Mortgage Originator Quiz 1

Retail lender
Correspondent lender
Wholesale lender
Closed-end financing
Open-end financing
Fixed-rate mortgage
Interest-only mortgage
Funds loans and sells them to wholesale lenders
No amortization during loan term; balloon payment
Provides fixed amount repayable over fixed period
Funds loans applied for through mortgage brokers
Borrower may repay and reborrow up to credit limit
Interest rate and payments don’t change for set term
Interacts directly with borrower, actually makes loan

Types Of Mortgage Loans and Home Loans Explained 2018

Conforming and Noncomforming Loans

There is many types of mortgage loans. Conventional loans are loans made by private parties and nongovernment lending institutions without any government insurance or government guarantee against loss for the lender. Mortgage loans that are not FHA, VA or USDA (or Rural Housing Service) loans are conventional loans. They may be conforming or nonconforming.

Conventional loans that conform to the eligibility guidelines for purchase by Fannie Mae or Freddie Mac are considered conforming loans. Fannie Mae and Freddie Mac have a maximum loan limit for loans they will purchase, which is adjusted annually.

Loans to persons with satisfactory credit but that exceed this loan limit are called jumbo loans or nonconforming loans. Because these loans cannot be sold to Fannie Mae or Freddie Mac, they often have a higher interest rate than conforming loans.

Insured Loans

Conventional loans can be insured or uninsured. Generally, a conventional loan of up to 80 percent of the property’s value will be made without private mortgage insurance. Some lenders will charge higher interest rates to compensate for the increased risk inherent in making a loan that is more than 80 percent of the value; however, most require that the loan be insured by a private mortgage insurance company.

Private mortgage insurance (PMI) is an insurance policy issued to provide protection to the mortgage lender in the event of financial loss due to a borrower’s default that results in foreclosure. In the event of a foreclosure, the insurance company will either purchase the loan or let the lender foreclose and pay the lender for losses up to the face amount of the policy.

So that he may get a loan with a small down payment, the borrower pays a mortgage insurance premium either as a lump sum at closing covering the life of the loan, or by paying the first year’s premium at closing and then paying annual premiums as part of his mortgage payment. The amount of the premium is a percentage of the loan amount based on the borrower’s down payment. The annual premiums and the insurance stop automatically once the loan is paid down to 78 percent; or may be canceled at the borrower’s request once the loan balance reaches 80 percent of the value of the property at the time the loan was made.

Subprime Loans – one of Types Of Mortgage Loans

Until 2008, credit-impaired borrowers and other borrowers unable to obtain credit in the prime market were able to easily obtain financing from lenders specializing in subprime loans. Loans made to borrowers meeting Fannie Mae and Freddie Mac credit requirements are called A-paper loans. A-paper loans are conforming loans. Loans not meeting these requirements were called “Alt-A,” “B,” “C” and “D” paper loans, or subprime loans. Alt-A loans were treated as “A-” (A-minus) loans, in some cases because of less-than-prime credit, in other cases because of a lack of supporting documentation.

Factors causing a borrower to seek a loan from a subprime lender include:

  • a weak past credit performance.
  • a high monthly debt payment relative to income.
  • a lack of assets other than current income to support loan payments.
  • self-employment, variable income, or a desire to limit disclosure of his financial situation.

Under the risk-based pricing model used for subprime loans, up-front fees and interest rates were based on the degree of risk posed by the subprime borrower: the higher the risk, the higher a borrower’s rate and costs.

However, due to laxity and abuses in the origination and securitization of subprime loans, the actual loss far exceeded the estimated risk, resulting in bankruptcy and foreclosure for many borrowers and upheaval in primary and secondary markets, as well as real estate markets across the country.


Government-Related Loans

Many real estate mortgage loans are insured or guaranteed by the federal government through such programs as:

  • FHA-insured loans.
  • VA-guaranteed loans.
  • USDA-guaranteed loans.

These programs are one of the types of mortgage loans which have more liberal qualification criteria in terms of qualifying ratios and credit standards and higher loan-to-value ratios (LTVs). They also have requirements for some loan terms, including a limit of 4 percent as a late charge on a payment 15 days late and loan assumability.

Federal Housing Administration (FHA) Loans


The FHA is a division of HUD. FHA loans are loans that meet FHA program criteria and are made by approved lenders. For these loans, the FHA insures the issuing lender against loss in the event of default. Under the FHA program the lender can charge whatever points and interest a borrower is willing to pay, as the cost of the loan is negotiable. The advantage to the borrower is that the lender will make the loan with a very high LTV because it is insured.

However, FHA loan limits restrict the size of mortgages that can be insured by the Federal Housing Administration. The floor for a low-cost area is 65 percent of the national conforming loan limit. This is currently $417,000 for a one-unit property. For areas that have been designated high-cost areas, the ceiling loan limit is 150 percent of $417,000, as prescribed by the National Housing Act and the Economic Stimulus Act of 2008. The following table itemizes the floor/ceiling limits through December 31, 2016. (Single Family Housing Policy Handbook 4000.1)

Property Size

LowCost Area Floor

HighCost Area Ceiling

One Unit



Two Units



Three Units



Four Units



The states and territories of Alaska, Guam, Hawaii and the U.S. Virgin Islands are special exception areas allowing loan limits to be adjusted up to 150 percent of the national ceiling.

Federal Housing Administration (FHA) Loans


The FHA funds the insurance from a mortgage insurance premium (MIP) charged to the borrower. Most FHA mortgages require payment of an up-front mortgage insurance premium (UFMIP). The UFMIP is nonrefundable (except to the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within three years).

In addition, most FHA loans require payment of an annual mortgage insurance premium, payable monthly as part of the mortgage payment. This premium is based on the loan program, the loan term and the LTV.

For loans with FHA case numbers assigned on or after June 3, 2013, the FHA collects the annual MIP for the maximum duration permitted under statute.

  • For all mortgages, regardless of their amortization terms, involving an original principal obligation (excluding financed UFMIP) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.
  • For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, the FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first. (12 USC §1709(c)(2)(B), Single Family Housing Policy Handbook 4000.1)
The FHA calculates LTV as a percentage by dividing the loan amount (prior to the financing of any UFMIP) by the lesser of the purchase price (if applicable) or the appraised value of the home. For streamline refinances without appraisals, the FHA uses the original appraised value of the property to calculate the LTV.

Federal Housing Administration (FHA) Loans

The table below shows the previous and the new duration of annual MIP by amortization term and LTV ratio at origination. (Single Family Housing Policy Handbook 4000.1)






≤ 15 yrs ≤ 78% No annual MIP

11 years

≤ 15 yrs 78.01% – 90% Canceled at 78% LTV

11 years

≤ 15 yrs > 90% Canceled at 78% LTV

Loan term

> 15 yrs ≤ 78% 5 years

11 years

> 15 yrs 78.01% – 90% Canceled at 78% LTV & 5 yrs

11 years

> 15 yrs > 90% Canceled at 78% LTV & 5 yrs

Loan term

Under Public Law 111-229(1)(b), the FHA may adjust its mortgage insurance premium rates, as measured in basis points (bps).

This first table shows the previous and the new annual MIP rates by amortization term, base loan amount and LTV ratio. All MIPs in this table are effective for case numbers assigned on or after January 26, 2015.


Term > 15 Years

Base Loan Amt.


Previous MIP


≤ $625,500

≤ 95%

130 bps

80 bps

≤ $625,500

> 95%

135 bps

85 bps

> $625,500

≤ 95%

150 bps

100 bps

> $625,500

> 95%

155 bps

105 bps

This second table shows the effective annual MIP rates for loans with terms of up to 15 years. The new annual MIP for these loans is effective for case numbers assigned on or after January 26, 2015.


