Mortgage Exam Review – Key Concepts Missed Flashcards

Federal Laws & Regulations

• RESPA / Regulation X

  • Purpose: To educate consumers about the costs associated with the settlement process and to eliminate abusive practices such as kickbacks and unearned referral fees among settlement service providers.

  • Defines “loan originator” as a lender or a mortgage broker involved in the origination process.

  • Section 8: Explicitly prohibits any "thing of value" (e.g., money, discounts, merchandise, gift cards) for the referral of settlement-service business. This means, for instance, a title company providing a gift card to a Mortgage Loan Originator (MLO) for referring clients is an illegal kickback.

• ECOA / Regulation B

  • Prohibits credit discrimination based on specific protected characteristics: race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), receipt of public assistance income, or exercising any rights under the Consumer Credit Protection Act (CCPA).

  • Requires a Notice of Action Taken within 30 days of application, informing the applicant of the decision (approval, denial, incompleteness). If information is missing, a Notice of Incomplete Application must be sent within 30 days.

  • Creditors must give applicants the "Right to Receive a Copy of the Appraisal" within three business days of application. If the appraisal is completed, a copy must be provided promptly, or no later than three business days before consummation (unless waived by the borrower).

  • The Government-Monitoring section of the Uniform Residential Loan Application (URLA) must be completed by observation (based on visual appearance and surname) if the applicant chooses not to provide the information voluntarily.

• Fair Housing Act

  • Broader in scope than ECOA regarding protected classes, specifically adding handicap (disability) and familial status (e.g., presence of children under 18, pregnant women) to the anti-discrimination protections.

  • Bans discriminatory practices in housing-related transactions, including steering (channeling prospective buyers to or away from certain neighborhoods based on protected characteristics) and redlining (refusing to make loans or offering less favorable terms in certain neighborhoods based on demographics).

• TILA / Regulation Z

  • TRID (TILA-RESPA Integrated Disclosure) rules, including the Loan Estimate (LE) and Closing Disclosure (CD), apply to most closed-end, federally related residential mortgage loans.

  • LE: Must be delivered or mailed to the consumer within 3 general business days (any day the creditor's offices are open to the public for carrying on substantially all of its business functions) of application. It must also be received by the consumer at least 7 general business days prior to loan consummation.

  • CD: The consumer must receive the Closing Disclosure at least 3 specific business days (all calendar days except Sundays and federal public holidays) before loan closing/consummation. The creditor is ultimately responsible for ensuring the CD is delivered, even if a settlement agent performs the delivery.

  • APR (Annual Percentage Rate) includes most finance charges over the loan term, such as origination fees, discount points, mortgage insurance premiums (PMI), and pre-paid interest. It typically excludes third-party charges like title insurance, escrow fees, notary fees, and most seller fees (unless the seller is required by the creditor).

  • Advertising that includes certain "trigger terms" (e.g., interest rate, down payment amount, payment amount, number of payments) or offers multiple rates must disclose each rate, the time period each rate applies, and the corresponding Annual Percentage Rate (APR) clearly and conspicuously.

• HOEPA / High-Cost (Section 32) Loans

  • Imposes stricter requirements on loans identified as high-cost based on specific APR or points/fees thresholds.

  • Balloon payments are generally banned for high-cost loans unless specific exceptions apply: the loan is a Qualified Mortgage (QM) with a balloon feature, the borrower has seasonal or irregular income, or it is a bridge loan with a term of 12 months or less.

  • Prohibits making loans based solely on the collateral value of the property without regard for the borrower’s ability to repay, often referred to as equity-based lending.

• HPML Rule (Section 35)

  • Covers High-Priced Mortgage Loans (HPMLs), defined by their APR exceeding the Average Prime Offer Rate (APOR) by a specified percentage. For first-lien loans, the APR must exceed APOR by 1.5 percentage points (pp); for subordinate-lien loans, it must exceed APOR by 3.5 pp.

  • Mandates the establishment of an escrow account for first-lien HPMLs on a principal dwelling. This account must be established before consummation to cover property taxes and hazard insurance premiums.

