate & Mortgage Training, is an approved Nationwide
Mortgage Licensing System (NMLS) course provider who has created a workbook covering
residential mortgage lending. The workbook is approved for distribution and use as a certified
document for pre-license 20-hour SAFE comprehensive training by the Nationwide Mortgage
Licensing System.

This workbook “Mortgage Loan Originator (MLO) SAFE Act Manual” provides a comprehensive
review of the residential mortgage universe and a detailed analysis of the information required to
prepare for the national MLO examination. The authors of the workbook are industry
professionals with years of prior and current experience to ensure that the content is relevant,
comprehensive and targeted. The information presented in this workbook comes from numerous
sources including federal law publications, industry publications, document review, interviews
and the extensive experience of the authors.

Readers of this workbook will receive a comprehensive overview of the requirements of

residential mortgage lending, acquire the necessary tools to navigate world of mortgage loan
origination and receive the necessary information to prepare for the national MLO exam. The
authors have designed the workbook consistent with the national exam outline to ensure the
effective transfer of learning for the reader.

2|Page
 Rules of Conduct for NMLS Approved
Pre-Licensure (PE) and Continuing Education (CE) Courses
The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), requires that state-licensed MLOs complete
pre-licensing (PE) and continuing education (CE) courses as a condition to be licensed. The SAFE Act also requires that
all education completed as a condition for state licensure be NMLS approved. Since 2009 NMLS has established course
design, approval, and delivery standards which NMLS approved course providers are required to meet. To further
ensure students meet the education requirements of the SAFE Act, NMLS has established a Rules of Conduct (ROC). The
ROC, which have been approved by the NMLS Mortgage Testing & Education Board, and the NMLS Policy Committee,
both of which are comprised of state regulators, are intended to stress that NMLS approved education be delivered and
completed with integrity.

Rules of Conduct
As an individual completing either pre-licensure education (PE) or continuing education (CE), I agree to abide by the
following rules of conduct:
1. I attest that I am the person who I say I am and that all my course registration information is accurate.
2. I acknowledge that I will be required to show a current government issued form of identification prior to, and
during the course, and/or be required to answer questions that are intended to verify/validate my identity prior
to, and during the course.
3. I understand that the SAFE Act and state laws require me to spend a specific amount of time in specific subject
areas. Accordingly, I will not attempt to circumvent the requirements of any NMLS approved course.
4. I will not divulge my login ID or password or other login credential(s) to another individual for any online course.
5. I will not seek or attempt to seek outside assistance to complete the course.
6. I will not give or attempt to give assistance to any person who is registered to take an NMLS approved pre-
licensure or continuing education course.
7. I will not engage in any conduct that creates a disturbance or interferes with the administration of the course or
other students’ learning.
8. I will not engage in any conduct that would be contrary to good character or reputation, or engage in any
behavior that would cause the public to believe that I would not operate in the mortgage loan business lawfully,
honestly or fairly.
9. I will not engage in any conduct that is dishonest, fraudulent, or would adversely impact the integrity of the
course(s) I am completing and the conditions for which I am seeking licensure or renewal of licensure.
I understand that NMLS approved course providers are not authorized by NMLS to grant exceptions to these rules and
that I alone am responsible for my conduct under these rules. I also understand that these rules are in addition to
whatever applicable rules my course provider may have.
I understand that the course provider or others may report any alleged violations to NMLS and that NMLS may conduct
an investigation into alleged violations and that it may report alleged violations to the state(s) in which I am seeking
licensure or maintain licenses, or to other states.
“I understand the CSBS Privacy Notice is applicable to these Rules of Conduct. The CSBS Privacy Notice can be
found
here: https://nationwidelicensingsystem.org/about/policies/NMLS%20Document%20Library/CSBS%20External%2
0Privacy%20Notice-6.18%20(1).pdf “

I further understand that the results of any investigation into my alleged violation(s) may subject me to disciplinary
actions by the state(s) or the State Regulatory Registry (SRR), including removal of any course from my NMLS record,
and/or denial or revocation of my license(s).

Signature Print Name Date (mm/dd/yyyy)

3|Page
 Table of Contents

Preface 2
Rules of Conduct for NMLS Approved PE and CE Courses 3

1.0 OVERVIEW OF MORTGAGE LENDING 9

1.1 History/Introduction to the Mortgage Industry 9
1.2 Primary Market 9
1.3 Secondary Market 10
Chapter 1 Quiz 12

2.0 FEDERAL MORTGAGE-RELATED LAWS PART I 13

2.1 Consumer Financial Protection Bureau (CFPB) 13
2.2 The Dodd-Frank Act of 2008 14
2.3 Real Estate Settlement Procedures Act (RESPA) 15
2.4 Settlement Services 15
2.5 RESPA Covered Transactions 16
2.6 RESPA Section 6 – Mortgage Servicing & Mortgage Servicing Abuses 17
2.7 RESPA Section 8 - Prohibits kickbacks, fee-splitting & unearned fees 18
2.8 RESPA Section 9 - Title Insurance 18
2.9 RESPA Section 10 – Escrow Accounts 19
2.10 RESPA Disclosure Requirements 19
2.11 Application Definition 20
2.12 Disclosures Required within 3 days of Application 20
2.13 Disclosures Required “Before” Settlement 22
2.14 Disclosures Required “At” Settlement 23
2.15 Disclosures Required “After” Settlement 23
2.16 Other Disclosures Required by RESPA 23
2.17 The Truth in Lending Act (TILA) Reg Z 23
2.18 Closed-end Loans vs Open-End Loans 24
2.19 TILA Disclosure Requirements 25
2.20 Annual Percentage Rate (APR) 26
2.21 Finance Charges 26
2.22 APR Accuracy and Redisclosure 27
2.23 The Mortgage Disclosure Improvement Act (MDIA Act) 27
2.24 Right of Recession 28
2.25 TILA Advertising Disclosures 30
2.26 Prohibition in Advertising 31
2.27 Appraisal Prohibited Practices Under TILA 32
2.28 TILA Record Retention 32
2.29 Home Ownership & Equity Protection Act (HOEPA) 33
2.30 HOEPA, Section 32 HIGH-COST LOANS 34
2.31 HOEPA, Section 35 HIGH PRICED LOAS 35

4|Page
2.32Loan Originator Compensation Rule 35
2.33 Ability-to-Repay (ATR) Mortgage Rules 36
2.34 Qualified Mortgage 37
2.35 TILA-RESPA Integrated Disclosure Rule (TRID) 37
2.36 Loan Estimate 38
2.37 Delivering the Loan Estimate 39
2.38 Good Faith Estimate 40
2.39 Loan Estimate and “Business Days” 40
2.40 Valid Change in Circumstances 41
2.41 Tolerances 42
2.42 Revised Loan Estimates 44
2.43 Key Terms Appearing on the Loan Estimate 45
2.44 Closing Disclosure 45
2.45 Revised Closing Disclosure 46
Chapter 2 – End of Chapter Quiz 48

3.0 FEDERAL MORTGAGE-RELATED LAWS PART II 52

3.1 Equal Credit Opportunity Act (ECOA), Regulation B 52
3.2 ECOA & Marital Status 54
3.3 ECOA & Age 55
3.4 ECOA Disclosures & Notifications 55
3.5 Identifying Discrimination 57
3.6 Monitoring Information 58
3.7 Enforcement of ECOA 58
3.8 Civil Rights Act of 1866 58
3.9 Fair Housing Act 59
3.10 Fair Housing Violations 59
3.11 Fair Housing Act Discriminatory Practices 60
3.12 Fair Housing Advertising 60
3.13 HUD and VA Rule on Equal Access to Housing 61
3.14 Community Reinvestment Act 61
3.15 Home Mortgage Disclosure Act (HMDA) – Regulation C 61
3.16 HMDA Reporting 61
3.17 Homeowners Protection Act (HPA) 63
3.18 Fair Credit Reporting Act (FCRA) – Regulation V 63
3.19 Consumer Rights Under FCRA 64
3.20 CRA Obligations 65
3.21 Fair and Accurate Credit Transaction Act (FACTA) 65
3.22 FTC Red Flag Rules 67
3.23 Gramm-Leach-Bliley Act - Privacy and FTC Safeguard Rules 67
3.24 Mortgage Assistance Relief Services (MARS) Rule (REG O) 68
3.25 USA Patriot Act 69
3.26 Do Not Call (DNC) Regulations 70
3.27 Do Not Fax 71

5|Page
3.28 Bank Secrecy Act/Anti-Money Laundering (BSA/AML) 71
3.29 Electronic Signatures in Global & National Commerce Act (E-SIGN Act) 72
3.30 Mortgage Acts and Practices – Advertising (Regulation N) 72
Chapter 3 – End of Chapter Quiz 74

4.0 GENERAL MORTGAGE KNOWLEDGE 77

4.1 Conventional Loans (sometimes referred to as conforming) 77
4.2 Conventional/Non-Conforming Loans 78
4.3 Government (FHA, VA, USDA) 79
4.4 FHA Loans 79
4.5 FHA Guidelines and Benefits 79
4.6 FHA Mortgage Insurance Premium 80
4.7 FHA Total Scorecard 80
4.8 FHA Programs 81
4.9 VA Loans 81
4.10 VA Eligibility and Qualifications 82
4.11 VA Funding Fee 84
4.12 Restoring Entitlement 84
4.13 VA Loan Limits 85
4.14 VA Entitlement and Loan Guarantee 85
4.15 USDA Loans 86
4.16 Non-Traditional Mortgage Products (NMP) 87
4.17 Other Non-traditional Products 92
4.18 Income-Related Terms 93
4.19 Other Loan Terms 93
4.20 Financial Terms 94
4.21 General Terms 94
4.22 Statement on Subprime Lending 97
Chapter 4 Quiz 99

5.0 MORTGAGE LOAN ORIGINATION ACTIVITIES 103

5.1 Steps in Obtaining a Real Estate/Mortgage Loan 103
5.2 Pre-Qualification or Pre-Approval 104
5.3 Application Information and Requirements 104
5.4 Completing the Loan Application 106
5.5 Assets and Liabilities 111
5.6 Income Guidelines 113
5.7 IRS Form 4506-T 115
5.8 Credit Report 115
5.9 Tangible Net Benefit 116
5.10 Processing the Loan Application 116
5.11 Underwriting 117
5.12 Uniform Residential Appraisal Report 118
5.13 Appraisal Approaches 119

6|Page
5.14 Appraisal Violations 119
5.15 Loan Consummation (Loan Settlement) 120
5.16 Title and Closing 121
5.17 Closing/Settlement 122
5.18 Title Report 123
5.19 Title Insurance Coverage 124
5.20 Insurance: Hazard, Flood and Mortgage 125
5.21 Points: Discount Points and Origination Points 126
5.22 Yield Spread Premium (YSP) 126
5.23 Prepayment Penalties 127
Chapter 5 Quiz 128

6.0 FINANCIAL CALCULATIONS 129

6.1 Computing Gross Income 129
6.2 Periodic Interest 130
6.3 Payments (Principal, Interest, Taxes, and Insurance; Mortgage Insurance) 131
6.4 Calculating PMI Mortgage Insurance 133
6.5 Down Payment 133
6.6 Loan-to-Value (Loan-To-Value, Combined Loan-to-Value, Total Loan-to-Value) 134
6.7 Acquisition Cost 135
6.8 Discount Points (Buydowns) - Temporary and Fixed Interest 136
6.9 Permanent Buy Down 137
6.10 Temporary Buy Down 137
6.11 Basis Points (BPS) 138
6.12 Debt-to-Income Ratios 138
6.13 Maximum Mortgage Amount 139
6.14 Additional Math Practice Questions & Scenarios 140
6.15 General Math Questions 142
Chapter 6 Quiz 147
7.0 ETHICS AND FRAUD 148
7.1 Mortgage Fraud 149
7.2 Types of Mortgage Fraud 149
7.3 Mortgage Fraud Schemes 151
7.4 Illegal Flipping 154
7.5 Ethics and Appraisers 154
7.6 Predatory Lending 155
7.7 Typical Predatory Lending Practices 156
7.8 Red Flags of Mortgage Fraud 157
7.9 Equity Skimming 157
7.10 Other Unethical Practices 158
7.11 Unfair and Deceptive Practice 159
7.12 Ethical Behavior among Mortgage Participants 160
7.13 Fraud Enforcement 160
7.14 Scenarios to Consider 161

7|Page
Chapter 7 Quiz 164

8.0 Uniform State Content 166

8.1 The Safe Act (Title V of HERA) 166
8.2 State Regulatory Authority Responsibilities 167
8.3 Enforcement Authorities of the CFPB 168
8.4 Definitions and Documents 170
8.5 Persons Required to be Licensed 172
8.6 Taking an Application 173
8.7 “Offer” Or “Negotiate” - The Terms of a Loan 174
8.8 Other Exempt Activities: Not Requiring Licensure 175
8.9 License Qualifications 175
8.10 Education and Testing Requirements 177
8.11 License Renewal, Continuing Education & License Maintenance 177
8.12 Background Check and License Issuance 179
8.13 Surety Bond, Net Worth and State Fund 180
8.14 Unique Identifier 180
8.15 Compliance - Prohibited Conduct and Practices 181
8:16 MLO Transitional Authority 182
Quiz Chapter 8 183

Appendix 185
End of Chapter Quiz Answer Key 243
List of Acronyms Chart 254
Chronology of Federal Financing Laws 255
Calculating Income Chart 257
Loan Estimate 260
Closing Disclosure 263
Citation Reference List 268
Glossary 271
About the Author – Artricia Woods 293

8|Page
1.0 OVERVIEW OF MORTGAGE LENDING
Chapter Objective
Upon completion of this chapter, you will be able to:
● Understand the History of the Mortgage Industry
● Have a general understanding of the primary and secondary market
● This section will provide a general overview of mortgage lending and its history. We will also
discuss the primary and secondary market.
1.1 History/Introduction to the Mortgage Industry
The mortgage industry of the United States is a major financial sector. The federal government
created several programs, including government sponsored entities, to foster mortgage lending,
construction and encourage home ownership. These programs were created under the direction of
President Franklin Roosevelt and were designed to get the country back on track after the depression.
One of the first programs created under President Roosevelt was the creation of the Federal Housing
Administration (FHA). Prior to FHA, a borrower would typically have to make a large down payment,
many times as much as 50% of the purchase price and accept a loan that had a balloon payment.
Many of these balloon payments would be due after a very short term – which forced many
borrowers into a constant cycle of refinancing.
In an attempt to minimize these complications and revitalize the housing market, FHA began insuring
banks against real estate losses. FHA was able to accomplish this because they would charge
borrowers a small premium that would in turn, provide the bank with insurance coverage in the event
that the borrower defaulted on the loan.
Because the mortgage industry continued to be in constant turmoil, additional programs were
necessary to stabilize the market. These programs include the Government National Mortgage
Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie
Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac).

1.2 Primary Market

A Mortgage is a written instrument using real property to secure repayment of a debt. The process of
originating, processing, underwriting, closing and funding a mortgage occurs on the primary market.
The primary market is where borrowers and lenders come together to negotiate terms for mortgages.
It is where we, as consumers, obtain mortgages. Primary market lenders include the following
sources:
● Mortgage Banker: Company, individual, or entity that originate, process, underwrite, close,
fund, and service mortgage loan.
● Mortgage Broker: Company or individual who, for a fee, places loans with lenders, but does
not service such loans
● Commercial Banks: Variety of financial services
● Savings and Loan Associations (Thrifts)

9|Page
 ● Credit Unions: Cooperative financial institutions owned and controlled by their members
● Finance Companies: Specialize in making higher-risk loans at higher interest rates
● Mutual Savings Banks: State-chartered banks that are owned by depositors (Thrifts)

1.3 Secondary Market

The secondary market is where existing mortgage loans (and the right to collect borrower payments)
are bought and sold. There are several important entities operating in the secondary market. Those
investors include the following entities:
● Fannie Mae
● Freddie Mac
● Ginnie Mae
● The Federal Home Loan Bank System
● Private investors

Fannie Mae - Created in 1938 as a means to assist the housing sector in the midst of the Great
Depression, Fannie Mae is a Government-Sponsored Enterprise (GSE) that acts as a quasi-
governmental agency for the purpose of making a secondary market for mortgages.
● Its full and formal name is the Federal National Mortgage Association (which sometimes
appears in abbreviated form as “FNMA”).
● Fannie Mae is the nation’s largest mortgage investor.
● Through a process known as securitization, Fannie Mae “pools” the loans it purchases into
investment vehicles called mortgage-backed securities (MBS). Also referred to as “mortgage
bonds,” these securities are offered for sale to the public and are often purchased by pension
funds, state governments, and foreign sovereign entities, in addition to individual investors
and investment management funds.
Freddie Mac is the second major GSE. Freddie Mac was created by Congress in 1970 to provide a
secondary market for mortgages originated by savings and loan associations.
● Its full name is the Federal Home Loan Mortgage Corporation (which sometimes appears in
abbreviated form as “FHLMC”).
● Like Fannie Mae, Freddie Mac securitizes the loans it purchases and issues mortgage bonds.
Ginnie Mae - Created by Congress in 1968, Ginnie Mae is now part of the Department of Housing and
Urban Development (HUD). It does not purchase or sell loans on the secondary market. Rather,
Ginnie Mae issues guarantees on bond pools that are comprised exclusively of government-backed
(FHA/VA/USDA) loans.
● Its full name is the Government National Mortgage Association (sometimes abbreviated as
“GNMA”).
On September 6, 2008, Fannie Mae and Freddie Mac were placed into conservatorship. This was in
response to a substantial deterioration in the housing markets that severely damaged Fannie Mae’s
and Freddie Mac’s financial condition and left them unable to fulfill their mission without government
intervention.

10 | P a g e
“Conservatorship” is a legal process in which a person or entity is appointed to establish control and
oversight of a company to put it in a sound and solvent condition. In a conservatorship, the powers of
the company’s directors, officers, and shareholders are transferred to the designated Conservator.
A key component of the conservatorships is the commitment of the U.S. Department of the Treasury
to provide financial support to Fannie Mae and Freddie Mac to enable them to continue to provide
liquidity and stability to the mortgage market.
The Federal Home Loan Bank (FHLB) system is owned by over 8,000 community financial institutions
and provides advances to financial institutions in order for those institutions to make residential
mortgage loans. The Federal Home Loan Banks were originally designed to spur lending in local
communities through their member banks, and they still have that goal today, although many of the
nation’s largest banks and insurance companies have become members of the system in recent years.
Like Fannie Mae and Freddie Mac, the Federal Home Loan Banks are GSEs.
Private Investors - In addition to the above government and government-related investors, the
secondary market has had many private investors, including Wall Street companies and large financial
institutions.

11 | P a g e
 CHAPTER 1 QUIZ
1) A ____________ is a written instrument using real property to secure repayment of a debt.
a. Trust Deed
b. Promissory Note
c. Mortgage
d. Land Contract

2) Company or individual who, brings borrowers and lenders together for loan origination on the
primary market is a _____________.
a. Mortgage Banker
b. Mortgage Broker
c. Loan Originator
d. Settlement Agent

3) When borrowers and MLOs come together to negotiate terms and close mortgage loan
transactions, this is referred to as
a. Hypothecation
b. mortgage-brokered loans.
c. The primary mortgage market.
d. The secondary mortgage market.

4) Which statement about Ginnie Mae is TRUE?

a. Ginnie Mae buys loans from commercial banks and mortgage companies.
b. Ginnie Mae guarantees mortgage-backed securities.
c. Ginnie Mae is a participant in the primary market.
d. Ginnie Mae is a private corporation.

5) Which of the following government sponsored enterprises (GSE) holds the largest amount of
home loan mortgages?
a. Federal Agricultural Mortgage Corporation
b. Federal Home Loan Mortgage Corporation
c. Federal National Mortgage Association
d. Government National Mortgage Association

12 | P a g e
2.0 FEDERAL MORTGAGE-RELATED LAWS PART I
Chapter Objective
Upon completion of this chapter, you will be able to:
• Gain a general overview of the Consumer Financial Protection Bureau (CFPB)
• Learn about the Real Estate Settlement Procedures Act (RESPA)
• Learn about the Truth in Lending Act (TILA)
• Learn about TILA-RESPA Integrated Disclosure (TRID)

Chapter Introduction
Federal financial disclosure laws specify a variety of disclosure requirements that must be fulfilled by
mortgage loan originators and other parties involved in mortgage lending transactions and activities.
This chapter provides information about many of these requirements that affect the mortgage lending
industry.

2.1 Consumer Financial Protection Bureau (CFPB)

The Dodd-Frank Act created the new federal “super-regulator” called the Consumer Financial
Protection Bureau, or CFPB. The CFPB has been tasked with rule-making and enforcement for the vast
majority of federal mortgage laws. In addition to its rule-making and enforcement powers, the CFPB
also is the primary federal regulator for state-licensed mortgage banks and mortgage brokers. It also
has primary oversight responsibility for any “systemically important financial institution,” which is
defined as any depository institution with total assets over $10 billion.
The purpose of the CFPB is to promote financial stability through accountability and transparency. It
was created by the Dodd-Frank Act and the Consumer Finance Protection Act, and combined rule-
making authority for the following:
• Office of the Comptroller of the Currency (OCC)
• Office of Thrift Supervision (OTS)
• Federal Deposit Insurance Corporation (FDIC)
• Federal Reserve
• National Credit Union Administration (NCUA)
• The Department of Housing and Urban Development (HUD), and
• Federal Trade Commission (FTC)

The following laws are regulated by CFPB

• Regulation B: Equal Credit Opportunity (ECOA) – 12 CFR §1002
• Regulation C: Home Mortgage Disclosure (HMDA) – 12 CFR §1003
• Regulation F: Fair Debt Collection Practices Act (FDCPA) – 12 CFR
• §1006
• Regulation H: SAFE (Secure and Fair Enforcement) Mortgage Licensing Act – State Compliance
and Bureau Registration System – 12 CFR §1008

13 | P a g e
 • Regulation N: Mortgage Acts and Practices-Advertising – 12 CFR §1014
• Regulation O: Mortgage Assistance Relief Services (MARS) – 12 CFR §1015
• Regulation P: Privacy of Consumer Financial Information – 12 CFR§1016
• Regulation V: Fair Credit Reporting Act (FCRA) – 12 CFR §1022
• Regulation X: Real Estate Settlement Procedures Act (RESPA) – 12 CFR §1024
• Regulation Z: Truth in Lending Act (TILA) – 12 CFR §1026

2.2 The Dodd-Frank Act Of 2008

In the fall of 2008, a financial crisis of a scale and severity not seen in generations left millions of
Americans unemployed and resulted in trillions in lost wealth. Our broken financial regulatory system
was a principal cause of that crisis. It was fragmented, outdated, and allowed large parts of the
financial system to operate with little or no oversight. It allowed some irresponsible lenders to use
hidden fees and fine print to take advantage of consumers.
To make sure that a crisis like this never happens again, President Obama signed the Dodd-Frank Wall
Street Reform and Consumer Protection Act into law. The most far-reaching Wall Street reform in
history, Dodd-Frank will prevent the excessive risk-taking that led to the financial crisis.
The law also provides common-sense protections for American families, creating a new
consumer watchdog to prevent mortgage companies and payday lenders from exploiting
consumers.
Accountability was lacking because responsibility was diffused and fragmented. In addition, many
mortgage lenders and mortgage brokers were almost completely unregulated. Too many responsible
American families have paid the price for an outdated regulatory system that failed to adequately
oversee payday lenders, credit card companies, mortgage lenders, and others, allowing them to take
advantage of consumers.
President Obama's Wall Street reform law created an independent agency to set and enforce
clear, consistent rules for the financial marketplace. The Consumer Financial Protection Bureau
(CFPB) set clear rules of the road and ensures that financial firms are held to high standards. The
CFPB supervises banks, credit unions, and other financial companies, and will enforce federal
consumer financial laws.
The Dodd-Frank Act of 2008 fundamentally changed consumer financial protection and regulation in
the United States. This law has already had a significant impact on mortgage businesses. It addresses
several issues, including the following topics:
• Loan originator compensation
• Anti-steering provisions
• Risk retention requirements
• Ability-to-repay provisions
• Prepayment penalty restrictions

14 | P a g e
2.3 Real Estate Settlement Procedures Act (RESPA)
The Real Estate Settlement Procedures Act (RESPA):
• Was promulgated in 1975 by the U. S. Department of Housing and Urban Development (HUD)
through Regulation X.
• Currently is implemented and enforced by the CFPB.
The Real Estate Settlement Procedures Act (RESPA) allows borrowers to receive pertinent and timely
disclosure regarding the nature and costs of the real estate settlement (closing) process. The law also
protects consumers against abusive practices (such as kickbacks) and places limitations on the use of
reserve accounts.
The rules for complying with RESPA are found in Regulation X. Those rules are promulgated and
enforced at the federal level by the Consumer Financial Protection Bureau (CFPB). Failure to comply
with RESPA can result in stiff financial and criminal penalties. In addition, state regulatory agencies
may suspend or revoke a mortgage loan originator’s license for RESPA violations.
The purpose of RESPA is to help consumers become better shoppers for settlement services and to
eliminate unnecessary increases in the costs of certain settlement services due to kickbacks and
referral fees. Settlement is sometimes called closing and settlement charges and are frequently
referred to as closing costs.
The terms "settlement" and "closing" can be and are used interchangeably under RESPA and within
the mortgage industry.
There are four sections to RESPA that impact and guide the mortgage industry in protecting
borrowers from abuses:
• Section 6 - Protects homeowners against abuses in loan servicing
• Section 8 - Prohibits kickbacks, fee-splitting and unearned fees
• Section 9 - States a seller cannot require the use of particular title company
• Section 10 - Identifies the amounts that can be charged to maintain escrow accounts
Penalties - Subjects violators to criminal and civil penalties, including:
● Fines up to $10,000
● Imprisonment up to one year
● Liability up to three times the amount of the charge paid for the service (civil lawsuit)

Record Keeping - Any documents provided in accordance with this section must be retained for five
(5) years.

2.4 Settlement Services

According to Regulation X, settlement services are defined as services provided in connection with a
prospective or actual settlement. Borrowers depend on a number of settlement service providers to
prepare for closing.

15 | P a g e
Settlement services include any service provided in connection with a real estate settlement.
Examples of settlement services include:
• Origination of a federally related mortgage loan (including, but not limited to, the taking of
loan applications, loan processing, and the underwriting and funding of such loans).
• Services by a mortgage broker (including counseling, taking of applications, obtaining
verifications and appraisals, other loan processing and origination services, and
communicating with the borrower and lender).
• Any services related to the origination, processing, or funding of a federally related mortgage
loan.
• Title services, including title searches, title examinations, abstract preparation, insurability
determinations, and the issuance of title commitments and title insurance policies.

The following are not considered settlement services and are not regulated by RESPA or subject to
RESPA rules:
• Building/remodeling contractors
• Service and repair contractors
• Moving companies
• Landscaper
• Home improvement or design companies

2.5 RESPA Covered Transactions

RESPA applies to any federally related mortgage loan secured by a first or subordinate lien on a
residential real property designed for one-to-four families. The rules and regulations of RESPA apply
to:
• Conventional loans
• FHA, VA, and other government-sponsored loans
• Purchase loans
• Reverse mortgages
• Assumptions
• Refinances
• Property improvement loans
• Equity lines of credit
The following types of transactions are not covered:
• All-cash sale
• Sale where the individual home seller takes back the mortgage
• Rental property transaction
• Temporary construction loans or temporary financing, such as bridge loans
• Other business purpose transaction
• Property of 25 acres or more (agricultural)
• Vacant or unimproved property, unless a dwelling will be constructed or moved onto the
property within two years

16 | P a g e
2.6 RESPA Section 6 – Mortgage Servicing
A mortgage servicer is the company that collects monthly mortgage payments, pays taxes, insurance,
and other items as they come due, and notifies the borrower of late payments. The mortgage servicer
is supposed to work with homeowners if they have trouble making their mortgage payments.
Section 6 of RESPA addresses servicers' obligations to correct errors asserted by borrowers and other
duties prescribed by the Consumer Financial Protection Bureau.
Many mortgage servicers have been accused of excessive foreclosure or modification fees, foreclosing
without the proper paperwork, or failing to help people stay in their homes. As a result, there have
been numerous settlements paid by the nation's largest mortgage servicers to individuals and states
in connection with the servicing of mortgage loans.
Forced-Placed Insurance - Loan servicers have the right to administer “Force-Placed Insurance” when
the servicer believes that the policy has been canceled or not renewed.
➢ Servicer must notify the borrower 45 days before charging the borrower for the force-
placed insurance.
➢ Servicer must send a 2nd notice 30 days before charging the borrower for the force-placed
insurance.
➢ Remember: Force-Place Insurance protects the lender, not homeowner or possessions of
the homeowner.
Qualified Written Request – Homeowners who are having issues with their mortgage servicers may take
advantage of a provision of RESPA whereby a borrower may request information relating to the servicing
of a loan.

It is called a Qualified Written Request, or "QWR," and imposes a duty to respond to borrowers'
inquiries.

Upon receipt of a QWR, a mortgage servicer is required to take certain steps, each of which is subject to
certain deadlines:

• Borrower complaints to servicers - Loan servicers have five (5) days to acknowledge a
borrower’s complaint and 45 days to resolve or explain their position.
• Missed/Delinquent Mortgage Payments - Servicers must attempt to speak with delinquent
borrowers within 36 days after the missed payment. Servicers must mail/offer loss mitigation
information within 45 days of a borrowers missed payment. Servicers must acknowledge
receipt of a loan mitigation application within five (5) days.
• Foreclosure Timelines - If the servicer receives the mitigation application 37 days before a
foreclosure sale, the applications must be evaluated for all applicable options within 30 days.
A servicer cannot file a pre-foreclosure Notice of Default (NOD) until the mortgage payment is
120 days late.

• Violation of the RESPA QWR provisions may result in statutory damages to an individual of

17 | P a g e
 $2,000 and, in the case of a class action lawsuit, up to $1 million.

2.7 RESPA Section 8 - Prohibits Kickbacks, Fee-Splitting & Unearned Fees

RESPA Section 8 prohibits kickbacks, fee-splitting and unearned fees. A kickback is generally defined
as providing “a thing of value” to a third party in return for the referral of a client, customer or
business. For example, a loan originator paying a fee to a real estate agent for each closed loan that
was referred by the agent would be providing a kickback.
Keep in mind that “something of value” includes gift cards, sports tickets, advertising space, marketing
materials bearing a real estate agent’s information to give to his/her clients, and donations to a real
estate agent’s favorite charity, discounts, salaries, commissions and fees, among others.
Despite prohibiting kickbacks, RESPA does NOT prohibit the payment of fair market value for goods or
services that were actually received or performed, nor does it prohibit a mortgage originator from
passing out promotional material bearing the originator’s information, logo, etc. in a real estate
agent’s office.
RESPA also does not prohibit joint marketing efforts on the part of loan originators and real estate
agents, so long as all parties pay their fair share of the marketing space.
According to Regulation X, a referral is any oral or written action directed to a person, which has the
effect of affirmatively influencing the selection by any person of a provider of a settlement service or
business.
In addition, Section 8:
● Prohibits fee-splitting and receiving unearned fees or a percentage of any charge made or
received for services not actually performed.
● Prohibits a "required use" of specific settlement service providers, except in cases where a
lender refers a borrower to an attorney, credit reporting agency, or real estate appraiser to
represent the lender's interest in the transaction.
● Does not prohibit the payment of fees to attorneys, title companies or agents for services
actually performed, the payment of a bona fide salary or compensation to a person for goods
or products.

2.8 RESPA Section 9 - Title Insurance

Under RESPA, it is illegal for a property seller to require the buyer to use a particular title insurance
company, either directly or indirectly, as a condition of sale. A violation of this provision can result in
what is referred to as treble damages, which means that those who violate this provision of RESPA
can be held liable for three times the cost of the title services that were improperly required.

2.9 RESPA Section 10 – Escrow Accounts

Section 10 of RESPA sets limits on the amounts a lender may require a borrower to put into an escrow
account. An escrow account holds money (e.g., for purposes of paying taxes hazard insurance, and

18 | P a g e
other charges related to the property) that some mortgage lenders collect every month, along with a
mortgage payment.
● Under RESPA, the lender cannot require the borrower to deposit no more than 1/12th the
annual amount into an escrow account the estimated payment of taxes, insurance premiums
or other charges with respect to the property.
● Lenders may also require a cushion of two months (1/6th of a year) of the total disbursements
for the year at closing.
● An escrow account analysis is required once during the year, and borrowers must be notified
of any shortage.
● Generally, any excess of $50 or more in escrow must be returned to the borrower, as long as
the borrower is not delinquent.
Although RESPA does not require lenders to impose an escrow account on borrowers, there are some
government loan programs that require escrow accounts as a condition of the loan, including, but not
limited to:
● A mortgage loan that includes mortgage insurance MUST have an escrow account.
● All government-insured or guaranteed loans (FHA/VA).
● A loan that meets the TILA definition of a "higher-priced" loan is required to have a lender-
imposed escrow account for at least 60 months.

2.10 RESPA Disclosure Requirements

RESPA requires certain documents to be delivered to the borrower at various stages of the loan
process. To comply with RESPA and other regulations, it is important to understand what is required
and when it is required.
Special Notice - In dealing with a purchase or a refinance – you will notice that:
• The Good Faith Estimate (GFE) has been replaced by a new form known as the Loan Estimate
(LE).
• The Uniform Settlement Statement (HUD1) has been replaced by the Closing Disclosure (CD).
However, in a reverse mortgage, construction mortgage and mobile home loans, the GFE and HUD
forms are still used. (This will be discussed further in later chapters.)
Required disclosures regarding settlement services must be provided to the borrower at four (4)
stages:
1. At the time of loan application.
2. Before settlement.
3. At settlement.
4. After settlement.

RESPA deals with “Timing” – meaning when certain disclosures must be provided to the borrower.
When Which Disclosure
At or Within 3 Business Home Loan Toolkit (CFPB) (or HUD Special Information Booklet)
Days of Application aka “Know Before You Owe” booklet

19 | P a g e
 Loan Estimate (TILA) (or GFE)
Mortgage Servicing Disclosure Statement
Notice of Right to Receive Appraisal (ECOA)
List of HUD Counselors
Before Settlement Affiliated Business Arrangement (AfBA) Disclosure
Closing Disclosure: 3 days prior to consummation (TILA) (or
HUD1)
At Settlement Finalized Closing Disclosure (TILA) (or HUD1)
Initial Escrow Statement (within 45 days of closing)
After Settlement Annual Escrow Statement
Servicing Transfer Statement
Prohibition on Certain Fees - No fee can be charged for preparing disclosures! Federal law prohibits
lenders and servicers from charging a fee for the preparation of the RESPA, TILA or any other
disclosures statements required by law for a 1-4-unit residential property.

2.11 Application Definition

According to RESPA, these are the six (6) items that make up a complete application and provide the
type of information necessary for a creditor to make a credit decision:
1. Name(s) of borrower(s)
2. SSN for each borrower
3. Gross monthly income of borrower(s)
4. Loan amount sought
5. Address of subject property
6. Estimate of property value
When consumers complete an application, or provide the information sufficient to complete an
application, the MLOs must give them certain disclosures. If a borrower does not receive these
disclosures at the time of application, the MLO must provide them within three (3) business days of
receiving the completed application.
If the applicant withdraws the application or the lender turns down the loan before the end of the
three (3) business-day period, RESPA does not require the MLO to provide these documents.

2.12 Disclosures within three (3) business days of completed application

HUD Special Information Booklet - HUD Special Information Booklet (still required on HELOCs,
reverse mortgages and loans secured by mobile homes). The Department of Housing and Urban
Development’s Special Information Booklet Settlement Costs (sometimes referred to as “HUD’s
Settlement Cost Booklet”).
The “Your Home Loan Toolkit” (aka Know Before You Owe Booklet) - The “Your Home Loan Toolkit”
replaced the Special Information Booklet due to the TILA-RESPA Integrated Disclosure rule when

20 | P a g e
dealing with a new home PURCHASE. Information that guides the consumer about a mortgage loan is
provided in a new format with the integration of the “Know Before You Owe” Disclosures.
The "Your Home Loan Toolkit' must be provided to the primary borrower within three (3) business
days after receipt of a completed application.
Good Faith Estimate (GFE) - The GFE is still required on HELOCs, reverse mortgages and loans secured
by mobile homes. It is the required disclosure of the known or anticipated fees, charges or settlement
costs that the mortgage applicant is likely to incur at the settlement (closing) of the loan. Each such
estimate must be made in good faith and bear a reasonable relationship to the charge a borrower is
likely to pay at closing.
Loan Estimate (LE) - The Loan Estimate is the required disclosure of the known or anticipated fees,
charges or settlement costs that the mortgage applicant is likely to incur at the settlement (closing) of
the loan. Each such estimate must be made in good faith and bear a reasonable relationship to the
charge a borrower is likely to pay at closing. It must be delivered within three business days of
receiving or preparing an application. (Based on TRID Rules and regulations discussed later in this
chapter).
Mortgage Loan Servicing Disclosure - Mortgage Loan Servicing Disclosure provides notice regarding
the lender’s practices of transferring or retaining the servicing of the loan. Servicing refers to the
process of collecting the principal, interest and escrow account payments on the loan, sending
required notices and handling all borrower inquiries.
The Mortgage Loan Servicing Disclosure must be provided to the borrower within three business days
of the loan application and describes what is likely to happen to the applicant’s loan after closing.
Must be retained for 5 years by the servicer.
Note: The Mortgage Loan Servicing Disclosure is NOT the same document as the Servicing Transfer
Disclosure, which informs the borrower that his/her loan has been transferred to another servicer.
Affiliated Business Arrangement (ABA or AFBA) Disclosure - This disclosure is required whenever a
settlement service provider involved in a RESPA covered transaction refers a consumer to a provider
with whom the referring party has:
• a greater than 1% ownership
• other beneficial interest
• an associate relationship, meaning the transaction would not qualify as “arms-length”.
The referring party must give the ABA disclosure to the consumer at or prior to the time of referral.
The disclosure:
• describes the business arrangement that exists between the two providers
• gives the borrower an estimate of the second provider's charges.
• not required when a lender refers a borrower to an attorney, consumer reporting agency or
real estate appraiser to represent the lender's interest in the transaction
Sham Affiliated Business Arrangement - It is a business relationship created between settlement
service providers for the sole purpose of splitting fees. When splitting of fees occur when no service is
provided, it is a violation of RESPA Section 8.

21 | P a g e
Associate: means one who has one or more of the following relationships with a person in a position
to refer settlement business:
1) A spouse, parent, or child of such person;
2) A corporation or business entity that controls, is controlled by, or is under common
control with such person;
3) An employer, officer, director, partner, franchisor, or franchisee of such person;
4) Anyone who has an agreement, arrangement, or understanding, with such person, the
purpose or substantial effect of which is to enable the person in a position to refer
settlement business to benefit financially from the referrals of such business;
List of homeownership counseling - Lenders are required to provide a list of homeownership
counseling organizations to consumers within three business days after they apply for a mortgage
loan, with the exclusion of reverse mortgages and mortgage loans secured by a timeshare.
Creditors must confirm that a first-time borrower has received homeownership counseling from a
federally certified or approved homeownership counselor or counseling organization before making a
loan that provides for or permits negative amortization to the borrower.
NOTE: Until the Loan Estimate disclosure and other required disclosures are delivered to the
borrower, a borrower may not be charged any fees other than the fee necessary to obtain a credit
report.

2.13 Disclosures Required “Before” Settlement

Affiliate Business Arrangement Disclosure (AFBA) - (see above)
HUD-1 (aka Uniform Settlement Statement) - The HUD is commonly referred to as the “HUD-1”
settlement statement. The HUD-1 sets forth a complete list of the actual settlement costs that will be
charged at the closing. It must be made available for review, if requested by the borrowers, at least
one business day prior to settlement.
For most mortgage transactions occurring after October 3, 2015, the HUD-1 has been replaced by the
“Closing Disclosure.” However, HUD-1 will continue to be provided on home equity lines of credit
(HELOCs), reverse mortgages and for loans that are secured by mobile homes where the owner will
not also own the land on which the mobile home resides.
Closing Disclosure (CD) - The new TILA-RESPA Integrated Disclosure (TRID) rules require a Closing
Disclosure be delivered to the borrower within three (3) business days prior to loan consummation.
The disclosure combines the former HUD-1 Settlement Statement and the Final Truth in Lending
Statement into one form that provides the consumer information about the settlement service
provider charges incurred in an easy to read and understand format.

2.14 Disclosures Required “At” Settlement

Closing Disclosure/CD (Final) - The Closing Disclosure (CD) shows the actual finalized settlement costs
of the loan transaction. Separate forms may be prepared for the borrower and the seller.

22 | P a g e
Initial Escrow Statement - Itemizes the estimated taxes, insurance premiums and escrow account
charges “anticipated to be paid” from the Escrow Account during the loan’s first 12 months. Usually
given at settlement, but lender has 45 days from settlement to deliver. Sometimes referred to as the
“HELLO LETTER”.

2.15 Disclosures Required “After” Settlement

Annual Escrow Statement - Summarizes escrow account deposits and payments during the servicer's
12-month computation year. Must be delivered once a year. Required by RESPA Section 10.
Servicing Transfer Statement - Required if the loan servicer sells or assigns the servicing rights to
another servicer. The loan servicer must notify the borrower 15 days before the date of a servicing
transfer. This is often referred to as a “goodbye” letter in industry jargon.
There is also a statutory 60-day “grace period” during which any payment mistakenly made to the old
servicer must be forwarded by that company to the new servicer and, as long as the old servicer
receives the payment in a timely manner, no late fee can be assessed.

2.16 Other Disclosures Required By RESPA

The Escrow Closing Notice - The Escrow Closing Notice must be provided by the creditor prior to
cancelling an escrow account for any consumers who had one established by the creditor.
Partial Payment Policy Disclosure - Partial Payment Policy Disclosure is a new disclosure found on the
Closing Disclosure regarding the acceptance of a partial mortgage payment by the loan servicer. This
disclosure informs the consumer about the policy of the mortgage servicer/creditor and the
acceptance of a payment less than the full amount due under the note. The creditor must provide
information about the likelihood that partial mortgage payments will be accepted in the event of a
hardship of the borrower.

2.17 Truth In Lending Act (TILA), Regulation Z

The purpose of the Truth in Lending Act (TILA) is to promote the informed use of consumer credit
(i.e., credit to a consumer primarily for personal, family or household purposes) by requiring
disclosure about its terms and cost.
TILA is actually Title I of a broader piece of legislation called the “Consumer Credit Protection Act of
1968,” and it does not apply to loans for commercial or business purposes.

• TILA requires lenders to disclose the complete cost of credit to consumer loan applicants.
• TILA requires disclosure of the Annual Percentage Rate (APR) in advertising.
• Creditors must provide the TILA no later than the third business day after the creditor
receives the consumer’s written application.
• The only fee that may be collected prior to these disclosures are fees for credit reports.
• MLOs and servicers are prohibited from charging a fee for the preparation of the TILA
Disclosures.

23 | P a g e
 • The Act also establishes a three-business day right of rescission in certain transactions.
• TILA also regulates advertising of consumer loans.
• TILA defines a creditor in part as "a person who regularly extends consumer credit that is
subject to a finance charge or is payable by written agreement in more than four
installments.”
Disclosure under TILA is important because it helps the consumer compare costs (including rates and
fees) when shopping for a mortgage loan. Regulation Z is the federal regulation that implements TILA.
Rule-making and enforcement power under TILA is handled by the Consumer Financial Protection
Bureau.
While Regulation Z does not set limits on interest rates or other finance charges imposed by lenders,
it does regulate the disclosure of these items. Specifically, the Act requires all creditors who deal
with consumers to make certain disclosures concerning all finance charges and related aspects of
credit transactions (including disclosing finance charges expressed as an annual percentage rate).
The loans that are subject to TILA are subject to two sets of rules: those for open-end credit and
those for closed-end credit. While differences in Regulation Z’s rules for closed-end and open-end
credit may be minor at times, it is important to note the distinction in order to fully comply with the
law.
Penalties for violation - $5,000 per day for a single violation, $25,000 per day for reckless violations
and/or $1,000,000 per day for knowingly violating TRID rules.

2.18 Closed-End Loans Vs. Open-End Loans

Closed-End Loans - In a closed-end transaction, a lender disburses all of the funds at closing and
demands repayment within a specified period of time. During the repayment period, borrowers
cannot request an increase in the principal amount of the loan. A loan to purchase a home and a
mortgage refinancing to secure a lower interest rate are examples of closed-end loans that are subject
to the provisions of TILA and Regulation Z.
Open-End Loans -The primary characteristic of an open-end loan is that both borrower and lender
anticipate repeat transactions. In an open-end transaction, a lender gives the borrower a limit on the
amount of funds that he/she can withdraw, and the borrower can request a cash advance in any
amount. The borrower may have the option of requesting an increase in the credit amount. Payments
depend on the interest due on the amount withdrawn.

2.19 TILA Disclosure Requirements

Disclosures are required in two general areas:
1. When creditors offer credit but before the transaction is consummated
2. When credit terms are advertised to potential customers. The credit terms advertised must
actually be available.
The following are specific disclosures required by Regulation Z:

24 | P a g e
The Loan Estimate (LE) & Closing Disclosure (CD) - LE is provided at or within 3 days of the application
and the CD is provided 3 days prior to consummation and again at time of consummation.
Consumer Handbook on Adjustable Rate Mortgages (CHARM booklet) - The CHARM booklet
provides detailed information to borrowers who select an adjustable rate mortgage. These disclosures
must be provided within the same three-business-day period as the Loan Estimate, which we will
cover in detail elsewhere. Provided within 3 days of receipt of an application.
When Your Home is on the Line: What You Should Know About Home Equity Lines of Credit booklet
- This booklet is only provided to borrowers for home equity installment loans and home equity lines
of credit. Provided within 3 days of receipt of an application.
ARM Disclosure - Some disclosures under TILA are specific to adjustable-rate mortgage loans (ARMs).
Loan servicers must provide a borrower with an ARM at least 60 days’ notice before an interest rate
change occurs if that change will result in a new payment.
Transfer of Ownership Disclosure - TILA requires entities that purchase or acquire mortgage loans to
notify the borrower(s) and provide the name, address and phone number of the new owner of the
mortgage, as well as the location where the transfer of ownership in the mortgage loan is recorded,
within 30 days after acquisition. This requirement applies only to loans secured by a borrower’s
primary residence. (Do NOT confuse this requirement, which applies to a transfer of ownership of the
loan, with the RESPA mandate that a borrower be notified 15 days before a transfer of servicing
occurs.) The owner of the loan and the servicer are frequently separate entities.
Notice of Right to Rescind - Required by TILA and due at the time of closing to ALL individuals with
ownership interest in subject property, even if they are not on the loan. All individuals with ownership
interest (not only for those applying for the loan) should receive 2 copies of the right to rescind.
Balloon Payment Notice - Required by HOEPA and due 3 business days prior to closing.
A creditor must retain evidence of compliance with these disclosure requirements for at least two
years after the disclosures were required to be made.
EXCEPTIONS: Lenders must retain the Closing Disclosure for five (5) years and the Loan Estimate for
three (3) years.

2.20 Annual Percentage Rate (APR)

The APR tells a borrower the total cost of financing a loan in percentage terms as a relationship of the
total finance charges to the total amount financed. For residential mortgages, disclosure of the annual
percentage rate is very important. The APR reflects certain finance charges associated with the loan,
spread out over the life of the loan. Therefore, the APR is generally higher than the note rate.
The APR is not simply the interest rate that appears in the promissory note! The APR tells a borrower
the total cost of financing a loan in percentage terms as a relationship of the total finance charges to
the total amount financed.

25 | P a g e
Sometimes it can be very difficult to explain closing costs and fees to consumers. In simple terms, they
are finance charges or those charges that are required as a direct result of the borrower obtaining
“credit” (as opposed to if the consumer paid all cash for the transaction).
Whenever an MLO quotes an interest rate to a consumer – whether ally or in writing, including
advertisements, websites, etc. – TILA requires that the APR must be disclosed, even when the
consumer simply calls for an interest rate quote.

2.21 Finance Charge

Finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable
directly or indirectly by the consumer and imposed directly or indirectly by the creditor as a condition
of the extension of credit.
Please find below, the charges that are considered Finance Charges for the purposes of calculating the
APR:
• Interest, time, price differential and any amount payable under an add-on or discount system
of additional charges
• Service, transaction, activity and carrying charges, including any charge imposed on a checking
or other transaction account to the extent that the charge exceeds the charge for a similar
account without a credit feature
• Points, loan fees, assumption fees, finder's fees and similar charges
Another way of remembering which ones are included in the APR calculation: If a homebuyer is
paying cash for the home, the home buyer would not need to pay these fees.
Charges excluded from the Finance Charge (fees charged by third parties):
• Seller's points
• Interest forfeited as a result of an interest reduction required by law on a time deposit used as
security for an extension of credit
• Fees in a transaction secured by real property or in a residential mortgage transaction, if bona
fide and a reasonable amount, including fees for title examination, abstract of title, title
insurance, property survey and similar purposes
• Fees for preparing loan-related documents, such as deeds, mortgages and reconveyance or
settlement documents
• Notary and credit report fees
• Property appraisal fees or fees for inspections to assess the value or condition of the property
if the service is performed prior to closing, including fees related to pest infestation or flood
hazard determinations
• Amounts required to be paid into escrow or trustee accounts if the amounts would not
otherwise be included in the finance charge

2.22 APR Accuracy and Redisclosure

According to Regulation Z, the annual percentage rate is generally considered accurate if it does not

26 | P a g e
vary above or below the APR initially disclosed by more than:
• 1/8% (.125) for a regular transaction (30-year fixed/Traditional Mortgage)
• 1/4% (.25) for an irregular transaction (Not a 30-year fixed/Non-traditional mortgage)
An irregular transaction is defined as one that includes one or more of the following features:
• Multiple advances
• Irregular payment periods
• Irregular payment amounts (other than an irregular first period or irregular first and final
payment)

If a change renders the APR inaccurate prior to loan consummation, TILA requires that the borrower
be given a corrected disclosure of all terms.
• The consumer must receive the corrected Closing Disclosure no later than three (3) days prior
to loan consummation or the corrected Loan Estimate no later than four (4) business days
prior to loan consummation.
• If the corrected disclosures are mailed or delivered by some method other than in person, the
consumer is considered to have received them three (3) business days after they were mailed.
A borrower may be able to waive the waiting periods if there is a bona fide personal financial
emergency (lender determines if it’s a valid emergency). Also, remember that consumers are not
required to continue with the loan during these waiting periods simply because the creditor provided
these disclosures.

2.23 The Mortgage Disclosure Improvement Act (MDIA)

The Mortgage Disclosure Improvement Act (MDIA) states that:
▪ Initial disclosures are required within three (3) business days of receipt of completed
application.
▪ Earliest consummation is on the 7th business day after disclosures delivered/mailed.
▪ If redisclosure is required - consumer must receive corrected disclosure at least 3 business
days before loan can be consummated.

Example 1: The creditor takes an application for a fixed rate loan on Tuesday, June 1 and mails the
Loan Estimate the next day, Wednesday, June 2. The earliest the loan can close is the following
Thursday, June 10, the seventh business day after mailing the initial disclosure (assuming no legal
federal holidays occur during the waiting period).

CASE STUDY QUESTION: GET THE LOAN CLOSED

A mortgage loan originator was one loan away from meeting the quarterly volume goal that would
earn him a trip to Hawaii. The only loan scheduled was a loan where the circumstances had just
changed. The change resulted in a .375% decrease from the initially disclosed APR. But this loan has

27 | P a g e
yet another problem. The home being purchased goes to trustee sale as a foreclosure in two days.
Today is March 29th and his processor is sending a redisclosure on the loan to the borrower.
Is there a legal way the mortgage loan originator will close this loan, make his quota and earn the trip?

CASE STUDY ANSWER: GET THE LOAN CLOSED

First of all, if the annual percentage rate provided in the good faith estimates changes beyond a
specified tolerance for accuracy, (>.125% for regular loans and .25% for Arms) creditors must provide
corrected disclosures, which the consumer must receive on or before the third business day before
consummation of the transaction. This means that the loan originator's plans for a sunny get- away
just went "aloha."
MDIA has a provision that allows consumers to expedite consummation to meet a "bona fide"
personal financial emergency. Stopping a sheriff sale certainly falls under the definition of a "bona
fide" emergency. These buyers would lose their purchase if the home went to trustee sale. However,
the consumer must still receive the disclosures required by TILA Section 128 (a), 15 U. S.C. 1638(a), at
or before the time of the consumers modification or waiver. Therefore, the loan can close on the 31st
so the consumer is not financially penalized by the provisions of MDIA meant to protect them. Break
out the sun block. This smart mortgage loan originator is on his way to sun and surf.