Term ≤ 15 Years

Base Loan Amt.


Previous MIP


≤ $625,500

≤ 90%

45 bps

45 bps

≤ $625,500

> 90%

70 bps

70 bps

> $625,500

≤ 78%

45 bps

45 bps

> $625,500

78.01 – 90%

70 bps

70 bps

> $625,500

> 90%

95 bps

95 bps

The increases in the annual MIP specified in the Single Family Housing Policy Handbook 4000.1 apply to all mortgages insured under the FHA’s single-family mortgage insurance programs except:

  • streamline refinance transactions of existing FHA loans that were endorsed on or before May 31, 2009.
  • Section 247 (Hawaiian Homelands).


203(b) Program

The most popular of the FHA loan programs is the 203(b) program. This program helps finance the purchase of a one- to four-unit family home that the borrower intends to occupy as his residence (i.e., move in within 60 days after closing and stay in the property for 12 months), using a 15- or 30-year loan and a cash investment of as little as 3.5 percent of the lesser of the property value or the purchase price. An applicant with a credit score of at least 580 can qualify for the 3.5 percent rate. One with a score of 500-579 can qualify with a cash investment of 10 percent. One with a score below 500 is not eligible for the loan.

Some or all of the cash investment can come from a gift from:

  • an immediate relative.
  • a labor union or employer.
  • a government agency or public entity.
  • a nonprofit charitable organization.

The gift donor, and the source of the gift donor’s funds, may not be a person or entity with an interest in the sale of the property (e.g., the seller, the real estate agent or broker, the builder, or an associated entity). A gift from any of these sources would be considered an inducement to purchase and would have to be deducted from the sales price. Therefore, a seller could not give the buyer a gift directly or channel funds through a nonprofit charitable organization to assist the buyer in acquiring the funds for his down payment.
The FHA allows the seller to contribute up to 6 percent of the purchase price toward the buyer’s actual closing costs, prepaid taxes and insurance, discount points, buydown fees, mortgage insurance premiums, and other financing concessions, but nothing toward the down payment.

Home Equity Conversion Mortgages (HECMs) The FHA’s Home Equity Conversion Mortgage (HECM) is a loan that enables an individual age 62 or older to:

  1. convert some of the equity in his primary residence to cash to pay living expenses; or
  2. purchase a primary residence, if he has the cash to pay the down payment and closing costs.

The borrower may take the loan funds in monthly advances for a fixed period or until he no longer qualifies and/or through a line of credit. Each month’s interest is added to the principal loan balance, causing the interest to be compounded.

The key points regarding HECM loans include the following:

  • The borrower must be 62 years of age or older, have significant equity in the property, occupy the property as his principal residence, and participate in a consumer information session given by an approved HECM counselor.
  • The loan amount is based on the age of the youngest borrower, the current interest rate, and the lesser of appraised value or the HECM FHA mortgage limit. The loan amount may include closing costs.
  • The borrower can select a fixed interest rate or an adjustable rate and choose whether the rate will adjust monthly or annually.
  • The loan has no specified term, prepayment penalties, or credit or income qualifications, as it requires no repayment until either the property is sold or the owner:
    • dies;
    • permanently moves;
    • fails to live in the house for 12 consecutive months; or
    • fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).

Unlike other FHA mortgage programs, the HECM has:

  • a UFMIP of 0.5 percent or 2.5 percent, depending on the disbursements;
  • an annual MIP of 1.25 percent; and
  • a loan origination fee limit of:
    • the greater of $2,500 or 2 percent of the first $200,000; and
    • 1 percent of the amount over $200,000 of value.

    HECM origination fees are capped at $6,000.

    The FHA used to provide a second option, known as the HECM Saver, but the two programs were consolidated in 2013.

HECM Counseling (HUD Mortgagee Letter 2010-37; 2011-26; 2011-31)
All owners shown on the property deed (or legal representative in cases involving documented lack of competency) and a nonborrowing spouse must personally receive HECM counseling prior to entering an HECM contract. The counseling certificate must be signed and dated by:

  • the counselor;
  • all owners shown on the property deed (or legal representative in cases involving documented lack of competency); and
  • the nonborrowing spouse.

Lenders are required to provide each client with a list of HECM counseling agencies that includes no fewer than nine HUD-approved counseling agencies, including:

  • five agencies within the local area and/or state of the prospective borrower;
  • one agency within reasonable driving distance for the purpose of face-to-face counseling; and
  • national intermediaries awarded HECM counseling grant funds by HUD.

Fees and Loan Limits

The FHA allows most loan and closing fees, including discount points and yield spread premiums. However, it does prohibit the borrower from being charged a tax service fee, and it limits:

  • the loan origination fee on its HECM and Section 203(k) rehabilitation loans.
  • appraisal and credit report charges to their actual cost.
  • other closing costs to what would be customary and reasonable.

The maximum insurable mortgage amount is the lesser of:

  • a statutory loan limit for the area (based on housing costs), typically a county or metropolitan statistical area (MSA); or
  • the applicable LTV limit.

Neither limit includes the UFMIP, even if it is added to the base loan amount.

Income and Credit Qualifications

FHA loans are not restricted to first-time homebuyers or those with low or moderate income. Anyone who can meet the FHA’s liberal underwriting criteria can obtain such a loan. The borrower’s income and employment must be verified, and his credit history will be analyzed (e.g., a court-ordered judgment must be paid off or be in the process of being paid off under an agreement with the creditor for regular and timely payments). The FHA also accepts nontraditional mortgage credit reports on borrowers lacking the types of trade references that normally appear on traditional credit reports, provided the information is verified and documented. These may be a substitute or a supplement to a traditional credit report. Such reports include credit references relating to rental housing payments, utility payments and other bill payments (e.g., insurance, child care, phone, auto leases, etc.)

A borrower can qualify for an FHA loan with monthly payments for principal, interest, and property taxes and insurance (PITI) of up to 31 percent of his gross monthly income; and total monthly debt of up to 43 percent of his gross monthly income. In addition, sources of regular income not subject to federal taxes (e.g., certain types of disability and public assistance payments, Social Security income, and military allowances) and child support income can be grossed up by 25 percent in calculating the borrower’s income for qualifying purposes. This means the amount of continuing tax savings attributable to that source may be added to the borrower’s gross income. When a borrower does not have to file a federal income tax return, the tax rate used is 25 percent. On the other hand, the FHA requires that gross rental income be reduced by either 25 percent or a percentage developed by HUD’s jurisdictional Homeownership Center (HOC) for vacancies and maintenance.


Before agreeing to insure a loan, the FHA can require repairs necessary to preserve the continued marketability of the subject property and protect the health and safety of the occupants. If the home requires flood insurance and is not located in an area where the National Flood Insurance Program is in force, it is not eligible for FHA financing.

The FHA requires that a “For Your Protection: Get a Home Inspection” notice be given to a prospective homebuyer at first contact (whether for prequalification, preapproval or initial application), but never later than at the time of the initial application. The notice informs the buyer of the importance of a home inspection prior to purchasing a home. It also makes clear that:

  1. the FHA does not insure the condition of the property.
  2. the appraisal is intended only to assist the lender.

The FHA also requires the use of an amendatory clause in most transactions. This provides that the buyer is not obligated to conclude the transaction and is entitled to a full refund of his earnest money deposit if the property is appraised at less than the purchase price.


