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Review of Federal Regulations on the NMLS Mortgage Loan Officer Test

This post was most recently updated on January 13th, 2018

Last year I was introduced to Utah real estate company Homie and I blogged a lot about them. I was interested in how they fit into the mix of services that helped you sell a home. That affiliation ended and I looked for something else in the real estate niche. About that time, Utah Mortgage Loan Corp. reached out to me. We met and I really loved the way they do business.

The only problem? To work with them I need to become a licensed mortgage loan officer. That means taking and passing the NMLS (Nationwide Mortgage Licensing System and Registry) exam. This is a big challenge for me. There are so many acronyms and details to remember. I haven’t taken a test this intense since college. So I keep putting it off hoping that I can learn everything which is impossible!

The federal regulations related to the mortgage industry are a big chunk of the test. In addition to my official training series (20 hours of federal training and 15 hours of Utah specific training) I watch YouTube videos. My favorite teacher is Artricia at Affinity Real Estate & Mortgage Training Services. I could just give her a hug for how well she explains things.

Here’s an example:

Looking for a Utah mortgage? Utah Mortgage Loan Corp is offering a free credit report from one of the reporting bureaus to get you started. Simply call (385) 645-5395 or go to https://www.utahmortgageloan.com/credit-report

The test is divided by topic, as follows:

Federal mortgage-related laws (23%)
General mortgage knowledge (23%)
Mortgage loan origination activities (25%)
Ethics (16%)
Uniform State Content (13%)

Mortgage Loan Officer Test Prep

Here’s a review of the federal regulations that you’ll be tested on. I tried to be accurate but if I made any mistakes, they are mine. Please leave a comment with any corrections or outdated information. I arranged these in alphabetical order.

ABA and AfBA – Affiliated Business Arrangement
If you own 1% or higher ownership in a company you recommend to a loan client, you must disclose immediately or prior to signing. So if they ask you for a recommendation for a radon testing company and you recommend a radon company that you own 1% or more of, you have to tell them. This is part of RESPA (Reg X).

Bank Secrecy Act or Anti Money Laundering Act
If you’re transporting, withdrawing or depositing cash over $10,000 you have to report it. The feds do this to try to catch counterfeit money, money laundering, etc. Here’s a case of Abby Lee Miller, from the show Dance Moms. She was sentenced to a year and 1 day in prison for breaking this law. The judge had seen the show where she disclosed what she made from the TV show and turns out her bankruptcy didn’t list the money she got from the show.

Records need to be kept for 5 years.

Civil Rights Act or Fair Housing Act
Can’t discriminate based on race. Doesn’t have to do with other forms of discrimination so if a test question specifically says Civil Rights Act, then you should know that refers to race.

Community Reinvestment Act
Banks are required to meet the credit needs of the communities in which they operate. Banks would open branches in communities and just have checking and savings accounts. People in poorer areas wouldn’t qualify for loans. So this act says if people aren’t able to get loans, the bank should have training or programs to help qualify more people. There’s a lot more to this act but for test purposes focus on this aspect.

ECOA Equal Credit Opportunity Act, Reg B
Be equal (B) when extending credit. Everyone should have an equal chance to get credit. The lender has 30 days to give you an answer on a credit application. Enforced by the CFPB (Consumer Financial Protection Bureau).

As part of this law you can challenge the value given in the appraisal and request a copy of your appraisal. If DENIED (you get an adverse action notice or denial letter), you have 90 days to request a copy of the appraisal and they have 30 days to deliver it. If APPROVED, you get a copy 3 days before signing.

The lender has to keep records for 25 months and you can sue a lender up to 24 months. There’s a $10,000 penalty for violation.

ECOA has 8 protected classes (half of them are also protected by the Fair Housing Act) but the ones that are unique to ECOA are

  1. AGE
  3. If you receive public assistance

The protected classes covered by both ECOA and the Fair Housing Act are

  1. SEX
  2. RACE
  3. COLOR

Another thing, you cannot ask if someone is single, divorced or widowed. Instead you ask if they’re either: MARRIED, UNMARRIED or SEPARATED.

Keep ECOA and Fair Housing Act straight: ECOA is about discrimination when granting credit (lending). So if there’s a credit application. Fair Housing is discrimination on the sale and lease of property (a mortgage or lease).

You cannot be denied based on the source of your income, only on the amount of income. Like they can’t say we won’t approve the loan because your income is from child support. They can say you don’t get enough child support to get approved. Child support or alimony can’t be required to use on the application (you can’t require that a borrower use that income to qualify for a loan). However, ECOA says you must take those payments if the borrower wants to use it.