2.24 Right of Rescission

TILA allows borrowers to have the right to cancel certain credit transactions. This right is the right of
rescission. Rescind means to take back or withdraw an offer or contract. The right of rescission is
required for refinance transactions on a borrower’s principal residence. When the borrower
refinances, the original loan obligation is paid off with a new loan.
If a borrower rescinds, the borrower is entitled to a full refund of any funds given to anyone
connected with the transaction, including appraisal fees and credit report fees, even if the originating
company has incurred an expense relating to these charges.
Rescission applies to any credit transaction involving the establishment of a security interest (for
example, a mortgage or deed of trust) in a principal residence, such as:
• Home equity loans
• Home improvement loans
• Refinances
• Home equity lines of credit
This right of rescission does not apply to the following:
• Purchase loans (which protect sellers who may have entered into another contract or
purchased a home contingent on the buyers purchasing their present home)
• Construction loans (which protect builders who may have performed services based on the
buyer's commitment)
• Commercial loans
• Loans on vacation or second homes
28 | P a g e
 • Transactions in which a state agency is a creditor
Some specific items to consider when it comes to the Right of Recession include:
• When more than one consumer has the right to rescind, the exercise of the right by one
consumer is effective for all consumers.
• If a consumer chooses to exercise the right to rescind, the mortgage is void, and the creditor
must return any money collected related to the loan within 20 calendar days. The consumer
has no liability for the loan, including finance charges.
• The day of signing is NOT included in the three-day calculation. Therefore, if recession
happens on a Monday, the three-day rescission period lasts through Thursday at 11:59pm
(midnight). The first opportunity to fund the loan would be Friday.
• Under TILA, when calculating the right of rescission, the definition of a business day includes
any day except legal federal holidays and Sunday. Thus, Saturday can be included in the day
count, but Sunday and legal federal holidays cannot.
Notice of Right to Rescind - Creditors must inform consumers of their right to rescind by providing
two (2) copies of a Notice of Right to Rescind document to each consumer entitled to rescind (if not
properly notified).
Extended Right of Rescission - Consumers may have the right to an extended rescission period of up
to three (3) years under these circumstances:
• The creditor fails to properly notify (i.e. provide two copies of the notice) consumers of the
right to rescind.
• The creditor does not provide the consumer with the required material disclosures (or the
required corrected redisclosures).

CASE STUDY QUESTION: ALLOWABLE RESCISSION

Stephanie Williams would like to refinance two loans, her primary residence in town and her lake
house. Although the payments have been made on time for both properties, a decrease in the
Stephanie's income, along with a higher standard for underwriting approval, has made the borrower
ineligible for the requested mortgage on the lakefront property, in order to refinance the second
home, the mortgage loan originator advised the borrower that a cosigner would be needed.
She discussed the situation with her parents, and they agreed to cosign for the mortgage loan, and
the closing went as planned. After the closing, the parents had second thoughts about their
obligations. They realized that if anything happened to their daughter's finances, they would be
obligated to make those payments, which would be very difficult for them financially. The parents told
their daughter that they were rescinding the refinance and wanted her to pursue other avenues of
financing. Is this a process that the parents are allowed to pursue?

CASE STUDY ANSWER: ALLOWABLE RESCISSION

Even though it only takes one (1) of the borrowers to rescind the loan to cancel the transaction this is

29 | P a g e
not the case on a property that is not a primary residence or "principal dwelling". The borrower may
now have to find another cosigner and refinance the home again to get her parents off the loan.

2.25 TILA Advertising Disclosures

Before TILA, some advertisers generally only disclosed the most attractive credit terms, distorting the
true cost of financing. For example, the ad could have included the low monthly payments (e.g., $350
a month) without indicating the large down payment necessary to qualify for that payment level.
Anyone who places advertising that references consumer credit is required to follow the advertising
provisions of TILA. In addition, if specific loan terms are shown in an ad, those terms must be actually
available.

The Act requires the advertiser to tell the whole story, and tell it clearly and conspicuously.
Regulation Z provides that when certain loan terms, called trigger terms, are set forth in an
advertisement, several other terms must be disclosed as well.
If an advertisement contains any one of the triggering terms about the loan as specified in TILA, that
advertisement must also include the required disclosures. Examples of triggering terms in
advertisements include:
• Amount of the down payment (e.g., "15% down")
• Amount of any payment (e.g., "Pay only $400 per month")
• Number of payments (e.g., "Only 360 monthly payments")
• Period of repayment (e.g., "30-year financing available")
• Amount of any finance charge (e.g., "2% finance charge")

When trigger terms are used, the advertisement must also state all of the following terms:
• The amount or percentage of the down payment.
• The terms of repayment.
• The annual percentage rates.
Examples of terms that do not trigger required disclosures include:
• "5% Annual Percentage Rate loan available here."
• "Easy monthly payments."
• "FHA financing available" or "100% VA financing available."
• "Terms to fit your budget."

2.26 Prohibitions in Advertising

Regulation Z includes a list of seven (7) prohibited practices when advertising closed-end mortgage
loans. The prohibitions are based on “…an extensive review of advertising copy and other outreach

30 | P a g e
efforts…” that allowed the Federal Reserve to identify misleading and deceptive practices in the
advertisement of mortgage loans.
Following are the seven practices that are prohibited in closed-end mortgage loans and some of the
examples that the Federal Reserve offers, in its Staff Commentary, of prohibited advertisements:
1. Misleading advertising of “fixed” rates and payments. Today, mortgage products are
complex, and there are many that combine fixed and variable rates, such as a stepped-rate
mortgage with an initial lower rate that is subject to an increased fixed rate. The use of the
word “fixed” in advertisements for these types of loans is prohibited unless there is
conspicuous and equally prominent information about variable rates and increasing
payments.
2. Misleading comparisons in advertisements. Comparisons between an advertised mortgage
and a hypothetical loan that a consumer may have are prohibited unless the ad includes the
requisite disclosures regarding APRs and payments. An advertisement to “save $300 per
month on a $300,000 loan” is an implied and prohibited comparison between the payment
due on the advertised loan and a consumer’s current loan payments.
3. Misrepresentations about government endorsement. Statements that lead consumers to
the incorrect assumption that a mortgage product is endorsed by the government are illegal.
4. Misleading use of the current lender’s name. Some lenders and mortgage brokers have
made direct solicitations that lead consumers to the incorrect assumption that their own
lender is contacting them with information on mortgage products.
5. Misleading claims of debt elimination. This involves claiming debt elimination when one debt
merely replaces another debt.
6. Misleading use of the term counselor. An advertisement cannot refer to a for-profit lender,
mortgage broker or its employees as a “counselor.”
7. Misleading foreign-language advertisements. Some advertisements target immigrants who
lack fluency in English by advertising favorable lending terms in their first language, while
providing information on the additional and less favorable lending terms in English.
Regulation Z prohibits the use of misleading terms in advertisements for home equity loans. “Free
Money!” is an example that the regulations give of a misleading and, therefore, prohibited term.
Regulation Z also prohibits misleading statements regarding tax deductions for interest paid on home
equity loans.

2.27 Appraisal Prohibited Practices Under TILA.

Creditors, mortgage brokers and their affiliates are prohibited from coercing, influencing or
encouraging an appraiser to misstate the value of the dwelling. The law specifically prohibits:
• Implying to an appraiser that current or future retention of the appraiser depends on the
amount at which the appraiser values a consumer's principal dwelling.
• Excluding an appraiser from consideration for future engagement because the appraiser
reports a value of a consumer's principal dwelling that does not meet or exceed a minimum
threshold.

31 | P a g e
 • Telling an appraiser a minimum reported value of a consumer's principal dwelling that is
needed to approve the loan.
• Failing to compensate an appraiser because the appraiser does not value a consumer's
principal dwelling at or above a certain amount.
• Conditioning an appraiser's compensation on loan consummation.
• In addition, a creditor cannot extend credit if the creditor knows, at or before closing, that
improper coercion has occurred by anyone unless the creditor can document that it has acted
with reasonable diligence to determine that the appraisal does not materially misstate or
misrepresent the dwelling's value.
The following practices are not prohibited:
• Asking an appraiser to consider additional information about the dwelling or comparable
properties.
• Asking an appraiser to correct factual errors.
• Obtaining multiple appraisals of a consumer's principal dwelling, as long as the creditor
adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that
states the highest value.
• Withholding compensation from an appraiser for breach of contract or substandard
performance of services as provided by contract.

2.28 TILA Record Retention

A creditor must retain evidence of compliance with this regulation for 2 years after the date
disclosures are required to be made or action is required to be taken. For the loan estimate,
document must be kept for 3 years and the closing disclosure must be kept for 5 years.

2.29 Home Ownership and Equity Protection Act (HOEPA)

HOEPA addresses certain deceptive and unfair practices in home equity lending. It amends the Truth
in Lending Act (TILA) and establishes requirements for certain loans with rates and fees above a
certain threshold. The rules for these loans are contained in this section of Regulation Z, which
implements the TILA.
Home Ownership and Equity Protection Act (HOEPA) establishes disclosure requirements and
prohibits deceptive and unfair practices in lending. HOEPA also places limitations on loan terms apply
to certain loans with high interest rates and/or high loan fees.
Prohibited Loan Terms: a loan that is subject to HOEPA cannot feature a balloon payment, negative
amortization or a prepayment penalty. A loan subject to HOEPA can also not be refinanced into
another HOEPA loan within one year unless doing so would create a tangible benefit for the
consumer.
Escrow Account: The rule requires the originating lender to establish and maintain an escrow
(impound) account for property taxes and insurance for a minimum of five years.
HOEPA Limitations - A loan transaction subject to the HOEPA may not include the following terms:

32 | P a g e
 • Balloon payments. When the regular payments do not fully pay (Turf the principal balance
and a lump sum payment of more than twice the amount of the regular payments is required.
HOEPA-covered loans must have regular payments to pay down the principal or at least pay
interest.
• Negative amortization. When smaller monthly payments do not fully pay off the loan and
cause an increase in the borrower's total principal debt. Any interest rate changes and
payment schedule caps must be coordinated to avoid this situation.
• Advance payments. When consolidating more than two periodic payments that are to be
paid in advance from the proceeds of the loan. The borrower should get the maximum use of
the funds and have a legitimate opportunity to use the loan proceeds.
• Increased interest rates. When there are higher than pre-default rates. Also includes rebates
of interest upon default calculated by any method less favorable than the actuarial method.
• Rebates.
• Prepayment penalties. Strictly prohibited.
• Acceleration of debt. Strictly prohibited. Includes any provision that would enable the creditor
to call the loan before maturity. Only certain behavior of the consumer would permit the
lender to call the loan, such as fraud, material misrepresentation, default, or damage to the
security property.
Additional Prohibitions - Additionally, according to Regulation Z, creditors granting loans meeting
HOEPA criteria may not
• Grant loans solely based on the collateral value of the borrower's property without regard
to the borrower’s ability to repay the loan (using the largest payment of principal and
interest scheduled in the first seven years following consummation).
• Disburse proceeds from home improvement loans to anyone other than the borrower,
jointly to the borrower and the home improvement contractor, or, in some instances, to
the escrow agent.
• Refinance a HOEPA loan into another HOEPA loan within the first 12 months of origination
unless the new loan is in the borrower's best interest. The prohibition also applies to
assignees holding or servicing the loan.
• Finance points and fees into the loan balance. It is permissible to finance certain
settlement costs into the loan amount.
• Charge late fees in excess of 4% of the past due monthly payment.
• Encourage borrowers to default on their mortgage obligations.
• Charge a fee for a loan modification or loan deferral and fees for payoff statements.

2.30 HOEPA, SECTION 32 – High Cost Loans

In order to figure out whether a loan is a high-cost loan, we must compare our loan’s APR against the
Average Prime Offer Rate (APOR), as published weekly by the Federal Financial Institutions
Examination Council (FFIEC).
When a loan is determined to be a high cost loan, it must meet the requirements set by Section 32 of
HOEPA. For example, the borrower must receive a Section 32 disclosure three days prior to executing

33 | P a g e
the loan documents for the transaction.
Be careful not to confuse high-cost mortgage loans with “higher-priced loans.” Higher-priced loans
will be explained in the next section.
APR Coverage Test - The APR coverage test. A loan is a high cost mortgage if the APR calculated with
the locked-in rate exceeds the Average Prime Offer Rate (APOR)* (which is an average of the APRs of
prime borrowers in the United States during the previous week), by more than:
• 6.5% on a first lien of $50,000 or higher
• 8.5% on a first lien less than $50,000
• 8.5% on second lien loans

Points and Fees Coverage Test - The points and fees coverage test. A loan is a high cost mortgage if
the points and fees exceed the following thresholds:
• 5% of the loan amount for loans equal to or greater than $21,549
• 8% of the total loan amount or $1077 for loan amounts less than $21,549
Prepayment Penalty Test - A transaction is a high cost mortgage, if a prepayment penalty is charged
for:
• More than 36 months after closing
• An amount more than 2% of the amount prepaid
Example - Applicant applied for a $100,000 loan and the Average Prime Offer Rate (APOR) was 4%.
The APR for the borrower is 10.625%, the points and fees are $6,100 and the prepayment penalty is
for 4 years and is quoted as 3% of the payoff amount. The following actions would trigger TILA section
32 or a High Cost loan designation:

1. APR Test - 10.625% APR (Exceeds APR threshold 4% + 6.5% (1st lien) = 10.5%)
2. Points and Fees Test - $6,100 fees (Exceeds threshold of 5% - $100,000 x 5% = $5,000)
3. Prepayment Penalty Test - 4 years and 3% of the payoff amount (Exceeds the 36-month
maximum prepayment period and exceeds the payoff penalty amount of 2%)

2.31 Home Ownership and Equity Protection Act (HOEPA, Section 35 HIGH PRICED)
TILA was amended in 2009 to create a new category of loans called “higher-priced mortgage loans,”
sometimes known as “HPMLs” or “Section 35 loans.” These loans, formerly called subprime, are now
called Higher Priced Mortgage Loans (HPML).
HPML Thresholds - A loan is a HPML if:
(a) The APR exceeds the APOR by 1.5% or higher for a first lien
(b) The APR exceeds the APOR by 3.5% or higher for a subordinate lien

Example - A borrower closed on a first mortgage loan of $120,000 where the APOR was quoted at 4%.
The APR at closing was 5.5%. The following would trigger a HPML designation:

34 | P a g e
APR Test - ARP 5.5. (Equal to or exceeds the APOR threshold – 4% + 1.5% (1st lien) = 5.5% by 1.5%
reaching the 1.5% HPML trigger threshold for a first lien)
On a HPML, the borrower must escrow (first liens only) for a minimum of five (5) years, and the
lender is prohibited from charging a prepayment penalty if the loan’s interest rate can adjust in the
first four years of the loan term.
Additionally, lenders must verify the borrower’s ability to repay all higher-priced mortgage loans by
looking at the borrower’s income, assets, credit and debt and by calculating a debt-to-income ratio.

2.32 Loan Originator Compensation Rule

In the past, loan originators’ compensation was partially based on the type and terms of the chosen
loan product. The Loan Originator Compensation Rule:
• Prohibits creditors from compensating MLOs based on the loan’s interest rate or other terms
associated with the rate/terms of the loan.
• Additionally, the rule eliminated the form of compensation known as yield-spread premium
(YSP), in which mortgage brokers and originators were able to increase their compensation by
providing the borrower an interest rate higher than that for which they qualified.
• Compensation includes commissions, bonuses, salaries, merchandise, trips and any other
financial incentives.
• The law further prohibits against dual compensation; that is, it restricts an originator from
being paid by either the borrower OR the lender on a given transaction, but not both.

Loan originator organizations must keep a record of payments from a creditor and payments to
individual originators for three (3) years.

2.33 Ability-To-Repay (ATR) Mortgage Rules

As part of the requirements of the Dodd-Frank Bill, the Consumer Financial Protection Bureau (CFPB)
implemented the Ability to Repay (ATR)/Qualified Mortgage (QM) rule, which took effect on January
10, 2014.
The rule requires lenders to make a reasonable, good-faith determination before or when a loan is
consummated, that the consumer/borrower has a reasonable ability to repay the loan.
If a borrower can prove in court that a loan did not meet the ATR requirements, then the borrower
can sue for up to three times the amount of finance charges paid, including attorney fees. A borrower
has three years to file a claim.
The ability-to-repay provisions requires creditors to make a “reasonable and good faith
determination” based on verified and documented information that, at the time the loan is
consummated (closed), the consumer has a reasonable ability to repay the loan according to its terms,
as well as all applicable taxes, insurance (including mortgage insurance) and assessments.
Coverage of the Rule - The rule applies to all closed-end mortgages secured by residential properties,

35 | P a g e
with the following exceptions:
● HELOCs
● Timeshares
● Reverse mortgages
● Temporary loans (less than 12 months)
● Construction loans

Factors to Consider When Evaluating ATR - Lenders should consider the following eight (8) factors
when determining whether or not a borrower has the ability to repay a mortgage:
1. Current or reasonably expected income or assets.
2. Current employment status.
3. Borrower’s Credit History.
4. Monthly mortgage payment for this loan. You calculate this using the introductory or
fully-indexed rate, whichever is higher, and monthly, fully amortizing payments that are
substantially equal.
5. Monthly payment on any simultaneous loans secured by the same property.
6. Monthly payments for property taxes and insurance that you require the consumer to
buy, and certain other costs related to the property such as homeowner’s association
fees or ground rent.
7. Other debts, including alimony, and child support obligations.
8. Monthly debt-to-income ratios or residual income that you calculated using the total of
all the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly
income.

2.34 Qualified Mortgage

Lenders are deemed to have complied with ATR requirements if they satisfy the definition of a
Qualified Mortgage (QM). The requirements for a QM are, in general:
● No-doc loans not eligible: So-called no-doc loans where the creditor does not verify income
or assets cannot be qualified mortgages.
● No excess upfront points and fees: Limits points and fees, including those used to
compensate loan originators, such as loan officers and brokers. A loan generally cannot be
considered a qualified mortgage if the points and fees paid by the consumer exceed three
percent (3%) of the total loan amount.
● Cap on how much income can go toward debt: Qualified mortgages generally will be
provided to people who have debt-to-income ratios less than or equal to 43%. This
requirement helps ensure consumers are only getting what they can likely afford.
● Maximum loan term of 30 years.
● Prepayment penalties prohibited: Prepayment penalties are generally prohibited, except for
certain fixed-rate, qualified loans.
● No risky or toxic features: No negative amortization, no balloon payments, no Interest-only
loans.

36 | P a g e
 ● For ARMs - Must be underwritten as a fully amortizing loan at the maximum interest rate
that the loan can adjust to in the first five (5) years.
Temporarily, if a loan can be sold to Fannie Mae, Freddie Mac, or insured/guaranteed by FHA, VA or
USDA, the 43% DTI requirement will be waived.
NOTE: Do NOT confuse Qualified Mortgages with qualified residential mortgages (QRMs). The QM
deals with a consumer’s ability to repay. The QRM deals with risk retention and focuses on the
secondary market. In essence, if a mortgage loan fulfills all of the requirements to be a QM, the
institution is presumed to have complied with the ability-to-repay requirements. This is an important
distinction because loans that meet the QM standards protect the lender from potential legal action,
as described above.

2.35 TILA-RESPA Integrated Disclosure Rule (TRID)

Prior to October 3, 2015, borrowers received two cost-related disclosure forms at the time of
application and potentially two more similar forms at the time of closing. The similar forms (called the
Good Faith Estimate and Truth in Lending disclosure) contained overlapping information and were
quite confusing for consumers to understand.

In response to those problems, the Dodd-Frank Act required the Consumer Financial Protection
Bureau to combine a few of the disclosures required by RESPA and TILA in order to make them easier
to understand and to cut back on some of the excessive paperwork.
By integrating some of the disclosure forms and making other related changes, the government is
hoping to make it easier for consumers to understand the terms of their loans.
In December 2013, the CFPB addressed the integration of the RESPA and TILA disclosures by finalizing
what has become known as the “TILA-RESPA Integrated Disclosure Rule.” The rule contains two
newly integrated disclosure forms and instructions on how to use them. Note that even though these
disclosures are referred to as “TRID” or “TILA/RESPA Integrated Disclosures,” the actual requirements
for providing them to applicants are now contained entirely in Regulation Z.
Specifics regarding the newly integrated forms will be discussed in greater detail over the next few
pages. However, the basics are as follows:
● The Good Faith Estimate and the initial Truth in Lending disclosure form have been combined
into one disclosure form known as the Loan Estimate. This form discloses the cost of the credit
itself, as well as settlement cost information based on the information known at the time of
application.
● The HUD Settlement Statement and the final Truth in Lending disclosure form have been
combined into one disclosure form known as the Closing Disclosure, which discloses actual
cost information at the time of closing/settlement/consummation of the loan.
The contents of the TILA-RESPA Integrated Disclosure Rule (including the requirements pertaining to
the two new disclosure forms) apply in credit transactions involving a wide range of mortgage loans.
As with any rule, however, there are some exceptions. The TRID rule doesn’t apply to the following
types of mortgage loans:
37 | P a g e
 ● Home equity lines of credit (HELOCs).
● Reverse mortgages.
● Mortgages for mobile homes not secured by real estate.
● Loans from anyone who funds no more than five loans in a calendar year (typically sellers
assisting in financing properties that they are selling).
Loans that are exempt from the TRID requirements will continue to use the GFE, HUD and TIL
disclosure forms.

2.36 Loan Estimate

The new Loan Estimate form replaces the Good Faith Estimate required by RESPA and the initial TIL
disclosure form required by TILA. The purpose of the new form is to help applicants obtain an early
understanding of various features, costs and risks that are associated with a potential mortgage loan.
Records of Loan Estimates must be kept by creditors for at least three (3) years after the loan has
been consummated.
Intent to Proceed - In addition to providing essential information to potential borrowers, the Loan
Estimate is an important disclosure form because creditors are prohibited from performing certain
acts until the form is received and the borrowers have indicated their intent to proceed with the
transaction presented.
● The borrower can indicate an intent to proceed with the transaction in any way that he or she
chooses, unless the creditor requires a specific kind of communication. The intent to proceed
might be provided orally in a face-to-face or phone conversation or in some written format.
However, a creditor cannot interpret a borrower’s silence as an intent to proceed with the
transaction.
● Until the borrower has received the Loan Estimate and indicated an intent to proceed, a
creditor is generally forbidden from charging any fees. Prohibited fees in this early stage of
the transaction include (but are not limited to) application fees, appraisal fees and
underwriting fees.
● The only fee that can be charged prior to delivery of the Loan Estimate and receipt of the
borrower’s intent to proceed is a fee for obtaining the borrower’s credit report.
● In cases where the creditor is not charging an advance fee for the credit report, the regulation
specifically prohibits taking any credit card information or collecting a check before receiving
the applicant’s intent to proceed, even if the card is not charged or the check is not cashed.

2.37 Delivering the Loan Estimate

The creditor is required to either give or mail the Loan Estimate to a borrower no later than three (3)
business days after taking the borrower’s application.
The form does not need to be given or mailed to the borrower if the borrower withdraws the
application during that three-day period or if the application is denied by the creditor during that
period.
The three-day clock for providing the Loan Estimate begins when a creditor receives an “application.”
38 | P a g e
For purposes of complying with the TILA-RESPA Integrated Disclosure Rule, an application is
considered to have been received when the creditor has obtained the following six pieces (and ONLY
these six pieces) of information from the applicant:
1. Name
2. Income
3. Social Security number
4. Property address
5. Estimated value of property
6. Loan amount
The application is considered to be taken when the creditor has the sixth and final piece of
information, even if that information is taken verbally from the applicant.
Be aware that although mortgage brokers may provide the Loan Estimate to borrowers, the creditor is
ultimately responsible for its delivery.
1. Requires delivery or mailing 3 business days of receipt of “application”. If the Loan Estimate is
not provided to the consumer in person, the consumer is considered to have received the
Loan Estimate three business days after it is delivered or placed in the mail.
2. Most charges on the Loan Estimate must be good for at least 10 business days from date
provided unless a new Loan Estimate is provided prior to settlement. However, this 10-
business day provision does not apply to interest rate.
3. A revised Loan Estimate must be provided within 3 business days of receiving information
establishing changed circumstances affecting settlement costs, loan terms, or the borrower
requested changes (but not less than 4 days PRIOR to closing)
4. Requires corrected disclosures to be delivered at least 4 business days before loan
consummation.
5. Originator is not bound by the Loan Estimate if a borrower does not express intent to
continue with application within 10 business days after providing the Loan Estimate.
6. 3-year record retention for documenting reasons for providing new Loan Estimate
7. If charges at settlement exceed the LE charges by more than the permitted tolerances, the
originator may cure the violations by reimbursing the borrower by the amount the tolerance
was exceeded within 60 calendar days of settlement.
8. A lender/MLO must now wait at least 7 business days after delivery of the disclosures to the
borrower before closing the mortgage loan.
9. Require corrected disclosures to be delivered at least 3 business days before closing the
mortgage if the APR on FIXED rate loans increases by more than 1/8% and on an ARM
mortgage increases by more than 1/4%.

2.38 Good Faith and The Loan Estimate

The Loan Estimate is designed to provide an accurate estimate of all settlement provider charges the
borrower can expect to incur during the course of the loan and at loan consummation. Whether the
Loan Estimate is made in good faith is determined by the difference of the initial cost estimate and
39 | P a g e
the final costs charged at loan closing.
If the closing costs on the Closing Disclosure are:
• Greater than what was disclosed initially on the Loan Estimate, the Loan Estimate is
considered to not be made in good faith.
• Less than the Loan Estimate, the originator is considered to have acted in good faith when
making the initial Loan Estimate.

2.39 Loan Estimates and “Business Days”

Because the Loan Estimate must be provided within three (3) business days of a creditor receiving an
application, it is important to understand the definition of a “business day.”
• Within the context of the deadline for providing the Loan Estimate, a business day is any day
on which a creditor is open to the public for the purpose of conducting its regular business
activities.
• The definition of “business day” can be tricky because it isn’t identical in all federal mortgage
laws and rules. According to TILA (and other Federal Regulations, including the Closing
Disclosure “business day” is defined as all calendar days except Sundays and legal federal
public holidays.

2.40 Valid Changed Circumstances

Completing the Loan Estimate - Because the Loan Estimate is, in part, meant to replace the Good
Faith Estimate, it’s not surprising that the figures contained on the Loan Estimate must be based on an
honest assessment of settlement costs that the applicant is likely to pay.
• The amounts listed on the form must result from all the information that is reasonably
available to the creditor or mortgage broker at that time. A creditor or mortgage broker who
does not exercise due diligence when completing the form is not acting in good faith and is in
violation of the rule.
• A creditor will have acted in bad faith if amounts charged to the borrower end up exceeding
the amounts on the Loan Estimate. This presumption of bad faith will occur even if the
differences are the result of mere miscalculations or unintentional poor estimates.
Creditors may only use revised or corrected Loan Estimates when specific requirements are met.
• MAY NOT ISSUE REVISIONS to Loan Estimates because they later discover technical errors,
miscalculations, or underestimations of charges.
• MAY ISSUE REVISED Loan Estimates only in certain situations such as when CHANGED
CIRCUMSTANCES result in increased charges.
Changed Circumstances: Revisions are permitted only in certain specific circumstances. Although a
Loan Estimate may provide to the borrower in good faith, settlement charges can change
unexpectedly between the time of Loan Estimate and the closing.
These variations are permitted by the TILA-RESPA Integrated Disclosure Rule and are subject to legal
tolerance limits.

40 | P a g e
These situations that may justify a revised Loan Estimate for the purpose of resetting the fees.
They include:
• Changed circumstances that cause an increase to settlement charges: For example, a Loan
Estimate discloses an estimated appraisal fee of $300, based upon an information given to the
lender that the subject property was a single-family dwelling.
o When the appraiser arrives, it is discovered that the property is located on a 20-acre
farm. The appraiser revised the fee to $450, based upon a different schedule of fees for
farm property.
o The lender must issue a revised Loan Estimate with the new appraisal fee or be guilty of
a tolerance violation.
• Changed circumstances that affect the consumer's eligibility for the loan or affect the value
of the subject property: For example, the borrower applies for a loan program, which provides
for a preferred interest rate based upon a lower LTV ratio. However, when the appraisal is
completed, it is discovered that the LTV is too high to qualify for the program, triggering a
revised Loan Estimate with a higher interest rate.
• Consumer-requested changes: For example, assume that the borrower has decided to give
power of attorney to a family member to consummate the transaction on the borrower's
behalf.
o Recording fees are not increased to account for the recording of the power of attorney.
o A revised Loan Estimate must be provided.
• Interest rate locks: If the interest rate Is not locked at the time the Loan Estimate is provided,
a lender may issue a revised Loan Estimate once the rate Is locked, assuming there has been a
change in rate or charges.
• Expiration of original Loan Estimate: Loan Estimates only guarantee rate and fees for 10
business days. Should the borrower fail to indicate an intent to proceed within that time the
lender may Issue a new Loan Estimate with different terms and fees.
• Construction loan settlement delays: For construction loans expected to close more than 60
days after a Loan Estimate is provided, lenders may reserve the right to revise disclosures at
least 60 days prior to consummation by clearly and conspicuously stating that in the original
disclosures.
Should there be a valid changed circumstance justifying the need to issue a new Loan Estimate, the
following should be understood:
• The revised Loan Estimate must be sent within three business days of the changed
circumstance and at least four business days prior to dosing.
• A revised Loan Estimate may not be issued once the Closing Disclosure has been delivered.
• Documentation justifying the new Loan Estimate should be kept in the loan file.
Changed Circumstances that affect eligibility: A creditor also may provide and use a revised Loan
Estimate if a changed circumstance affected the consumer’s creditworthiness or the value of the
security for the loan, and resulted in the consumer being ineligible for an estimated loan term
previously disclosed.

41 | P a g e
Examples:
• The creditor relied on the consumer’s representation to the creditor of a $95,000 annual
income, but underwriting determines that the consumer’s annual income is only $85,000.
• There are two co-applicants applying for a mortgage loan and the creditor relied on a
combined income when providing the Loan Estimate, but one applicant subsequently
becomes unemployed.

2.41 Tolerances
In some cases, the amounts actually charged to borrowers can exceed the amounts listed on the Loan
Estimate. This is particularly true in regard to charges from third-party service providers. However,
even these charges might have a limit to how much they can differ from the amounts on the Loan
Estimate. The amount that a particular charge can exceed the amount listed on the Loan Estimate is
known as the charge’s “tolerance.”
If the closing costs on the Closing Disclosure are greater than what was disclosed initially on the Loan
Estimate, the Loan Estimate is considered to not be made in good faith. If they are less than the Loan
Estimate, then the originator is considered to have acted in good faith when making the initial Loan
Estimate.
Zero tolerance - Some charges and fees on the Loan Estimate have “zero tolerance.” In other words,
the amount listed on the Loan Estimate cannot be less than the final amount actually charged to the
borrower. There is zero tolerance for the following items:
➢ Fees paid to the creditor, mortgage broker, or an affiliate of either
➢ Taking, underwriting, and processing the application
➢ Origination Fees, application fee, tax service fee, junk fees
➢ Discount Fees (after locking the loan)
➢ Credit to the Borrower (Yield Spread Premium) - after locking the loan
➢ Fees paid to an unaffiliated third party if the creditor did not permit the consumer to shop
for a third-party service provider for a settlement service
➢ Transfer taxes
Cumulative tolerance of 10% - Some third-party services that are charged to the borrower have a
cumulative tolerance of 10%. Although any one of these third-party service charges can exceed the
corresponding charge listed on the Loan Estimate by any amount (even above 10%), the final amount
(aggregate) for these third-party charges cannot exceed the amount disclosed on the Loan Estimate
by more than 10%. The 10% tolerance is cumulative (figured upon the sum total of all such costs) and
applies to the following charges and fees:
➢ Settlement services where the lender/MLO selects the provider (appraisal and credit
report fees). The charge is not paid to the creditor or the creditor’s affiliate
➢ Settlement services where the borrower selects the provider from the MLO’s list
➢ Title services and Title insurance if the lender/MLO selects the provider
➢ Government recording fees

42 | P a g e
 ➢ A creditor may charge a consumer fee that would fall under the 10% cumulative tolerance
but was not included on the Loan Estimate so long as the sum of all charges in this category
paid does not exceed the sum of all estimated charges by more than 10%.
No tolerance requirement - If a borrower is allowed to choose a third-party service provider and
chooses a provider who is NOT on the creditor’s recommended provider list, the cost of the service
will not be subject to any tolerance and may increase from the amount listed on the Loan Estimate
without limit.
➢ Services the borrower chooses providers (title companies, termite, survey, etc.)
➢ Impounds for Taxes and Insurance (Escrow Account)
➢ Prepaid interest (Per diem interest)
➢ Homeowner’s/Flood Insurance/Property Taxes due at closing
Remember, when a creditor allows a consumer to shop for a third-party service and the consumer
chooses a service provider not identified on the creditor’s list, the charge is not subject to a tolerance
limitation.
Fees that are greater than those listed on the Loan Estimate and exceed their allowed tolerances must
be refunded to the borrower within 60 days after consummation.

2.42 Revised Loan Estimates

In most cases, the amounts listed on the Loan Estimate cannot be changed by the creditor after the
form has been delivered. However, there are some situations in which a Loan Estimate can be
replaced with a revised Loan Estimate.
● When a revised Loan Estimate is used, the amounts on the revised form are the ones that will
be compared to the final settlement costs. The amounts on the original form will no longer
apply.
● If a revised Loan Estimate is used, it will need to be mailed or given to the borrower no later
than three (3) business days after the creditor learns of the reason for the revision.
● Note that, in all cases, a revised Loan Estimate CANNOT be provided to the applicant after the
delivery of the Closing Disclosure.
● A revised Loan Estimate is to be received at least four (4) days prior to loan consummation (as
the Closing Disclosure must be given to the borrower no more than three business days prior
to closing). This is to make sure that that the SOONEST a loan can close is seven (7) days after
the disclosures have been delivered or placed in the mail (3 + 4 = 7).
A revised Loan Estimate can be issued in the following circumstances:
● The borrower requests changes to the credit terms or the settlement.
● A previously floating interest rate is locked after the original Loan Estimate was given or mailed
to the borrower.
● A Loan Estimate has already been given or mailed to the borrower, and the borrower has gone
more than ten (10) business days without indicating an intent to proceed.

43 | P a g e
 ● A “changed circumstance,” which is a special scenario that occurs or is discovered after
delivery of the Loan Estimate, and either results in higher settlement costs or a change in a
borrower’s eligibility for a loan. There are three broad categories of changed circumstances:
1. An extraordinary or unexpected event.
2. A change in the information that was reasonably relied on by the creditor when making
the Loan Estimate.
3. New information that impacts the settlement costs or the borrower’s eligibility for the
loan.
Some examples of a changed circumstance are:
➢ A title insurance company going out of business.
➢ The appraised value of the property is lower than the borrower’s original estimate of
value.
➢ A natural disaster damaging a property.
➢ A change or inaccuracy in the borrower’s stated income.

2.43 Key Terms Appearing on The Loan Estimate

Annual Percentage Rate (APR) - APR is the estimated total cost of credit over the life of the loan,
expressed as an effective annual interest rate. It includes any interest, discount points, origination
fees, mortgage insurance premiums and other costs of borrowing money.
Total Interest Percentage (TIP) - The Total Interest Percentage (TIP) discloses to borrowers the total
amount of interest that they will pay over the life of the loan, expressed as a percentage of the
original loan amount.
Waiting Periods After the Loan Estimate - A transaction cannot be consummated until seven (7)
business days after the provision of the Loan Estimate. This seven-day period starts when the creditor
delivers or mails the form (in other words, not necessarily when the borrower actually receives it).
• The definition of “business day” for the purpose of this waiting period differs from the
definition that lenders use to determine the deadline for providing the Loan Estimate. For
purposes of the seven-day waiting period, a business day is not merely any day on which a
creditor is open to the public (as in the Initial Loan Estimate) to conduct regular business.
Instead, it is any day except Sundays and federal holidays.
• A borrower can waive the seven-day waiting period in the event of a “bona fide personal
emergency.” For instance, a borrower might want to eliminate or shorten the waiting period if
the loan is needed right away in order to prevent a property from being sold at a foreclosure
proceeding.
• A borrower who wants to waive or reduce the waiting period must give the creditor a signed
handwritten statement that explains the issue and specifically requests the elimination or

44 | P a g e
 reduction of the waiting period. No pre-printed waiver forms are allowed. The lender will
make the final decision on whether or not this waiver is approved.

2.44 Closing Disclosure

The Closing Disclosure replaces the HUD Settlement Statement and (if applicable) the final TIL
disclosure that was provided to borrowers at closing. The new form is used to help consumers
understand the final costs and terms of the transaction. It must be provided in all transactions that (i)
require the issuance of a Loan Estimate, and (ii) have reached the closing stage.
Copies of the Closing Disclosure must be kept by the creditor for at least five (5) years. If the creditor
sells the loan or transfers servicing to another entity, the other entity must receive a copy of the form.
At that point, both the creditor, the new owner and/or the new servicer must keep their copies for at
least five (5) years from the time of consummation.
Delivering the Closing Disclosure - Creditors are ultimately responsible for giving the Closing
Disclosure to the borrower no later than three (3) business days before consummation.
Once again, it is important for us to understand the definition of “business day” within its proper
context. The Closing Disclosure must be given to the borrower no later than three (3) business days
prior to consummation. For the purposes of this deadline, a business day is any day except Sundays
and federal holidays. Remember, this definition is not the same as the one used to determine timely
delivery of the Loan Estimate form.
The Closing Disclosure can be provided to the borrower in person, or it can be mailed physically or
electronically. If it is mailed, the borrower is deemed to have received it three (3) business days after
the mailing date. If it is sent electronically (email), the consumer is deemed to have received it three
business days after electronic delivery.
Like the waiting periods associated with the Loan Estimate, the three-day requirement for the Closing
Disclosure can be waived by the borrower (and the loan can be consummated) if there is a bona fide
personal emergency.
The Role of Settlement Agents - Creditors might utilize settlement agents in order to complete
certain tasks or monitor the status of a transaction. For example, settlement agents might ensure that
all necessary documents have been signed by consumers and that all fees, charges and other kinds of
payments have been made prior to the end of a transaction. The TILA-RESPA Integrated Disclosure
rule allows creditors to use settlement agents for the purpose of completing and/or delivering the
Closing Disclosure. However, the creditor is responsible for the accuracy of the form and ensuring that
it is delivered in a timely manner.

45 | P a g e
2.45 Revised Closing Disclosure
Revised Closing Disclosures - When changes result in different amounts being charged than what
appeared on the Closing Disclosure, a revised form must be provided to the borrower. The deadline
for providing a revised form will depend on the type of change and the time it occurs.
If any of the following changes occur after the issuance of the Closing Disclosure but prior to
consummation, the creditor must provide a corrected Closing Disclosure to the borrower no later
than three (3) days before the consummation (in other words, a new three-day period is required):
• An increase in the APR by more than 0.125% (for most loans) or 0.25% (for “irregular” loans
with nontraditional payments or periods).
• A change in the loan product.
• The addition of a prepayment penalty.
If other changes occur, creditors must ensure that the consumer receives a corrected Closing
Disclosure at or before consummation
If a settlement is scheduled during the waiting period, the creditor generally must postpone
settlement, unless a settlement within the waiting period is necessary to meet a bona fide personal
financial emergency.
Consumers may waive or modify the three-business-day waiting period when the following criteria is
met:
1. The extension of credit is needed to meet a bona fide personal financial emergency.
2. The consumer has received the Closing Disclosure; and
3. The consumer gives the creditor a dated written statement that describes the emergency,
specifically modifies or waives the waiting period, and bears the signature of all consumers
who are primarily liable on the legal obligation.
4. The creditor is prohibited from providing the consumer with a pre-printed waiver form.
Example: the imminent sale of the consumer’s home at foreclosure, where the foreclosure sale will
proceed unless loan proceeds are made available to the consumer during the waiting period, may be
considered a bona fide personal financial emergency
Other changes that occur prior to consummation must still be disclosed on a corrected form, but
those changes are less likely to delay the transaction. For changes that do not require a new waiting
period, the corrected form must be given to the borrower no later than at or before consummation.
• If a change occurs within 30 calendar days after consummation, the creditor will have 30
calendar days to deliver or mail a revised Closing Disclosure. An example of this kind of change
would be an underestimated recording fee. However, a change in taxes or in other costs that
aren’t related to settlement does not require a new disclosure after consummation.
• Some instances require a corrected Closing Disclosure within 60 calendar days after
consummation. This requirement will apply in cases where a clerical error has occurred. For
example, a borrower would be entitled to a new Closing Disclosure within 60 calendar days
after consummation if the original form were to contain the incorrect name of a third-party
service provider.

46 | P a g e
• A Tolerance Violation occurs if certain costs on the Loan Estimate form are lower than the
borrower’s actual costs. If a creditor reimburses a borrower for this reason, the
reimbursement will be noted on a new Closing Statement. This too must be given within 60
calendar days after consummation.

47 | P a g e
 CHAPTER 2 QUIZ
1) The Consumer Financial Protection Bureau was created by the
a. Dodd-Frank Wall Street Reform and Consumer Protection Act.
b. Federal Home Loan Bank Act.
c. National Housing Act.
d. Federal Reserve Act.

2) Diana files a complaint with her mortgage servicer, how long does the servicer have to acknowledge
receipt of Diana’s complaint?
a. 5 days.
b. 10 days
c. 15 days
d. 45 days

3) _______________ is a disclosure that provides notice regarding the lender’s intentions on transferring
or retaining the servicing of the loan.
a. Servicing transfer statement
b. Mortgage servicing disclosure
c. Loan estimate
d. Annual

4) Under RESPA section ________ it is illegal for a property seller to require the buyer to use a particular
title insurance company, either directly or indirectly, as a condition of sale?
a. 6
b. 8
c. 9
d. 10

5) The definition of a “Complete Application” according to RESPA, includes all of the following EXCEPT
the
a. address of the subject property.
b. gross monthly income.
c. most recent two months of bank statements.
d. name of the borrower.

48 | P a g e
6) A lender may not use ____on the Loan Estimate in the “property address” section.
a. N/A
b. ABC
c. TBD
d. UNK

7) Which regulation requires disclosure of the Annual Percentage Rate (APR) in advertising?
a. RESPA
b. TILA
c. ECOA
d. HPA

8) TILA applies when credit is payable by written agreement in __________ installments.

a. more than four (4) installments
b. less than four (4) installment
c. four (4) installment
d. more than three (3) installments

9) A higher-priced loan is a one that

a. has an APR greater than 6.5%
b. includes finance charges greater than 5% of the loan amount
c. is also known as a Section 32 loan
d. uses the average prime offer rate as an index

10) A high cost loan is one that is defined as a mortgage loan (first lien) where the APR exceeds the
average prime offer rate by
a. 4.0%
b. 5.0%
c. 6.5%
d. 8.5%

11) How long must the closing disclosure me kept?

a. 5 years
b. 3 years
c. 2 years
d. 10 years

49 | P a g e
12) A Qualified Mortgage may contain all of the following terms except?
a. A 40-year term loan
b. The ability to repay the mortgage debt
c. Debt-to-income ratio of 43% or less
d. Good standing on current income or assets

13) The TILA-RESPA Integrated Disclosures do not apply to all of the following except:
a. Home Equity Line of credit
b. Reverse mortgages
c. Mobile homes not secured by real property
d. Mobile homes not secured by real property

14) How long must the loan estimate disclosure be kept?

a. 5 years
b. 3 years
c. 2 years
d. 10 years

15) If the loan estimate has been revised after receiving information establishing changed circumstances
affecting settlement costs, loan terms, or borrower requested changes – when must a revised loan
estimate be provided to the borrower.
a. 10 business days
b. 5 business days
c. 15 business days
d. 3 business days

16) Which of the following would allow a 10% cumulative tolerance?

a. Origination fees.
b. Transfer taxes.
c. Flood certifications.
d. Recording fees.

17) Which law requires MLOs to provide borrowers with a Loan estimate of potential closing costs?
a. FCRA
b. HMDA
c. RESPA
d. TILA

50 | P a g e
18) Which fee can be collected prior to delivery of the Loan Estimate?
a. Appraisal fee
b. Credit report fee
c. Origination fee
d. No fees can be collected prior to delivery of the Loan Estimate

51 | P a g e
3.0 FEDERAL MORTGAGE-RELATED LAWS PART II
Chapter Objective
Upon completion of this chapter, you will be able to:
• Learn about the Equal Credit Opportunities Act (ECOA)
• Learn about the Fair Housing Act (FHA)
• Learn about various additional Federally mandated laws
This chapter continues the discussion of Federal Mortgage-related laws, specifically those dealing with
discrimination and consumer protection.
The three primary fair lending laws that regulate the residential mortgage industry are
• The Equal Credit Opportunity Act (ECOA) – addresses fairness in the application process, the
extension of credit and appraisal disclosure requirements
• The Fair Housing Act (FH Act) – addresses fairness in the extension of credit relating to housing
and other housing related discrimination practices
• The Home Mortgage Disclosure Act (HMDA) – addresses patterns of discrimination

3.1 Equal Credit Opportunity Act (ECOA), REG B

Enacted in 1974 and amended in 1976, The Equal Credit Opportunity Act (ECOA) prohibits
discrimination in lending. Women and minorities now have an equal opportunity to obtain credit that
they may not have had prior to 1974. The right to receive a copy of the appraisal is also granted by
ECOA.
Regulation B is the federal regulation that implements ECOA. Rule-making and enforcement power
regarding ECOA belongs to the Consumer Financial Protection Bureau (CFPB).
The Equal Credit Opportunity Act (ECOA) is a federal law that ensures that all consumers are given an
equal chance to obtain credit. ECOA:
• Requires creditors to disclose to consumers what their rights are under ECOA, including a
notice to the applicant of their right to receive a copy of any appraisal report on the property
that was used in the credit decision-making process.
• Requires credit bureaus to maintain separate credit files for married spouses, if requested.
• Allows credit applicants to file discrimination complaints or bring a civil lawsuit for alleged
discrimination.
• ECOA prohibits a creditor from inquiring about a consumer’s marital status or intentions related
to having or raising children.
• ECOA also prohibits creditors from making any oral or written statement, in advertising or
otherwise, to applicants or prospective applicants that would discourage them from making
or pursuing an application on a prohibited basis, such as membership in a protected class.

52 | P a g e
The Equal Credit Opportunity Act (ECOA) prohibits discrimination in the granting of all types of credit
based on:
• Sex
• Race
• Color
• Religion
• National Origin
• Marital status
• Age (provided that the applicant has the capacity to enter into a legally binding contract)
• Receipt of income from public assistance benefits (welfare, social security, disability, child
support, alimony, etc.)
• The fact that the applicant has exercised any right, in good faith, under the Consumer Credit
Protection Act

Compare Fair Housing “protected classes” with ECOA’s “protected classes”

FAIR HOUSING ECOA
• Sex • Sex
• Race • Race
• Color • Color
• Religion • Religion
• National Origin • National Origin
• Disability/Handicap • Marital Status
• Familial Status • Age
• Receipt of Public Assistance

The law indicates that someone cannot be discouraged from applying for credit based on any of the
above factors.

ECOA states that lenders/MLOs are not allowed to ask borrowers questions related to how many
children they are planning on having in their family.
➢ Childbearing, childrearing. A creditor shall not inquire about birth control practices,
intentions concerning the bearing or rearing of children, or the capability to bear children.
➢ A creditor may inquire about the number and ages of an applicant's dependents or about
dependent-related financial obligations or expenditures, provided such information is
requested without regard to sex, marital status, or any other prohibited basis.

In order to ensure compliance with ECOA, lenders and mortgage loan originators should refrain from
asking any questions that may be construed as discriminatory.
• For example, a loan originator should never ask a borrower whether any portion of his/her
income is derived from alimony, child support or public assistance.

53 | P a g e
 • ECOA allows for those forms of income (i.e. child support, alimony, etc.) to be used, but only if
the borrower elects to disclose them. If borrowers do not wish to use such income as a basis for
qualification, they may leave those sources undisclosed.
• An example of an appropriate non-discriminatory question that a loan originator may ask is,
“Are there any other sources of income you wish to disclose to me?”
• As long as the borrower's income from public assistance is stable (or permanent), the lender or
mortgage broker must consider this income as valid as any other qualifying income. The
stability of a borrower's income should be considered and not its source. Lenders and
mortgage brokers must therefore:
➢ Consider reliable public assistance income the same way as other income.
➢ Consider reliable income from part-time employment, Social Security, pensions and
annuities.
➢ Accept someone other than a spouse as a co-signer, if one is needed.
➢ Consider reliable alimony, child support or separate maintenance payments if the
borrower chooses to provide this information (lenders may ask for proof).
➢ Cannot discount income because of sex or marital status.
➢ Cannot discount or refuse to consider income because it comes from part-time
employment or pension, annuity or retirement programs.
• Note that although it is considered discriminatory to ask if an applicant receives income from
alimony, child support or public assistance sources, it is NOT considered discriminatory to ask
if an applicant has been mandated by a court to pay alimony, child support or other
maintenance. In fact, loan originators should ask this question, as those payments are treated
as liabilities and must be disclosed on the loan application.

3.2 ECOA & Marital Status

The marital status of an applicant may be requested for a mortgage loan. This information is
important to the lender because of the different requirements in some states for establishing a
secured interest in real estate depending on whether or not a person is married. It is also permissible
to ask the applicant(s) their marital status, as this may have an impact on the documents that the
lender will require to be executed at closing.
• If an applicant is not legally married, it is NOT permissible to ask if he/she is divorced, widowed,
etc.
• The only three choices on the application regarding marital status are: married, unmarried and
separated.
• One should never ask applicants how many children they have (or plan to have). Rather, the
proper question is, “How many dependents do you have?”
• A lender/MLO may never ask questions about an applicant's spouse unless:
➢ It’s a joint application
➢ The applicant is relying on the spouse' income to qualify
➢ The applicant resides in a community property state or the security is in such a state
➢ The applicant is relying on alimony, child support or separation maintenance

54 | P a g e
 payments from a spouse or former spouse

3.3 ECOA & AGE

Creditors can consider the age of an applicant for credit under these circumstances: The applicant is
too young to sign contracts, generally under age 18, or the applicant is applying for a reverse
mortgage, in which case applicants must be age 62 and older.

3.4 ECOA Disclosures & Notifications

ECOA required a creditor to notify the borrower within 30 days following receipt of a completed
application whether the application is approved, denied, or whether further actions is required to
make such determination.
For any application which is denied, ECOA requires the creditor either explain to the borrower the
reason for the denial in writing or provide the borrower a written notification of denial, including an
explanation of the applicant’s rights of as statement of the reason for denial.

Required Disclosures
Creditors must disclose customer’s rights under ECOA. Creditors must notify applicants of the lending
decision within 30 days of filing a completed application as follows:
• Approved: Commitment Letter
• Incomplete: Notice of Incomplete Application
• Denied or offered less favorable terms or if there was a change of terms of an existing credit
agreement: Statement of Adverse Action
The Statement of Adverse Action must be in writing and include specific reasons for the decision or
inform the applicant of the right to request specific reasons for the decision within 60 days of a credit
decision.
Here is a sample letter that contains the necessary statement:
Dear Applicant:
In reference to your application for a mortgage loan, we regret to inform you that we are unable to further consider you for a
mortgage loan at this time. Our decision, in part, is the result of information obtained through the Consumer Reporting
Agency identified below:
You have a right to obtain, within 60 days, a free copy of your consumer report from the Consumer Reporting agency as
identified below. You have a right to contact the Consumer Reporting Agency listed below to dispute any information
contained in the report that you believe may be inaccurate or incomplete. A copy of your rights can be found under the Equal
Credit Opportunity Act.
The consumer reporting agency used to make this decision is listed below:
Equifax - 123 ABC Street * Anytown, CA * 1-800-991-4444
Sincerely,
Notice of Action Taken: Within 30 days of receipt of a loan or credit application, lenders must notify
consumers in writing of action taken. If the creditor takes adverse action on the application, the
notice must provide a statement of the reasons for the unfavorable decision, and must include a

55 | P a g e
statement that ECOA prohibits discrimination against credit applicants. A description of the credit is
also provided on the notice and, if the adverse action was based on data from a consumer credit
report, information on the credit reporting agency must also be included.
• If there is adverse action taken against an application (the application is denied, or the lender
issues a counteroffer on different terms than those applied for), the applicant must receive
written notification (called an “adverse action notice”).
Notice of Incomplete Application: Within 30 days of receipt of an application that lacks sufficient
information, the creditor must provide a Notice of Action or a Notice of Incompleteness. A Notice of
Incompleteness must state the information needed, set a reasonable time for submission of the
information, and advise the applicant that failure to provide the information will result in no further
consideration of the application.
• When an application involves more than one applicant, notification need only be given to one
of them, but must be given to the primary applicant where one is readily apparent.
Counteroffer: A creditor must notify the applicant of adverse action within 90 days after making a
counteroffer to an application for credit if the applicant rejects the counteroffer.
Content of notification when adverse action is taken. A notification given to an applicant when
adverse action is taken shall be in writing and shall contain a statement of the action taken; the name
and address of the creditor; the name and address of the Federal agency that administers compliance
with respect to the creditor; and either:
• A statement of specific reasons for the action taken; or
• A disclosure of the applicant's right to a statement of specific reasons within 30 days, if the
statement is requested within 60 days of the creditor's notification. The disclosure shall
include the name, address, and telephone number of the person or office from which the
statement of reasons can be obtained.
• If the creditor chooses to provide the reasons orally, the creditor shall also disclose the
applicant's right to have them confirmed in writing within 30 days of receiving the applicant's
written request for confirmation.
Notice of Right to Receive Appraisal Report: If a loan applicant applies for credit and it is to be
secured by a lien on a dwelling, the creditor must notify the loan applicant in writing of the right to
receive a copy of the appraisal report, unless the appraisal report is routinely provided. The notice
must advise the applicant to make a written request for the appraisal report.
• Notice of Right to Receive Appraisal Report: Required by ECOA and due within 3 business days
of application.
• If an application is denied based on the appraisal report, the consumer has the right to request
appraisal report used within 90 days of credit decision. The lender must provide within 30
days.