Most FHA loans are assumable, subject to the person assuming the loan qualifying. However, a loan insured after 1989 can only be assumed by an owner-occupant. A lender cannot approve the sale or other transfer of a property to a person (e.g., an investor) who will not be using the property as a primary residence or a secondary residence.

VA loans are made by approved lenders and guaranteed by the U.S. Department of Veterans Affairs. The guarantee is similar to mortgage insurance in that it limits the lender’s exposure to loss in the event of a borrower’s default that results in foreclosure. However, the veteran borrower is charged a nonrefundable up-front funding fee that can be financed, instead of a mortgage insurance premium for the guarantee. A veteran receiving VA compensation for a service-connected disability is exempt from the fee requirement.

The fee varies based on whether the borrower:

is a first-time VA borrower or a repeat borrower;
is eligible because of service in the regular military, or because of service in the Reserves or National Guard; and
puts nothing down, or puts at least 5 percent down.
The fee for a first-time VA borrower who is a veteran of the regular military is 2.15 percent of the loan amount. It is higher if he qualifies as a Reservist or has obtained a VA loan previously. It is lower if he makes a down payment of at least 5 percent. As with the FHA premium, this fee can be financed in the loan.

Advantages of VA Loans

VA loans  are types of mortgage loans that primary advantage of a VA loan is that there is no down payment required on a loan of up to Freddie Mac’s conforming loan limit. In addition, the seller can pay:

  • all of the borrower’s nonrecurring closing costs and discount points, with no limit.
  • up to 4 percent of the sales price in seller concessions (i.e., anything of value added to the transaction for which the borrower pays no additional amount and that the seller is not customarily expected to pay). Concessions include prepaid taxes and insurance, the VA funding fee, payoff of the borrower’s existing debts, temporary buydown fees, and gifts.
    Additionally, it is easier to qualify for a VA loan than for a conventional loan. The VA uses two methods for qualifying its borrowers:


  • A 41 percent debt-to-income ratio (including housing and fixed debt)
  • The residual income method, which determines whether the veteran has enough income after paying his fixed debts to cover his daily living expenses and which can qualify a borrower whose ratio might exceed the 41 percent limit
    However, the interest rate is not lower than that for other loans, the seller is generally not required to make repairs, and finance charges are not significantly lower.



A VA loan is available only to veterans of the armed services, certain active and discharged military personnel, and their spouses; however, the loan is assumable by nonveterans. In order to obtain the loan, the applicant must obtain a Certificate of Eligibility from the VA (directly online, through the lender online, or by mail). This will determine whether he is eligible for a VA loan and whether he is eligible for a loan with the full guarantee.

The maximum loan guarantee varies depending on the location of the property. While the VA does not have a maximum loan amount, it will guarantee to the lender the lesser of 25 percent of the loan balance or 25 percent of the Freddie Mac limit. For high-cost counties, the guarantee is the lesser of 25 percent of the loan balance or 25 percent of the VA county loan limit, which takes into consideration the county’s median home price and the Freddie Mac conforming loan limit. The guarantee enables the lender to avoid losing money if he can recoup 75 percent of the loan balance from a sale of the borrower’s property at or after foreclosure.

For Example
If the Freddie Mac limit is $417,000, a veteran with full eligibility can get a loan of up to $417,000 without a down payment. The VA will guarantee the lender $104,250 (25 percent) against his loss in the event of default. If the borrower wanted to buy a home for $450,000, the VA would still only guarantee up to $104,250 of the loan. The borrower would need a 25 percent down payment on the balance of the price above $417,000.

If the borrower wanted to buy a $200,000 home, the lender would be guaranteed $50,000 against loss by the VA.

U.S. Department of Veterans Affairs (VA) Loans

An applicant who has used all or part of his entitlement for a VA loan can get it back to purchase another home if any of the following applies:

  1. The prior property has been sold and the VA loan has been paid in full.
  2. A qualified veteran buyer has agreed to assume the outstanding balance on the VA loan and substitute his entitlement for the same amount of entitlement the applicant originally used to get the loan.
  3. One time only, the applicant has repaid the prior VA loan in full without disposing of the property securing that loan.
  4. Even if an existing VA loan has not been paid off, the applicant has “remaining entitlement” due to an increase in the maximum entitlement amount since he obtained that loan.
  5. The borrower must also sign a Certificate of Occupancy, certifying that he will use the property as his primary residence. As with an FHA loan, for a VA loan, the applicant must intend to move in within 60 days after closing and stay in the property for 12 months.

A veteran cannot borrow more than the value shown on the VA appraisal, called a Certificate of Reasonable Value (CRV). He can, however, buy the property for a higher purchase price if he pays the difference in cash. If he does not wish to do so, he can terminate the transaction and receive a refund of his earnest money, utilizing an escape clause required in the VA sales agreement.
The VA does not warrant the condition of the property and is not concerned with cosmetic items, such as chipped paint. However, if the property was constructed before 1978, any area with chipping or peeling paint must be stabilized (i.e., scraped and painted to remove the lead-based paint hazard) and a lead paint notification and disclosure must be provided to the buyer.

The Rural Housing Service (RHS), within the USDA, makes financing available in rural areas through its Section 502 guaranteed loan program.

The loan funds can be used to build, repair, rehabilitate, renovate or relocate a primary residence or to purchase and prepare a site for one, including providing water and sewage facilities. The housing must be modest in size, design and cost and also meet the voluntary national model building code adopted by the state and the Housing and Community Facilities Program’s (HCFP) thermal and site standards.

This program is similar to that offered by the federal VA in that both involve loans with a 30-year term, a fixed interest rate set by the lender, no required down payment and an up-front 2 percent guarantee fee (which may be financed). However, the USDA guarantee applies to 90 percent of the loan. Lenders for this program include state housing agencies and lenders approved for participation in FHA, VA, Fannie Mae or Freddie Mac loan programs.

Loan applicants must:

  • be without adequate housing.
  • have less than 20 percent liquid assets (not including retirement accounts).
  • have a steady income of up to 115 percent of the median income for the area;
  • have a reasonable credit history; and
  • be able to afford the mortgage payments, including taxes and insurance.

The lender must determine repayment feasibility, using 29 percent housing-to-income and 41 percent debt-to-income ratios.
For low-income creditworthy households unable to obtain credit elsewhere, the USDA is authorized to make loans through Section 502.

Fixed-Rate Mortgage (FRM)

Names (or terms) are often applied to mortgages and trust deeds to describe a certain feature of the loan, such as its purpose, the type of interest charged, the security used for the loan, etc. The mortgage or trust deed itself would not show the term, but a feature of that document would cause people to use the term to describe it. In most instances, in fact, one document could be described using any number of terms.

With a level-payment fixed-rate mortgage (FRM), both the interest rate and the monthly principal and interest payments stay the same for the entire loan term. The fixed interest rate will not change, regardless of future changes in the money supply, rate of inflation or anything else. The only possible change in monthly payments on the loan will result from changes in the cost of property taxes and insurance, if those are included in the monthly payment. The lender will change the payment amount after performing its annual escrow analysis.

In the case of a balloon/reset loan (or two-step loan), the interest rate and payments remain fixed for a specified term. At the end of that term, the borrower has the choice of repaying the loan or resetting the interest rate to the current interest rate and having a new fixed rate and payment amount for the remainder of the loan term.

For Example
For a 7/23 loan, the borrower’s payments are based on a 30-year term, but he has to pay off the loan in seven years or have the rate reset to a new fixed rate, which will require a new payment amount for the remaining 23 years. Even though this type of loan has two rates, it is considered a fixed-rate loan.

