Free MLO sample questions

Correct answer: Average the income from the past 24 months of personal and business tax returns.

For borrowers with fluctuating or seasonal self-employment income, Fannie Mae and Freddie Mac guidelines require averaging the income over a 24-month period using tax returns to get a stable, predictable figure. Using only recent P&L statements would not account for seasonal downturns and would likely overstate the qualifying income. Using only the most profitable year is not permitted, and relying solely on bank statements without tax returns is insufficient for conventional underwriting.

Correct answer: Contact the borrower and their insurance agent to amend the policy to meet lender requirements.

The correct action is to resolve the known issue before submitting the file to underwriting. The flood insurance policy does not meet lender guidelines, which is a critical underwriting condition. The MLO or processor must work with the borrower and their insurance agent to correct the policy's deductible. Submitting a file with a known, resolvable issue will only lead to delays. The property is not uninsurable, the policy simply needs adjustment. Denying the loan is premature.

Correct answer: The income can be 'grossed up' by 25% (multiplied by 1.25) before being used in the DTI calculation.

Fannie Mae and Freddie Mac guidelines permit the 'grossing up' of non-taxable income to make it comparable to a wage earner's gross (pre-tax) income. The standard gross-up factor is 25%, meaning the monthly non-taxable income is multiplied by 1.25. This adjusted, higher income figure is then used to calculate the DTI ratio. Simply using the net amount, adding a flat amount, or requiring it to be taxed are all incorrect procedures.

Correct answers: Fair Housing Act; Equal Credit Opportunity Act (ECOA)

The Fair Housing Act prohibits discrimination in housing-related transactions, including making loans, based on race, color, national origin, and other protected characteristics. The scenario describes a form of digital redlining where loan products are selectively offered based on the racial composition of a neighborhood.

ECOA prohibits discrimination in any aspect of a credit transaction. By steering or limiting the loan options presented to consumers based on the characteristics of their neighborhood (a proxy for race), the MLO is engaging in discriminatory practices that violate ECOA.

Correct answer: Asset and Money Laundering Scheme

Large, unseasoned cash deposits and questionable gift funds are classic indicators of asset fraud. The MLO might be helping borrowers temporarily inflate their assets to qualify for loans. This could also be part of a money laundering scheme where illicit funds are being legitimized through a real estate transaction. The other options are less likely given the specific evidence.

Correct answer: False

The Gramm-Leach-Bliley Act (GLBA) Safeguards Rule applies to all financial institutions, regardless of size. While the complexity of the information security program can be scaled to the size and complexity of the organization, no institution that handles nonpublic personal information is exempt from the core requirement to have a written program in place.

Correct answer: Mortgage with a Due-on-Sale Clause

A due-on-sale clause (also known as an alienation clause) is a standard provision in most modern mortgages that requires the borrower to repay the remaining balance of the loan in full upon the sale or transfer of the property securing the mortgage. An assumable mortgage is the opposite, allowing a new buyer to take over the existing loan.

Correct answer: The number of years the initial interest rate is fixed.

In a Hybrid ARM, such as a 5/1 ARM, the first number ('5') indicates the initial period, in years, during which the interest rate is fixed. The second number ('1') indicates how frequently the rate will adjust after the initial fixed period ends (in this case, once per year).

Correct answer: To provide a source of funds for consumer claims against the MLO for improper conduct.

A surety bond is a form of insurance that provides a financial guarantee to cover losses if an MLO engages in improper or illegal activities that harm a consumer. It ensures there is a pool of money available to pay claims and judgments against the MLO, thereby protecting the public. It is not for state fines, company E&O insurance, or MLO income.

Correct answer: The name, address, and phone number of the credit reporting agency that provided the report.

Under FCRA, when a creditor takes adverse action based on a credit report, they must provide the consumer with an adverse action notice that includes several key disclosures. This includes the contact information for the credit reporting agency (CRA) that furnished the report, a statement that the CRA did not make the credit decision, and notice of the consumer's right to obtain a free copy of their report from that CRA and to dispute inaccurate information.