• If the application is actually approved, the applicant should receive the appraisal no later than
three (3) business days prior to the close of a first-lien loan.
Disclosures regarding Monitoring Programs: While ECOA establishes prohibited basis that may not be

56 | P a g e
considered when granting credit, the law does make an exception for demographic information
gathered for government monitoring programs.

1. The Home Mortgage Disclosure Act is one law that requires compliance with government
monitoring. Providing information about a prohibited category such as race or sex is voluntary on
the part of a loan applicant.
2. When obtaining information on race, ethnicity, sex, marital status and age for monitoring
purposes, creditors must advise applicants that the information is requested by the federal
government for monitoring purposes and that the creditor must provide information on ethnicity,
race and sex.
o If the applicant chooses not to provide (refuses to complete this section) the information
or any part of the information, the fact must be noted on the form.
o In this case, the creditor must provide the information to the government based on visual
observation if the applicant refuses to provide it.

3.5 Identifying Discrimination

There are three separate legal theories that the CFPB has indicated are valid ways to identify
discrimination in lending under ECOA:
• Overt discrimination is discrimination that is explicit or obvious. An example would be
advertising that indicates members of a protected class are not welcome at the institution.
Alternatively, overt discrimination might exist if there is a widespread understanding in the
community that members of a protected class will not be served by an institution.
• Disparate Treatment is discrimination that is defined by differences in the way members of a
protected class are served by the institution. For example, an individual may be engaging in
disparate treatment by shaking the hand of members of one race or gender and not following
the same procedure with members of another race or gender. Disparate treatment can also
occur if members of a protected class are charged higher rates and/or fees than similarly
situated members of a non-protected class.
• Disparate Impact is a method of identifying discrimination through statistical analysis. It
occurs when a practice or policy that appears to be non-discriminatory on its face has a
disproportionately negative effect on members of a particular race, gender or other protected
class. Unlike other forms of discrimination, discrimination identified via disparate impact is
often illegal even if the discrimination is unintentional. For example, one of the largest fair-
lending settlements based on disparate impact theory alleged that a creditor’s minimum credit
score policies resulted in a disproportionate number of minority applicants receiving FHA loans
instead of less expensive conventional loans.

3.6 Monitoring Information

1. This information is optional by the borrower, mandatory for the lender.
2. A typical FNMA application form will contain a government monitoring information section.

57 | P a g e
 3. The MLO will ask the applicant to supply information as to race, sex and national origin.
4. The applicant should be informed that this information is only used to assure that the lender
is not discriminating against applicants and is not considered when determining whether to
grant a loan.
The applicant must also be told that this information need not be supplied, BUT if it is not supplied by
the borrower the MLO must supply the information based on visual observations and surname.

3.7 Enforcement of ECOA

ECOA Disclosures must be retained for 25 months. Civil action may be filed within two (2) years (24
months) if a consumer believes his rights have been violated under ECOA. Penalties for Violations of
ECOA – $10,000 per violation

3.8 Civil Rights Act of 1866

Prohibits public and private racial discrimination in any property transaction in the United States.
Applies to all property, real or personal, residential or commercial, improved or unimproved.
Prohibits any discrimination based on race/ancestry. Although created in 1866, it was basically
ignored until 1968.
The Supreme Court Case of Jones v. Mayer prohibits discrimination based on race by upholding the
1866 Civil Rights Act and the 13th Amendment to the U.S. Constitution, which prohibits slavery.

3.9 Fair Housing Act

Title VIII of the Civil Rights Act of 1968 is commonly called the Fair Housing Act. The Fair Housing Act
expanded on the 1866 Act, making it illegal to discriminate in the sale or lease of residential property,
including vacant land intended for residential housing. The United States Department of Housing and

58 | P a g e
Urban Development (HUD) is the principal agency charged with eliminating discriminatory housing
practices. The Act has been amended several times and now extends protection against discrimination
based on:
• Sex
• Race
• Color
• National origin
• Religion
• Physical or mental disability (Handicap)
• Familial status (the fact that an adult has a child 18 or younger living with him or her)

Compare Fair Housing “protected classes” with ECOA’s “protected classes”

FAIR HOUSING ECOA
• Sex • Sex
• Race • Race
• Color • Color
• Religion • Religion
• National Origin • National Origin
• Disability/Handicap • Marital Status
• Familial Status • Age
• Receipt of Public Assistance

3.10 FAIR HOUSING VIOLATIONS

The following discriminatory practices and activities violate the Fair Housing Act:
• Refusing to rent/sell property after good faith offer
• Refusing to negotiate sale/rental of residential property
• Taking action that would make residential property unavailable to any person
• Making any representation that property is not available for inspection/sale/or rent when it is
available
• Using discriminatory advertising that indicates limitation/preference
• Coercing, intimidating, threatening or interfering with anyone for exercising rights granted by
the Fair Housing Act
• Discriminating in the terms/conditions of any sale/rental of residential property or providing
any services/facilities

Maternity Leave and Discrimination

Under familial status, the basic requirements to be protected is having children in the household,
either currently or in a short period of time. Familial status includes:
• Families with children under the age of 18 living with parents or legal custodians

59 | P a g e
 • Pregnant women
• People securing custody of children under the age of 18

Fair Housing Complaints

• A written complaint may be filed with HUD office within one (1) year of violation.
The Fair Housing Act covers the majority of residential transactions in the U.S., although there are
specific exemptions:
• It is NOT a violation to refuse rental of a room or unit in a dwelling with no more than four
independent units, provided that the owner occupies one unit as a residence.
• Single-family home is sold or rented by a private owner without the use of a broker.
• Housing operated by organizations
• Housing operated by private clubs

3.11 Fair Housing Act Discriminatory Practices

Fair Housing Act Discriminatory Practices include the following:
• Blockbusting (panic selling) - trying to induce owners to sell their homes by suggesting that
the ethnic or racial composition of the neighborhood is changing, with the implication that
property values will decline due to this change.
• Steering - channeling prospective real estate buyers or tenants towards (or away from)
particular neighborhoods based on their race.
• Redlining - refusal to make loans on property located in a particular neighborhood for
discriminatory reasons. Concerns about redlining prompted the passage of the HMDA law.
Other Discriminatory Practices under this law include the following:
• Refusing to rent or sell residential property after receiving a bona fide offer.
• Refusing to negotiate for the sale or rental of residential property or making it unavailable.
• Changing the terms of a sale or lease for different potential buyers.
• Using advertising that indicates a preference or an intent to discriminate.
• Representing that a property is not available for inspection, sale, or rent when it is available.

3.12 Fair Housing: Advertising

The Fair Housing Act also prohibits discrimination in advertising, real estate brokerage, lending, and
some other services associated with residential transactions. To comply with this Act, lenders are
required to:
• Include the "equal housing lender" slogan in any broadcast advertisement
• Display the Equal Housing Opportunity logo on all printed promotional material

3.13 HUD and VA Rule on Equal Access to Housing

The U.S. Department of Housing and Urban Development posted a rule that is important in the fight
60 | P a g e
against discrimination by ensuring that all HUD core programs are open to eligible persons regardless
of sexual orientation, gender identity or marital status.
• The rule prohibits entities, including MLOs from inquiring about an applicant's or occupant's
sexual orientation or gender identity for the purpose of determining eligibility or otherwise
making housing available.
3.14 Community Reinvestment Act
Congress enacted the Community Reinvestment Act to encourage financial institutions to help meet
the credit needs of the communities in which they operate, including low and moderate income
neighborhoods, consistent with safe and sound lending practices.

3.15 Home Mortgage Disclosure Act (HMDA) – Regulation C

Adopted by Congress in 1975, the Home Mortgage Disclosure Act (HMDA) was written as a response
to public concerns that lenders were “redlining.” Redlining is the arbitrary denial of real estate loan
applications in certain geographic areas without considering individual applicant qualification. It is
usually displayed by lenders refusing to make loans on property located in a particular neighborhood
for discriminatory reasons.
Regulation C is the federal regulation that implements HMDA. The Consumer Financial Protection
Bureau has primary rule-making and enforcement authority over this regulation.
Congress enacted the Community Reinvestment Act to encourage financial institutions to help meet
the housing needs of the communities in which they operate, including low and moderate income
neighborhoods, consistent with safe and sound lending practices.
HMDA does not expressly prohibit redlining or require that a certain number of loans be made in
certain neighborhoods. Instead, lenders subject to HMDA must compile certain data, provide the data
in a certain format to government agencies, and make available to the public, a disclosure statement
regarding that institution’s lending activities.

3.16 HMDA Reporting

HMDA requires lenders to file reports and maintain a log based on the race, ethnicity and sex of every
applicant that applies for a home loan. The log of applications that a creditor must keep and provide
to the federal government is called a Loan Application Register (or LAR). These reports are due every
March.

The data to be compiled by lenders pursuant to HMDA includes the following information regarding
each loan:
• Loan type (e.g., conventional, FHA, VA)
• Loan purpose (e.g., purchase or refinance)
• Loan amount
• Property location

61 | P a g e
 • Borrower ethnicity and race
• Borrower sex
• Borrower gross income
• Occupancy
• Action taken on the loan application
• The “rate spread” (the difference between the loan’s APR and the Average Prime Offer Rate on
the date the rate was locked)
A lender must accept the loan application from the borrower even if he/she refuses to provide
information (e.g., ethnicity or race) requested pursuant to HMDA. In fact, if the borrower elects not to
provide race and gender information, the mortgage loan originator is required to record a guess (for
applications taken face-to-face only). That guess can legally be based only on visual observation or
surname (last name).

The data provided in the LAR is used by federal and state regulators to monitor creditors for risk
factors and warning signs of discrimination. If warning signs are present, a fair lending examination
may be undertaken by the CFPB (under the Equal Credit Opportunity Act), HUD (under the Fair Housing
Act) and/or by state regulators.

HMDA requires a lending institution to post a general notice about the availability of HMDA data in
the lobby of hits home office and in the lobby of each branch office located in a metropolitan area.

HMDA information is provided on Section X of the 1003 (Government Monitoring Section).

3.17 Homeowners Protection Act (HPA)

Congress passed the Homeowners Protection Act (HPA) in 1998 to facilitate the cancellation of
private mortgage insurance (PMI). Lenders may require borrowers to purchase PMI when they make
down payments of less than 20%, and the loan-to-value ratio is high. Borrowers who have little
money to invest in the purchase of a home are more likely to default on their loans, and PMI allows

62 | P a g e
lenders to protect their interests while making these riskier loans. PMI helps consumers by enabling
them to secure a loan when they have little cash for a down payment.
Under the HPA, private mortgage insurance (PMI) on a loan for a borrower’s primary residence must
be automatically cancelled when the loan-to value ratio (LTV) reaches 78% or less of the original
purchase price or appraised value of the home at the time the loans was obtained (whichever is less)
and the borrower is not delinquent.
Homeowners may request cancellation of private mortgage insurance (PMI) when the loan balance
reaches 80% of the original purchase price or appraised value of the home at the time the loans was
obtained (whichever is less) if the loan is current and the payment history is acceptable.
• This means that no payment was 30 days or more past due in the previous 12 months and no
payment was 60 days or more past due in the previous 24 months.
• “Original value” for refinanced mortgages is whatever appraised value the lender relied on in
the specific loan refinance transaction.
The lender or servicer must provide a disclosure to the homeowner at settlement describing these
cancellation rights. In addition, the lender or servicer must disclose this information annually to the
homeowner.
If the PMI has not been cancelled or otherwise terminated, it will end when the loan reaches the
midpoint. For example, on a 30-year loan the midpoint is after 180 payments.
The HPA does not apply to government loans (like FHA). All FHA loan programs require their own kind
of mortgage insurance not PMI (Private Mortgage Insurance). Loans on second homes and investment
properties are not subject to HPA requirements.

3.18 Fair Credit Reporting Act (FCRA) – Regulation V

Congress enacted the Fair Credit Reporting Act (FCRA) in 1970 to ensure the accuracy, fairness and
privacy of consumers’ personal information that is assembled and used by consumer reporting
agencies.
The Fair Credit Reporting Act (FCRA) governs the collection, assembly, and use of consumer report
information and provides the framework for the credit reporting system in the United States. The
FCRA was enacted in 1970, and it has been amended several times in the ensuing years. FCRA is title
VI of the Consumer Credit Protection Act, and is enforced by the Consumer Financial Protection
Bureau
The FCRA regulates the practices of consumer reporting agencies (CRAs) that collect and compile
consumer information into consumer reports for use by credit grantors, insurance companies,
employers, landlords, and other entities in making eligibility decisions affecting consumers. Its
primary intent is to protect consumers from the willful and/or negligent inclusion of inaccurate
information on their credit reports.

The FCRA allows the consumers to dispute inaccurate or incomplete information found in the credit
report, requires nationwide consumer reporting agencies to provide national security freezes free of

63 | P a g e
charge to consumers, and consumers are also given the right to an adverse action notice.

Information included in consumer reports generally may include consumers’ credit history and
payment patterns, as well as demographic and identifying information and public record information.
Consumer report information may be used by entities to predict the risk of future nonpayment,
default, or other adverse events.

Credit Reporting Agencies, users of consumer reports, and furnishers of information may be held
civilly liable for violations under FCRA. The statue of limitations to bring a lawsuit is two years after
the violation is discovered or five years after it occurs, whichever is sooner. The penalty is up to
$1,000.

Parts of the law are now implemented and enforced by the Consumer Financial Protection Bureau,
but other parts of it remain with the Federal Trade Commission (FTC).

3.19 Consumer Rights Under FCRA

The Fair Credit Reporting Act provides for the following rights:
Adverse Action Notice - Any entity that uses a credit report to deny an application for credit,
insurance or employment (adverse action) must provide the consumer with the name, address and
toll-free phone number of the reporting credit bureau.
• Example: “We denied you, we used Equifax – here is their name, address and telephone
number.”
• Lenders can only request credit information for those applicants who have applied for loans
and who have provided the appropriate written authorization.

Copy of a consumer credit file - The Fair Credit Reporting Act (Reg V) requires each of the nationwide
consumer reporting agencies (also known as “credit bureaus;” these agencies are Equifax, Experian
and TransUnion) to provide an individual with his/her credit report under these circumstances:
• Information resulted in adverse action (denial)
• Victim of identity theft (with fraud alert)
• Inaccurate information as a result of fraud
• On public assistance or unemployed
• Allows the consumer to place a credit freezes (free of charge) on a credit file in order to
prevent information from showing on the credit report

In addition, and upon request, consumers are also entitled to one free disclosure every 12 months
from each of the three nationwide credit bureaus. The website where individuals may obtain the free
reports mandated by the FCRA is www.annualcreditreport.com.
Credit Score - Again, individuals may also request their credit score from the credit bureaus, but the
bureaus are permitted to charge a fee.

64 | P a g e
Dispute incomplete or inaccurate information – The consumer reporting agency must correct or
delete inaccurate, incomplete, or unverifiable information within 30 days of receipt of the dispute.
Limit Prescreened offers – Reg V gives consumers the right to limit “prescreened” offers of credit and
insurance based on information in their credit report. These offers must include a toll-free phone
number to call to be removed from the list.
Inform Consumers about negative information that is in the process of being placed, or has already
been placed, on a consumer’s credit report within one month.

3.20 CRA Obligations

Credit reporting agencies (CRAs) may not report outdated negative credit information and must
adhere to the following guidelines:
• Negative credit information more than seven (7) years must be deleted.
• Bankruptcies, judgments or other public records more than ten (10) years must be deleted.
• Unpaid federal tax liens may be retained on credit reports forever.
• Criminal convictions also remain forever (if the State reports this information).
• Must limit access to a credit file to ONLY those with legitimate business need. In order for the
information to be lawfully disclosed for the purpose of a legitimate business need, the
disclosure must relate to a business transaction that was initiated by the consumer.
• May not give out consumer credit information to an employer, or a potential employer,
without written consent.
Accessing a credit report for a consumer without any of the above permissible purposes is a violation
of the law.
Note that a loan originator may not provide a credit report to a real estate agent for the purpose of pre-
screening a tenant for the agent’s rental property. This is prohibited, even with the permission of the
individual whose report is being accessed, because the loan originator does not have a permissible
purpose.

3.21 Fair and Accurate Transaction Act (FACTA)

In 2003, Congress added additional provisions to the Fair Credit Reporting Act (FCRA) with the
enactment of the Fair and Accurate Credit Transactions Act (Fact Act or FACTA). Congress adopted
these additional provisions in order to address the problem of identity theft, to facilitate consumers’
access to the information retained by CRAs, and to improve the accuracy of consumer reports.
According to official government estimates, as many as 12 million Americans have their identities
stolen each year.
According to the FACTA, identity theft means a fraud - committed or attempted, using the identifying
information of another person without authority. Identifying information may include name, Social
Security number, date of birth or numerous other forms of identification.
Any person who obtains a credit report without prior authorization, or a credit reporting agency

65 | P a g e
employee who gives a credit report to an unauthorized person, maybe be fined up to $5,000 or
imprisonment for 1 year, or both.
• ACCESS TO CREDIT REPORTS (Section 211) - Before the passing of the FACTA, consumers had to
pay to receive a copy of their credit report. One of the main provisions of this law aims to make it
easier for consumers to access their credit report as a way to spot and possibly reduce identity
theft, along with allowing consumers to dispute incomplete and inaccurate information.
o FACTA requires that consumers applying for credit receive the Home Loan Applicant Credit
Score Information Disclosure, which explains their rights.
o FACTA allows consumers to obtain a free copy of credit report once every 12 months. The
FTC recommends using www.annualcreditreport.com for the purposes of obtaining a free
copy of the credit report.
o The FACTA requires that when a consumer applies for a home loan, he or she must receive
the Home Loan Application Credit Score Information Disclosure, which explains their
rights under this law.
• FRAUD ALERTS AND FREEZES (Section 112) - FACTA allows consumers who believe they have been
the victim of identity theft to contact the Credit Bureau and place a fraud alerts.
o In addition, allows the consumer to place a credit freezes (free of charge) on a credit file in
order to prevent information from showing on the credit report. Then consumers can
“thaw” the credit report when they apply for a loan.
o If an MLO is running a credit report and sees a fraud alert, he must contact the person
whose name is on the account at the number provided to the credit bureau or take other
reasonable steps to ensure that the person applying or the mortgage loan is not really an
identity thief.
o The minimum timeframe that a consumer reporting agency must include a fraud alert in a
consumer’s file is one year.
• TRUNCATION OF CREDIT AND DEBIT CARD NUMBERS (Section 113) - FACTA Prohibiting
businesses from printing more than five digits of any customer's credit/debit card number or
expiration date on any receipt.
• SECURITY AND DISPOSAL (Section 216) - FACTA requiring businesses to burn or shred papers that
contain consumer report information.
o Destroying/erasing electronic files or media so that information cannot be recovered, and
locking up all pending loan documents at the end of the day.

3.22 FTC Red Flags Rule

The Red Flags Rule is a measure included in FACTA to address identity theft. These rules are known as
Section 114 rules of the FACTA. “Red Flag Rules” require the following:
• Financial institutions and creditors must implement a written identity theft prevention
program.
• Credit card issuers must address the validity of change of address request.
• Users of consumer reporting agencies must reasonably verify the identity of the subject of a

66 | P a g e
 consumer report in the event of a notice of address discrepancy.
Other possible red flags/fraud alerts on credit report include:
• Active duty alerts on credit report
• Address discrepancies on credit report
• Inconsistent activity on credit report
• Documents that appear altered or forged
• Photos that do not match the person presenting the I.D.
• Information on I.D. that disagrees with other information
• Application that looks altered, forged or reassembled after destruction
• Inconsistencies with Social Security number
• Multiple uses of same phone number, address, or Social Security number
• Invalid addresses or P.O. boxes
• Inconsistent information presented by borrower

3.23 Gramm-Leach-Bliley Act – Regulation P

The Financial Modernization Act of 1999, also known as the Gramm- Leach-Bliley Act (GLBA),
includes provisions to protect individuals’ personal financial information held by financial institutions.
The main purpose of the Act is to protect and regulate the disclosure of consumers’ personal financial
information.

There are three main parts of the GLBA:

• Financial Privacy Rules
• Safeguarding Rule
• Pretexting Provisions

FINANCIAL PRIVACY RULE - The Financial Privacy Rule governs the collection and disclosure of
personal financial information - also known as nonpublic personal information (NPI) by financial
institutions.
• Nonpublic information is defined as any personally-identifiable financial information that a
financial institutions collects about an individual in connection with providing a financial
product or services, including: Information on an application, Account balances, payment
history, debit/credit card purchases, etc.
• This Financial Privacy Rule distinguishes a consumer from a customer. According to the GLBA, a
“consumer” is someone who obtains a specific product or service for personal use, while a
“customer” has an ongoing significant relationship. Consequently, the law provides a customer
with more privacy protection.
• The GLBA requires financial institutions to give their customers privacy policies that explain the
financial institution’s information collection and sharing practices. The privacy notice must be
given to the customer either in writing or, if the customer agrees, electronically. This notice is
required to be given at three distinct times:
o When the “consumer” becomes a “customer.”

67 | P a g e
 o Annually, for as long as the individual remains a “customer.”
o When the institution’s privacy practices change (while the individual is a “customer”).
In turn, customers have the right to limit some sharing of their information. The customer’s right to
limit the sharing of information to non-affiliated third parties is called the opt-out right.
Customers must receive a financial institution’s privacy notice every year for as long as the customer
relationship last.
A short form of the privacy policy must be available to consumers (not customers) in an easily
accessible place, such as on the company’s website.

SAFEGUARDS RULE - The GLBA requires financial institutions to have a written security plan to
protect the confidentiality and integrity of personal consumer information. This security plan must
describe the measures that the firm is taking to protect data, and employees should be trained on the
requirements of the plan. Written Safeguards Policy must:
• Ensure security and confidentiality
• Protect against anticipated threats or hazards
• Protect against unauthorized access that could harm or inconvenience consumers

PRETEXTING PROVISIONS - The GLBA prohibits the use of false pretenses, including fraudulent
statements and impersonation (pretexting) to obtain consumers’ personal financial information, such
as bank balances.
• The reason we must put in “security questions” – i.e. mother’s maiden name, etc.
• To prevent others from “pretending” to be you and gaining access to your info
• (e.g., loan officers calling a borrower’s bank to obtain information would be guilty of
pretexting if they were impersonating the borrower to get that information). No pretexting
occurs if individuals are forthright with who they are, what they are attempting to do and why.

3.24 Mortgage Assistance Relief Services (MARS) Rule (REG O)

The Mortgage Assistance Relief Services (MARS) Rule helps to protect distressed homeowners from
foreclosure-prevention scams.
The law applies to everyone who offers to negotiate loan terms with a lender or loan servicer in
order to prevent or delay foreclosure; this includes loan originators. The rule includes the
following points:
• Fees may not be collected until a written agreement from the lender that the loan terms
may be modified, has been delivered, and accepted by the customer. This law doesn't
allow up-front payments.
• Borrowers can cancel their agreement with the loan negotiator at any time.
• The negotiator cannot advise borrowers to stop making mortgage payments unless the
individuals are informed about the consequences of such an act, which include lower credit
scores and the possibility of foreclosure.

68 | P a g e
 • The negotiator cannot interfere with the communication between the borrower and lender.
• The negotiator must present all lender offers and inform the borrowers that no fee is due
until they accept an offer.
• The negotiator can't misrepresent his services or qualifications.

3.25 USA Patriot Act

After the 9/11 attacks, Congress rushed to pass legislation to help law enforcement officials
monitor communication and control money laundering activity that might be funneling money to
terrorists. The Patriot Act is intended to help the federal government respond to potential terrorist
threats and monitor suspicious activity. Among other things, the law imposes the following
requirements on certain types of financial institutions:
• It sets minimum standards for verifying customers’ identities. Requires lenders to verify
name, address, ethnicity, date of birth and social security numbers of all applicants.
• It requires the establishment of anti-money laundering programs, which are meant to
identify and address financial crimes.
A small piece of this applies to mortgage lenders and loan originators. It was the Patriot Act that
required loan originators to acquire photo identification from loan applicants. Loan originators and
lenders must collect copies of the borrower's:
• Name
• Address
• Birth Date
• Social security number or employee identification number
• Government-issued photo identification
All financial institutions must:
• Take steps to verify the identity of all account holders.
• Establish an anti-money laundering policy.
• Report suspicious activity.
• Verify names of account holders against a federal database of known terrorists and fugitives.
• Train employees on policy compliance.

3.26 Do Not Call (DNC) Registry

Many mortgage professionals have successfully forged new business relationships by “cold-
calling” prospects; however, loan originators must exercise particular care in order to avoid
violating restrictions on telemarketing.
To keep from violating National Do Not Call regulations, a company must maintain national and
internal lists of customers and prospects and keep them updated regularly.
Both the national DNC list and the company’s internal DNC list must be updated every 31 days,
and records to document this must be maintained for 24 months.

69 | P a g e
A consumer who receives a telemarketing call despite being on the registry is able to file a
complaint with the FTC.
The registry is nationwide in scope, applies to all telemarketers (apart from certain non-profit
organizations), and covers both interstate and intrastate telemarketing calls.
Registration is free, and an individual may enter a maximum of three personal phone numbers.
Telemarketers may call registered numbers if they have obtained written permission from the
individual.

DNC PENALTY - The penalty for violations is $$42,530 per call. Each phone call to a number on
the Do Not Call Registry may be considered a violation, making non-compliance potentially
extremely expensive.
Safe Harbor - Everybody makes mistakes, and companies won't be held liable if they have a written
do-not-call policy, train employees, maintain an internal list of customers who requested not to be
called and access the register every 31 days. They must be able to prove that the call was made in
error. Additional Telemarketing Violations - Commercial telemarketers may also be fined for the
following offenses:
• Calling before 8 AM or after 9 PM.
• Leaving a message without including a phone number or the telemarketing Company does
not identify itself.
• Leaving a pre-recorded commercial message without having an established business
relationship or permission to call.
• Offering debt-relief services without stating a timeframe for results, the amount of money
needed to settle the debt with the creditor, the fact that missing monthly payments may
have adverse consequences including lower credit score, and the fact that the customer
has full rights to funds in any account opened in response to a request by the debt-relief
service.

DNC LIST MAINTENANCE - The national list is updated every 31 days, a company’s internal list
must also be updated every 31 days. All companies must maintain entity-specific DNC lists. If a
consumer asks to be placed on a company-specific list, the company has 30 days to place the
customer on the list.
Established Business Relationship (EBR) entities may contact someone on the National Registry,
provided they have an established business relationship (EBR), which can be established in one of two
ways:
• Eighteen (18) months after the consumer's last purchase/transaction - The consumer
purchased, rented, or leased goods and/or services from the seller or participated in a
financial transaction between the consumer and the seller within 18 months preceding a
telemarketing call.
• Three (3) months after the consumer makes an inquiry or submits an application to the
company within three months preceding a telemarketing call.

70 | P a g e
3.27 Do Not Fax
Advertisers may not send a message to anyone's fax number unless:
• They have an established business relationship.
• Fax number is public information.
• Recipient granted permission.
• Advertisement has clear opt-out instructions on the first page of the transmission for
recipients who no longer wish to receive faxes from the sender.
• The penalty for violations is $500 per unauthorized fax.

3.28 Bank Secrecy Act/Anti-Money Laundering (BSA/AML)

The Bank Secrecy Act (BSA) requires that financial institutions (including residential mortgage loan
origination businesses) take steps to prevent and report cases of “money laundering.” The BSA is
often referred to as the Anti-Money Laundering Law (AML), or sometimes as the “BSA/AML.”
The act requires financial institutions to keep detailed records of cash transactions exceeding $10,000
(withdrawing, depositing or transporting) and to report suspicious activity that might be a sign of tax
evasion, money laundering, or other possible criminal activity.
In general, money laundering involves bringing illegally obtained funds into and out of the financial
system in a manner that evades law enforcement. Laundered funds are often linked to such serious
crimes as terrorism, arms smuggling and drug trafficking.
Entities that are subject to the BSA must implement an anti-money laundering (AML) program. The
AML program should be designed to identify, detect and report possible red flags (or warning signs) of
money laundering. Under the BSA, loan origination businesses must file suspicious activity reports
(SARs) under certain circumstances.
The FBI compiles data on mortgage fraud through SARs filed by financial institutions through the
Financial Crime Enforcement Network (FinCEN).
• Loan Originators must report any suspicious transaction if it involves $5,000 or more.
• Copies of reports must be kept for at least five (5) years.
• The SAR must be filed 30 days of detecting suspicious activity.

3.29 Electronic Signatures in Global & National Commerce Act (E-SIGN ACT)
The Electronic Signatures in Global and National Commerce Act, also known as the “E-Sign Act,” was
passed in 2000 in order to address the validity of electronic signatures and the use of electronic
disclosures.
In general, the law clarifies that a contract or signature cannot be considered invalid or unenforceable
simply because it is in an electronic format.
The law also sets requirements for businesses and other entities that want to provide mandatory
documents to consumers in an electronic format rather than on paper.

71 | P a g e
In order for required documents to be sent to a consumer solely in an electronic format, the entity that
is required to provide the documents must first obtain the consumer’s consent and disclose the
following information:
• The consumer’s right to withdraw his or her consent (and the consequences, if any, of doing
so).
• The consumer’s right, if any, to obtain a non-electronic version of the documents and how to
obtain it.
• Whether the consumer’s consent will apply to other transactions.
• Procedures for withdrawing consent.
• Procedures for updating the consumer’s contact information.
• Any hardware or software requirements for viewing electronic documents. (If the hardware
and software requirements change and there is a reasonable risk that the consumer will no
longer be able to access an electronic document, the consumer must be informed of the
change and given the opportunity to receive a non-electronic version free of charge.)
3.30 Mortgage Acts and Practices – Advertising (Regulation N)
Regulation N was issued by the Consumer Financial Protection Bureau in order to prohibit false or
misleading advertising of mortgage products. It applies to any “commercial communication” designed
to produce a sale or to create interest in mortgage products or services. Note that the definition of
“commercial communication” is very broad and includes promotional items and Web pages, sales
scripts and “on hold” content and emails (as well as more traditional forms of advertising).
In general, Regulation N prohibits misleading claims by mortgage lenders concerning government
affiliation, interest rates, fees, cost, payments associated with the loan, and the amount of cash or
credit available to the consumer in any commercial communication.
Advertisements for mortgage products and services cannot contain any material misrepresentations,
whether they are stated (expressed) or implied. A fact is “material” if knowledge of the truth would
lead reasonable consumers to consider an alternative option in accomplishing their goals. In order to
avoid confusing the public, mortgage professionals should be particularly careful when their
advertising mentions the following topics:
• Any type of interest rate.
• Fees or costs to the consumer.
• Taxes and insurance.
• Prepayment penalties.
• Whether the loan product is fully amortizing.
• Amount of credit or cash that will be received as part of a mortgage credit transaction.
• Number, amount or timing of required payments.
• Potential for default/Eliminating or reducing a consumer’s debts.
• Government loan programs, federal agencies or any connection (or lack thereof) to the federal
government.
• Eligibility for loan products or loan programs.
• Credit counseling services.

72 | P a g e
For example, advertising that you have a “five-year fixed rate loan” when in fact you are offering an
adjustable-rate loan with an initial rate period of five (5) years might be considered deceptive.
Information about the loan program and potential payment changes would certainly be considered
“material.”
In accordance with Reg N, copies of all advertisements must be kept for at least two (2) years.

73 | P a g e
 CHAPTER 3 QUIZ
1) Which regulations is designed to ensures that all consumers are given an equal chance to obtain
credit?
a. RESPA
b. TILA
c. ECOA
d. COMMUNITY REINVESTMENT ACT

2) The _____________ addresses fairness in the extension of credit relating to housing and other
housing related discrimination practices.
a. Fair Housing Act
b. Equal Credit Opportunities Act
c. Home Mortgage Disclosure Act
d. Truth in Lending Act

3) The Civil Rights Act of 1866 prohibits what type of discrimination in property transactions?
a. Familial status
b. Race
c. Religion
d. Sex

4) The Fair Housing Act prohibits discrimination based on race, color, religion, sex, and
a. age, disability/handicap, familial status, or national origin.
b. disability/handicap, familial status, marital status, or national origin.
c. disability/handicap, familial status, or national origin.
d. disability, national origin, or sexual orientation.

5) Which law requires lenders to document how they are serving the housing needs within the
communities in which they do business?
a. Equal Credit Opportunity Act
b. Fair Credit Reporting Act
c. Fair Housing Act
d. Home Mortgage Disclosure Act

6) Which Act specifically prohibits blockbusting?

a. Civil Rights Act of 1866
b. Equal Credit Opportunity Act
c. Fair Housing Act
d. Home Mortgage Disclosure Act

74 | P a g e
7) Which regulation requires credit reporting agencies to verify information that is under dispute and
limits how long negative information can remain on a credit report?
a. Equal Credit Opportunities Act
b. Fair and Credit Transaction Act
c. Fair Credit Reporting Act
d. Home Mortgage Disclosure Act

8) Denise reviewed her credit report and discovered a few discrepancies and would like to dispute
them – once disputed, how long does the credit reporting agency have to respond to the dispute?
a. 30 day
b. 60 days
c. 120 days
d. One year

9) ______ is a statement that has information about your credit activity and current credit situation
such as loan paying history and the status of your credit accounts. Credit reports often include
a. credit score
b. credit report
c. fraud alert
d. freeze on a credit report

10) The FCRA mandates that a credit reporting bureau remove unpaid tax liens after:
a. credit has been re-established for over five years
b. 7 years
c. 10 years
d. Never

11) ____________ requires credit card issuers to assess the validity of change of address requests.
a. Section 114 rules
b. Graham-leach-Bliley act
c. Home ownership protection act
d. Truth in lending act

12) The Red Flags Rules are also known as

a. Advertising triggering terms
b. of Regulation X
c. Section 32
d. Section 114

75 | P a g e
13) According to the GLB Act, a person who completes a single transaction with a creditor is known as
a(n)
a. Applicant
b. Consumer
c. Creditor
d. Customer

14) The penalty per occurrence per day for violating the National Do Not Call regulations is
a. $16,000
b. $10,000
c. $11,000
d. $42,530

15) The Mortgage Assistance Relief Services regulation applies to

a. Down payment assistance programs
b. Loan modification/short sale
c. New borrower loan originations
d. Providing services for potential homebuyers in obtaining a new mortgage

16) Under the Bank Secrecy Act requires loan originators report suspicious activity that might be a sign
of tax evasion, money laundering, or other possible criminal activity. MLOs are required to report
any suspicious activity exceeding $_____________.
a. $10,000
b. $5,000
c. $100,000
d. $25,000

76 | P a g e
4.0 GENERAL MORTGAGE KNOWLEDGE
Chapter Objective
Upon completion of this chapter, you will be able to:
● Understand various government loan programs (FHA, VA, USDA)
● Understand non-traditional lending products
● Understand definitions of key mortgage terms
The General Mortgage Knowledge section of this workbook is an introduction to residential real
estate financing and familiarizes the reader with the components that make up the loan process: the
players, the products and the programs.

Loan Programs - There are two major categories of loan programs in residential mortgage financing:
Insured or guaranteed by an agency of the federal government and conventional.

4.1 CONVENTIONAL LOANS

Most real estate loans are not backed by an agency of the federal government and have a first lien
position. Conventional loans are conforming loans that limit loan amounts of single family residences
to the current limit of $510,400. Loans that exceed the conforming loan limit are called non-
conforming or jumbo loans. Conforming loans must meet the eligibility requirements of either the
Federal National Mortgage Corporation (Fannie Mae) or the Federal Home Loan Mortgage
Corporation (Freddie Mac).
Conventional loans that do not exceed the loan limits established by the secondary market are
conforming loans and are eligible for purchase by Fannie Mae and/or Freddie Mac, known as
Government Sponsored Enterprises (GSE).
Conventional Conforming Loan Limits
“The Federal Housing Financing Agency (FHFA) has issued the maximum loan limits that will apply to
conventional loans to be acquired by Fannie Mae in 2020.
One-Family Properties: $510,400
Two-Family Properties: $653,550
Three-Family Properties: $789,950
Four-Family Properties: $981,700

Standard Fannie Mae Conforming Guidelines

A conventional mortgage is a mortgage NOT obtained through the Federal Housing Administration
(FHA), the Department of Veterans Affairs (VA) or the US Department of Agriculture (USDA). There are
two types of conventional mortgages: conforming and non-conforming.

77 | P a g e
A conventional (conforming) mortgage conforms to loan limits, down payment requirements,
borrower income requirements, debt-to-income ratios, and other underwriting guidelines established
by Fannie Mae and Freddie Mac.

Income Qualifications for Conforming Mortgages

Conforming loan programs require comprehensive income qualifications. Each borrower’s income
must meet standards and guidelines relevant to the loan program. Some general qualification
guidelines include:
● Standard income documentation for salaried and hourly individuals typically includes pay
stubs for the most recent 30-day period and W-2s for the most recent two-year period.
● Individuals earning more than 25% of their income in commission must provide up to two
years’ tax returns.
● Individuals who own more than 25% of a business are required to provide up to two years’ tax
returns.
● Individuals who earn non-taxed income such as Social Security, public assistance or disability
must provide comprehensive documentation relevant to the type of income. However, they
are permitted to “gross up” those earnings by 25% (i.e. multiply the income by 125%).
● Commissions – average of the most recent two years’ income.
● Bonus/Overtime – average income for the last two years.
● Student and Installment loans – Qualifying borrower’s when no monthly payment is reflected:
1% student loan balance 5% installment debt amount

4.2 CONVENTIONAL/NON-CONFORMING LOANS

Loans that do not meet the conventional conforming loan standards because the loan amount is too
large are referred to as non-conforming loans or jumbo loans. Non-conforming loans are higher risk
as they do not meet the Fannie Mae and Freddie Mac purchasing requirements. These products carry
higher interest rates because they are harder to sell to investors on the secondary market.
There are two main reasons why a loan would be classified as nonconforming: The size of the loan
and the credit quality of the borrower. Examples of non-conforming loan include:
● Jumbo loans, which exceed the loan limits established by Fannie Mae and Freddie Mac.
● Alt-A Loans, which are non-conforming as a result of the credit risk associated with the
borrower. Unlike a jumbo loan, where the loan is nonconforming because of the size of the
loan, an Alt-A loan represents increased risk to the lender because the borrower is unable to
meet underwriting standards for a conforming loan. Still, the borrower’s credit is not so poor
as to require a subprime loan. Many Alt-A loans also required less verification of income and
assets than many other loans.
● Subprime loans (B/C Borrowers). When a mortgage applicant’s credit history reflects
significant derogatory issues or the loan is otherwise ineligible for sale to Fannie Mae, Freddie
Mac or other prime investors because of a combination of credit and documentation issues, it
is classified as a subprime loan and typically carries a higher degree of risk.

78 | P a g e
4.3 GOVERNMENT (FHA, VA, USDA)
There are three types of government-related loans that are integral parts of the mortgage industry:
• Federal Housing Administration (FHA) loans
• Veterans Affairs (VA) loans
• United States Department of Agriculture (USDA) loans
FHA loans insure lenders in the event of borrower default, and VA and USDA loans provide a
guarantee to lenders in the event of borrower default.

4.4 FHA LOANS

Federal Housing Administration (FHA) is a loan insurance program created by the Homeowners Act of
1934 to provide borrowers with an opportunity for affordable financing by allowing them to obtain
financing with a minimal down payment. FHA is NOT an institutional lender; therefore, it does not
lend money. Instead, the FHA insures lenders will receive 100% of the loan balance due, should the
borrower default on their mortgage.
In 1965, the FHA became a part of the Department of Housing and Urban Development (HUD).
Advantages of FHA loans include low down payments, no prepayment penalties, and fee limits on
closing costs. For purchases involving an FHA loan, the property must be an owner-occupied, one-to-
four-unit residence.

FHA Credit Score and Down Payment Requirements

The amount a borrower will need for a down payment will depend on their credit score based on the
following:
• Minimum credit score of 580 – Down payment: 3.5%
• Credit score 579 to 500 – Down payment: 10%
• Credit Score below 500 – Not eligible for FHA Financing

4.5 FHA GUIDELINES AND BENEFITS

● FHA Occupancy - The borrower must occupy the property within 60 days after closing to be
compliant with the terms of the note and mortgage and plan to occupy the property for at
least one (1) year.
● Assumable - FHA loans are assumable, meaning a new buyer may take over the payments of
the existing mortgage holder, subject to approval of the loan servicer and HUD credit
guidelines. The process of releasing the original borrower and substituting the new mortgagor
is known as novation.
● FHA Qualifying Ratios - In general, in order to obtain an FHA loan, the monthly mortgage
payment cannot exceed 31% of the borrower’s income (front-end ratio) and must have total
monthly debt obligations of no more than 43% (back-end ratio) of his or her income.
● Seller concessions - Sales concessions are limited to 6% of the sales price, or else they are
treated as inducements to purchase, which results in reduction of the mortgage.
● FHA mortgage payments are due on the 1st and are late after the 15th of the month.

79 | P a g e
 ● The maximum late charge is 4% of the P&I Only.
● No prepayment penalties
● The maximum allowable term on FHA/VA loans is 30 years.
● Loan amounts reviewed every three years. For example, The Federal Housing Administration
has updated its new schedule of loan limits for 2018, with most areas in the country set to
experience an increase. The national loan limit for one-unit homes will be $294,515 in 2018,
up from $275,655 this year. In high-cost areas, county-level loan limits can be as high as
$679,650, up from $636,150. The lenders set the interest rates, not the FHA or HUD.
● Appraisal Requirements. The appraiser is required to follow HUD/FHA guidance and comply
with the Uniform Standards of Professional Appraisal Practice (USPAP) when completing
appraisals of property used as security for FHA-Insured mortgages.
● Anti-“Flip” Policy – FHA financing is not available if a borrower is purchasing a home from a
seller that recently bought the property within the past 90 days and is currently reselling it.
Any sales during this timeframe are considered a “flip”. If the property is sold between 91-180
days after acquisition and the price increase is 100% or more of the acquisition price, a second
appraisal is required at the lender’s expense.

4.6 FHA MORTGAGE INSURANCE PREMIUMS (MIP)

All FHA loan programs require mortgage insurance. FHA mortgage insurance protects the lender or
investor against default by the borrower for the life of the loan. There are two types of mortgage
insurance premiums: Upfront mortgage insurance premiums (UFMIP) and monthly mortgage
insurance premiums. FHA requires borrowers to pay upfront mortgage insurance premium (UFMIP)
of 1.75% of the loan amount. This amount can be paid at closing or financed into the loan.
● The UFMIP is calculated by multiplying the loan amount by a factor and then collecting that
amount at closing.
● It can be paid by the borrower or the seller (for the borrower). The FHA UFMIP is currently
1.75% of the loan amount for ALL forward mortgages and either 0.5% or 2.50% for HECM
(reverse) mortgage transactions, depending upon the amount advanced in the first 12 months
after closing.
● Monthly MIP is calculated by multiplying the base loan amount by a factor, then dividing by 12.
● The borrower pays the MIP as part of the monthly mortgage payment, along with principal,
interest, taxes and insurance (PITI).

4.7 FHA TOTAL SCORECARD

FHA has an automated underwriting system that compares borrowers’ profiles to other similar
borrowers’ profiles in a database. This system is called Total Scorecard. Depending on the
performance of borrowers in the database, the score card will recommend loan approval or denial.
The FHA scorecard is integrated with the Fannie Mae and Freddie Mac automated underwriting
vehicles.

FHA’s “5” Cs of Underwriting”:

1 Credit – evaluated by looking at the borrower’s credit report

80 | P a g e
 2 Capacity – refers to the borrowers ‘ability” to repay the debt based on sufficient income.
3 Cash - refers to borrower’s ability to make the required down payment, pay for closing cost,
required reserves, etc.
4 Collateral – the property being mortgaged as security for the loan
5 Character – borrows willingness to repay the debt (different than the borrower’s “ability” to
repay the loan.

4.8 FHA PROGRAMS

FHA offers a number of programs to meet the needs of eligible borrowers. Several popular programs
include:
• 203(b) Home Mortgages: FHA’s primary program, 203(b) is a fixed-rate program used to
purchase or refinance one-to-four-unit family dwellings.
• 234(c) Condominium Mortgages: An FHA condo loan, also known as Section 234(c), is a
mortgage insured by the FHA, which is designed to assist people who are getting into a new
condo.
• 203(k) Rehab Mortgage: Section 203(k) insurance enables homebuyers and homeowners to
finance both the purchase (or refinancing) of a house and the cost of its rehabilitation
through a single mortgage or to finance the rehabilitation of their existing home.
• 251 Adjustable-Rate Mortgages: The 251 program is based on 203(b), with the added feature
of an adjustable rate. FHA offers a number of different types of ARMs, including one-, three-,
five-, seven- and ten-year versions.
• Energy Efficient Mortgages: These loans are allowed for improvements to existing and new
construction properties to increase their energy efficiency. Financing is the greater of 5% of
the loan or $4,000, with the maximum capped at $8,000.
• 245(a) Growing Equity Mortgages and 245 Graduated Payment Mortgages: Similar in
structure, these programs are intended to assist borrowers by lowering the initial costs of
their mortgage. Payments increase each year, so the programs are best for borrowers
expecting a steady increase in their income over time.
• 2-1 Buy Downs: FHA permits borrowers to buy down the rate on their fixed-rate loan.
Lenders are required to qualify the borrower at the note rate and not the buy down rate. In
this type of buy down, the borrower deposits funds in an escrow account in order to offset
lower interest.
• 203(g) Officer and Teacher Next Door: The 203(g) program is intended to revitalize
communities by offering homes for sale at a 50% discount off the HUD appraised value to
teachers, law enforcement officers and firefighters/EMTs. HUD requires a mortgage
agreement to be signed for the discounted amount although no payments or interest is
charged as long as the borrower fulfills a three-year owner occupancy requirement.
The Federal Housing Administration (FHA)
http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory
FHA Single Family Housing Policy Manual 4000.1.
https://www.hud.gov/sites/documents/40001HSGH.PDF

81 | P a g e
4.9 VA LOANS
The Department of Veterans Affairs (VA) is a loan guarantee program which supports affordable loan
programs for our nation’s active veterans, honorably discharged/disabled veterans, and spouses of
deceased veterans. The fundamental difference between the FHA and the VA is that the VA permits
100% financing (no down payment) and FHA requires a minimum 3.5% down payment for eligible
borrowers.
VA loans are made to owner-occupant veterans by private lenders such as banks, thrifts and
mortgage companies. To obtain a loan, the veteran applies directly to a lender. If the loan is approved,
the VA guarantees a percentage of the loan amount after closing. The guaranty protects the lender
against loss if the borrower defaults in repaying the loan and is provided through what is referred to
as the VA entitlement that all eligible veterans receive.

Veterans seeking financing can obtain a VA loan for one-to four-unit properties, including
condominiums and manufactured homes.

4.10 VA ELIGIBILITY AND QUALIFICATIONS

There are two documents needed for VA Eligibility: Certificate of Eligibility (COE), which verifies
eligibility based on the length of service; and the DD214 (discharge paperwork for who have been
discharged) or NGB22/23 (General Orders) or Statement of Service.
VA Qualifications and Guidelines - VA loans require the originator to perform two different
qualification calculations: one on debt-to-income ratio and one on residual income.
● Veteran must qualify on full documentation. PITI plus all other debt must be no more than
41% of their gross monthly income and he/she must meet the residual income requirements.
● Residual income is the amount that is left over to purchase necessities like food and gasoline
after all other expenses are paid. The numbers are based on a report filed by the Department
of Labor’s Bureau of Labor Statics and is available on their website.
● No mortgage insurance. Instead of mortgage insurance, there is a one-time variable VA
funding fee that can be included in the loan.
● The lender sets the interest rate on VA loans, not the VA.
● The maximum term for a VA loan is 30 years.
● The late fee is 4% of the monthly P&I.
● Mortgage Insurance: Not required on VA Loans.
● If legally married, spouse’s income may also be considered for qualification purposes:
o Non-married co-borrower is not allowed on a VA loan unless he or she is an eligible
veteran who will occupy the home
o Two eligible veterans may combine their VA Benefits to qualify for a larger loan

VA Appraisal - The reasonable value of the property is obtained through a VA appraisal, which is also
called a Certificate of Reasonable Value (CRV) or Notice of Reasonable Value (NOV).

Assumption of VA Loans
A VA-guaranteed loan may be assumed by a purchaser of the subject property, and the interest rate
82 | P a g e
will remain intact. If it is assumed by an “eligible veteran,” then the selling veteran’s entitlement is
restored and he/she would be eligible for a new VA Loan. If it is assumed by a non-veteran, the
entitlement is NOT restored.

Closing Costs
The veteran can pay a maximum of reasonable and customary amounts for any and all of the itemized
fees and charges designated by the VA including:
• Flood zone determination
• Recording fees
• Credit report
• Prepaid items
• Hazard insurance
• Appraisal and compliance inspections
• Survey
• Title examination and title insurance
• Special mailing fees for refinancing loans
• Mortgage Electronic Registration System (MERS) fee

The veteran cannot be charged for the following fees and charges under VA regulations:
• Attorney 's fees
• Brokerage fees
• Prepayment penalties
• Builder's HUD/FHA inspection fees
• Attorney 's fees
• Brokerage fees
• Prepayment penalties
• Builder's HUD/FHA inspection fees

VA Closing Cost and Seller Concessions

Borrowers may pay reasonable and customary fees for each loan, but with several exceptions. A
veteran cannot pay tax services, underwriting, processing, lender inspection and application or loan
preparation fees. Loans are permitted to contain up to 4% seller concessions (seller-paid closing
cost).

Considered Seller Concessions and Not Considered as Seller

Subject to a 4% Limit Concessions
Payment of the buyer's VA funding fee Payment of the buyer's closing costs
Prepayment of the buyer's property taxes and/ or Payment of points as appropriate to
insurance the market
Gifts (such as a television or microwave oven)
Payment of extra points to provide permanent

83 | P a g e
interest rate buydowns
Provision of escrowed funds to provide temporary
interest rate buydowns
Payoff of credit balances or judgments on behalf of
the buyer

4.11 VA FUNDING FEE

Unlike a FHA-insured loan, there is no minimum investment or down payment required for VA loans;
however, there may be a variable VA funding fee to the VA to help defray the costs of the VA home
loan program.
o This fee may be waived for veterans with disabilities or surviving spouses.
o The funding fee may be financed into the loan and ranges from 0.50% to 3.30%, depending on
what type of loan the veteran is obtaining and whether it is his/her first-time use of loan
eligibility or a subsequent use.
o The funding fee is considered non-refundable unless the borrower is overcharged or
inadvertently charged.
o The typical funding fee is 2.15 percent of the purchase price of the home.
Type of Veteran Down Payment 1stTime Use Subsequent Use
Regular Military No down payment* 2.15 % 3.30%
5%ormore (up to 10%) 1.50% 1.50%
1.25 % 1.25 %
10%ormore
National Guard and No down payment* 2.40% 3.30%
Reservists 5%ormore (up to 10%) 1.75 % 1.75 %
10%ormore 1.50% 1.50%

4.12 RESTORING ENTITLEMENT

It is possible for a veteran to use some entitlement on a previous purchase, and have partial
entitlement available for another purchase if:
o The property, securing the VA loan, has been sold and that loan has been paid in full.
o An eligible veteran (not disabled/not dishonored) has agreed to assume the outstanding
balance on a VA loan and substitute his entitlement for the same amount originally used on
the loan

4.13 VA LOAN LIMITS

The VA doesn’t limit the price a veteran can pay for a house – but it does limit the amount it will
guarantee. The VA will guarantee up to 25% of the purchased price (or value - whichever is less).

84 | P a g e
For example – if a home is selling for $405,000 – the MAX amount the VA will guarantee is $101,250
($405,000 x 25%). This amount is then compared to the veteran “entitlement amount” to see if he
can purchase the property without a down payment.