ECOA records must be kept for 25 months. They have up to 24 months to sue for ECOA violations.

Penalty for violation is $10,000.


FACTA Fair and Accurate Credit Transactions Act
Also called the FACT Act. Rules in section 114 (red flag rules) to prevent identity theft. If you see these then you need to verify. If you change addresses, it must be verified.

Think of T as standing for not just transactions, but THEFT (identity theft) to remind you. National credit score disclosure form, telling you what credit score they used to determine if you get the loan. This is the act that says you can get a free copy of your credit once a year for any reason at this website annualcreditreport.com (note it’s not FREEcreditreport.com).

Credit scores run from 300 to 850.

They require that you truncate or shorten your credit card number (like this xxxx-xxxx-4533).

Businesses have to shred or burn sensitive information. Lock up documents at the end of the day to avoid someone stealing identity.

Businesses must have written identity theft policies.

Fair Housing Act
Title VIII of the Civil Rights Act of 1968 says you can’t discriminate based on race, color, national origin, religion, sex, or familial status (if you’re pregnant or how many kids you have) for a sale or rental of a dwelling. This is where things like blockbusting (a real estate agent says an ethnic group is moving in and advises you to sell at a reduced cost so they can resell it for more later), steering (steering someone in or out of a neighborhood based on ethnicity or race), and redlining (not giving loans or limiting them for specific neighborhoods).

This has to do with discrimination in selling or leasing of residential property. Disability and familial status are unique to the Fair Housing Act. Age isn’t a protected class for the Fair Housing Act.

Some of the exemptions from the regulations are, renting a room in your own private home (you don’t have to let anyone rent it, you can choose), selling your own house by owner (if it’s on MLS or you’re using a broker you don’t get to choose), a private club or organization.

BLOCKBUSTING – a real estate agent tries to get someone to panic and sell their house because the property values will drop because people of another race is moving in.

STEERING – opposite of blockbusting. Trying to get people or steer them towards a certain neighborhood because of their ethnicity, race, religion, etc. You can choose to live in a certain area based on your religion but the real estate agent can’t direct them.

REDLINE – refusing to give a loan in certain neighborhoods (poor, on welfare, etc). Lead to creating HUMDA.

Requires that you put the Equal Housing Opportunity sticker on printed and broadcast advertisements.

FCRA Fair Credit Reporting Act Reg V
Concerns credit reports and credit agencies – what they can and cannot do. They have to verify information and if it’s incorrect on a credit report they have to remove it. If they deny you based on your credit report, you don’t give them a copy of the report. You can show them but not give them a copy. Instead tell the borrower who they used and the address and phone number so they can get a copy. They need to go direct to get a free copy of their credit report.

You can get a free copy of your credit report if you’ve been denied or if you’re a victim of identity theft, unemployed, public assistance. The report is FREE the score isn’t necessarily free. You can dispute negative information. After 30 days if they can’t prove it they have to take it off. Limit prescreened offers (write them to get off the list). Negative info stays on a credit report for 7 years. Bankruptcy, 10 years. Unpaid tax liens stay until you pay them. If they’re paid they’re on there for 7 years.

Frank-Dodd Act
Rules for QM (qualified mortgages), if the loan qualifies then it gets Safe Harbor (legal protection). So if a mortgage is a QM then if the borrower defaults, the loss will be covered. It’s a YES or NO.

  • Verify Income (no doc loan not QM)
  • Back end ratio must be 43% or less
  • Fees must be 3% or less of the loan amount
  • Has to be 30 years or less
  • No prepayment
  • No negative amortization
  • Can’t factor in teaser rates

GLBA Gramm, Leach, Bliley Act or the Financial Services Modernization Act
Remember with the acronym SPF – always wear sunscreen with SPF to protect yourself.

S safeguarding companies most have a policy on how they keep your information safe when you use a credit card in a store.
P pretexting to prevent someone from pretending to be you and stealing your identity.
F Financial privacy, this portion lets you opt in or opt out of letting companies share your information

Defines who a consumer (one time transaction) is and who is a customer (has an ongoing relationship with the business).

HERA Housing and Economic Recovery Act
The law that created the SAFE Act (or Title V).

HOEPA – Home Ownership and Equity Protection Act
Hard money loans. Very high interest rate loans. They require extra disclosures. HOEPA is prt of TILA, Reg Z. HOEPA limits the amount of points that can be charged on loans without additional disclosures. If a fee exceeds 5% of the loan amount (a high cost loan) it triggers HOEPA disclosures.

