SAFE MLO National Test – Comprehensive Study Notes

General Test Information

• Test length & scoring:
  • 120 multiple-choice items (115 scored, 5 un-scored experimental questions)
  • Passing score is set by the NMLS; items are weighted according to the five content areas.
• Content weighting:
  • Mortgage Loan Origination Activities – 27 %
  • Federal Mortgage-Related Laws – 24 %
  • General Mortgage Knowledge – 20 %
  • Ethics – 18 %
  • Uniform State Content – 11 %
• Legislative updates:
  • Candidates must answer according to current statutes/regulations, even if the outline has not been updated yet.
  • Continuous professional reading (CFPB, HUD, state regulator bulletins) is essential to detect mid-cycle changes.

I. Mortgage Loan Origination Activities (27 %)

A. Loan Inquiry & Application Process Requirements

• Loan inquiry stage:
  • Triggered by the consumer’s request for information about credit terms.
  • Requires early disclosure of the MLO’s unique identifier, your role (broker/ lender), and whether you will receive compensation from multiple parties.
  • Key federal disclosure: “Know Before You Owe” Home Loan Toolkit must be delivered within 3 business days for purchase transactions.
• Taking an application ("A – L I E N S" 🎯 mnemonic):
  1. Address of subject property
  2. Loan amount
  3. Income
  4. Estimated value of the property
  5. Name(s) of borrower(s)
  6. Social Security Number
  • Collecting all 6 constitutes an application under TRID and starts multiple clocks (Loan Estimate, ECOA notification, etc.).
  • Permissible / prohibited questions (ECOA):
  • May ask marital status (married, unmarried, separated) & age (only to determine legal capacity or reverse-mortgage eligibility).
  • Cannot ask about child-bearing intentions.
• Gift donors:
  • Acceptable sources: immediate relatives, domestic partners, fiancés.
  • Must obtain a gift letter stating that funds are not repayable; must source & season funds (e.g., 60-day account history).

3. Verification

• Authorization forms (4506-C/4506-T, SSA-89) – borrower consent to pull IRS transcripts & SSA records.
• Verifying employment: Written Verification of Employment (WVOE) or electronic database; compare to paystubs & transcripts.
• Asset attribution: Underwriters normally allow 100 % of verified checking/savings; retirement accounts often discounted to 60–70 % to reflect taxes & penalties.

4. Product & Program Suitability

• Must align loan purpose, term, and risk with borrower’s stated goals & ability to repay (ATR).
  • Example: steering a fixed-income senior into a risky 12-month interest-only ARM ≈ unethical & potentially illegal.

5. Accuracy (Tolerances)

• Zero-tolerance fees (may not increase at closing): lender fees, transfer taxes, fees paid to affiliates selected by the lender.
• 10 % cumulative tolerance: third-party charges (appraisal, title) when borrower selects from lender’s written list.
• No-limit category: prepaid interest, escrow deposits, homeowner’s insurance chosen by borrower.
  • Violation scenario: Title fee quoted \$500, closes at \$575; total 10 % basket increase must not exceed 10 % of aggregate estimates.

6. Disclosure Timing Highlights

• Loan Estimate (LE) – within 3 business days of application; mailed counts if sent.
• Notification of action taken (ECOA) – 30 days.
• Early disclosures (TIL/CHARM booklet for ARMs) – due at application or within 3 BD.
• Affiliated Business Arrangement (AfBA) disclosure – at time of referral.

7. Loan Estimate Nuances

• Expiration of LE settlement charges: consumer must express intent to proceed within 10 business days.
• Revised LE permissible if bona-fide "change of circumstance"; must be re-issued within 3 BD.
• Tolerance cures: lender refunds excess \le 60 calendar days after closing.

8. Closing Disclosure (CD)

• Must be delivered 3 specific business days before consummation.
• A corrected CD triggering a new waiting period is required for:
  1. APR increases >1/8\,(0.125\%) (fixed) or >1/4 on irregular loans.
  2. Addition of a pre-payment penalty.
  3. Loan product change.
• Homeownership Counseling Disclosure (Reg X §1024.20): list of HUD-approved counselors—given within 3 BD of application.