4.14 VA ENTITLEMENT AND LOAN GUARANTY

Eligible veterans receive specific amount of entitlement to be used when applying for VA financing.
The Entitlement amount is the maximum amount that the VA will “guarantee” on behalf of a Veteran.
Full entitlement is equal to $36,000. Most lenders will lend up to four times the amount of the
veterans entitlement ($144,000) For military borrowers with the $36,000 of maximum entitlement,
VA’s maximum guarantee amount for loans over $144,000 is based on 25% of the county loan limits.
Since a Veterans entitlement is based on 25% or of the County Limit ($453,100 in most counties for
2018) the maximum is $113,275. If an entitlement is insufficient, a cash down payment may be
allowed for the balance.
For Example:
➢ Assume each veteran is buying a home in a county where the current loan limit for a single-
family home is $453,100, making the maximum guarantee $113,275 ($ 453,100 x .25).
➢ Veteran Steve has full entitlement available and is purchasing a home for $350,000. $350,000
x 25% (sales price/appraised value) = $87,500.
➢ Since Steve has his entire entitlement of $113,275 available, he can purchase this house
without a down payment, and there is still $25,775 in available entitlement.

CASE STUDY QUESTION: RESTORATION OF VA HOME LOAN ENTITLEMENT

A mortgage loan originator is working with a veteran who had previously used his VA home buying
benefits. The veteran advised the mortgage loan originator that the loan no longer exists.
The mortgage loan originator in turn advised the veteran that if he had paid off the prior VA loan and
disposed of the property that the eligibility can be restored for additional use, what the veteran did
not tell the MLO was that the home had been sold in a “short sale”.
This veteran had been liable for the deficiency that the VA incurred in liquidating the property and
the VA settled for payment representing fifty percent (50%) of the deficiency. The veteran was
released from future liability with the settlement.
What should the mortgage loan originator tell the veteran about the reusability of that entitlement?
CASE STUDY ANSWER: RESTORATION OF VA HOME LOAN ENTITLEMENT
Even though the veteran was released from liability and the home (and its loan) is gone, the Federal
Government still suffered a loss on the loan. The law does not permit the used portion of the
veteran's eligibility to be restored until the loss has been repaid in full.
The mortgage loan originator should do the math and help the veteran understand the costs involved.
The veteran can either pay off the remaining deficiency or come up with the down payment required

85 | P a g e
to offset the shortfall of guarantee necessary to provide the twenty-five percent (25%) level required.

VA Purchase & Cash Out Refinance Home Loans -

http://benefits.va.gov/HOMELOANS/purchasecashout.asp?expandable=0&subexpandable=0

4.15 USDA LOANS

A source of financing for rural properties is the United States Department of Agriculture (USDA). A
USDA Guaranteed loan (sometimes referred to as a Section 502 loan) is a Government insured 100%
purchase loan for properties in rural areas. The loans available through the program are very similar
to FHA loans; but target rural homebuyers. USDA loans are primarily used to help low-income
individuals or households purchase homes in rural areas.
Funds can be used to build, repair, renovate, or relocate a home, or to purchase and prepare sites,
including providing water and sewage facilities.
Loans made under the USDA program are referred to as Section 502 loans.
● The Section 502 Direct Housing Loan program offers mortgages for low-income homebuyers
in rural areas. Section 502 direct is operated by the U.S. Department of Agriculture’s Rural
Development Housing and Community Facilities Programs office (RD). The Direct Housing Loan
is for very low to low-income families. An income below 50% of the area median income is
considered very low.
● There is also a separate Section 502 Loan Guarantee program. The program requires that loan
applicants without adequate down payment resources to secure a conventional loan. The
Guaranteed Housing Loan caters to the average income borrower. Applicants can have an
income of up to 115% of the median income for the area.

The following is a broad overview of some of the USDA program guidelines:

● 30-Year Fixed: The USDA loan program offers 30-year fixed-rate loans only, and there is no
required down payment. However, the lender must use debt ratios to ensure the borrower is
adequately able to repay the loan.
● Insurance - USDA Mortgages do not have PMI, but instead have an upfront
premium/funding fee that is meant to cover any losses incurred by borrowers who may
default. This fee is much less than the PMI required on FHA mortgages or mortgages where
the borrower pays less than 20 percent of the down payment and is 2 percent of the
purchase.

● Debt Ratios: USDA utilizes debt-to-income ratios of 29% for housing and 41% for total debt.
● 100% Financing: USDA loans do not require a down payment. Borrowers are also permitted
to finance the required funding fee, allowing financing up to 102%.
● “Rural” can include small towns up to 35,000 people.
● It is funded by the Department of Agriculture.
● There is no prepay penalty.
● The late fee is 4 % of the monthly P&I only.

86 | P a g e
4.16 NON-TRADITIONAL MORTGAGE PRODUCTS (NMP)
Nontraditional Mortgage means any mortgage product other than a 30-year fixed-rate mortgage. This
definition is specifically provided in the Federal S.A.F.E. Mortgage Licensing Act of 2008.
According to the SAFE Act, a non-traditional mortgage is anything other than a 30-year fixed rate
mortgage. The SAFE ACT defines a traditional mortgage as a 30-year Fixed Mortgage.
Fixed - A fixed-rate mortgage (sometimes referred to as an “FRM”) is a type of mortgage loan in
which the interest rate and payments (principal and interest) remain the same for the life of the loan.
Lenders will make fixed-rate loans for terms of any length although 10-, 15-, 20-, 25- and 30-year
terms are common, although other terms are available on a limited basis up to 40 years.
A borrower may prefer a fixed-rate mortgage loan because it eliminates any risk of rising interest
rates during the life of the loan. The rate will never change as a result of any corresponding change to
an index or Treasury rates. Therefore, the principal and interest payment remains static for the life of
the loan, although the total payment may change if the borrower escrows (pays property taxes and/or
insurance with the loan) and those charges change.
Adjustable - An adjustable-rate mortgage (ARM) is a type of mortgage instrument in which the
interest rate periodically adjusts up or down according to a specific index and pre-determined margin.
At adjustment, interest rates for ARMs are generally calculated by adding the ARM’s index value to
the lender’s margin.
The Index + the Margin = the Fully Indexed Rate
● An index is an economic measurement that is used to make periodic interest adjustments for
an adjustable-rate mortgage. An example of an index would be the interest rate of one-year or
three-year U.S. Treasury bills. Other examples are the cost of funds index (COFI) and the
London Interbank Offered Rate (LIBOR). Although the lender chooses the index that will be
used, the lender has no control over what the measurement of the index is at any given time.
● The margin is the number that a lender adds to an index to determine the interest rate of an
ARM. Usually, the margin is measured in “basis points.” The margin does not change during
the life of the loan.
● By adding the index to the margin, lenders calculate the fully indexed rate, which is the rate
that is typically charged at each adjustment period.
● Introductory rate - The interest rate on an ARM loan at closing is called the introductory rate,
and it will be in effect for a period of time ranging from one month to ten (10) years, depending
upon the loan product. The introductory rate is also known as the “start rate” or “initial rate.”
● Teaser rate - When the introductory rate is lower than the fully-indexed rate at the time of closing,
it is known as a teaser rate. All introductory rates, whether teaser or not, are set by the lender.
● Adjustment Period - the period between rate changes is the adjustment rate period. When the
initial rate expires, the loan will undergo the first of several adjustment periods. Like the initial
rate, the rate for the adjustment period can last anywhere from several months to several years
until it is re-calculated.
● Rate Caps - ARM loans help avoid payment shock with built-in protections called caps. Payment
shock is a significant increase in the monthly payment on an ARM that may surprise the borrower.
A rate cap is a limitation on the amount that an interest rate may increase or decrease either at

87 | P a g e
 the adjustment date or over the lifetime of the loan. These may also be referred to as “adjustment
caps.” There are three types of rate caps on most ARM loans:
● The initial cap applies only to the first rate adjustment period and indicates the number of
percentage points that a rate may increase over the start rate.
● The periodic cap applies to all subsequent adjustment periods and indicates the number of
percentage points that a rate may increase or decrease from the rate that was in effect
immediately prior to the adjustment.
● The life cap sets a maximum number of percentage points that the rate can increase over the
start rate for the life of the loan.

On a lender’s rate sheet or guideline document, these caps are expressed as a series of three numbers
with slashes between them.
• For example, “Caps=5/2/5.” In this scenario, the loan could adjust 5% at the FIRST adjustment
period, 2% at every adjustment period thereafter, and could only adjust 5% total over the life of
the loan.
• For loans where the initial cap and periodic cap are identical, two numbers are sometimes used.
For example, a loan with a 2% initial cap, a 2% periodic cap and a 6% life cap could be expressed as
“2/6”. Remember that the numbers here indicate maximum percentages of change, NOT
maximum interest rates.
Example

Rate Floor - Although rate caps generally protect the borrower, a rate floor is sometimes included in a
lending agreement in order to protect the lender. The rate floor is the lowest interest rate to which an
ARM may adjust.
Hybrid ARMs - A hybrid ARM is a mortgage loan with a fixed rate during the first three to five years of
the loans.
● After the initial fixed-rate period expires, the loan becomes an adjustable-rate loan. Lenders
offer a variety of hybrid loans, which are referred to by their initial fixed period and
adjustment period.
● For example, a 3/1 hybrid loan is a loan in which the interest is fixed for a period of three years
and then adjusts once each year for the duration of the loan term. Other hybrid loan products

88 | P a g e
 include 5/1, 7/1, and 10/1 ARMs. Hybrid ARMs are good products for borrowers who know
that they will only live in a home for a few years.

Bi-Weekly Mortgage - Making a payment every two weeks is the same as making an extra mortgage
payment every year because there are 26 bi-weekly periods in a year (13 monthly payments). The bi-
weekly payment plan can be applied to both fixed-rate and adjustable-rate loans with a payment plan
that allows borrowers to make a payment every two weeks instead of once a month. Theoretically,
this helps people who are paid every two weeks to manage their cash flow.
Balloon Mortgage - A balloon mortgage is a mortgage, which requires the borrower to make one large
payment at the end of the loan term. Borrowers usually pay the balance by refinancing – a refinance
provision is often included in the terms of the loan. The Home Ownership and Equity Protection Act
(HOEPA) prohibits balloon payments for high-cost home loans with terms of less than five years.
o For example, a 360/180 loan is a balloon loan in which a borrower is required to make
payments based on a 30-year (360 months) payment schedule for 15 years (180 months).
o Then, after those 15 years, the remaining loan balance would be due. Since the minimum
payments on a balloon mortgage reduces the principal balance but does not extinguish the
balance by the end of the loan term, we call balloons “partially amortizing loans.”
Interest-Only Loans - An interest-only loan (also known as a straight note) is a type of fixed-rate
mortgage that allows the borrower to pay only the interest due on the mortgage for a period of years,
after which the loan becomes fully amortizing.
Today, the most common interest-only period is ten (10) years. Thus, on a 30-year, interest-only loan,
the borrower is only required to pay the interest accrued in any given month for the first ten (10)
years, after which time the loan converts to an amortizing loan with the full balance to be paid over
the remaining 20 years of the loan term.
● The formula used to calculate an interest-only payment is: (Loan Amount X Interest Rate) ÷
12
Home Equity (Fixed and Line of Credit) - A subordinate lien is any mortgage or other lien that has
priority lower than that of the first mortgage. Such a lien is also referred to as a “junior lien.” Loans
secured by subordinate liens are referred to as subordinate financing.
A subordinate loan is not necessarily a second mortgage. There may be multiple layers of subordinate
debt encumbering a property (e.g., third mortgage, fourth mortgage, etc.). Each loan is subordinate to
those with higher lien priority.
● Loans are assigned priority by the date they are recorded with the county clerk or recorder of
deeds in the county in which the property is located.
● The oldest lien on a property is the first lien, the second oldest is the second lien, and so forth.
Home Equity Line of Credit (HELOC) - The most common form of subordinate financing in residential
lending is the home equity line of credit (HELOC). HELOCs are considered open-ended credit – similar
to credit cards – and as a borrower pays off the principal, they can continue to make withdrawals.
Although a HELOC is often a second mortgage, it can also be a first mortgage. For example, a borrower
can refinance a first mortgage with a HELOC in order to secure a line of credit.
89 | P a g e
Fixed Home Equity Loans - The loan is closed-end, meaning that the borrower receives a lump sum
and does not continue to make withdrawals. The lender gives the borrower a check, based on the
equity in the borrower’s home, and the borrower begins repayment. These types of loans are usually
second mortgages.
Equity Participation Mortgage - A participation mortgage is a type of mortgage that allows the
lender to share in part of the income or resale proceeds. (aka- Shared Appreciation Mortgage
(“SAM”)
Package Mortgage - A package mortgage is a loan secured by real estate and in which the personal
property and furniture is included in the purchase price of the house.
Blanket Mortgage - A blanket loan, or blanket mortgage, is a type of loan used to fund the purchase
of more than one piece of real property. Blanket loans are popular with builders and developers who
buy large tracts of land, then subdivide them to create many individual parcels to be gradually sold
one at a time.
Bridge Mortgage (Bridge Loan) - A bridge loan is a short-term financing tool that helps purchasers to
“bridge” the gap between old and new mortgages by allowing them to tap the equity in their current
residence as a down payment, while essentially owning two properties concurrently as they wait for
the sale of their existing home to close.
Refinance/Cash-out Mortgage - A cash-out refinance is a refinancing of an existing mortgage loan,
where the new mortgage loan is for a larger amount than the existing mortgage loan, and you (the
borrower) get the difference between the two loans in cash. All refinance loans must have a “net-
tangible benefit”.
Purchase Money Mortgage - A purchase-money mortgage is a note secured by a mortgage or deed of
trust given by a buyer, as borrower, to a seller, as lender, as part of the purchase price of the real
estate. It is a method of financing a home in which buyer borrows from the seller instead of, or in
addition to, a bank.
● It is sometimes used when a buyer cannot qualify for a bank loan for the full amount. It may
also be referred to as seller financing, seller-carry-back or owner financing.
Reverse Mortgage (Reverse Annuity) - On a reverse mortgage, there are no payments due from the
borrower. In fact, in many cases the lender will actually make periodic payments to the borrower that
come from the borrower’s equity in the home. This product is often used to provide income to
retirees or elderly borrowers based upon their existing home equity. They allow an older homeowner
to use equity in their homes to meet the expenses of living, or to pay for home improvements.
Borrowers are not required to repay the loan as long as they continue to live in the home. The
common features of a reverse mortgage include:
● Loans are only available to borrowers that are 62 or older.
● The borrower must live in his/her home.
● Payments are not taxable income and paid out based on the tenure method (payments over
time as opposed to a lump-sum payment).
● Balance of loan rises as equity shrinks (rising debt, falling equity).
● Upon death of the Home Equity Conversion Mortgage (HECM) borrower(s) the heirs must
90 | P a g e
 either sell the house or refinance to repay the HECM – all equity remain after paying the HECM
in full will go to the heirs. (Spouse who is NOT on the Note may stay in the house – without
refinancing)
● The mortgage is payable in full when the home is sold or the last surviving homeowner dies.
● Reverse mortgages may also be referred to as “reverse annuity mortgages “(RAM) or “home-
equity conversion mortgages” (HECM). HECM is the FHA’s reverse mortgage program, and is
the most common program available today.
● The amount that an applicant may borrow is based on the age of the youngest borrower, the
value of the property and the expected interest rate on the loan.
● Individuals must demonstrate their ability to make property tax and homeowners insurance
payments.
● If they are unable to do so, FHA now requires that the lender establish a life expectancy set-
aside (LESA) to assist the applicant in making such payments when they come due. This
resembles an escrow account, although it is different in that the money is segregated from the
available applicant funds up front.
● The nationwide maximum loan amount for a reverse mortgage is $679,650.
There are a number of reasons why a reverse mortgage might become due and payable, some of
which are:
● The homeowner dies.
● The homeowner moves out of the home (for a period of one continuous year).
● The homeowner sells the home.
● The homeowner fails to pay property taxes or keep the home insured.
● The homeowner fails to maintain or repair the home.
● The homeowner declares bankruptcy.
● The homeowner abandons the property.
● Perpetration of fraud or misrepresentation.
● Eminent domain or condemnation proceedings.
Payment Plans
1. Single Disbursement Lump Sum - a single payment at loan closing.
2. Line of Credit - unscheduled payments or in installments, at times and in an amount of your
choosing until the line of credit is exhausted.
3. Term - equal monthly payments for a fixed period of months selected.
4. Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy
the property as a principal residence.
5. Modified Term - combination of line of credit plus monthly payments for a fixed period of
months selected by the borrower.
6. Modified Tenure - combination of line of credit and scheduled monthly payments for as long as
you remain in the home.
Wraparound Mortgage - A wraparound mortgage, more commonly known as a "wrap," is a form of
secondary financing for the purchase of real property used when an existing loan on a property is
retained, while the lender gives the buyer another larger loan.

91 | P a g e
 ● This type of loan is used frequently as a method of refinancing property or financing the
purchase of property when an existing mortgage cannot be paid off.
● The total amount of a wraparound mortgage includes the previous mortgage's unpaid amount,
plus the additional funds required by the borrower. The borrower makes payments to the new
lender on the larger loan, and the new lender makes payments on the original loan. For
example, S, who has a $70,000 mortgage on his home, sells his home to B for $100,000. B pays
$5,000 down and borrows $95,000 on a new mortgage. This mortgage "wraps around" the
existing $70,000 mortgage because the new lender will make the payments on the old
mortgage.
Construction Loans - Construction financing is comprised of two phases: the construction phase and
completion. During the construction phase, an interim loan used to pay for the construction of
buildings or homes. Interim financing is short-term financing (i.e., 3-9 months) made to cover costs
while waiting for the requirements of a permanent loan to be met.
Upon completion of the construction, the borrower must obtain permanent financing or pay the
construction loan in full. The permanent loan that pays off a construction loans is a takeout loan.
Construction loans are usually designed to provide periodic disbursements to the builder/developer
as construction progresses. The release of funds from a lender to the contractor, is referred to as a
“draw.”

4.17 OTHER NON-TRADITIONAL PRODUCTS

Loan Modifications - The basic definition of a loan modification is a permanent change in the terms of
a loan (either term, interest rate or both) in response to a borrower’s long-term inability to make
payments. Additionally, a loan modification may involve a change to the outstanding principal if the
lender is willing/able to write a portion of the loan off.

Short Sale (or Pre-foreclosure Sale) - A short sale is when the lender agrees to a reduced payoff on a
loan when the subject property is sold.
Forbearance - In a forbearance, the lender agrees to a reduction or suspension of loan payments for
an agreed upon period of time. At the end of the period, the borrower is responsible for resuming
payments and for making up past due amounts.
Assumption - Some mortgages are eligible for assumption. It is a method transferring the property to
a new owner who takes over the outstanding mortgage debt.
Deed-in-lieu of Foreclosure - Obviously a last resort to other foreclosure avoidance methods, this
method results in the homeowner voluntarily giving the deed to their property back to the lender
(voluntary returning the deed) – in lieu of a foreclosure being filed against him/her.

4.18 INCOME-RELATED TERMS

Reduced Documentation/No Documentation Loans: Reduced documentation loans – also known as
“low doc” or “no doc” loans – are one type that has become virtually unavailable in the marketplace.
Low doc and no doc loans were initially used for self-employed individuals and other borrowers with

92 | P a g e
income, debt and assets, which were difficult to verify through standard underwriting documentation.
No Ratio: Conforming loans require an underwriting analysis of a borrower’s debt ratios – ratio of
housing debt-to-income and ratio of total debt-to-income. In this type of nontraditional loan, the
borrower’s debt ratios were not considered.
No Income, No Assets (NINA): In a NINA loan program, no income or assets information was provided
by the borrower, nor verified by the lender. Although income was not verified, the lender verified that
the borrower was employed.
Stated Income, Stated Assets (SISA): In a SISA loan program, the borrower provided information
about his/her income and assets. However, no documentation was provided, and the lender
performed no verification of the information. Although income was not verified, the lender verified
that the borrower was employed.
No Income, Verified Assets (NIVA): No income information was considered; however, assets were
verified. Although income was not verified, the lender verified that the borrower was employed.
Stated Income, Verified Assets (SIVA): The borrower provided information on his/her income;
however, no documentation was required, or verification on the actual income figures was
performed. Assets, employment and other requirements were verified by the lender.
No Doc: In a no doc loan, the only documentation used was the credit report and appraisal. These
loan programs relied on the value of the home and the borrower’s credit history.

4.19 OTHER LOAN TERMS

When evaluating a loan applicant, it is important to consider the five “C’s” of underwriting: Capacity,
Capital, Credit, Collateral and Character.
Capacity refers to the borrower’s ability to repay the loan (and service other debts and obligations)
based upon sufficient income. The underwriter relies on the loan processor to verify the income
information set forth by the borrower in the loan application. The borrower’s capacity to repay a loan
is determined, in part, by calculating and evaluating a debt-to-income ratio.
Capital refers to the borrower’s ability to make a down payment, pay for closing costs and fund any
escrows or reserves required at closing. In some cases, a lender will require that a borrower have
enough reserves (liquid assets left over after closing) to pay a certain number of mortgage payments.
For example, it is common for lenders to require that borrowers have two months of mortgage
payments in reserve on primary residence transactions, and some lenders require that borrowers
have six months in reserve on a loan secured by an investment property. The applicant’s capital is
generally evaluated by looking at the last two months of bank statements and/or quarterly
investment account statements.
Credit is evaluated by looking at the credit report. While the borrower’s FICO credit score is very
important, there are other items that can affect the evaluation of the applicant’s creditworthiness.
Collateral refers to the property being mortgaged as security for the loan. The value of that property
is established by a property appraisal performed by a licensed appraiser.

93 | P a g e
Character refers to the borrower’s willingness to repay the debt, as distinguished from the
borrower’s ability to repay the debt. Credit history can help to provide an indication of a borrower’s
willingness to repay, and evaluation of extenuating circumstances (as mentioned above) factors in as
a measure of character, especially in loans that are manually underwritten.

4.20 FINANCIAL TERMS

Negative Amortization - Negative amortization occurs when the interest payment due does not cover
all of the interest accrued for the period. Any unpaid interest is added to the loan’s outstanding
principal balance, causing it to grow.
Positive Amortization - Positive amortization occurs when a portion of each payment is applied to
principal, thereby reducing the outstanding balance. On positively amortizing loans, the interest
portion of each payment decreases, and the principal portion increases such that the first payment
consists almost entirely of interest, while payments late in the loan term consist almost exclusively of
principal.
Fully Amortizing Loans (self-liquidating) - A loan is fully amortizing when the regular monthly
payments result in the principal balance being extinguished at the end of the loan term. Most fixed-
rate loans are fully amortizing.
Partially Amortizing Loans - A loan where a portion of the principal is repaid with regular monthly
payments, but the balance is not fully extinguished at the end of the loan term (resulting in a large
payment to satisfy the remaining balance), is called a “partially amortizing loan.” Balloon loans are
partially amortizing loans.

4.21 GENERAL TERMS

Acceleration Clause - Gives lender right to declare the entire loan balance due immediately because
of borrower default or for violation of other contract provisions. This clause allows the mortgagee,
(lender) to accelerate the payment schedule, (to call the entire loan amount due), if payments are not
received as agreed, (default by the borrower).
o Lenders must wait until payments are delinquent at least 120 days before enforcing
acceleration clause due to new regulation implemented January 2014 by CFPB.

Alienation Clause - A clause that specifically calls a mortgage loan due upon sale or transfer of the
property. This clause makes the mortgage not assumable, this allows the lender to be paid
immediately if the borrower transfers ownership of the mortgaged property without lender's approval
(aka due on sale clause).
Defeasance Clause - Requires the lender to execute a release of lien or satisfaction of mortgage
document upon full payment of the debt.
Escalator Clause - Allows the mortgagee to increase the interest rate under certain circumstances.
Subordination Clause - Allows this mortgage to be subordinated, (placed at a lower priority position

94 | P a g e
voluntarily), to a junior mortgage. For example: to move from first mortgage to second mortgage
position.
Exculpatory Clause - Relieves the borrower from any personal liability in the event of a default.
Conversion Clause - Allows an adjustable mortgage to be converted to a fixed rate mortgage.
Mortgage Brokers - A mortgage broker is a firm that, for a commission, matches borrowers and
lenders. A mortgage broker does not retain servicing, does not use its own funds, and is not a lender.
Mortgage Bankers - A mortgage banker originates, funds and sells loans secured by mortgages on
real property. Mortgage bankers generally act as intermediaries between investors and borrowers.
Rate Lock - A rate lock agreement between the borrower and lender details a specified period of time
in which the lender will keep a specific interest rate and fee combination available for the borrower.
Some lenders charge a fee for locking a rate at application.
Closing Costs - At the time of closing, payment is due for a number of fees that relate to the cost of
obtaining a loan, the transfer of ownership to the borrower, and the taxes and fees owed to the state
and local government. Closing costs normally include an origination fee, property taxes, charges for
title insurance and escrow costs, appraisal fees, etc.
Debt-to-Income Ratio - The relationship, expressed as a percentage, between a borrower's monthly
obligations on long-term debts and his or her gross monthly income.
Discount Points (also known as buy-downs) - A fee paid in exchange for a reduction in the rate to
something below the lender’s quoted market rate. The payment “offsets” the lender’s loss of return
of interest over time from the reduced rate.
Deficiency Judgment - A judgment or decree rendered by a court against a party when security
pledged for a debt, (loan), is not sufficient to satisfy the debt after default and a foreclosure sale of
the security property. For example, if a default takes place and the property is sold at foreclosure and
brings a price of $50,000 and the outstanding debt is $60,000, a deficiency judgment could be ordered
by a court for the remaining $10,000.
Equity - The difference between the fair market value of a property and the current balances of any
liens against the property.
Hypothecate - To pledge property as collateral without giving up possession of the property. Serves
as protection for creditor, motivation for debtor, ensuring terms of note are fulfilled and note is
repaid as agreed. When debt is repaid, the note and security instrument are canceled.
Prepayment Penalty - Fees charged for an early repayment of debt. Prepayment penalties are subject
to laws that restrict the amount of the penalty and that limit the imposition of prepayment penalties
to the early years of a loan.
PITI - Principal, interest, taxes and insurance are the monthly housing expenses that a lender
calculates in order to determine a borrower’s housing expense ratio.
Foreclosure - The sale of property after a borrower’s default on payments to satisfy the unpaid debt.
The exact procedure that the lender follows in order to foreclose on a piece of property depends on
the presence or absence of a power of sale clause in the mortgage or deed of trust.

95 | P a g e
 ● Judicial foreclosure - If the mortgage or deed of trust does not include a power of sale clause,
the lender must file a lawsuit, requesting the court to enter an order of foreclosure. This type
of foreclosure is known as a judicial foreclosure.
● Non-judicial foreclosure - When the mortgage or deed of trust includes a power of sale clause,
the lender is not required to file a lawsuit in order to begin foreclosure proceedings. The
power of sale clause authorizes the lender to sell the property to pay off the balance on the
loan. This type of foreclosure proceeding is known as a non-judicial foreclosure.
Equitable Right of Redemption - The right of the mortgagor to cure a default any time prior to
foreclosure.
Right of Redemption - The right of the mortgagor to reclaim, (redeem), their property even after
default and foreclosure has taken place. Can be 6 months to 2 years, depending on state law
Promissory Note - The note, or promissory note, is signed by the borrower as evidence to promise to
pay (the borrower’s obligation to repay the debt to the lender).
Security Instruments - Two main types of security instruments used in real estate transactions are
trust deeds and mortgages.
● Trust Deeds (or deed of trust) - Instruments placing specific financial interest in title to real
property into hands of disinterested third party as security for payment of note.
o Borrower called trustor
o Lender is beneficiary who retains note and deed of trust
o Trustee holds legal title to security property described in a deed of trust subject to
terms of trust for lender benefit .
● Mortgages are signed by the borrower creating a voluntary lien on the property for the
security of payment of the debt, evidenced by the promissory note.
▪ Borrower is call the mortgagor
▪ Lender is mortgagee who retains note and deed of trust

4.22 STATEMENT ON SUBPRIME LENDING

Multiple federal banking regulators publicly released a “Statement on Subprime Mortgage Lending”
in June of 2007. These agencies developed the statement to address emerging risks associated with
certain subprime mortgage products and lending practices. This statement was directed only to
institutions regulated by the specific agencies.
Concerned that the statement equally applied to mortgage brokers and loan originators that were not
regulated by the federal agencies, the Conference of State Bank Supervisors (CSBS), the American
Association of Residential Mortgage Regulators (AARMR), and the National Association of Consumer
Credit Administrators (NACCA) issued a parallel Statement on Subprime Mortgage Lending (the
“Subprime Statement”), intended to guide state-chartered lending institutions and state-licensed
mortgage professionals.

"Subprime loans" are loans to borrowers displaying one or more of these characteristics at the time of

96 | P a g e
origination or purchase:
• Two or more 30-day delinquencies in the last 12 months, or one or more 60-day delinquency
in the past 24 months;
• Judgment, foreclosure, repossession, or charge-off in the prior 24 months;
• Bankruptcy in the last 5 years;
• Relatively high default probability as evidenced by, for example, a credit bureau risk score
(FICO) of 660 or below.
• Debt service-to-income ratio of 50% or greater.
The Subprime Statement specifically expresses concern regarding adjustable-rate mortgage (ARM)
products typically offered to subprime borrowers that have one or more of the following
characteristics:
• Low initial payments based on an introductory teaser rate that expires after a short period and
then adjusts based on the index rate, plus a margin for the remaining term of the loan.
• Very high or no limits on how much the payment amount or the interest rate may increase on
adjustment dates.
• Limited or no documentation of borrowers’ income.
• Product features likely to result in frequent refinancing to maintain an affordable monthly
payment.
• Substantial prepayment penalties and/or prepayment penalties that extend beyond the initial
fixed interest rate period.
Information provided to consumers should clearly explain:
• Payment Shock. Potential payment increases, including how the new payment will be
calculated when the introductory fixed rate expires.
• Prepayment Penalties. The existence of any prepayment penalty, how it will be calculated,
and when it may be imposed.
• Balloon Payments. The existence of any balloon payment.
Risk layering – is the practice of approving loans with multiple layers of risk, which may significantly
increase the risks to both the lending institution and the borrower. Subprime borrowers are
understood to be “at risk” borrowers because of past credit problems, layering on additional risk on
the same loan would include such things as; reduced documentation, a simultaneous high LTV second
mortgage, and not including escrows for taxes and insurance.
With each layer of risk, the chances for loan default increase substantially. Therefore, an institution
should have clear policies governing the use of risk layering. When risk- layering features are
combined with a loan, the lender should demonstrate or document effective mitigating factors that
support both:
● Tight underwriting; and
● Borrowers’ ability to repay the loan (suitability)

The Subprime Statement sets forth guidelines for risk management practices that loan providers

97 | P a g e
should follow in order to mitigate these risks.
First, providers should ensure that they do not engage in predatory lending practices involving one of
the following elements:
● Making loans based predominantly on the foreclosure or liquidation value of a borrower’s
collateral rather than on the borrower’s ability to repay the loan according to its terms.
● Inducing a borrower to repeatedly refinance a loan in order to charge high points and fees
each time the loan is refinanced. This practice is referred to as “loan flipping.”
● Engaging in fraud or deception to conceal the true nature of the mortgage loan obligation
or ancillary products from an unsuspecting or unsophisticated borrower.

98 | P a g e
 CHAPTER 4 QUIZ
1) Which type of mortgage is funded by the United States Department of Agriculture?
a. Section 502 Loan
b. FHA mortgage
c. Rural home mortgage
d. VA mortgage

2) Maria is applying for an FHA loan on a house with an appraised value of $135,000 and a sales price
of $141,000. What is the required minimum investment?
a. $4,935
b. $4,725
c. $3,600
d. $4,250

3) What type of loans requires a one-time variable funding fee?

a. VA Loans
b. FHA Loans
c. Conventional Loans
d. USDA Loans

4) The required housing/total debt ratio requirement necessary to qualify for an FHA loan is:
a. 28%; 36%
b. 29%; 36%
c. 29%; 41%
d. 31%; 43%

5) A residual income calculation shows the

a. Amount of cash flow available for maintenance and utilities
b. Cash flow remaining for family support
c. Funds remaining for the proposed PITI payment
d. True composite debt-to-income ratio

6) Financed MIP can be cancelled in which of the following situations?

a. When the loan balance has been paid down to 80% LTV
b. When the loan balance has been paid down to 78% LTV
c. After the first year of full payments
d. Never

99 | P a g e
7) The annual Area Median Income for a county is $50,000. Using USDA guaranteed financing, what
is the maximum amount of gross annual income that the borrower can earn and qualify for USDA
guaranteed financing?
a. $50,000
b. $55,000
c. $57,500
d. $62,500

8) Which of FHA's “4 Cs of Underwriting” evaluates the borrower’s “willingness” to meet his monthly
payment obligations?
a. Character
b. Cash
c. Collateral
d. Credit

9) Full VA entitlement can generally be restored to a veteran

a. if any disabled veteran assumes the loan
b. if an eligible veteran substitutes his entitlement for the seller’s
c. under no circumstances
d. when the loan is paid down to below
50% LTV

10) According to the SAFE Act, which of the following is a traditional mortgage?
a. 15-year fixed mortgage
b. An adjustable rate mortgage
c. A 30-year fixed mortgage
d. Partially amortizing loan

11) To determine the fully-indexed rate on an adjustable rate mortgage, the index is added to the
__________ ?
a. Cap
b. Index
c. Margin
d. Prepayment

12) What type of mortgage covers more than one parcel of land?
a. Bridge mortgage
b. Construction mortgage
c. Blanket mortgage
d. Bi-weekly mortgage

100 | P a g e
13) What type of mortgage requires that the lender provide the borrower with the CHARM booklet?
a. Fixed Rate Mortgage
b. Adjustable Rate Mortgage
c. Partially Amortized Mortgage
d. Bi-weekly mortgage

14) A promissory note calling only for payment of both principle and interest is classified as:
a. fully-amortizing note.
b. installment note.
c. negotiated note.
d. straight note.

15) A clause that gives the lender certain stated rights when there is a transfer of ownership in the
property.
a. Acceleration clause
b. Alienation clause
c. Balloon payment clause
d. Exculpatory clause

16) Which document would require judicial foreclosure proceeding?

a. Mortgage
b. Contract of sale
c. Trust deed
d. Promissory note

17) A _____________ clause in a contract that gives the lender the right to charge the borrower a
penalty for paying off the loan early, such as when refinancing a loan.
a. Acceleration clause
b. Prepayment penalty clause
c. Balloon payment clause
d. Exculpatory clause

18) To foreclose a mortgage, a creditor

a. Files an attachment in the amount of the debt.
b. Files a court action.
c. Notifies the debtor of the default, waits ten days, publishes a notice of default in the paper,
then claims a forfeiture.
d. Notifies the trustee of default.

101 | P a g e
19) Which term describes the process by which a borrower pledges property as security for a loan
without giving up possession of it?
a. Defeasance
b. Hypothecation
c. Redemption
d. Subordination

102 | P a g e
5.0 MORTGAGE LOAN ORIGINATION ACTIVITIES

Chapter Objective
Upon completion of this chapter, you will be able to:
• Understand the requirements and importance of the application process
• Learn to perform loan qualification and borrower analysis
• Develop an understanding of appraisal requirements
• Learn about title and settlement
Mortgage loan originators are expected to have a general understanding of laws, terms, and
procedures pertaining to the residential mortgage industry. This chapter provides an overview of
mortgage loan originator activities.

Mortgage Professional Functions

• Origination: Making or initiating a new loan
– Initial contact with borrower
– Ordering credit report, other required documentation
• Loan Processing: Verifying information in the loan file
– Employment and other verification
– Coordination of loan process
• Underwriting: Evaluating and deciding whether to make a new loan, and if so, on what terms
– Done by the funding source
– Evaluates credit scores/history, appraisals, job history, collateral, etc.
• Servicing: Continued maintenance of loan after closing
– Done by lender, servicing company, other
– Mortgage and escrow statements, collecting payments, pursuing late payments

5.1 Steps in Obtaining A Real Estate/Mortgage Loan

All products offered to a borrower should be consistent with the borrower’s condition and based on
their ability to repay. A borrower is entitled to receive the best product and loan program for their
situation. Generally, when a borrower has excellent credit history, good assets and stable income they
receive a loan product that is a consistent with their overall financial position. Putting that borrower
in a subprime loan would be both unethical and a violation of the borrower’s rights. Similarly, a
borrower on fixed income should not receive an adjustable rate mortgage where the payment could
increase in the future.

The Steps in the Loan Process includes the following:

1. Completing the Application
2. Processing
3. Underwriting (risk analysis)
4. Closing

103 | P a g e
5.2 Pre-Qualification or Pre-Approval
Prequalification is not the same as preapproval. Prequalification is merely a determination of the
amount a person might be able to borrow. Preapproval is a determination made by a lender that a
borrower can actually be financed for a given amount of money. Preapproval involves an actual credit
determination and prequalification does not.
Pre-qualification - MLO reviews the borrower history to determine if they are likely to get approved
for a loan, and approximate loan amount.
• Does not guarantee approval; not binding
• Done by any MLO
• Does not require disclosure
Pre-approval. Lender uses an application to determine that potential borrowers can be financed for a
certain amount for a specific property; done only by a lender.
• Rendering a credit decision; may be binding
• Only done by a lender
• Triggers mandate disclosures with completed applications

5.3 Application Information and Requirements

Once a purchase agreement is executed (or once a decision is made to refinance), the loan originator
and the borrower meet to complete a loan application (or complete one over the phone or Internet).
The application is referred to as the Uniform Residential Loan Application (URLA) - also called “the
1003,” as it is Fannie Mae’s form number 1003. Form 65 is a similar form created by Freddie Mac.
The Uniform Underwriting and Transmittal Summary, or the 1008, is submitted with the file for
underwriting. It contains a summary of the loan including borrower information, ratios, LTV, credit
score, appraised value, loan type, etc.
In conjunction with the loan application, the borrower should be made aware of the FBI Mortgage
Fraud Warning Notice, which includes the following language:
Mortgage Fraud is investigated by the Federal Bureau of Investigation and is punishable by
up to 30 years in federal prison or $1,000,000, or both. It is illegal for a person to make any
false statement regarding income, assets, debt, or matters of identification, or to willfully
overvalue any land or property, in a loan and credit application for the purpose of influencing
in any way the action of a financial institution.
Borrower/Customer - Each borrower associated with a mortgage loan application must answer
questions accurately and truthfully. Concealing, adjusting or withholding any material facts that may
affect the application constitutes mortgage fraud. A fact is considered “material” if knowledge of that
fact would lead a lender to consider a different course of action on the application.
A lender will provide financing based on information provided in a borrower’s loan application. If a
lender determines any information is inaccurate and untruthful, it may result in the lender approving
a loan that it would otherwise not provide. Borrowers who provide inaccurate information may be
guilty of “fraud for property” and could be subject to both civil and or criminal penalties. The

104 | P a g e
borrower(s) signs and dates the application.
Co-Borrowers - Someone who signs the note along with primary borrower and accepts joint
obligation to repay. A co-borrower must have acceptable credit/assets and if no joint
assets/liabilities, two applications should be used.
Loan Originator - The core of the mortgage loan originator’s job is to obtain a complete and accurate
1003 supported by documentation from the borrower. The Loan Originator assists the borrower in
completing the loan application and collects the necessary documentation to validate information
provided on the application.
The application is designed to be completed by the borrower, with the loan originator assisting in data
input. A Mortgage Loan Originator is required to accurately document all information a borrower
provides during the interview process without leading or coaching borrowers on their answers. The
Mortgage Loan Originator signs and dates the application.
Application Accuracy and Truthfulness - Each borrower must declare that the information in the
application is truthful and whether the borrower:
• Is obligated to pay alimony or child support
• Has any outstanding judgments, bankruptcies, foreclosures , etc.
• Has borrowed any part of the down payment
• Is a co-signer on any other debt
• Is a U.S. citizen or permanent resident
• Intends to occupy the property as a primary residence
The borrower and co-borrower must date and sign the application to acknowledge that they
have answered everything truthfully and that they understand and agree to be bound by the
terms of the loan, if granted. Additionally, borrowers are obligated to update any material
changes to income or assets after signing the initial application and prior to dosing.
Mortgage loan originators also have an obligation for accuracy and truthfulness because they are
required to assist borrowers with completion of the application.
Verification and Documentation - A borrower's net worth is determined by subtracting liabilities
from total assets. In other words, it's the value of all property (real and personal) a person has
accumulated after subtracting all debts or obligations owed. Underwriters want to confirm the
borrower has:
• Sufficient assets and personal money to make the down payment on the
property and to pay closing costs without having to borrow.
• Adequate reserves to cover two months of PITI mortgage payments after
making a down payment and paying dosing costs.
• Other assets, showing an ability to manage money and a resource, if needed,
to handle emergencies and make mortgage payments.
For the down payment, lenders:
• Want to know the source of the buyer's down payment (which usually cannot be borrowed
funds or gifts) for the first 5% for conventional loans.

105 | P a g e
 • May require two months of bank statements and/or a Verification of Deposit (VOD) form.
• May require a gift letter signed by the donor to confirm the money does not
need to be repaid and donor bank statement showing that the gift funds are
available.

5.4 Completing the Loan Application

The Uniform Residential Loan Application (URLA) or 1003 - intended to be completed by the borrower
with the assistance of the loan originator. Applications may be in writing or electronic. Typical forms
are:
• Fannie Mae Form 1003
• Freddie Mac Form 65
The purpose of the application interview with the potential borrower is to capture information to
complete the loan application. This may take place in a face-to-face meeting, over the phone or even
over the internet.
The URLA has ten sections that a MLO is to complete for each loan applicant during the origination
process.

I • Type of Mortgage and Term of Loan

.

II • Property Information and Purpose of Loan

.

III • Borrower Information

.

IV • Employment Information
.

V • Monthly Income and Combined Housing Expense Information

.

VI • Assets and Liabilities

.

VI • Details of Transactions
I.

VII • Declarations
I.

I • Acknowledgement and Agreement

X

X • Information for Government Monitoring

.

106 | P a g e
Section I - “Mortgage and Terms of Loan” section. This section allows borrowers to choose the type
of loan for which they are applying. There are specific boxes on the loan application for each loan type
that must be checked. Borrowers will also fill out the loan amount that they are requesting.
The agency case number box is designated for the Federal Housing Administration (FHA), the Veterans
Administration (VA) or Farmer’s Home Administration (FmHA) case numbers. There is also a section
for the lender’s case numbers.

Section II - “Property Information and Purpose of Loan” - is used to designate information concerning
the property address and how the loan proceeds will be used. The property address for the loan
collateral is the address that will be connected to the loan. The address may be different from the
applicant’s primary address. The property address must include the city, state and zip code.
Designation of the property type – a single-family home or a multi-unit – is disclosed here. This
section also requires the applicant to state:
• The year of construction of the property
• The purpose of the loan (how the borrower plans to use the loan proceeds)
• The type of property (primary residence, second home, investment property)
• Year of acquisition (when was the borrower added to the title)
• Original cost,
• Existing loan amounts
• Value of the property
• Names currently on title
• How the title will be held (joint tenancy, tenancy in common or single tenancy)

107 | P a g e
 Section III – “Borrower Information” – asks for the applicant’s personal information. If the applicant
has lived in his/her home for less than two (2) years, residency information must be provided for the
past two years. Contact information for the applicant is also necessary.
The applicant must provide personal information including social security number, age and number
of dependents. Age is requested because the applicant must be of age to execute a contract.

Section IV – “Employment Information” – is for the applicant’s current and/or two-year employment
history. If the applicant has not been at his/her current job for two years or more, he/she must
provide information on employment for the past two years. If the applicant is self-employed, this
must also be specified.

Section V – “Monthly Income and Combined Housing Expense Information” – covers the information
required to calculate an applicant’s front and back debt-to-income ratios.

108 | P a g e
 Section VI – “Assets and Liabilities” – addresses the applicant’s assets and liabilities.

Section VII – “Details of Transaction” – is for specific information about the proposed transaction.
The transaction information section is used to display how much money the borrower will need in
order to get the loan to closing.

Section VIII – “Declarations” – contains questions regarding judgments, citizenship, default status,
occupancy status and other questions that may affect the underwriting of the loan and may result in
additional conditions or immediate rejection of the loan.

109 | P a g e
Section IX – “Acknowledgment and Agreement” – allows applicants to affirm that they understand
the purpose of the loan application and that it is a binding agreement. Applicants are required to sign
this section and certify that all information contained in the 1003 is true and correct to the best of
their knowledge. The applicant should be made aware that his/her failure to truthfully complete the
application could result in civil liability or criminal prosecution for mortgage fraud.

Section X – “Information for Government Reporting Purposes” – is related to Government statistics.

The section is referred to as the Home Mortgage Disclosure Act (HMDA) Section. It requests
information regarding race, sex and national origin.

110 | P a g e
None of this information can be used to discriminate against the borrower, and it is at the applicant’s
discretion whether he/she completes this section. If the applicant decides not to furnish this
information, it will be up to the loan originator to make an “educated guess” concerning the
demographic information to report to the government (only in regards to face-to-face applications;
not internet, mail or telephone).
Applicants must be made aware of the status of their loan application in writing within 30 days of the
date of application (according to Regulation B – ECOA). Evidence of this notification must be kept in
the loan file.
If information is missing from the application, the originator should make an effort to notify the
borrower immediately and allow them a reasonable amount of time to provide missing information.
All applicants must be made aware of the status of their application in writing within 30 days of the
date of the application. Evidence of this notification must be kept in the loan file.
Incomplete Application/Adverse Action: If the applicant submits an incomplete loan application,
under the Equal Credit Opportunity Act (ECOA), the loan originator is required to either send out a
notice of incompleteness or an Adverse Action Notice to the applicant. The request to complete
missing information can be given either verbally or in writing. However, if the applicant does not
respond in an appropriate amount of time to a verbal request, the request must be given in writing.

5.5 Assets and Liabilities

Qualifying a buyer simply means evaluating a borrower's credit-worthiness. In reviewing the
borrower's loan application to determine whether to make the loan, the lender considers the
applicant's credit, capacity, collateral, and cash by looking specifically at the following: Assets,
Liabilities, Income, Credit report, and Qualifying ratios.
The primary concern throughout the loan underwriting process is determining the degree of risk
a loan represents. The underwriter attempts to answer two fundamental questions:
Is there sufficient value in the property pledged as collateral to assure recovery of the loan
amount in the event of default?
Does the borrower's overall financial situation - which is comprised of income, credit history, and
net worth indicate he can reasonably be expected to make the proposed monthly loan payments
in a timely manner?
Assets are items of value owned by the borrower, such as cash on hand, checking or savings accounts,
stocks, bonds, insurance policies, real estate, retirement funds, automobiles, and personal property.
In practically all cases, a borrower must have some assets in order to satisfy a down payment and
complete a mortgage transaction. It is important that the application clearly indicate the source of
funds that the applicant will use to close the mortgage loan because these funds must be verified in
the file. Some sources of funds include:
• Cash in the Bank - If the applicant indicates on the application that he or she will use cash
currently on deposit in the bank to close the loan, then the loan originator can easily verify this
by asking for the last two or three months’ worth of bank statements.

111 | P a g e
 o Two months’ statements must be obtained because investors want to see seasoned
funds (funds that have been in the account for a minimum length of time).
o If the bank statements reveal any large deposits, the applicants must provide a written
explanation of the source of those funds, along with supporting documentation like a
cancelled check.
o A large deposit, as defined by Fannie Mae, is any deposit that exceeds 50% of the
monthly qualifying income for the loan.
• Sale of Current Residence - In this case, the applicant must supply a copy of the Closing
Disclosure or HUD-1 Settlement Statement from the sale transaction, verifying that the
property has been sold and that the applicant received sufficient proceeds to close the new
loan.
• Gift Funds - The donor(s) must complete a gift letter indicating the amount of the gift and the
donor’s relationship to the applicant. The relationship must be acceptable to the investor.
Typically, the individual must be a family member.
o The gift letter must state that no repayment of the funds is required, and the creditor
must verify that the funds have been given; this is generally done with a copy of a
cancelled check. The donor must also typically provide a copy of a bank statement from
which the funds were transferred to evidence the ability to give.
• Sale of Other Assets - Some of the items often sold for cash to close a real estate transaction
include cars, boats, RVs, guns, artwork, antiques, jewelry and coin collections. In the case of an
asset sale, the applicant must prove ownership of the asset that was sold, provide a market
value for that asset (i.e., a Blue Book value for cars or an appraisal for jewelry), and show the
bill of sale and proof of payment.
• Secured Borrowed Funds - Unsecured borrowed funds, such as from a credit card advance, are
NOT an acceptable source of down payment. All borrowed funds must be secured by an asset,
such as a 401(k).
• Cash on Hand - Some applicants do not use or trust commercial banks and keep their cash at
home. This is referred to as “unverified cash” or “cash on hand.” Investors generally do not
allow cash on hand to be used as a source of down payment or closing costs.
• Reserves: Cash on deposit or other highly liquid assets a borrower will have available after the
loan funds
– Prefer at least 2 months PITI
– Non-owner occupied require 6 months
Liabilities are financial obligations or debts owed by a borrower. Debts are any recurring monetary
obligation that cannot be cancelled. Liabilities, including various credit-related obligations, must be
considered in order to determine the likelihood of repayment. Most lenders require that the
borrower’s monthly mortgage payment plus other liabilities not exceed a certain percentage of the
person’s income.
• Revolving Accounts (e.g., Credit Cards) - For credit cards and other revolving accounts, the
payment that will be used in the calculation of the borrower’s debt-to-income ratio is the
minimum monthly payment shown on the credit report. If a credit report does not show a
minimum monthly payment, the underwriter will use 5% of the unpaid balance as a payment

112 | P a g e
 when calculating the ratios.
• Installment Loans - Monthly payments for installment loans (such as auto loans) with fewer
than ten (10) payments remaining may be excluded when calculating qualifying ratios.
Installment loans can also be paid off or paid down to fewer than ten (10) payments in order to
help an applicant qualify for a loan.
• Auto Leases - Monthly auto lease payments are always included in the qualifying ratios
regardless of the balance remaining on the lease (as compared to auto loans, which may be
excluded if ten (10) or fewer payments remain).
• Student Loans - If payment on a student loan is deferred, Fannie Mae and Freddie Mac both
require that the underwriter include a payment in calculating the borrower’s debt ratio for
qualification purposes. Generally, this is done by obtaining a payment letter from the
institution holding/servicing the student loan (e.g. Sallie Mae). If no payment letter can be
obtained, the lender must use 1% of the unpaid balance.
• Contingent Liabilities - A borrower has a contingent liability when he or she has co-signed for
another person’s installment debt, but the actual payments are being made by the primary
obligor. Such liabilities do NOT have to be taken into consideration when calculating the
borrower’s debt ratio as long as both of the following are true:
o The payments have been made on-time for the previous 12- month period.
o The lender documents that the payments were made from the primary obligor’s
account(s).

5.6 Income Guidelines

The two biggest things that lenders look for in income (and employment) are stability and consistency.
In order for most kinds of income to count (especially for variable income such as overtime or bonus
income), lenders will also want to receive confirmation that income is likely to continue. For example,
all income with an expiration date (child support, alimony, long-term disability programs for example)
must be likely to continue for at least three years after the loan closing.
A quality source of income is one that is reasonably reliable, such as income from an established
employer, government agency, interest-yielding investment account, etc.
A durable source of income can be expected to continue for a sustained period. Permanent disability,
retirement earnings, and interest on established investments clearly are durable types of income.
Temporary unemployment benefits are unlikely to be counted.
To be considered durable, bonus, commission, and part-time earning types of income must be shown
to have been a consistent part of the borrower's earnings for two years.
• Standard income documentation: For salaried and hourly individuals, this typically includes
paystubs for the most recent 30-day period and W-2s for the most recent two-year period.
• Commission Income: Lenders will require copies of income tax returns for the past two years
and information on current income if commissions represent 25% or more of an applicant’s
annual income. In order to account for the variability of an applicant’s commissions, lenders will
average the past two (2) years of income.
• Overtime and Bonus Pay: In order to account for the variable income such as overtime or

113 | P a g e
 bonus income, lenders will average the past two years.
• Non-Taxable Income: Grossing Up - Some income sources, such as permanent disability
payments, Social Security benefits and child support, may be exempt from federal income
taxes. Most investors/governmental agencies allow the lender to calculate how much tax the
borrower would pay if this income were taxable and add that figure to the gross amount
received. This procedure is known as grossing up. The allowable “gross up” factor is usually
25%; in other words, the non-taxable income can be multiplied by 125% to adjust it accordingly.
• Rental Income (Other Real Estate Owned): If the borrower wishes to use rental income as a
way of qualifying for a loan, the loan originator should obtain 1040 tax returns, complete with
all schedules, including Schedule E. If 1040 tax returns cannot be used, the lender will calculate
the rental income by 75% of the amount shown on the lease agreement. Generally, a 25%
vacancy/maintenance factor should be subtracted from the monthly gross rent (thus the 75%
mentioned earlier).
• Unemployment Compensation: For applicants whose work is seasonal, unemployment income
can be used as part of qualifying income. Some trades, such as fishing, construction and farm
work, are seasonal with regular down time. During this time, most workers receive
unemployment. If unemployment is part of the natural annual work cycle, then it may be
included in qualifying income. The loan originator should obtain two years’ copies of tax returns
and average both the employment income and the unemployment income. In general,
unemployment compensation received due to layoffs or termination cannot be used as
qualifying income.
• Self-Employed Borrower: If an applicant is self-employed, the loan originator should obtain tax
returns for the past two years. Twenty-five percent of income derived from 1099 income is
considered self-employment and 25% or more ownership in a business is also considered self-
employment.
• Disability payments count as income if they are a permanent source of income, but the
lender will use caution if they are only for a limited time. If the benefits have a defined
expiration date, the remaining term should be at least three years from the date of
the mortgage application. Creditors should review the borrower's disability award
letter to determine if the disability income is taxed or non-taxable. Not all disability
payments are income tax-free.
• Social Security income counts as permanent income for a borrower who has reached
retirement age. If these payments are the result of a disability or some other condition
, the lender treats them like other disability payments and requires no greater amount
of documentation than what is imposed on a regular-paid employee.
• Pensions and Retirement Benefits -Lenders generally consider pension and retirement
benefits as stable income, although they may investigate the source to determine
solvency.