Fixed-Rate Mortgage (FRM)

Particularly during periods when the interest rates are relatively low, borrowers will select the fixed-rate loan over a variable-rate loan. Those last one are more popular types of mortgage loans. The drawbacks of this type of loan, however, are that:

  • the rate is usually higher than the initial variable rate being offered at the same time.
  • if interest rates were to decrease during the term of the loan, the borrower would have to refinance the loan (i.e., obtain a new loan to pay off all or part of the existing loan) and incur new loan costs in order to take advantage of the lower rates. As a result, during periods of high interest rates more borrowers will lean toward adjustable-rate mortgages (ARMs).
    A fixed-rate loan has no index rate or adjustment period; those are features of an ARM.


Adjustable-Rate Mortgage (ARM)

The initial (start) interest rate for an ARM is lower than that for fixed-rate mortgages for those  types of mortgage loans. The initial rate and payment amount will remain in effect for a limited time. After the initial period, the ARM interest rate will be based on an index rate, which increases or decreases periodically during the term of the loan according to an index specified in the loan agreement, plus a fixed margin amount. An ARM is subject to any limits, or caps, on changes in the rate or payment amount.

Amortized Loans

Amortization is the process of paying off a loan by gradually reducing the balance through a series of installment payments.

Fully Amortizing Loan

A fully amortizing (or self-liquidating) mortgage provides for periodic payments that repay the loan in its entirety by the end of the mortgage term. The most common methods of payment used for these loans are:

  • the level payment mortgage, which provides for equal payments of principal and interest throughout the loan period. As the principal balance is paid down, the portion of each payment that applies to the principal increases while the portion applying to interest goes down. However, the total monthly payment remains the same.
  • the budget mortgage, which provides for monthly mortgage payments to include an amount equal to 1/12 of the estimated annual property taxes and property insurance premiums, homeowners’ association dues and/or special assessments.

Partially Amortizing Loan

A partially amortized (balloon) mortgage provides for some, but not total, amortization during the mortgage term. It has payments that are equal and regular in nature. However, the loan term is shorter than the time needed to repay the full loan balance by making those payments. Therefore, at the end of the loan term, a large balloon payment is needed to pay off the remaining balance.

For Example
A $20,000 loan is made with an interest rate of 9 percent per year. Payments are based on amortization schedule of 30 years, but the loan has a term of only five years. The 30-year amortization schedule keeps the payments affordable at $162.92 per month. However, after five years, the borrower would have to pay off the entire outstanding principal balance of about $19,176 in one lump-sum balloon payment. This could be described as a 360/60 loan, indicating payments based on 360 months of amortization with a term of only 60 months. It could also be described as a 30/5 loan, indicating a term of five years with 30-year amortization.

Negative Amortization

If periodic installment payments on a loan are insufficient to pay all of the interest due, the unpaid interest is added to the principal, causing the loan balance to increase rather than decrease. This is called negative amortization.

Negative amortization may occur when the loan is:

  • a graduated-payment mortgage (GPM). In a GPM, payments start at a level that does not pay all of the interest being charged, so the unpaid interest is added to the loan balance, causing negative amortization. The payments gradually increase in scheduled amounts at scheduled times until they finally level out at the amount needed to amortize the loan over the remainder of the loan term.
  • an ARM with a payment cap. This loan allows a borrower to make payments that do not cover all of the interest being charged, while the lender adds unpaid interest to the outstanding loan balance.
  • an option ARM, or payment-option ARM, which gives the borrower options to make payments to amortize the loan over 15 years or 30 years, to pay interest-only for a period, or to make minimum payments. Payments under the minimum payment option (negative amortization, deferred interest) will not pay all the interest being charged, so the unpaid interest is added to the loan balance. (This type of loan is no longer generally available.)
  • a reverse mortgage, or reverse annuity mortgage. This loan has a balance that increases as loan proceeds are disbursed to the borrower and as interest is added to the balance.

Interest-Only Loans

An interest-only mortgage, also called a term or a straight mortgage, provides for no amortization during the term of the loan. The principal is repaid at the end of the loan term through a balloon payment. Some interest-only loans are really combination loans, as they have an initial period during which payments are interest-only followed by a period of substantially higher payments amortizing the loan for the remainder of the loan term.

Construction Loans

Construction financing is one of the  types of mortgage loans and is high-interest interim (or temporary) financing that serves to finance the cost of labor and materials used during construction. It extends from the start to the completion of the work, when it is then paid off, often with the proceeds of a more permanent form of financing (a take-out loan).

At the time a construction mortgage is created, the building that is pledged as part of the collateral for the loan does not exist, so only the land value is available as collateral. Generally, the lender wants the loan to be a first mortgage on the property. This means that either the land must be free of liens or the existing liens must be subordinated to the construction loan.

The loan is generally an open-end mortgage or a line of credit, in which the lender commits to lending (or authorizes) a certain amount, usually around 75 percent of the expected value of the property after the work has been completed. However, the lender does not initially release the full loan amount. Instead, it provides advances, or draws, as work is completed. If the mortgage provides for obligatory future advances (i.e., advances that must be provided if certain conditions are met by the borrower), those advances have priority over intervening liens.

The lender may withhold the final release of funds until the building inspector issues a certificate of completion and:

  • the lien period has expired, to ensure no liens are filed against the property for unpaid work; or
  • all labor and materials have been paid for, as evidenced by lien waivers from each of the contractors and subcontractors on the job.

Interest is charged on the money only as it is disbursed. It is generally repaid in interest-only installments during the loan period, although some lenders will allow interest to be repaid in a lump sum after the work is complete. In either case, the entire loan amount is due in full within a short period after completion of the work.
Permanent construction loans or construction-to-permanent loans which are  types of mortgage loans for investors may be made to owner-occupants and developers. Fannie Mae’s construction-to-permanent mortgage is a 15- or 30-year loan that can be used to finance construction of one- or two-unit owner-occupied homes, one-unit second homes, or investor homes. The loan amount may be up to 95 percent of the construction cost or the value of the property upon completion of construction, and the funds may be used to purchase the land for the home.

What are Land Contracts in Mortgages and Trust Deeds

Land Contracts

The three devices typically used to secure real estate for a loan (such as in a sales transaction) are the land contract, the mortgage and the trust deed.

A land contract is known by different names in different parts of the country, including “agreement of sale,” “land sales contract,” “real estate contract,” “installment sales contract” and “contract for deed.”

In such a contract, the seller (or vendor) finances the purchase of his property for the buyer. The buyer (or vendee) makes payments to the seller in installments until he can pay off the entire debt, generally by refinancing, at which time he is given a deed transferring ownership of the property to the buyer. The transfer of property, and the deed itself, may be called a conveyance.

Until the contract is paid off, the seller keeps legal title to the property, even though the contract may give the buyer possession and equitable title as soon as it is signed. Equitable title means the buyer is entitled to a deed conveying the legal title when the contract is fully paid and performed. If the vendee defaults, the vendor may foreclose or, depending on state statute, declare forfeiture to regain his property.

Note and Mortgage (or Trust Deed)

In the typical real estate sales transaction, the seller gives the buyer a deed at closing and the buyer gives the lender a promissory note and a security instrument (i.e., a mortgage or trust deed) that creates a lien on the property. When the seller finances the purchase and does not actually give the buyer any cash, the loan may be called a soft money loan. When a third-party lender provides actual funds for the loan, it is called a hard money loan.

