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MLO NMLS Practice Test Questions and Exam Dumps

Question 1

Which of the following circumstances may indicate fraud with respect to the assets a borrower will use for closing?

A. Bank deposits that are not supported by income or other disclosures
B. Disclosure of gift funds
C. Parental loans disclosed but not yet received
D. Borrower's receipt of a large bonus from an employer

Correct Answer: A

Explanation
This question focuses on identifying circumstances that could suggest potential fraud related to the assets a borrower is using for closing. Lenders are required to verify the legitimacy and source of a borrower’s assets to ensure that all funds involved in a mortgage or loan transaction are valid and properly disclosed.

Let’s evaluate each option:

• Option A: Bank deposits that are not supported by income or other disclosures — This is a common red flag for fraud. Lenders typically require documentation that supports any large or unexplained deposits, as unverified deposits could indicate that the borrower is attempting to hide additional sources of income or assets, which may not be disclosed truthfully. If a borrower cannot explain the origin of funds or provide appropriate documentation (such as income statements, tax returns, or a gift letter), it raises suspicions about the legitimacy of the deposit. This type of situation is often a sign of fraud.

• Option B: Disclosure of gift funds — Gift funds are legitimate in the context of securing a loan, provided they are properly documented. For example, if a borrower is receiving a gift from a family member to help with closing costs or the down payment, the borrower must disclose this and provide a gift letter. The lender will verify that the funds are truly a gift and not a loan that needs to be repaid. While gift funds must be disclosed, they are generally not considered an indication of fraud when disclosed correctly and accompanied by the appropriate documentation.

• Option C: Parental loans disclosed but not yet received — Similar to gift funds, loans from family members (such as parental loans) can be a valid source of funds. However, if the loan has not yet been received, it may raise questions about the borrower’s ability to actually close the deal. Disclosing that the loan has not yet been received could cause delays or necessitate further verification, but by itself, this does not suggest fraud unless other suspicious activity or misinformation is involved.

• Option D: Borrower's receipt of a large bonus from an employer — While receiving a large bonus may need to be disclosed and verified as part of the borrower’s income, this by itself is not necessarily an indication of fraud. As long as the bonus is documented appropriately (e.g., through pay stubs, employer verification, etc.), it should not be considered fraudulent. Lenders regularly verify income, including bonuses, but the receipt of such funds, when legitimate and documented, is not inherently fraudulent.

In conclusion, A (bank deposits that are not supported by income or other disclosures) is the most likely indicator of fraud in this context. It suggests that funds might not have been properly disclosed or are being hidden, making it the most concerning scenario for lenders.

Question 2

When a mortgage loan originator notices multiple Social Security number discrepancies within the same loan file, it is considered a red flag of:

A. fair lending
B. mortgage fraud
C. a forgetful borrower
D. pricing discrepancies

Correct Answer: B

Explanation:

In the mortgage lending industry, a red flag refers to any warning sign or suspicious indicator that something in the loan application may not be valid, consistent, or accurate. When it comes to critical personal identification details such as a Social Security number (SSN), consistency is paramount. A discrepancy involving multiple different SSNs within the same loan file is highly unusual and concerning.

A Social Security number is a unique identifier issued to each individual in the United States and is used across various systems for verification, including credit reporting, tax filing, and identity confirmation. Therefore, when a mortgage loan originator finds more than one SSN associated with a single borrower in the loan file, it raises serious concerns about the legitimacy of the application.

This type of inconsistency is considered a strong red flag for mortgage fraud, which is defined as a deliberate misstatement, misrepresentation, or omission made by someone in order to deceive a lender into extending credit that would not otherwise be offered. Fraud can be committed by borrowers, lenders, or other third parties involved in the mortgage process. Using multiple or inconsistent SSNs is one of the classic tactics used to either falsify identity, obscure credit history, or manipulate application information.

Let’s analyze the other answer choices:

A. Fair lending relates to ensuring that all applicants are treated equally and without discrimination. SSN discrepancies have no direct link to fair lending issues.

C. A forgetful borrower is not a plausible explanation for inconsistent SSNs. While borrowers may occasionally make clerical errors, multiple discrepancies suggest intent rather than forgetfulness.

