1 Safety and Ethics: Red Flags for the MLOChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Safety and Ethics: Red Flags for the MLO SAFE Comprehensive: ● 02/27/15

2 Chapter 2:Safety and Ethics: Red Flags for MLODisclaimer Disclaimer: Names of all persons, companies, and entities in any documented example have been changed. Therefore, if further research is desired, names will differ in the actual case law from that presented within the course. If further research is desired in regards to specific case law, research is best performed by visiting each specific state’s department of financial institutions website. Each state may use varying versions of this department name. Some case law may be easily researched and other states are extremely protective of case law and extended research may be required. As an example, to research Florida case law, first visit the Florida Office of Financial Regulation website and proceed to the Final Administrative Actions page where a search engine will be presented. For California, the Consumer Affairs agency must be selected from their state website (www.ca.gov). Researchers must then move through the following pages, Licenses, Press Release, and Board of Real Estate to arrive at the Disciplinary Actions page to research the case law. SAFE Comprehensive: ● 02/27/15

3 Key Terms Arm’s Length TransactionChapter 2:Safety and Ethics: Red Flags for MLO Key Terms Arm’s Length Transaction Home Ownership Equity Protection Act (HEOPA) Housing and Economic Recovery Act of 2008 (HERA) Mortgage Disclosure Improvement Act (MDIA) Predatory Lending SAFE Comprehensive: ● 02/27/15 Refer to page 33

4 Chapter 2:Safety and Ethics: Red Flags for MLOTo Be Ethical Lawfully and thoroughly catalog all important documentation Adhere to a code of ethics from a professional organization Serve the mortgage lending needs of the public in an ethical manner Treat everyone equally Instill honesty in every action Never use authority to take advantage of people Give full disclosure about all terms and conditions of the mortgage loan SAFE Comprehensive: ● 02/27/15 Refer to page 34

5 Chapter 2:Safety and Ethics: Red Flags for MLOCode of Ethics Provided by the National Association of Mortgage Professionals Honesty and Integrity Professional Conduct Honesty in Advertising Confidentiality Compliance with Law Disclosure of Financial Interests SAFE Comprehensive: ● 02/27/15 Refer to page 34

6 The Informed MLO - SourcesChapter 2:Safety and Ethics: Red Flags for MLO The Informed MLO - Sources The Consumer Financial Protection Bureau (CFPB) Federal National Mortgage Association (FNMA) Federal Home Loan Mortgage Corporation (Freddie Mac) Housing and Urban Development (HUD) Veteran’s Administration (VA) Loans State Regulatory Agencies SAFE Comprehensive: ● 02/27/15 Refer to page 35 & 36

7 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Knowledge Check 1. A MLO acts in an ethical manner by adhering to all of the following actions EXCEPT allowing a borrower to change the terms of the loan. being honest with clients and lenders. charging a higher interest rate to a minority borrower. treating everyone in an equal manner. Correct Answer C: Ethical treatment of all borrowers is required by the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA). SAFE Comprehensive: ● 02/27/15 Refer to page 37

8 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Knowledge Check 2. On the website for HUD, a loan originator can locate all of the information listed below EXCEPT disciplinary actions taken by a state regulatory agency against a MLO. the FHA National Mortgage Limit list. HUD-approved condominium projects. HUD-approved counseling agencies. Correct Answer A: The HUD website does not provide for consumer access to the NMLS or state regulatory agency website. SAFE Comprehensive: ● 02/27/15 Refer to page 37

9 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Knowledge Check 3. The underwriting manual for FHA forward insured loans and programs is also titled 203B. HUD Clips. Section 8. Correct Answer B: The underwriting manual for FHA forward mortgage loans is known as the SAFE Comprehensive: ● 02/27/15 Refer to page 37

10 Chapter 2:Safety and Ethics: Red Flags for MLOContinuing Training A successful MLO seeks education and training that exceeds the national requirement of the annual 8 hours of continuing education required by the NMLS. Traditional Education Mentoring SAFE Comprehensive: ● 02/27/15 Refer to page 37 & 38

11 Chapter 2:Safety and Ethics: Red Flags for MLOCrime and Reputation Deception is the act of convincing an individual of a falsehood or untruth. Fraud is an intentional misrepresentation of the truth or facts for the sole intent to rob an individual of a right or possession. Criminal fraud is any fraud that injures an individual as a result of the action. SAFE Comprehensive: ● 02/27/15 Refer to page 38