B. Qualification: Processing & Underwriting

1. Borrower Analysis

• Assets: must be liquid, sourced, seasoned.
• Liabilities: include all monthly obligations; omit business debt only with proof of 12-month company payment.
• Income:
  • Salaried – use YTD paystub + W-2.
  • Self-employed – average 2 years 1040s (possibly 1 yr with AUS approval).
• Credit report tri-merge; use middle score (lower of two if co-borrowers).
• Qualifying ratios (example conventional):
  • Housing ratio \text{Front‐end} = \frac{PITI}{Gross\,Monthly\,Income}.
  • Debt ratio \text{Back‐end} = \frac{PITI+All\,Monthly\,Debt}{Gross\,Income}.
• Ability-to-Repay (ATR) Rule (Reg Z §1026.43) – eight underwriting factors incl. income, assets, debts, credit, DTI.

2. Appraisals

• Purpose: ensure collateral value to protect lender & investor.
• Three classical approaches:
  1. Sales Comparison/Market – primary for 1–4 family.
  2. Cost – new construction & insurance.
  3. Income (Capitalization) – investment property.
• Independence: Appraiser Independence Requirements (AIR); originator may not influence value.
• Timing: copy of appraisal must be provided at least 3 BD before consummation (Reg B Valuations Rule).

3. Title

• Preliminary Title Report/Commitment – ordered early to discover liens, encroachments, easements.
• Final title policy issued at/following closing; protects lender (lender’s policy) & optionally owner.

4. Insurance

• Flood: mandatory if structure lies in FEMA Special Flood Hazard Area; minimum \$250,000 coverage.
• PMI: required on conventional loans when LTV > 80 %; borrower-paid/Mortgage-insurance-premium (MIP) for FHA.
• Hazard: at least replacement cost of improvements; first-year premium collected in advance.
• Government MI: FHA MIP (UFMIP + annual); VA funding fee; USDA guarantee fee.

C. Closing

• Security instrument signatures: all owners and any spouse in a community-property state must sign.
• Power of Attorney (POA): must be specific to transaction & recorded.
• Fee explanations: line-by-line walk-through of CD replaces HUD-1 (post-2015 TRID).
• Funding: table-funding vs. dry-funding states; rescission period (Reg Z) of 3 BD on owner-occupied refinance before disbursement.

D. Financial Calculations

• Periodic interest (simple interest) I = P\times r \times t (if t in years).
• Monthly payment (fully amortized): M = P\times \dfrac{r/12}{1-(1+r/12)^{-n}}.
• Down payment = \text{Purchase Price} - \text{Loan Amount}.
• ARM adjustment example: new rate =\text{Index}+\text{Margin}; payment recast using remaining term.

II. Federal Mortgage-Related Laws (24 %)

A. RESPA (Reg X)

• Purpose: prohibit kickbacks; set standard closing disclosures; limit escrow cushions to 2 months.
• Applies to federally related 1–4 unit residential loans.
• Section 8: no kickbacks, fee-splitting, or unearned fees; max \$10,000 fine &/or 1 yr prison.
• Required disclosures:
  • LE & CD (via TRID)
  • AfBA: if >= 1 % ownership.
  • Initial Escrow Statement: due 45 days of closing.
  • Annual Escrow Statement: once per year.
• Foreclosure protections: required contact attempts for delinquent borrowers; restrict dual tracking.

B. ECOA (Reg B)

• Protected characteristics: race, color, religion, national origin, sex, marital status, age, public-assistance income, consumer rights exercised.
• Notice of Action Taken letters:
  • Approved/denied/incomplete – 30 calendar days.
  • Adverse action after counter-offer – within 90 days.
• Adverse Action disclosure must contain specific reason(s), ECOA rights, and bureau contact.
• Definition "elderly" ≥ 62 years.
• If borrower refuses demographic info on 1003, MLO must visually identify.

