Ethics practice

All 21 free ethics questions

1. If a borrower pays a mortgage broker directly at closing, when may the lender also pay the broker on that loan?

   • A Never Correct
   • B If the total stays reasonable The bar is absolute for that transaction and does not soften when the total looks reasonable.
   • C If the borrower is told Telling the borrower does not lift the bar, because the rule prohibits the second payment rather than a hidden one.
   • D After the loan closes Waiting until after closing does not help, since the ban reaches any payment in connection with the transaction.

   Once a loan originator receives compensation directly from the consumer on a dwelling-secured transaction, no one else may pay that originator anything in connection with it, and a person who knows of the consumer-paid compensation may not pay either. Telling the borrower does not lift the bar, since the second payment itself is what is barred.

   Regulation Z, 12 CFR s. 1026.36(d)(2)(i)(A)

2. An advertisement for credit states specific credit terms. Which terms may it state?

   • A Only terms the creditor is or will be offering Correct
   • B Any terms the consumer might qualify for elsewhere What a consumer could get from someone else is not a term this creditor is arranging or offering.
   • C Terms the creditor once offered but has discontinued A term that is no longer offered is not one that actually is or will be arranged.
   • D Terms the creditor could offer if the market improved A term the creditor might reach under better conditions is not one it actually is or will be offering.

   If an advertisement states specific credit terms it may state only those terms that actually are or will be arranged or offered by the creditor, which closes off the rate advertised to draw calls that nobody can get.

   Regulation Z, 12 CFR s. 1026.24(a)

3. Under the Truth in Lending Act (TILA), an advertisement that states the monthly payment must also state:

   • A Down payment, repayment terms and annual percentage rate Correct
   • B The annual percentage rate and total finance charge The amount of a finance charge is itself a triggering term rather than one of the additions the rule requires.
   • C Loan amount, closing costs and license number None of those three appears on the list of additional terms the rule requires.
   • D None, if no rate is stated The amount of a payment is a triggering term on its own, so stating no rate does not avoid the additions.

   Stating the amount of a payment means the ad must also give the amount or percentage of the down payment, the terms of repayment over the full loan term, and the annual percentage rate, using that term. Leaving the rate out of the ad does not avoid them.

   Regulation Z, 12 CFR s. 1026.24(d)

4. Which factors does the Fair Housing Act bar a lender from using to set a loan's rate or term?

   • A Race, color, religion, sex, handicap, familial status, national origin Correct
   • B Race, color, religion, age, marital status, national origin Age and marital status come from the Equal Credit Opportunity Act list, and handicap and familial status are missing here.
   • C Race, color, income source, sex, age, national origin Source of income and age are not on the list this rule names.
   • D Race, color, religion, sex, age, credit score, national origin A credit score is a lawful underwriting factor and not a protected characteristic.

   A lender may not set the type of loan, or fix its amount, interest rate, cost, duration or other terms, because of race, color, religion, sex, handicap, familial status or national origin. Age and marital status belong to a different list.

   24 CFR s. 100.130(b)(2)

5. A borrower's application says the property will be her primary residence, but the file shows a signed lease with a tenant starting at closing. Which fraud is that?

   • A Occupancy fraud Correct
   • B Income fraud Nothing here misstates what the borrower earns.
   • C Appraisal fraud The value of the property is not what this file misstates.
   • D Employment fraud The employer and the job are not in question on these facts.

   Occupancy fraud occurs when the borrower fails to occupy the property although the loan application specified it was the borrower's primary residence, and it is commonly done because an owner-occupied loan carries better pricing than an investment loan.

   FinCEN mortgage loan fraud SAR analysis, p. 15 Reference document, not law.

6. A buyer asks about a neighborhood. The real estate agent replies that the buyer would not be comfortable with the existing residents because of her religion. What is this?