12 Criminal Actions that Financially Impact ConsumersChapter 2:Safety and Ethics: Red Flags for MLO Criminal Actions that Financially Impact Consumers “Steers” borrower into a higher interest rate, which costs a continuing monthly sum of money Commits mortgage fraud by inflating consumer charges on GFE Fails to notify/disclose changed circumstances that have an impact on the fees paid at closing or monthly payment amounts Engages in illegal, improper, deceptive, or fraudulent business practices that cause harm to the consumer SAFE Comprehensive: ● 02/27/15 Refer to page 38 & 39

13 Case Study ABC Loan CorporationSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study ABC Loan Corporation ABC Loan Corporation was accused of violating which regulation? How did ABC Loan Corporation violate this regulation? How did the actions of ABC Loan Corporation cause harm to the consumer, sometimes without the consumer’s knowledge? Today, MLO compensation is regulated by an amendment to which federal regulation? A1: ABC Loan Corporation was accused of violating the Federal Reserve Board’s Loan Originator Compensation Rule, which was implemented in July 2011. A2: ABC Loan Corporation paid the MLOs a “bonus,” which was an incentive paid from the retained rebate paid on a higher interest rate loan. A3: The actions of the loan originator included “steering” borrowers into a higher interest rate that would pay the MLO a rebate and bonus on a quarterly basis. The higher interest rate caused harm to the borrower in the form of higher monthly principal and interest payments. A4: The MLO Comp rule is implemented under the Truth In Lending regulations SAFE Comprehensive: ● 02/27/15 Refer to page 40

14 Criminal Actions that Financially Impact EmployersChapter 2:Safety and Ethics: Red Flags for MLO Criminal Actions that Financially Impact Employers Violating the timeframes set by TILA and RESPA for proper disclosure to the consumer Advertising violations Failure to provide required information to processing/underwriting Failing to submit loan files for processing and review in a timely manner SAFE Comprehensive: ● 02/27/15 Refer to page 40

15 Criminal Actions that Financially Impact Mortgage Loan PartiesChapter 2:Safety and Ethics: Red Flags for MLO Criminal Actions that Financially Impact Mortgage Loan Parties By the creditor By the mortgage broker/banker/correspondent By surrounding homeowners To private mortgage insurers To FHA, VA or USDA SAFE Comprehensive: ● 02/27/15 Refer to page 41

16 Avoid Common Licensee MistakesChapter 2:Safety and Ethics: Red Flags for MLO Avoid Common Licensee Mistakes Cautiously scrutinize all borrowers and the documentation that is provided Qualify the borrower in advance with a thorough conversation with the borrower regarding the Four “C’s” of credit. Ask for: Full names, including middle names Current residence address and residences for the previous two years Current rental/mortgage payment to determine the amount of payment shock that may occur SAFE Comprehensive: ● 02/27/15 Refer to page 41 & 42

17 Chapter 2:Safety and Ethics: Red Flags for MLOHigh-level Red Flags SSN and address discrepancies within the loan file Verifications addressed to a specific party’s attention Verifications completed on the same day they were ordered or on weekend/holiday Documentation includes deletions, correction fluid or other alteration Numbers on the documentation appear to be “squeezed” due to alteration Different handwriting or type styles within a document Excessive number of AUS submissions SAFE Comprehensive: ● 02/27/15 Refer to page 42 & 43

18 Mortgage Application Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Mortgage Application Red Flags Significant or contradictory changes from handwritten to typed application Unsigned or undated application Employer’s address shown only as a post office box Loan purpose is cash-out refinance on a recently acquired property Buyer currently resides in subject property Same telephone number for applicant and employer Extreme payment shock may signal straw buyer and/or or inflated income Purchaser of investment property does not own residence SAFE Comprehensive: ● 02/27/15 Refer to page 43

