NMLS MLO Mortgage Loan Origination (SAFE MLO) Exam Exam Practice Test

Non-qualified mortgages (Non-QM) are designed to help borrowers who do not meet the standard documentation or income verification requirements of traditional qualified mortgages (QM). Non-QM loans provide more flexibility in underwriting guidelines and are often used by borrowers such as:

Self-employed individuals who may have inconsistent or difficult-to-verify income streams. These borrowers may use bank statements or asset-based verification instead of W-2 forms or tax returns to qualify for a loan.

Non-QMs cater to borrowers who have unique financial situations but still demonstrate the ability to repay. Non-QM loans are not necessarily high-risk but offer alternatives for those who don’t meet the stringent Qualified Mortgage rules.

Other options:

Unemployed individuals (A) typically cannot qualify unless they have alternative forms of income.

No down payment (C): Non-QM loans usually still require a down payment, though the amount may vary.

Living with parents (D) is not a relevant factor in Non-QM lending.

References:

Dodd-Frank Act and Ability-to-Repay (ATR) rule

CFPB guidelines on Qualified vs. Non-Qualified Mortgages

When evaluating credit risk, lenders are legally permitted to consider whether alimony payments that the applicant relies on for income are likely to continue and be consistently made. Lenders need to assess the reliability of income sources, and documented alimony that is expected to continue is a valid consideration under ECOA (Equal Credit Opportunity Act) guidelines.

Factors like the applicant’s likelihood of having children (A), phone listing (B), and age (C) are not permissible criteria for evaluating creditworthiness under ECOA, as these would constitute discrimination.

References:

Equal Credit Opportunity Act (ECOA), 15 U.S.C. §1691

CFPB ECOA Guidelines

Flood insurance coverage is required to cover the lesser of:

The outstanding principal balance of the loan, or

The maximum coverage limit available under the National Flood Insurance Program (NFIP), which is $250,000 for residential properties.

The purpose of flood insurance is to protect the lender's interest in the property, ensuring that the loan amount is covered in the event of a flood.

The appraised value of the home (A) and the property value on file with the county (D) are irrelevant in determining flood insurance requirements.

References:

National Flood Insurance Program (NFIP)

FEMA Flood Insurance Guidelines

A rate lock agreement is the document that specifies the time period during which a mortgage lender agrees to hold the interest rate at a certain percentage for the borrower. It guarantees that the rate will not change, even if market interest rates fluctuate, as long as the loan closes within the agreed-upon timeframe.

The loan application (A) initiates the mortgage process, but it does not secure the interest rate.

A preapproval letter (B) gives a preliminary loan approval but does not lock the rate.

The Closing Disclosure (C) provides final loan terms but does not set the rate lock.

References:

Fannie Mae and Freddie Mac rate lock policies

CFPB Guidelines on rate lock agreements

Under the Equal Credit Opportunity Act (ECOA), lenders can deny a loan based on immigration status, as it directly relates to the borrower’s ability to legally reside and work in the country. Lenders must ensure that the borrower has the legal capacity to enter into a binding contract and that they are authorized to work in the U.S. for the loan’s duration.

Receipt of child support (A), marital status (C), and country of birth (D) are protected characteristics under ECOA, meaning a lender cannot deny credit based on these factors.

References:

Equal Credit Opportunity Act (ECOA), 15 U.S.C. §1691

CFPB Regulation B

Net rental income is considered qualifying income when applying for a mortgage, as it represents income generated from rental properties. Lenders typically calculate net rental income by subtracting property expenses from the total rental income, and they require documentation such as tax returns or lease agreements to verify this income.

Reimbursed expenses (A), family gifts (C), and federal tax refunds (D) are generally not considered qualifying income, as they are one-time or non-recurring sources of funds.

References:

Fannie Mae Selling Guide on qualifying income

Freddie Mac Guidelines for rental income

The maximum available flood insurance structure coverage for a residential property under the National Flood Insurance Program (NFIP) is £250,000. The NFIP is a federal program that provides flood insurance to property owners in participating communities.

The £250,000 limit applies specifically to residential property structures. For contents coverage, the maximum is $100,000.

Higher coverage limits, such as $500,000 or $1,000,000, may be available through private insurers, but the NFIP itself caps coverage at $250,000 for structures.