  • Imposes a "Two-Appraisal Rule" for property flips: a second appraisal is required if the seller’s acquisition price of the property was 10 \% or more lower than the current sale price (within 90 days), or 20 \% or more lower (between 91 and 180 days).

• MAP Rule / Regulation N

  • The Mortgage Acts and Practices - Advertising Rule (MAP Rule) prohibits material misrepresentations in any commercial communication regarding mortgage credit products.

  • Administered by the CFPB, it aims to prevent deceptive advertising that could mislead consumers.

• HPA (Homeowners Protection Act)

  • Governs the cancellation of Private Mortgage Insurance (PMI) on conventional loans. Borrowers can request cancellation when the loan-to-value (LTV) reaches 80 \% (based on original value). PMI must automatically terminate at 78 \% LTV (based on original value) or at the midpoint of the amortization period, whichever comes first.

  • Importantly, the HPA does NOT apply to FHA loans, which have their own mortgage insurance rules (MIP).

• FACTA / FCRA

  • FACTA (Fair and Accurate Credit Transactions Act) amended FCRA (Fair Credit Reporting Act).

  • An initial fraud alert placed on a credit report stays for 1 year; an extended fraud alert stays for 7 years.

  • Consumer reporting agencies generally retain bankruptcy information on a credit report for up to 10 years (Chapter 7 or 11). Most other negative information (e.g., late payments, collections, foreclosures) may remain for up to 7 years.

• GLB Privacy Rule

  • The Gramm-Leach-Bliley Act (GLBA) Privacy Rule requires financial institutions to explain their information-sharing practices to their customers.

  • Consumers typically have the right to opt-out of sharing their non-public personal information with non-affiliated third parties.

  • Financial institutions must provide an initial privacy notice at the time the customer relationship is established and an annual privacy notice thereafter.

• SAFE Act

  • The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) created the Nationwide Multistate Licensing System & Registry (NMLS), which was developed and is maintained by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). The Consumer Financial Protection Bureau (CFPB) holds the primary implementation authority.

  • MLOs (Mortgage Loan Originators) are required to display their unique identifier on various documents including loan applications, advertisements, and business cards. It is not, however, required on office signage.

  • LOs must be covered by a surety bond or contribute to a state recovery fund, ensuring financial protection for consumers. Employees may be covered by their employer's surety bond (piggy-back) rather than obtaining their own.

• Telemarketing Sales Rule

  • Prohibits telemarketing calls before 8 a.m. or after 9 p.m. in the consumer's time zone.

  • Telemarketers must honor requests to be placed on the national Do-Not-Call Registry and also respect a consumer’s specific request to opt-out of future calls from that particular entity.

Mortgage Insurance & Government Loans

• FHA

  • UFMIP (Upfront Mortgage Insurance Premium): Typically 1.75 \% of the base loan amount, which is generally financed into the loan. It is non-refundable, except for a partial refund if the borrower refinances into a new FHA loan within 3 years.

  • Annual MIP (Mortgage Insurance Premium): Required on most FHA loans. If the original LTV was less than or equal to 90 \% at origination, the annual MIP is required for 11 years. If the original LTV was greater than 90 \% at origination, the annual MIP is required for the full term of the loan or 30 years, whichever comes first.

  • Seller concessions are capped at 6 \% of the sales price and cannot be used to fund the borrower’s minimum required down payment.

• VA

  • VA loans offer a guarantee to the lender, the percentage of which varies with the loan amount (referred to as the veteran's entitlement). A funding fee is typically required, which is non-refundable unless it was an over-charge or the veteran is exempt (e.g., disabled veterans).

  • Underwriting guidelines include a DTI (Debt-to-Income) ratio guideline of 41 \% (total DTI) plus a residual-income test, which ensures the veteran has sufficient discretionary income left after housing and other major debts.

  • VA loans are assumable (if the new borrower qualifies) and do not require monthly mortgage insurance. They allow for 100 \% Loan-to-Value (LTV) financing (no down payment required).

• USDA / RHS

  • USDA (United States Department of Agriculture) / RHS (Rural Housing Service) loans are designed for rural areas.