   • A Unlawful steering Correct
   • B Lawful The remark is on the list of steering practices, and nothing has to be refused for it to be unlawful.
   • C Lawful, if the buyer raised the neighborhood Who raised the subject first makes no difference. The rule looks at what was communicated and why.
   • D Blockbusting Blockbusting is inducing someone to sell or rent, for profit, by talk of who is moving into the neighborhood; this remark steered a buyer away.

   Telling a prospective purchaser she would not be comfortable or compatible with a neighborhood's existing residents because of a protected characteristic is on the list of steering practices. The remark is unlawful by itself; no application has to be refused.

   24 CFR s. 100.70(c)(3)

7. What marks out redlining from other forms of illegal disparate treatment in lending?

   • A Credit turns on who lives in the area Correct
   • B Credit turns on the applicant's own credit record A decision on the applicant's own credit record is not about the area, so it is not what this practice names.
   • C Credit turns on a low appraised value An appraised value below the price is a property fact, not a characteristic of the people in the area.
   • D Credit turns on the type of property offered Declining a property type is a collateral policy. It becomes a fair lending matter only when it works on a prohibited basis.

   Redlining is unequal access to credit, or unequal terms, because of a protected characteristic of the residents of the area where the borrower lives or the property sits. The applicant's own credit record has nothing to do with the area.

   FFIEC interagency fair lending examination procedures, p. 6 Reference document, not law.

8. Under the federal identity theft rules, what is a Red Flag?

   • A A pattern indicating possible identity theft Correct
   • B A confirmed case of identity theft A confirmed theft is what the program exists to prevent and detect, and the flag comes earlier.
   • C A credit score below a set figure A low score says something about credit risk and nothing about whether an identity is being misused.
   • D A notice from a consumer reporting agency An address discrepancy notice from a consumer reporting agency is handled under a separate rule.

   A Red Flag means a pattern, practice or specific activity that indicates the possible existence of identity theft. Confirmed theft comes later; the flag is the warning before it.

   16 CFR s. 681.1(b)(9)

9. A brokerage asks a borrower to sign a contract saying it earns its fee for best efforts even if no loan is obtained. What does the model state law say?

   • A The contract is a prohibited practice Correct
   • B Lawful, where the fee is disclosed up front Disclosing the term does not make it permitted, since the contract itself is what the rule prohibits.
   • C Lawful, where the borrower signs willingly Consent is no answer to a prohibited practice.
   • D Lawful, where the fee is refundable later A refund promise does not change the nature of the contract the licensee asked the borrower to sign.

   Asking a borrower to sign a contract under which the licensee earns its fee for best efforts, whether or not any loan comes through, is a prohibited act. Her willing signature does not make it lawful, and neither does disclosing the fee.

10. A borrower seeking a modification gives the lender false pay stubs and a doctored credit report to win better terms. What scheme is this?

    • A Modification and refinance fraud Correct
    • B A foreclosure rescue scheme A foreclosure rescue scheme promises a distressed homeowner that the home can be saved, usually for up-front fees or a deed transfer.
    • C A debt elimination scheme A debt elimination scheme offers to wipe out the debt for an up-front fee using phony legal documents sent to the lender.
    • D Equity skimming Equity skimming rests on a fraudulent appraisal that over-values the property to create phantom equity.

    Loan modification and refinance fraud is a borrower submitting false income information or false credit reports to persuade a lender to modify or refinance a loan on more favorable terms, which means false pay stubs and a doctored credit report put this squarely under that scheme.

    FFIEC mortgage fraud white paper, p. 31 Reference document, not law.

11. Under the loan originator compensation rule, which of these counts as compensation?

    • A An award of a trip or merchandise Correct
    • B A credit report charge passed straight to the vendor A bona fide and reasonable charge collected and passed on to an unaffiliated third party is not compensation, because the originator keeps nothing.
    • C A brokerage's bona fide fee as a title insurance agent Payments for services that are not loan origination activities, such as acting as a title insurance agent, are excluded from compensation.
    • D A bona fide dividend on owned stock Bona fide returns or dividends on stock or other equity holdings are not compensation, although an award of stock generally is.