19 Case Study Fraud for LoveSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study Fraud for Love What actions did Lou Loan Officer take to ensure that his girlfriend demonstrated the ability to repay the mortgage loan and obtain financing? What actions did Lou Loan Officer take to ensure that his girlfriend appeared to have sufficient assets for down payment and reserves? What measures could SunTrust Mortgage have taken to prevent the fraudulent loan? A1: 1. Provided false employment information (accounting company) 2. Provided false paystubs 3. Provided false IRS tax forms A2: Lou provided false asset information by supplying false bank statements A3: Require an independent Verification of Employment Performed independent research and look up of employer stated on the application and on Verification of Employment Compare YTD information on the most recent paystub with the information provided on a Verification of Deposit Obtain borrower’s signature on a Form 4506-T and review income reported to Internal Revenue Service on transcripts Check the format of employer ID number shown on the W-2 Send Verification of Deposit directly to bank If bank statements show SunTrust is the financial institution, send the VOD to the corporate office or directly to the branch manager SAFE Comprehensive: ● 02/27/15 Refer to page 43 & 44

20 Employment & Income Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Employment & Income Red Flags Applicant’s job title is generic Employer’s address is a P O Box, the property address, or applicant’s current residence Applicant’s residence is (will be) in location remote from employer Employer name is similar to a party to transaction Employer unable to be contacted SAFE Comprehensive: ● 02/27/15 Refer to page 44

21 Employment & Income Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Employment & Income Red Flags Year-to-date past-year earnings are even dollar amounts Withholding not calculated correctly or totals do not flow from pay advice to pay advice Abnormalities in pay check numbering Handwritten VOE, pay stubs, or W-2 forms W-2 form presented is not the employee’s copy Employer’s ID # has format other than Tax returns not signed or dated Income appears to be out of line with type of employment Applicant reports substantial income but has no cash in bank SAFE Comprehensive: ● 02/27/15 Refer to page 44

22 Case Study Straw Buying SchemeSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study Straw Buying Scheme Manny, Moe, Curly, and Shem’s motivation was to help obtain fraudulent loans for straw buyers, and then split the loan proceeds, beginning in What new regulations, which are part of the Dodd-Frank Act and were implemented in 2014, address the acts that these four engaged in? A: The Dodd-Frank Act, implemented in 2014, required that lenders verify the borrower’s ability to repair the loan or issue a Qualified Mortgage to a borrower for a government regulated loan. SAFE Comprehensive: ● 02/27/15 Refer to page 45

23 Credit Report Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Credit Report Red Flags Difference in names, addresses and birth dates Superior credit histories; or histories that are not in line with age of applicant Tri-merge report alerts – recently issued SSN, credit inquiries, new/closed accounts Written verifications of employment, rent, deposits, and sometimes loans (for credit that is not reported on the credit report) should be obtained as independent verifications of the information presented by the borrower. SAFE Comprehensive: ● 02/27/15 Refer to page 45 & 46

24 Case Study Identity ThievesSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study Identity Thieves How did Mickey, Donald, and Ralph assist persons with poor credit histories or criminal records to obtain a “clean slate?” If the defendants are convicted, what would the maximum penalty be for the alleged crimes? A1: The gang provided the individuals with a poor credit history or criminal background a misappropriated Social Security number or driver’s license. A2: The defendants face a maximum sentence of 30 years in prison for conspiring to commit wire fraud. SAFE Comprehensive: ● 02/27/15 Refer to page 46 & 47

25 Case Study The Worst CallSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call The MLO took an initial loan application on August 28. The borrower stated he was employed as an operations manager. Should the MLO have rejected the application initially? Less than a month later, the MLO is informed by another employee of the lender that the borrower’s employment had been terminated by the employer on August 2, three weeks prior to the initial application. What call should have been made by the MLO? A1: There is nothing suspicious so far. Taking a loan application is “a good call” on the part of the MLO. A2: The MLO, processing staff, and branch manager should have made two phone calls: To the borrower to ask his version of the events and, more importantly, where the paycheck statements he provided came from? The second call should have been to the employer/former employer inquiring about the termination of the borrower. SAFE Comprehensive: ● 02/27/15 Refer to page 48

26 Case Study The Worst CallSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call Upon hearing of the employment status, the MLO ed the borrower to discuss the job situation and to request updated paycheck statements. The borrower stated there was an error and asked the MLO to call the Phoenix office (the VOE came from the corporate office in Tucson) and ask for “Adrianne”. Within minutes, the paycheck statements dated 8/15, 9/5, and 9/15 were ed by the borrower to the MLO. Is it possible to receive paychecks and be terminated/severed from employment? What bothers you about the borrower’s response? A3: When a borrower is severed from his employment and given a package of continuing pay for a certain period of time, some employers (or employees) opt for continuing pay periods, not a lump sum severance payment. This allows a borrower to provide consecutive paycheck statements to the MLO that may give the appearance that he is still employed. Within minutes, the MLO had the requested paycheck statements. This should most likely cause concern for you as a MLO. SAFE Comprehensive: ● 02/27/15 Refer to page 48