  • Direct loans from USDA typically offer terms of 33 or 38 years, depending on the borrower's income level.

• PMI (Conventional)

  • Private Mortgage Insurance (PMI) is required on conventional loans when the Loan-to-Value (LTV) exceeds 80 \% (i.e., the borrower has less than 20 \% equity/down payment).

  • Seller concessions for conventional loans are often tied to LTV: if LTV is greater than 90 \%, seller concessions are typically capped at 3 \%; if LTV is less than or equal to 90 \%, they may be capped at 6 \%.

Disclosures & Documents

• Loan Estimate (LE)

  • When providing estimated fees, specific amounts may be rounded to the next whole dollar, with the exception of the estimated principal and interest payment, which should reflect the exact calculation.

  • A revised LE is permitted for specific “changed circumstances” (e.g., changes to interest rate that impact closing costs, natural disaster impacting property, new unforeseen information affecting eligibility) and when the interest rate is locked. A revised LE must be delivered to the consumer at least 4 general business days before consummation.

• Closing Disclosure (CD)

  • The "Loan Terms" table on the CD specifically asks: “Can this amount increase after closing?” for key loan features such as the loan amount, interest rate, monthly principal and interest payment, prepayment penalty, and whether the loan has a balloon payment. This clarifies potential future changes to the borrower.

  • The creditor is ultimately responsible for the accuracy and timely delivery of the Closing Disclosure, even if a settlement agent or other third party prepares and delivers it to the consumer.

• ECOA Valuations Rule

  • Under ECOA, creditors must promptly provide applicants with a copy of all appraisals and other written valuations developed in connection with an application for credit secured by a first lien on a dwelling.

  • The copy must be provided promptly upon completion, or at least 3 specific business days before closing/consummation. The borrower can waive this 3-day timing requirement but must still receive the copy by consummation.

• HELOC/Open-End

  • For Home Equity Lines of Credit (HELOCs) and other open-end credit products secured by a dwelling, consumers must receive the booklet "What You Should Know about Home Equity Lines of Credit" along with specific program disclosures outlining the terms.

  • TRID forms (LE and CD) are not required for open-end transactions; instead, separate TILA disclosures are used.

• HOEPA & HECM Counseling

  • It is mandatory for consumers to receive independent third-party counseling from an HUD-approved counselor before closing certain types of loans: high-cost loans (HOEPA), all reverse mortgages (e.g., HECM), or any loan that could result in negative amortization for a first-time borrower.

Mortgage Calculations & Ratios

• Interest: Annual Interest is calculated by multiplying the stated interest Rate by the current Loan Balance.

  • Example: For a 6 \% rate on a \$200{,}000 loan balance, the annual interest would be 0.06 \times \$200{,}000 = \$12{,}000.

• Rental Income Qualifying: When underwriting with rental income from an investment property, lenders typically use 75 \% of the gross rental income. This 25 \% reduction accounts for potential vacancies, maintenance, and other operating expenses usually borne by the landlord.

  • Example: If gross rental income is \$1{,}000, then \$0.75 \times \$1{,}000 = \$750 is used for qualifying.

• CLTV (Combined Loan-to-Value): Calculated as the sum of the first mortgage balance and any drawn amount on a second lien (e.g., HELOC balance) divided by the property's value.

  • Example: For a \$80,000 first mortgage and a \$15,000 drawn on a second lien on a property valued at \$100,000, the CLTV is (\$\,80k + \$\,15k) / \$\,100k = 95 \%.

• Housing Ratio (Front-End DTI): This ratio assesses the borrower's ability to cover housing expenses and is calculated by dividing the total proposed housing payment (Principal, Interest, Taxes, Insurance - PITI) by the borrower's Gross Monthly Income.

• Discount Point: A discount point is a fee paid to the lender at closing to reduce the interest rate on a loan. One discount point is equal to 1 \% of the loan amount (after accounting for any down payment).

  • Example: Two discount points on a \$180,000 loan would cost 0.02 \times \$180{,}000 = \$3{,}600.

