NMLS MLO - Mortgage Loan Origination (SAFE MLO) Exam

Under the Truth in Lending Act (TILA), for adjustable-rate mortgages (ARMs) like a 5/1 ARM, the MLO must calculate the borrower's monthly payment amount based on the fully indexed rate, not the introductory rate. The fully indexed rate is the sum of the index and the margin at the time of origination, reflecting the potential payment increases after the introductory period ends.

This requirement ensures borrowers understand what their payments could be after the rate adjusts, helping them evaluate the true affordability of the loan.

For an FHA loan, the loan-to-value (LTV) ratio is calculated by dividing the loan amount by the lesser of the purchase price or appraised value of the property. This ensures that the loan amount is based on the lower of the two figures, protecting the lender from over-lending on a property that may not appraise at the agreed purchase price.

This method is consistent with FHA guidelines, ensuring that the loan is adequately secured by the property’s value.

Private mortgage insurance (PMI) is typically required for conventional first-lien loans when the loan-to-value (LTV) ratio exceeds 80%. That is, when the borrower puts down less than 20% as a down payment.

“PMI is required by lenders on conventional loans with a loan-to-value ratio greater than 80 percent.”

— Homeowners Protection Act of 1998; CFPB PMI Guidance

The upfront premium charged on an FHA mortgage is an example of government mortgage insurance. This upfront mortgage insurance premium (UFMIP) is required for FHA loans and protects the lender (creditor) in the event of borrower default. FHA loans are insured by the Federal Housing Administration (FHA), a government agency.

Private mortgage insurance (D) is used for conventional loans, while optional credit life insurance (A) and force-placed hazard insurance (B) are unrelated to FHA loans.

A fixed-rate mortgage (FRM) is a mortgage loan where the interest rate remains constant for the entire term of the loan, regardless of changes in market interest rates. These loans typically come in terms of 15, 20, or 30 years, with 30-year fixed-rate mortgages being the most common in the U.S.

“A fixed-rate mortgage is one in which the interest rate remains the same for the entire term of the loan. The most common term is 30 years. This provides borrowers with a stable and predictable monthly payment over the life of the loan.”

— SAFE Mortgage Loan Originator Test Prep Guide (NMLS-approved)

“Unlike adjustable-rate mortgages, fixed-rate mortgages do not change over time. The interest rate is locked in at the time of loan origination.”

— U.S. Department of Housing and Urban Development (HUD), Mortgage Basics Guide

The other options describe adjustable-rate mortgages (ARMs) or balloon mortgages, which are distinctly different products:

Option A: Describes a type of step-rate mortgage, not a fixed-rate loan.

Option B: Refers to a 10/1 ARM, not a fixed-rate mortgage.

Option C: Refers to a balloon mortgage, where a large payment is due at the end of the term.

Therefore, only Option D accurately describes a true fixed-rate mortgage product.

In an Adjustable-Rate Mortgage (ARM), the components that adjust periodically are the index and the interest rate. Here’s how it works:

The index is the benchmark interest rate that fluctuates with market conditions (e.g., LIBOR, SOFR).

The interest rate adjusts based on changes in the index, but the margin (the fixed percentage added to the index) remains constant throughout the life of the loan.

Thus, the index and interest rate are the variables that change periodically, while the margin remains fixed.

Under the Equal Credit Opportunity Act (ECOA), age cannot be a basis for discrimination in the loan application process. If borrowers are over 72 years old, the MLO must complete the application and proceed as normal, treating them the same as any other applicant. The MLO should not make assumptions about the borrowers' needs, such as automatically suggesting a reverse mortgage (A) or a home equity line of credit (B). Similarly, there is no obligation for the MLO to inquire specifically about the borrower's ability to repay in the event of death (D), as this would be age discrimination.

Under HMDA (Regulation C), lenders must collect and report applicant data including race, ethnicity, and sex, but not religion. Collecting data on an applicant’s religion would be prohibited by the Equal Credit Opportunity Act (ECOA).

“The data reported under HMDA includes the applicant’s ethnicity, race, sex, and income… religion is not collected or reported.”

— 12 CFR § 1003.4(a); Regulation C

Lenders are permitted to verify employment status as part of underwriting and evaluating an applicant’s ability to repay. However, lenders are prohibited by ECOA and Fair Housing Act from making inquiries about sex, religion, or childbearing intentions.

“A creditor may request information regarding the applicant’s employment status, income, and other credit qualifications, but may not inquire about an applicant’s sex, religion, or childbearing intentions.”

— 12 CFR § 1002.5(b); Regulation B (ECOA)

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.