Mortgage Loan Originator SAFE Exam Prep Flashcards

NMLS SAFE MMLO Exam Essentials and Procedures

• The S.A.F.E. Mortgage Loan Originator National Test includes a total of $120$ questions.
• Only $115$ questions are scored, while $5$ questions are unscored pre-test questions used for pilot testing.
• The time limit for the examination is $190$ minutes.
• A passing score is defined as $75\%$ or higher, which requires answering at least $86$ correct out of the $115$ scored questions.
• The registration fee for the exam is $\$110.00$.
• Official test results are typically available in the NMLSR (Nationwide Mortgage Licensing System and Registry) within $72$ hours of test completion.
• Once a test is paid for in NMLS, the candidate has an enrollment window of $180$ days to schedule and take the exam.
• Candidates must bring one form of current, government-issued photo identification with a signature (e.g., Driver's License, Passport, Military ID).
• NMLS policy requires cancellation or rescheduling at least two business days prior to the appointment by $11:59\,\text{p.m.}$ Eastern Time to avoid forfeiting fees.
• The Retest Policy is as follows:
  • Individuals may take the test up to three consecutive times, with a $30$-day waiting period between each attempt.
  • After the third failure, there is a mandatory waiting period of $180$ calendar days before the cycle starts again.
• If a state-licensed loan originator fails to maintain a valid license for $5$ years or longer, they must retake and pass the exam again.

Federal Mortgage-Related Laws: RESPA (Regulation X)

• The Real Estate Settlement Procedures Act (RESPA) of $1974$ is a consumer protection statute enforced by the Consumer Financial Protection Bureau (CFPB).
• RESPA's implementing regulations are known as Regulation X.
• Purposes of RESPA:
  • Educating consumers about settlement services and costs.
  • Eliminating kickbacks and unearned fees (Section $8$).
  • Limiting the amounts required in escrow accounts (Section $10$).
• Coverage: Applies to federally related mortgage loans, which include loans secured by first or subordinate liens on residential real property ($1$-to-$4$ family structures or manufactured homes).
• Exemptions: Business/commercial/agricultural purpose loans, temporary financing (construction/bridge/swing loans), vacant land (unless a structure will be built within $2$ years), loan assumptions without lender approval, and loan conversions.
• Application Definition ($6$ pieces of data known as ALIENS):
  • 1. Address of the property.
  • 2. Loan amount sought.
  • 3. Income of the consumer.
  • 4. Estimated value of the property.
  • 5. Name of the consumer.
  • 6. Social Security number to obtain a credit report.
• Mandatory Disclosures at Time of Application (within $3$ business days):
  • 1. Special Information Booklet ("Your Home Loan Toolkit").
  • 2. Good Faith Estimate (GFE) for reverse mortgages or Loan Estimate (LE) for closed-end loans.
  • 3. Mortgage Servicing Disclosure Statement.
  • 4. List of $10$ Homeownership Counseling Organizations.
• RESPA Section $6$ (Servicing): Requires lenders to notify borrowers of servicing transfers $15$ days before the effective date. A $60$-day "grace period" prevents late fees if the borrower pays the old servicer by mistake.
• Qualified Written Request (QWR): A borrower can request loan information or notify the servicer of an error. The servicer must acknowledge receipt within $5$ business days and respond within $30$ business days.
• RESPA Section $8$ (Anti-Kickback): Prohibits giving or receiving a "thing of value" for the referral of settlement services. Elements of a violation: a thing of value, an agreement/understanding, and a referral.
  • Criminal penalties: Fines up to $\$10,000$ and/or imprisonment for up to $1$ year per violation.
  • Civil penalties: Liability for $3\times$ the amount of the charge paid for the service.
• RESPA Section $9$ (Title Insurance): Prohibits sellers from requiring buyers to use a specific title insurance company as a condition of sale. Buyers can sue for $3\times$ all charges made for title insurance.
• RESPA Section $10$ (Escrow Accounts): Limits monthly escrow payments to $1/12$ of the total annual disbursements, plus a cushion not to exceed $1/6$ ($2$ months) of the total disbursements. Excess sums of $\$50$ or more must be returned to the borrower within $30$ days of audit.