• Per-Diem Interest: This is the daily amount of interest collected from the borrower at closing to cover the period from the closing date through the end of the month in which the loan closes. Interest is typically paid in arrears.

  • Example: If closing is on January 20, interest would be collected for 12 days (from January 20 to January 31).

• ARM Fully-Indexed Rate (FIR): The Fully-Indexed Rate on an Adjustable-Rate Mortgage (ARM) is determined by adding the current Index value to the fixed Margin. This is the rate before applying any caps.

  • Example: If an ARM starts at 4 \% with periodic caps of 2 \% and a lifetime cap of 6 \% above the start rate, and the current index is 5 \% with a margin of 3 \%, the FIR would be 5 \% + 3 \% = 8 \%. However, if the periodic cap limits the increase to 2 \%, the new rate for that adjustment period would be capped at 4 \% + 2 \% = 6 \%.

• HPML Flip Test: To prevent property flipping abuse, a second appraisal is required for High-Priced Mortgage Loans if the seller acquired the property at a significantly lower price recently. Specifically, if the current sale price is more than 10 \% higher than the seller's price within the past 90 days, or more than 20 \% higher within the past 91 to 180 days.

Loan Types & Features

• Non-traditional mortgage: Any mortgage product other than a 30-year fixed-rate fully amortizing loan is generally considered non-traditional (e.g., ARMs, interest-only loans, balloon mortgages).

• Interest-Only (IO)

  • An Interest-Only loan temporarily requires only interest payments, leading to lower initial monthly payments. Principal reduction does not occur during this interest-only period.

  • These loans are suitable for sophisticated borrowers who anticipate uneven cash flows, such as those relying on annual executive bonuses or seasonal business income, which allows them to pay down principal later.

• Balloon Mortgage

  • A balloon mortgage is amortized over a longer period (e.g., 30 years) than its actual loan term (e.g., 5 or 7 years), resulting in a large lump-sum payment (the "balloon") due at maturity.

  • Some balloon mortgages include a Conditional Refinance provision, which may allow the borrower to modify the loan to a fully amortizing loan if certain conditions are met, such as owner-occupancy, no late payments, no junior liens, and the new rate being less than or equal to the original start rate plus 5 \%.

• Option ARM / Negative Amortization

  • An Option ARM (Adjustable-Rate Mortgage) offers the borrower several payment options, potentially including a minimum payment that is less than the accrued interest. When payments are less than the accrued interest, the unpaid interest is added to the principal balance, causing the loan balance to increase (negative amortization).

• Piggyback (80-10-10, etc.)

  • A piggyback loan involves obtaining a simultaneous second lien (e.g., an 80-10-10 loan where 80 \% is the first mortgage, 10 \% is the second mortgage, and 10 \% is the down payment) to avoid paying Private Mortgage Insurance (PMI) on the first mortgage. The Ability-to-Repay (ATR) rule applies to both the first and second loans.

• Bridge Loan

  • A bridge loan, typically a short-term loan with a term of 12 months or less, is specifically exempt from aspects of the Qualified Mortgage (QM) and HOEPA (High-Cost Loan) balloon payment bans.

• Reverse Mortgages

  • These loans allow homeowners, typically seniors, to convert a portion of their home equity into cash without selling the home or making monthly mortgage payments.

  • Types include: HECM (Home Equity Conversion Mortgage) which is an FHA-insured reverse mortgage and the most common; Proprietary reverse mortgages offered by private lenders; and Single-Purpose reverse mortgages, which are often the cheapest, offered by local government agencies or non-profits, and earmarked for specific uses like property taxes or repairs.

  • Loan "acceleration events" that can cause a reverse mortgage to become due and payable include: adding a new owner to the title, renting out the property, obtaining new debt that is senior to the reverse mortgage lien, the last surviving borrower dying or ceasing to occupy the property as a principal dwelling, or failing to pay property taxes or homeowner’s insurance.

• Qualified Mortgage (QM)

  • A Qualified Mortgage is a category of loans with certain features that make them more stable and easier for consumers to repay. Key criteria include:

  • Maximum loan term of 30 years.