D. Pricing discrepancies concern the terms or interest rates of the loan and how they are determined for different borrowers. SSNs would not typically impact this unless identity manipulation is involved, which again points back to fraud.

Mortgage lenders and originators are trained to identify red flags like this and are obligated under federal regulations (such as the Red Flags Rule under the Fair Credit Reporting Act) to investigate and report suspicious activity. This helps prevent identity theft and fraudulent loan origination.

In conclusion, multiple Social Security number discrepancies in a single loan file are a major red flag pointing toward mortgage fraud, making the correct answer B.

Question 3

Which of the following valuation methods is typically used by an appraiser when evaluating a rental property?

A. Cost approach
B. Income approach
C. Annual approach
D. Sales comparison approach

Correct Answer: B

Explanation:

When an appraiser is tasked with valuing a rental property, the primary objective is to determine its market value based on the income it generates. This is essential because the value of rental property is strongly tied to how much income it can reliably produce over time. Among the available appraisal approaches, the income approach is specifically designed for such situations.

The income approach estimates the value of a property based on the income it generates. It is particularly suitable for rental properties, whether residential or commercial. This method involves determining the net operating income (NOI) from the property and then dividing it by a capitalization rate (cap rate), which reflects the return rate expected by an investor in that market. The formula used is:

Value=Net Operating Income (NOI)Capitalization Rate (Cap Rate)\text{Value} = \frac{\text{Net Operating Income (NOI)}}{\text{Capitalization Rate (Cap Rate)}}Value=Capitalization Rate (Cap Rate)Net Operating Income (NOI)​

This approach is best suited for investment properties like apartment buildings, office complexes, retail centers, and any real estate where rental income plays a major role in determining its value.

Now, let’s briefly go through why the other options are incorrect:

A. Cost approach:
This method is generally used when the property is new or unique and not frequently sold, such as a school or church. The cost approach estimates the value based on how much it would cost to rebuild or replace the structure, minus depreciation. It is not ideal for income-producing properties because it does not consider the income potential.

C. Annual approach:
This is not a recognized valuation method in real estate appraisal. It appears to be a distractor option and does not represent a formal or industry-accepted technique for property valuation.

D. Sales comparison approach:
This method is based on comparing the subject property to similar properties that have recently sold in the same area. While it’s commonly used for single-family homes and owner-occupied residences, it may not reflect the true value of a rental property whose main appeal lies in its ability to generate income. For instance, two properties may be identical in structure and size but have very different rental incomes; the sales comparison approach wouldn’t capture that difference, whereas the income approach would.

In summary, rental properties are valued primarily based on their income-generating capability, and the income approach is the best-suited appraisal method for capturing this. It aligns with investor goals and reflects how the property performs as a financial asset.

Correct answer: B

Question 4

How many continuing education hours must mortgage loan originators complete every year to renew their license?

A. 3 hours
B. 8 hours
C. 16 hours
D. 20 hours

Correct Answer: B

Explanation
Mortgage loan originators (MLOs) are required to complete a minimum of 8 hours of continuing education annually to renew their licenses, as mandated by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). These 8 hours must be NMLS-approved and include specific topics

• 3 hours of Federal law and regulations

• 2 hours of ethics, including instruction on fraud, consumer protection, and fair lending issues

• 2 hours of training related to lending standards for the nontraditional mortgage product market

• 1 hour of undefined instruction on mortgage origination (commonly referred to as an elective)

While the SAFE Act sets a national minimum, some states may have additional requirements. For example, Washington state requires an extra hour of state-specific law, bringing the total to 9 hours for MLOs licensed there .

Therefore, the correct answer is B. 8 hours, which aligns with the federal requirement.

Question 5

Which of the following activities is an example of redlining in mortgage lending?

A. Ensuring that all creditworthy borrowers are afforded equal treatment when applying for a mortgage loan
B. The mortgage loan originator convincing the underwriter to move their loan file to the front of the line or "redline" it
C. The act of the mortgage lender putting a "red line" under the borrower's name in a file to indicate they are a substandard applicant
D. The systematic denial of various services to residents of specific, often racially associated, neighborhoods or communities, either explicitly or through the selective raising of prices

Correct Answer: D

Explanation:

Redlining is a discriminatory practice in mortgage lending where lenders systematically refuse to offer financial services, especially mortgage loans, to individuals in certain geographic areas based on the racial or ethnic composition of those areas. It is named after the practice in which lenders and insurers would literally draw red lines on maps around neighborhoods they deemed too risky or undesirable, often simply because those areas were predominantly occupied by racial minorities, especially African Americans.