Federal Mortgage-Related Laws: TILA (Regulation Z)

• The Truth in Lending Act (TILA) is Title I of the Consumer Credit Protection Act, implemented via Regulation Z by the CFPB.
• Coverage: Applies when credit is offered regularly, primarily for personal/family/household use, and is subject to a finance charge or payable in more than $4$ installments.
• Dwelling Definition: Residential structure with $1$-to-$4$ units, including individual condominium/cooperative units, mobile homes, trailers, or even boats used as a residence.
• Annual Percentage Rate (APR): A measure of the cost of credit, expressed as a yearly rate. It includes nominal interest plus other costs like origination fees, discount points, and mortgage insurance.
• APR Tolerances for Accuracy:
  • Regular Transactions: Not more than $1/8$ of one percentage point ($0.125\%$) above or below the actual APR.
  • Irregular Transactions (multi-advance/irregular payment): Not more than $1/4$ of one percentage point ($0.250\%$) above or below the actual APR.
• Right of Rescission: Applies to refinances on a principal dwelling. Borrowers have until midnight of the $3$rd business day following consummation or delivery of disclosures to rescind.
  • If the lender fails to provide the notice of right to rescind or material disclosures, the rescission period extends to $3$ years.
• TILA Advertising (Trigger Terms): If an ad mentions down payment, payment amount, number of payments, period of repayment, or finance charge amount, it MUST also disclose the amount/percentage of down payment, terms of repayment, and the APR.

High-Cost Mortgages (HOEPA) and Higher-Priced Loan (HPML) Rules

• HOEPA (Home Ownership Equity Protection Act - Section $32$):
  • Coverage Tests:
  • 1. APR Coverage: APR exceeds APOR (Average Prime Offer Rate) by $>6.5$ percentage points for first liens (on loans $\ge \$50,000$) or $>8.5$ percentage points for subordinate liens.
  • 2. Points-and-Fees: Exceed $5\%$ of the loan amount (for loans $\ge \$26,968$).
  • 3. Prepayment Penalty: Penalty exists $>36$ months after consummation or exceeds $2\%$ of the amount prepaid.
  • Restrictions: No balloon payments (with limited exceptions), no negative amortization, and mandatory pre-loan counseling from a HUD-approved agency.
• HPML (Higher-Priced Mortgage Loans - Section $35$):
  • Definition: First lien loans with APR exceeding APOR by $1.5$ percentage points ($2.5$ for jumbo loans) or subordinate liens exceeding APOR by $3.5$ percentage points.
  • Requirements: Must establish an escrow account for at least $5$ years (cannot be cancelled unless LTV is $<80\%$ and borrower is not in default). Must obtain a written appraisal including a physical visit of the interior.
  • A second appraisal (at no cost to the borrower) is required if the property is a "flip" (sold within $90$ days at $>10\%$ increase or $91-180$ days at $>20\%$ increase).

TILA-RESPA Integrated Disclosure (TRID)

• Know Before You Owe (TRID) integrated disclosures combined the TILA and RESPA forms for most closed-end mortgage transactions.
• Forms:
  • Loan Estimate (LE): Integrated GFE and Initial TIL. Provided within $3$ business days of application.
  • Closing Disclosure (CD): Integrated HUD-1 and Final TIL. Provided at least $3$ business days before consummation.
• Tolerances for Charges:
  • Zero Tolerance: Fees paid to the creditor/broker, fees to unaffiliated third-party if the creditor did not permit shopping, and transfer taxes.
  • $10\%$ Cumulative Tolerance: Recording fees and third-party services where the borrower SHOPPED from the creditor's list.
  • No Tolerance Limit: Prepaid interest, property insurance premiums, and services where the borrower chose a provider NOT on the creditor's list.
• Revised LE Timing: Must be delivered within $3$ business days of receiving information about a "changed circumstance" and at least $4$ business days before consummation.