Promissory Note

The promissory note is both a promise to repay the money borrowed with interest and evidence of the debt. It shows:

  • the payor and payee.
  • the amount owed.
  • the rate of interest and whether it is fixed or adjustable.
  • the due date(s) for payment.
  • loan terms, which may include:
    • a prepayment privilege, which allows the borrower to prepay the loan;
    • a prepayment penalty, which imposes an extra charge if the borrower does prepay. While government-backed loans (e.g., FHA and VA loans) have no prepayment penalties,
    • conventional loans (i.e., loans not backed by government insurance or guarantees) may have prepayment penalties;
    • a lock-in clause, which prohibits prepayment;
    • an acceleration clause, which permits the lender to declare the entire balance of the loan due at once if the borrower defaults; or
    • a late payment penalty, which imposes a charge if the borrower’s payment is late.

Note and Mortgage (or Trust Deed)

Mortgage or Trust Deed

The mortgage or trust deed secures repayment of the note. In lien theory states, this instrument hypothecates the property, meaning the property is pledged as security, or collateral, but the borrower retains equitable title or possession.

The borrower, in giving a mortgage to the lender, is called a mortgagor, while the lender receiving it is called a mortgagee. The borrower, in giving a trust deed to the lender, is called a grantor or trustor; the lender receiving it is called a beneficiary; and a third party with a power of sale allowing him to foreclose without going to court is the trustee.

NOTE: Because the trust deed has the same legal effect as a mortgage, the term “mortgage” is often used when referring to a trust deed.

Among the provisions of the security instrument are:

  1. a due-on-sale (alienation) clause, which allows the lender to:
    1. declare the entire balance of the loan due at once; or
    2. refuse to allow another person to assume the loan if the title is transferred. FHA or VA loans are assumable by qualified buyers. Fannie Mae and Freddie Mac conforming loans may or may not be assumable based on the contents of the mortgage documents and the type of transfer.
  2. a defeasance clause, which provides for release of the lien when the borrower pays off the debt. However, to provide public notice that the debt has been repaid and to clear it from the public record:
    1. a satisfaction or release is recorded to clear a mortgage lien; or
    2. a deed of reconveyance is recorded to clear a trust deed lien (or in some states, a mortgage).


The security instrument typically provides that monthly payments are applied in the following order:

  1. Interest
  2. Principal due
  3. Taxes and insurance, if paid to the lender
  4. Late charges
  5. Any other amounts due
  6. Additional principal reduction


Primary and Subordinate Financing

A primary mortgage (first mortgage) is a loan that has priority over all other unsatisfied mortgages secured by the same property, generally because it was recorded before them.

A subordinate mortgage (junior mortgage or second mortgage) secures a loan that is secondary to one or more other loans on the property. A mortgage is a second mortgage when:

  • it is recorded after another mortgage that is still outstanding on the same property; or
  • it has a subordination clause specifying that it:
    • has lower priority (i.e., is subordinate) even though it may have had priority based on its date of recording; or
    • will remain subordinate in the event that the first mortgage is refinanced.
      In the event of a foreclosure on a first mortgage, the subordinate loan will be removed as a lien even if foreclosure sale proceeds are not sufficient to pay it off. Because of this risk, such loans have higher interest rates than first loans.

Subordinate financing can be obtained:

  • at the same time as a primary mortgage to finance a down payment or closing costs (as a piggyback mortgage); or
  • after closing, as either a closed-end second mortgage or as a home equity loan or home equity line of credit (HELOC).


Foreclosure laws vary from state to state. If a borrower defaults on his mortgage or trust deed loan, the lender can ask the court for a judicial foreclosure and a court-ordered sheriff’s sale of the property to repay the debt. After the sale, the sheriff will issue a sheriff’s deed conveying title to the purchaser.

If included in a trust deed or mortgage, a power-of-sale provision allows a trustee to foreclose and sell the property on behalf of the lender without a court order and issue a trustee’s deed conveying title to the purchaser.

Depending on state statute, the debtor may be liable for a deficiency judgment when sale proceeds are insufficient to satisfy the debt.

Also, depending upon state statute, an owner or other person with an interest in the property may, by paying off the entire debt and court costs, exercise:

an equitable right of redemption prior to the sale, to prevent a foreclosure sale.
a statutory right of redemption following a foreclosure, to reclaim the property. If there is a statutory right of redemption, the sheriff’s deed or trustee’s deed will not be issued until the redemption period expires.

If a mortgage or trust deed has the right of reinstatement, a defaulted borrower has a period after default to stop a foreclosure by paying all past-due payments and penalties and bringing the loan current, instead of having to pay off the entire debt.

Often, the high bidder at a foreclosure sale is the lender holding the note. Property that the lender has acquired through foreclosure is called an REO, for “real estate owned.”

The lender will attempt to recover as much as it can from resale of its inventory of REOs.

Among the options available to a lender in order to prevent or avoid foreclosure are:

  • acceptance of a deed in lieu of foreclosure, or estoppel deed, from a borrower facing foreclosure in return for releasing him from his debt.
  • a forbearance, which allows a borrower experiencing temporary financial difficulty to delay his monthly mortgage payments for a short period of time. It is often combined with other programs designed to help bring the monthly mortgage payments current after a negotiated period of time.

Who is a Correspondent Lender

Mortgage lending involves both a primary mortgage market and a secondary mortgage market. In the primary mortgage market, lenders originate mortgage loans by lending funds to borrowers by a correspondent lender or a retail lender.
A real estate loan can be originated through:

  1. a retail lender. This is a lender (e.g., a bank, savings bank, credit union or mortgage lender) that interacts directly with the borrower and actually makes the loan. If the lender holds its loans, rather than selling them, it is called a portfolio lender. A retail lender can also offer loans as a wholesale lender through mortgage brokers.
  2. a correspondent lender. This is generally a smaller lender that takes applications and underwrites and funds loans, either with its own money or from a line of credit with a larger lender, and sells the loans to wholesale lenders immediately upon closing under previously agreed-upon terms.
  3. a wholesale lender through a mortgage broker. This is a mortgage investor that prices and funds loans applied for through mortgage brokers. After a mortgage broker processes an application, the wholesale lender has it underwritten and funded. After the loan is made, the wholesale lender will either service it (i.e., collect the loan payments from the borrower) or sell or assign servicing to another entity.

Mortgage Lender (Banker)

A mortgage lender, or mortgage banker, makes mortgage loans with its own funds through mortgage brokers, mortgage loan originators and loan processors, who obtain and process applications from borrowers.

Mortgage Broker

A mortgage broker does not fund loans. In general terms, a mortgage broker can be defined as an individual or firm that, for or in expectation of compensation or gain, obtains application information from a prospective borrower and attempts to match the borrower with a lender who is willing to make a loan based on the borrower’s qualifications.

A mortgage broker can work with a few specific lenders or offer a borrower’s application to a number of lenders. He will enter into wholesale broker agreements with these lenders. These agreements may provide remedies for the lender if the borrower immediately defaults or is found to have committed fraud.

In table funding arrangements, a mortgage broker will originate, process, and close in his own name a loan underwritten and funded by a secondary lender, but will then assign the loan to the funding lender at the closing table A mortgage broker typically does not service the loans he originates.

Mortgage Loan Originators
The term “mortgage loan originator” is used differently throughout the country and in different statutes or regulations.

Under Regulation X of the Real Estate Settlement Procedures Act (RESPA), a mortgage loan originator is defined as any person who originates the loan, including a lender or mortgage broker; the term “mortgage broker” applies to a mortgage broker or an individual who transacts loans for the mortgage brokers.

