When there is no tax return history for a rental property, FHA guidelines require lenders to reduce the gross rental income by 25% to account for vacancies and maintenance.

“If there is no history of rental income on the borrower’s tax returns, the lender must reduce the market rent by 25% before considering it as effective income.”

— HUD 4000.1 FHA Single Family Housing Policy Handbook

The Real Estate Settlement Procedures Act (RESPA) prohibits payment of fees or kickbacks to any party unless that party performs actual, legitimate services related to the origination or processing of a loan. In this case, the MLO did not perform any actual origination services for the borrower, so the fee paid by Bank XYZ to the MLO is not permitted.

RESPA Section 8 prohibits referral fees or any unearned fees. The MLO did not originate the loan or perform any substantive services related to the HELOC, which makes the payment illegal.

The SAFE Act defines a mortgage loan originator (MLO) as someone who takes a residential mortgage loan application and offers or negotiates terms for compensation or gain. An individual who only handles the collection of mortgage payments is not acting as an MLO under the Act.

“Mortgage loan originator means an individual who (i) takes a residential mortgage loan application; and (ii) offers or negotiates terms of a residential mortgage loan for compensation or gain. The term does not include an individual who only performs administrative or clerical tasks or who only collects mortgage payments.”

— SAFE Act, 12 U.S.C. § 5102(4); NMLS Uniform State Content Outline

A balloon mortgage is a type of loan where a large portion of the principal is repaid in a lump sum at the end of the loan term. This structure often features smaller, periodic payments during the life of the loan, with the remaining balance (the balloon payment) due at the end of the loan period. Balloon mortgages are typically shorter-term loans, such as 5 or 7 years.

This differs from other loan types:

FHA mortgages (A) are fully amortized loans backed by the government.

Qualified mortgages (C) meet specific ability-to-repay standards and are fully amortized.

Deferred-payment mortgages (D) often refer to reverse mortgages or loans with delayed payment schedules, which are not the same as balloon loans.

Under the SAFE Act, administrative and clerical duties may be performed by an individual (including a third-party underwriter) if performed at the direction and supervision of a licensed MLO. Origination activities must be done only by licensed MLOs, and company or MLO licensing is state-specific.

“Administrative or clerical tasks performed at the direction and subject to the supervision and instruction of a licensed mortgage loan originator do not require licensure.”

— SAFE Act, 12 U.S.C. § 5102(4)(C)

The statement " Current interest rates as low as 3.50% with an APR of 3.99%. Contact us today! " is permissible under TILA and Regulation Z, provided it accurately reflects the current rates and corresponding Annual Percentage Rate (APR).

Regulation Z requires that if an advertisement states an interest rate, it must also disclose the APR to ensure consumers understand the true cost of the loan, including fees and other finance charges.

The other statements are prohibited due to potential misrepresentation:

B (affiliation with the VA) could be misleading unless it is an actual endorsement, which is rare.

C (no payments with a reverse mortgage) could mislead consumers about the conditions of a reverse mortgage.

D (guaranteed refinancing) could be misleading as future refinancing depends on market conditions and the borrower ' s qualifications.

A Qualified Mortgage (QM) is a category of loans that has certain, more stable features that help make it more likely that a borrower will be able to afford their loan. QMs cannot have negative amortization, interest-only payments, or balloon payments (with a few rural lender exceptions). They must provide for regular, substantially equal periodic payments of principal and interest.

“A qualified mortgage provides for regular periodic payments that are substantially equal, does not result in negative amortization, does not allow for interest-only payments, and does not generally include balloon payments.”

— 12 CFR § 1026.43(e), Ability-to-Repay/Qualified Mortgage Rule; CFPB

If the mortgage loan originator (MLO) becomes aware of a potential change in the borrower’s employment status, such as the company closing and the borrower being laid off, the MLO must notify the underwriter. The borrower ' s ability to repay the loan could be impacted by the job loss, and failing to update the underwriter would be a violation of proper lending practices.

Ignoring the information or withholding it (Options A and B) could lead to loan default and is unethical.

Homeownership counseling (C) is beneficial but not relevant to the immediate concern of loan approval and repayment ability.

In mortgage loan origination, a key focus is ensuring the borrower has the financial means to cover the costs of the mortgage, including closing costs, down payments, and reserves. Fraud may be indicated when there are discrepancies or inconsistencies in the borrower ' s disclosed assets and income. Here’s a detailed explanation of why Option A is the correct answer:

Bank Deposits that are not supported by income or other disclosures (Option A):

This is a red flag for possible fraud. If large or frequent deposits are reflected in the borrower’s bank accounts but cannot be linked to their income or other sources of funds disclosed in the application (e.g., salary, bonuses, or documented gifts), it raises suspicions that the borrower may be trying to misrepresent their financial position.

The Uniform Residential Loan Application (URLA) or 1003 form requires borrowers to disclose their assets, liabilities, and income sources in detail. Mortgage underwriters will carefully review these disclosures and cross-check them with bank statements to verify the legitimacy of deposits.

According to Fannie Mae’s Selling Guide, large, unexplained deposits need to be sourced and seasoned (i.e., must be in the borrower’s account for a specific period, typically two months) to ensure the funds are legitimate. Unsupported deposits that cannot be explained could indicate that the funds are coming from non-disclosed sources, such as unreported loans, which could impact the borrower’s ability to repay the loan.

Disclosure of gift funds (Option B):

Disclosing gift funds is a legitimate and common source of funds for closing costs and down payments, especially for first-time homebuyers. As long as the gift funds are properly documented (typically via a gift letter from the donor), this would not raise concerns of fraud. Lenders typically require that the gift funds come from a verifiable source, and a gift letter confirming that the funds are a true gift, not a loan that must be repaid, is crucial.

Parental loans disclosed but not yet received (Option C):

If a borrower discloses a loan from a parent but has not yet received the funds, this may raise underwriting concerns about whether the borrower truly has sufficient assets for closing. However, this does not indicate fraud as long as the loan is disclosed. The lender would verify that the loan will be received and accounted for prior to closing. The loan could potentially affect the borrower’s debt-to-income ratio (DTI) but wouldn’t necessarily suggest deception.

Borrower ' s receipt of a large bonus from an employer (Option D):

Receiving a large bonus from an employer is not in itself suspicious as long as the bonus is documented and can be verified by the lender. Borrowers often use bonuses as part of their qualifying income, and these are acceptable as long as they are stable and likely to continue, as outlined in Fannie Mae or Freddie Mac guidelines. Therefore, this would not indicate fraud unless there was an attempt to misrepresent the amount or source of the bonus.

In conclusion, Option A (Bank deposits that are not supported by income or other disclosures) is the most likely indicator of potential fraud because it involves unexplained and unverified funds, which may suggest misrepresentation of the borrower ' s financial standing.

Standard guidelines recommend a 2-year history of commission income to count it as qualifying income. However, lenders may consider a shorter history if there are positive factors to offset the shortfall. MLOs should always take the application and allow underwriting to review the overall credit risk.

“Generally, a minimum history of two years is recommended for commission income, but a shorter period may be considered with compensating factors.”

— Fannie Mae Selling Guide, B3-3.1-05: Secondary Employment Income