References:

National Flood Insurance Program (NFIP)

FEMA Flood Insurance Manual

Under TILA-RESPA Integrated Disclosure (TRID) rules, borrowers must receive the Loan Estimate (LE) at least 7 business days before consummation of the loan. This rule allows borrowers ample time to review the terms and costs of the mortgage before closing.

If a revised Loan Estimate is issued due to changes in circumstances (e.g., interest rate changes, property changes), the borrower still needs to receive it no later than 7 business days before consummation.

References:

TRID (TILA-RESPA Integrated Disclosure Rule), 12 CFR §1026.19(f)

CFPB Loan Estimate Requirements

Under RESPA (Real Estate Settlement Procedures Act), settlement services include activities related to closing the mortgage loan, such as title company services and escrow agent services. These services are integral to the settlement process and ensure that the transaction is completed legally and correctly.

Flood insurance (A) is required for properties in flood zones but is not considered a settlement service.

Homeowners association fees (B) and the sale of the mortgage loan on the secondary market (D) are also not part of the settlement services.

References:

RESPA (Real Estate Settlement Procedures Act), 12 USC §2602

CFPB RESPA Guidelines on settlement services

According to ECOA (Equal Credit Opportunity Act) and Regulation B, if a borrower waives the right to receive their appraisal three business days before consummation, and the transaction does not close, the creditor must still provide a copy of the appraisal within 30 days of determining that the loan will not consummate.

This ensures that borrowers still receive essential documentation, even if the loan fails to close.

References:

ECOA (Equal Credit Opportunity Act), 12 CFR §1002.14(a)(1)

CFPB Guidelines on appraisal delivery timelines

Under the Truth in Lending Act (TILA), for adjustable-rate mortgages (ARMs) like a 5/1 ARM, the MLO must calculate the borrower's monthly payment amount based on the fully indexed rate, not the introductory rate. The fully indexed rate is the sum of the index and the margin at the time of origination, reflecting the potential payment increases after the introductory period ends.

This requirement ensures borrowers understand what their payments could be after the rate adjusts, helping them evaluate the true affordability of the loan.

References:

Truth in Lending Act (TILA), 12 CFR Part 1026 (Regulation Z)

CFPB ARM Guidelines

For subprime mortgages, the credit score of the applicants is a primary factor in determining the interest rate. Subprime loans are designed for borrowers with lower credit scores, typically below 620, and are offered at higher interest rates due to the increased risk of default.

Factors like the loan term (A), property location (B), and sales price (C) may influence other aspects of the loan, but the credit score is the key factor that determines whether a borrower qualifies for a subprime mortgage and the corresponding interest rate.

References:

Fannie Mae and Freddie Mac Subprime Lending Guidelines

CFPB Subprime Mortgage Standards

For state-licensed, non-depository lenders, the primary regulatory authority is the state regulator in the jurisdiction where the lender operates. Each state has its own agency or department responsible for overseeing licensing, compliance, and enforcement of mortgage laws for non-depository institutions.

The NMLS (A) is the system used to manage licenses but is not a regulatory authority.

The Federal Trade Commission (B) oversees federal consumer protection laws but is not the primary regulator for state-licensed lenders.

The Conference of State Bank Supervisors (CSBS) (D) helps coordinate state regulation but does not directly regulate individual lenders.

References:

SAFE Act, 12 USC §5101

NMLS and State Regulator Guidelines

Under the SAFE Act, mortgage loan originators (MLOs) must complete 8 hours of continuing education (CE) each year to maintain their licenses. The required CE topics include:

3 hours of federal law and regulations.

2 hours of ethics, which must include instruction on fraud, consumer protection, and fair lending.

2 hours on nontraditional mortgage lending standards, which refers to loan products that do not have fixed interest rates, such as adjustable-rate mortgages (ARMs) and other alternative loan types.

1 elective hour, which can vary based on state or company preferences.

The focus on nontraditional mortgage lending helps ensure MLOs understand the complexities and risks of nonstandard loan products.