Under the SAFE Act and most state laws, the term “mortgage loan originator” applies to an individual who takes a residential mortgage loan application and/or offers or negotiates terms of a residential mortgage loan on behalf of a mortgage lender or mortgage broker for compensation or gain; or who may also be licensed as a mortgage broker or mortgage lender, as an individual. Loan originators employed by depository institutions (e.g., banks) regulated by federal agencies must be registered with the NMLS. Those working for other lenders or mortgage brokers must be licensed by the state and registered with the NMLS. This mortgage loan originator takes or receives mortgage applications, assembles information, and prepares the paperwork and documentation necessary for obtaining a mortgage loan. In the process, he may interview the borrower to determine his needs and may counsel and prequalify the borrower. He works and communicates with loan processors, underwriters, title, escrow, and lenders to ensure that the loan is processed smoothly and closes on time.

After making a loan, a lender can:

  • hold it and bear the risks until the entire debt is repaid.
  • warehouse it, using it as collateral for loans the lender needs from other lenders.
  • sell it to another lender or investor.
  • use it to back securities sold to investors.

These activities occur in the secondary mortgage market. The secondary mortgage market is where mortgages may be sold individually or bundled with other mortgages with similar features into mortgage-backed securities and sold on the equity market. It is composed of investors and lenders that buy and sell real estate mortgages or guarantee loans from primary market lenders.

Major participants in the secondary mortgage market are three agencies created by Congress, the first two of which buy and sell loans, while the third only guarantees them:

    1. Federal National Mortgage Association (FNMA), or Fannie Mae, created in 1938
    2. Federal Home Loan Mortgage Corporation (FHLMC), or Freddie Mac, created in 1970
    3. Government National Mortgage Association (GNMA), or Ginnie Mae, created in 1968

None of these entities makes loans directly to homebuyers or has any direct contact with the public. Instead, their function is to provide a source of funds for lenders in the primary mortgage market by buying and selling mortgage loans and offering securities backed by these loans. The issuance of these securities, which represent interests in pools of mortgages, is termed securitization.

Can I Be a Loan Officer With a Felony?

Being a loan officer with a felony

You can be a loan officer with a felony, however, there are few things you have to know. The SAFE Act provides that, among the criteria for eligibility for a license, an individual must not have been convicted of, or pled guilty or nolo contendere to, any felony in a domestic, foreign or military court within the preceding seven years; or have been convicted of a felony involving an act of fraud, dishonesty, a breach of trust, or money laundering at any time prior to application.

Being a loan officer with a conviction

Because the provision is triggered by a conviction, rather than by an extent (i.e., still existing) record of a conviction, the CFPB interprets the provision to make an individual ineligible for a mortgage loan originator license even if the conviction is later expunged. However, pardoned convictions are generally treated as legal nullities for all purposes under state law and would not render an individual ineligible. The law under which an individual is convicted, rather than the state where the individual applies for a license, determine whether a particular crime is classified as a felony.

To show he can satisfy these requirements, the applicant must furnish to the NMLS the following information concerning his identity:

  • Fingerprints for submission to the FBI and any governmental agency or entity authorized to conduct a criminal history background check
  • Personal history and experience, including authorization for the NMLS to obtain independent credit report information related to any administrative, civil or criminal findings by any governmental jurisdiction

Passing your NMLS license test

So when you went through above steps to be a loan officer with a felony, and you fit in those rules, you can think about passing your NMLS test now.

The mortgage loan originator must pass a national test and individual state test developed by the NMLS and administered by an approved test provider that covers ethics; federal and state law; and regulation pertaining to mortgage origination, fraud, consumer protection, the nontraditional mortgage marketplace and fair lending issues. To pass, the mortgage loan originator must achieve a test score of not less than 75 percent.

An individual may take a test three times, but to retake the exam he must wait at least 30 days after the date of the preceding test. If he fails three consecutive tests, he must wait at least six months before taking the test again.

If a mortgage loan originator was formerly licensed in a state and fails to maintain a valid license for five years or longer, the individual must retake the test and achieve a test score of not less than 75 percent in order to again be licensed as a mortgage loan originator. When determining whether a mortgage loan originator has not held a valid license for five years, any period during which the individual is a registered mortgage loan originator is not taken into account.

Prelicensing Education to Be a Mortgage Broker

Not many people know that you can be a loan officer with a felony, it’s just a matter of what type of felony it is.

To be licensed, a mortgage loan originator must complete required prelicensing education consisting of at least 20 hours of NMLS-approved education. The SAFE Act specifies that the education must include at least:

  • three hours of federal law and regulations.
  • three hours of ethics, including instruction on fraud, consumer protection, and fair lending issues.
  • two hours of training related to lending standards for the nontraditional mortgage product (i.e., any mortgage product other than a 30-year fixed-rate mortgage) marketplace.

States may specify more hours. Some may include specific requirements or hours for education on state statutes and regulations relating to mortgage lending.

Financial Responsibility Requirements

The SAFE Act provides that states must set minimum financial responsibility requirements. This may include a minimum net worth, surety bond acquisition requirements, or establishment of a recovery fund paid into by mortgage loan originators. The CFPB has determined that states would still be in compliance with the SAFE Act if they allow companies employing more than one mortgage loan originator to fulfill the bonding requirement at the company level. This means that individual loan originators would not have to be bonded separately.
A mortgage loan originator must have demonstrated financial responsibility, character and general fitness to warrant a determination that he will operate honestly, fairly and efficiently.

License and Registration

Under the amended SAFE Act, the CFPB determines the acceptability of states’ licensing and registration systems and their participation in the NMLS. To meet the SAFE Act’s licensing requirements:

  1. The NMLS must develop tests and approve educational courses.
  2. mortgage loan originators are required to comply with testing, education and bonding requirements.
  3. states have to evaluate the records of thousands of applicants. To qualify for licensing or registration as a state-licensed mortgage loan originator, an applicant must meet certain minimum standards.

Exempt Individuals For Being a Mortgage Broker

Despite the broad definition of “mortgage loan originator” in the SAFE Act, there are some limited contexts where offering or negotiating residential mortgage loan terms would not make an individual a mortgage loan originator. The CFPB considers the provision in the definition that mortgage loan originators are individuals who “take an application” to imply a formality and commercial context that does not exist where:

  • an individual offers or negotiates terms of a residential mortgage loan with or on behalf of a member of his immediate family. Therefore, state statutes generally exclude from licensing and registration requirements an individual who offers or negotiates terms of a residential mortgage loan only with or on behalf of an immediate family member.
  • an individual seller provides financing to a buyer in the course of the sale of his own residence. The frequency with which a particular seller provides financing is so limited that the CFPB’s view is that Congress did not intend to require such sellers to obtain mortgage loan originator licenses. Therefore, state statutes generally exclude from licensing and registration requirements an individual who offers or negotiates terms of a residential mortgage loan only to the buyer, or a prospective buyer, of the seller’s residence.
  • a licensed attorney, in the course of representing the client, negotiates terms of a residential mortgage loan with a prospective lender on his client’s behalf, as the attorney owes significant duties of loyalty, competence, and diligence to his client. However, if the attorney is compensated by a lender, mortgage broker or other mortgage loan originator, the definition of “mortgage loan originator” and all associated licensing and registration requirements would apply.

License Renewal

A state-licensed mortgage loan originator must renew his license annually by:

  1. continuing to meet the minimum standards for license issuance.
  2. satisfying the continuing education requirement of at least eight hours of courses that have been reviewed and approved by the NMLS. These hours must include:
    1. three hours of federal law and regulations.
    2. two hours of ethics, including instruction on fraud, consumer protection, and fair lending issues.
    3. two hours of training related to lending standards for the nontraditional mortgage product marketplace. States may require more than eight hours and may include requirements for hours of education related to state laws.
This is one fewer hour than the number of hours in ethics required for prelicensing education.