27 Case Study The Worst CallSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call On September 27, the lender is again informed that the borrower was terminated on August 2. The employer communicated this to the lender both verbally and in writing by re-submitting the Verification of Employment to the lender. Was the former employer at fault in this situation? When the MLO received the information for the second time, he was asked by the processing unit if there was anyone else at the employer’s workplace that could complete a second VOE. What should the MLO have done to properly address the possible fraud? A4: This is NOT a crime or a bad call for the former employer of the borrower. This was probably the BEST call that was ever made, but again, the information the employer provided was disregarded. A5: While there was no phone call made in this instance, it was a bad call to attempt to obtain a second Verification of Employment from another source. A seasoned MLO would have questioned this approach. SAFE Comprehensive: ● 02/27/15 Refer to page 48 & 49

28 Case Study The Worst CallSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call The MLO did not bring the borrower’s loan file to a “hard stop" or request that further work on the file be suspended. Although he did inform the processing supervisor about the discrepancies in the loan file, he failed to bring the information to the attention of the branch manager. He failed to file a suspicious activity report with the branch manager. In paragraph g, there was a lot of activity that could have alleviated a DFI Order and financial repercussions for the employer. What actions could have been taken at this point to address and prevent the fraudulent actions that were taking place? 6A: Even though poor decisions were made and very little attention paid to the evidence of fraudulent activity, the loan continued to be processed with the help of the MLO. The staff and the MLO should have: Addressed the potential fraud issue with management. Requested that the work on the loan file be suspended until the fraud questions were addressed and satisfied. Informed management of the potential fraudulent activity and allowed them to pursue appropriate action. SAFE Comprehensive: ● 02/27/15 Refer to page 49

29 Case Study The Worst CallSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call The MLO made the phone call to the “inside contact” at the employer and advised processing that he verbally verified the borrower’s employment. He then requested a Verification of Employment be sent to a specific person at the employer as the borrower was “still gainfully employed”; two addresses were given. This information was also given to the senior loan processor. What are the indicators of a fraudulent loan that are beginning to be discovered? 7A: The call from the MLO to the fraudulent verification source is likely the second worst call made in this loan file. Some “red flags” that surface are: The MLO communicated with the verification source. Is this a fraudulent action? The MLO accepted the source’s declaration that the borrower was still “gainfully employed.” Failure to obtain an independent source to send the verification to rather than research an independent source to send the VOE. Sending an to a personal mailbox rather than the mailbox that the company provided. SAFE Comprehensive: ● 02/27/15 Refer to page 49

30 Case Study The Worst CallSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study The Worst Call What actions of the MLO bother you as a professional mortgage loan originator? Who is responsible for validity of documentation in a loan file? What actions can be taken by the secondary market buyer of the loan in the event of fraud? What actions can be taken by the state regulatory authority against the licensees in a fraudulent mortgage loan scheme? 8A: The MLO seemed to have great disregard for or did not know the red flags of mortgage fraud. The actions he took seemed to have greater concern with getting the deal done and closed than protecting the reputation of the mortgage industry, protecting the consumer (even if the consumer was a party to the fraud), and protecting the interests of his employer. 9A: All parties to the mortgage loan transaction (the borrower, the MLO, the clerical and underwriting staff of the creditor, and the ownership of the creditor). The MLO and the employer have the responsibility to educate the employees about mortgage fraud. 10A: If a loan is found to be fraudulent prior to its purchase in the secondary market, the investor can refuse to purchase the loan. Since most loans are sold to the secondary market in bulk (except for FNMA), there is little time to analyze the entire pool of loans for mortgage fraud. After purchase, quality control checks are performed on loans within the pool to analyze the underwriting, for compliance with regulations and disclosures, and the loan documents for presence of fraud. There typically is no time limit for discovery of fraud and repurchase. A mortgage banker, broker, or correspondent can be required to repurchase the mortgage loan during the note term. 11A: The licensee can have his license revoked or suspended for a period of time and/or be assessed a civil fine. SAFE Comprehensive: ● 02/27/15 Refer to page 50