References:

SAFE Act Continuing Education Requirements

NMLS Annual Renewal Guidelines

When applying for a Home Equity Line of Credit (HELOC), consumers should carefully review the APR and the total costs of acquiring and maintaining the HELOC. The APR reflects the overall cost of borrowing, including interest and certain fees, and is crucial for understanding the long-term expense of the HELOC. Additionally, consumers should consider fees associated with setting up and maintaining the HELOC, such as annual fees, transaction fees, and closing costs.

While HUD insurance (A) and FDIC deposit insurance (C) are unrelated to HELOCs, and private mortgage insurance (B) is generally not required for HELOCs, the APR and fees are critical factors that directly impact the cost of borrowing.

References:

Truth in Lending Act (TILA) disclosure requirements for HELOCs

CFPB HELOC Guide

Under the SAFE Act, any activity that involves offering, negotiating, or discussing loan terms with consumers requires licensure as a mortgage loan originator (MLO). Communicating the details of an offer over the phone would require MLO licensure, as it involves explaining or negotiating loan terms.

Providing general information or resources like a Homebuyer's Toolkit (A) or loan policies (B) does not require an MLO license, as these are not specific to negotiating loan terms.

References:

SAFE Act, 12 USC §5101

NMLS Licensing Requirements

A quit claim deed is a legal document used in real estate transactions to convey ownership or interest in a property from one party to another. It transfers the grantor’s interest in the property without any warranties or guarantees about the property’s title.

Promissory notes (B) represent a borrower’s promise to repay a loan.

Mortgage instruments (C) create a lien on the property but do not convey ownership.

Occupancy certificates (D) certify that a property complies with regulations for occupancy but are not involved in transferring ownership.

References:

Real Estate Law on property conveyances

Fannie Mae Deed and Title Transfer Guidelines

Real estate brokerage activities are not a primary function of a mortgage loan originator (MLO). The MLO’s primary role is to assist consumers in taking an application (A), offering or negotiating credit terms (B), and helping consumers apply for credit (C).

Real estate brokerage activities, such as negotiating real estate transactions, are separate from the loan origination process and require different licensing and qualifications.

References:

SAFE Act, 12 USC §5101

NMLS MLO Licensing Guidelines

Under the Ability-to-Repay (ATR) Rule and Qualified Mortgage (QM) standards, mortgages with adjustable rates can be considered qualified mortgages if they meet certain criteria, such as having fully amortizing payments and adhering to limits on points and fees. Adjustable-rate mortgages (ARMs) are qualified as long as the borrower’s ability to repay is assessed using the maximum rate that could apply in the first five years.

Loans like interest-only mortgages (A), balloon payment loans (B), and negative amortization loans (C) are not typically considered qualified mortgages because they carry higher risks of default.

References:

CFPB Ability-to-Repay and Qualified Mortgage Rule

Dodd-Frank Act standards for Qualified Mortgages

Fee splitting is the illegal practice where a mortgage loan originator (MLO) and another party, such as an appraiser, share fees in exchange for referrals or future business. This is prohibited under the Real Estate Settlement Procedures Act (RESPA), which bans kickbacks, referral fees, and unearned fees between settlement service providers.

In this case, the appraiser offering to give the MLO half of her appraisal fees in exchange for future business is a clear violation of RESPA’s anti-kickback provisions. Fee splitting can lead to inflated costs for consumers and undermines the integrity of the mortgage process.

Other options:

Redlining (A) refers to discriminatory lending practices based on geography.

Blockbusting (C) refers to discriminatory real estate practices.

Paying it forward (D) is not a term in the context of mortgage lending.

References:

RESPA (Real Estate Settlement Procedures Act), Section 8

CFPB RESPA guidelines

In a debt-to-income (DTI) analysis, the borrower’s total monthly housing-related payments (including principal, interest, taxes, insurance, and any homeowner association fees) are assessed as a percentage of their gross monthly income. Lenders use the gross income, which is the borrower’s income before taxes and deductions, to determine affordability and creditworthiness.

Net monthly income (A) and taxable income (C) are not used in standard DTI calculations.

The loan amount (D) is unrelated to the DTI calculation.

References:

Fannie Mae and Freddie Mac Guidelines on DTI ratios

CFPB Guidelines on Ability-to-Repay and DTI

The SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act) requires all mortgage loan originators (MLOs) to obtain a unique identifier through the Nationwide Multistate Licensing System (NMLS) before engaging in the business of residential mortgage loan origination. This identifier is used to track MLOs across state lines and ensure accountability and transparency in the mortgage industry.