  • Points and fees charged to the borrower are capped, generally at 3 \% of the total loan amount (with specific thresholds for smaller loan amounts).

  • Prohibits negative amortization, interest-only payments (except for small-creditor balloon QMs under specific conditions), and balloon payments (with limited exceptions).

  • Requires DTI (Debt-to-Income) ratio not exceeding 43 \%%. However, loans eligible for purchase by Fannie Mae, Freddie Mac, or insured by FHA/VA/USDA are generally considered QMs regardless of DTI if they meet agency guidelines (GSE patch).

  • Only fixed-rate non-HPML QMs may include prepayment penalties, which are tightly restricted: a maximum of 2 \% of the outstanding balance during the first 2 years and 1 \% during the third year. Prepayment penalties are not allowed after the third year.

• Non-QM underwriting

  • For non-Qualified Mortgages (Non-QM), underwriting may not consider periodic interest-rate caps on Adjustable-Rate Mortgages (ARMs) when calculating the borrower’s maximum potential monthly payment during the initial re-cast period. Instead, the highest possible payment must be considered to assess ability to repay.

ARM Mechanics & Indices

• Margin: A fixed percentage added to the index to determine the fully indexed rate of an ARM. It represents the lender's profit and operating costs and remains constant over the life of the loan.

• Index examples: The index is a variable interest rate benchmark that fluctuates with market conditions. Common examples include: SOFR (Secured Overnight Financing Rate), which has largely replaced LIBOR; Treasury Bill (T-Bill) rates; COFI (Cost of Funds Index); and LIBOR (London Interbank Offered Rate), which is a legacy index phasing out.

• Caps

  • Initial Cap: Limits how much the interest rate can change (up or down) at the first adjustment period.

  • Periodic Cap: Limits how much the interest rate can change during any subsequent adjustment period after the first.

  • Lifetime Cap: Sets the maximum and minimum interest rate that can be charged over the entire life of the loan.

  • Payment cap (common with Option ARMs) limits how much the monthly payment can change, potentially leading to negative amortization if the payment limit does not cover the accrued interest.

  • Periodic rate cap limits the interest-rate change per adjustment period, directly affecting the interest rate the borrower pays.

Appraisal & Property Valuation

• Sales Comparison/Market Data: This is the primary and most commonly used appraisal approach for single-family residential properties. It relies on comparing the subject property to recent sales of similar properties (comparable sales or "comps") in the same or similar market.

• Cost Approach: This appraisal method is best suited for new construction, unique properties (e.g., schools, hospitals), or properties with limited comparable sales data. It estimates the cost to build a new replica, subtracts depreciation, and adds the land value.

• Income/Capitalization: Used for income-producing properties, such as rental homes or commercial buildings. It estimates the value of a property based on the income it is expected to generate. FNMA Form 1007 is specifically used for single-family residential (SFR) investment property income analysis.

• Predominant Value: The most common value or price range of properties in a specific neighborhood or market area, determined by recent sales data.

• Warranty Deed: A legal document that conveys ownership of real property from the grantor (seller) to the grantee (buyer) and typically includes covenants (promises) that guarantee the title is clear and free of encumbrances.

• Deed of Trust: Used in title-theory states (like NC, CA, TX), where the borrower conveys legal title to a neutral third-party trustee, who holds it until the loan is paid off. The lender is the beneficiary, and the borrower retains equitable title and possession.

• Table Funding: A process where a mortgage broker originates and closes a loan in their own name, but the loan is immediately assigned and funded by the actual lender at the closing table. Essentially, the broker acts as a temporary lender.

• Appraisal red flags: Indicators of potential fraud or inaccuracies in an appraisal report include: a report dated before the purchase contract, photos appearing inconsistent with property description or condition, an effective age that is an outlier compared to similar homes, significant value increase without improvements, or use of distant or inferior comparables.

• ECOA appraisal copy rule; HPML two-appraisal rule: These rules reinforce the requirement for borrowers to receive appraisal copies (ECOA) and for specific HPMLs on property flips to have two appraisals to prevent inflated values, with an exemption for servicemembers.