• An auto allowance is an amount an employer gives an employee for the business use
of her car. This amount of reimbursement may be offset by deducting actual expenses
from the allowance. The remainder is considered taxable income by the IRS and when
averaged for the previous two years is considered income for loan qualification.

114 | P a g e
 • Alimony, child support, and/or maintenance can be considered part of the borrower's
monthly qualifying income if it's determined they are likely to be made on a consistent
basis. Such a determination is dependent on whether the payments are required by
written agreement or court decree, the length of time the payments have been
received, the age of the child (child support payments generally stop at age 18), the
overall financial and credit status of the payer, and the ability of the borrower to
compel payment if necessary (e.g., through a court order). They should be expected to
continue for a minimum of three years to be used in income calculations. They do not
need to be listed as sources of income if a borrower does not want them considered
for the loan, per ECOA. To verify receipt of income, the borrower must verify child
support payments either by six months of cancelled checks or six months of
consecutive bank statements showing child support/alimony deposits.
• Foster Care Income - Qualifying payments for foster care are generally not taxable,
according to IRS Publication 525. To fully document the income for use in loan
qualification, an MLO must:
o Obtain a letter from the state agency case worker to substantiate the foster
worker's placement and that the placement of children will be ongoing.
o Document receipt of reimbursement for the previous 24 months. Because the
income will likely be sporadic and change monthly, use a 24-month average.
o Place a letter in the loan file from the borrower stating he intends to continue
with foster care.

5.7 IRS Form 4506-T

Due to the prevalence of overstated income and the potential for tampering with income documents,
many lenders require authorization from a loan applicant to conduct an independent verification of
tax records. This independent verification is often performed for self-employed borrowers but is
becoming more common with other types of borrowers. The IRS Form 4506-T is used to obtain a
transcript of tax returns. IRS Form 8821 is used to authorize the release of other tax information.

5.8 Credit Report

Credit scoring is an objective means of determining creditworthiness of potential borrowers
based on a number system.
A credit score is a numeric representation of the borrower's credit profile compiled by
assigning specified numerical values to different aspects of the borrower. These numbers are
adjusted up and down based on the strengths and weaknesses of particular qualifications.
The numbers are added from all the categories and a credit score based on these various
criteria is assigned.
Credit scores also play an important role in automated underwriting since Fannie Mae and
Freddie Mac have identified a strong correlation between mortgage performance and credit
scores. The higher the score, the better the credit risk. The lower the score, the higher the
risk of default.

115 | P a g e
The loan originator will order a credit report from one or all the credit bureaus in order to review
the applicant's credit history. This is a record of debt repayment, detailing how a person paid credit
accounts in the past as a guide to whether he is likely to pay accounts on time and as agreed in
the future.
The Fair Credit Reporting Act indicates that consumer reporting agencies may maintain
bankruptcy information on a consumer's credit report for no more than 10 years from the date
of entry of the order for relief or the date of adjudication, whichever the case may be.
Generally speaking, however:
• Chapter 7 bankruptcy (Liquidation ) and Chapter 13 (wage earner plan) remain on a credit
report for ten (10) years.
• Derogatory accounts may only remain on a borrower's credit history for seven (7) years.
Credit scoring is considered an objective means of determining creditworthiness of potential
borrowers based on a number system. Calculated differently by all credit bureaus, although
credit scores range from about 300 to 850. The three most familiar credit bureaus are: Experian,
Equifax and TransUnion.

5.9 Tangible Net Benefit

Refinancing can be a good choice for many applicants, and there are many reasons to refinance a
mortgage. For example, someone may be looking for a lower rate and mortgage payment or might be
looking to pay off higher interest debt, such as credit cards (in which case, the possibility exists that the
rate on the new mortgage loan may actually be higher than that on the existing loan).
Often, people may want to shorten the term of their loan (i.e., go from a 30-year term to a 15-year
term) or take cash out to help their children pay for college.
• Whatever the reason for refinancing, borrowers must be receiving some sort of positive
outcome by doing so, otherwise known as a “tangible net benefit”; that is, there must be facts
about the new loan that make it in the interest of the applicant to proceed.
• Refinancing a loan with no tangible benefit to the borrower is called loan flipping, which is an
abusive practice and considered loan fraud. Loan flipping is a form of equity stripping - a
practice where the applicant’s equity is taken away by a mortgage lender. Equity stripping can
come in many forms, but in all cases, is viewed as predatory lending and must be avoided.

5.10 Processing the Loan Application

Once the borrower completes the application, the loan processing begins. Loan processing is
described as the steps taken by a lender from the time the application is received to the time the loan
is approved. The person in charge of processing the loan is known as a loan processor.
The loan processor performs clerical or support duties as an employee under the directions of a
licensed mortgage loan originator or an exempt lender. The first step in the loan process is to gather
information and prepare the loan package.

116 | P a g e
The loan processor orders an appraisal of the property and a credit report on the borrower. The
processor also sends out the necessary verification letters to confirm the borrower’s employment,
income, bank accounts and other liquid assets, and any other claims made by the borrower that must
be verified.
Typical verification letters include the Verification of Deposit (VOD) and Verification of Employment
(VOE). The VOD is a form completed by the borrower’s bank to confirm the status and balance of the
borrower’s bank accounts.
The VOE is a form completed by the borrower’s employer to confirm the borrower’s employment and
employment history.
The processor who is confirming information regarding the borrower of a VA loan must send out a
Request for Certificate of Eligibility (COE) in addition to the aforementioned verification letters. The
COE is a form completed by the VA that confirms the borrower is sufficiently entitled to a VA loan.
The processor then compares the information on the returned verifications with the borrower’s loan
application to make sure they are the same. If not, the borrower is asked to explain the differences.
Review–Preparing the Loan Package
• Order the appraisal
• Order the credit report
• Send out employment, income, and bank account verifications
• Verify information

5.11 Underwriting
Upon receiving the loan package, the underwriter analyzes the risk factors associated with the
borrower and the property before making the loan. Underwriting is the practice of analyzing the
degree of risk involved in a real estate loan. The underwriter determines whether the borrower has
the ability and willingness to repay the debt and if the property to be pledged as collateral is adequate
security for the debt.
The underwriter also examines the loan package to see if it conforms to the guidelines for selling in
the secondary mortgage market or directly to another permanent investor. In any case, the loan must
be attractive to an investor from the perspectives of risk and profitability. If any part of the loan
process is poorly done (the processing or underwriting is subpar, for example) the lender might find it
difficult to sell the loan. In addition, if the borrower defaults on a carelessly underwritten loan, the
loss to the real estate lender can be considerable. For example, if the appraisal is too high and the
borrower defaults, the lender may sustain a loss.
Automated Underwriting System (AUS) is a technology-based tool that combines historical loan
performance, statistical models, and mortgage lending factors to determine whether a loan can be
sold into the secondary market.
An automated underwriting system (AUS) can evaluate a loan application and deliver a credit risk
assessment to the lender in a matter of minutes. It reduces costs and makes lending decisions more
accurate and consistent. AUS’s promote fair and consistent mortgage lending decisions because they

117 | P a g e
are blind to an applicant’s race and ethnicity. The most widely used automated underwriting systems
are Fannie Mae’s Desktop Underwriter® and Freddie Mac’s Freddie Mac’s Loan Product Advisor
(formerly Loan Prospector)®. FHA-insured loan processing uses the FHA Total Scorecard AUS.
Contrary to popular belief, Desktop Underwriter® and Loan Prospector® do not approve loans. They
provide quick feedback as to the eligibility of the borrower and property for particular Fannie Mae or
Freddie Mac loan. As useful as an AUS is, it is only as good as its inputs. If a lender inputs incorrect
data (accidentally or intentionally), then the AUS results are invalid.

5.12 Uniform Residential Appraisal Report

An appraisal is an opinion of market value (most probably selling price) as of a certain date that is
supported by objective data. It is only an estimate or opinion; it is not a guarantee of value. It is
only valid as of its effective date, which establishes terms, conditions, and economic
circumstances upon which the value is estimated.
This Uniform Residential Appraisal Report (URAR) is the primary appraisal form used in the real
estate industry to report property values. A full appraisal report is also known as a Fannie Mae Form
1004. An exterior inspection, or a drive-by appraisal, is referred to as Form 2055.

The appraisal must be re-certified if it will be 120 days or older as of the date of the promissory note,
and a new appraisal is required after 180 days. Below are important aspects of appraisals that a MLO
should know.

MLO Requirements and Limitations

• An MLO is prohibited from attempting to influence the independent judgement of an
appraiser
• Anyone receiving any incentive as a result of the loan closing is not allowed to select the
appraiser
• The borrower is not allowed to pay the appraiser at the door
Appraisal Terms
• Subject property – Property being purchased, refinanced or seeking secondary financing
• Comps – Properties that have sold recently, close to subject property and similar in size and
features (generally 3-6 comps required on a loan transaction)
• Geographic and Market Analysis – Addresses the economic setting of the property and the
market forces that might impact the value
• Functional Obsolescence – Internal and external factors that could impair the ability to sell
the property. (ex. 5 bedroom house with 1 bath)
• VA appraisal – Certificate of reasonable value (CRV) or a Notice of Value (NOV)
• Automated Valuation Model (AVM) – Computer programs that can provide a probable value
range for properties by performing a statistical analysis of available data
• HVCC – Home Valuation Code of Conduct – Result of Fannie Mae settlement with New York
City Attorney General to improve appraisal independence and integrity rules. Replaced by
the provisions of Dodd Frank Act.

118 | P a g e
The processor orders the appraisal and the appraisal is valid for 12 months; however, it must be re-
certified (updated) if the appraisal will be four (4) months old or more at closing.

5.13 Appraisal Approaches

Appraisers value properties using three different approaches. Each approach is independent of
the others and is performed separately to arrive at an opinion of value.
Sales Comparison Approach - In the sales comparison approach (also called the “market data
approach”), value is determined by looking at the recent sale price of similar properties.
• Often used in evaluating residential property.
• Considered the most useful and accurate of the three appraisal methods because it's
rooted in actual market activity.
• According to Fannie Mae, the appraiser’s opinion of value must be developed from at least
three comparable sales that have closed within the past year.
Cost Approach - Calculating the cost of the land, site improvements, the cost to build the structure on
the land, and the cost of any depreciation to the property to reproduce the property. The Cost
Approach is best for relatively vacant land, new construction or for unusual or special purpose.
• Also used when evaluating the cost to replace property that was damaged due to natural
disasters.
• Also called the “Replacement Cost Approach.”
Income approach (capitalization approach) - For income-producing properties, this estimates the
value of real estate by analyzing the revenue or income the property currently generates or could
generate.

5.14 APPRAISAL VIOLATIONS

Examples of actions that violate coercion standards include:
• Seeking to influence a person that prepares a valuation to report a minimum or maximum
value for the consumer's principal dwelling.
• Withholding or threatening to withhold timely payment to a person that prepares a valuation
or performs valuation management functions because the person does not value the
consumer's principal dwelling at or above a certain amount.
• Implying to a person that prepares valuations that current or future retention of the person
depends on the amount at which the person estimates the value of the consumer's principal
dwelling.
• Excluding a person that prepares a valuation from consideration for future engagement
because the person reports a value for the consumer's principal dwelling that does not meet
or exceed a predetermined threshold.
• Conditioning the compensation paid to a person who prepares a valuation on consummation
of the covered transaction.

119 | P a g e
 Examples of actions that do not violate independence and integrity rules include:
• Asking a person who prepares a valuation to consider additional, appropriate property
information, including information about comparable properties, to make or support a
valuation.
• Requesting that a person who prepares a valuation provide further detail, substantiation, or
explanation for the person's conclusion about the value of the consumer's principal dwelling.
• Asking a person who prepares a valuation to correct errors in the valuation
• Obtaining multiple valuations for the consumer's principal dwelling to select the most
reliable valuation.
• Withholding compensation due to breach of contract or substandard performance of
services.
• Taking action permitted or required by applicable Federal or state statute, regulation, or
agency guidance.
Easements - An easement is a formal right granted to another party allowing them to traverse or
access a given property. Utility companies are often granted easements to access a property to
maintain their infrastructure, such as electrical wires or cell phone towers. When recorded on the title
of a property, an easement will remain permanently and will survive any transfer of title of that
property.
Encroachments - An encroachment is a structure or portion of a structure that extends over the
boundary line of a property onto another parcel. For example, fences that are built to separate
properties without the aid of a surveyor often are not built on the property line and end up
encroaching on a neighbor’s property.

5.15 Loan Consummation (Loan Settlement)

Loan consummation is the point in time when a consumer becomes contractually obligated on a
credit transaction. A closing or settlement is the process by which the terms of the loan agreement
are fulfilled, the appropriate parties sign the paperwork, and funds may be disbursed. On a purchase
loan, closing is also when ownership of real property transfers from seller to buyer, according to the
terms and conditions in the sales contract or escrow agreement. Closing procedures may be different
from state to state.
Closing Agent - A closing agent, sometimes called an escrow agent, is the person responsible for the
mechanics of closing. This could be an attorney or someone from the lender's in-house escrow
department, an independent escrow company, or a title insurance company.
o The closing agent simultaneously follows the instructions of both buyer and seller in a sales
transaction, as per the sales contract, agreement or a separate set of escrow instructions.
o The closing agent also gathers all necessary documents (e.g., promissory note, mortgage, deed)
and makes certain they're properly signed.
o Calculates the various proration's, which are the division of expenses between buyer and seller in
proportion to the actual usage of the item represented by a particular expense as of the day the
loan is funded.

120 | P a g e
o Completes the Closing Disclosure for the seller to comply with TILA regulations.
o Coordinates closing with the lender, who is responsible for the preparation of the Closing
Disclosure for the borrower, and obtains necessary signatures, facilitates recording of the security
instrument among other functions.

5.16 Title and Closing

Real Estate Ownership Rights
Ownership in real estate is defined as an interest in real property. This interest is called an estate and
the degree of ownership is measured by its potential duration.
• Fee simple ownership represents absolute ownership of real property, but it is limited by the
four basic government powers of taxation, eminent domain, police power and escheat; and
could also be limited by certain encumbrances or a condition in the deed.
• Life estate is a term to describe the ownership of land for the duration of a person's life. In
legal terms, it is an estate in real property that ends at death. The owner of a life estate is
called a "life tenant.” Because a life estate ceases to exist upon death, the owner of the life
estate cannot leave it to heirs and the life estate cannot be inherited.
• Joint Tenancy refers to property owned by two or more people at the same time in equal
shares, and is typically referred to as the four unities (unity of time, title, interest and
possession vesting in each joint tenant). Each joint tenant has an undivided right to possess
the whole property, and a proportionate right of equal ownership interest. When one joint
tenant dies, his/her interest automatically vests in the surviving joint tenant(s) by operation of
law.
• Tenancy in the Entireties refers to property owned by a husband and wife with each owning a
percentage. Neither spouse can sell the property without the consent of the other. The
property interest of one spouse cannot be attached for individual legal obligations of the
other.
• Tenants in Common refers to property owned by two or more persons at the same time. The
proportionate interest and right to possess and enjoy the property between the tenants in
common do not have to be equal. Upon death, the decedent's interest passes to his/her heirs
designated in the will, who then become new tenants in common with the surviving tenants in
common. Words in the deed such as "Peter, Paul, John and Mary as tenants in common"
establish tenancy in common.
• Community Property applies only in states that recognize community property, which is a
special form of joint tenancy between husband and wife. In the event of death of one of the
parties, the right of survivorship exists.
In community property states, each spouse is responsible for the debts of the other even if he or she
did not incur the debts. Therefore, a credit report is required for the non-participating spouse for the
purposes of establishing qualifying ratios.

121 | P a g e
5.17 CLOSING/SETTLEMENT
Settlement or closing, is the final meeting of the parties involved in the real estate transaction at
which the transaction documents are signed and the deed and money are transferred. In some states,
the closing or settlement procedure is handled through escrow.
Escrow is a short-lived trust arrangement. The goal of the closing meeting is to transfer ownership of
the property to the buyer and pay the seller for the property. To accomplish this goal, the paperwork
brought to the meeting must be prepared, inspected, corrected if needed, approved, signed if
necessary, and exchanged as required.
The people who are present at a closing meeting vary from state to state. Sometimes it even varies
from one region of state to another. The closing agent, seller, buyer, and real estate agents generally
attend the real estate closing. Sometimes the title officer, loan originator, and attorneys from the
buyer or seller also attend. When the principals’ agents and attorneys attend, they are not neutral
third parties. Agents and attorneys attend the closing meeting to represent their client’s interests.
Buyers, sellers, lenders, and real estate brokers all rely on title insurance companies for chain of title
information and policies of title insurance. The goal of title insurance is to ensure a clear, marketable
title or property.

Marketable title is a saleable title that is reasonably free from risk of litigation over possible defects.

Title insurance is insurance that protects the policyholder from losses due to a problem in the chain of
title. Typically, both the owner and the lender take out separate policies.

The chain of title is a clear and unbroken chronological record of the ownership of a specific piece of
property. Tracing the chain of title simply means tracing the successive conveyances of title, starting
with the current deed and going back a suitable number of years.
A gap in the chain of title creates uncertainty, which is referred to as a cloud on the title.
Color of title is the appearance of having title to personal or real property by some evidence but ,
in reality, there is either no title or a vital defect in the title. One might show a title document to
real property but, in reality, someone may have deeded the property to another person and not
be the true titled owner.
A suit to quiet title, also called a quiet title action, may be required to dose any missing links and
remove the cloud on the title. This is a lawsuit filed to determine and resolve problems of
instruments conveying a particular piece of land.
The American Land Title Association (ALTA) is the national trade association for title insurance
companies and title insurance agents. The two types of title insurance coverage are (1) standard and
(2) extended.

122 | P a g e
Closing Agent - The closing agent is often employed by the title company, although in some cases he
or she may be an employee of the lender. The responsibilities of the closing agent include:
• Coordinating the closing process
• Verifying transaction amounts
• Ensuring all parties to the transaction (borrower/buyer, seller, etc.) have copies of forms and
disclosures required for settlement
• Verifying identity and notarizing documents
• Discussing closing requirements with parties to the transaction including fees, dates, funding,
rescission, etc.

Settlement/Closing Agent - A closing (also referred to as “settlement”) takes place either at a title
insurance company’s office or at another location with a representative of the title insurance company.
The title company acts on behalf of the lender to confirm that the borrower signs all of the loan
documents and makes all other required closing deliveries (e.g., evidence of required insurance,
adequate funds to close).
The closing is referred to as an “agency closing” because of the title company’s actions as agent on
behalf of the lender.
• Wet Settlement - A wet settlement is when the parties to a loan transaction meet to execute
document and funds are disbursed afterwards.
• Dry Settlement - A dry settlement is the opposite of a wet settlement. A dry settlement occurs
when the parties meet to execute documents, but funds are not disbursed. With dry
settlements, the parties are made aware that the funds are not disbursing and the property
will not be conveyed until certain conditions are satisfied.
• Table funding - is a process that allows a broker to originate and close a loan under his or her
name. After closing, the mortgage and note are immediately assigned to that investor.

5.18 TITLE REPORT

Title insurance is a type of insurance coverage that protects against defects in title that were not listed
in a title report or abstract. A lender’s policy of title insurance protects the lender from claims against
the priority of the lien of the lender’s mortgage.
• A “title search” is performed to determine any encumbrances or liens affecting the property
by careful research regarding every known recorded document related to the current and prior
ownership of the subject property. The search includes all public and court records of the
county in which the property is located, including all property tax and assessment records.
• In most cases, the title search is performed by a title insurance company (or an agent for the
title insurance company), and the title insurance company will issue a title commitment for
the subject property (also referred to as a “preliminary title report,” a “preliminary title
commitment” or a “commitment for title insurance”).

123 | P a g e
5.19 Title Insurance Coverage
The American Land Title Association (ALTA) is the national trade association for title insurance
companies and title insurance agents. The American Land Title Association (ALTA) forms are used
almost universally throughout the nation. The two types of title insurance coverage are (1) standard
and (2) extended.
Standard Coverage Policy - A standard title insurance policy is usually issued to homebuyers. No
physical inspection of the property is required and the buyer is protected against all recorded matters
and certain risks such as forgery and incompetence.
The title company does not do a survey or check boundary lines when preparing a standard title
insurance policy.
Losses Protected by Standard Title Policies
• Matters of record
• Off-record hazards such as forgery, impersonation, or failure of a party to be legally competent
to make a contact
• The possibility that a deed of record was not delivered with intent to convey title
• Losses that might arise from the lien of federal estate taxes, which becomes effective without
notice upon death
• Expenses incurred in defending the title
Losses Not Protected by Standard Title Policies
• Defects in the title known to the holder to exist at the date of the policy but not previously
disclosed to the title insurance company
• Easements and liens that are not shown by public records
• Rights or claims of persons in physical possession of the land but whose claims are not shown
by the public records
• Rights or claims not shown by public records but which can be discovered by physical
inspection of the land
• Mining claims
• Reservations in patents or water rights
• Zoning ordinances

Extended Coverage Policy

All risks covered by a standard policy are covered by an extended coverage policy. An extended
coverage policy also covers other unrecorded hazards such as outstanding mechanics’ liens, tax liens,
encumbrances, encroachments, unrecorded physical easements, facts shown by a correct survey, and
certain water claims. Also covered are rights of parties in possession, including tenants and owners
under unrecorded deeds.

124 | P a g e
5.20 Insurance: Hazard, Flood and Mortgage
An insurance policy is a contract in which one parry agrees to compensate another parry for a loss that
occurs as a result of a designated hazard. Providing funds to a borrower to purchase a home carries
with it a great deal of financial risk for the lender, who is said to have an insurable interest in the
property. Lenders, therefore, normally require different types of insurance:
• Homeowner's hazard insurance
• Flood insurance (if applicable)
• Mortgage insurance (if the LTV is greater than 80%)
Hazard Insurance - The borrower is required to maintain proper insurance to protect against possible
loss or damage to the property that will be collateral for the mortgage. Insurance coverage may be for
both dwelling and contents in case of fire, other damage, theft, liability for property damage and
personal liability.
If required insurance is cancelled or not obtained, a lender can insure the property and force the
borrower to pay for it. This insurance, known as force-placed insurance, has become controversial
because it is often more expensive than what consumers can obtain on their own.
Flood Insurance - Property located in areas Flood Zone A or V (areas that are designated as high flood
zones) must have flood insurance required by lender for life of loan.
In fact, federal law requires mortgage lenders to assure that all properties within designated flood
prone areas have flood insurance before the lenders provide a mortgage on the property. Flood
insurance covers losses from flooding, including structural damage; damage to furnace, water heater,
and air conditioner units; flood debris clean up; and the replacement of floor surfaces.
For more information, visit http://www.fema.gov. Flood insurance is provided almost exclusively by
the National Flood Insurance Program (NFIP), which is operated by the Federal Emergency
Management Agency (FEMA).

Private Mortgage Insurance (PMI) – Private mortgage insurance (PMI) is offered by private insurance
companies to insure a lender against default on a loan by a borrower and against a loss in the
collateral value of the home at the time of the trustee/foreclosure sale. In the event of default and
foreclosure, lenders can make a claim for reimbursement of actual losses (if any) up to the face
amount of the policy after foreclosing and selling the property if a loss occurs.

If the loan-to-value (LTV) of any conventional loan exceeds 80%, private mortgage insurance (PMI) is
required. PMI protects the lender against losses that result from default by the borrower.

Mortgage Insurance Premiums for FHA Insured Loans - FHA charges two types of mortgage
insurance for loans that it endorses. Both are referred to as Mortgage Insurance Premiums (MIP).
As of April 1, 2013, the FHA increased mortgage insurance and the length of time a borrower
must have to pay the insurance.
• Upfront Mortgage Insurance (known as Upfront MIP) is 1.75% of the base loan amount.
It is a one- time charge and can be added to dosing costs or can be financed by adding it

125 | P a g e
 to the loan amount. It is paid on all types of FHA insured loans, except HECM 's which
utilize a different MIP charge.
• Annual MIP is paid monthly as part of the monthly mortgage payment. The calculation is
Loan Amount x MI rate/ 12 months = Monthly MI Payment.

5.21 Points: Discount Points & Origination Points

The loan originator should take responsibility for educating the borrower regarding the types of fees
paid in connection with the mortgage loan.

Discount Points - Discount points are amounts charged by a lender to the borrower or seller in
order to increase the lender’s effective yield on the loan. Discount points represent a pre-
payment of interest at the beginning of a loan for reducing the note interest rate charged for
some defined period of the life of the loan.
By charging discount points up front, the lender is able to make up the required return on
investment that is lost by making the loan below par rate. However, it's important to know that
to be legitimate , the discount points must reflect a bona fide reduction to the market or par
rate that is reasonably consistent with established industry norms and practices for secondary
market transactions. In other words, a lender could not quote a higher interest rate than the
borrower would qualify for, and then offer discount points to lower it.
The difference between origination "points" and discount points is apparent on the Loan
Estimate. All origination points must be lumped together as the origination fee on the Loan
Estimate while discount points used to buy down the rate must be indicated as a charge the
borrower incurs for the interest rate selected. This allows the borrower to make an informed
decision about the rate options available and the impact on the loan.
• One discount point is equal to 1% of the total loan amount.
• From a borrower’s perspective, discount points are paid to achieve a lower interest rate;
without the payment of the discount points, the interest rate would be higher for the life of
the loan.
• Achieving a lower interest rate by paying discount points is referred to as a “permanent
buydown” of the rate.

Origination Points/Fees - Also known as a “loan fee,” the origination fee is a fee or charge for the
work involved in the evaluation, preparation and submission of a proposed mortgage loan. The
origination fee must be disclosed as both a dollar amount and a percentage of the loan amount on the
Loan Estimate and Closing Disclosure. It is limited to 1% of the loan amount for VA loans.

5.22 Yield Spread Premium

Yield spread premium (YSP) (lender credits) is a tool that an MLO can use to lower the upfront cash
out-of-pocket expenses at closing for a borrower in exchange for higher monthly out-of-pocket
payments required by a higher interest rate. Like discount points, YSP also shifts the timing of the out
-of-pocket fees that a borrower pays to a lender for the privilege of getting a loan, but with YSP, the

126 | P a g e
borrower pays less out-of-pocket upfront and more out-of-pocket later.
Lender credits must be disclosed to the borrower on the Loan estimate as a credit the borrower
receives for the interest rate selected. This allows the borrower to make an informed decision about
the rate options available and the impact on the loan.

5.23 Prepayment Penalties

Some loans provide prepayment penalties, which are fees that must be paid by the borrower if the
loan’s principal is repaid in full prior to the loan’s expiration.
The prepayment penalty is intended to discourage the borrower from repaying the loan early. When a
loan is repaid early, the lender/investor loses the opportunity to continue earning interest on the
principal amount for the balance of the intended life of the loan. The prepayment penalty must be
disclosed as part of the Truth in Lending disclosure and on a separate disclosure.
• A prepayment penalty may be seen in a conventional loan, but prohibited in Government
Loans (FHA, VA & USDA loans).
• Title XIV of the Dodd- Frank prohibits prepayment penalties on residential mortgage loans
other than fixed-rate qualified mortgages.
• The prepayment penalty is calculated by multiplying the outstanding principal amount of the
loan by the penalty rate.
• For example, if a 30-year $200,000 loan has a prepayment penalty equal to 3% for the first 12
months of the loan, 2% for the second 12 months of the loan and 1% for the third 12 months
of the loan, then:
➢ If the borrower repays the loan within the first 12 months, the prepayment penalty will
equal 3% multiplied by the outstanding principal amount of the loan at the time of
prepayment.
➢ If the borrower repays the loan during months 13 through 24, the prepayment penalty will
equal 2% multiplied by the outstanding principal amount of the loan at the time of
prepayment.
➢ If the borrower repays the loan during months 25 through 36, the prepayment penalty will
equal 1% multiplied by the outstanding principal amount of the loan at the time of
prepayment.
➢ If the borrower repays the loan during months 37 through 360, there will be no prepayment
penalty.

127 | P a g e
 CHAPTER 5 QUIZ
1) The appraisal must be re-certified if it will be _______ or older as of the date of the promissory
note.
a. 30 days
b. 60 days
c. 120 days
d. 180 days

2) Which appraisal approach is BEST for appraising vacant land, new construction or for unusual or
special purpose?
a. Cost Approach
b. Income approach
c. Market data approach
d. Sales comparison approach

3) Discount points are shown on the loan estimate as a ______

a. Charge to the lender
b. Charge to the borrower
c. Charge to the real estate agent
d. Charge to the MLO

4) Which of the following zone is considered a Flood Zone ________properties?

a. A
b. B
c. O
d. X

5) Which appraisal approach would be used to appraise 10-unit apartment building?

a. Competitive market analysis
b. Cost approach
c. Income approach
d. Sales comparison approach

6) Kevin wants to get a loan to buy a house. When evaluating his credit obligations, which would
LEAST LIKELY be considered as debt?
a. Car loan payment
b. Cell phone service payment
c. Child support payment
d. Credit card payment

128 | P a g e
6.0 FINANCIAL CALCULATIONS
Chapter Objective
Upon completion of this chapter, you will be able to:
● Learn to perform loan qualification and borrower analysis
● Calculate Loan to Value
● Understand financial calculations

6.1 Computing Gross Income

Paid Hourly - If the borrower is paid on an hourly basis, the hourly rate should be multiplied by the
number of hours worked per week to determine the weekly gross pay. Then, the weekly gross pay is
multiplied by 52 weeks, then divided by 12 to determine the monthly income. The formula is as
follows:
1. {base rate} x {hours} = {weekly base income}
2. {OT rate} x {OT hours} = {OT weekly income}
3. {weekly base} + {OT income} = {weekly income}
4. {weekly income} x {weeks worked} = {annual income}
5. {annual income} ÷ 12 = {monthly income}

Paid Bi-monthly/Paid Twice Per Month - If the borrower is paid twice a month (semi-monthly - i.e.,
on the 1st and on the 16th day of each month), take the gross income on the semi-monthly paycheck,
multiply it by 24, and divide that result by 12 to determine the gross monthly income. Remember that
there are 24 bi-monthly pay periods in a year.
1. {bi-monthly salary} x 24 = {annual income}
2. {annual income} ÷ 12 = {monthly income}

Paid Bi-weekly - If the borrower is paid every other week (bi-weekly), the gross bi-weekly paycheck
should be multiplied by 26, then divided by 12 to find the monthly income. Remember that there are
26 bi-weekly pay periods in a year.
1. {bi-weekly salary} x 26 = {annual income}
2. {annual income} ÷ 12 = {monthly income}

Paid Weekly - If the borrower is paid weekly, the weekly gross pay should be multiplied by 52 weeks,
then divided by 12 to find the monthly income.
1. {weekly salary} x 52 = {annual income}

129 | P a g e
Practice #1 - A borrower who is paid $14.50 per hour and works 30 hours per week receives ______
per month?

$14.50 Rate
x 30 Hours per week
x 52 Weeks in a year
÷ 12 Month in a year
$1,885.00 Gross Monthly Salary

Practice #2 - A borrower who receives a bi-weekly fixed salary of $2,500 received a monthly income
amount of ____________?

$2,500 Bi-weekly rate

x 26 Bi-weekly pay period in a year

÷ 12 Month in a year
$5,416.67 Gross Monthly Salary

6.2 Periodic Interest

Per-diem (or daily interest) means the amount of daily interest payable under a loan. A borrower’s
first monthly payment is typically due on the first day of the second month after closing. For example,
if a loan closes on January 15, then the first monthly payment will be due on March 1.
Interest is payable in arrears, so (using the above example) the March 1 monthly payment will cover
interest that accrued during the month of February.
At closing, the borrower will have to pay interest for the period from January 15 through January 31,
since this interest will not be included in the March 1 monthly payment.
NOTE: Lenders typically calculate per-diem interest based on a “360-day year”. When calculating
per-diem interest, always divide by 360 days unless the lender instructs otherwise.)
The formula to calculate per-diem is as follows:
● Step #1 – Principal loan amount x Interest rate = Total annual interest payable under the loan
● Step #2 – Annual interest amount ÷ 360 = per diem interest
● Step #3 – Per diem interest amount x # of days remaining in the month

130 | P a g e
Practice #1 - Assume that a loan with an original principal amount equal to $100,000 and an annual
interest rate of 7% is funded on January 15. We must determine the amount of per-diem interest that
will be payable by the borrower at closing.
$100,000 Loan amount
x 7% Interest rate
$7,000.00 Annual Interest

$ 7,000 Annual Interest

÷ 360 Days per year
$ 19.44 Per-diem per day

$19.44 x 17 days = The total amount of per-diem interest payable at closing equals $330.48. The total
number of days for which per-diem interest is payable equals 17 days (January 15 through January 31
inclusive).
Practice #2 - Assume a loan amount of $235,000 with a note rate of 6.25% and if a borrower's loan
funds on September 13:
$235,000 Loan amount
x 6.25% Interest rate
$14,687.50 Annual Interest

$14,687.50 Annual Interest

÷ 360 Day per year
$40.7986 Per-diem per day

If a borrower's loan funds on September 13 and September has 30 days in the month, there would be
18 days from the day of funding to October 1. The prepaid interest charge would be $40.7986 x 18
days = $724.38, which is charged to the borrower.

6.3 Payments (Principal, Interest, Taxes, And Insurance; Mortgage

Insurance, If Applicable)
Interest is the cost of borrowing money, while principal is the balance of the loan. The formula to
find the annual and monthly interest is as follows:
● Annual Interest Only Payment = the loan amount x the note rate (interest rate/nominal rate)
● Monthly Interest Only Payment = the loan amount x the note rate (interest rate/nominal rate)
then divided by 12

131 | P a g e
Practice - Assume a loan amount of $235,000 with a note rate of 6.25% - what is the annual interest
amount on the loan? What is the monthly interest rate on the loan?
$235,000 Loan amount
x 6.25% Interest rate
$14,687.50 Annual interest

$14,687.50 Annual Interest Charge

÷ 12 Number of months in a year
$1,223.96 Interest only payment per month

Calculating Property Taxes

The annual tax amount is divided by 12 to arrive at a monthly tax payment (semi-annual is divided by
6). The formula to calculate property tax is as follows:
● Annual Property Taxes ÷ 12 = Monthly Property Taxes
Practice – What is the monthly property tax amount when the property taxes are reported as $1,500
per half year?
$1,500 Property taxes per half-year
÷ 6 Number of months in one-half year
$250 Per month for property taxes

Monthly insurance (hazard, condominium or flood)

Mortgage insurance protects a lender from homeowners who default on their loans. Homeowners
pay mortgage insurance each month, while also paying interest and paying off part of the principal on
the mortgage. The formula to calculate monthly insurance is as follows:
● Annual insurance amount ÷ 12 = Monthly insurance amount

Practice – What is the monthly insurance amount if the insurance cost is $636 per year?
$636 Annual homeowner’s insurance premium
÷ 12 Number of months in one year
$53 Per month for homeowners (e.g., hazard) insurance
payment

132 | P a g e
6.4 Calculating PMI Mortgage Insurance
Private Mortgage Insurance (PMI) is a special type of insurance policy, provided by private insurers,
to protect a lender against loss if a borrower defaults. Most lenders require PMI when a homebuyer
makes a down payment of less than 20% of the home's purchase price. The formula to calculate
monthly PMI insurance is as follows:
● Annual PMI = Loan Amount × PMI Rate
● Monthly PMI = Annual PMI ÷ 12
Practice – Assume that the loan amount is $235,000 with a PMI factor of .52%. What is the monthly
charge for private mortgage insurance?

$235,000 Loan amount

x .52% PMI factor expressed as decimal
$1,222 Annual PMI payment

$1,222 Annual PMI payment

÷ 12 Number of months in a year
$101.83 Per month PMI charge

Let’s put it all together. What is the PITI on an interest-only loan with a loan amount of $235,000,
note rate of 6.25% property tax of $1,500 per half, annual hazard insurance of $636 per year, and
monthly PMI factor of .0052?

Housing expense payment (P&I) $1,223.96

Monthly property tax payment (T) $ 250.00
Monthly hazard insurance payment (I) $ 53.00
Monthly PMI Charge (I) $ 101.83
Total monthly housing expense $1,628.79

6.5 Down Payment

To calculate a down payment for a home purchase, a mortgage loan originator first must know the
minimum requirements for down payment of each individual loan type. For example, a conventional
conforming loan generally requires between 3-5% down payment (from the borrower's own funds), a
FHA insured loan requires a 3.5% down payment (can be a gift), and VA and USDA guaranteed loans
do not require a payment.

133 | P a g e
Note: When given both the sales price and the appraised value, use the lower of the two for the
calculations.
Practice #1 – What is the down payment if a property has a sale price of $177,000 and an appraised
value of $180,000, and is a conventional loan with a down payment of 5%?
$177,000 Lesser of sale price or appraised value
x 5% Down payment required (or .05)
$ 8,850 Cash down payment required

Practice #2 – What is the down payment if a property has a sale price of $150,000 and an appraised
value of $165,000, and is an FHA insured loan down payment?
$150,000 Lesser of sale price or appraised value
x 3.5% Down payment required (or .035)
$ 5,250 Cash down payment required

6.6 Loan-to-Value (Loan-to-Value, Combined Loan-to-Value, Total Loan-to-Value)

The loan-to-value ratio (LTV) refers to the amount of money borrowed from the first mortgage
compared to the value of the property. The combined-loan-to-value (CLTV) ratio refers to the first
mortgage and the second mortgage combined – compared to the value of the property. The formula
to calculate LTV and CLTV are as follows:
● LTV = 1st Loan Amount ÷ Lesser of the Property Value or Purchase Price
● CLTV = 1st Loan Balance + 2nd Loan Balance ÷ Lesser of the Property Value or Purchase Price
Practice - Assume a borrower is purchasing a home appraised at $280,000 and the purchase price is
$278,000 with a loan amount of $208,500. What is the LTV for this transaction?
$208,000 Loan Amount
÷ 278,000 Lesser of sale price or appraised value
75% LTV LTV

Practice - Assume a borrower has a first mortgage balance of $115,000 and a second mortgage with a
balance of $21,000. His property has appraised at $192,000. What is his CLTV?
$ 136,000 $115,000 + $21,000 (1st and 2nd mortgage)
÷ $192,000 Lesser of sale price or appraised value
71% CLTV CLTV

134 | P a g e
HCLTV
HCLTV means “home equity line of credit (HELOC) combined loan-to-value ratio.” The formula to
calculate HLTV is as follows:
● HLTV = 1st Loan Amount + the maximum available balance of the HELOC ÷ Lesser of the
Property Value or Purchase Price

Practice - The purchase price and appraised value of the property is $800,000. The loan amount is
$600,000. The borrower is also taking out a home equity line of credit that will allow her to borrow
up to $100,000. At closing, the borrower will immediately draw $50,000 from the line of credit in
order to close the loan. What is the LTV, CLTV and the HLTV?
Based on those facts, we can arrive at the following calculations:
● The LTV is 75%
$600,000 Loan Amount
÷ $800,000 Lesser of sale price or appraised value
75% LTV LTV

● The CLTV is 81.25%

$650,000 First mortgage of $600,000 + HELOC drawn amount $50,000
÷ $800,000 Lesser of sale price or appraised value
81.25% LTV LTV

● The HCLTV is 87.5%

$700,000 We use $700,000 because the maximum amount of available indebtedness is

$600,000 + $100,000.
÷ $800,000 Lesser of sale price or appraised value
87.5% LTV LTV – Even though the borrower has only borrowed $50,000 under the HELOC
so far, we still include the entire $100,000 available balance in our HCLTV
calculation.

6.7 Acquisition Cost

The acquisition cost is defined as the total amount needed to purchase property, including down
payment, loan amount, and any allowable buyer-paid closing costs.
Practice #1 – Assume that the sale price is $197,000, the loan amount is $132,700, and the closing
costs are $6,500. What is the acquisition cost?

135 | P a g e
 $197,000 Sales Price
+ $6,500 Closing Cost
$203,500 Total acquisition cost

Practice #2 – Assume that the sale price is $197,000, the loan amount is $132,700, and the closing
costs are $6,500. In addition, the seller agreed to pay two discount points. What is the acquisition
cost?

$197,000 Sales Price

+ $6,500 Closing Cost
- $2,654 2 points = 2% of the loan amount (132,700 x 2% =
$2,654)
$200,846 Total acquisition cost

6.8 Discount Points (Buydowns) - Temporary and Fixed Interest

Discount points (points) are a percentage of the loan amount and are fees paid to a lender to lower
the interest rate. The process is referred to as rate buy down and can be a permanent buy down or a
temporary buy down of the rate.
A discount point (buydown) may be temporary (for a defined time period during the loan) or
permanent (for the life of the entire loan). Regardless, the calculation will always be based on the
loan amount. The formula to calculate discount points is as follows:
Discount Point(s) = Loan amount x # (%) of points
Practice - If a property has a sale price of $197,000 and appraised value of $196,000, with a loan
amount of $152,700 and a cost of two points, what is the cost of the buydown?

$152,700 Loan Amount

x 2% Points (.02 discount points)
$3,054 Total Discount Points

Note: Loan Origination Points are also based on the loan amount and calculated in the same manner
as discount points (% of the loan amount). Loan Origination Points (or fees) are points paid to the
loan originator as a fee for his/her service.

TIP: Discount points are a percentage of the loan amount, not the sales price, and allow a lender to
make up for the loss of reducing the interest rate below the par rate. A par rate is the rate offered to
the public that does not cost the lender or the borrower any fees. Like the game of golf, par in the real
estate financing world means breakeven.

136 | P a g e
6.9 Permanent Buy Down
A permanent buy down occurs when a borrower pays a lender discount points at the beginning of the
loan to permanently reduce the rate during the term of the loan.
Example: A lender has established a par rate of 5 percent. The borrower would like to lower the rate
to 4.75% on a $200,000 loan amount. The lender has determined it will cost 1.75 discount points for
the permanent buy down.
What is the cost in dollars to the borrower to lower the rate?
• Loan amount $200,000
• Cost at 5% Rate $0 (par rate)
• Cost at 4.75% rate is 1.75 discount points
• $200,000 X 1.75% = $ 3,500
The borrower would be required to pay the lender $3,500 to lower the rate permanently from 5% to
4.75%

6.10 Temporary Buy Down

A temporary buy down loan provides borrowers a temporary graduated interest rate buy down at the
beginning of the loan for a limited time and returns to the note rate once the temporary period has
ended. During the buy down period, payments are subsidized and the cost is generally paid by the
lender or seller.

Examples of temporary buy downs can be 2/1 buy downs or 3/2/1 buy downs. The numbers represent
a reduction in the note rate of interest during each year. For example, on a 3/2/1 buy down, the note
rate would be reduced by 3% for 1 year, 2% for 2 years, 1% for 3 years with no buy down after year 3.
On a 2/1 buy down, the interest rate would be reduced by 2% for 1 year and 1% for 2 years with no
buy down after year 2.

The following table shows how the 2/1 temporary buy down would work on a 5% fixed rate loan.

Year Note Rate Buy down Percent Buy down

Rate
1 5% 2% 3%
2 5% 1% 4%
3 5% 0 0
Example: 2/1 Temporary buy down

A borrower has been approved for a 30 year fixed rate mortgage with a 6% interest rate and wants to
lower her payment during the first 2 years and the seller of the property agrees to pay the temporary
buy down costs. This would be a 2/1 temporary buy down where the rate is reduced by 2% in year
one and 1% in year 2.

137 | P a g e
 • Year 1, the rate is reduced by 2%, so the start rate for that year will be 4% (12-month period)
• Year 2, the rate is reduced by 1%, so the rate for the second year will be 5% (12-month period)
• Year 3, there is no buy down rate, so the rate will be 6% (which is the note rate for the balance
of the loan period.)
If the rate is reduced in any year, then the payment is reduced for that year. If the rate is not reduced,
then the principal and interest payment remains the same.

6.11 Basis Points (BPS)

Basis points are often used in the mortgage instead of Quoting rates. 100 Basis Points = 1 point.
Example: If a borrower was charged 75 basis points on a $100,000 loan, then the fee would be
$100,000 x .75% = $750

6.12 Debt-to-Income Ratios

When considering a borrower’s income, there are two important qualifying standards that lenders
look at: housing expense ratio and the total debt-to-income ratio. A borrower must qualify under
BOTH ratios.
Housing Expense Ratio (HER) (Front-End/Top Ratio) - The formula to calculate housing expense ratio
is as follows:
● Housing Ratio = Housing Expense (PITI) ÷ Gross Monthly Income
Practice - If a family earning $6,780 per month is seeking a new mortgage with a PITI payment of
$1,756, and there are no association dues or subordinate financing, what is the housing expense
ratio?
$1,756 PITI
÷ $6,870 Gross Monthly Income
0.26 This would be expressed as a 26% housing or front ratio.
Total Obligation Ratio (TOR) Debt-to-Income Ratio (Back-End/Bottom Ratio) This is calculated by
adding the payments for all long-term debts. A long-term debt is generally defined as one that will
take more than ten (10) months to repay. Debt with ten (10) payments or less do not count (unless
it’s an auto lease). Legal obligations such as child support and alimony must also be included.

The formula to calculate debt-to-income (back ratio) is as follows:

Back Ratio = Total Monthly Debts ÷ Gross Monthly Income
Practice - If a family earning $6,780 per month is seeking a new mortgage with a PITI payment of
$1,756 and has a $358 monthly car payment with 22 months remaining and $175 monthly credit
card debt, what would be the total back ratio?

138 | P a g e
 $1,756 PITI
+ $358 Car
+ $175 Credit Card
÷ $6,870 Gross Monthly Income
0.33 This would be expressed as a 33% housing or front ratio.
The debt-to-income ratios vary by the type of loan the borrower obtains. The mortgage loan
originator should know the debt-to-income ratio guidelines for each loan program and how to
correctly calculate the ratios.

Housing Expense Ratio Total Debt-to-

Income
Ratio
Conventional
28% 36%

FHA Loans 31% 43%

VA Loans Not used 41%

USDA Loans 29% 41%

6.13 Maximum Mortgage Amount

Determining Maximum Mortgage Amount – In order to calculate the maximum loan amount a
borrower can qualify for, the loan originator must memorize the standard ratios for conventional and
FHA loans. The formula to calculate maximum loan amount is as follows:
● Step #1 - Monthly GROSS income x FRONT RATIO = Maximum PITI
● Step #2 - Monthly GROSS income x BACK RATIO – MONTHLY DEBT = Maximum PITI
● Step #3 - The LOWER OF THE TWO is the Maximum Mortgage Amount the borrower will
qualify for.
Practice - A borrower has a stable monthly income of $4,000 and recurring debts of $600. If he’s
getting an FHA loan, what’s the maximum monthly payment for which he would qualify?
$4,000 x 31% = $1,240 Gross income x front ratio for FHA
$4,000 x 43% - $600 = $1,120 Gross income x back ratio for FHA – the debt
$1,120 is the answer The answer is the LOWER of the TWO

139 | P a g e
6.14 Additional Math Practice Questions & Scenarios
Scenario 1: A property is valued at $342,000. There is a first and second mortgage with a CLTV of 85%.
The second mortgage has an 8% LTV. What is the approximate amount of the first mortgage?
● Answer: $263,340. The calculation is fairly straightforward – the second mortgage LTV can be
subtracted from the combined loan-to-value and the resulting % can be used to determine the
amount of the first mortgage. The calculation is as follows: 85% [CLTV] – 8% [2nd mortgage
LTV] = 77% [1st mortgage LTV]

$342,000 [property value] × .77 [1st mortgage LTV] = $263,340. The approximate value of the
first mortgage is: $263,340.

Scenario 2: The Gonzales family is closing on a 30-year 1/1 ARM of $295,000 with rate caps of 1 and 6.
The start rate is 6.125%. What is the most the interest rate could be following the third adjustment?
What is the most the interest rate could be in the second year of the loan?
● Answer: 7.125%. The calculations for the Gonzales’ scenario is very simple – you just need to
be clear on what is being asked. Because the ARM has a cap of 1% on the annual adjustment
(referenced by “1” in “rate caps of 1 and 6” – “6” refers to the lifetime cap), each annual
adjustment cannot exceed 1%. So, beginning with a start rate of 6.125%, the highest that the
third adjustment could be is 9.125%.

● For the second question in the scenario, you need to reference the fact that it’s a 1/1 ARM –
the interest rate is 6.125% for the first year of the loan. In the second year, it will begin
adjusting. Again, referring to the annual rate cap, the most the interest rate can be in the
second year of the loan is 7.125%.

Scenario 3: The Jackson family is closing on a conventional mortgage for a property valued at
$272,225 with an LTV of 90%. They will pay a private mortgage insurance premium of 1.35% at closing
and an origination fee of 1.5 points. What is the dollar amount of the PMI premium? What is the
dollar value of the origination fee?
● Answer: $3,675.00. Points and premiums calculations are generally just a matter of
multiplying the loan amount by the % specified. With points, you need to remember that 1
point = 1% of the loan amount. Also, take into consideration the LTV – the borrowers are
putting down 10% so, while the property value is $272,225, the loan amount is approximately
$245,000. In this scenario, a PMI premium of 1.35% would equal $3,307.50 ($245,000 × .0135).
The origination fee is $3,675 ($245,000 × .0150).

Scenario 4: Steve Stephens is a draftsman for a local architectural firm. He works 40 hours each week
and is paid an hourly wage of $16.85 with no history of overtime. He receives a two-week paid
vacation each year and has been with the company for six years. What is his monthly qualifying
income?
● Answer: $2,920.67. The calculation for Mr. Stephens’ income is fairly straight forward. In

140 | P a g e
 the example, it is fine to use 52 weeks per year, as we know his vacation is paid. The basic
calculation is as follows: (Hourly Rate × Hours Worked Per Week) × Weeks Worked Per Year
= Annual Income Annual Income ÷ 12 = Monthly Qualifying Income.
Mr. Stephens’ calculation: ($16.85 × 40) × 52 = $35,048 $35,048 ÷ 12 = $2,920.67. Steve
Stephens’ monthly qualifying income is: $2,920.67.

Scenario 5: Jamie James is a mid-level executive with a local utility company. She is paid bi-weekly.
Her pay stub shows a base rate of $2,307.89 per pay period. It also shows a discretionary bonus
income with a year-to-date total of $4,500. What is her monthly qualifying income?
● Answer: $5,000.43. In the calculation for Ms. James, it’s important to note that she is paid
bi-weekly. This means she receives 26 paychecks per year. (Alternately, someone who is
paid semi-monthly receives 24 paychecks per year.) With regard to her bonus, it would not
be used for qualifying income since it is noted that it is “discretionary” (meaning the
amount can change or she may not receive it at all), and we do not have evidence that there
is a two-year history of receiving the bonus.

The calculation is as follows: Bi-weekly Pay Amount × 26 = Annual Salary Annual Salary ÷ 12
= Monthly Qualifying Income

Mrs. James’ calculation: $2,307.89 × 26 = $60,005.14 $60,005.14 ÷ 12 = $5,000.43

Jamie James’ monthly qualifying income is: $5,000.43.

Scenario 6: Tommy Thomas is a maintenance worker for a local sign company. He is paid a weekly
salary of $765 and works an average of 46 weeks each year. What is his qualifying income?
● Answer: $2,932.50. Mr. Thomas’ calculation is fairly straightforward. However, it’s
important to remember that we have been told he works 46 weeks per year. It’s easy to
forget and perform the calculation based on 52 weeks.