C. TILA (Reg Z)

• Goal: promote informed use of credit via standardized cost disclosures.
• Coverage: consumer credit secured by dwelling & loans <$\$60,000$ (except HELOCs & RMs not used for business).
• Key terms:
  • APR (Annual Percentage Rate): cost of credit expressed as yearly rate.
  • Finance charge: dollar cost including interest & certain fees.
  • Rescission: 3 BD for owner-occupied refinance; NOT for purchase, 2nd home, investment.
• HOEPA high-cost triggers (Section 32):
  • APR exceeds APOR by > 6.5 % (1st lien) or 8.5 % (< $50k subordinate) OR total points & fees > 5 %.
• Higher-Priced Mortgage Loan (HPML) (§1026.35): APR exceeds APOR 1.5 % (1st lien) or 3.5 % (subordinate); requires escrows & appraisal.
• MLO Compensation Rule: bans compensation based on loan terms or steering; dual compensation prohibited.

D. TRID (“Know Before You Owe” Rule)

• Merged GFE + initial TIL → Loan Estimate; HUD-1 + final TIL → Closing Disclosure.
• Covered loans: closed-end consumer credit secured by 1–4 unit dwelling (not HELOC, reverse, chattel loans).
• Consummation ≠ closing; it’s when consumer becomes contractually obligated (often signing note).
• "Change of circumstance" examples: borrower-requested change, rate lock, unforeseeable events.
• Information on demand: lender must provide copy of appraisal, credit score disclosure, etc. upon request.

E. Other Federal Acts & Guidelines (high-yield facts)

• HMDA (Reg C): Loan Application Register (LAR) due March 1; identifies redlining.
• FCRA/FACTA: right to free annual credit report; Fraud Alert (90 days temporary), Identity Theft red flags.
• FTC Red Flags Rule: program to detect patterns indicating ID theft.
• BSA/AML: Suspicious Activity Report (SAR) within 30 days of detection; Currency Transaction Report (CTR) >$\$10,000$.
• GLBA: Safeguards Rule (protect customer data); Privacy Notice at account opening & annually; Opt-out for info sharing.
• MAP Rule (Reg N): prohibits deceptive mortgage advertising.
• E-Sign Act: electronic records acceptable if consumer consents & receives disclosure of hardware/software requirements.
• USA PATRIOT Act: Customer Identification Program (CIP); must collect name, DOB, address, SSN.
• PMI Cancellation Act (HPA): borrower may request when LTV = 80 %; automatic at 78 %.
• Dodd-Frank: created CFPB; defined UDAAP (Unfair, Deceptive, or Abusive Acts or Practices).

F. Regulatory Authorities

• CFPB – primary federal regulator & rule-writer for consumer financial products.
• HUD – oversees FHA, fair housing; still enforces RESPA Section 8 on certain matters.

III. General Mortgage Knowledge (20 %)

A. Qualified vs. Non-Qualified Mortgage Programs

• Qualified Mortgage (QM): meets ATR, no negative amortization, balloon (few cases), max points & fees 3 %, DTI ≤ 43 % (temporary GSE patch allows AUS-approved > 43 %).
• Conventional / Conforming: meet Fannie Mae/Freddie Mac limits (\$726,200 base 2023; higher in high-cost areas).
• Government:
  • FHA: 3.5 % down, UFMIP 1.75 %, annual MIP.
  • VA: zero down, residual income test, funding fee (exempt disabled vets).
  • USDA: rural, income-restricted, guarantee fee.
• Non-conforming:
  • Jumbo: > conforming limit.
  • Alt-A: A-paper with atypical documentation (e.g., 12-month bank statements).
  • Subprime: below 620 FICO, high DTI.
  • Non-QM: interest-only, 40-year term, DTI > 43 %, etc.

B. Mortgage Loan Products (key features)

• Fixed-Rate Mortgage (FRM): constant P&I; best for rate stability.
• ARM parameters**: index (SOFR, CMT), margin, caps (periodic, lifetime), negative amortization? example *2/2/6* cap structure.
• Purchase Money Second: simultaneous 80-10-10 to avoid PMI.
• Balloon: 360/120 example – 30-yr amortization, due in 10 yrs.
• Reverse (HECM): 62+ borrower, rising loan balance; non-recourse.
• HELOC: open-end, interest-only draw period.
• Construction-to-perm: two-time or single-close; interest-only during build.
• Interest-Only: IO period (5–10 yrs) then recast; non-QM today.