Fair Lending, Credit Reporting, and Information Security

• ECOA (Equal Credit Opportunity Act - Regulation B): Prohibits discrimination based on Race, Color, Religion, National Origin, Sex, Marital Status, Age, or Public Assistance Income.
  • Lenders must notify applicants of action taken within $30$ days. Adverse Action notices must provide the specific reason for denial or the right to request it.
• HMDA (Home Mortgage Disclosure Act - Regulation C): Requires lenders to report applicant data on the LAR (Loan Application Register) to identify discriminatory patterns.
• FCRA (Fair Credit Reporting Act - Regulation V): Regulates the accuracy and privacy of credit reports.
• FACTA (Fair and Accurate Credit Transaction Act): Aimed at identity theft protection. Includes the Red Flag Rules, which require an Identity Theft Prevention Program.
• BSA/AML (Bank Secrecy Act): Requires Suspicious Activity Reports (SARs) for transactions $\ge \$5,000$ involving suspected illegal activity. SARs must be filed within $30$ days and kept for $5$ years.
• GLBA (Gramm-Leach-Bliley Act): Protects consumer nonpublic personal information via the Financial Privacy Rule, the Safeguard Rule, and Pretexting Provisions.

Uniform State Content and the SAFE Act

• SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act): Created the NMLSR and provides a Model State Law for licensing individual MLOs.
• Licensing Requirements:
  • Never had an MLO license revoked.
  • No felony convictions in the last $7$ years, and NO felony involving fraud/dishonesty/money laundering at any time.
  • Financial Responsibility: No recent foreclosures ($3$ years), tax liens, or patterns of delinquency.
  • Pre-licensing Education: $20$ hours ($3$ Federal, $3$ Ethics, $2$ Nontraditional, $12$ General).
  • Continuing Education: $8$ hours annually ($3$ Federal, $2$ Ethics, $2$ Nontraditional, $1$ General).
• Temporary Authority to Operate: Allows MLOs transitioning from a bank to a non-bank, or moving between states, to operate for up to $120$ days while their license is pending.
• Mortgage Call Reports (MCR): Licensees must submit financial data (FC - annually) and activity data (RMLA - quarterly within $45$ days of quarter-end).
• Professional Conduct: Civil penalties for SAFE Act violations can be up to $\$25,000$ per act.

General Mortgage Knowledge: QM, ATR, and Loan Products

• Ability to Repay (ATR): Creditors must verify $8$ factors: current income/assets, employment, monthly mortgage payment, simultaneous loans, mortgage-related expenses (taxes/insurance), current debts (alimony/child support), DTI ratio, and credit history.
• Qualified Mortgage (QM):
  • No negative amortization, no interest-only payments, and no balloon payments.
  • Points and fees cannot exceed $3\%$ of the total loan amount (for loans $\ge \$134,841$).
  • Loan term cannot exceed $30$ years.
• Conforming Loans: Follow Fannie Mae ($DU$ - Desktop Underwriter) and Freddie Mac ($LPA$ - Loan Product Advisor) guidelines.
  • $2025$ Conforming Loan Limit for single-family: $\$806,500$.
• FHA Loans: Insured by HUD. Requires Up Front Mortgage Insurance Premium (UFMIP) of $1.75\%$ and annual Mortgage Insurance Premium (MIP).
  • Minimum down payment: $3.5\%$ with a credit score $\ge 580$.
• VA Loans: Guaranteed for veterans with a Certificate of Eligibility (COE).
  • No down payment required for full entitlement.
  • Funding Fee: Varies by veteran status and down payment.
  • Maximum Seller Concession: $4\%$ of the reasonable value.
• RHS/USDA Loans: $100\%$ financing for low-to-moderate income borrowers in rural areas.

Mortgage Product Types and Secondary Market Guidelines

• Adjustable Rate Mortgages (ARMs): Interest rates change based on an Index (e.g., SOFR, T-Bill) plus a Margin.
  • Formula: $\text{Index} + \text{Margin} = \text{Fully Indexed Rate}$.
  • Hybrid ARMs (e.g., $5/1$): Fixed for $5$ years and then adjusts every year.
• Balloon Loans: Amortized over a long term ($30$ years) but die in a short term ($5, 7, 10$ years).
• Construction Loans: Short-term, interest-only financing.
  • Construction-to-Permanent: One-time close.
  • Construction-Only: Borrower must secure a new mortgage to pay off the construction loan once the home is finished.
• Temporary Buydown ($3-2-1$): Interest rate is subsidized for the first three years (e.g., year $1$ is $3\%$ below note rate, year $2$ is $2\%$ below, year $3$ is $1\%$ below).