The basic calculation is as follows: Weekly Salary × Weeks Worked Per Year = Annual
Salary Annual Salary ÷ 12 = Monthly Qualifying Income

Mr. Thomas’ calculation: $765 × 46 = $35,190 $35,190 ÷ 12 = Monthly Qualifying Income.

Tommy Thomas’ monthly qualifying income is: $2,932.50.

Scenario 7: A borrower is purchasing a home for $120,000 and closing cost total 4% of the purchase
price. The seller has agreed to contribute 2% of the purchase price toward the buyer's closing costs.
How much cash would the borrower need at closing in order to obtain an LTV of 85%?

• Answer: $3,250.00. $120,000 x 4% = $4,800 closing cost. $120,000 x 2 % = $2,400 – the

seller will pay. The borrower will need 15% (85% LTV) of the purchase price - $18,000
$2,400 + $18,000 = $20,400. $100,000 X 6.5% = Annual Interest. Divide it by 6 for six
months’ interest.

141 | P a g e
Scenario 8: A lender gave a borrower an ARM with a 3% introductory rate. At the time, the index
associated with the ARM was at 2%, and the lender's margin for the loan is also 2%. The ARM has a 3%
initial and periodic cap. The loan has reached its first adjustment period, but the index for the loan has
not changed. What is the ARM's new interest rate?

● Answer: 4% - the index + margin = rate. Index is 2% + Margin 2% = 4%. Index is the part
that adjusts, but in this case, it did not change; it remained 2%. The margin remains the
same for the life of the loan.

Scenario 9: You are working with borrowers who are refinancing their primary residence. The
property appraises for $421,000 and your client wants two separate loans. The first loan will be a 15-
year fixed-rate with a loan amount of $274,000, and the second loan will be a home equity line of
credit having a credit limit of $41,750, with $21,000 of that being drawn at closing. What is the HCLTV
for this transaction?

● Answer: 75%. Borrower is pulling $21,000 cash out is irrelevant. For home equity
calculation, the full amount of the line of credit is used vs. the amount borrower has
spent/drawn down. So, add up mortgage amount ($274,000) plus HELOC amount
($41,750). Then, divide the result ($315,750) by the property value ($421,000). This equals
a 75% home equity combined loan-to-value ratio.

Scenario 10: A borrower is applying to refinance his mortgage. His first mortgage is $25,000 at a 9%
rate. He plans to cash out up to $40,000. He qualifies for an 80% LTV and his house appraises for
$100,000. Shortly before closing, the title exam shows $23,000 in bond liens. Closing costs total
$6,000. How much cash will he receive at closing?

● Answer: $26,000. $100,000 x 80% = $80,000 - $25,000 - $23,000 - $6,000 = $26,000.

6.15 General Math Questions

1. Tom Brown is a nurse at the local hospital. He has worked the night shift for three years and plans
to continue this schedule. His base pay is $29.50 per hour with a 5% shift differential. He averages
35 hours per week. What is his qualifying income?
A. $5,369.00
B. $4,474.17
C. $4,697.87
D. $3,613.75

Answer: C. Calculate the shift differential first: $29.50 x 5% = 1.475. So, he gets an additional
$1.475 per hour. $1.475 + $29.50 = $30.975. $30.975 x 35hrs x 52 weeks ÷ 12 = $4,697.87.

142 | P a g e
2. A potential borrower is applying for a conventional loan to purchase a primary residence.
Currently, he pays $500 rent, $420 for an auto loan, $170 towards his VISA bill, and $300 on a
student loan each month. His gross monthly income totals $4,900, and his take-home pay after
taxes is $3,700. What is the maximum housing payment for which he can qualify?
A. $701.00
B. $874.00
C. $1,036.00
D. $1,372.00

Answer: B. To answer this question, you would need to understand the formula for calculating
Maximum Mortgage Payment (please review this in the course material). Step 1 is to take $4,900
x 28% = $1,372. Step 2 is $4,900 x 36% - $170 -$420 – $300 = $874.00. Step 3 – the lowest of the
two is the correct answer.

3. Mary wants to obtain FHA insured financing on her primary home. Her housing expense will be
$800.65. She also has the following debt: $192.65 (auto payment) and $40 (credit account).
Based on her debt, what would be Mary’s required stable monthly income to qualify for this loan
using the total debt-to-income ratio?
A. $1,601.68
B. $2,403.02
C. $2,582.74
D. $3,333.62

Answer: B. $2,403.02. You MUST know the ratios for FHA to do this problem. The back-end (total
DTI) for FHA is 43%. $800.65 + $192.65 + $40.00 = $1,033.30. $1,033.30/43% = $2,403.02.

4. Larry is refinancing his $360,000 home with two mortgages. The first lien will be a 30-year fixed
rate with a loan amount of $216,000. The second lien will only be a Home Equity Line of Credit
with a limit of $54,000; however, Larry will only draw $36,000 at closing. Which of the following
statements is true?
A. LTV of the first lien is 70%
B. LTV of the second lien is 25%
C. HCLTV is 75%
D. CLTV is 65%

Answer: C. HCLTV Stands for HELOC Combined Loan to Value (HCLTV). 1st Lien = $216,000 +
HELOC $54,000 = $270,000. $270,000 ÷ $360,000 = 75% HELOC.

143 | P a g e
5. An applicant is purchasing a home for $100,000 utilizing FHA financing. The home appraises for
$98,000. What is the minimum dollar amount that the borrower must contribute as a down
payment on this transaction?
A. $3,500.00
B. $3,430.00
C. $6,200.00
D. $5,430.00

Answer: B. $3,430 ($98,000 x 3.5%).

6. An applicant for a mortgage loan is a salaried employee who is paid $1,350 every two weeks. In
addition, she indicates that she receives $500 a month in alimony. What is the gross monthly
income you can use to qualify her?

A. $2,700.00
B. $2,925.00
C. $3,200.00
D. $3,550.00

Answer: D. $1,350 x 26 ÷12 = $2,925 $500 alimony grossed up by 25% = $625. $2,925 + $625 =
$3,550.

7. If a borrower pays $695.20 for principal and interest every month for 30 years on his $110,000
loan, how much interest will he pay over the life of the loan?

A. $20,856
B. $110,000
C. $140,272
D. $250,272

Answer: C. $695.20 x 360 months - $110,000 = $140.272.

8. Borrower is buying a house with sale price of $200,000 and an LTV of 75%. If he paid $3,000 in
points, how many points does that represent?

A. 1.5
B. 4
C. 2
D. 3

Answer: C. Points are based on the loan amount, so if he has an LTV of 75%, the loan amount is
$150,000. Two points were charged. $150,000 x 2% = $3,000.

144 | P a g e
9. A property's annual property taxes are $2,400, paid in one annual installment on January 1. The
lender requires monthly payments into a tax escrow account, plus two additional months of
cushion payments. If the loan funds on June 30, what will be the required tax escrow payment at
closing?
A. $1,200
B. $1,400
C. $1,600
D. $2,400

Answer: B. $2,400 ÷ 2 = $1,200 for half the year. $2,400 ÷ 12 = $200 a month. $1,200 + $400
(2month cushion) = $1,600.

10. A borrower has the following minimum payments due monthly: Mortgage PITI $1100, Auto loan
with 12 payments remaining - $350, Auto lease with 3 payments remaining - $250, Electric bill -
$110, Gas bill - $80, Student loan with 92 payments remaining - $60, Visa credit card - $50. Given
this set of data, what amount would the underwriter use to calculate the borrower's total debt
ratio in a conventional conforming loan?
A. $1,810.00
B. $2,000.00
C. $1,560.00
D. $900.00

Answer: A. $1100 + $350 + $250 + $60 + $50 = $1,810.00 (gas and electric bill are not
included).

11. Sharon is buying a home and putting 10% down payment. The house is worth $150,000 and has
an interest rate of 5.25%. The PMI required has an annual premium of .61% of the loan amount.
What is the monthly payment amount and what is the dollar amount of the PMI payment per
month?
A. 659.26/68.63
B. 1276.63/686
C. 732.50/76.25
D. 656.25/732.50
Answer: A. $150,000 x 90% = $135,000 loan amount. $135,000 x 5.25% ÷ 12 = $590.63 +
$68.63 = $659.26. The PMI is $68.63.

12. What is the total monthly payment, including escrows, on a 30-year interest-only loan of
$205,000, taxes of $1,800 per half, hazard insurance of $420 annually, $65 monthly mortgage
insurance, and an interest rate of 6%?

A. $1,275.00

145 | P a g e
 B. $1,315.00
C. $1,425.00
D. $1,575.00

Answer: C. $1,425. Per half means 1/2 a year, so you divide that part by 6. $1,800 ÷ 6 = $300 a
month. $420 annual = $420 ÷ 12 = $35 a month. Mortgage insurance is $65 a month. Payment
= $205,000 x 6% ÷ 12 = $1,025 a month. Answer: $1,425.

13. Borrower Stu wants an FHA loan for a home priced at $253,500 and appraised for $257,000.
After paying the 3.5% minimum down payment, what is the amount of the 1.75% Up-front
Mortgage Insurance Premium (UFMIP) for Stu?
A. $4,280.98
B. $4,340.09
C. $4,436.25
D. $4,497.50

Answer: A. 253,500 x 3.5% = $8,875.50. $253,500 – $8,875.50 = $244,627.50. $244,627.50 x

1.75% = 4,280.98.

14. Borrowers with gross monthly income of $5,700 applying for a loan with a PITI of $1,345.67 and
a VISA account with a minimum monthly payment of $245.00 would have a debt-to income
("bottom" or "back-end") qualifying ratio equal to:

A. 23.6%
B. 4.3%
C. 26.9%
D. 27.9%

Answer: D. (1,345.67 + 245) $1590.97 ÷ $5,700 = 27.9%.

15. Bob is buying a house. It was appraised at $236,000, the sales price is $228,000, and the loan
amount is $216,800. In order to buy down his interest rate, Bob is willing to pay 2 points in
addition to the 1 point in loan origination fees. What is the price of Bob's points?

A. $4,336.00
B. $4,720.00
C. $6,504.00
D. $7,080.00

Answer: C. The loan amount is $216,800. Points are based on the loan amount. 3 points (3%
total). $216,800 x 3% = $6,504.00.

146 | P a g e
 CHAPTER 6 QUIZ

1. When the initial loan amount is multiplied by the note rate, the result is the
A. annual interest charge.
B. monthly interest-only payment.
C. monthly PMI payment.
D. total housing expense.

2. When the initial loan amount is divided by the lesser of the sale price or the current appraised
value, the result is known as the
A. annual interest charge.
B. combined loan-to-value.
C. housing ratio.
D. loan-to-value.

3 When the PITI payment is divided by the gross monthly income, the result is known as the
A. annual debt payment ratio.
B. back ratio.
C. gross monthly interest-only payment.
D. housing expense ratio.

147 | P a g e
7.0 ETHICS AND FRAUD
Chapter Objective
Upon completion of this chapter, you will be able to:
• Explore mortgage fraud scenarios and schemes
• Examine the role of consumer complaints in identifying Unfair, Deceptive, or Abusive Acts or
Practices (UDAAP)
• Analyze predatory lending and steering standards
• Review prohibited practices and disclosure requirements in advertising

Chapter Introduction
The highest standards of ethical behavior are required in residential real estate lending because the
average consumer is significantly disadvantaged when comparing the degree of knowledge they
would have as compared to the expertise of a mortgage professional. Mortgage Loan Originator
(MLO) organizations and individuals have a responsibility to ensure that:
• The consumer is fully aware of the details relating to loan products being offered.
• The programs and products present a net tangible benefit to the consumer who has the
capacity to successfully execute the terms of the loan.
• Loan originators have a comprehensive understanding of the laws and practices that provide
consumer protections and the consequences of failing to understand and adhere to these
laws.

The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) is designed to protect
consumers and reduce fraud. The law requires that licensed individual mortgage loan originators
complete pre-license education requirements that include a minimum of three hours of ethics. Ethics
includes instruction on fraud, consumer protection and fair lending. The national test outline also
defines the areas for testing the knowledge of the MLO as it relates to ethical issues associated with
federal laws and ethical behavior relating to MLO origination activities.

What are Ethics? - Ethics play a role in everyone’s life – regardless of age, race, or gender – and in all
aspects of life – home, work or social interaction. But what do we mean when we say “ethics”?
Webster's defines ethics as "a set of moral principles and the principles of conduct governing an
individual or a group". Violations of sound ethical practices are not always illegal, but they can be. If
an individual belongs to a professional organization that enforces a strict Code of Conduct, Ethical
Violations may lead to fines and expulsion, but not jail time.
For the National Loan Originator Examination, you might be presented with a variety of situational
problems and asked to choose if any ethical or legal constraints have been violated. Take your time
and read the question as many times as you need. Put yourself in the subject's place and ask, "Would I
want to be treated that way"? If the answer is no, then your common-sense moral compass is
probably leading you to the right answer.

148 | P a g e
7.1 Mortgage Fraud
Fraud in the mortgage industry has resulted in billions of dollars in losses to both the industry and to
consumers who depend on mortgage professionals to obtain financing.
Fraud is intentional or negligent misrepresentation or concealment of material facts. Failing to
disclose information the MLO is required to disclose can be a form of fraud. Fraud also includes
actively concealing information and making false or misleading statements.
● Actual Fraud - Actual fraud is an intentional misrepresentation or concealment of a material
fact. Actual fraud occurs when a person actively hides information, or makes statements
known to be false or misleading. When any of these is done with intent to deceive, they
constitute Actual Fraud. This is also called deceit or intentional misrepresentation.
● Constructive Fraud - Constructive Fraud is a negligent misrepresentation or concealment of a
material fact. When information is not disclosed, or false statements are made unintentionally,
it may be considered Constructive Fraud. This is usually the result of a person making false
statements or failure to disclose pertinent information, which are the result of carelessness or
negligence, rather than an intent to deceive. This is also called Negligent Misrepresentation.
The definition of Mortgage Fraud is “causing a lender to fund or purchase a loan it may not have
funded or purchased if it was made aware of all of the material facts”.
Mortgage Fraud may lead to civil and/or criminal penalties. Negligence is an unintentional breach of a
legal duty. It's a tort if it causes harm and the MLO can be sued for it.

7.2 Types of Mortgage Fraud

There are two types of Mortgage fraud: Fraud for property (also called “Fraud for Housing”) and
Fraud for Profit.
Fraud for Property is more common and is typically perpetuated by borrowers. Fraud for property
involves misrepresentation with the intent of gaining the property. Fraud for housing is generally
committed by home buyers attempting to purchase homes for their personal use. Examples include:
• Misrepresented income such as - False/forged employment verifications and/or false/forged
tax returns, pay stubs or W-2s.
• Misrepresented Assets such as - False/forged bank statements, Undisclosed second
mortgage, and/or loan represented as a gift.
• Occupancy Fraud - misrepresented intent to occupy.
• Asset Rental - Someone deposits temporary funds or assets in a borrower's bank account so
that he will qualify for a loan. The Loan Applicant usually pays the depositor a rental fee for
the use of the money.
• Fake Down Payment - Someone falsifies the borrower's down payment verification through
fake or altered documentation.
• Fraudulent Appraisal - Appraiser deliberately creates an inflated appraisal report to mislead
the lender.
• Fraudulent Shell Company - Illegal use of a Shell Company to hide financial information.

149 | P a g e
 • Identity Theft - Use of someone’s stolen Social Security Number or credit card information
to obtain a Loan Approval.
• Silent Second - Buyer obtains seller financing for the down payment and doesn't disclose
this fact to the lender. The lien may go unrecorded.

Fraud for Profit involves misrepresentation with the intent of gaining money through the affected
transaction. Fraud for profit is typically perpetuated by industry insiders and often involves more
than one participant (such as a Loan Officer and an appraiser or attorney). Fraud for Profit generally
results in a large monetary loss for the creditor. Examples include:
• Attorneys may prepare bogus deeds, falsify tax returns, profit and loss statements, and
other documentation required by Lenders to qualify loans.
• Title Companies may charge borrower's fees for services never provided at the closing or
may complete incorrect title reports that omit valid liens or that create false chains of title.
• Government workers may falsify deeds and other records.
• Real estate agents may assist in the preparation of false documentation, such as sales
contracts or property inspections, and even finding Straw Buyers for the property.
• Real estate brokers and agents collude in flipping schemes by finding borrowers for scams
and by raising listing prices of homes after a deal is put together to make the over-inflated
appraisal value appear valid.
• Unscrupulous Real Estate Agents may also steer borrowers to a specific lender in exchange
for a kickback or other consideration.
• Rehabbers and FSBO (For Sale by Owner) Flippers may use sub-par material, removing
materials or fixtures after an appraisal, providing straw buyers, and improperly influencing
appraisers, Loan Officers, and title companies.
• Investment property owners may falsify occupancy rates on their rent rolls or otherwise
misrepresent the condition of rental units or incomplete renovations.
Mortgage Fraud Perpetrators - Everyone involved in a mortgage transaction can play a role in a fraud
scheme, such as:
• Borrowers. Lying on applications or supplying false documents, or acting as an illegal straw
buyer, which is someone who allows his name and personal details to be used to obtain a
mortgage loan for a property he has no intention of inhabiting.
• Mortgage Loan Originators and Lenders. Ignoring derogatory information to get a loan
approved, creating phantom documents for verification, concealing the true nature of a
borrower's down payment, falsifying documents, making loans to straw buyers, illegally
flipping properties, or making loans to unqualified buyers and then selling them to die
secondary market as quickly as possible.
• Appraisers. Inflating property values to "hit a number" provided by a borrower or lender, or
by using inappropriate comparables.
• Attorneys. Preparing bogus deeds and getting them duly recorded on public records with the
participation of government workers.
• Accountants. Falsifying tax returns, profit and loss statements, and other documentation
required by lenders to qualify loans.

150 | P a g e
 • Title Companies. Charging fees to borrowers for services never provided at the dosing or
completing incorrect title reports that omit valid liens or that create false chains of title.
• Government Workers Falsifying deeds and other records,
• Real Estate Agents. Preparing false documentation such as sales contracts or property
inspections, finding straw buyers for the property, raising list prices of homes after a deal is
put together to make the over-inflated appraisal value appear valid, or steering borrowers to
a specific lender in exchange for a kickback or other consideration.
• Rehabbers and FSBO (For Sale by Owner) Flippers. Using sub-par material, removing
materials or fixtures after an appraisal, providing straw buyers, or improperly influencing
appraisers or ML0s.

7.3 Mortgage Fraud Schemes

Common Mortgage Fraud Schemes - Determined individuals will always be able to cheat the system
by either dreaming up brand new schemes or by putting a new twist on an old one. The FBI website is
an interesting place to visit and learn about the latest methods criminals are using to commit fraud.
Some of the more common schemes are presented here:
• Air Loan - A loan is made on a non-existent property or non-existent borrower. This might be
the most extreme form of mortgage fraud because neither the borrower nor the property
exists. This type of scheme involves a group of individuals working together to defraud the
lender.
• Builder Bailout - This type of fraud is most likely to happen when a developer needs money
and is under pressure to sell the remaining units in a subdivision or housing complex. In this
situation, he might raise the sales price of the property, but offer undisclosed down payment
assistance or excessive concessions.
o If the property appraises for the increased sales price, the lender is acquiring a loan
that is worth more than the unit. Builders may bribe appraisers to inflate the value on
the report, and they might use Straw Buyers to accelerate the liquidation of the
remaining inventory.
• Buy and Bail - A Buy and Bail happens when a homeowner is underwater on the mortgage
(Loan Balance is higher than the market value), or circumstances are about to change that will
have an adverse effect on the homeowner's finances (looming lay-off or interest rate
adjustment coming due).
o The individual proceeds to buy a cheaper "investment" property (not owner-occupied)
while he still has good credit, and walks away from his primary residence immediately
after closing. In this case, the buyer may collaborate with or invent existing tenants and
create a fictitious lease that shows an adequate cash flow to pay the housing expenses
for the investment property.
• Chunking - This scheme involves an innocent buyer and a devious seller. The seller poses as an
agent, approaches the buyer and encourages him to buy one or more of his investment
properties. Unbeknownst to the borrower, the "Agent" submits the loan application to
multiple lenders, arranges multiple closings for the same property within a very short
timeframe, has Power-of-Attorney to sign for the borrower, pockets the loan proceeds and

151 | P a g e
 leaves the buyer facing the need to pay multiple lenders. The property forecloses, and the
lenders suffer losses.
o This scheme usually involves the cooperation of a title company or real estate broker
because the down payment funds need to be falsified for each sale. The same strategy
can be accomplished with a Straw Buyer who has sufficient assets and good credit. In
another version, the "Agent" obtains one signed Loan Application, changes the
property address and submits the altered Loan Application to a number of different
lenders for the purchase of multiple properties.
• Churning - Excessive selling or lending to generate fees and commissions is called churning.
Lenders may start with a teaser rate to get borrowers to sign. When the rate adjusts and the
borrower experiences payment shock, the lender will refinance the loan, perhaps even
skimming the equity in costs and fees. The lender may step the rate down through multiple
refinances, slightly lowering each rate until the pre-arranged rate is reached or may simply
refinance the loan at a lower teaser rate, ready to do so again every time the rate jumps.
• Double Selling - Double selling is a scheme undertaken by a Criminal Loan Originator who may
be cooperating with a homeowner. One scenario involves the submission of an equity line of
credit application to multiple lenders. The borrower's asset information may be altered in
order for him to qualify. The loans are approved, multiple closings are completed before there
is time to record any of the liens, and the borrower and Loan Originator split the money.
o Another situation proceeds without the homeowner's knowledge. The Loan Originator
uses a warehouse lender to provide Short-Term Financing for the loan and then sells
the loan to multiple investors. He pays off the warehouse lender and pockets the rest
of the money.
• Deed Scam - In a Deed Scam, the Seller's signature on the Deed is forged, meaning the real
homeowner is not even aware the property is being fraudulently transferred. The deed is
recorded; the thief mortgages the property with cash-out refinancing, then walks away with
the money, and walks away from the Mortgage without making a payment.
o Often, this scheme takes place when an owner owns the property free and clear, the
property is vacant, or the owners are having trouble making their mortgage payments.
• Equity Skimming - Equity skimming is the use of a fraudulent appraisal that over-values a
property, creating phantom equity, which is subsequently stripped out through various
schemes.
• Unrecorded or Silent Second - In a down market, it's not that unusual for a seller to make
concessions in order to entice a buyer. These concessions could even include financing some
of the purchase price for the buyer. For example, let's say that the buyer applies for a 75% First
Mortgage, agrees to pay 5% down, and gives the seller a Second Mortgage at 20% of the sale
price. This Second Mortgage will not be recorded so that the Lender will think that the buyer is
actually putting 25% down.
o The buyer may have every intention of paying the seller, but this unrecorded second -
also called a silent second - is actually a type of mortgage fraud and it could be quite a
risk for the seller. If the buyer does not pay the loan, the seller would not be able to
foreclose to get the property back.

152 | P a g e
 • Disappearing Second - A more common variation on this scheme is when the buyer has no
intention of paying the second mortgage. For example, schemers will find uninformed buyers
willing to sign a Sales Contract beyond market prices with such enticements as "Seller will help
finance." In these cases, the seller holds a Second Mortgage that they present to the lender as
if it were an actual mortgage to induce the bank to loan a higher amount.
o Once the transaction closes, the seller destroys the mortgage, sometimes even giving it
back to the buyer immediately. This is called a disappearing second. The lender thinks it
has an 80% LTV loan, for example, when it may actually be 100% LTV.
• Phantom Sale - A Phantom Sale occurs when an individual finds an abandoned home, records
a false quitclaim deed and proceeds to take out a loan on the property or sell it.
• Reverse Mortgage Fraud - The amount of eligible funds in a reverse mortgage depends
primarily on the appraisal value of the home and on the age of the youngest applicant.
Consequently, inflated appraisals and altered birth dates are likely sources of fraud.
• Short Sale Fraud - A Short Sale occurs when a homeowner owes more on the mortgage
balance than the current market value of the home, and the lender agrees to sell at or below
market value and "forgive" the difference. The lender releases the mortgage lien for less than
the balance of the loan amount.
o These properties typically sell below market value. This is an alternative to foreclosure,
and the lender usually requires that the homeowner has a financial hardship and is
unable to continue making the mortgage payments.
o Fraud occurs when the buyer is related or affiliated with the seller, or financial records
are altered to show a financial hardship. Short Sale Fraud also occurs when the
perpetrator uses a straw buyer to purchase and ultimately default on a home loan. This
creates a Short Sale situation that the perpetrator can take advantage of to purchase
the home at a discount.
• Straw Borrower - Someone who applies for and obtains a mortgage loan and who has no
intention of being responsible for the loan but expects a third party, who may not have
enough credit or assets to do so, in order to get a good loan. Straw borrowers are often paid to
act as the borrower. Acting as a straw borrower or 'credit partner' is a federal crime.
• Straw Seller - A seller is hired to take title to and sell a house to conceal the identity of the
actual seller. Straw sellers are intermediaries in fraudulent transactions to keep the fraudsters
names off of the documents. Straw sellers will be unable to convince authorities that they
were not the guilty parties. Sometimes identity theft is used to create a seller, and the victim's
name is forged to a document without his or her knowledge of the transaction. This adds
another layer of complexity to the problem.

Consequences of Fraud - Mortgage fraud is investigated by the Federal Bureau of Investigation and is
punishable by 30 years in federal prison or $1,000,000 fine or both. It is illegal for a person to make
any false statement regarding income, assets, debt or matters of identification, or to willfully
overvalue any land or property, in a loan and credit application for the purpose of influencing in any
way the action of a financial institution.

153 | P a g e
7.4 Illegal Flipping
While flipping property – busing property, fixing it up, and selling it for a profit may be legitimate,
illegal flipping has become a major issue in the real estate industry.
Property flips typically involve properties that are bought and sold within a short period of time. Other
flips happen when the property isn't selling, and the homeowner is highly motivated to sell it. Many
flips are legal, but some are not.
An Inflated Appraisal is often the mechanism of choice for the fraudulent flipper. For example, a
buyer approaches the seller of a property that's been on the market for a long time and is desperate
to sell. The investor offers an amount of money that's much higher than the list price and that's
supported by an inflated appraisal. At closing, the seller receives the proceeds of the loan and
disburses the difference between the sale price and original list price to the investors.
Many people are confused by the term "Flipping," as it has long been understood to mean that an
investor has remodeled a property and quickly sold it for a profit. If the investor bought the property
below market and remodeling has brought it up to true market value, this would be a valid definition,
and is completely legal.
Illegal Flipping is something else entirely. Illegal property flipping generally requires collusion among
the seller, buyer, appraiser and lender/broker. An illegal property-flipping scheme occurs when a
property is purchased at a low price, appraised at an inflated value without any valid reason for the
increase, and then resold at a much higher price.

FHA Response to Flipping Schemes - The FHA requires sellers to own a property for at least three (3)
months prior to the new sale. FHA will not insure any resale properties unless the owner of record is
the seller. This prevents thieves from flipping property without ever having legally owned it. Resales
ranging from 91-180 days can only be FHA-insured only if there is a second appraisal that matches a
resale threshold percentage established by HUD. The second appraisal may not be paid for by the
borrower.

7.5 Ethics and Appraisers

Appraisals are a critical aspect of mortgage lending. An appraisal with inaccurate information -
whether completed because of fraud or negligence - can have a serious impact.
An Inflated Appraisal Scheme occurs when a property is intentionally appraised with a higher-than-
market value by an appraiser acting in collusion with a real estate agent, mortgage broker, or lender.
Unscrupulous lenders hire only those appraisers who agree to "hit the number," "push the value," or
"work with us on the number," regardless of its relationship to actual market value.
Appraisers subscribe to a set of rules and guidelines, known as the Uniform Standards of Professional
Appraisal Practice (USPAP). The appraiser is required by law and professional standards to act
independently, impartially and objectively, when performing the work he is engaged in.
Lenders, mortgage brokers, and their affiliates are prohibited from coercing, influencing or
encouraging an Appraiser to misstate the value of the dwelling.

154 | P a g e
TILA (Regulation Z) specifically prohibits these practices:
● An appraiser must never accept an assignment that requires him to "hit a specific number" or
bring the value in keeping with the client's demands.
● Implying to an appraiser that current or future retention of the appraiser depends on the
amount at which the appraiser values a consumer's principal dwelling.
● Excluding an appraiser from consideration for future engagement because the appraiser
reports a value of a consumer's principal dwelling that does not meet or exceed a minimum
threshold.
● Telling an appraiser a minimum reported value of a consumer's principal dwelling that is
needed to approve the loan.
● Failing to compensate an appraiser because the appraiser does not value a consumer's
principal dwelling at or above a certain amount.
● Conditioning an appraiser's compensation on loan consummation.
● In addition, a lender cannot extend credit if the lender knows, at or before closing, that
improper coercion has occurred by anyone unless the lender can document that it has acted
with reasonable diligence to determine that the appraisal does not materially misstate or
misrepresent the dwelling's value.
In addition, the following practices are not prohibited:
● Obtaining multiple appraisals of a consumer's principal dwelling, unless the creditor adheres to
a policy of selecting the most reliable appraisal, rather than the appraisal that states the
highest value.
● Withholding compensation from an appraiser for breach of contract or substandard
performance of services as provided by contract.
● It is not a violation to ask an appraiser to consider additional information about the dwelling or
comparable properties or to ask an appraiser to correct factual errors.

7.6 Predatory Lending

Although many people equate the term “predatory lending” with “mortgage fraud,” the two are not
synonymous. Although it is very possible for both to be present in the same transaction, it is not
always so.
When we refer to Predatory Lending, we are talking about a wide range of unethical behaviors and
abusive practices that can leave borrowers unable to pay the loans that they have received and/or
unnecessarily take away the equity in their homes.
Predatory lending involves loans that take advantage of ill-informed consumers through excessively
high fees, misrepresented loan terms frequent refinancing that does not benefit the borrower, and
other prohibited acts.
Predatory lending targets borrowers with little knowledge of, or defense against, these practices.
New regulations require that complete and clear disclosures be made to borrowers and specifically
prohibit certain practices, including:

155 | P a g e
 ● Packing a loan with credit insurance and other extra fees.
● Extending credit to people with little or no income and who have little chance of repaying the
loan (the lender forecloses on the property and keeps the excess equity to cover costs).
● Refinancing the lender's own high-cost loan with another fee-rich loan in less than a year's
time (unless a lender can show that the new loan benefits the borrower).
● Predatory loans are approved without regard for the borrower's ability to repay. Interest rates
are higher than the level of risk justifies.
● Lenders may bundle unrelated products - such as a life insurance policy - into the mortgage
loan to further their profit.

7.7 Typical Predatory Lending Practices

The motive for predatory lending is profit. The goal of a predatory lender is to take the property or
strip its equity, or to profit from the exorbitant fees charged. Here are descriptions of some of the
most egregious predatory lending practices:
• Excessive fees: Points and fees are costs not directly reflected in a mortgage’s interest rate.
Because these costs can be financed, they are easy to disguise or downplay. On predatory
loans, fees often total more than 5% of the loan amount.
• Abusive prepayment penalties: Borrowers with higher-interest-rate loans have an incentive to
refinance as soon as their situation improves. However, up to 80% of all subprime mortgages
that were originated back in the days of the housing bubble carried a prepayment penalty (a
fee for paying off a loan early). Not all prepayment penalties are abusive, but one that is
effective for more than three years and/or costs the consumer more than six months’ interest
would certainly fall into the predatory category.

Indicators of Predatory Lending - Changing loan terms at closing was historically one of the most
common predatory lending schemes.

Borrowers discovered closing documents did not reflect the loan terms and fees originally stated in
the loan estimate, and often felt as though they had no choice but to go through with the loan.
The Department of Housing and Urban Development (HUD) identifies several predatory schemes used
by unscrupulous mortgage loan originators, including the following:
● Encouraging borrowers to lie about their income, expenses or cash available for down
payments in order to get a loan.
● Knowingly lending more money than a borrower can afford to repay.
● Charging high interest rates to borrowers based on their race or national origin and not on
their credit history.
● Charging fees for unnecessary or nonexistent products and services.
● Pressuring borrowers to accept higher-risk loans such as Balloon Loans, Interest Only
Payments, and steep Prepayment Penalties.
● Targeting vulnerable borrowers to Cash-Out Refinance Offers when they know borrowers are
in need of cash due to medical, unemployment or debt problems.

156 | P a g e
 ● Stripping Homeowners' Equity from their homes by convincing them to refinance again and
again when there is no benefit to the borrower.

7.8 Red Flags of Mortgage Fraud

HUD also indicates that borrowers should be aware of the following red flags that could indicate
predatory tactics:
• Steering Buyers to a Specific Lender. If a transaction will close only if a certain lender is
used, it is possibly a scam.
• Stated Income. No doc or low doc loans chat require minimal documentation have great
potential for fraud. Most lenders will not offer these programs any longer.
• No Money Due at Closing. If a buyer is not required to pay anything at closing, the sales
price may have been inflated to cover the down payment and closing costs.
• Sale Subject to the Seller Acquiring Title. If the seller on the purchase contract is not the
owner of record, participants should verify that the transaction is legitimate.
• Difference in Sale Price. The sales contract is supposed to guide the title agency or closing
agent to the terms of the Closing Disclosure, and there should be no discrepancies.
• Sale Price Changes to Fit Appraisal. The sales contract is altered after an appraiser comes
back with a higher-than-expected appraisal.
• Related Parties Involved. While there is no law against selling property to a relative, even
at a discounted price, mortgage fraud scams often involve family members. Full disclosure
is imperative.
• Funds Paid to Undisclosed Third Parties. When unknown third parties, who appear to have
no relevance to the transaction, are paid out of the funds received at the closing, there may
be debt not revealed in the closing statements. A closing statement that is not followed to
the letter is a red flag to the borrower.
• Cash Paid to Seller Outside of Escrow. The seller receives cash from the sale of the
property; however, it is not stated in closing statements or in the purchase contract.
• Cash Paid to Borrower. Although seller-paid costs are becoming more typical in today's
economy, schemes in which the buyer receives money from the transaction are not.

7.9 Equity Skimming

Equity Skimming involves lenders making various types of loans knowing the borrowers will not be
able to make the monthly payments and thus setting them up for foreclosure. The borrower loses
everything - the home and the equity in it.
Most of the equity-skimming schemes involve the use of an inflated appraisal and a dishonest buyer
or homeowner.
In one case, an appraiser over values the property; the sale price is increased to match the appraisal
value, and the buyer receives the difference in cash after the closing. In another case, inflated
appraisals allow a homeowner to participate in cash-out refinances.
Some common types of equity skimming schemes include:

157 | P a g e
 ● Loans Exceeding Ability to Repay. Borrowers typically rely on a lender's advice regarding debt-
to-income ratio, believing there are reasonable limits in place on what they can borrow.
Equity Skimming Schemes may falsify loan documents so the borrower does not realize the
amount being borrowed is too much, with a monthly payment amount that is too high.
The lender makes the loan, knowing the borrower will not be able to make those monthly
payments, setting them up for foreclosure. The borrower loses everything, the home and the
equity in it.
● Home Improvement Scams. In these instances, a contractor working in conjunction with a
predatory lender recommends repairs to the home, driveway, basement, etc. (Work may or
may not actually need to be done.) The quote for the work is typically extremely high, and the
contractor indicates arrangements for financing are available. Now enter the lender, offering a
loan that will strip the equity out of the home, again resulting in possible foreclosure.
● Loan Flipping. This involves refinancing over and over again, usually with minimal to no net
tangible benefit to the borrower in terms of lowering the interest rate or saving fees. The
borrower is promised benefits that never materialize. Because the lender profits every time a
loan is made, there is no incentive for the lender to recommend otherwise. Often, the
refinancing actually raises the interest rate to the borrower. With higher monthly payments,
the borrower may wind up defaulting on the loan, undergoing foreclosure, or being forced to
refinance into even more unfavorable terms. Once again, the high-risk borrower takes a hit
financially.
● Extreme Lending. Some borrowers fall victim to extreme lending. Borrowers with extremely
high debt in relationship to income are targets. With typical lending guidelines restricting
borrowers to around 30% of income toward the mortgage payment, this extreme lending -
often as much as 50% of income going toward the mortgage payment or more - puts
borrowers at risk. If this borrower is laid off, loses a job or experiences unanticipated expenses
due to injury or illness, the risk for foreclosure is great because of the high percentage of
income going to the mortgage loan.

7.10 Other Unethical Practices

Bait and Switch is described as luring consumers in with promises of low rates and specific products,
and then steering otherwise qualified buyers to other terms so that the mortgage loan originator can
earn a higher fee. Its purpose is to switch consumers from buying the advertised merchandise in
order to sell something else, usually at a higher price or on a basis more advantageous to the
advertiser. The primary aim of a bait advertisement is to obtain leads as to persons interested in
buying merchandise of the type so advertised.

Bona Fide Offer - In order to determine if the offer is bona fide (i.e., an offer made in good faith),
these points would be considered:
● The refusal of the advertiser to show, demonstrate or sell the product offered in accordance
with the terms of the offer.

158 | P a g e
 ● The disparagement by acts or words of the advertised product or the disparagement of the
guarantee, credit terms, availability of service, repairs or parts, or in any other respect, in
connection with it.
● The failure to have available, at all outlets listed in the advertisement, a sufficient quantity of
the advertised product to meet reasonably anticipated demands, unless the advertisement
clearly and adequately discloses that supply is limited and/or the merchandise is available only
at designated outlets.
● The refusal to take orders for the advertised merchandise to be delivered within a reasonable
period of time.
● The showing or demonstrating of a product that is defective, unusable or impractical for the
purpose represented or implied in the advertisement.

Switch After Sale is described as accepting a deposit for the advertised product, then switching the
purchaser to a higher-priced product. It could also include one of the following:
● Failure to make delivery of the advertised product within a reasonable time or to make a
refund.
● Disparagement by acts or words of the advertised product, or the disparagement of the
guarantee, credit terms, availability of service, repairs, or in any other respect, in connection
with it.
● The delivery of the advertised product, which is defective, unusable or impractical for the
purpose represented or implied in the advertisement.

7.11 Unfair and Deceptive Practice - Advertising (Regulation N): Unfair Acts or
Practices
When determining whether an advertisement or practice is likely to be deceptive, the Federal Trade
Commission (FTC) will examine it from the perspective of a consumer acting reasonably in the
circumstances, examining the entire advertisement, transaction or course of dealing in determining
how reasonable consumers are likely to respond. Regulation N enforces regulation for unfair acts or
practices. This includes mortgage advertising.
Unfair Practices - It is considered unfair if:
● The act causes or is likely to cause substantial injury (monetary harm) to consumers.
● The injury is not reasonably avoided by consumers.
Deceptive Practices - An act is considered deceptive if:
● The representation, omission, act or practice misleads or is likely to mislead the consumer.
● The consumer’s interpretation of the representation, omission, act or practice is reasonable
under the circumstances; and
● The misleading representation, omission, act or practice is material.

Abusive Practices - Abusive acts, which are acts that:

159 | P a g e
 ● Materially interfere with the ability on the part of the consumer to understand a term or
condition of a consumer financial product or service; or
● Reasonably take advantage of a lack of understanding on the part of the consumer of the
material risks, costs or conditions of the product or service; the inability of the consumer to
protect its interests in selecting or using a Consumer Financial Product or service; or the
reasonable reliance by the consumer on a covered person to act in the interests of the
consumer.

7.12 Ethical Behavior Among Mortgage Participants

Investors - Investors can't state on the loan application that a property is owner-occupied if it's
actually a rental. Leases can't be altered or forged to show increased cash flow or to prove the
existence of fictitious tenants. Investors can't work with fraudulent appraisers to inflate the value of
flipped properties.

Real Estate Licensees - Loan Originators and Title Companies can't pay Real Estate Agents a Referral
Fee. Real Estate Sales Associates must comply with the Fair Housing Act that prohibits housing
discrimination on the basis of Race, Color, Religion, Sex, Disability, Familial Status, and National Origin.
They can't "steer" buyers into or away from particular neighborhoods based on their Ethnic or Racial
Demographics. Blockbusting occurs when a Real Estate Agent spreads the rumor that a specific Ethnic
Group is planning to move into the neighborhood and advises residents to sell before the property
values drop.

Mortgage Loan Originators - Loan originators shouldn't falsify documents, create fictitious borrowers
or encourage rate-locks when interest rates are going down. An Ethical Loan Originator explains the
details of the chosen loan product to the borrower and carefully reviews the Loan Application for
accuracy. Originators need to include disclosed monthly debts that don't appear in the Credit Report
in the calculation of the Total Obligation Ratio.

7.13 Fraud Enforcement

Each year, the FBI reports on suspicious activity reports (SAR). The Financial Crime Enforcement
Network (FinCEN) uses SARs as vehicles to track the level of fraud. Every mortgage professional has a
responsibility to report any suspicious activity through a mandatory program that every company
must have in place to report SARs.
Private subscription services, such as the Mortgage Asset Research Institute (MARI), give members
access to a database of all fraud and suspected fraud as reported by its members and state and
federal regulatory agencies, as well as the actions taken. The service allows those in the industry to
check credentials of companies and individuals with whom they work.
To report mortgage fraud, a consumer or mortgage originator can file a report at: http://www.stop
fraud.gov/report.html.

160 | P a g e
The Fraud Enforcement and Recovery Act of 2009 (Pub. L. 111-21), or FERA, is a public law in the
United States that makes it a felony to falsify loan documents submitted to a broad range of financial
institutions, including Mortgage Lending Businesses.

7.14 SENARIOS TO CONSIDER

MLO Sara advertises what she calls “5 for 5” mortgage loans: 5% down and 5% fixed-rate interest for
30 years. A qualified borrower arrives and starts the loan process, paying for a credit report, and
completing a loan application. However, Sara does not lock in that interest rate. She knows that rates
are going up, so she sits on the application for an extra week, and then tells the borrower that the
best she can do is 5 3/4%.
• Would this be considered an example of a bait and switch tactic? Why or why not? Answer:
Yes, if Sara had never intended to close a so-called “5 for 5” loan and just wanted to get
prospective borrowers in the door, her offer was not in good faith.
MLO John advertises that he will close loans in 14 business days, even though he knows that his
average close takes 47 days. His ad brings in 100 new customers, and he works hard to close a few of
those loans in 14 days so that his advertisement remains legitimate.
• Would this be considered an example of a bait and switch tactic? Why or why not? Answer:
Yes, even though John is closing some of the loans in the timeframe advertised, he still used
deception to bring in more customers, because he never intended to achieve that closing
timeframe for most loans. This is an example of bait and switch.
Young couple Danny and Brenda really wanted to buy a home, but their debt ratio was too high and
they didn’t have enough for a down payment. Brenda’s dad, Jack, decided to help them by applying
for an FHA loan himself, with the understanding that Brenda and Danny would make the mortgage
payments. Within a year of moving in, they were well behind in their monthly payments, and the
lender called Jack. Jack said he had no intention of making the payments, so the lender started
foreclosure procedures, and Brenda and Danny moved into Jack’s basement.
• What are the fraud scheme(s) or legal violations for which Jack is potentially at risk? Answer:
Jack is technically a straw buyer in this situation, since he used his personal information to
apply for a loan on a property where he did not intend to live and for which he did not intend to
make mortgage payments. Although he may have had pure intentions, since he applied for the
loan, Jack was contractually obligated to ensure that the monthly payments were made,
whether he lived in the house or not!
MLO Stan is working with Evelyn, who is planning on buying her cousin Dennis’s house. Evelyn is
putting 10% down and Dennis is willing to hold a 10% purchase money mortgage so Evelyn can avoid
paying private mortgage insurance. As he’s consulting with Dennis and Evelyn to put the deal
together, Dennis asks Stan if he can just tear the mortgage up after closing, since he doesn’t really
expect Evelyn to pay him back.
• What are the fraud scheme(s) or legal violations for which Stan is potentially at risk?
Answer: Dennis could be on the verge of perpetrating a fraud scheme called a disappearing
second. The lender thinks it has an 80% LTV loan, for example, when it may actually be 90%

161 | P a g e
 LTV. Stan should be aware that if he goes along with facilitating this deal, he could be guilty of
a material omission if he does not inform the lender of seller Dennis’s plans. Another issue is
the fact that the buyer and seller are related. Certainly, there is no law against someone selling
his property to a cousin, even at a discounted price. However, mortgage fraud scams often
involve family members. So, in these instances, full disclosure is imperative. Purchase contracts
between family members should specifically state their relationships so it does not appear
intentionally hidden. Stan probably needs to get out of this transaction.
Patrick is behind on his mortgage payments and has been threatened with foreclosure. He has his
house on the market and a few people are showing interest in purchasing the property. Patrick
contacts his lender and asks if they would consider agreeing to a short sale. Patrick has several offers
but does not submit the highest offer to the lender. Instead, he convinces his friend Joe to purchase
the property. The lender agrees to the sale and once the lien is released, Joe sells the property at
market value to the other prospective buyer, then he and Patrick split the $30,000 profit.
• What are the fraud scheme(s) or legal violations for which Patrick is potentially at risk?
Answer: This is an example of a short sale fraud, and also a flipping scheme. You could even
reasonably say that Joe was a straw buyer since he never intended to make payments on the
mortgage loan. For the short sale to go through, it’s also very likely that Joe and Patrick did not
reveal their relationship. Short sales that involve relatives and friends are a significant red flag.
Alex faces possible foreclosure and contacts a mortgage lender whose ad promises to save his home.
At closing, Alex sees that the lender changed the terms of the loan that they had agreed to, but he felt
he had no choice but to go ahead with the loan or lose the house.
• Is this a case of predatory lending? Why or why not? Answer: This is an obvious case of
predatory lending. The consumer was under duress in this situation, and the lender took
advantage of him by changing the loan terms. Furthermore, unless the lender’s changes were
below the tolerances that require redisclosure of terms, the lender is in violation of the Truth in
Lending Act that requires a waiting period of three business days after redisclosure.
Bob takes an application for a cash-out loan from a woman on a fixed income so she can pay her real
estate taxes. Bob does not advise her to make sure the new loan collects for real estate taxes, hoping
in a few years she will need to get a new loan for the same reason.
• Is this a case of predatory lending? Why or why not? Answer: Making loans with a meager
tangible benefit that does not resolve the borrower’s problem but creates repeat business
would be considered predatory lending. More specifically, this is an example of loan flipping,
which is a type of equity skimming.
Sara has some credit issues and is trying to bounce back from a recent bankruptcy. Still, she is
interested in buying a home. She finds a mortgage broker who can secure a loan for her, but only if
she pays 20% down and consents to an interest rate that is higher than that offered to consumers
with perfect credit.
• Is this a case of predatory lending? Why or why not? Answer: Borrowers with less than
perfect credit may have to pay higher rates to secure a loan. That alone would not

162 | P a g e
 necessarily be considered predatory. It does depend on the actual terms of the loan, so
more information would be needed to make a definitive call on this situation.
Penny has applied for a loan with XYZ Mortgage Company. The MLO tells her that because she is a
single woman, she can only be approved for the loan if she takes out a credit insurance policy to cover
the mortgage in the event of her death. The insurance policy requires a significant one-time fee at
closing.
• Is this a case of predatory lending? Why or why not? Answer: Legitimate lenders do not
require credit insurance, and in fact, many states forbid it since the loan balance would be
paid off when the property was sold out of her estate. Therefore, this could be an example
of predatory lending. This might also be an example of illegal discrimination if such credit
insurance is not required of single men.

Veronica, a 61-year-old minority woman who works as a teacher, contacts you about getting a loan to
purchase a condominium. As you’re chatting, she indicates that she’s hoping to retire from teaching in
three years. You take her financial and personal information and see that you should be able to get
her the amount she needs to purchase the home, and now you need to discuss terms. You share some
loan options with her and she insists that she’s only interested in an adjustable rate mortgage,
because she wants the lower monthly payments to start and is convinced the interest rates will stay
low or go down even further.
• What should you share with Veronica about an ARM loan given her situation? Are you
obligated to help her apply for the loan she wants? Answer: You need to be very clear that
Veronica understands all conditions and terms associated with an adjustable rate
mortgage. She needs to understand that the interest rate she will pay when adjusted
according to the terms in the note will be set based off a standard index over which neither
she nor her lender has any control, and it could be lower, but it could also be higher. You
are not required to take her loan application as long as your refusal is not based on
Veronica’s membership in a protected class (race, color, religion, nationality, sex, disability,
familial status, source of income). However, you might have a hard time proving that.
Based on the above scenario - Suppose you decide that you will not submit an application for an ARM
due to Veronica’s intention to retire in three years, about the time the monthly payments on the loan
could jump beyond her ability to pay on a fixed income. You don’t want to seem as though you are
pushing through an inappropriate loan. Veronica is very unhappy and accuses you of refusing to help
her because she’s a woman and a minority.
• It seems as though your choice is between risking accusations of discrimination or
accusations of predatory lending. Now, what do you do? Answer: If you submit the loan
application, you should take extra special care to confirm that you have made all required
disclosures and that she acknowledges the receipt of them.

163 | P a g e
 CHAPTER 7 QUIZ
1 _______is a tactic of luring consumers in with promises of low rates and specific products, and
then steering otherwise qualified buyers to other terms so that the MLO can earn a higher fee.
a. Switch After Sale
b. Bait and Switch
c. Bona Fide Offer
d. Valuable Offer

2 __________occurs when a person actively hides information, or makes statements known to be

false or misleading.
a. Actual Fraud
b. Constructive Fraud
c. Consumer Fraud
d. Property Fraud

3 The Penalty for Mortgage Fraud is _____________________.

a. 30 years in jail.
b. $1,000,000 fine.
c. $2,000,000 or imprisoned not more than 15 years, or both.
d. $1,000,000 or imprisoned not more than 30 years, or both.

4 Which situation is not likely to be considered predatory lending?

a. CalWest Mortgage Co. offers a subprime loan to Daniel, who is coming out of bankruptcy.
b. Sylvia shows up at closing and finds that the lender has changed the terms of the loan.
c. Socorro paid off his mortgage loan early with lottery winnings and the lender charged a
$75,000 prepayment penalty.
d. Susan was 25 days late paying her mortgage, and the lender raised the interest rate 1/4%.

5 Which situation would be considered a straw buyer?

a. Alice revises her pay stubs so she can qualify for a loan to buy her dream house.
b. Barry uses his twin brother’s Social Security number and credit information to apply for a loan.
c. Daniel agrees to secure a loan under his name, even though only his sister with bad credit will
live in the house.
d. Teresa tells Rob, who is facing foreclosure, that if he deeds the property to her, she will
refinance on good terms and let him stay in the house.

164 | P a g e
6 Maria’s customer, Javier, purposely does not tell her that he just co-signed his nephew’s auto
loan. The credit report shows neither that loan nor a credit inquiry, and so that debt is not
considered when the lender preapproves him for a larger mortgage than he should have. Did
Maria do anything wrong?
a. No, she can’t be held responsible if a client withholds information that does not show on
Javier’s credit report
b. Yes, she colluded with the customer to withhold material information.
c. Yes, she committed actual fraud by approving a purposely false application.
d. Yes, she committed constructive fraud by not confirming Javier’s debts.

7 Which of the following fraud scheme involves the seller's signature on the deed being forged and
the real homeowner is not even aware the property is being fraudulently transferred?
a. Bait and Switch
b. Air loan
c. Equity Skimming
d. Deed Scam

165 | P a g e
8.0 UNIFORM STATE CONTENT
Chapter Objective
Upon completion of this chapter, you will be able to:
● Understand the detail of the SAFE Act and the Model State Law (MSL)
● Identify Individuals Required to be Licensed by States
● Identify Educational and Testing Requirements

Chapter Introduction
In 2008, the housing industry suffered significant declines due to an economic financial crisis. To help
mitigate the impact of these changes, Congress passed the Housing & Economic Recovery Act (HERA).
Title V of HERA is the SAFE Act. The SAFE Act was originally enforced by HUD.
With the passage of the Dodd Frank Act in July 2010 and the subsequent creation of the Consumer
Financial Protection Bureau (CFPB), an umbrella was created to house most of the mortgage related
laws under one entity. One of these laws is the Secure and Fair Enforcement for Mortgage Licensing
Act (SAFE Act), under CFPB, which is the first law this lesson will address.
The SAFE Act was created to provide additional protections for consumers and to reduce fraud in
residential mortgage lending. The law accomplished these objectives by requiring the establishment
of a registry to track individuals and entities involved in loan origination. In addition, the SAFE Act
mandates that states ensure mortgage loan originators comply with the Act by instituting regulations
to implement this federal law on a state level.
In previous years, many states required two (2) exams in order for individuals to obtain a NMLS
Endorsement – a National Exam, as well as an individual State Exam. However, on April 1, 2013, the
NMLS launched the Uniform State Test (UST). This was the first major change to the SAFE MLO Exam
since 2009.
The UST added an additional 25 questions to the National Test Component, increasing the total
amount of exam questions from 100 to 125.
Currently every state, territories or agencies, have adopted the UST. A list of each state and any state
requirements can be found on the NMLS Website at:
http://mortgage.nationwidelicensingsystem.org/Pages/Default.aspx

8.1 THE SAFE ACT (TITLE V OF HERA)

“Secure and Fair Enforcement for Mortgage Licensing Act of 2008’’ (or ‘‘S.A.F.E. Mortgage Licensing
Act of 2008”) is a key component of the Housing and Economic Recovery Act of 2008 (HERA). The
SAFE Act requires states to implement SAFE-Compliant MLO licensing that meet certain minimum
requirements through the Nationwide Mortgage Licensing System & Registry (NMLS).
The SAFE Act is a federal law that has jurisdiction in all states, the District of Columbia, and the U.S.
Territories of Puerto Rico, U.S. Virgin Islands and Guam [see 12 CFR, Part 1026, Truth in Lending -
Regulation Z § 1026.2(a) (26) State].