C. Core Terminology

• Subordinate lien, escrow/impound, table funding (broker closes in lender’s name), YSP (now called lender credit), LTV =\frac{Loan}{Value}, Discount points (1 pt = 1 % of loan; lowers rate ≈ .25 % each), 2-1 Buy-down (temporary subsidy).
• Primary vs. Secondary Market: originators vs. investors (FNMA, FHLMC, GNMA securitization).
• Assumable loan: allowed for FHA/VA (with qualification), rarely conventional.

IV. Ethics (18 %)

A. Ethical Issues & Prohibited Acts

• Redlining: geographic discrimination (HMDA data will expose).
• Kickbacks: any thing of value for referral – RESPA §8.
• Steering: directing consumer into costlier product for compensation.
• Appraiser coercion: illegal per AIR & TILA §36.
• Fraud red flags:
  • Income too round (\$10,000 even), multiple SSNs, gifts from unrelated parties, PO Box employer address.
• Advertising UDAAP: “fixed for 30 yrs” on an ARM is deceptive.

B. Ethical Behavior in Practice

• Permitted fees: bona-fide third-party pass-through; upfront credit-report fee only before LE.
• Complaint routing: log, time-stamped, resolution within regulator’s timeline.
• Cybersecurity: GLBA Safeguards, no emailing unencrypted 1003.
• Multiple applications (shopping borrowers): must disclose credit pulls; cannot discourage by threat to FICO.
• Marketing statements must include NMLS ID & equal housing logo.
• Business ethics: always disclose material facts, avoid dual agency conflicts, document verbal discussions.

V. Uniform State Content (11 %)

A. SAFE Act & Model State Law

• Purpose: establish minimum national licensing standards, create NMLS.
• Public-record filings: licensee name, NMLS ID, disciplinary actions.

State Regulatory Framework

• Authorities: examine books, issue subpoenas, impose fines/cease-and-desist.
• Exam frequency: at regulator’s discretion; typical 24-month cycle.
• CFPB LO Rule: prohibits dual compensation (borrower & lender).

Licensing Essentials

• Must be licensed: take/residential app, negotiate terms, expect compensation (unless depository).
• Pre-license education: 20 hrs (3 fed law, 3 ethics, 2 nontraditional, 12 electives).
• Testing: SAFE National Test + UST; retake wait 30 – 30 – 180 rule.
• Financial responsibility: credit check & fingerprints; felony within 7 yrs or any fraud felony → ineligible.
• Sponsorship: must be employed by state-licensed entity or federally regulated bank (registry only).
• Temporary Authority (EGRRCPA 2018): 120 days for bank-to-nonbank or state-to-state moves.

Compliance & Conduct

• Record retention: at least 3 yrs (most states mirror RESPA).
• Prohibited: paying for agent advertising, using someone else’s NMLS ID, omitting debts, bait-and-switch.
• Required: furnish docs on request, cooperate with investigations.
• Advertising must display full company/legal name & NMLS ID; cannot imply gov’t endorsement.

High-Value Numerical / Statistical References

• Zero-tolerance fee category – 0 % increase.
• 10 % tolerance bucket – aggregate cap.
• Escrow cushion – 2 months.
• LE delivery – 3 BD of application.
• CD delivery – 3 specific BD before consummation.
• Rescission period – 3 BD (owner-occupied refi).
• Adverse Action – 30 days.
• SAR filing – 30 days.
• QM points & fees cap – 3 % of total loan amount.
• HOEPA points & fees – 5 % (> $24,866 2023 adjust).
• HPML APR triggers – 1.5 % / 3.5 %.

Practical Study Tips & Connections

• Map each federal disclosure to its timing requirement – build a 3-day/30-day/45-day flashcard set.
• Use real-world scenarios (e.g., purchase vs. refinance) to practice which disclosures appear and which do not (e.g., no rescission on purchase).
• Cross-reference ethics examples with actual statutes: kickbacks → RESPA §8, steering → TILA §36.
• Remember state content focuses on process & licensing, while federal content focuses on consumer protection laws.