Mortgage Loan Origination Activities: The Application Process

• URLA (Uniform Residential Loan Application - Form $1003$): The central document for loan processing.
• Net Tangible Benefit: Borrowers must receive a specific financial benefit from a refinance (e.g., lower payment, shorter term, more stable product).
• Asset Verification: Liquid assets must be verified via bank statements ($60$ days for purchase, $30$ days for refinance).
• Income Assessment: Generally requires a $2$-year history. Pay stubs must cover the past $30$ days.
• Self-Employed Borrowers: Lenders generally require $2$ years of personal and business tax returns if the borrower owns $\ge 25\%$ of the business.
• Nontaxable Income (Gross-up): Child support, Social Security, and disability can often be "grossed up" by $125\%$ (FNMA/VA) or $115\%$ (FHA).

Mortgage Calculation Formulas

• Loan-to-Value (LTV):   $\frac{\text{1st Loan Amount}}{\text{Lesser of Sales Price or Appraised Value}}$
• Combined LTV (CLTV):   $\frac{\text{Total Principal Balance of All Liens}}{\text{Lesser of Sales Price or Appraised Value}}$
• Housing Expense Ratio (Front Ratio):   $\frac{\text{PITIA}}{\text{Gross Monthly Income}}$
• Debt-to-Income (DTI) Ratio (Back Ratio):   $\frac{\text{PITIA} + \text{Total Monthly Long-Term Debt}}{\text{Gross Monthly Income}}$
• Interest Per Diem Calculation (360-day year example):   $\frac{\text{Principal} \times \text{Interest Rate}}{360} \times \text{Number of days left in month}$

Appraisal, Insurance, and Title

• Uniform Residential Appraisal Report (URAR - Form $1004$): Standard appraisal form.
• Approaches to Value:
  • 1. Sales Comparison: Best for existing residential homes. Uses comparables.
  • Net adjustments should not exceed $15\%$ of the comp price.
  • Gross adjustments should not exceed $25\%$ of the comp price.
  • 2. Cost Approach: Best for new construction or special-use buildings.
  • 3. Income Approach: Best for investment properties.
• Depreciation Types: Physical Deterioration (wear and tear), Functional Obsolescence (bad layout/outdated style), and External Obsolescence (factors outside property lines, like traffic or industry).
• Hazard Insurance requirements: Usually the lesser of $100\%$ of structure replacement cost or the unpaid principal balance (as long as it covers at least $80\%$ of replacement cost).
• Flood Insurance: Max NFIP coverage is $\$250,000$. Required in zones beginning with "A" or "V".
• Title Insurance:
  • Owner's Policy (Mortgagor's Policy): Protects the buyer.
  • Lender's Policy (Mortgagee's Policy): Protects the lender and is assignable to the secondary market.

Closing, Settlement, and Funding

• Promissory Note: The borrower's formal promise to repay the debt; includes interest rate, loan amount, and terms (not recorded).
• Mortgage / Deed of Trust: The security instrument that pledges the property as collateral (recorded).
• Wet Funding (Table Funding): Disbursement occurs at the closing table.
• Dry Funding: The lender reviews docs before releasing funds (takes $1$-to-$4$ days).

Ethics, Fair Lending, and Fraud Prevention

• Types of Discrimination:
  • Overt Discrimination: Openly discriminatory policy.
  • Disparate Treatment: Treating similarly situated applicants differently based on a protected factor.
  • Disparate Impact: A neutral policy that has a disproportionate adverse effect on a protected class.
  • Redlining: Refusing to provide credit in specific geographic areas based on demographics.
• Mortgage Fraud Schemes:
  • Churning: Refinancing a loan repeatedly to generate fees.
  • Chunking: Convincing an investor to buy multiple properties with no intent to repay.
  • Equity Theft: Forging deeds or using foreclosure rescue scams to strip equity.
  • Straw Buyer: Using a person's credit to purchase property for the actual owner who cannot qualify.
• Fraud Enforcement and Recovery Act (FERA) of $2009$: Established a maximum penalty of $30$ years in prison and/or $\$1,000,000$ fine for mortgage fraud.