APOR – average prime offer rate. You’ll want to know if it’s a high cost or a high price loan based on the APOR. APOR means the average rates today. If the APOR rate is

Section 32 deals with high-cost loans section. I think about how 32 (thirty two) has a t in two, so does the word cost. It’s a high cost loan if it’s a primary mortgage and the APR is more than 6.5% of the APOR. 2nd mortgage? to be a high cost loan it has to 8.5% higher than the APOR.

Section 35 deals with high-priced loans or a HPML (high priced mortgage loan) Also based on the APOR. If it’s more than 1.5% (first mortgage), 2.5% (jumbo or over $417,000) or 3.5% (for a 2nd or lower loan) of the APOR. If the loan qualifies then it’s required to have an escrow account for the first 5 years (60 months). Taxes and insurance will be taken out.

HPA – Homeowners Protection Act
Concerning PMI (private mortgage insurance) which protects the lender in case of a loan default. It’s not related to MIP. For conventional not government loans. Lets the borrower drop mortgage insurance when they have 20% or more equity in their home. LTV (loan to value) needed to drop PMI: 80/78%. Can request when you’re at 80% LTV. It drops off automatically at 78%. They have to update you on your LTV each year.

HMDA – Home Mortgage Disclosure Act, Reg C
This act let’s regulators see where possible discrimination has taken place it’s reported in section 10 of the 1003 loan application the government monitoring section. Must file monthly reports (Loan Application Register Reports LAR Reports) regarding ethnicity, race or sex of anyone who applies for a loan. Made in response to Redlining.

The feds are looking for patterns of discrimination. If someone won’t fill it out, you can look and give your best guess on the application.

HUD Equal Access and VA Rule
Has to do with the military (think, don’t ask, don’t tell) saying that you can’t ask about sexual identification or gender identity. Why not? Because the information has nothing to do with if someone can repay a loan.

Mortgage Acts and Practices, Reg N
Try thinking of it as Mortgage Acts ‘n Practices to remember that it’s Reg N. It’s about advertising and prohibiting false or misleading ads. Tell the necessary facts. Must keep all ads for 2 years.

Mortgage Disclosure Improvement Act MDIA or the 3/7/3 Rule
Part of TILA. Initial disclosures are required in 3 days, the soonest a loan can close is the 7 business days after the disclosures have been mailed. If you have to redisclose then you need another 3 days if they want the loan. If the APR changes up or down more than .125 or 1/8 on a 30 year fixed or 1/4 on any other type of mortgage, they must do another disclosure and give another 3 days. A borrower can waive the waiting time only if there’s a financial emergency.

Loan modifications, release scams, short sales and foreclosure. You can’t collect any money until you get a completed loan. Can’t tell people not to answer if the bank or lender calls about your loan.

Mortgage Loan Originator Compensation Rule
Can’t be paid on the interest rate or other terms. Compensation isn’t just money, it’s a bonus, trip, etc. This helps prevent MLOs a loan based on what they could earn more, instead of what’s best for the borrower. Can’t get dual compensation. You can’t get paid points on the front and get paid a rebate.

RESPA – The Real Estate Settlement Procedures Act, Reg X

This law is Reg X and you can say the word REXPA to remember that.

Know the sections
6 – servicing (lays out the laws for collecting payments, escrow, etc). I remember six and servicing start with the letter s. RESPA requires a Servicing Transfer Statement to be sent to the consumer if the loan servicer sells or assigns the servicing rights of the loan to another service provider.
8 – kickbacks, fees and penalties
9 – can’t require a buyer to use a specific title company as a condition of the sale, if caught the fine is 3x the settlement fee
10 – how much can be held in an escrow account at a time. Lenders can only collect 1 month of reserves (or impound fees) at a time for property taxes and insurance. At closing they can take a 2 month cushion. Must conduct an annual escrow analysis to show what they did with the money in the account. If they took too much – over $50 – they have to return the money.

Penalty $10,000 AND up to 1 year in jail.

TRID is part of RESPA and it deals with timing of when certain documents have to be given out.