For more than 30 years, Federal law has required lenders to provide two different disclosure forms to consumers applying for a mortgage. The law also has generally required two different forms at or shortly before closing on the loan. Two different Federal agencies developed these forms separately, under two Federal statutes: the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA). The information on these forms is overlapping and the language is inconsistent. Not surprisingly, consumers often find the forms confusing. It is also not surprising that lenders and settlement agents find the forms burdensome to provide and explain. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) directs the Consumer Financial Protection Bureau (the Bureau) to integrate the mortgage loan disclosures under TILA and RESPA sections 4 and 5. Section 1032(f) of the Dodd-Frank Act mandated that the Bureau propose for public comment rules and model disclosures that integrate the TILA and RESPA disclosures by July 21, 2012. The Bureau satisfied this statutory mandate and issued proposed rules and forms on July 9, 2012. To accomplish this, the Bureau engaged in extensive consumer and industry research, analysis of public comment, and public outreach for more than a year. After issuing the proposal, the Bureau conducted a largescale quantitative study of its integrated disclosures with approximately 850 consumers, which concluded that the Bureau’s integrated disclosures had on average statistically significant better performance than the current disclosures under TILA and RESPA. The Bureau has now finalized a rule with new, integrated disclosures (TILA-RESPA rule).1 The TILA-RESPA rule also provides a detailed explanation of how the forms should be filled out and used.

The first new form (the Loan Estimate) is designed to provide disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage loan for which they are applying. The Loan Estimate must be provided to consumers no later than three business days after they submit a loan application. The second form (the Closing Disclosure) is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction. The Closing Disclosure must be provided to consumers three business days before they close on the loan. The forms use clear language and design to make it easier for consumers to locate key information, such as interest rate, monthly payments, and costs to close the loan. The forms also provide more information to help consumers decide whether they can afford the loan and to compare the cost of different loan offers, including the cost of the loans over time. The Loan Estimate and Closing Disclosure must be used for most closedend consumer mortgages. Home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land) must continue to use current disclosure forms required by TILA and RESPA separately. The TILA-RESPA rule does not apply to loans made by persons who are not considered “creditors” because they make five or fewer mortgages as year. Generally, the Loan Estimate and Closing Disclosure require the disclosure of categories of information that will vary due to the type of loan, the payment schedule of the loan, the fees charged, the terms of the transaction, and State law provisions. The extent of these variations cannot be shown on a single, static example. This Guide includes most of the requirements concerning completing the Loan Estimate and Closing Disclosure. However, this Guide may not illustrate all of the permutations of the information required or omitted from the Loan Estimate or Closing Disclosure for any particular transaction. Only the TILA-RESPA rule and its official interpretations can provide complete and definitive information regarding its requirements.

Loan Estimate

Issuance and Delivery

You must provide a Loan Estimate to the consumer, either by delivering by hand or placing in the mail, no later than three business days of the receipt of an application. An application is considered received when the consumer provides the following information: § Consumer’s name, § Consumer’s income, § Consumer’s Social Security number to obtain a credit report, § Address of the property, § Estimate of the value of the property, and § The mortgage loan amount sought.

Revised Loan Estimate

When there is a changed circumstance after the Loan Estimate has been provided, the creditor can revise the Loan Estimate within three business days. A revised Loan Estimate generally can be provided no later than seven business days before consummation. (See section 2.1.5 below)

Use of Compliance Guide

Please see Compliance Guide, sections 6, 7, 8, and 9, for additional information on details of these requirements. The information that follows discusses how to complete the Loan Estimate. Samples of completed Loan Estimates can be found at


Dollar amounts must be rounded to the nearest whole dollar where noted in the regulation. (§ 1026. 37(o)(4)) If an amount is required to be rounded but is composed of other amounts that are not required or permitted to be rounded, use the unrounded amounts in calculating the total and then round the final sum. Conversely, if an amount is required to be rounded and is composed of rounded amounts, use the rounded amounts in calculating the total. (Comment 37(o)(4)-2) Percentage amounts may not be rounded and should be shown up to two or three decimals, as needed, except where noted in the regulation. (§ 1026.37(o)(4)(ii)) If a percentage amount is a whole number, show the whole number only with no decimals. (§ 1026.37(o)(4)(ii); Comment 37(o)(4)(ii)-1).


Consummation is not the same thing as closing or settlement. Consummation occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction. (§ 1026.2(a)(13)) The point in time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable State law. (§ 1026.2(a)(13); Comment 2(a)(13)-1) Creditors and settlement agents should verify the applicable State laws to determine when consummation will occur, and make sure delivery of the Loan Estimate occurs within three business days of the receipt of an application.


The point in time when a consumer becomes contractually obligated to the creditor on the loan depends on applicable State law. (§ 1026.2(a)(13); Comment 2(a)(13)-1) Creditors and settlement agents should verify the applicable State laws to determine when consummation will occur, and make sure delivery of the Loan Estimate occurs within three business days of the receipt of an application.

Good To Know
This Guide uses references to the legal obligation, which includes the promissory note plus any other agreements between the creditor and consumer concerning the extension of credit.

loan estimate

Page 1 of the Loan Estimate includes general information, a Loan Terms table with descriptions of applicable information about the loan, a Projected Payments table, a Costs at Closing table, and a link for consumers to obtain more information about loans secured by real property at a website maintained by the Bureau. Page 1 of the Loan Estimate includes the title “Loan Estimate” and a statement of “Save this Loan Estimate to compare with your Closing Disclosure.” (§ 1026.37(a)(1),(2)) The top of page 1 also includes the name and address of the creditor. (§ 1026.37(a)(3)) A logo or slogan can be used along with the creditor’s name and address, so long as the logo or slogan does not exceed the space provided for that information. (§ 1026.37(o)(5)(iii)) If there are multiple creditors, use only the name of the creditor completing the Loan Estimate. (Comment 37(a)(3)-1) If a mortgage broker is completing the Loan Estimate, use the name and address of the creditor if known. If not yet known, leave this space blank.

Date Issued

The date the Loan Estimate is mailed or delivered to the consumer. (§ 1026.37(a)(4)) Applicants Applicants includes the name and mailing address of the consumer(s) applying for the loan. Use each Applicant’s name and mailing address if there are multiple Applicants. An additional page may be added to the Loan Estimate if the space provided is insufficient to list all of the Applicants.


Property is the address of the property (which must include the zip code) that will secure the transaction. If the address of the Property is unavailable, use a description of the location of the property, for example a lot number. Always use a zip code.  Personal property such as furniture or appliances that also secures the credit transaction may be, but is not required to be included as Property. An additional page may not be appended to the Loan Estimate to disclose a description of personal property.

Sale Price or Appraised Value or Estimated Value

If the loan is for a purchase money mortgage, use Sale Price. (§ 1026.37(a)(7)(i)) If personal property is included in the Sale Price of the Property, use that price without any reduction for the appraised or estimated value of the personal property.  If the loan is for a transaction without a seller, use Appraised Value or Estimated Value.

Loan Term

Loan Term is the term of the debt obligation. Describe the Loan Term as “years” when the Loan Term is in whole years. For example “1 year” or “30 years.”  For a Loan Term that is more than 24 months but is not whole years, describe using years and months with the abbreviations “yr.” and “mo.,” respectively. For example, a loan term of 185 months is disclosed as “15 yr., 5mo.” For a Loan Term that is less than 24 months and not whole years, use months only with the abbreviation “mo.” For example, “6 mo.” or “16 mo.”