31 Asset Documentation Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Asset Documentation Red Flags Down payment from bank account with no ties to the applicant, does not appear as a withdrawal from applicant’s accounts, cannot be traced back to an account or source, or is made from gifts or from sales transactions Banking information has no traditional banking history, investment portfolio is concentrated and not diversified, or bank statements are co-owned by unrecognized parties Bank statements include even dollar amounts, do not identify the applicant, balances significantly higher than the accounts monthly average with no documentation explaining the increase, out-of-sequence dating on bank statements, or inconsistent deposits with the potential borrower’s income SAFE Comprehensive: ● 02/27/15 Refer to page 50

32 Case Study Cattle FraudSAFE Ethics - Introduction to Mortgage Fraud Chapter 2:Safety and Ethics: Red Flags for MLO Case Study Cattle Fraud John Wayne, although not involved with a mortgage loan application, committed a common type of asset fraud by: John Wayne could be sentenced to a maximum prison term of _______ and a maximum fine of $ _________, which is the maximum punishment for mortgage fraud. A1: Overstating his assets (cows). A2: The punishment for mortgage fraud is a maximum prison term of 30 years and a maximum fine of $1,000,000. SAFE Comprehensive: ● 02/27/15 Refer to page 51

33 Owner Occupancy Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Owner Occupancy Red Flags Purchase Transactions: Real estate listed on application however applicant is a renter Applicant intends to lease current residence Significant or unrealistic commute distance Applicant is downgrading from a larger or more expensive house Sales Contract is subject to an existing lease Occupancy affidavits reflect applicant does NOT intend to occupy New homeowner’s insurance is a rental policy SAFE Comprehensive: ● 02/27/15 Refer to page 52

34 Owner Occupancy Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Owner Occupancy Red Flags Refinance Transactions: Rental property listed on application is more expensive than subject property Different mailing address on applicant’s bank statements, pay advices, etc. Different address reported on Credit Report Significant or unrealistic commute distance Appraisal reflects vacant or tenant occupancy Occupancy affidavits reflect applicant does NOT intend to occupy Homeowner’s insurance is a rental policy Reverse directory does not disclose subject property address SAFE Comprehensive: ● 02/27/15 Refer to page 52

35 Appraisal Red Flags Appraisal ordered by a party to the transactionChapter 2:Safety and Ethics: Red Flags for MLO Appraisal Red Flags Appraisal ordered by a party to the transaction Occupant shown to be tenant or unknown Owner is someone other than seller shown on sales contract Appraisal indicates transaction is a refinance, but other documentation reflects a purchase Purchase price is substantially higher than predominant market value Purchase price is substantially lower than predominant market value Subject property obsolescence is minimized Large positive adjustments made to comparable properties SAFE Comprehensive: ● 02/27/15 Refer to page 52

36 Appraisal Red Flags Inconsistency in comparable salesChapter 2:Safety and Ethics: Red Flags for MLO Appraisal Red Flags Inconsistency in comparable sales Map scale distorts distance of comparable properties “For Rent” sign appears in photographs Photos appear to be taken from an awkward or unusual standpoint Address reflected in photos does not match property address Weather conditions in photos inconsistent with date of appraisal Appraisal dated before sales contract Significant appreciation in short period of time Prior sales are listed for subject and/or comparables without adequate explanation SAFE Comprehensive: ● 02/27/15 Refer to page 52

37 Sales Contract Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Sales Contract Red Flags Non arms-length transaction: seller is real estate broker, relative, employer, etc. Seller is not currently reflected on title Purchaser is not the applicant Purchaser(s) deleted from/added to sales contract No real estate agent is involved Power of Attorney is used Second mortgage is indicated, but not disclosed on the application SAFE Comprehensive: ● 02/27/15 Refer to page 52

38 Sales Contract Red FlagsChapter 2:Safety and Ethics: Red Flags for MLO Sales Contract Red Flags Earnest money deposit equals the entire down payment, or is an odd amount for local market Multiple deposit checks have inconsistent dates, i.e., #303 dated 10/1, #299 dated 11/1 Name and/or address on earnest money deposit check differ from buyer Real estate commission is excessive Contract dated after credit documents Contract is “boiler plate” with limited fill-in-the-blank terms, not reflective of a true negotiation SAFE Comprehensive: ● 02/27/15 Refer to page 52