Option D accurately defines this unethical and illegal behavior. It reflects how institutions may deny loans, insurance, or other financial services either overtly or covertly by making those services inaccessible or disproportionately expensive for people in targeted neighborhoods. These practices have long-term economic and social impacts, contributing to systemic inequality, poverty, and segregation in housing and access to resources.

Option A describes equitable lending practices, which are encouraged and required under laws such as the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Ensuring that all creditworthy borrowers are treated equally is the opposite of redlining.

Option B is a misunderstanding of the term "redline." It suggests a fictional scenario where “redlining” means prioritizing a file by moving it to the front of a queue. This is not related to the historical or regulatory definition of redlining and reflects a misuse of the term.

Option C incorrectly interprets the concept as a marking system for individual files. While lenders may highlight or flag files for various administrative reasons, that internal marking doesn’t constitute redlining unless it results in systemic denial based on discriminatory criteria.

In the United States, redlining was formally recognized as a problem in the mid-20th century and has been outlawed by several key pieces of legislation. However, despite these laws, allegations of modern-day redlining continue to surface, showing that the legacy of this practice still affects housing and lending patterns today. Regulators and advocacy groups monitor lending data and patterns closely to identify and prevent such behavior.

Therefore, the correct and complete example of redlining is reflected in D, making it the correct answer.

Question 6

What is the loan amount if the purchase price is $249,955.00 and the borrower makes an 18% down payment?

A. $204,693.10
B. $204,936.10
C. $204,963.10
D. $204,966.10

Correct Answer: C

Explanation:

To determine the loan amount, we need to subtract the down payment from the purchase price. The borrower is putting down 18%, which means the remaining 82% of the purchase price will be financed through the loan.

We can calculate this in two ways:

Step 1: Calculate the Down Payment

Down Payment=18% of $249,955.00=0.18×249,955=44,991.90\text{Down Payment} = 18\% \text{ of } \$249,955.00 = 0.18 \times 249,955 = 44,991.90Down Payment=18% of $249,955.00=0.18×249,955=44,991.90

Step 2: Subtract the Down Payment from the Purchase Price

Loan Amount=$249,955.00−$44,991.90=$204,963.10\text{Loan Amount} = \$249,955.00 - \$44,991.90 = \$204,963.10Loan Amount=$249,955.00−$44,991.90=$204,963.10

So, the borrower will finance $204,963.10 through the loan.

Alternatively, you can calculate the loan amount directly as 82% of the purchase price:

Loan Amount=82% of $249,955.00=0.82×249,955=204,963.10\text{Loan Amount} = 82\% \text{ of } \$249,955.00 = 0.82 \times 249,955 = 204,963.10Loan Amount=82% of $249,955.00=0.82×249,955=204,963.10

Checking the Options:

• A. $204,693.10 — Incorrect. This is lower than the correct amount.

• B. $204,936.10 — Incorrect. This is close but off by a few dollars.

• C. $204,963.10 — Correct. Matches our precise calculation.

• D. $204,966.10 — Incorrect. Slightly higher than the correct value.

Why Accuracy Matters:

In real estate transactions, even a small error in calculating the loan amount can lead to significant issues during closing. Lenders rely on precise percentages to determine financing eligibility, interest rates, and monthly payments. Therefore, understanding how to compute these figures is essential for both professionals and borrowers.

In this question, we see a real-world application of percentage calculations. Whether you're preparing for a licensing exam or working with clients, being able to confidently perform these computations ensures you provide accurate and trustworthy information.

Correct answer: C

Question 7

For an FHA loan, which of the following payments must a borrower make to protect a lender in case of a foreclosure?