  • At time of applications or within 3 days, those are the initial disclosures: Home loan toolkit (for purchases only), LE (this is required by TILA, used to be the GFE or Good Faith Estimate), Mortgage Servicing Disclosure (are they going to collect payments or will they sell the servicing to another company), List of HUD home counselors.  If it asks for time frame, it’s RESPA. If you’re asked about what docs have to be given out, it’s in TILA.
  • BEFORE settlement (also called consummation, doc signing): the Affiliated Business Arrangement (AfBA). Closing Disclosure (CD) within 3 days.
  • AT settlement: final CD, initial escrow statement (has up to 45 days to give) of closing.
  • AFTER settlement: annual escrow statement, servicing transfer statement (only if/when they sell or transfer the servicing of the loan) also called the Goodbye Letter. They need to notify you 15 days prior to the transfer. You have a 60 day cushion where no late fees or credit ding can happen if they make the payments to the old servicer by mistake.

Just to recap: you give a loan estimate TWICE – both 3 days before doc signing and then at signing. Also know that on the loan estimate (LE) the lender and mortgage broker fees for the same transaction must be itemized. The TITLE AGENT is responsible for completing the accurate Closing Disclosure (CD) to the seller once a closing date has been scheduled.

The loan estimate must be kept for 3 years and the closing disclosure for 5 years.

SAFE – Secure and Fair Enforcement Act
Passed in 2008, the SAFE Act is the law that requires MLOs pass a written qualified test, complete pre-licensure education courses, and to take annual continuing education (CE) courses. Also called Title V. It’s a key component of the Housing and Economic Recovery Act of 2008.

The SAFE Act says a 30 year fixed mortgage is a traditional mortgage and everything else is called a non traditional mortgage. To qualify for a traditional mortgage (one that can be sold on the secondary market, i.e. Freddie Mac and Fannie Mae) you have to fit the guidelines of 28/36. 28% is your housing debt and 28% is your debt to income. You must qualify under both and have 5% of your own funds to qualify as a traditional mortgage. The borrower needs 2 months reserves.

TILA – Truth in Lending Act, Reg Z
Artricia calls it TILA the GODZILLA so you can remember it’s a big law and that it’s also called Reg Z. It concerns credit, APR and advertising. These other regs fall under TILA: HOEPA, Frank-Dodd, TILA/RESPA Integrated Disclosure (TRID) which lays out how many days you have after LE (loan estimate) and for CD (closing documents).

TILA includes the 3 day recission in a HELOC or a refi, they have 3 days after they sign to change their mind. On a purchase you don’t have a right of rescission rule. TILA only kicks in if there are more than 4 payments (like mortgages, etc). The recission period starts the next day at midnight. The lender has 20 days to return the money. The lender has to give 2 copies of the recission document to each borrower. If they fail to do this then the borrower can rescind the loan for up to 3 years.

Penalties for violating TILA:

$5,000 per day for a single violation
$25,000 per day for reckless violation
$1 MILLION per day for knowingly violating TRID rules. So that 3 day timeframe is very important!

TILA Disclosures
Loan estimates
Closing disclosure
CHARM booklet Consumer Handbook on Adjustable Rate Mortgages (only for ARMs)
When your Home is On the Line Disclosure – only for a HELOC or Refi (it explains the risk and how if you don’t pay, you could lose your house)

TILA Trigger Terms
If they use a number to describe the loan terms (other than the APR) they have to trigger additional disclosures, except 0 or 100%).

Sets rules about appraisals. You can’t hire an appraisal based on if they give you the value on the home that you need. You can’t tell the appraiser you’ll never use them again. Can’t tell them a number of what you want the value to come in as. Can’t threaten not to pay them at closing if you don’t get a certain value. They need to be objective. After you get the appraisal you can give them add’l information (like look at these other comps to consider), correct factual information error, can get another appraisal but you’ll have to pay for it.

United States Patriot Act or Anti Terrorist Act
Must verify date of birth, social security number and ethnicity of anyone getting a loan. Created in response to 9/11. Also concerns the Do Not Call Registry. Consult the registry before you call someone on the list – every 31 days. The National list is updated every 3 months or 90 days. Each bank, company, etc. must have their own internal list and it has to be updated every 30 days.

Exception to do not call list. If you have an established business relationship you can call up to 18 months if you had a closed transaction with the consumer. If you didn’t close, up to 3 months. But if the person requests to be on your do not call list, then you have to stop right away.

You can be charged $16,000 per violation. So if you call twice then you could be fined $32,000.

APR is the annual percentage rate is also called the effective rate.

Interest rate is also called the NOTE rate or the NOMINAL rate. The finance charge DOES NOT include the notary, appraisal or credit report fees are not part of the APR.

TRID disclosure timeline (source).
Here’s my white board:

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