39 Chapter 2:Safety and Ethics: Red Flags for MLOSummary Ethical behavior in mortgage lending involves applying fundamental principles of honesty, integrity, and service to mortgage loan clients and their application, disclosures, and closing. Ethics in mortgage lending includes serving the mortgage lending needs of the consumer, treating everyone ethically, being honest, making full disclosure to the consumer always, not taking advantage of people, keeping good documentation, and adhering to a code of ethics. The Lending Seal of Integrity is the nation’s first national standard for mortgage loan originators and is administered by the National Association of Mortgage Professionals (NAMB). Many successful loan originators work to not only increase their production and closings, but their knowledge of mortgage related topics and issues. SAFE Comprehensive: ● 02/27/15 Refer to page 53

40 Chapter 2:Safety and Ethics: Red Flags for MLOSummary An MLO should use the Consumer Financial Protection Bureau’s website to learn the new regulations that are being proposed or implemented. Fannie Mae’s website provides underwriting guidelines for conventional, conforming loans for sale into the secondary market. Freddie Mac’s website provides the Primary Mortgage Market Survey, which is a weekly average of the top lender’s annual percentage rates. HUD’s website educates the loan originator regarding FHA rules and regulations. Information on reverse mortgages is also found on this website. SAFE Comprehensive: ● 02/27/15 Refer to page 53

41 Chapter 2:Safety and Ethics: Red Flags for MLOSummary The VA website is shared with veterans and informs the veteran regarding programs that are designed to assist them. Information regarding VA guaranteed home loans and guidelines are on this site also. State regulators maintain sites that contain information on licensing and state law for mortgage licensees. They also report disciplinary actions concerning licensees. Loan originators have many resources to assist them in staying informed of pending changes to the industry, including onsite classes, online classes, and self-study programs of information. When an entry-level loan originator needs further instruction in the everyday practices and procedures, he may want to seek a more capable MLO who can “mentor” him. SAFE Comprehensive: ● 02/27/15 Refer to page 53

42 Chapter 2:Safety and Ethics: Red Flags for MLOSummary A mortgage “team” comprised of senior MLO team leaders and junior MLO’s or assistants can provide the environment that is needed to further learn the nuances of the mortgage industry. Deception is making someone believe something that is not true. Fraud is the deliberate misrepresentation, omission, or misstatement of a material fact that will cause a different underwriting decision had the material fact be known. Parties to the mortgage loan could be affected by mortgage fraud. Those that can be affected include the consumer, the employer or licensee, the lender and/or servicer, and Federal and State regulators. When qualifying a borrower for a mortgage loan, the 4 C’s of underwriting should be considered: Credit, capacity, cash, and the collateral. SAFE Comprehensive: ● 02/27/15 Refer to page 53

43 Chapter 2:Safety and Ethics: Red Flags for MLOSummary Detection of mortgage fraud is the responsibility of all parties to the transaction. Mortgage fraud detection begins at the time of prequalification and application. MLO’s should know the red flags of mortgage fraud and how they apply to the 4 C’s of underwriting When fraud is committed, there are consequences, such as loss of value in a property, potential repurchase of the mortgage loan, monetary fines, and possibly time in prison. SAFE Comprehensive: ● 02/27/15 Refer to page 53

44 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 1. Ethical behavior in mortgage lending involves all of the following EXCEPT applying principles of service to mortgage loan clients. not disclosing a prepayment penalty to the consumer. practicing principles of integrity. principles of honesty. Correct Answer B: Ethical behavior includes practicing principles of honesty, integrity, and service to mortgage loan clients. Ethical behavior does not include non-disclosure of a prepayment penalty. Refer students to page 34. SAFE Comprehensive: ● 02/27/15 Refer to page 54

45 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 2. Which website provides information about the index value used to determine if a mortgage loan is a HOEPA or a Higher-Priced loan? Correct Answer C: Freddie Mac’s website hosts the Primary Mortgage Market Survey, which compiles annual percentage rates (APRs) from various lenders in the United States. The weekly average is then compiled and listed as the average prime offered rate (APOR), which is the index used in determining if a loan is considered a HOEPA or Higher-Priced loan. Refer students to page 36. SAFE Comprehensive: ● 02/27/15 Refer to page54