166 | P a g e
According to the SAFE Act:
• Industry: All residential MLOs must be either state licensed or federally registered.
• States: All states are required to have a system of licensing in place for residential MLOs that
meets national definitions and minimum standards, including among other things: criminal
history and credit background checks, pre-licensure education, pre-licensure testing,
continuing education, net worth, and surety bond or recovery fund.
Objectives of the SAFE Act:
• To provide uniform license applications and requirements for state-licensed loan originators.
• To provide a comprehensive licensing and supervisory database.
• To aggregate and improve the flow of information between regulators.
• To provide increased accountability and tracking of loan originators.
• To streamline the licensing process and reduce regulatory burden.
• To enhance consumer protections and support anti-fraud measures.
• To provide free information about loan originators to consumers.
• To establish a means by which loan originators are required to act in a consumer’s best
interest.
• To facilitate responsible behavior in the subprime mortgage marketplace.
• To facilitate the consumer complaint process.
Through Section 5101 of the SAFE Act, the federal government encouraged the states to establish a
Nationwide Mortgage Licensing System and Registry (NMLS-R). The NMLS-R was created by two
entities: The Conference of State Banks Supervisors (CSBS) and The American Association of
Residential Mortgage Regulators (AARMR).

8.2 State Regulatory Authority Responsibilities

At a minimum, each State Regulatory Authority must meet the following requirements:
• Must provide effective supervision and enforcement of the law, including the suspension,
termination or nonrenewal of a license for a violation of any state or federal law.
• Must ensure that all state-licensed mortgage loan originators operating in the state are
registered with the Nationwide Mortgage Licensing System and Registry (NMLS).
• Must regularly report violations, as well as enforcement actions, and other relevant
information, to the NMLS.
• Must have a process in place for challenging information contained in the NMLS.
• Must have an established mechanism to assess civil money penalties for individuals acting as
mortgage loan originators in their state without a valid license or registration.
• Must have one of these protection options in place: an established minimum net worth or
surety bonding requirement that reflects the dollar amount of loans originated by a residential
mortgage loan originator, or have an established recovery fund paid into by mortgage loan
originators.

167 | P a g e
Responsibilities and Limitations: The State Regulatory Authority possess the following
responsibilities:
• Enforcing state licensing laws.
• Regularly reporting licensing violations to the NMLS-R.
• Assessing civil penalties against individuals who originate without a license.
Broad Administrative Authority: The State Regulatory Authority must have a broad administrative
authority to administer, interpret and enforce the SAFE Act, and to make the rules or regulations
implementing the Act known, in order to carry out the intentions of the legislature [see12 CFR Part
1008, Subpart B, §1008. 111(b)].
State Examination Authority: In addition to any authority allowed under State law, a state-licensing
agency must have the authority to conduct investigations and examinations [see 12 CFR Part 1008,
Subpart B, §1008.111(a)(4)].
Authority to Access Information: For the purposes of initial licensing and license maintenance, the
state shall have access to all MLO or mortgage entity records.
Fees: CSBS, AARMR or the Bureau, as applicable, may charge reasonable fees to cover the costs of
maintaining and providing access to information from the NMLS-R. Fees shall not be charged to
consumers for access to such system and registry. If the Bureau determines to charge fees, the fees to
be charged shall be issued by notice with the opportunity for comment prior to any fees being
charged.
Penalties: The maximum amount of penalty for each act or omission shall be $28,474 as of January
12, 2018 (previously $25,000). Each violation or failure to comply with any directive or order of the
State Regulatory Authority is a separate and distinct violation or failure.
Regulatory Authority Limitations: State and federal regulating authorities do not have the authority,
nor are they empowered, to impose a prison sentence.

8.3 Enforcement Authorities of the CFPB

Consumer Financial Protection Bureau (CFPB) is responsible for enforcement of the SAFE Act. The
CFPB has the authority to:
• Examine any books, papers, records, or other data of any mortgage loan originator operating
at any time, in any state, to investigate compliance with the SAFE Act.
• Summon any mortgage loan originator or any person having possession, custody, or care of
the reports and records relating to such mortgage loan originator in any state, under the SAFE
Act, to appear before the Bureau at a time and place named in the summons.
• Compel any mortgage loan originator or any person from any state, subject to the SAFE Act, to
produce such books, papers, records, or other relevant data.
• Order any mortgage loan originator from any state to give testimony, under oath, as may be
relevant or material to an investigation of such mortgage loan originator for compliance with
the requirements of the SAFE Act.

168 | P a g e
Investigation, Examination and Subpoena Authority: The state regulatory authority may review,
investigate, exam any licensee, individual, or person subject to the SAFE Act, as often as necessary in
order to carry out (i.e., audit records) for the purpose of the Act.
Access and Availability to Books and Records - Each mortgage loan originator must make available,
upon request to the state regulatory authority, the books and records relating to the operations of
that originator. The state regulatory authority may have access to such books and records and
interview the officers, principals, mortgage loan originators, employees, independent contractors,
agents, and customers of the licensee concerning their business.
In addition, no person subject to investigation or examination under this Act may knowingly withhold,
abstract, remove, mutilate, destroy, or secrete any books, records, computer records, or other
information.
Mortgage Call Reports - the Mortgage Call Report is a quarterly report of condition an entity submits
through NMLS. These reports are comprised of two parts: The state-level “Residential Mortgage Loan
Activity Report” and the entity level “Financial Condition Report.” Due quarterly, within 45 days of
the end of the calendar quarter
State Department Obligations – The state regulator authority must establish a process whereby MLOs
may challenge information entered into the NMLS. The State regulatory authority may be
responsible for setting, or resetting as necessary, renewal or reporting dates. Also, must establish
requirements for amending, transferring, or surrendering a license or any other license status change
that it deems necessary for participation in the NMLS. All fees related to renewal must be submitted
thru the NMLS.
Additional Authority - in order to carry out the purposes of the SAFE Act, the state regulatory
authority may:
• Retain attorneys, accountants, or other professionals and specialists as examiners, auditors, or
investigators to conduct or assist in the conduct of examinations or investigations.
• Enter into agreements or relationships with other government officials or regulatory
associations in order to improve efficiencies and reduce regulatory burden by sharing
resources, standardized or uniform methods or procedures, and documents, records,
information, or evidence obtained under this section of the SAFE Act.
• Use, hire, contract, or employ public or privately available analytical systems, methods, or
software to examine or investigate the licensee, individual, or person subject to the SAFE Act.
• Accept and rely on examination or investigation reports made by other government officials,
within or outside of this state.
• Accept audit reports made by an independent certified public accountant for the licensee,
individual, or person subject to the SAFE Act in the course of that part of the examination,
covering the same general subject matter as the audit and may incorporate the audit report in
the report of the examination, report of investigation, or other writing of the state regulatory
authority.

169 | P a g e
8.4 Definitions and Documents
This section of the study guide contains important terminology from the SAFE Act, Regulation H and
the model law from CSBS and AARMR. The most common definitions included in the SAFE Act Law
include:
• Administrative and clerical tasks are the receipt, collection and distribution of information
that is common in the processing or underwriting of a loan in the mortgage business. The term
is also used to describe communication that is designed to obtain common information from a
consumer. In general, an individual who only performs administrative or clerical tasks and
doesn’t negotiate with or give advice to borrowers does not need a loan originator license.
• The American Association of Residential Mortgage Regulators (AARMR) is a national
association of individuals who are charged with administering and regulating various aspects
of residential mortgage lending. It played a key role in the formation of the NMLS-R and in the
drafting of the model licensing law.
• An application is a request for a residential mortgage loan and includes the borrower-related
information that lenders commonly use when considering the request. Someone who takes an
application from a consumer is generally considered to be acting as a loan originator, even
when gathering application information over the phone or the Internet.
• The Conference of State Bank Supervisors (CSBS) is a national organization of state bank
supervisors who are charged with ensuring that state banking institutions adhere to certain
standards. The organization played a key role in the formation of the NMLS-R and in the drafting
of the model licensing law.
• Depository Institution - the term depository institution means any bank or savings and
includes any credit union.
• Dwelling - TILA Section 103(v) defines dwelling as: A residential structure or mobile home
which contains one-to-four-family housing units, or individual units of condominiums or
cooperatives.
• Federal Banking Agencies - The term Federal Banking Agencies refers to any of the following:
o The Board of Governors of the Federal Reserve System
o The Comptroller of the Currency
o The Director of the Office of Thrift Supervision
o The National Credit Union Administration
o The Federal Deposit Insurance Corporation
• An immediate family member is a spouse, child, sibling, parent, grandparent or grandchild. An
individual who only originates loans with or on behalf of an immediate family member doesn’t
need a loan originator license. Note: This term also includes step (stepparents, stepchildren,
stepsiblings) and adoptive relationships.
• An independent contractor is someone who performs mortgage-related duties and isn’t
supervised or directed by a licensed or registered loan originator. An independent contractor
who otherwise only performs the same tasks as a loan processor or underwriter must still be
licensed as a loan originator.
• Individual - The term individual means a natural person.
• A loan originator is someone who takes residential mortgage loan applications and offers or
negotiates the terms of such loans in exchange for compensation or gain. Most loan
170 | P a g e
 originators must be licensed. Be aware that the term “loan originator” can refer to an
individual or a company. In practice, the term “MLO” (or “mortgage loan originator”) is
sometimes used to describe an individual who is a loan originator.
• A loan processor or underwriter is someone who is supervised by a licensed or registered loan
originator and performs clerical or support duties. A loan processor or underwriter only needs
to be licensed as a loan originator under certain circumstances, such as when performing work
for more than one company at a time.
• Mortgage Loan Originator is an individual who, for compensation or gain, or in the
expectation of compensation or gain, takes a residential mortgage loan application, or offers
or negotiates terms of a residential mortgage loan.
Exemptions - The term “mortgage loan originator” does not include:
o An individual engaged solely as a loan processor or underwriter working as an employee
paid on a W-2, except as otherwise provided by state law;
o A person or entity that only performs real estate brokerage activities and is licensed or
registered in accordance with state law, unless the person or entity is compensated by a
lender, a mortgage broker, or other mortgage loan originator or by any agent of such
lender, mortgage broker or other mortgage loan originator; and
o A person or entity solely involved in extensions of credit relating to timeshare plans, as
that term is defined in section 101(53D) of Title 11, United States Code.
• A nontraditional mortgage product is any mortgage product that isn’t a 30-year, fixed-rate
loan.
• Nationwide Mortgage Licensing System and Registry is a mortgage licensing system
developed and maintained by the Conference of State Bank Supervisors and the American
Association of Residential Mortgage Regulators for the licensing and registration of licensed
mortgage loan originators.
• Person refers to any of the following: Natural person, Corporation, Company, Limited
liability company, Partnership or Association.
• A registered loan originator is a loan originator who is registered with the NMLS-R and
employed by a depository institution, a subsidiary of a depository institution or an
institution regulated by the Farm Credit Association. A registered loan originator generally
does not need to be licensed. Is registered with and maintains a unique identifier through
the Nationwide Mortgage Licensing System and Registry (NMLS).
• A residential mortgage - According to the SAFE Act, the term residential mortgage loan
means any loan primarily for personal, family, or household use that is secured by a
mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as
defined in section 103(v) of the Truth in Lending Act) or residential real estate upon which is
constructed or intended to be constructed as a dwelling (also as defined by TILA).
• Residential Real Estate - The term residential real estate means any real property located in
the state upon which is constructed or intended to be constructed as a dwelling (as defined
under TILA).
• Representations to the Public - An individual engaging solely in loan processor or underwriter
activities shall not represent to the public, through advertising or other means of
communicating or providing information, including the use of business cards, stationery,
brochures, signs, rate lists or other promotional items, that such individual can or will perform
171 | P a g e
 any of the activities of a mortgage loan originator.
• Real Estate Brokerage Activity - For purposes of the SAFE Act, the term real estate brokerage
activity means any activity that involves offering or providing real estate brokerage services to
the public, including: Acting as a real estate agent or real estate broker for a buyer, seller,
lessor, or lessee of real property; Bringing together parties interested in the sale, purchase,
lease, rental, or exchange of real property; Negotiating, on behalf of any party, any portion of
a contract relating to the sale, purchase, lease, rental, or exchange of real property or,
Engaging in any activity for which a person engaged in the activity is required to be registered
or licensed as a real estate agent or real estate broker under any applicable law.
• A state-licensed loan originator is a loan originator who is licensed by his or her state,
registered with the NMLS-R and isn’t employed by entities mentioned in the definition of
“registered loan originator”. If you are reading this study guide, you are likely planning on
becoming (or have already become) a state-licensed loan originator.
• State Regulatory Registry, LLC is a wholly- owned subsidiary of CSBS that runs the NMLS-R.
• A unique identifier is a number or other identifier that is assigned to a loan originator by the
NMLS-R in order to identify the person and track his or her conduct in the mortgage-lending
business. The unique identifier must appear on various documents, including on
advertisements. The term unique identifier means a number (or other identifier) assigned by
protocols established by the Nationwide Mortgage Licensing System and Registry (NMLS)
designed to replace the social security number of the individual on mortgage loan
documents.

8.5 Persons Required to Be Licensed

An individual required to be licensed under the SAFE Act is an individual who is engaged in the
“business of a mortgage loan originator”; that is, an individual who acts as a residential mortgage loan
originator with respect to financing that is provided in a commercial context and with some degree of
habitualness or repetition.
Mortgage Loan Originator - The SAFE Act defines a mortgage loan originator as an individual who, for
compensation or gain or in the expectation of compensation or gain:
• Takes a residential mortgage loan application;
• Assists or offers to assist anyone who attempts to apply for a residential mortgage loan;
• Offers, discusses or negotiates terms of a residential mortgage loan for compensation or gain;
• Represents to the public through advertising of an ability to originate loans.
• Independent contractor processors/underwriters must register as a loan originator through
and obtain a unique identifier from the NMLS-R and obtain and maintain a valid loan
originator license from a state.
Under the SAFE Act, the definition of a mortgage loan originator does not include:
• Any individual who performs purely administrative or clerical tasks on behalf of a licensee.
• A person or entity that only performs real estate brokerage activities and is licensed or
registered in accordance with applicable state law, unless the person or entity is compensated
by a lender, a mortgage broker or other mortgage loan originator or by any agent of such
lender, mortgage broker, or other mortgage loan originator.
172 | P a g e
 • A person or entity solely involved in extensions of credit relating to timeshare plans.
• A loan processor or underwriter who does not represent to the public through advertising or
other means of communicating or providing information (including the use of business cards,
stationery, brochures, signs, rate lists, or other promotional items), that he or she can or will
perform any of the activities of a mortgage loan originator shall not be required to be a state-
licensed mortgage loan originator.
• Someone who is engaged in loan-related activities in connection with a loan that will be
secured by the person’s own residence.
• Someone who is offering or negotiating terms of a loan with or on behalf of an immediate
family member. (An immediate family member can be a spouse, child, sibling, parent,
grandparent or grandchildren. The term includes stepparents, stepchildren, stepsiblings and
adoptive relationships.)
• Someone who is engaging in loan-related activities in their official capacity at a government
agency or housing finance agency or non-profit organization.
• Someone who is originating loans within the proper context of an attorney-client relationship if
the person is an attorney and is not being compensated by a lender, mortgage broker or loan
originator.
• Someone who is a registered loan originator. (A registered mortgage loan originator is a loan
originator who is registered with the NMLS-R and is employed by a depository institution, a
depository institution’s subsidiary.
• A state is not required to impose SAFE Act licensing requirements on any individual loan
processor or underwriter who performs only clerical or support duties as an employee of a
mortgage lender or mortgage brokerage firm, and who performs those duties at the direction
of and subject to the supervision and instruction of an individual who is employed by the same
employer and who is licensed in accordance with state licensing of MLOs.

8.6 Taking an Application

The following actions constitute “taking an application” - Receipt by an individual, for the purpose of
facilitating a decision whether to extend an offer of loan terms to a borrower or prospective borrower,
of an application.
An individual “takes a residential mortgage loan application,” even if the individual has received the
borrower or prospective borrower's request or information indirectly.
• This means that an individual who offers or negotiates residential mortgage loan terms for
compensation or gain cannot avoid licensing requirements simply by having another person
“physically” receive the application from the prospective borrower, and then pass the
application to the individual.
An individual “takes a residential mortgage loan application,” even if the individual is not responsible
for verifying information. The fact that an individual who takes application information from a
borrower or prospective borrower is not responsible for verifying that information.

173 | P a g e
 • This example highlights the fact that just because an individual is a mortgage broker who
collects and sends information to a lender who makes the ultimate lending decision, that does
not mean that the individual who receives the information is not taking an application.
An individual “takes a residential mortgage loan application” even if the individual only inputs the
information into an online application or other automated system; or is not involved in approval of
the loan, including determining whether the consumer qualifies for the loan.
• Similar to an individual who is not responsible for verification, an individual can still “take a
residential mortgage loan application” even if he or she is not ultimately responsible for
approving the loan.
• A mortgage broker, for example, can “take a residential mortgage loan application,” even
though it is passed on to a lender for a decision on whether the borrower qualifies for the
loan and for the ultimate loan approval.
For the purpose of defining the term “loan originator,” the following actions DO NOT constitute
“taking an application”:
• Receiving an application in the mail and forwarding it to someone else without reviewing it.
• Explaining the content of an application to a borrower and where certain information should
be noted.
• Giving a general description of the lending process without discussing particular loan
products.
• Collecting basic identifying information from a borrower on behalf of a lender.
• For example, taking the borrower’s name, address and phone number over the phone or in a
reception setting for the purpose of forwarding the information to a licensed loan originator
for follow-up and/or setting an appointment for a licensed loan originator to contact the
borrower in order to take an application.

8.7 “Offer” or “Negotiate” - The Terms of a Loan.

An individual is offering or negotiating the terms of a loan if he/she is engaged in any of the following
activities:
• Presenting terms to a borrower.
• Attempting to reach a mutual understanding with a borrower regarding loan terms.
• Recommending, referring or directing a borrower to a lender or a set of loan terms in
accordance with an agreement with (or an incentive from) someone besides the borrower.
• Responding to a borrower’s request for a different rate or different fees on a pending loan
application by providing a revised offer (regardless of whether it’s accepted).
• In addition, an individual is offering or negotiating the terms of a loan in the following
scenarios:
o The person presents loan terms before verification of loan data is complete.
o The mortgage loan offer being made is conditional.
o Other individuals will be responsible for completing the loan process.
o The person taking the application lacks the authority to negotiate the rate or loan
terms.

174 | P a g e
 o The person doesn’t have the authority to bind the party who would be funding the
loan (i.e., a mortgage broker).
An individual is NOT offering or negotiating loan terms if he/she is engaged in any of the following
activities:
• Giving general information in response to borrower queries. General information includes
information about terminology, lending policies and lending-related services.
• Arranging the closing or other aspect of the loan process, as long as terms are only discussed
for the purpose of verifying what’s already been agreed to.
• Explaining the steps a borrower must take in order to receive an offer for a loan.
• Communicating to the borrower that a loan offer has been sent (without providing other
information about the offer).

8.8 OTHER EXEMPT ACTIVITIES: NOT REQUIRING LICENSURE

The following examples illustrate when an individual generally does not “engage in the business of a
mortgage loan originator”:
• An individual who acts as a mortgage loan originator in providing financing for the sale of that
individual’s own residence, provided that the individual does not act as a mortgage loan
originator or provide financing for such sales so frequently and under such circumstances that
it constitutes a habitual and commercial activity.
• An individual who acts as a mortgage loan originator in providing financing for the sale of a
property owned by that individual, provided that such individual does not engage in such
activity with habitualness.
• A parent who acts as a mortgage loan originator in providing loan financing to his or her child.
• An employee of a government entity who acts as a mortgage loan originator only pursuant to
his or her official duties as an employee of that government entity.

8.9 License Qualifications

Applicants for a state mortgage loan originator license, working for a mortgage broker or mortgage
banker, must:
• Must complete at least twenty (20) hours of NMLS-approved prelicensing education, which
includes these national topics: Federal law and regulation (3 hours), Ethics, including fraud
and consumer protections, and fair lending (3 hours), Lending standards for non-traditional
mortgage products (2 hours), and Elective (12 hours).
• Submit to a background check (including fingerprints, state and national criminal check).
• Provide personal history and experience. The NMLS uses a generic application, known as the
MU4. The NMLS does not give a person their license, only a state can give a license to
someone. The MU4 is the application for any state, it includes information all states require
on their license.
• Provide authorization to obtain an independent credit report and information relative to any
administrative, civil or criminal findings. This would be considered a soft pull and can be used
for multiple applications as long as those applications happen within the same 30-day period.

175 | P a g e
 Once that 30-day period is up, if the licensee wishes to obtain a license in another state a new
credit report will be pulled.
• Never have had a mortgage loan originator license revoked in any government jurisdiction.
• Not have been convicted of, or pled guilty or nolo contendere to, a felony in a domestic,
foreign or military court during the seven-year period preceding the date of the application
for licensing and registration or at any time preceding such date of application, if such felony
involved an act of fraud, dishonesty, or a breach of trust or money laundering (any pardon of
a conviction is not considered a conviction).
• The applicant has demonstrated fiscal responsibility, character and general fitness such as to
command the confidence of the community and to warrant a determination that the
mortgage loan originator will operate honestly, fairly and efficiently within the purposes of
this Act.
• The applicant has completed the pre-licensing education requirement.
• The applicant has passed a written test that meets the test requirement.
• The applicant has met the protection options required by the State Regulatory Authority;
either a net worth or surety bond requirement, or paid into a state recovery fund.
Annual Reports – Mortgage Broker: Mortgage brokers must typically submit annual reports of
condition to the state thru the NMLS by March 31 each year. Mortgage Loan Originators usually file
annual call reports with the NMLS.
Character and Fitness - The model state language of the SAFE Act indicates that an applicant must
demonstrate financial responsibility, character and general fitness such as to command the
confidence of the community and to warrant a determination that the mortgage loan originator will
operate honestly, fairly, and efficiently within the purposes of the Act.
A person has shown that he or she is not financially responsible when he or she has shown a disregard
in the management of his or her own financial condition. A determination that an individual has not
shown financial responsibility may include, but not be limited to:
• Current outstanding judgments, except judgments solely as a result of medical expenses.
• Current outstanding tax liens or other government liens and filings.
• Foreclosures within the past three years.
• A pattern of seriously delinquent accounts within the past three years.
Sponsorship Requirement - In order to receive a Loan Originator’s license, an applicant must have a
sponsoring employer. The NMLS-R will keep records of with whom each Loan Originator is employed
and the state agency must be notified through the NMLSR when sponsorship changes.

8.10 Education and Testing Requirements

In order to become licensed, a loan originator candidate must successfully complete a 20-hour pre-
license course. The NMLS-R is responsible for approving courses and education providers.
At a minimum, the 20-hour pre-license course must satisfy the following rules regarding course topics
and timing:
• Three hours of the course must focus on federal laws and federal regulations.
• Three hours of the course must focus on ethics topics. (Examples of ethics topics are fraud,

176 | P a g e
 consumer protection and fair lending issues.)
• Two hours of the course must focus on nontraditional mortgage products. (A nontraditional
mortgage product is any mortgage product other than a 30-year, fixed rate mortgage.)
• Electives (12 hours)

The National Exam - Once pre-license education has been completed, a loan originator candidate
must successfully complete a written exam developed by the NMLS-R. This exam consists of 125
questions, of which 115 will be scored and ten will be unscored.
• Candidates must pass the exam with a score of 75% or higher.
• A candidate who fails the exam can retake it again up to three times as long as there is at
least a 30-day gap between tests. After the third failure, that candidate must wait at least
six (6) months before taking the test again.
• Retest after Lapse of License: A licensed MLO who fails to maintain a valid license for a
period of five (5) years or longer shall retake the test.
The national component covers these topics:
Content Area Percentage of Test
Federal Mortgage-Related Laws 23%
General Mortgage Knowledge 23%
Mortgage Loan Origination Activities 25%
Ethics 16%
Uniform State Content 13%

Venue of Education — Pre-licensing education may be offered either in a classroom, online or by any
other means approved by the Nationwide Mortgage Licensing System and Registry.
Reciprocity of Education — The pre-licensing education requirements approved by the Nationwide
Mortgage Licensing System and Registry for any state must be accepted as credit towards completion
of pre-licensing education requirements in any State.

8.11 License Renewal, Continuing Education & License Maintenance

Loan originator licenses must be renewed each year no later than December 31st. In order for a
renewal to be possible, the licensee must continue to have met the license qualifications (including
continuing education and renewal fees).
In order to maintain and renew their license, loan originators must complete at least eight (8) hours of
continuing education each year.
A loan originator who teaches a continuing education course can receive up to two (2) hours of credit
for every hour taught.
At a minimum, the eight (8) hours of annual continuing education must consist of the following topics
and timings:

177 | P a g e
 • At least three (3) hours must be instruction on federal law and federal regulations.
• At least two (2) hours must be instruction on ethics topics. (Examples of ethics topics are
fraud, consumer protection and fair lending issues.)
• At least two (2) hours must be instruction on nontraditional mortgage products. (A
nontraditional mortgage product is any mortgage product other than a 30-year, fixed-rate
loan.)
• Elective (1 hour)
Each jurisdiction may impose additional continuing education requirements. Mortgage loan
originators cannot get credit for the same continuing education class twice in consecutive years.
Credit for completing a continuing education course will only be applied to the year in which the
course is completed. The same course can’t be completed more than once in the same year or in
consecutive years.
If a formerly licensed person wants to become licensed again, continuing education for the person’s
last year of licensure must be completed first. This is done through the completion of a “Late CE”
course (in the case of a lapse in licensing).
Courses and education providers must be approved by the NMLS-R.
Relicensing Education Requirements - A person previously licensed under the SAFE Act (subsequent
to the effective date of the Act) applying to be licensed again must prove that he has completed all of
the continuing education requirements for the year in which the license was last held.
Successive Year Rule - A licensed mortgage loan originator may only receive credit for a continuing
education course in the year in which the course is taken, and may not take the same approved
course in the same or successive years to meet the annual requirements for continuing education.
Instructor Credit - A licensed mortgage loan originator who is an approved instructor of an approved
continuing education course may receive credit for the licensed mortgage loan originator’s own
annual continuing education requirement at the rate of two (2) hours’ credit for every one (1) hour
taught.
CE Formats - continuing education that is taken to meet the minimum of 8 hours for license renewal
must be completed with an approved NMLS education provider by December 31 of each calendar
year. Formats allowed for CE include live class, live class equivalent and instructor-led online, also CE
requirements may be satisfied by completing a Self-Paced Online course. Self-paced online is a
distance learning format that is a timed, controlled format that allows the student to start and stop
the material and complete it over and undefined period of time.
Lapse in License – A licensed mortgage loan originator who subsequently becomes unlicensed must
complete the continuing education requirements for the last year in which the license was held prior
to issuance of a new or renewed license. A licensed mortgage loan originator who fails to maintain a
valid license for a period of five (5) years or longer shall retake the test, not taking into account any
time during which such individual is a registered mortgage loan originator.
License renewal window – The window for license renewal is November 1 to December 31.
License Expiration – The license of a mortgage loan originator failing to satisfy the minimum

178 | P a g e
standards for license renewal will expire on December 31st. The Commissioner may adopt procedures
for the reinstatement of expired licenses consistent with the standards established by the NMLS-R.
“Inactive” License Status Designation - If a licensee is inactive for more than 5 years, they are
required to take the National Test Component with Uniform State Test again.

8.12 Background Check and License Issuance

In connection with an application for licensing as a mortgage loan originator, the applicant shall, at a
minimum, furnish to the NMLS information concerning the applicant’s identity, including:
• Fingerprints for submission to the Federal Bureau of Investigation (FBI), and any governmental
agency or entity authorized to receive such information for a state, national and international
criminal history background check.
o Fingerprints must be less than 90 days old.
• Personal history and experience in a form prescribed by the NMLS including:
• Authorization for the NMLS and the state regulatory authority to obtain an independent credit
report obtained from a consumer reporting agency described in Section 603(p) of the Fair Credit
Reporting Act (FCRA).
• Credit report authorization less than 90 days old.
• Records related to any administrative, civil or criminal findings by any governmental jurisdiction.
• Any other information deemed necessary by the NMLS or state regulatory authority.
Issuance of License - The minimum standards for licensing and registration as a state-licensed
mortgage loan originator shall include the following:
Financial Stability - License applicants must submit their identity, including fingerprints, to the NMLS-
R. As part of this submission, applicants must consent to a series of criminal background and credit
checks. The purpose of these checks is to verify that an applicant exhibits fiscal responsibility,
character and general fitness to serve the public as a loan originator. An applicant who lacks these
traits will not be issued a license.
If a loan originator’s errors or misconduct result in negative financial consequences for consumers,
there must be a safeguard in place to help facilitate the payment of compensation. States can work
toward this requirement by choosing any of the following options:
• Require that loan originators maintain a net worth that is based on the dollar amount of their
originated loans. (If this option is chosen, the loan originator might be able to substitute an
employer’s net worth.)
• Require that loan originators maintain a surety bond, the value of which is based on the dollar
amount of their originated loans. (If this option is chosen, originators must file a new bond if
money is ever recovered from one. Again, this requirement may be fulfilled at the company
level as long as the bond covers the individual MLOs.)
• Require that loan originators pay into a state recovery fund.
• Note that some of the options listed above can be satisfied by a licensed mortgage business on
behalf of its individual loan originators.

179 | P a g e
8.13 Surety Bond, Net Worth, and State Fund
Pursuant to PL 110-289, Title V, Section 1508(d)(6), each state must choose one of the following
options:
• Required Surety Bond
• Required Minimum Net Worth
• Required State Fund
Surety Bond - Under this option, each mortgage loan originator must be covered by a surety bond. In
the event that the mortgage loan originator is an employee or exclusive agent of a person subject to
the SAFE Act, the surety bond of such person, subject to this Act, can be used in lieu of the mortgage
loan originator’s surety bond requirement.
The surety bond must provide coverage for each mortgage loan originator in an amount and form as
prescribed by the State Regulatory Authority. The State Regulatory Authority may promulgate rules or
regulations with respect to the requirements for such surety bonds as are necessary to accomplish the
purposes of the SAFE Act.
The penal sum of the surety bond must be maintained in an amount that reflects the dollar amount of
loans originated as determined by the State Regulatory Authority.
When an action is commenced on a licensee’s bond, the State Regulatory Authority may require the
filing of a new bond. Immediately upon recovery upon any action on the bond, the licensee must file a
new bond.
Minimum Net Worth - A minimum net worth must be continuously maintained for mortgage loan
originators. In the event that the mortgage loan originator is an employee or exclusive agent of a
person subject to the SAFE Act, the net worth of such person subject to this Act can be used in lieu of
the mortgage loan originator’s minimum net worth requirement.

Minimum net worth must be continuously maintained in an amount that reflects the dollar amount of
loans originated as determined by the State Regulatory Authority. The State Regulatory Authority may
promulgate rules or regulations with respect to the requirements for minimum net worth as are
necessary to accomplish the purposes of this Act.

State Fund - Each state choosing this option must draft unique language establishing a state recovery
fund. The fund is paid into by the state-licensed mortgage loan originator and the state-licensed
mortgage entity at the time of state mortgage license application and annual state license renewal.

8.14 UNIQUE IDENTIFIER

Unique Identifier - Before originating any loans, a loan originator must be issued a unique identifier. A
unique identifier is a number or other identifier that is assigned to a loan originator by the NMLS-R in
order to identify the person and track his or her conduct in the mortgage-lending business.
Once the unique identifier has been issued, the loan originator must include it on all applications,
solicitations and advertisements, including business cards and websites.

180 | P a g e
 • If the marketing materials reference the company only, the company's unique identifier must
be used.
• If the marketing materials and business cards are issued in the name of the mortgage loan
originator, then the marketing materials and business cards require the MLO's unique
identifier.
• All disclosures require the MLO's unique identifier.
To the greatest extent possible, states should use a loan originator’s unique identifier in place of the
person’s Social Security number. However, the identifier can only be used by the states in order to
fulfill the purposes of the SAFE Act and its rules.
NMLS Requirements - The NMLS-R clearly has an important role in the licensing and regulation of loan
originators. In summary, here are several general requirements that are related to the NMLS-R:
• State-licensed loan originators must register with the NMLS-R.
• Enforcement actions and licensing violations must be reported to the NMLS-R by the states.
• The unique identifier issued by the NMLS-R must appear on all of a licensee’s advertisements
and on various other documents.
• Education courses and education providers must be approved by the NMLS-R.
• License applicants must submit their identity, including fingerprints, to the NMLS-R.
• Licensees must submit “Mortgage Call Reports” to the NMLS-R.
Advertising - The NMLS unique identifier is required on all marketing materials, applications,
required disclosures and business cards. If the marketing materials are referencing the company
only, the company’s unique identifier must be used. If the marketing materials and business cards are
issued in the name of the mortgage loan originator, then the marketing materials and business cards
require the MLO’s unique identifier. All disclosures require the MLO’s unique identifier.

8.15 COMPLIANCE - PROHIBITED CONDUCT AND PRACTICES

The model law from CSBS and AARMR lists several activities that a loan originator is not allowed to
engage in. A licensee can be disciplined for any of the following acts:
• Attempting to defraud borrowers, lenders or any person.
• Engaging in any unfair or deceptive practice.
• Soliciting or entering into a contract that allows the loan originator to earn a fee or
commission even if no loan is obtained.
• Soliciting, advertising or entering into a contract for specific interest rates, points or other
financing terms that aren’t actually available.
• Failing to make disclosures as required by state or federal law.
• Failing to comply with state or federal laws, rules or regulations.
• Making false or deceptive statements or representations.
• Negligently making any false statement or intentionally omitting facts in connection with
information that is being filed with a government agency or the NMLS-R or an investigation
being conducted by one of these entities.
• Making any payment, threat or promise to any person in order to influence their independent
judgment regarding a residential mortgage loan.

181 | P a g e
 • Making any payment, threat or promise to any appraiser in order to influence their
independent judgment regarding a property’s value.
• Collecting, charging or attempting to receive illegal fees.
• Conduct any business covered by the SAFE Act without holding a valid license as required
under the Act, or assist or aid and abet any person in the conduct of business under the SAFE
Act without a valid license as required under the Act.
• Requiring or causing a borrower to obtain property insurance in an amount greater than the
property’s replacement cost.
• Failing to account for money belonging to someone as part of a residential mortgage
transaction.
• Making any payment, threat or promise, directly or indirectly, to any person for the purposes
of influencing the independent judgment of the person in connection with a residential
mortgage loan, or make any payment, threat or promise, directly or indirectly, to any appraiser
of a property, for the purposes of influencing the independent judgment of the appraiser with
respect to the value of the property.
• Collecting, charging, attempting to collect, or charging or using or proposing any agreement
purporting to collect or charge any fee prohibited by the SAFE Act.
• Causing or requiring a borrower to obtain property insurance coverage in an amount that
exceeds the replacement cost of the improvements as established by the property insurer.
• Failing to truthfully account for monies belonging to a party to a residential mortgage loan
transaction.
• Making, in any manner, any false or deceptive statement or representation, or optional add-
on, including, with regard to the rates, points, or other financing terms or conditions for a
residential mortgage loan, or engage in bait and switch advertising.
• According to the model law, a loan originator who commits a licensing violation or engages in
a prohibited activity can be fined up to $28,474 as of January 12, 2018 (previously $25,000).

8.16 MLO TRANSITIONAL AUTHORITY

The SAFE Act was amended in 2018 with the passage of the Economic Growth, Regulatory Relief, and
Consumer Protection Act of 2018 to mandate that all states implement transitional authority to MLOs
seeking to become licensed in other states or who seek to move from a bank to a non-bank lender.
What is “Temporary Authority” to act as a mortgage loan originator (MLO) provided by the
amendments?”
– qualified MLOs who are changing employment from a depository institution1 to a
state-licensed mortgage company, and
– qualified state-licensed MLOs seeking licensure in another state,
Are allowed to originate loans while completing any state-specific requirements for licensure such as
education or testing for up to 120 days while they are applying to the state agency for their new
license.

182 | P a g e
 CHAPTER 8 QUIZ
1) Although the state has the authority to issue penalties, which of the following penalties is the
state regulatory authority NOT allowed to administer?
a. Civil sanction
b. License revocation
c. Monetary payment
d. Prison sentence

2) A loan originator is:

a. A person who only performs real estate brokerage activities and is not compensated by a
lender, a mortgage broker, or other loan originator.
b. A person or entity solely involved in extensions of credit relating to timeshare plans.
c. An individual who takes a residential mortgage loan application and offers or negotiates terms
of a residential mortgage loan for compensation or gain.
d. A person who only handles clerical or data entry functions.

3) How long must an applicant wait to receive a new license if they have previously had their license
revoked?
a. 7 years
b. 10 years
c. 5 years
d. Once an individual’s license has been revoked, that person is never eligible for a future license.

4) The SAFE Act made it the responsibility of the states to use unique identifies instead of
a. Driver’s license numbers
b. Federal tax ID numbers
c. Social security numbers
d. Telephone numbers

5) Which of the following individuals would be exempt from licensing under the SAFE Act?
a. Sydney, a registered mortgage loan originator who is an independent contractor.
b. Lanita, an administrative assistant who negotiates the terms of a residential mortgage loan on
behalf of other loan originator while he is on vacation.
c. Raquel, who negotiates the terms of a residential mortgage loan on behalf of her best friend.
d. Terrence, who negotiates the terms of a residential mortgage loan on behalf of his sister.

183 | P a g e
6) Which incident from 15 years ago would NOT automatically disqualify an applicant for an MLO
license?
a. conviction for felony fraud
b. conviction for felony money laundering
c. revocation by the state of a mortgage broker’s license
d. conviction for felony assault

7) In order to renew your license, you must annually complete which of the minimum requirements
pertaining to Continuing Education?
a. 3 hours of Federal Law, 2 hours of Ethics, 2 hours of non-traditional and 1 Elective
b. 2 hours of Federal Law, 2 hours of Ethics, 2 hours of non-traditional and 2 Electives
c. 3 hours of Federal Law, 2 hours of Ethics, 1 hours of non-traditional and 2 Electives
d. 2 hours of Federal Law, 3 hours of Ethics, 2 hours of non-traditional and 1 Elective

8) If an MLO is applying for a NMLS license he must provide all of the following EXCEPT
a. credit report.
b. evidence of completion of the mandatory 8-hour education requirement.
c. Live-scan/background check.
d. a personal residence and employment history.

9) The Regulatory Authority may impose penalties for each violation up to, and not exceeding:
a. $28,474
b. $10,000
c. $100,000,00
d. The Regulatory Authority is not permitted to impose penalties.

184 | P a g e
 Appendix
End of Chapter Quiz Answer Sheet
List of Acronyms Chart
Chronology of Federal Financing Laws
Calculating Income Chart
Loan Estimate
Closing Disclosure
Glossary
National Component with Uniform State Test Reference List

185 | P a g e
 END OF CHAPTER – ANSWER SHEET

CHAPTER 1 QUIZ

1) A ____________ is a written instrument using real property to secure repayment of

a debt.
Answer: C -A Mortgage is a written instrument using real property to secure repayment of a
debt.

2) Company or individual who, brings borrowers and lenders together for loan origination on the
primary market is a _____________.
Answer: B - Mortgage Broker is a company or individual who, brings borrowers and lenders
together for loan origination

3) When borrowers and MLOs come together to negotiate terms and close mortgage loan
transactions, this is referred to as
Answer: C - When borrowers and lenders negotiate mortgage terms and close mortgage loans,
they are acting in the primary market.

4) Which statement about Ginnie Mae is TRUE?

Answer: B - Section 1011 of Subtitle A of Title X created the Consumer Financial Protection
Bureau (CFPB) whose task is to enforce consumer financial protection laws.

5) Which of the following government sponsored enterprises (GSE) holds the largest amount of
home loan mortgages?
Answer: C - The Federal National Mortgage Association (FNMA/Fannie Mae) is the nation’s
largest investor in residential mortgages. Fannie Mae was originally chartered as a GSE by
Congress in 1938 to provide liquidity and stability to the U.S. housing and mortgage markets,
primarily as a place for lenders to sell their FHA-insured loans.

CHAPTER 2 QUIZ
1) The Consumer Financial Protection Bureau was created by the___________________.
Answer: A - The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-
Frank Act) established the CFPB. [see http://www.consumerfinance.gov/the-bureau/]

186 | P a g e
2) Diana files a complaint with her mortgage servicer, how long does the servicer have to
acknowledge receipt of Diana’s complaint?

Answer: A - Borrower complaints to servicers - Loan servicers have five (5) days to acknowledge
a borrower’s complaint and 45 days to resolve or explain their position.

3) _______________ is a disclosure that provides notice regarding the lender’s intentions on

transferring or retaining the servicing of the loan.
Answer: B - Mortgage Servicing Disclosure provides notice regarding the lender’s practices of
transferring or retaining the servicing of the loan. Servicing refers to the process of collecting the
principal, interest and escrow account payments on the loan, sending required notices and handling
all borrower inquiries. Citation: escrow statement

4) Under RESPA section ________ it is illegal for a property seller to require the buyer to use a
particular title insurance company, either directly or indirectly, as a condition of sale?
Answer: C = Under RESPA section 9 it is illegal for a property seller to require the buyer to use a
particular title insurance company, either directly or indirectly, as a condition of sale unless the
seller pays for the title insurance and all other title-related fees.

5) The definition of a “Complete Application” according to RESPA, includes all of the following
EXCEPT the
Answer: C - Most recent two months of bank statements - A “complete application” is defined as the
receipt of a borrower’s name, social security number (s), gross monthly income, the subject property
address, the loan amount, and an estimate of value of the subject. An MLO is prohibited from
collecting documents that verify the information related to the application before providing the
Loan Estimate.

6) A lender may not use ____on the Loan Estimate in the “property address” section.
Answer: A - N/A – A lender is prohibited from using the term “N/A” on the Loan Estimate. The MLO
should leave the space blank rather than insert another phrase.

7) Which regulation requires disclosure of the Annual Percentage Rate (APR) in advertising?
Answer: B - TILA requires disclosure of the Annual Percentage Rate (APR) in advertising

8) TILA applies when credit is payable by written agreement in __________ installments.

Answer: A - TILA applies when credit is payable by written agreement in more than four installments

187 | P a g e
9) A higher-priced loan is a one that ________
Answer: D = A higher priced loan is a loan where the annual percentage rate is measured against
the current average prime offer rate.

10) A high cost loan is one that is defined as a mortgage loan (first lien) where the APR exceeds the
average prime offer rate by__________________
Answer C - The transaction’s annual percentage rate (APR) exceeds the applicable average prime
offer rate by more than 6.5 percentage points for most first lien mortgages.

11) How long must the closing disclosure me kept?

Answer: B - Lenders must retain the Closing Disclosure for five (5) years and the Loan Estimate for
three (3) years.

12) A Qualified Mortgage may contain all of the following terms except?
Answer: A - A qualified mortgage is defined by a maximum loan term of 30 years.

13) The TILA-RESPA Integrated Disclosures do not apply to all of the following except:
Answer: A - The TRID rule doesn’t apply to the following types of mortgage loans:
– Home equity lines of credit (HELOC),
– Reverse mortgages,
– Mortgages for mobile homes not secured by real estate,
– Loans from anyone who funds no more than five loans in a calendar year (typically sellers
assisting in financing properties that they are selling).

14) How long must the loan estimate disclosure be kept?

Answer: B - Records of Loan Estimates must be kept by creditors for at least three (3) years

15) If the loan estimate has been revised after receiving information establishing changed
circumstances affecting settlement costs, loan terms, or borrower requested changes – when
must a revised loan estimate be provided to the borrower.
Answer: D - A revised Loan Estimate must be provided within 3 business days of receiving
information establishing changed circumstances affecting settlement costs, loan terms, borrower
requested changes.

16) Which of the following would allow a 10% cumulative tolerance?

Answer: D - Recording fees.

188 | P a g e
17) Which law requires MLOs to provide borrowers with a Loan estimate of potential closing costs?
Answer: D - TILA requires the disclosure of the Loan Estimate to borrowers within 3 business days of
a completed application.

18) Which fee can be collected prior to delivery of the Loan Estimate?
Answer: B - Credit report fee- RESPA and TILA regulations both mandate that only the credit report
fee (bona fide) can be collected prior to the borrower’s receipt of all four mandated disclosures.

CHAPTER 3 QUIZ
1) Which regulations is designed to ensures that all consumers are given an equal chance to obtain
credit?
Answer C. - ECOA is a federal law that ensures that all consumers are given an equal chance to
obtain credit.

2) The _____________ addresses fairness in the extension of credit relating to housing and other
housing related discrimination practices.
Answer: A - The Fair Housing Act– addresses fairness in the extension of credit relating to
housing and other housing related discrimination practices.

3) The Civil Rights Act of 1866 prohibits what type of discrimination in property transactions?
Answer: B - The Civil Rights Act of 1866 prohibited discrimination in the sale or lease of
residential or commercial property based on race or ancestry.

4) The Fair Housing Act prohibits discrimination based on race, color, religion, sex, and
Answer: C - The Fair Housing Act of 1968 added the protected classes of disability/handicap and
familial status to the list of protected classes established by the Civil Rights Act of 1866.

5) Which law requires lenders to document how they are serving the housing needs within the
communities in which they do business?
Answer: D - The Home Mortgage Disclosure Act (Regulation C) requires creditors to disclose the
race, ethnicity, and gender of the applicant in order to monitor a lender’s compliance with the
Fair Housing Act and ECOA. (remember – HMDA deals with the “housing” needs CRA deals with
the “credit” needs of the community.)

6) Which Act specifically prohibits blockbusting?

Answer: C - The Fair Housing Act prohibits redlining, blockbusting and steering in any real estate
or mortgage credit transaction.

189 | P a g e
7) Which regulation requires credit reporting agencies to verify information that is under dispute and
limits how long negative information can remain on a credit report?
Answer: C - Regulation V – The Fair Credit Reporting Act requires credit reporting agencies to
verify information that is under dispute and limits how long negative information can remain on
a credit report

8) Denise reviewed her credit report and discovered a few discrepancies and would like to dispute
them – once disputed, how long does the credit reporting agency have to respond to the dispute?
Answer: A - Right to Dispute Negative or inaccurate information - the consumer reporting
agency must correct or delete inaccurate, incomplete, or unverifiable information within 30 days
of receipt of the dispute.

9) ______ is a statement that has information about your credit activity and current credit situation
such as loan paying history and the status of your credit accounts. Credit reports often include
Answer: B - A credit report is a statement that has information about your credit activity and
current credit situation such as loan paying history and the status of your credit accounts. Credit
reports often include

10) The FCRA mandates that a credit reporting bureau remove unpaid tax liens after:
Answer: C - Unpaid federal tax liens may be retained on credit reports forever.

11) ____________ requires credit card issuers to assess the validity of change of address requests.
Answer: A - Section 114 Rules requires credit card issuers to assess the validity of change of
address requests.

12) The Red Flags Rules are also known as

Answer: D - The Red Flag Rules are found in Section 114 of the Fair and Accurate Credit
Transaction Act.

13) According to the GLB Act, a person who completes a single transaction with a creditor is known as
a(n)
Answer: B - A consumer is identified by the Gramm-Leach-Bliley Act as a person who only closes
a single transaction with a creditor and who does not have an ongoing relationship with the
creditor.

14) The penalty per occurrence per day for violating the National Do Not Call regulations is
Answer: D - The National Do Not Call Registry regulations, administered by the FTC, set the
maximum penalty for violations at $$41,484 per incident

190 | P a g e
15) The Mortgage Assistance Relief Services regulation applies to _______________
Answer: B - MARS provides regulations for the mortgage modification services of a mortgage
originator or lender.

16) Under the Bank Secrecy Act requires loan originators report suspicious activity that might be a sign
of tax evasion, money laundering, or other possible criminal activity. MLOs are required to report
any suspicious activity exceeding $_____________.
Answer: D - The act also requires that loan originators report suspicious activity that might be a
sign of tax evasion, money laundering, or other possible criminal activity. MLOs are required to
report any suspicious activity exceeding $5,000.

CHAPTER 4 QUIZ
1) Which type of mortgage is funded by the United States Department of Agriculture?
Answer: A - USDA Loans (aka Section 502 loans) are funded by the USDA.

2) Maria is applying for an FHA loan on a house with an appraised value of $135,000 and a sales price
of $141,000. What is the required minimum investment?
Answer: B - The minimum down payment (3.5%) for FHA insured loans is calculated using the
lower of the sale price or appraised value. $135,000 x .035 = $4,725.

3) What type of loans requires a one-time variable funding fee?

Answer: A - While there are no upfront or monthly mortgage insurance premiums required for
VA loans, borrowers must pay a non-refundable one-time variable funding fee at closing for
guaranteeing the loan.

4) The required housing/total debt ratio requirement necessary to qualify for an FHA loan is:
Answer: D - FHA’s underwriting manual, the debt-to-income ratios for an FHA insured loan are
31% for the housing ratio and 43% for the total debt-to-income ratio

5) A residual income calculation shows the

Answer: B - When the residual is calculated, the amount of cash flow remaining for the veteran
to pay for family support (e.g., auto insurance, clothing, food, entertainment, and other debt) is
computed. This amount is compared with the residual table to ensure the veteran will have
ample monies for the items needed.

6) Financed MIP can be cancelled in which of the following situations?

Answer: D - Financed MIP cannot be canceled.

191 | P a g e
7) The annual Area Median Income for a county is $50,000. Using USDA guaranteed financing, what
is the maximum amount of gross annual income that the borrower can earn and qualify for USDA
guaranteed financing?
Answer C - A borrower using USDA financing can earn no more that 115% of the area median
income that is established in the area that the borrower wishes to purchase.

8) Which of FHA's “5 Cs of Underwriting” evaluates the borrower’s “willingness” to meet his monthly
payment obligations?
Answer: A - Character – borrows willingness to repay the debt (different than the borrower’s
“ability” to repay the loan.

9) Full VA entitlement can generally be restored to a veteran

Answer: B - If a seller has an existing VA loan, a buyer with a sufficient amount of entitlement
may assume the existing loan on its original terms, with the approval of VA or the lender. When
the assumption is approved, the buyer’s eligibility is substituted for the selling veteran’s
eligibility, and the seller’s entitlement used for the purchase is restored.

10) According to the SAFE Act, which of the following is a traditional mortgage?
Answer: C - A traditional Mortgage is defined as a 30-year Fixed

11) To determine the fully-indexed rate on an adjustable rate mortgage, the index is added to the
__________ ?
Answer: C - The index is added to the margin to determine the fully-indexed rate

12) What type of mortgage covers more than one parcel of land?
Answer: C - Blanket Mortgage - A blanket loan, or blanket mortgage, is a type of loan used to
fund the purchase of more than one piece of real property. Blanket loans are popular with
builders and developers who buy large tracts of land, then subdivide them to create many
individual parcels to be gradually sold one at a time.
13) What type of mortgage requires that the lender provide the borrower with the CHARM booklet?
Answer: B - A lender is required to give the loan applicant the Consumer Handbook on
Adjustable Rate Mortgages (CHARM), prepared by the Federal Reserve Board, within three
business days of loan application.

14) A promissory note calling only for payment of both principle and interest is classified as:
Answer: A - Fully Amortizing Loans (self-liquidating) - A loan is fully amortizing when the regular
monthly payments result in the principal balance being extinguished at the end of the loan term.

192 | P a g e
 Most fixed-rate loans are fully amortizing.

15) A clause that gives the lender certain stated rights when there is a transfer of ownership in the
property.
Answer: B - Alienation Clause - A clause within a loan instrument calling for payment of a debt in
its entirety upon the transfer of ownership of the secured property. Also called a "due on sale"
clause (aka due on sale clause).

16) Which document would require judicial foreclosure proceeding?

Answer: A - When borrower defaults on mortgage, lender may commence judicial foreclosure
action

17) A _____________ clause in a contract that gives the lender the right to charge the borrower a
penalty for paying off the loan early, such as when refinancing a loan.
Answer: B - Prepayment Clause – a clause in a contract that gives the lender the right to charge
the borrower a penalty for paying off the loan early, such as when refinancing a loan.