A compliance plan (B) or other qualifications like a high school diploma (C) or counseling certificate (D) are not specific SAFE Act requirements for engaging in mortgage origination.

References:

SAFE Act, 12 USC §5101

NMLS Licensing Requirements

Publicly traded stocks are considered liquid assets because they can be easily converted to cash through a sale in a public stock market. Liquid assets are those that can be quickly sold or accessed with minimal loss of value.

Antique jewelry (A), net worth of a business (C), and an automobile (D) are not considered liquid assets because they are harder to convert into cash quickly without losing value.

References:

Fannie Mae and Freddie Mac guidelines on liquid assets

CFPB Mortgage Qualifying Standards

Redlining is the discriminatory practice of denying loans or other financial services to otherwise creditworthy applicants based on the location of the property, often in minority or economically disadvantaged neighborhoods. This is illegal under the Fair Housing Act and Equal Credit Opportunity Act (ECOA), as it constitutes a form of racial or ethnic discrimination in housing and lending.

Steering (A) involves directing borrowers toward certain loan products for the lender’s benefit, while low balling (D) and appraising (C) are unrelated to this form of discrimination.

References:

Fair Housing Act

Equal Credit Opportunity Act (ECOA)

A fixed-rate mortgage is characterized by a fixed interest rate that remains constant throughout the life of the loan, ensuring that the borrower’s monthly principal and interest payments remain the same over time. This is the defining feature of a fixed-rate mortgage.

Other options:

A fixed margin (A) applies to adjustable-rate mortgages (ARMs).

Mandatory 30-year terms (C) and balloon payments (D) are not characteristics of a fixed-rate mortgage, as fixed-rate loans can have varying term lengths (15, 20, or 30 years) without balloon payments.

References:

Fannie Mae Selling Guide on fixed-rate mortgages

Freddie Mac Mortgage Products

The main purpose of the secondary market is to fund additional loans by allowing lenders to sell existing mortgages to investors. This process replenishes the lender’s capital, enabling them to originate more loans. The secondary market is where mortgage-backed securities (MBS) are bought and sold, providing liquidity to the mortgage market.

Other options such as funding second mortgages or second home loans are specific transactions that do not capture the overall purpose of the secondary market.

References:

Fannie Mae and Freddie Mac Secondary Market Guidelines

HUD Secondary Mortgage Market Overview

Under the CFPB mortgage servicing rules, a mortgage company cannot initiate foreclosure proceedings until a borrower’s loan is at least 120 days delinquent. This rule is designed to give borrowers sufficient time to explore loss mitigation options, such as loan modification, forbearance, or repayment plans, before facing foreclosure.

The 120-day delinquency rule applies to all residential mortgage loans, providing a mandatory grace period before foreclosure filing.

This requirement is part of the Dodd-Frank Act and is enforced under Regulation X.

References:

CFPB Mortgage Servicing Rules

12 CFR Part 1024 (Regulation X)

Under the Equal Credit Opportunity Act (ECOA), the term "elderly" is defined as anyone who is 62 years of age or older. This designation is significant in fair lending, as the ECOA prohibits discrimination based on age in any aspect of a credit transaction, including mortgage lending.

ECOA protects borrowers from being denied credit or offered unfavorable terms based solely on their age, and it provides additional protections to borrowers considered "elderly."

References:

Equal Credit Opportunity Act (ECOA), 15 U.S.C. § 1691(a)

CFPB Regulation B, 12 CFR Part 1002

Lenders are permitted to accept the employment information provided by the borrower on the initial loan application without asking for a letter of explanation when the borrower has a stable employment history, such as being employed by the same company for three years or more. This provides sufficient documentation of employment stability, reducing the need for further explanation.

Other options (A, B, C) involve situations where the employment status or job stability may raise concerns, thus requiring additional documentation or explanation.

References:

Fannie Mae Selling Guide on employment verification

Freddie Mac Employment History Guidelines

Under TILA-RESPA Integrated Disclosure (TRID) rules, if a lender overcharges the borrower by more than the allowable 10% aggregate tolerance on certain closing costs, the lender must refund the excess amount to the borrower within 60 days of loan consummation. The 10% tolerance applies to certain fees like title insurance and government recording fees, ensuring that the lender provides accurate estimates on the Loan Estimate (LE) and does not exceed allowable variances at closing.