46 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 3. On the HUD website the MLO can access information about all of the following information EXCEPT an alphabetical list of licensed MLO’s sorted by state. appraisers approved by HUD. condominiums approved by HUD. national maximum loan limits. Correct Answer A: The HUD website does not provide an alphabetical list of licensed MLO’s nor any information about mortgage loan originator’s NMLS numbers. Refer students to page 36. SAFE Comprehensive: ● 02/27/15 Refer to page 54

47 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 4. All of the following are considered part of the Four C’s of credit EXCEPT cash assets available to close the loan. collateral. conditions. credit. Correct Answer C: FHA states that the Four C’s of credit consist of credit history, capacity to repay the mortgage loan, cash assets available to close the mortgage, and collateral. Refer students to page 42 SAFE Comprehensive: ● 02/27/15 Refer to page 54

48 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 5. All of the following are examples of high-level red flags EXCEPT verification of rent completed with a payment history ledger. verifications addressed to a specific party’s attention. verifications completed on the same day they were ordered. verifications completed on weekend or holiday. Correct Answer A: A verification of rent that is completed with a payment history ledger for the borrower contains no indications of red flags for mortgage fraud. Refer students to page 42 & 43. SAFE Comprehensive: ● 02/27/15 Refer to page 54

49 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 6. If a borrower does not earn sufficient income but wants to make sure he meets the debt-to-income ratio requirement, all of the following red flags may be present EXCEPT paycheck stubs that are computer generated. Social Security and Medicare withholding taxes that are not calculated correctly and do not equal 7.65% of gross income. the W-2 form is handwritten. the W-2 form presented is not the employee’s copy. Correct Answer A: A computer generated paystub is not an indication of a red flag for fraudulent employment or mortgage fraud. Refer students to page 44. SAFE Comprehensive: ● 02/27/15 Refer to page 54

50 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 7. Indicators of fraudulent income tax returns may include all of the following EXCEPT when the high income applicant does not use a paid preparer for compilation of returns. paid preparer signs taxpayer’s copy of returns. self-employed or commissioned applicant does not make estimated tax payments. tax returns are stamped “Client’s Copy.” Correct Answer D: A client’s copy of the income tax returns, marked as “Client’s Copy,” is not an indicator of mortgage property. Refer students to page 44. SAFE Comprehensive: ● 02/27/15 Refer to page 54

51 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 8. On a borrower’s credit report, numerous retail inquiries for credit may indicate the borrower has changed jobs without informing the MLO. the borrower has great credit because many retail stores are offering him credit. the borrower opened a new checking account. new debt that is not disclosed on the loan application. Correct Answer D: Numerous inquiries from retail establishments may indicate the borrower obtained new loans that may not be disclosed. An MLO should carefully review the credit inquiries and have the applicant provide a written, signed statement for each one. Refer students to page 45. SAFE Comprehensive: ● 02/27/15 Refer to page 54

52 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 9. If a credit report indicates an address mismatch on the report, this may indicate the borrower has not informed the credit bureaus of his forwarding address. the borrower is providing a bogus address. the borrower moves a lot. the credit bureau does not have the borrower’s current address in their files. Correct Answer D: An address mismatch typically indicates that the applicant has moved and has not obtained a credit report since the move; therefore, the address is not in the credit bureau’s file. Refer students to page 45. SAFE Comprehensive: ● 02/27/15 Refer to page 54

53 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 10. To reduce the incidence of mortgage fraud, an MLO should do all of the following EXCEPT require the applicant to close all credit card accounts. verify the birthdate of the applicant on the application and the credit report with valid photo identification. verify the borrower’s Social Security number provided on the application is not on the Master Death List. validate the employers (current and previous) shown on the loan application with the employment shown on the credit report. Correct Answer A: If a borrower qualifies with open, revolving credit accounts, there would be no reason to close the accounts. Refer students to page 48. SAFE Comprehensive: ● 02/27/15 Refer to page 54

54 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 11. The maximum prison term for participating in fraudulent loan schemes is one year. five years. thirty years. There is no prison term. All penalties are civil (monetary) penalties. Correct Answer C: The maximum prison term for participating in fraudulent loan schemes is 30 years. Refer students to page 51. SAFE Comprehensive: ● 02/27/15 Refer to page 55