    Compensation includes salaries, commissions and any financial or similar incentive the originator receives and retains, which means a periodic bonus and an award of merchandise, services, trips or similar prizes all count.

    CFPB Loan Originator Rule small entity compliance guide, p. 28 Reference document, not law.

12. Which party may a loan originator deceive without breaking the Model State Law's prohibited practices?

    • A The home seller The model's bar on deceptive practices reaches every person, and the home seller is one.
    • B The listing agent The listing agent is a person too, so deceiving the agent is a prohibited practice under the model.
    • C No one Correct
    • D A competing lender The bar is not limited to borrowers; a competing lender is a person the loan originator may not deceive.

    The Model State Law lists unfair or deceptive dealing with anyone as a prohibited practice for a licensee, which means no party to a deal is outside the bar. A seller, an agent and a rival lender are all people the loan originator must deal with honestly.

13. If a borrower offers a signed waiver to keep a personal loan off her application, what should the loan originator do under the Model State Law?

    • A Accept the waiver A borrower's waiver cannot make a false application true, and the bar on false statements has no consent exception.
    • B Get the waiver notarized A notarized waiver is still a waiver, and the application would still hide a debt the loan originator knows about.
    • C Leave it to the underwriter The loan originator who leaves the known debt off makes the false statement, whatever the underwriter later finds.
    • D Refuse Correct

    Making a false or deceptive statement in any manner is a prohibited practice under the Model State Law, and an application that hides a debt the loan originator knows about is false whatever the borrower signs. A waiver does not change that, notarized or not, and leaving the debt for the underwriter to find still puts the false statement on the file.

14. What should a loan originator tell a buyer who gets new wiring instructions by email the day before closing?

    • A Wire the funds as instructed Wiring on unverified email instructions is how these schemes succeed, and such transfers are often impossible to recall.
    • B Reply to the email to check A reply goes back through the same email thread, which may be the one a criminal has taken over.
    • C Confirm them another way first Correct
    • D Ask for them in a new email A second email is the same channel, so it cannot confirm that the first one was genuine.

    Changed payment instructions sent by email are a common fraud route, and the buyer should confirm them another way before wiring because Financial Crimes Enforcement Network (FinCEN) guidance says suspicious emailed instructions can be verified through other means of communication or with others authorized on the deal. A reply or a fresh email stays inside the channel a criminal may control.

    FinCEN Advisory FIN-2019-A005, p. 8 Reference document, not law.

15. If a borrower's rate is floating, what should the loan originator tell her about the rate on her Loan Estimate?

    • A It is guaranteed for 30 days A set period applies to a rate that has been locked, and a floating rate has no lock yet.
    • B It is guaranteed until closing A floating rate can go up or down until it is locked, so nothing holds it until closing.
    • C It is set only when locked Correct
    • D It is set when she applies Applying does not fix the rate; a floating rate is set only when it is later locked.

    The rate on a Loan Estimate is not a guarantee, and a floating rate is set only at the later time it is locked. Telling the borrower it is fixed for a period, until closing or from the application would misstate a rate that can still move.

    Your Home Loan Toolkit, p. 14 Reference document, not law.

16. May a lender cut a loan originator's leads for reporting a coworker's race-based pricing to a state agency, under the Fair Housing Act?

    • A Yes Retaliating against a person for reporting a discriminatory housing practice to an authority is unlawful conduct under the Fair Housing Act rules.
    • B No Correct
    • C Not if she filed a formal complaint The rules protect a report made to a housing provider or other authority, not only a formal complaint or proceeding.
    • D Only if leads are at its discretion Discretion over leads does not allow the lender to use them to punish a report; retaliation in any form is barred.

    Fair Housing Act rules make it unlawful to retaliate against any person because she reported a discriminatory housing practice to a housing provider or other authority, and cutting her leads is retaliation. The protection applies to the report itself, whether or not she also filed a formal complaint.

