Ethics — NMLS SAFE MLO practice questions

An applicant states a property will be a primary residence, but the file shows the subject is 400 miles from the applicant's job and a lease naming a tenant is in the file. The MLO should FIRST:

1. Approve the file, because occupancy statements are certified by the borrower alone
2. Change the application to investment occupancy without telling the applicant why it changed
3. Resolve the contradiction with the applicant and document the file before submission
4. Report the applicant directly to the state attorney general and abandon the loan file

Answer: C — Resolve the contradiction with the applicant and document the file before submission

C) Correct - occupancy misstatement is material because it changes pricing and underwriting, and the originator's first duty is to resolve and document inconsistent information rather than pass an unresolved red flag forward. A) Tempts because the borrower does certify occupancy, but an originator may not ignore contradicting evidence in the file. B) Silently altering an application misstates the applicant's intent and is itself improper. D) Skips steps; escalation runs through the employer's compliance channel, and abandoning a file is not the first response to an unexplained discrepancy.

Reconciling a file after closing, an MLO notices that a $1,400 fee collected from the borrower was never paid to the service provider. The MLO should:

1. tell the borrower to contact the settlement agent directly to request a refund of the fee
2. assume the settlement agent will catch the error during its own month-end reconciliation
3. collect the amount again from the provider's invoice and remit it out of the branch account
4. report the discrepancy internally so the funds can be traced and the borrower made whole

Answer: D — report the discrepancy internally so the funds can be traced and the borrower made whole

D) Correct — consumer funds collected for a specific purpose must reach that purpose; an unexplained shortfall is escalated so it can be traced and remedied. A) pushing the borrower to chase her own funds shifts the burden to the consumer and leaves the shortfall unexamined. B) relying on someone else's future reconciliation abandons the duty and delays a remedy the borrower is owed now. C) quietly papering over the gap from another account obscures where the money went and defeats any audit trail.

An elderly homeowner with substantial equity and modest fixed income is refinanced four times in twenty months, each time financing large fees into a loan with no rate or term benefit. This pattern is BEST described as:

1. Reverse redlining, because the borrower's neighborhood was specifically targeted
2. Packing, because insurance products were added without the borrower's knowledge
3. Negative amortization steering into a product whose balance grows over its term
4. Loan flipping with equity stripping, repeated refinancing that erodes home equity

Answer: D — Loan flipping with equity stripping, repeated refinancing that erodes home equity

D) Correct - repeated refinancing that produces no net tangible benefit while financing fees into the balance is loan flipping, and the resulting consumption of accumulated equity is equity stripping. A) Reverse redlining depends on targeting a protected-class geography, and no such targeting is stated. B) Packing requires added products such as single-premium credit insurance, which the facts do not mention. C) Negative amortization concerns a payment structure that lets the balance rise, which is not described in a series of fee-laden refinances.

An MLO originates a purchase loan in which the MLO's spouse is the real estate agent representing both buyer and seller. Neither party is told of the marital relationship. This raises:

1. No concern at all, since real estate representation is separate from lending
2. A concern under state real estate license law only, not lending ethics rules
3. A concern that arises only if underwriting ultimately denies the loan request
4. An undisclosed conflict of interest that should be disclosed to all parties

Answer: D — An undisclosed conflict of interest that should be disclosed to all parties

D) Correct — a household financial interest in both sides of the transaction can influence advice on price, product, and timing; the controlling duty is to disclose material relationships so parties can make informed decisions. A) Tempts by treating the two roles as sealed off, when the shared household economics link them. B) Tempts because agency-disclosure rules do apply, but lending ethics standards independently reach undisclosed conflicts. C) Tempts by conditioning the duty on outcome, whereas the disclosure obligation attaches when the conflict arises, not when the file closes.

Which statement BEST distinguishes internal escalation from filing a suspicious activity report?

1. Escalation is required by federal law; a report is a discretionary courtesy filing
2. Escalation replaces the filing whenever the institution resolves the matter internally
3. Escalation is a company process; a report is a confidential government filing
4. Escalation is confidential; a report must be disclosed to the customer involved

Answer: C — Escalation is a company process; a report is a confidential government filing

A) reverses which obligation is legally mandated. B) is wrong because internal resolution does not excuse a required filing. C) Correct - internal escalation routes concerns to compliance, while a suspicious activity report is a regulatory filing made confidentially by the institution and never disclosed to the subject. D) reverses the confidentiality rule, since disclosing a filing is prohibited.

A recipient clicks the unsubscribe link in a lender's marketing email. The lender must:

1. require the recipient to create an account before the request can be processed
2. confirm the request by placing a telephone call to the recipient within ten days
3. continue sending until the recipient also registers on the national do-not-call list
4. stop sending commercial messages to that address within the time the rule allows

Answer: D — stop sending commercial messages to that address within the time the rule allows

A) fails because burdensome conditions on opting out are prohibited. B) invents a confirmation call requirement. C) confuses email opt-out with telephone registry rules. D) Correct - opt-out requests must be honored promptly, the mechanism must stay live for a period after sending, and the sender may not charge or demand extra information.

