Free Practice Questions for NMLS MLO Exam

Non-qualified mortgages (Non-QM) are designed to help borrowers who do not meet the standard documentation or income verification requirements of traditional qualified mortgages (QM). Non-QM loans provide more flexibility in underwriting guidelines and are often used by borrowers such as:

Self-employed individuals who may have inconsistent or difficult-to-verify income streams. These borrowers may use bank statements or asset-based verification instead of W-2 forms or tax returns to qualify for a loan.

Non-QMs cater to borrowers who have unique financial situations but still demonstrate the ability to repay. Non-QM loans are not necessarily high-risk but offer alternatives for those who don’t meet the stringent Qualified Mortgage rules.

Other options:

Unemployed individuals (A) typically cannot qualify unless they have alternative forms of income.

No down payment (C): Non-QM loans usually still require a down payment, though the amount may vary.

Living with parents (D) is not a relevant factor in Non-QM lending.

Under ECOA, a creditor may decline a loan based on an applicant’s inability to repay, as demonstrated by verified income and other underwriting criteria. It is illegal to consider race, receipt of public assistance, or exercise of consumer rights as a basis for denial.

“A creditor may consider verified income in evaluating creditworthiness. Discrimination based on race, public assistance, or exercise of rights under the Consumer Credit Protection Act is prohibited.”

— 12 CFR § 1002.6, Regulation B (ECOA)

Under HOEPA (Home Ownership and Equity Protection Act) rules for high-cost mortgages, a creditor may not refinance a high-cost mortgage into another high-cost mortgage within 12 months of the previous transaction unless the new loan is in the borrower’s best interest. This is to prevent loan flipping and predatory lending.

“A creditor may not refinance a high-cost mortgage into another high-cost mortgage within one year unless the new loan is in the borrower’s best interest.”

— 12 CFR § 1026.34(a)(3)

Since the purpose here is a cash-out for a collector car (not generally a “best interest” purpose), the MLO should deny the loan unless a strong case can be made that it is in the borrower’s best interest.

A servicing transfer is when the responsibility for collecting payments, managing escrow accounts, and handling other aspects of loan servicing is moved from one lender or servicer to another. This is regulated by RESPA, which requires timely notification to borrowers.

“A servicing transfer is the transfer of the right to collect payments and service a mortgage loan from one servicer to another.”

— CFPB, RESPA Servicing Transfer Disclosures

Under Regulation Z, when a consumer applies for an ARM, the required variable-rate program disclosures must be given when an application form is provided or before a nonrefundable fee is paid, whichever is earlier.

“The disclosures required… must be given at the time an application form is provided or before the consumer pays a nonrefundable fee, whichever is earlier.”

— 12 CFR § 1026.19(b)(1)

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.

Under the SAFE Act, individuals who take an application and offer or negotiate terms of a residential mortgage loan for compensation or gain must be licensed as MLOs.

A seller providing financing for the sale of their own property (such as in an owner-finance transaction) is generally required to be licensed as an MLO unless specifically exempted by state or federal law (limited situations, e.g., seller-finance up to 3 properties per year).

Other individuals listed (processors, assistants, underwriters) do not require licensure as long as they are working under the direction and supervision of a licensed MLO and not negotiating loan terms or taking applications.

“Any individual who takes a residential mortgage loan application and offers or negotiates terms for compensation or gain must be licensed as a mortgage loan originator, unless specifically exempted.”

— SAFE Act, 12 U.S.C. § 5102(4)

Mortgage loan originators (MLOs) are required to complete 8 hours of continuing education (CE) annually to maintain their license under the SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act). This is mandatory to ensure that MLOs stay updated with changing regulations, compliance requirements, and industry practices.

The 8 hours must include specific coursework, typically:

3 hours of federal law and regulations

2 hours of ethics (covering fraud, consumer protection, etc.)

2 hours of non-traditional mortgage lending

1 hour of elective content that may vary depending on state requirements.

Failure to meet these CE requirements can result in license suspension or revocation.

Under the SAFE Act, offering or negotiating the terms of a loan includes presenting specific loan terms to an applicant, whether verbally, in writing, or through any other communication method. This activity directly involves discussing or negotiating loan details like interest rates, loan amounts, and repayment terms, which requires licensure as a mortgage loan originator (MLO).

Providing general explanations (A) and arranging loan closings (D) do not require an MLO license because they do not involve negotiating or offering specific loan terms.

Making underwriting decisions (B) is also a separate activity not considered "offering or negotiating" loan terms.

An assumable loan is a loan in which a purchaser of a property has the option to take over the existing loan payments under the same terms as the original borrower. This can happen with certain types of loans, such as FHA or VA loans, which allow the buyer to assume the mortgage, potentially at a more favorable interest rate than current market rates.

Options like taking out a second mortgage (A), choosing a loan servicer (B), or selling the loan (D) do not describe assumable loans.