55 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 12. An asset can be cash or items that can easily be converted to cash. Methods used to verify the asset include all of the following EXCEPT bank statements for the previous two months. Internet bank statements that do not identify the borrower. a quarterly 401K statement from the plan administrator. a Verification of Deposit from the banking institution. Correct Answer B: Any form of asset verification must clearly identify the borrower and the account number(s). Refer students to page 50. SAFE Comprehensive: ● 02/27/15 Refer to page 55

56 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 13. When reviewing bank statements and a Verification of Deposit, red flags that may indicate fraud include all of the following EXCEPT for when applicant’s earnings do not support the amount in savings accounts. average balance is greater than current balance. current balance is greater than average balance. dates of bank statements are unusual or out of sequence. Correct Answer B: If the average balance (for two (2) months or more) is greater than the current account balance, this is n ot an indicator of mortgage fraud. Refer students to page 44. SAFE Comprehensive: ● 02/27/15 Refer to page 55

57 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 14. Bank statements or a Verification of Deposit could be fraudulent if any of the following are present EXCEPT bank statements do not reflect deposits consistent with income. earnest money deposit check not reflecting in account withdrawals. recently deposited funds that are not sourced or seasoned. statements in sequence and providing all pages. Correct answer D: If all pages of the bank statements are provided and the pages are in sequential or der, this would not be an indicator of mortgage fraud. Refer students to page 44 SAFE Comprehensive: ● 02/27/15 Refer to page 55

58 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 15. Which of the following is NOT considered fraud for property? misstating the intention to owner occupy the property not occupying a home within 60 days that has a FHA or VA insured loan purchasing a home as a part of a relocation with an employer using a “straw buyer” to purchase the property and obtain the financing Correct Answer C: A borrower who is purchasing a home as part of the employer’s relocation package is not acting fraudulently. Refer students to page 51 & 52. SAFE Comprehensive: ● 02/27/15 Refer to page 55

59 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 16. Which of the following is NOT an indicator of fraud for property? an applicant downgrading from a larger or more expensive property purchasing a homeowner’s insurance policy a sales contract contingent to an existing lease when a new homeowner’s insurance is a rental policy (from declarations page) Correct Answer B: When a buyer purchases a homeowner’s insurance policy, it indicates that he will owner occupy the home and have indicated that to their insurance agent. Refer students to page 51 & 52. SAFE Comprehensive: ● 02/27/15 Refer to page 55

60 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 17. A lender may want to order a second appraisal if the original appraisal contains any of the following EXCEPT comparable properties a significant distance from the subject property. the occupant is the owner of record. the value of the home is bracketed by the comparables. the value of the home is greater than the predominant value. Correct Answer D: If the value of the home is greater than the predominant value for the homes in the surrounding neighborhood, it may indicate that the home is overvalued and a second opinion of value should be obtained. Refer students to page 52. SAFE Comprehensive: ● 02/27/15 Refer to page 55

61 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 18. Which of the following is NOT a common red flag that may indicate a problem with the appraisal or the value stated on the report? address of property reflected in photos do not match property address the appraisal is dated before the contract the comparable sales occurred within an acceptable time frame the value of the home has appreciated significantly in a short period of time of ownership Correct Answer C: The purchase contract is executed before the appraisal is ordered. If the contract is dated after the inspection date of the appraisal then the sale price was set to match the appraisal, which may be an indicator of mortgage fraud. Refer students to page 52. SAFE Comprehensive: ● 02/27/15 Refer to page 56

62 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 19. An arm’s length transaction occurs when the appraiser is related to the seller. the parties are acting in their own best interests. the seller is a broker, relative, employer, etc. the seller makes excessive contributions to the buyer’s closing costs. Correct Answer: An arm’s length transaction is defined as a transaction where each party acts in his own best interest and parties to the transaction are not related. Refer students to page 52. SAFE Comprehensive: ● 02/27/15 Refer to page 56

63 SAFE Ethics - Introduction to Mortgage FraudChapter 2:Safety and Ethics: Red Flags for MLO Chapter 2 Quiz 20. The sales contract may be fraudulent if it contains any of the following EXCEPT the purchaser is not the applicant for the loan. the purchaser(s) are added to or deleted from the sale contract. the seller is a Limited Liability Company. the seller is not currently on title. Correct Answer C: The sales contract is not considered fraudulent if the seller is a limited liability company. Refer students to page 52 SAFE Comprehensive: ● 02/27/15 Refer to page 56