References:

TILA-RESPA Integrated Disclosure Rule (TRID), 12 CFR §1026.19(f)

CFPB Guidelines on refund timelines

In an Adjustable-Rate Mortgage (ARM), the components that adjust periodically are the index and the interest rate. Here’s how it works:

The index is the benchmark interest rate that fluctuates with market conditions (e.g., LIBOR, SOFR).

The interest rate adjusts based on changes in the index, but the margin (the fixed percentage added to the index) remains constant throughout the life of the loan.

Thus, the index and interest rate are the variables that change periodically, while the margin remains fixed.

References:

Fannie Mae Selling Guide for ARMs

Freddie Mac ARM Guidelines

The right of rescission is a provision under TILA (Truth in Lending Act) that gives borrowers the right to cancel certain types of loans within three business days after closing. This right applies specifically to refinance transactions on a borrower's primary residence, where they are taking cash out or refinancing their mortgage.

Cash-out refinances on a primary residence (C) are subject to the right of rescission because they involve the homeowner's primary residence.

Purchase loans (A) and loans secured by vacation homes (B) or other investment properties are not subject to this rule.

Even if the same creditor is refinancing the loan (Option D), the right of rescission still applies if it's a refinance of the primary residence.

References:

Truth in Lending Act (TILA) Section 125

Regulation Z, 12 CFR §1026.23 on the right of rescission

Illegal fee splitting occurs when a fee is divided among multiple parties and at least one party does not perform any actual work or service to earn the fee. Under RESPA (Real Estate Settlement Procedures Act), Section 8 prohibits fee splitting, kickbacks, and unearned fees in any federally related mortgage loan transaction. If three companies split a fee, but one company did no work, this would constitute an illegal fee split.

Fee splitting (A, C) can be legal if all parties involved provide legitimate services.

References:

RESPA Section 8 - Prohibition on fee splitting and unearned fees

CFPB RESPA Guidelines

Redlining is a discriminatory practice in mortgage lending where certain neighborhoods, often those predominantly inhabited by minority groups, are systematically denied access to mortgages, insurance, or other financial services. Lenders would use literal red lines on maps to designate these areas as high-risk or undesirable, refusing to offer loans or offering them at inflated interest rates.

Redlining is a violation of fair lending laws such as the Fair Housing Act (FHA) and Equal Credit Opportunity Act (ECOA). Both of these federal laws prohibit discrimination based on race, color, national origin, religion, sex, family status, or disability in housing and credit transactions.

This practice has historically contributed to racial segregation and economic inequality in the U.S., as minority groups were systematically excluded from access to homeownership and wealth-building opportunities.

References:

Home Mortgage Disclosure Act (HMDA)

Fair Housing Act (FHA)

Equal Credit Opportunity Act (ECOA)

The debt-to-income (DTI) ratio is a key metric used by lenders to assess a borrower’s ability to manage monthly payments and repay a mortgage. It is calculated by dividing the borrower’s total monthly debt obligations, including:

Monthly housing expenses (principal, interest, taxes, and insurance, also known as PITI).

Any other recurring debt obligations (car loans, student loans, credit card payments, etc.).

This total is divided by the borrower’s gross monthly income (before taxes and deductions). This calculation helps determine whether the borrower meets lending standards, with most lenders preferring a DTI ratio below 43% for qualified mortgages.

References:

Fannie Mae and Freddie Mac guidelines on debt-to-income ratio

CFPB Qualified Mortgage Rules

Under RESPA (Real Estate Settlement Procedures Act), Section 8 prohibits any payment, kickback, or unearned fee in exchange for loan referrals. This includes payments to real estate agents or other third parties for referring business to lenders or mortgage brokers. Such payments are illegal because they could inflate the cost of settlement services and are not tied to any actual services rendered.

Payments for actual services (A, D), such as payments to attorneys or contractors for legitimate work, are allowed under RESPA, but paying for loan referrals (B) is strictly prohibited.

References:

RESPA (Real Estate Settlement Procedures Act), Section 8

CFPB RESPA Guidance