    24 CFR s. 100.400(c)(6)

17. On an FHA loan, what should a loan originator paid by commission do about choosing the appraiser?

    • A Leave it to the lender Correct
    • B Use an appraiser he knows Past good work does not matter; a commissioned originator may not select the appraiser at all.
    • C Pick one the borrower approves The borrower's agreement does not lift the bar on a commissioned originator selecting the appraiser.
    • D Select from the lender's approved list Choosing from an approved list is still the originator selecting the appraiser, which the rule bars for anyone paid on closed loans.

    Because a commissioned originator has a stake in the value, the Federal Housing Administration (FHA) makes the lender, or a third party it authorizes, responsible for selecting and paying the appraiser, and bars anyone paid on closed loans from selecting, retaining, managing or paying one. Picking from the lender's approved list is still the originator making the choice.

    FHA Handbook 4000.1, p. 169 Reference document, not law.

18. If a borrower asks whether she must buy credit life insurance her lender does not require, what should her loan originator say?

    • A That the lender requires it Telling her the insurance is required to get the loan is the predatory tactic the report describes.
    • B That the lender decides at closing Leaving the question to closing keeps her believing she may have to buy the product to close.
    • C That she can cancel it after closing Adding the product and letting her cancel later still leads her to buy something she was never required to buy.
    • D That it is optional Correct

    The originator tells her it is optional, because leading a borrower to believe she must buy a product such as credit insurance to close the loan is a deceptive sales tactic of predatory lending. Saying the lender decides at closing leaves her with the same false belief until it is too late to shop.

    HUD-Treasury, Curbing Predatory Home Mortgage Lending, p. 26 Reference document, not law.

19. If none of a loan originator's lenders will give the very low rate his ad shows, what should he do?

    • A Quote callers the real rate Switching callers to a higher rate leaves the unavailable rate in the ad, which is what draws them in.
    • B Add 'rates subject to change' A disclaimer does not make the rate available, and the bar is on advertising a rate that never will be.
    • C Pull the ad Correct
    • D Keep it for top scores Keeping the ad up for some callers still advertises a rate no lender will give anyone.

    An ad may not show a very low annual percentage rate that will not in fact be available at any time, so a rate no lender will give has to come out of the ad. Quoting callers the real rate on the phone is the switch itself, because the ad drew them in with a rate nobody offers.

    Regulation Z, 12 CFR Part 1026, Supplement I, comment 24(a)-1

20. Fraud for property is generally committed by:

    • A Buyers of homes to live in Correct
    • B Appraisers paid by the home's seller Appraisers are industry insiders, who are linked to fraud for profit rather than fraud for property.
    • C Investors reselling homes at a profit Reselling for gain is driven by money, which marks fraud for profit.
    • D Settlement agents skimming loan proceeds Settlement agents are insiders tied to fraud for profit, while fraud for property is a buyer seeking a home.

    Fraud for property is generally committed by home buyers trying to purchase homes for their personal use, often by misstating facts to win credit they would not otherwise get. Investors reselling homes at a profit fit fraud for profit instead, because money is the motive there.

    FinCEN mortgage loan fraud SAR analysis, p. 6 Reference document, not law.

21. If a buyer asks her loan originator to call a rental purchase her primary residence for a lower rate, how should he list it?

    • A As primary if she moves in briefly A brief stay does not make a rental her primary residence, so the listing would still misstate the loan purpose.
    • B As a second home A rental is not a second home either; listing it that way still misstates what the property is for.
    • C As primary with a file note A note in the file does not correct a false occupancy answer the lender relies on to set the rate.
    • D As an investment property Correct

    Borrowers misstate occupancy to buy investment property at better rates than a lender would give if it knew the home was not a primary residence, which is occupancy fraud. Listing it as primary and noting her plans still puts a false occupancy answer on the application, because the lender prices the loan off that answer.

    FinCEN mortgage loan fraud SAR analysis, p. 15 Reference document, not law.