• Hazard-insurance requirement (FNMA): Fannie Mae generally requires homeowner's (hazard) insurance coverage to be the lesser of 100 \% of the insurable value of the improvements or the unpaid principal balance of the loan, but never less than 80 \% of the replacement cost of the improvements.

Title, Liens, Escrow

• Lien Theory vs. Title Theory states:

  • Lien Theory States: The borrower holds legal title to the property, and the lender holds a lien (mortgage) against the property as security for the debt.

  • Title Theory States: The borrower conveys legal title to a third-party trustee via a deed of trust, who holds it in trust for the lender (beneficiary) until the loan is repaid. The borrower retains equitable title and the right to possess the property.

• Due-on-Sale (alienation) clause: A clause in a mortgage or deed of trust that allows the lender to demand immediate repayment of the entire loan balance upon the transfer of ownership of the property. This clause is typically absent in FHA and VA loans, which are generally assumable, allowing a new qualified buyer to take over the existing loan.

• Subordination agreement: A legal document that changes the priority of a lien. It is often used to ensure that a second lien remains junior (subordinate) to the first mortgage, especially when the first mortgage is refinanced, preserving the original lender's priority.

• Lender’s Title Policy: Protects the lender's investment and priority of their lien against title defects or undisclosed encumbrances. The coverage decreases as the loan balance decreases.

• Owner’s Policy: Protects the homebuyer/owner from financial loss caused by defects in the title that were not discovered during the title search. The coverage amount typically equals the purchase price and remains constant.

• Escrow (impound) shortages: If there's a deficiency in the escrow account:

  • A shortage of more than one month's escrow payment (up to the amount of the shortage) may be collected from the borrower over at least 12 months in equal installments.

  • A shortage of less than one month's escrow payment may be collected in 30 days or in 2 or more equal monthly installments.

Fraud & Ethics

• Fraud for Housing: Fraud committed by a borrower to obtain or maintain housing (e.g., misrepresenting income, assets, employment on a loan application, or concealing a silent second mortgage to avoid a higher interest rate or PMI). The borrower intends to live in the home and make payments.

• Fraud for Profit: A more complex scheme often involving collusion among industry insiders (e.g., MLOs, appraisers, real estate agents, investors) to inflate the value of a property or loan amount to illegally profit from the transaction. This includes property flipping schemes, air loans, or identity theft.

• Straw Buyer: An individual who allows their name and credit to be used by another person to obtain a mortgage loan. The actual borrower is concealed, and the straw buyer's identity is used for a fee, with no intention of occupying the property or making payments.

• Reverse Redlining: The practice of targeting vulnerable consumers or specific geographic areas, often with predominantly minority residents, with predatory lending products that have higher costs or less favorable terms than those offered to other borrowers. This practice is prohibited, particularly by HOEPA's bans on certain high-cost loan features.

• Appraisal influence: Any threat, coercion, extortion, inducement, or bribery to influence an appraiser's professional judgment regarding property value is strictly prohibited and illegal under the Dodd-Frank Act.

• MAP Rule & CFPB: The Mortgage Acts and Practices (MAP) Rule (Regulation N) is enforced by the Consumer Financial Protection Bureau (CFPB) to ensure truthful and accurate advertising of mortgage credit products. An advertisement is considered deceptive if it contains a representation or omission that is material and is likely to mislead a reasonable consumer acting reasonably under the circumstances.

Licensing & Oversight

• State agencies: State regulatory authorities have significant powers to oversee MLOs and mortgage companies. These include the ability to subpoena witnesses and documents, conduct examinations of books and records, impose civil monetary penalties, order restitution to consumers, and issue cease and desist orders for violations. However, state agencies cannot impose jail time; criminal charges are handled by criminal courts.

• License lapse: If an MLO's license lapses for a period of 5 years or more, they are typically required to retest the national component of the SAFE MLO test to regain licensure. Time spent as a registered MLO (e.g., bank employee MLO) counts toward the active licensing period.

