NMLS Updated MLO Exam Questions and Answers by elle

In mortgage loan origination, a key focus is ensuring the borrower has the financial means to cover the costs of the mortgage, including closing costs, down payments, and reserves. Fraud may be indicated when there are discrepancies or inconsistencies in the borrower's disclosed assets and income. Here’s a detailed explanation of why Option A is the correct answer:

Bank Deposits that are not supported by income or other disclosures (Option A):

This is a red flag for possible fraud. If large or frequent deposits are reflected in the borrower’s bank accounts but cannot be linked to their income or other sources of funds disclosed in the application (e.g., salary, bonuses, or documented gifts), it raises suspicions that the borrower may be trying to misrepresent their financial position.

The Uniform Residential Loan Application (URLA) or 1003 form requires borrowers to disclose their assets, liabilities, and income sources in detail. Mortgage underwriters will carefully review these disclosures and cross-check them with bank statements to verify the legitimacy of deposits.

According to Fannie Mae’s Selling Guide, large, unexplained deposits need to be sourced and seasoned (i.e., must be in the borrower’s account for a specific period, typically two months) to ensure the funds are legitimate. Unsupported deposits that cannot be explained could indicate that the funds are coming from non-disclosed sources, such as unreported loans, which could impact the borrower’s ability to repay the loan.

Disclosure of gift funds (Option B):

Disclosing gift funds is a legitimate and common source of funds for closing costs and down payments, especially for first-time homebuyers. As long as the gift funds are properly documented (typically via a gift letter from the donor), this would not raise concerns of fraud. Lenders typically require that the gift funds come from a verifiable source, and a gift letter confirming that the funds are a true gift, not a loan that must be repaid, is crucial.

Parental loans disclosed but not yet received (Option C):

If a borrower discloses a loan from a parent but has not yet received the funds, this may raise underwriting concerns about whether the borrower truly has sufficient assets for closing. However, this does not indicate fraud as long as the loan is disclosed. The lender would verify that the loan will be received and accounted for prior to closing. The loan could potentially affect the borrower’s debt-to-income ratio (DTI) but wouldn’t necessarily suggest deception.

Borrower's receipt of a large bonus from an employer (Option D):

Receiving a large bonus from an employer is not in itself suspicious as long as the bonus is documented and can be verified by the lender. Borrowers often use bonuses as part of their qualifying income, and these are acceptable as long as they are stable and likely to continue, as outlined in Fannie Mae or Freddie Mac guidelines. Therefore, this would not indicate fraud unless there was an attempt to misrepresent the amount or source of the bonus.

In conclusion, Option A (Bank deposits that are not supported by income or other disclosures) is the most likely indicator of potential fraud because it involves unexplained and unverified funds, which may suggest misrepresentation of the borrower's financial standing.

The Federal Trade Commission (FTC) has primary enforcement authority under the Red Flags Rule, which is part of the Fair and Accurate Credit Transactions Act (FACTA). The Red Flags Rule requires financial institutions and creditors, including mortgage companies, to implement identity theft prevention programs that detect, prevent, and mitigate identity theft.

IRS (A), HUD (C), and the Conference of State Bank Supervisors (D) are not responsible for enforcing the Red Flags Rule.

The purpose of an appraisal in mortgage underwriting is to determine the current market value of the property being used as collateral for the loan. This is to ensure the loan amount does not exceed the value of the property and to protect the lender’s interest in case of default.

“An appraisal provides an opinion of the property’s market value, which is essential for the lender to determine if the property adequately secures the loan.”

— Fannie Mae Selling Guide, B4-1.1-03: Appraisal Report Forms and Exhibits

Mortgage loan originators are bound by ethical and legal requirements to disclose any material changes in a loan application that could affect the underwriting decision. Discovering that the property is no longer the borrower’s primary residence is a significant change and may affect loan terms, program eligibility, and disclosures. According to the SAFE Act and industry best practices, the MLO must immediately report such information to their employer and/or the lender.

“A mortgage loan originator has a duty to promptly notify the lender of any material change in the application or circumstances of the borrower that could impact loan eligibility or the terms of the loan.”

— SAFE MLO National Test Study Guide; NMLS UST Outline

Other options fail to fulfill the MLO’s legal and ethical obligations and could be construed as misrepresentation or fraud.