Pass the NMLS SAFE MLO MLO Questions and answers with CertsForce

The index for an adjustable-rate mortgage (ARM) is tied to a published benchmark (such as LIBOR, SOFR, or U.S. Treasury securities). Index rates fluctuate over time as the general level of interest rates in the market changes.

“The index is a published interest rate to which the interest rate on an ARM is tied. The index rate changes over time, usually in line with general market rates.”

— CFPB, Consumer Handbook on Adjustable-Rate Mortgages (CHARM)

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.

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.

For an Adjustable-Rate Mortgage (ARM), specific disclosures must be provided to the borrower within three business days of receiving a completed loan application. These disclosures are required under TILA (Truth in Lending Act) and include detailed information about the loan’s terms, how the interest rate can change, and what potential payment increases might occur over time.

The Loan Estimate (LE), which includes ARM-specific information, must be provided within this timeframe to ensure the borrower understands the adjustable nature of the loan before proceeding further in the process.

Other options like at closing or when a loan is locked in are incorrect, as disclosures must be provided much earlier in the process.

A purchase money second mortgage allows a borrower to avoid paying private mortgage insurance (PMI) by using a second loan to cover part of the down payment. This structure, often referred to as a "piggyback loan", is commonly used when a borrower does not have a 20% down payment but wants to avoid PMI, which is typically required for loans with less than 20% down.

The borrower makes payments on both the primary mortgage and the second mortgage, but by keeping the loan-to-value (LTV) on the first mortgage below 80%, they can avoid PMI.

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.

For rental properties, an appraiser will typically use the Income Approach to estimate the property's value. This method is based on the income-generating potential of the property, which is most relevant for investment properties, including rentals.

The Income Approach assesses the property's ability to generate future cash flow by evaluating the income that can be derived from renting it. The formula often involves determining the net operating income (NOI) and applying a capitalization rate (cap rate) to estimate value.

This method is most appropriate for rental properties because their value is inherently tied to their profitability.

Other methods:

Cost approach: More suited for unique properties or new construction.

Sales comparison approach: Often used for owner-occupied properties, comparing recent sales of similar properties.

Under TRID, a revised Loan Estimate (LE) can be issued if there is a changed circumstance that affects the loan terms or costs. This can include situations such as a natural disaster in the area where the loan will close, which may impact the value of the property or loan costs. Such changes are considered beyond the control of the parties involved and justify a revised estimate.

Market fluctuations (A) on a locked loan and borrower salary increases (B) are not valid reasons for issuing a revised LE.

Changes that the MLO should have known at the time of the original LE (D) do not qualify as a valid changed circumstance.

The Truth in Lending Act (TILA, Regulation Z) applies to consumer credit transactions, which include home equity loans and other loans extended primarily for personal, family, or household purposes. TILA does not cover credit extended for business, commercial, agricultural purposes, or loans to entities rather than natural persons.

“Regulation Z applies to each individual or business that offers or extends credit when four conditions are met:

(1) the credit is offered or extended to consumers,

(2) the offering or extension of credit is done regularly,

(3) the credit is subject to a finance charge or payable by a written agreement in more than four installments, and

(4) the credit is primarily for personal, family, or household purposes.”

— 12 CFR § 1026.1(c); Regulation Z, TILA

Home equity loans are covered; agricultural, business, or commercial credit and credit to entities (not individuals) are excluded.

Under RESPA (Real Estate Settlement Procedures Act), it is illegal to charge a fee for a settlement service if no services or only nominal services are performed. This is true regardless of who pays the fee, whether it’s the borrower, seller, real estate agent, or any other party. RESPA prohibits unearned fees, kickbacks, or payments for referrals in federally related mortgage transactions.

Even if someone other than the borrower pays, the charge is still illegal if it is not justified by actual services performed.