A. Down payment
B. Hazard insurance premium
C. Mortgage insurance premium
D. Homeowners association dues

Correct Answer: C

Explanation
FHA loans are government-backed loans designed to help lower-income and first-time homebuyers. One of the key features of FHA loans is the requirement for mortgage insurance, which helps protect the lender in case the borrower defaults on the loan or goes into foreclosure. This insurance provides a safeguard to the lender by covering a portion of the loan balance if the borrower fails to repay.

Here’s a breakdown of each option:

• Option A: Down payment — While FHA loans require a down payment (typically as low as 3.5% of the purchase price), the down payment is not meant to protect the lender in case of foreclosure. It is a way to reduce the borrower’s loan balance and demonstrate the borrower’s commitment to the loan, but it does not function as insurance for the lender.

• Option B: Hazard insurance premium — Hazard insurance, also known as homeowner's insurance, is required by most lenders to protect the property in the event of damage or destruction (such as from fire or natural disasters). While this insurance protects the borrower’s property, it does not directly protect the lender in case of foreclosure.

• Option C: Mortgage insurance premium — This is the correct answer. FHA loans require the borrower to pay mortgage insurance premiums (MIP) to protect the lender in case of default. MIP covers the lender’s potential losses if the borrower is unable to repay the loan and foreclosure occurs. The MIP is a mandatory component of an FHA loan, and it comes in both an upfront premium and an annual premium.

• Option D: Homeowners association dues — While these dues are typically required for properties that are part of a homeowners association (HOA), they do not protect the lender in case of foreclosure. HOA dues are for the upkeep and maintenance of shared community areas, and they are not linked to the protection of the lender’s financial interest in the property.

In conclusion, the correct answer is C, the mortgage insurance premium, as this is the payment that directly protects the lender in the event of foreclosure.

Question 8

A licensed mortgage loan originator (MLO) sharing his commission with another licensed MLO at his company for actual services performed on a loan is considered which of the following terms?

A. Tip sharing
B. Fee splitting
C. Single fee method
D. Double fee method

Correct Answer: B

Explanation:

In mortgage lending and real estate transactions, compensation practices are heavily regulated to ensure transparency, prevent consumer exploitation, and avoid conflicts of interest. One legitimate and commonly used practice is fee splitting, which refers to the division of a commission or fee between two or more licensed individuals who have each performed actual, meaningful services in the course of completing a loan transaction.

When a licensed Mortgage Loan Originator (MLO) shares part of their earned commission with another licensed MLO within the same company, and this sharing is based on actual work performed by both parties on the loan file, it is a legal and recognized example of fee splitting. The key point is that both individuals must be licensed and must have contributed substantially to the transaction. Fee splitting is permissible under these circumstances, provided it complies with applicable laws, including the Real Estate Settlement Procedures Act (RESPA).

RESPA specifically prohibits kickbacks and unearned fees—such as payments for referrals or for nominal or no services. However, when compensation is based on actual work completed and is split between licensed professionals within the same entity or brokerage, the law does not prohibit such a structure.

Let’s examine why the other options are incorrect:

A. Tip sharing is not a recognized term in mortgage or real estate compensation practices. This phrase is more commonly associated with the hospitality or service industries and has no legal or professional basis in the mortgage lending context.

C. Single fee method suggests that only one party receives compensation for the transaction, which does not apply here since the question is about sharing compensation.

D. Double fee method could imply charging a consumer twice for the same service, which would be both unethical and illegal under RESPA and similar consumer protection regulations. It is not applicable or valid in this context.

Thus, the only term that accurately describes the legal and appropriate scenario of two licensed MLOs sharing commission for actual services performed on a loan is fee splitting. This aligns with industry regulations as long as all parties are licensed, the compensation is for legitimate work, and no part of the fee is for mere referrals.

Therefore, the correct answer is B.

Question 9

Non-qualified mortgages provide greater flexibility for borrowers who fall into which of the following categories?

A. are unemployed
B. are self-employed
C. have no down payment
D. are currently living with their parents

Correct Answer: B

Explanation:

Non-qualified mortgages (often abbreviated as non-QM loans) are designed to serve borrowers who don’t meet the strict lending standards required for qualified mortgages (QM) as defined by the Consumer Financial Protection Bureau (CFPB). These standards include strict income verification, debt-to-income (DTI) limits, and other guidelines that ensure a borrower’s ability to repay.