An MLO learns the day before closing that the borrower who granted a power of attorney has become incapacitated. The MLO should:

1. cancel the transaction outright, because no power of attorney can ever survive the incapacity of the principal
2. proceed, because a recorded power of attorney remains effective until it is formally revoked by a court order
3. proceed, because incapacity of the principal transfers the authority permanently to the named attorney-in-fact
4. raise the issue immediately, because whether the authority survives incapacity depends on the instrument's terms

Answer: D — raise the issue immediately, because whether the authority survives incapacity depends on the instrument's terms

D) Correct — only a durable instrument survives the principal's incapacity, so the terms must be examined and the issue escalated rather than assumed either way. A) an outright cancellation overstates the rule, since a properly drafted durable power of attorney can remain effective. B) recording does not make an instrument durable, and revocation is not the only way authority ends. C) incapacity does not enlarge the agent's authority; this reverses the effect of the event entirely.

The established business relationship concept matters MOST because it:

1. allows a caller to ignore an internal do-not-call request made by that same consumer
2. can permit calls to a registry-listed consumer for a limited time after a sale
3. permanently exempts the caller from every do-not-call and calling-time restriction
4. authorizes autodialed marketing texts without any written consent from the consumer

Answer: B — can permit calls to a registry-listed consumer for a limited time after a sale

A) is wrong because an internal request always overrides the exemption. B) Correct - an existing relationship supports a limited-duration exemption from the national registry, with different periods for inquiries and completed transactions. C) overstates, since time-of-day rules and internal requests still apply. D) confuses the registry exemption with autodialer consent, which is separate.

A borrower complaint alleges that an MLO quoted a rate she never received. In responding, the company's documentation should MOST importantly include:

1. the dated records of what was actually quoted, locked and disclosed, tied to the loan file and retained with it
2. a signed statement from the MLO describing his general practice when quoting rates to prospective borrowers
3. a copy of the rate sheet in effect on the day the complaint itself was received by the company's compliance staff
4. the borrower's credit report and score, showing the pricing adjustments the company applied at the time of lock

Answer: A — the dated records of what was actually quoted, locked and disclosed, tied to the loan file and retained with it

A) Correct — the contemporaneous, dated record of quotes, locks and disclosures is what substantiates or refutes the allegation, and recordkeeping duties exist so it can be produced. B) a description of habit is weak evidence and cannot establish what happened on this file; it tempts because it is easy to obtain after the fact. C) the rate sheet from the complaint date is the wrong day entirely, which is an off-by-one on timing rather than proof of the quote actually given. D) credit data may explain pricing adjustments but does not show what the MLO told the borrower, and pulling it forward here answers a different question.

A caller tells an MLO's assistant that he is from the company's IT vendor, that a system is failing, and that he needs the assistant's login to fix it right now. This is BEST described as:

1. social engineering, and the request should be refused and reported regardless of how plausible the caller sounds
2. an authorised vendor access request that may proceed once the caller states the company's own support account number
3. a permissible exception to password policy because the request relates to maintaining the company's systems
4. a matter for the assistant's own judgement, since the assistant is not a licensed originator on the loan file

Answer: A — social engineering, and the request should be refused and reported regardless of how plausible the caller sounds

A) Correct — pretexting a support call to harvest credentials is textbook social engineering; credentials are never shared, and the attempt itself is a reportable event. B) reciting an account number proves nothing, since that detail is obtainable, and no legitimate support process needs a user's password. C) there is no maintenance exception to credential confidentiality, and framing it as one is exactly the story the attacker is selling. D) licensing status is irrelevant to the safeguarding duty, which applies to everyone with access to customer information.

An MLO receives an urgent email changing the closing wire instructions. What should the MLO do, and what should the MLO never do?

Stop and verify the instructions out of band, by calling the settlement agent at a number obtained independently of the email, before anyone acts on them. Never confirm by replying to the email, and never forward the new instructions to the borrower on the strength of a matching display name or signature block, both of which are trivially spoofed. Report the attempt internally so others on the file are warned.

An originator wants to call homeowners in a neighborhood from a purchased list to solicit refinances. What TCPA and Do Not Call steps must come first?

The list must be scrubbed against the National Do Not Call Registry and against the company's own internal do-not-call list before any call goes out, and the caller must be within permitted calling hours for the consumer's time zone. Calls placed with an autodialer or prerecorded voice to wireless numbers require prior express written consent, which a purchased list almost never supplies. Each call must identify the caller and the company on whose behalf it is made and provide a way to request no further calls, and the request must be honored on the spot.

How does UDAAP apply to an originator's day-to-day conduct even when every required disclosure was delivered?

UDAAP reaches conduct, not just paperwork, so an originator can deliver a technically accurate Loan Estimate and still violate it. Quoting a rate the originator knows the borrower cannot get, burying a material term, describing a temporary buydown rate as the loan's rate, exploiting a language barrier or urgency, or discouraging a consumer from reading documents can each be unfair, deceptive or abusive. The test is the net impression on a reasonable consumer and whether the injury was reasonably avoidable, not whether a form was signed.

What are the requirements for a compliant affiliated business arrangement?

The referring party must disclose the nature of the affiliate relationship and the estimated range of charges at or before the time of referral, must not require the consumer to use the affiliate other than in the narrow exceptions the statute allows, and may receive only a return on its ownership interest. The affiliate must also be a bona fide provider that performs real services with its own staff and capital rather than a shell created to capture fees. Failing any element converts the arrangement into a prohibited kickback.