• Continuing Education: To reinstate an expired license, MLOs must complete all required continuing education for the last year they were licensed, in addition to any requirements for the current year or reinstatement period.

• NMLS public access: The NMLS Consumer Access website provides public access to an MLO's employment history and publicly available disciplinary actions (e.g., license revocations, suspensions, civil penalties). Other personal data provided during the application process (e.g., financial information, social security numbers) remains confidential.

Underwriting & Qualification

• Two main factors: Mortgage loan underwriting primarily evaluates two key aspects to assess risk:

  • Applicant: Assesses the borrower's creditworthiness (credit history, scores), income stability and sufficiency, and overall ability to repay the loan.

  • Collateral: Evaluates the property's value, condition, and marketability to ensure it provides sufficient security for the loan.

• Reliable income verification: Lenders verify income using various documents such as W-2 forms (for salaried employees), recent paystubs, and federal tax returns (typically 2 years for consistency). For self-employed borrowers, specific non-cash deductions (like depreciation) may be added back to their net income for qualifying purposes, as these are not actual cash outflows.

• Non-traditional credit: For borrowers with a thin credit file or no traditional credit bureau data, lenders may use alternative or non-traditional credit sources (e.g., timely payments for rent, utilities, phone bills, insurance premiums) to assess creditworthiness and repayment history.

• Residual-income test (VA): While DTI is considered, VA loans emphasize the residual-income test. This test determines if the veteran has sufficient discretionary income remaining after paying major monthly expenses (including the mortgage) to cover daily living expenses for their household size and region. A strong residual income can sometimes offset a higher DTI ratio.

Advertising & Marketing

• Regulation Z trigger terms: When an advertisement for mortgage credit states certain "trigger terms" (e.g., the amount or percentage of a down payment, the number of payments or period of repayment, the amount of any payment, or the amount of any finance charge), Regulation Z requires additional clear and conspicuous disclosures, including: the amount or percentage of the down payment, the terms of repayment, and the Annual Percentage Rate (APR).

• Phrase “Buy for less than rent”: This phrase, if used comparatively, does not contain any of the specific trigger terms related to loan costs or terms. Therefore, it does not require additional disclosures under Regulation Z.

• Multiple simple-interest rates in one ad: If an advertisement presents multiple simple interest rates (e.g., a "teaser rate," then a higher rate), for each rate advertised, the ad must disclose the applicable time period for that rate and the corresponding full Annual Percentage Rate (APR).

• Unique ID: The MLO's unique identifier, assigned by the NMLS, must appear on all loan applications, advertisements, and business cards provided by the MLO. It is not mandatory to display the unique ID on outside building signs.

Miscellaneous Standards & Facts

• Loan Product Advisor: This is the Automated Underwriting System (AUS) used by Freddie Mac.

• Desktop Underwriter: This is the Automated Underwriting System (AUS) used by Fannie Mae.

• Combined risk features: The practice of accumulating multiple higher-risk loan features (e.g., stated income loans, interest-only payments, piggyback loans) is known as "risk layering." This increases the overall risk of default for the lender.

• Prime Rate: The prime rate is a benchmark interest rate that individual banks charge their most creditworthy corporate customers. It is influenced by, but not directly dictated by, the Federal Reserve's target federal funds rate. Each bank sets its own prime rate.

• Business day (LE vs. CD):

  • For the Loan Estimate (LE), a "business day" is defined as a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions (also known as a "general business day").

  • For the Closing Disclosure (CD), a "business day" is defined as all calendar days except Sundays and federal public holidays (also known as a "specific business day"). This distinction is critical for compliance with TRID timing requirements.

• Surety bond: The penal sum (coverage amount) of an MLO's surety bond must generally reflect the volume of loans originated in the prior year to ensure adequate consumer protection. Individual employee LOs may be covered by their employing company's surety bond, or they may be required to pay into a state recovery fund.

• Flood-zone determination: The determination of whether a property is located in a flood zone is typically made by the appraiser during the appraisal process. The underwriter is then responsible for verifying that adequate flood insurance is obtained if the property is in a designated special flood hazard area (SFHA) and the loan is federally regulated.