One of the most common groups that benefit from non-qualified mortgages is self-employed individuals. Traditional qualified mortgages require borrowers to provide W-2s, pay stubs, and tax returns that show consistent, verifiable income. This can be difficult for self-employed people, whose income may fluctuate significantly or be documented in unconventional ways, such as business bank statements, 1099s, or retained earnings.

Non-QM lenders offer more flexible underwriting standards and may accept:

• Bank statement loans (using deposits to estimate income)

• Asset depletion loans (where assets are used to demonstrate repayment ability)

• Alternative documentation of income beyond standard tax returns

Therefore, option B is correct because self-employed borrowers are a primary audience for non-qualified mortgage products.

Let’s examine why the other options are incorrect:

A. are unemployed:
While non-QM loans are more flexible, they still require some proof of the ability to repay. Unemployed borrowers without any income source or asset-based repayment strategy would typically not qualify for any kind of mortgage, qualified or not. Lenders need to see a repayment capacity, and simply being unemployed with no income doesn't satisfy that.

C. have no down payment:
Non-QM loans do not inherently eliminate the need for a down payment. In fact, many non-QM products require larger down payments than standard loans due to the higher risk involved. Borrowers with no down payment would more likely seek government-backed loans like VA loans or USDA loans, which offer 100% financing for qualified applicants, not non-QM loans.

D. are currently living with their parents:
This may affect the borrower's housing history or stability, but it's not a determining factor in qualifying for a non-QM loan. People living with parents might apply for a mortgage, but that alone doesn’t make them the primary target group for non-QM products.

To summarize, non-qualified mortgages offer creative, flexible solutions for borrowers who don’t fit into the standard income verification mold — and self-employed borrowers are among the most common and legitimate candidates for these loans. Their irregular income patterns or difficulty providing traditional proof of earnings makes them a prime group for non-QM financing.

Correct answer: B

Question 10

Under which of the following programs is a creditor required to provide disclosures to the consumer that fully describe each of the creditor's variable-rate loan programs in which the consumer expresses an interest?

A. ARM
B. FHA
C. Fixed
D. Construction

Correct Answer: A

Explanation
The question asks about the requirement for creditors to provide disclosures to consumers for variable-rate loan programs. Variable-rate loans, often referred to as adjustable-rate mortgages (ARMs), are loans in which the interest rate can change over time based on a benchmark rate or index. The requirement for disclosures for ARMs comes from the Truth in Lending Act (TILA), which mandates that creditors provide detailed information about these types of loans to ensure consumers are well-informed about the terms and risks.

Here’s a breakdown of each option:

• Option A: ARM (Adjustable-Rate Mortgage) — The correct answer. Under TILA, creditors are required to provide detailed disclosures for each variable-rate loan program (such as ARMs) that a consumer expresses interest in. These disclosures must fully describe how the interest rate will adjust over time, the factors influencing those adjustments, and the potential risks to the consumer (such as payment increases). The goal is to ensure that consumers understand the implications of the variable-rate loan before they commit.

• Option B: FHA — The Federal Housing Administration (FHA) insures loans made by approved lenders to borrowers with low to moderate incomes. While FHA loans have specific guidelines, including terms for adjustable-rate mortgages (ARMs), the requirement for disclosures about variable-rate loan programs falls under TILA and is not specific to FHA loans. FHA loans may include ARMs, but the disclosure requirements are governed by TILA, not the FHA program itself.

• Option C: Fixed — Fixed-rate loans have an interest rate that does not change over the life of the loan. Since there is no variability in the interest rate, there is no need for disclosures about interest rate changes or adjustments. Fixed-rate loans do not require the same type of disclosures that ARMs do because the rate is constant and predictable.

• Option D: Construction — Construction loans are short-term loans used to finance the building of a home or other real estate project. While these loans may involve variable rates, the requirement for disclosures regarding rate adjustments is not specifically tied to construction loans. The key requirement for variable-rate disclosures applies to ARMs, not necessarily to construction loans.

In conclusion, A. ARM is the correct answer because creditors are required to provide detailed disclosures about the terms and adjustments of variable-rate loan programs, such as ARMs, that a consumer expresses interest in. This ensures that consumers fully understand how the interest rate can change over time and the potential impact on their payments.