18) To foreclose a mortgage, a creditor

Answer: B - A mortgage requires judicial foreclosure. To begin the judicial foreclosure process, a
lender must file an action in court.

19) Which term describes the process by which a borrower pledges property as security for a loan
without giving up possession of it?
Answer: B - Hypothecation is the pledging of security for a note or loan without giving up
possession or use of the property.

CHAPTER 5 QUIZ
1) The appraisal must be re-certified if it will be _______ or older as of the date of the promissory
note.
Answer: C - The appraisal must be re-certified if it will be 120 days or older as of the date of the
promissory note, and a new appraisal is required after 180 days.

2) Which appraisal approach is BEST for appraising vacant land, new construction or for unusual or
special purpose?
Answer: A - The Cost Approach is best for relatively vacant land, new construction or for unusual
or special purpose. The cost approach utilizes the depreciated reproduction cost of a property as
replicated on a parcel of land.

193 | P a g e
3) Discount points are shown on the loan estimate as a ______
Answer: B - All origination points must be lumped together as the origination fee on the Loan
Estimate while discount points used to buy down the rate must be indicated as a charge the
borrower incurs for the interest rate selected.

4) Which of the following zone is considered a Flood Zone ________properties?

Answer: A - Flood Zone A is referred to the 100-year flood or an area exceeding a 1% chance of
being inundated by a flood. Flood insurance is always required when a borrower has a mortgage
lien on his property with a dwelling

5) Which appraisal approach would be used to appraise 10-unit apartment building?

Answer: C - The income approach, sometimes called the capitalization approach, is most widely
used with commercial or investment properties.

6) Kevin wants to get a loan to buy a house. When evaluating his credit obligations, which would
LEAST LIKELY be considered as debt?
Answer: B - Utilities and insurance premiums are not considered debts because they can, in
theory, be cancelled. Lenders assume borrowers would turn off their phones or cable service
before losing their houses

CHAPTER 6 QUIZ
1) When the initial loan amount is multiplied by the note rate, the result is the
Answer: A - When the loan amount is multiplied by the note rate, the result is the annual
interest charge.

2) Total housing expense

Answer: D - When dividing the loan amount by the lesser of the sale price or the appraised
value, the result is the loan-to-value.

3) When the PITI payment is divided by the gross monthly income, the result is known as the
Answer: D - When the PITI payment is divided by the gross monthly income, the result is the
housing or front debt-to-income ratio.

194 | P a g e
CHAPTER 7 QUIZ
1) _______is a tactic of luring consumers in with promises of low rates and specific products, and
then steering otherwise qualified buyers to other terms so that the MLO can earn a higher fee.
Answer: B - This is a tactic of luring consumers in with promises of low rates and specific
products, and then steering otherwise qualified buyers to other terms so that the MLO can earn
a higher fee.

2) __________occurs when a person actively hides information, or makes statements known to be

false or misleading.
Answer: A - Actual fraud occurs when a person actively hides information, or makes statements
known to be false or misleading.

3) The Penalty for Mortgage Fraud is _____________________.

Answer: D - Whoever knowingly executes, or attempts to execute, a scheme or artifice shall be
fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

4) Which situation is not likely to be considered predatory lending?

Answer: A - Offering a higher interest rate or a higher down payment to someone in a mortgage
transaction who has completed bankruptcy proceedings would not be predatory lending, as long
as the borrower did not qualify for a better loan due to credit or income factors.

5) Which situation would be considered a straw buyer?

Answer: C - A straw buyer involves a third party who allows their name and identity to be used
for the purpose of purchasing or refinancing a property.

6) Maria’s customer, Javier, purposely does not tell her that he just co-signed his nephew’s auto
loan. The credit report shows neither that loan nor a credit inquiry, and so that debt is not
considered when the lender preapproves him for a larger mortgage than he should have. Did
Maria do anything wrong?
Answer: A - If Mary is unaware of the credit entry or the terms of the new loan because her
client did not disclose them to her, she is not guilty of any omission and cannot be held
responsible for the omissions of her borrower.

7) Which of the following fraud scheme involves the seller's signature on the deed being forged and
the real homeowner is not even aware the property is being fraudulently transferred?
Answer: D – Deed scam - the seller's signature on the deed is forged, meaning the real
homeowner is not even aware the property is being fraudulently transferred. The deed is

195 | P a g e
 recorded; the thief mortgages the property with cash-out refinancing, and then pockets the money
and walks away without making a payment.

CHAPTER 8 QUIZ
1) Although the state has the authority to issue penalties, which of the following penalties is the
state regulatory authority NOT allowed to administer?
Answer: D - State (and federal) authorities are not authorized to impose a prison sentence for
violations of the law.

2) A loan originator is:

Answer: C - An individual who takes a residential mortgage loan application and offers or
negotiates terms of a residential mortgage loan for compensation or gain.

3) How long must an applicant wait to receive a new license if they have previously had their license
revoked?
Answer: D - Once an individual's license has been revoked, that person is never eligible for a
future license.

4) The SAFE Act made it the responsibility of the states to use unique identifies instead of
Answer: C - The SAFE Act made it the responsibility of the states to use unique identifies instead
of Social security numbers

5) Which of the following individuals would be exempt from licensing under the SAFE Act?
Answer: D - Of these examples, only Terrence is exempt from licensing requirements under the
SAFE Act. An independent contractor who performs the activities of a mortgage loan originator
is required to be licensed.

6) Which incident from 15 years ago would NOT automatically disqualify an applicant for an MLO
license?
Answer: D - A felony conviction from 15 years ago for any crime other than a financial crime
would automatically not keep an MLO candidate from obtaining a license.

7) In order to renew your license, you must annually complete which of the minimum requirements
pertaining to Continuing Education?
Answer: A - 3 hours of Federal Law, 2 hours of Ethics, 2 hours of non-traditional and 1 Elective

196 | P a g e
8) If an MLO is applying for a NMLS license he must provide all of the following EXCEPT_________
Answer: B - For an MLO, 8 hours is the continuing education requirement after a license is
granted.

9) The Regulatory Authority may impose penalties for each violation up to, and not exceeding:
Answer: A - The maximum amount of penalty for each act or omission shall be $28,474 as of
January 12, 2018 (previously $25,000)

197 | P a g e
 Chronology of Federal Financing Laws
YEAR LAW REGULATION PURPOSE PROVISIONS CURRENT
REGULATOR
1968 Federal Fair Prohibits Protected HUD
Housing Act discrimination classifications: race,
in housing religion, color, sex,
national origin,
familial status,
handicap status
1968 Truth in Lending Regulation Z Disclosure of Disclosures within 3 CFPB
Act (TILA) (12 CFR 1026) finance charges days from
and APR application; rescission
rights on non-
purchase mortgages;
advertising
restrictions
1968 Fair Credit Regulation V Regulates what Notify of adverse CFPB
Reporting Act (12 CFR 1022) credit reporting action based on
(FCRA) agencies can credit
do with
information
about
consumers
1968 National Flood Government- Flood hazard areas FEMA
Insurance Act subsidized have 1 percent
(NFIA) insurance for probability of flooding
property in in any given year
flood hazard
areas
1974 Real Estate Regulation X Requires GFE within 3 days of CFPB
Settlement (12 CFR 1024) lenders to application; use of
Procedures Act inform buyers HUD-1 form unless
(RESPA) of closing costs no buyer closing
costs; escrow limits;
prohibition of
kickbacks
1974 Equal Credit Regulation B Requires Fair Housing Act CFPB
Opportunity Act (12 CFR 1002) lenders to protections plus
(ECOA) extend credit to marital status, age,
individuals and public assistance
fairly status
1976 Home Mortgage Regulation C Lenders must Must track race, CFPB
Disclosure Act disclose how gender, income of
(HMDA) community applicants and
housing credit geographic area of
needs are met loans made

198 | P a g e
 Home Regulation Z Protects Restrictions on CFPB
Ownership
Equity Protection (12 CFR 1026) consumers certain loans and
Act (HOEPA) from unfair disclosures if fees
lending greater than $528, 8
practices on percent of the loan,
subprime loans or rate 10 percent
above Treasury rate
1998 Homeowner’s Cancellation of Owner can request CFPB
Protection Act mortgage cancellation at 80
insurance when percent or cancelled
balance automatically when
reaches 80 balance reaches 78
percent of Percent
original
property value
2003 Fair and (12 CFR 1022) Lenders must Disclose credit score, CFPB
Accurate
Credit make adverse items in
Transactions Act disclosures credit history, credit
(FACT Act) about credit reporting agency,
history to right to free credit
borrowers report
2004 USA Patriot Act (31 CFR 1010) Lenders must Name, DOB, address, U.S.
collect taxpayer ID, or alien Department of
identifying ID card Treasury
information
about loan
applicants
2008 SAFE Act (12 CFR 1007) Regulate Loan originators must CFPB
residential complete 20 hours of
mortgage NMLS-approved
brokers and prelicensing
MLOs by education and pass a
creating national and state-
licensing and specific exam
registration
requirements

199 | P a g e
200 | P a g e
201 | P a g e
FICUS BANK
4321 Random Boulevard • Somecity, ST 12340 Save this Loan Estimate to compare with your Closing Disclosure.

Loan Estimate LOAN TERM 30 years

PURPOSE Purchase
DATE ISSUED 2/15/2013 PRODUCT Fixed Rate
APPLICANTS Michael Jones and Mary Stone LOAN TYPE x Conventional FHA VA
123 Anywhere Street LOAN ID # 123456789
Anytown, ST 12345 RATE LOCK NO x YES, until 4/16/2013 at 5:00 p.m. EDT
PROPERTY 456 Somewhere Avenue Before closing, your interest rate, points, and lender credits can
Anytown, ST 12345 change unless you lock the interest rate. All other estimated
SALE PRICE $180,000 closing costs expire on 3/4/2013 at 5:00 p.m. EDT

Loan Terms Can this amount increase after closing?

Loan Amount $162,000 NO

Interest Rate 3.875% NO

Monthly Principal & Interest $761.78 NO

See Projected Payments below for your
Estimated Total Monthly Payment

Does the loan have these features?

Prepayment Penalty YES • As high as $3,240 if you pay off the loan during the
first 2 years
Balloon Payment NO
Projected Payments

Payment Calculation Years 1-7 Years 8-30

Principal & Interest $761.78 $761.78

Mortgage Insurance + 82 + —
Estimated Escrow + 206 + 206
Amount can increase over time

Estimated Total
Monthly Payment $1,050 $968
This estimate includes In escrow?
x Property Taxes YES
Estimated Taxes, Insurance $206
& Assessments x Homeowner’s Insurance YES
Amount can increase over time a month Other:
See Section G on page 2 for escrowed property costs. You must pay for other
property costs separately.

Estimated Closing Costs $8,054 Includes $5,672 in Loan Costs + $2,382 in Other Costs – $0
in Lender Credits. See page 2 for details.

Estimated Cash to Close $16,054 Includes Closing Costs. See Calculating Cash to Close on page 2 for details.

LOAN ESTIMATE 202ID|#P123456789

PAGE 1 OF 3 • LOAN age
203 | P a g e
204 | P a g e
205 | P a g e
206 | P a g e
207 | P a g e
208 | P a g e
209 | P a g e
 GLOSSARY
Acceleration clause: A portion of a lending agreement that forces the borrower to repay the
entire loan upon the first instance of borrower default.
Adjustable-rate mortgage (ARM): A type of mortgage instrument in which the interest rate
periodically adjusts up or down according to a specific index and pre-determined margin. ARM
transactions require the creditor to provide borrowers with a special ARM disclosure, as well as
a CHARM booklet.
Adjustment period: The amount of time during which a new interest rate will be in effect for an
adjustable-rate mortgage. New adjustment periods might occur after several months, every
year or every few years.
Administrative and clerical tasks: The receipt, collection and distribution of information that is
common in the processing or underwriting of a loan in the mortgage business. The term is also
used to describe communication that is designed to obtain common information from a
consumer. In general, an individual who only performs administrative or clerical tasks and
doesn’t negotiate with or give advice to borrowers doesn’t need a loan originator license.
Adverse action: An unfavorable credit decision rendered against a consumer made on the basis
of information contained on the credit application. If a lender takes adverse action against an
applicant, the lender must notify the applicant in writing. If the adverse action is taken as a
result of information contained on the credit report, the notice must also provide the name,
address and toll-free phone number of the credit bureau that supplied the information.
Affiliated Business Arrangement Disclosure (AfBA): A document that informs mortgage
applicants of any service providers that may be used in the loan transaction that are affiliated
with the lender. It must be provided to the borrower no later than the time the referral to the
affiliated business is made and is required when there is greater than a 1% common ownership
in the affiliated settlement service business. If the lender requires the use of an affiliated
provider (such as for a flood certification), then the disclosure must be given at application.
Alienation clause: A portion of a lending agreement that prohibits the borrower from
transferring title to the mortgaged property without the consent of the lender.
Alt-A loans: Loans in which the borrower represents too much risk to meet the underwriting
standards for a conforming loan but is not risky enough to be considered “subprime.”
American Association of Residential Mortgage Regulators (AARMR): A national association of
individuals who are charged with administering and regulating various aspects of residential
mortgage lending. It played a major role in the formation of the NMLS-R and in the drafting of
the model licensing law.
Annual percentage rate (APR): A measurement of the total cost of the credit, expressed as an
annual rate. The APR includes specific costs of financing, both those paid at the time of closing
and those paid over the term of the loan. It includes all items that are part of the finance
charge, such as interest, discount points, mortgage insurance premiums and administrative
fees.

210 | P a g e
Application: A request for a residential mortgage loan and includes the borrower-related
information that lenders commonly use when considering the request. Someone who takes an
application from a consumer is generally considered to be acting as a loan originator, even
when gathering application information over the phone or Internet.
ARM Disclosure: A disclosure required to be presented to the applicant within three days of
application on any ARM loan. This disclosure provides the applicant with information about the
specific ARM product for which they are applying, such as a historical index value.
Assumable: A term used to describe a loan in which a new borrower can take over the
payments of an existing borrower.
Balloon mortgage: A type of fixed-rate mortgage loan with monthly payments based on a 30-
year amortization schedule, setting a maturity date for a shorter period of time – usually five,
seven, 10 or 15 years. This allows the borrower to make lower monthly payments for that
shorter period of time, with a large payment of the full remaining principal balance and interest
due at the maturity date.
Bank Secrecy Act (BSA): A federal law requiring that financial institutions take steps to prevent
and report cases of money laundering.
Bridge loan: A short-term balloon loan that is paid back either through the sale of the current
property or through a subsequent mortgage loan. It is commonly used when borrowers are
buying a new home but still haven’t sold their current residence.
Business day: Depending on the law in question, either any date on which the creditor is open to
the public for carrying on substantially all of the creditor’s business functions (when providing the
initial Loan Estimate and any disclosures required under RESPA) OR any day except Sunday and
federal holidays (when providing the Closing Disclosure and other disclosure required under TILA
EXCEPT the Loan Estimate).
Capacity: In mortgage lending, the borrower’s ability to repay the loan (and service other debts
and obligations) based upon sufficient income.
Capital: In mortgage lending, the borrower’s ability to make a down payment, pay for closing
costs and fund any escrows or reserves required at closing.
Certificate of Reasonable Value (CRV): A document issued by the VA that establishes the value
of a property to be secured with a VA-guaranteed loan.
Changed circumstance: A material event or piece of information that is discovered after the
issuance of a Loan Estimate and has an impact on either the borrower’s settlement costs or the
borrower’s eligibility for a loan. A changed circumstance allows a loan originator to reissue the
Loan Estimate to reset applicable tolerances.
Chapter 7 bankruptcy: A common kind of bankruptcy in which a borrower might need to
liquidate assets in order to satisfy creditors.
Chapter 13 bankruptcy: A common kind of bankruptcy in which a borrower might need to enter
into a repayment plan with his or her creditors.

211 | P a g e
Character: In mortgage lending, the borrower’s willingness to repay the debt.
CHARM (Consumer Handbook on Adjustable Rate Mortgages) booklet: A booklet about
adjustable-rate mortgages that is issued by the Federal Reserve. It must be provided
within three business days of application if the loan is an adjustable-rate mortgage.
Closing costs: Also called “settlement costs,” all of the costs related to closing except the prepaid
or escrow items. Examples of closing costs are the origination fee, discount points, real estate
sales commission, attorney fees, survey charges, title insurance premiums, agency closing fees,
appraisal fees, credit report fees, termite report fees, recording fees, mortgage insurance
premiums, loan transfer or assumption fees, and more.
Closing Disclosure: A disclosure that provides a final accounting of the closing costs associated
with the transaction, as well as information about the cost of the credit itself (such as the loan’s
APR). Required to be provided to the borrower within three business days of application under
Regulation Z, the Closing Disclosure is part of the TILA-RESPA Integrated Disclosure rule and
replaced the HUD-1 Settlement Statement for most transactions.
Code of ethics: A policy statement and written guidelines that reflect the ethical principles of the
company and how its employees are supposed to act when dealing with the customers and/or
each other. It should contain clear and enforceable consequences for violations.
Collateral: In mortgage lending, the value of the property mortgaged as security for the loan.
Combined loan-to-value ratio (CLTV): The figure that is found by adding the loan amount of the
first lien plus the loan amount of any subordinate lien(s) and dividing that result by the
purchase price or appraised value, whichever is less.
Commercial bank: A financial institution organized to accumulate funds primarily through time
and demand deposits and to make these funds available to finance the nation’s commerce and
industry.
Compensating factors: Positive characteristics about a borrower that might help to offset some
negative information on the borrower’s application. For example, a high credit score might be a
compensating factor for a borrower who has a high debt-to-income ratio.
Conference of State Bank Supervisors (CSBS): A national organization of state bank supervisors
who are charged with ensuring that state banking institutions adhere to certain standards. The
organization played a major role in the formation of the NMLS-R and in the drafting of the
model licensing law.
Conforming loans: Loans that can be sold to Fannie Mae and Freddie Mac.
Construction loan: A loan intended to facilitate the new construction of improvements at a
property. Typically, a construction lender will require a low loan-to-value ratio and only release
funds as it receives evidence of actual completion of construction. Most construction loans
provide for interest-only repayment and a requirement to pay off the principal balance within a
limited time period following completion of construction.

212 | P a g e
Consumer Financial Protection Bureau (CFPB): A federal regulator created under authority of
the Dodd-Frank Act. This agency is housed under and funded directly by the Federal Reserve,
and has been tasked with rule-making for and enforcement of the majority of U.S. mortgage laws.
Consumer reporting agencies: Organizations that allow lenders to report and gather
information about a borrower’s credit history. This is the legal term for what are generally
referred to as “credit bureaus.” The three major consumer reporting agencies are Equifax,
Experian and TransUnion.
Contingent liability: A liability that may be incurred as the result of a future action. A good
example of this in a mortgage transaction is the debt that is produced when a person has co-
signed for another person’s debt (like a student loan) but the actual payments are being made by
the other person (known as the “primary obligor”). Such liabilities do NOT have to be taken into
consideration when calculating the borrower’s debt ratio if the payments have been made on-
time for the previous 12-month period by the primary obligor.
Conventional loan: Any loan that is not insured or guaranteed by the federal government.
Cost approach: A method of appraisal in which the appraiser estimates the value of the
property by calculating the cost of construction minus any depreciation, plus the value of the
site (land).
Credit: In mortgage lending, the amount of a borrower’s outstanding debt.
Credit union: A financial institution operating somewhat differently than other thrift
institutions. After deducting operating expenses and reserves, credit unions return their
earnings to their members.
Debt-to-income ratio: Monthly principal, interest, taxes and insurance payments plus other
debts (such as credit card debt, installment loan payments, alimony and child-support
payments) divided by the borrower’s gross monthly income. However, the ratio doesn’t include
other expenses, such as utility payments, food bills, educational expenses (other than student
loans), childcare expenses (other than child support payments), medical insurance premiums or
entertainment expenses. For most loans, the debt-to- income ratio cannot exceed 36%. It is
sometimes known as the “back-end ratio” or the “bottom ratio.”
Deed of trust: An arrangement by which the borrower actually conveys title to the secured
property to a third-party trustee for the life of the loan. Upon repayment of the debt, the
trustee transfers title back to the borrower. In some states, a deed of trust is used as a
substitute for a mortgage.
Defeasance clause: A portion of a lending agreement that requires the lender to execute a
release of lien or satisfaction of mortgage document upon full payment of the debt.
Derogatory credit: The result of not paying obligations on time. A borrower’s derogatory credit
might be reported to a credit bureau or might lead to a judgment being filed against the
borrower.

213 | P a g e
Discount points: Amounts charged by a lender to the borrower or seller in order to increase the
lender’s effective yield on the loan. One discount point is equal to 1% of the total loan amount.
An industry-standard benchmark is that for each discount point paid, the lender increases its
yield on the loan by 1/8%. From a borrower’s perspective, discount points are paid to achieve a
lower interest rate; without the payment of the discount points, the interest rate would be
higher for the life of the loan.
Disparate impact: A method of identifying discrimination through statistical analysis. Disparate
impact claims occur when a seemingly neutral (non-discriminatory) policy is implemented to
achieve a neutral result but ends up having a disproportionately negative impact on a protected
class.
Disparate treatment: A method of identifying illegal discrimination. Occurs when two people
(or groups of people) are treated differently based on membership in a protected class. For
example, offering coffee to one visitor to your office but not to another; should those people be
of different races, genders, ethnicities, etc., disparate treatment may have occurred.
Dodd-Frank Act: A federal law that addresses several aspects of mortgage lending and other
financial regulatory matters. It created the Consumer Financial Protection Bureau (CFPB) and
amended many other mortgage-related laws.
Down payment: The portion of a property’s purchase price that won’t be financed as part of the
mortgage loan.
Dual compensation: A prohibited act under the CFPB’s Loan Originator Compensation Rule, this
refers to a broker receiving compensation from multiple parties (such as the lender AND the
borrower) on the same transaction.
Easement: Formal right to traverse or use real property without ownership or possession. Often
granted to utility companies so that they may maintain infrastructure located on a property.
Recorded with the county in which the property is located, easements will appear on the title
report and, in certain limited circumstances, may raise questions from an underwriter or
attorney.
Encroachment: A fixture, such as a fence, that crosses the boundary line of one property onto
another. It can create adverse possession issues and a cloud on the property’s title.
Equal Credit Opportunity Act (ECOA): A federal law prohibiting discrimination in the granting of
credit. Creditors cannot discriminate on the basis of race, color, religion, national origin, sex,
marital status, age, receipt of income from public assistance programs or the fact that an
applicant has exercised his or her rights under the Consumer Credit Protection Act. It is
implemented by Regulation B.
Equitable right of redemption: The ability to avoid a foreclosure prior to, or at the time of, a
judicial sale of a property.
Equity: The value of the property minus any mortgage debt.

214 | P a g e
Equity stripping: A practice whereby the applicant’s equity is taken away by a mortgage lender.
Equity stripping can come in many forms, but in all cases, is viewed as predatory lending and
must be avoided.
Escrow payments: Funds used by the lender to pay the property tax bill and hazard insurance
premiums.
Extenuating circumstances: Events beyond a person’s control that may have a temporary
negative impact on his/her credit history. Death of a close family member or an unexpected job
loss are examples of extenuating circumstances that may be taken into account during the
underwriting process.
Fair Credit Reporting Act: A federal law regulating the users and use of consumer credit
information. Parts of the law are now implemented and enforced by the Consumer Financial
Protection Bureau, but parts of it remain with the Federal Trade Commission.
Fannie Mae: The common name for the “Federal National Mortgage Association,” which is a
government-sponsored enterprise that acts as a quasi-governmental agency for the purpose of
creating a secondary market for mortgages. It purchases loans on the secondary market and
turns groups of loans into mortgage-backed securities (MBS) through the securitization process.
Federal Home Loan Bank (FHLB) system: A system of GSEs owned by over 8,000 community
financial institutions. It provides advances to financial institutions in order for those institutions
to make residential mortgage loans.
FHA loans: Government-insured loans that are issued by HUD-approved primary lenders. They
are for one-to-four-family-unit dwellings and require at least a 3.5% down payment. They also
require the payment of mortgage insurance premiums. In general, a maximum housing ratio of
31% and a maximum debt-to-income ratio of 43% are required too.
Fiduciary relationship: A relationship between a financial professional, such as a mortgage loan
originator, and the consumers they are doing business with. Fiduciary duties require originators
to place the consumer’s best financial interests ahead of their own.
Finance charge: The total cost of the loan in dollars, including interest, points, mortgage
insurance, administrative fees or any other charge paid directly or indirectly by the consumer
and imposed directly or indirectly by the lender in connection with making the loan. The
finance charge does not include deposits into escrow accounts, appraisal fees or pest inspection
fees paid prior to the closing.
Financing contingency date: In real estate transactions, the contractually determined date by
which the buyer’s financing must be in place.
Fixed-rate mortgage: A type of mortgage loan in which the interest rate and payments remain
the same for the life of the loan. It is the opposite of an adjustable-rate mortgage.
Floating rate: A mortgage interest rate that has not been locked and is being allowed to move
(or “float”) with the market. Floating the rate will benefit the borrower if interest rates drop
between the time of application and closing and will be a detriment if interest rates increase.
The floating rate is ultimately locked in sometime prior to closing.

215 | P a g e
Force-placed insurance: Property insurance that is purchased by a lender when an owner’s
insurance is cancelled or not properly obtained. Lenders must provide notice before billing a
borrower for force-placed insurance. The charges passed on to the borrower for this insurance
must be reasonable.
Foreclosure: A proceeding to extinguish all rights, title and interest of the owner of a property
in order to sell the property and satisfy a lien against it. Foreclosures are initiated by lenders
when borrowers fail to make payments.
Fraud for profit: A willful misrepresentation of material facts on a mortgage loan application
with the intent of gaining money through the transaction. This type of fraud is more likely to be
committed by industry professionals/insiders and result in more damage to the victimized
creditor(s).
Fraud for property: Also called “fraud for housing,” this is a willful misrepresentation of
material facts on a loan application with the intent of gaining property. This type of fraud is
more likely to be perpetuated by borrowers and result in less damage to the creditor(s)
involved because the loan is typically paid in a timely manner.
Freddie Mac: The common name for the “Federal Home Loan Mortgage Corporation,” which is
a government-sponsored enterprise that was intended to provide a secondary market for
mortgages originated by savings and loan associations and create competition to Fannie Mae.
Like Fannie Mae, Freddie Mac also issues mortgage-backed securities (MBS).
Fully indexed rate: The amount of interest that is calculated by adding the index to the margin.
Unless caps prevent it, the fully indexed rate becomes an ARM’s interest rate at the start of
each adjustment period.
Ginnie Mae: A government-sponsored enterprise that guarantees interest payments on MBS
pools made up of only government-insured or government-guaranteed mortgages (such as
FHA, VA and USDA loans).
Good Faith Estimate (GFE): This disclosure, required under Regulation X, has been replaced by
the Closing Disclosure for most mortgage loans. It contains information on the known or
anticipated fees, charges or settlement costs that the mortgage applicant is likely to incur at the
settlement (closing) of the loan. It must be delivered within three business days of receiving or
preparing an application on loans that do not use the TRID disclosures.
Government-sponsored enterprise (GSE): A quasi-governmental agency. Fannie Mae and
Freddie Mac are examples of GSEs.
Gramm-Leach-Bliley Act (GLBA): A federal law that includes provisions to protect consumers’
personal financial information held by financial institutions. Some of the issues pertaining to
GLBA compliance include financial privacy rules, safeguard rules and pretexting rules.
Grossing up: Calculating how much tax the borrower would pay if this income were taxable and
then adding that figure to the gross amount received. This is commonly done when non-taxable
income is used to qualify a borrower.

216 | P a g e
Hedging: In mortgage lending, the attempt to minimize interest-rate risk by purchasing a
Treasury security or MBS to offset large movements in the rate markets.
High-cost mortgage loan: A mortgage loan with an annual percentage rate exceeding the
Average Prime Offer Rate (APOR) by more than 6.5% for a first-lien transaction or 8.5% for a
second-lien transaction, OR a mortgage loan with total points and fees exceeding 5% of the
loan amount. ALL high-cost loans must be compliant with the Home Ownership and Equity
Protection Act (HOEPA).
Home equity line of credit (HELOC): A revolving mortgage loan that allows the borrower to take
advances at his/her discretion up to an approved limit that represents a percentage of the
borrower’s equity in a property.
Home Equity Line of Credit Combined Loan-to-Value (HCLTV): The figure found by adding the
loan amount of the first lien plus the credit limit of the home equity line of credit (HELOC) and
dividing that result by the purchase price or appraised value, whichever is less. This is calculated
when a borrower wants to obtain multiple mortgage loans for the same property and at least
one of the loans is a home-equity line of credit (HELOC).
Home Loan Toolkit: A booklet that provides consumers information on shopping for a home
loan, common closing costs and reading required disclosures like the Loan Estimate and Closing
Disclosure. This booklet is published by the CFPB and must be provided to the applicant within
three business days of application on purchase transactions according to TILA/Regulation Z.
Home Mortgage Disclosure Act (HMDA): A federal law written as a response to public concerns
that lenders were redlining. Requires creditors to track demographic data on applications and
lending activity and report that data to the federal government on an annual basis.
Home Ownership and Equity Protection Act (HOEPA): A federal law that sets rules for high-cost
loans. A loan that is subject to HOEPA cannot feature a balloon payment, negative amortization
or a prepayment penalty and cannot be refinanced within one year by the original creditor
(other creditors may refinance the loan) unless doing so is “clearly in the best interests of the
borrower.”
Homeowners Protection Act (HPA): A federal law requiring that private mortgage insurance be
automatically cancelled when the loan-to value ratio (LTV) on an owner-occupied single-family
residence reaches 78% or less of the original value of the property. Borrowers have the ability to
request cancellation of mortgage insurance when loan-to-value reaches 80% of the appraised
value.
Housing ratio: The sum of monthly principal, interest, taxes and insurance divided by the
borrower’s gross monthly income. For some loans, such as those sold to Freddie Mac, the
housing ratio cannot exceed 28% without compensating factors. The ratio is sometimes called
the “front-end ratio” or the “top ratio.”
Identity theft: A fraud, committed or attempted, using the identifying information of another
person without authority. Many businesses are required to implement a program that detects
and prevents identity theft.

217 | P a g e
Identity theft prevention program: A written program designed to detect the warning signs of
identity theft in day-to-day operations. Businesses defined as “financial institutions” under the
Fair and Accurate Credit Transactions Act’s Red Flags Rule are required to implement this kind
of program. Because of the broadness of the definition, all mortgage brokerages and mortgage
banks are covered by it.
Immediate family member: A spouse, child, sibling, parent, grandparent or grandchild. An
individual who only originates loans with or on behalf of an immediate family member doesn’t
need a loan originator license.
Independent contractor: Someone who performs mortgage-related duties and isn’t supervised
or directed by a licensed or registered loan originator. An independent contractor who
otherwise only performs the same tasks as a loan processor or underwriter must still be licensed
as a loan originator.
Index: An economic measurement that is used to make periodic interest adjustments for an
adjustable-rate mortgage. The index plus the margin equals the fully indexed rate.
Initial cap: A rate cap that applies only to the first rate adjustment period and indicates the
number of percentage points that a rate may increase over the introductory rate.
Intent to proceed: An indication by a potential borrower that he or she is interested in moving
forward with a mortgage transaction after delivery of the Loan Estimate. The intent to proceed
might be provided orally in a face-to-face or phone conversation or in some written format.
However, a creditor cannot interpret a borrower’s silence as an intent to proceed with the
transaction. In general, no fees (other than a fee to obtain a credit report) can be charged to a
consumer until there is an intent to proceed.
Interest-only loan: A fixed-rate mortgage that allows the borrower to pay only the interest due
on the mortgage for a period of years, after which the loan becomes fully amortizing.
Introductory rate: An initial rate for an adjustable-rate mortgage that is often lower than the
fully indexed rate. The introductory rate will often expire after anywhere from a few months to
a few years.
Judicial foreclosure: A method of foreclosure that requires court action in order to complete
the process. Typically found in states that use the mortgage document as the security
instrument.
Jumbo loans: Loans for amounts that are greater than the standards of Fannie Mae and Freddie
Mac.
Kickback: Something of value that is given in exchange for a referral. Kickbacks are prohibited
by RESPA.
Legitimate business need: One circumstance under which a lender can receive a consumer’s
credit information from a credit bureau. The disclosure must relate to a business transaction
that was initiated by the consumer or must be intended to help a creditor review an account in
order to determine whether a consumer continues to meet the terms of that account.

218 | P a g e
Lender-paid compensation (LPC): Compensation paid by a lender to a mortgage broker for
originating a loan funded by that lender. This compensation is different from the old yield-
spread premium (YSP) in that it does not vary based on the terms or conditions of a loan.
Typically, LPC is paid as a percentage of the loan amount and does not vary from transaction to
transaction in a given lender/broker relationship.
Life cap: A rate cap that sets a maximum number of percentage points that the rate can
increase over the start rate for the life of the loan.
Life expectancy set-aside: An account, similar to an escrow account, which must be created if a
borrower with a reverse mortgage cannot prove an ability to pay future property taxes and
insurance premiums.
Loan Application Register (LAR): A log of applications taken by a creditor. Required to be kept
up to date and provided to the federal government once per year under the Home Mortgage
Disclosure Act (HMDA).
Loan Estimate: A disclosure containing information on settlement costs and the cost of credit
itself. Required to be provided to the applicant within three business days of application under
Regulation Z, the Loan Estimate is part of the TILA-RESPA Integrated Disclosure rule that
replaced the Good Faith Estimate and Truth in Lending disclosure for most mortgage loans.
Loan flipping: An abusive practice in which a loan is refinanced without any tangible net benefit
for the borrower. A form of equity stripping.
Loan originator: Someone who takes residential mortgage loan applications and offers or
negotiates the terms of such loans in exchange for compensation or gain. Most loan originators
must be licensed. Be aware that the term “loan originator” can refer to an individual or a
company. In practice, the term “MLO” (or “mortgage loan originator”) is sometimes used to
describe an individual who is a loan originator.
Loan processor or underwriter: In the context of the SAFE Act, this is someone who is
supervised by a state-licensed or federally registered lending institution and who performs
clerical or support duties. Loan processors and underwriters do not typically need to hold loan
originator licenses unless they are performing duties for more than one company at a time.
Loan-to-value ratio (LTV): The loan amount divided by the lesser of the purchase price or
appraised value of the property. The higher the loan-to-value ratio on a given loan, the less
investment from the applicant in the form of a down payment is required.
Mailbox rule: If disclosures such as the Loan Estimate and Closing Disclosure are mailed to the
applicant, they are deemed received on the third business day after they are placed in the mail.
Margin: The number that a lender adds to an index to determine the interest rate of an ARM.
The margin never changes during the life of the loan.
MI factor: Another word for the premium on a mortgage insurance policy. It can be paid
monthly, annually or in a lump sum.

219 | P a g e
Misrepresentation: A characteristic of mortgage fraud and negligence, this involves a
misstatement or omission of a material fact on a loan application. A fact is considered to be
material if knowledge of that fact would have caused a lender to consider a different outcome
on a credit application.
Money laundering: Bringing illegally obtained funds into and out of the financial system in a
manner that evades law enforcement. Under the Bank Secrecy Act, many businesses, including
non-depository mortgage banks and mortgage brokers, must implement a program that detects
and prevents money laundering.
Monthly MIP: The monthly charge for FHA mortgage insurance. It is calculated by multiplying
the base loan amount by a factor, then dividing by 12. The borrower pays the MIP as part of the
monthly mortgage payment, along with principal, interest, taxes and insurance (PITI).
Mortgage: A document that creates a lien upon the subject property for the security of
payment of the debt.
Mortgage-backed securities (MBS): Pooled mortgages that have been converted into bonds
and sold to the public.
Mortgage banker: An individual, firm or corporation that originates and sells loans secured by
mortgages on real property. Mortgage bankers may occasionally service loans, although that
tends not to be their primary function. Some states actually require a separate license or
endorsement to allow a mortgage banker to engage in the act of servicing loans.
Mortgage broker: A firm or individual that, for a commission, matches borrowers and lenders.
A mortgage broker does not retain servicing, does not use its own funds and is not a lender.
Mortgage Loan Servicing Disclosure: A notice regarding the lender’s practices of transferring or
retaining the servicing of the loan. It must be provided to the borrower within three days of the
loan application.
National Do Not Call Registry: A list of phone numbers that cannot be called for telemarketing
purposes. Sellers of goods or services (including loan origination services) are required to
search the registry every 31 days and delete from their call lists phone numbers that are in the
registry.
Nationwide Mortgage Licensing System and Registry (NMLS-R): A licensing system and registry
that was established in connection with the SAFE Act.
Negative amortization: The result of an interest payment being less than the amount of
interest actually due. The difference between what is paid and what is due is added back to the
loan principal. In effect, this can force the borrower to make longer payments (or make bigger
payments) later in order to retire the debt.
Negligence: Unintentional misrepresentation on a loan application. The difference between
negligence and fraud is that negligence does not involve intent on the part of the perpetrator(s),
though it may still be a crime if it is serious enough.
Non-conforming loans: Loans that do not satisfy requirements of Fannie Mae and Freddie Mac
and cannot be sold to those GSEs.

220 | P a g e
Non-judicial foreclosure: A form of foreclosure that only requires administrative actions rather
than the involvement of a court. Typically found in states that use the trust deed as the security
instrument.
Nontraditional mortgage product: Any mortgage product that isn’t a 30-year, fixed-rate loan.
In order to obtain and renew their licenses, loan originators must complete courses with an
emphasis on nontraditional mortgage products.
Notice of Escrow Analysis: A required summary of payments into and disbursals from a
borrower’s escrow account. It must be provided to the borrower every year.
Novation: The process of releasing one borrower from a lending agreement and substituting a
new borrower.
Opt-out right: A consumer’s right, under the Privacy Rule of the Gramm-Leach-Bliley Act, to limit
some sharing of his or her financial information.
Origination fee: A fee or charge for the work involved in the evaluation, preparation and
submission of a proposed mortgage loan. The origination fee is limited to 1% of the loan
amount for FHA and VA loans.
Overt discrimination: A method of identifying illegal discrimination. Occurs when a business
has a known policy that refuses to serve, or provides different levels of service to, members of a
protected class based solely on their membership in the protected class (i.e., refusing service to
Hispanic borrowers).
Per-diem interest: The amount of daily interest payable under a loan. Per-diem interest is
determined by first multiplying the principal amount of the loan by the interest rate to
determine the annual amount of interest payable under the loan. Next, that annual amount is
divided by 360 days to determine the per-diem interest amount. Finally, the per-diem interest
amount is multiplied by the number of days remaining in the month of closing, including the
date of closing.
Periodic cap: A rate cap that applies to all subsequent adjustment periods and indicates the
number of percentage points that a rate may increase or decrease from the rate that was in
effect prior to the adjustment.
PITI: The monthly sum of principal, interest, taxes and insurance owed by the borrower. For
some loans, such as those sold to Freddie Mac, the monthly PITI cannot exceed 28% of the
borrower’s gross monthly income.
Positive amortization: The payment of a debt with equal periodic installments of both principal
and interest, so that a loan will be paid off at the end of a specific period of time.
Prepayment penalties: Fees that must be paid by the borrower if the loan’s principal is repaid
in full prior to the loan’s expiration. Many loans in today’s market cannot have prepayment
penalties that last more than three years or that are greater than 3% during the loan’s first year,
2% during the loan’s second year and 1% during the loan’s third year.
Pretexting: The use of false pretenses in order to obtain consumers’ personal financial
information. It is prohibited by the Gramm-Leach-Bliley Act.

221 | P a g e
Privacy policies: Required under the Privacy Rule of the Gramm-Leach-Bliley Act, these are
written documents that detail the financial institution’s practices for collection of non-public
personal information about customers and with whom that information is shared. A privacy
policy must be provided to your customer when they first become your customers, annually for
as long as they remain your customers and anytime the policy changes for as long as they remain
your customers. A short-form version of the policy must be readily available to consumers (not
customers) in a place like the company website.
Private mortgage insurance (PMI): Insurance that protects the lender against losses that result
from default by the borrower. It is required when the loan-to-value ratio is greater than 80%
and must be cancelled when the loan-to-value ratio is equal to or less than 78%. Other kinds of
mortgage insurance (not PMI) are used for FHA and VA loans.
Processor: An individual who performs clerical duties for a lender or mortgage broker, including
ordering independent verifications of employment, income and assets, preparing a loan for
underwriting and assisting in clearing of any underwriting conditions.
Promissory note: A document that evidences the borrower’s obligation to repay the debt to the
lender. Unlike the mortgage, the promissory note does not state that the property will be used
as collateral in order to obtain the loan.
Qualified mortgage (QM): One type of mortgage loan defined in the Dodd-Frank Act. If a loan is
a qualified mortgage, the lender is presumed to have complied with the Dodd-Frank’s ability-to-
repay requirements.
Rate cap: A limitation on the amount an interest rate may increase or decrease either at the
adjustment date or over the lifetime of the loan. Sometimes referred to as an “adjustment
cap,” a rate cap can dictate how much a rate can increase during the loan’s first adjustment
period, during each adjustment period or during the entire life of the loan.
Rate floor: The lowest interest rate to which an ARM may adjust.
Rate lock: An agreement between the borrower and lender for a specified period of time in
which the lender will keep a specific interest rate, loan fee and discount points available for the
borrower. Some lenders charge a fee for locking a rate at application.
Real estate contract: A written contract between a buyer and seller of real property, setting
forth the price and the terms of the sale. This contractual agreement contains all the terms and
conditions upon which the seller agrees to sell and the buyer agrees to buy.
Real Estate Settlement Procedures Act (RESPA): A federal law that allows borrowers to receive
pertinent and timely disclosure regarding the nature and costs of the real estate settlement
(closing) process. The law also protects consumers against abusive practices (such as kickbacks)
and places limitations on the use of reserve accounts. It is implemented by Regulation X.
Reconciliation: The process by which an appraiser examines several estimates of value and
bases the property’s final estimate of value on the intended use of the property.
Red flags: Warning signs of a particular activity. Many businesses are required to have
programs that detect the red flags of identity theft and money laundering.

222 | P a g e
Redemption period: A period of time in which the borrower may pay off the loan in full in order
to avoid a foreclosure sale of the property.
Refinance transactions: Loan transactions in which one mortgage loan is satisfied and replaced
by another mortgage loan. Refinance transactions on an owner-occupied primary residence give
borrowers a three-day right of rescission.
Registered loan originator: A loan originator who is registered with the NMLS-R and employed
by a depository institution, a subsidiary of a depository institution or an institution regulated by
the Farm Credit Association. A registered loan originator generally does not need to be licensed.
Regulation B: The federal regulation that implements the Equal Credit Opportunity Act (ECOA).
Rules from this regulation are enforced by the Consumer Financial Protection Bureau.
Regulation C: The federal regulation that implements HMDA. The Consumer Financial
Protection Bureau has primary rule-making and enforcement authority over this regulation.
Regulation X: The document containing the rules for implementing the Real Estate Settlement
Procedures Act (RESPA). The rules are enforced by the Consumer Financial Protection Bureau.
Regulation Z: The federal regulation that implements the Truth in Lending Act (TILA). Rule-
making and enforcement power under TILA is handled by the Consumer Financial Protection
Bureau.
Reserves: A borrower’s remaining liquid assets after the closing of a real estate transaction.
Residential mortgage loan: Any loan primarily for personal, family or household use that is
secured by a mortgage, deed of trust or other equivalent security interest on a dwelling (or on
real estate where a dwelling is being constructed or will be constructed). The requirements
mentioned in this guide relate to the origination of residential mortgage loans. They do not
necessarily apply to loans tied to commercial or industrial properties.
Residual income: The amount of income that a borrower will have left after taxes, debt
payments and childcare expenses to purchase necessities such as food or gasoline.
Retail lending: Direct lending to borrowers (as opposed to lending that is facilitated by a
broker).
Reverse mortgage: A mortgage loan in which the lender makes periodic payments at a fixed
rate to the borrower using the borrower’s equity in the home as security. This is often used to
provide income to retirees or elderly borrowers based upon their existing home equity.
Typically, no repayment is required until the property is sold or the borrower is deceased.
Right of rescission: The borrower’s right to cancel certain refinance transactions. Under the
Truth in Lending Act, this right last for three business days, not including Sundays or legal
holidays.
Sales comparison approach: A method of appraisal in which value is determined by looking at
the recent sale price of similar properties.

223 | P a g e
Seasoned funds: Funds that have been in the account for a minimum period of time. Many
lenders will require that money intended for a down payment or closing costs come from
seasoned funds.
Secondary market: The sector of the economy where existing mortgage loans (and the right to
collect borrower payments) are bought and sold. This market provides liquidity for lenders and
creates standardization in regard to credit requirements, loan types and loan documents.
Securitization: The pooling of multiple loans into single investment vehicles.
Service release premium: An amount paid by an investor to a mortgage banker in exchange for
the right to service (collect payments on) the loan after closing.
Servicer: The party collecting payments from borrowers. Servicing can be handled by the original
lender or by a third party.
Servicing: The process of collecting the principal, interest and escrow account payments on the
loan. Servicing may be done by the lender or transferred to another party.
Servicing Transfer Disclosure: A document informing the borrower that servicing of a loan has
been transferred to another entity. It must be provided to the borrower no later than 15 days
before servicing rights are transferred to a new institution.
State: In regard to the SAFE Act, any state of the United States, the District of Columbia, any
territory of the United States, Puerto Rico, Guam, American Samoa, the Trust Territory of the
Pacific Islands, the Virgin Islands and the Northern Mariana Islands.
State-licensed loan originator: A loan originator who is licensed by his or her state, registered
with the NMLS-R and isn’t employed by entities mentioned in the definition of “registered loan
originator.” If you are reading this study guide, you are likely planning on becoming (or have
already become) a state-licensed loan originator.
State Regulatory Registry, LLC: A wholly owned subsidiary of CSBS that runs the NMLS-R.
Statutory right of redemption: The ability to cure a foreclosure even after a judicial sale has
occurred.
Steering: Directing a borrower to a given loan or loan product to increase compensation when
that loan is not in the consumer’s interest. This is prohibited by the Dodd-Frank Act.
Subordinate financing: Loans secured by subordinate liens.
Subordinate lien: Any mortgage or other lien that has priority lower than that of the first
mortgage. Such a lien is also referred to as a “junior lien.”
Subprime loan: A loan in which the borrower represents too high of a risk for it to be sold to
Fannie Mae or Freddie Mac.
Suspicious activity reports (SARs): Reports that must be filed with the Treasury Department
whenever a person engages in suspicious aggregate transactions of $5,000 or more. These
reports are required by the Bank Secrecy Act.

224 | P a g e
Teaser rate: For an ARM, an introductory interest rate that is lower than the fully indexed rate
at the time of closing.
Thrift: Sometimes known as a “savings and loan,” a mutual or stock association chartered and
regulated by the Office of the Comptroller of the Currency. Traditionally, deposits are invested
in residential mortgage loans.
Title insurance: A type of insurance coverage that protects against defects in title that were not
listed in a title report or abstract. Separate coverage exists for owners and lenders. Owners’
policies are typically issued each time property is sold, covering the buyer. Lenders’ policies are
typically required each time a new mortgage loan is closed, including refinance transactions.
Title report: A document typically prepared by an attorney setting forth the condition of title.
Title insurance can be purchased to protect the lender or the owner from defects in title that
were not found in the title report.
Total interest percentage (TIP): The total amount of interest paid over the life of the loan
expressed as a percentage of the loan amount. It appears on both the Loan Estimate and Closing
Disclosure.
Treble damages: The maximum penalty allowed under RESPA for requiring a buyer/borrower to
use a specific title company; three times the amount of the title fees assessed to the borrower.
Trigger terms: Items in an advertisement that automatically require the disclosure of other items
in the same advertisement. Trigger terms are the amount or percentage of down payment, the
number of payments or period of repayment, the amount of any payment and the amount of
any finance charge.
Truth in Lending Act (TILA): A federal law designed to promote the informed use of consumer
credit (i.e., credit to a consumer primarily for personal, family or household purposes) by
requiring disclosure about its terms and cost. It does not apply to loans for commercial or
business purposes. It is implemented by Regulation Z.
Underwriter: The individual responsible for reviewing an application (including all related
documentation) evaluating the strength of the application (often in conjunction with findings
from an automated underwriting system) and issuing a credit decision.
Undisclosed concessions: Monies related to a purchase transaction passing between buyer and
seller that are not disclosed on the Closing Disclosure or HUD-1 settlement statement (for loans
not using the CD). ALL credits and concessions must be listed on the settlement statement.
Uniform Residential Appraisal Report (URAR): The most common form used by appraisers to
appraise a single-family home. Also called the “1004.”
Uniform Residential Loan Application (URLA): The common application form for residential
mortgage loans. It is also known as the “1003.”
Uniform Settlement Statement: A form containing a complete list of the actual settlement costs
(not an estimate) that will be charged at the closing. Also known as the “HUD-1,” this disclosure
has been replaced by the Closing Disclosure for most mortgage loans.

225 | P a g e
Unique identifier: A number or other identifier that is assigned to a loan originator by the
NMLS-R in order to identify the person and track his or her conduct in the mortgage-lending
business. The unique identifier must appear on various documents, including advertisements.
Upfront mortgage insurance premium (UFMIP): A one-time cost of FHA mortgage insurance
that is paid at closing. It is calculated by multiplying the loan amount by a factor.
VA entitlement: The portion of a VA loan that is guaranteed by the government.
VA funding fee: An amount paid by a veteran in order to help defray the costs of the VA loan
program. The size of the fee will depend on several factors, including the loan-to-value ratio,
the purpose of the loan, the veteran’s status and the number of times the veteran has obtained
a VA loan.
VA loans: Government-guaranteed loans that are made to owner-occupant veterans by private
lenders, such as banks, thrifts and mortgage companies.
Verification of deposit (VOD): Third-party verification of a borrower’s bank statements,
typically gathered by a loan processor.
Verification of employment (VOE): Third-party verification of a borrower’s employment,
typically gathered by a loan processor from an employer.
Veteran: A person who is currently serving in the U.S. Army, Navy, Air Force, Marine Corps or
Coast Guard, or who has been discharged from those services and has served a sufficient
amount of time to be eligible for the VA mortgage program.
Warehouse line of credit: A line of credit commonly used by mortgage bankers to fund loans.
Wholesale lenders: Entities that purchase and sell loans that have been originated by third
parties. Wholesale lenders may purchase loans with the intent to package the loans for sale to
secondary market investors; or they may purchase loans in order to service the loans
themselves.
Yield spread premium: An amount paid by an investor to a lender or mortgage broker at closing
to compensate the loan originator for making a loan at an interest rate that is higher than the
interest rate that the investor would have accepted for that loan. This type of compensation
was made illegal under the Dodd-Frank Act and the MLO Compensation Rule under TILA.

226 | P a g e
227 | P a g e
228 | P a g e
229 | P a g e
 ABOUT THE AUTHOR - ARTRICIA WOODS
Artricia Woods has been in the Mortgage & Real Estate business for over 18
years. She is currently a licensed real estate broker, trainer and owner of
Affinity Real Estate & Mortgage Services located in Southern California.

Her training classes, which she began teaching in 2000, are led throughout
California and are approved by both the Bureau of Real Estate and the
Nationwide Mortgage License System.

Prior to opening Affinity in 2010, Artricia received a Master’s in Business

Administration, a Bachelor’s in Business Management and has been active in
real estate since 1995.

Having a passion for helping others led her to obtain a teaching credential in
2000, after witnessing the U.S. housing market crash in 2009. Thus, she then
began focusing her training efforts on supporting agents, brokers &
homeowners by tackling foreclosure prevention, short sales and loan
modifications.

She has a strong desire and history of helping others obtain and maintain the
American Dream of Homeownership with hundreds of satisfied clients to back
her up!

For more information regarding Affinity Real Estate & Mortgage and our
training program - visit our website at www.mlotrainingacademy.com or call
800-991-6097.

Affinity Real Estate & Mortgage Services/Training

artricia@affinityreservices.com
www.mlotrainingacademy.com
https://www.facebook.com/artricia.affinity
https://www.linkedin.com/pub/artricia-woods/19/a21/372

'Never give up! Never give up! Never, never, never, give up!' Obstacles are inevitable; quitting
is optional! When you walk in faith and refuse to quit, God guarantees your obstacles won't
prevent your vision from being fulfilled." - Winston Churchill

230 | P a g e
Mortgage Loan Originator
(MLO) SAFE Act Manual
This textbook supports the live version of the flagship 20 hour CA-DBO
Prelicensing course. It is also used as a supplement to the online version of
the same course, a general study guide for those entering the mortgage
industry and as a reference source for industry professionals desiring to
remain current in an ever-changing mortgage regulatory and compliance
environment.

10070 ROSECRANS AVENUE * BELLFLOWER, CA 90706

Copyright© 2020, by Affinity Real Estate & Mortgage Training

ISBN-10: 0578429993
ISBN-13: 978-0578429991
1.27.2020

231 | P a g e