Describe the consumer’s intended use for the loan. (§ 1026.37(a)(9)) Purpose is disclosed using one of four descriptions: Purchase, Refinance, Construction, or Home Equity Loan.

  • Purchase is disclosed if the loan will be used to finance the Property’s acquisition.
  • Refinance is disclosed if the loan will be used for the refinance of an existing obligation that is secured by the Property (even if the creditor is not the holder or servicer of the original obligation).
  • Construction is disclosed if the loan will be used to finance the initial construction of a dwelling on the property disclosed on the Loan Estimate.
  • Home Equity Loan is disclosed if the loan will be used for any other purpose.


Provide a description of the loan.  You are required to include two pieces of information in this disclosure: The first piece of information is any payment feature that may change the periodic payment, which includes Negative Amortization, Interest Only, Step Payment, Balloon Payment, or Seasonal Payment. (§ 1026.37(a)(10)(ii)) Additionally, the duration of the relevant payment feature must be disclosed with a Negative Amortization, Interest Only, Step Payment, or Balloon Payment.  For example, a payment feature where there is a five-year period during which the payments cover only interest, and are not applied to the principal balance, would be disclosed as a 5 Year Interest Only for the payment feature.

  1. Negative Amortization is when the principal balance of the loan may increase due to the addition of accrued interest to the principal balance. § Interest Only is when one or more regular periodic payments may be applied only to interest accrued and not to the principal of the loan.
  2. Step Payment is when the scheduled variations in regular periodic payment amounts occur that are not caused by changes to the interest rate during the loan term.
  3. Balloon Payment is when the terms of the legal obligation include a payment that is more than two times that of a regular periodic payment.
  4. Seasonal Payment is when the terms of the legal obligation expressly provide that regular periodic payments are not scheduled between specified unitperiods on a regular basis. For example, a “teacher” loan that does not require monthly payments during summer months has a Seasonal Payment.
  5. If the loan can be described with more than one of these descriptions, only the first applicable feature is disclosed. For example, a loan that would result in both Negative Amortization and a Balloon Payment would only disclose Negative Amortization as part of Product

The second piece of information disclosed is whether the loan uses an Adjustable Rate, Step Rate, or Fixed Rate to determine the interest rate applied to the principal balance.

  • An interest rate is an Adjustable Rate if the interest rate may increase after consummation, but the rates that will apply or the periods for which they will apply are not known at consummation. Each description must be preceded by the duration of any introductory rate or payment period, and the first adjustment period, as applicable. For example, a product with an introductory rate that is fixed for the first five years and adjusts every three years starting in year 6 is a 5/3 Adjustable Rate. When there is no introductory period for an Adjustable Rate, disclose “0.”  For example, a product with no introductory rate that adjusts every year after consummation is a 0/1 Adjustable Rate.
  • An interest rate is a Step Rate if the interest rate will change after consummation and the rates that will apply and the periods for which they apply are known at consummation. Each description must be preceded by the duration of any introductory rate or payment period, and the first adjustment period, as applicable. For example, a product with a step rate that lasts for ten years, adjusts every year for five years, and then adjusts every three years for the next 15 years is a 10/1 Step Rate.When there is no introductory rate for a Step Rate, disclose “0” and then the applicable time period until the first adjustment.
  • An interest rate is a Fixed Rate if the interest rate is not an Adjustable Rate or Step Rate. The following are examples of Product with both pieces of information included:
  • Year 7 Balloon Payment, 3/1 Step Rate: a step rate with an introductory interest rate that lasts for three years and adjusts each year thereafter until a balloon payment is due in the seventh year of the loan term.
  • 2 Year Negative Amortization: a fixed rate product with a step-payment feature for the first two years of the legal obligation that may negatively amortize. When the time periods disclosed in Product are not in whole years, for time periods of 24 months or more, disclose the applicable fraction of a year by use of decimals rounded to two places. For time periods of 24 months or less, disclose the number of months with the abbreviation “mo.” For example:
  • An Adjustable Rate Product with an introductory interest rate for 31 months that adjusts every year thereafter is a 2.58/1 Adjustable Rate.
  • An Adjustable Rate Product with an introductory interest rate for 18 months that adjusts every 18 months thereafter is an 18 mo./18 mo. Adjustable Rate.
  • Loan Type Loan Type is the type of the loan, such as Conventional or FHA. For Loan Type, disclose: Conventional if the loan is not guaranteed or insured by a Federal or State government agency,
  • FHA if the loan is insured by the Federal Housing Administration,
  • VA if the loan is guaranteed by the U.S. Department of Veterans Affairs, and § Other with a brief description if the loan is insured or guaranteed by another Federal or a State agency.
  • Loan ID# Loan ID # is the creditor’s loan identification number that may be used by a creditor, consumer, and other parties to identify the transaction. The Loan ID # may contain alpha-numeric characters and must be unique to the particular transaction. The same Loan ID # may not be used for different, but related, loan transactions (such as different loans to the same borrower). When a revised Loan Estimate is issued, the Loan ID # must be sufficient for the purpose of identifying the transaction associated with the initial Loan Estimate.
  • Rate Lock Indicate the rate is locked with Yes, indicate the rate is not locked with No. When the interest rate is locked at the time of the Loan Estimate’s delivery, the date and time (including the applicable time zone) when the lock period ends must be disclosed. The date and time (including the applicable time zone) at which the estimated closing costs expire must be disclosed on every Loan Estimate.

Loan Terms

Disclose in the Loan Terms table:

  • Loan Amount (if the amount is in whole dollars, do not disclose cents)
  • § Initial Interest Rate,
  • Initial Monthly Principal & Interest amount
  • Any adjustments to these amounts after consummation,
  • Whether the loan includes a Prepayment Penalty, and § Whether the loan includes a Balloon Payment.

Interest Rate & Monthly Principal & Interest

If the initial Interest Rate is not known at consummation, the fully-indexed rate is disclosed; a fully-indexed rate is the interest rate calculated using the index value and margin at the time of consummation. The initial principal and interest payment amount also would be calculated using the same fully-indexed rate. Adjustment to Loan Amount, Interest Rate, and Monthly Principal & Interest after consummation Under the subheading Can this amount increase after closing?, if the Loan Amount, Interest Rate, or Monthly Principal & Interest amounts can increase after consummation, disclose Yes where applicable with the information pertinent to the adjustment after consummation.

  • For an adjustment in Loan Amount, the creditor must also disclose the maximum principal balance for the transaction and the due date (expressed as the year or month in which it occurs, rather than an exact date) of the last payment that may cause the principal balance to increase, together with a statement whether the maximum principal balance may or will occur under the terms of the legal obligation.  The date disclosed is the year in which the event occurs, counting from the due date of the initial periodic payment.
  • For an adjustment in the Interest Rate, also disclose the frequency of interest rate adjustments, the date when the interest rate may first adjust, the maximum interest rate, and the first date when the interest rate can reach the maximum interest rate.  The date disclosed is the year in which the event occurs, counting from the date that interest for the first scheduled periodic payment begins to accrue after consummation. Also, disclose and reference the Adjustable Interest Rate (AIR) Table on page 2 of the Loan Estimate.
  • For an adjustment to the Monthly Principal & Interest, the creditor would also disclose the scheduled frequency of adjustments, due date of the first adjustment, and the maximum possible amount (and the earliest date it can occur) of the Monthly Principal & Interest. In addition, if there is a period during which only interest is required to be paid, also disclose that fact and thedue date of the last periodic payment of such period. The date disclosed is the year in which the event occurs, counting from the due date of the initial payment. (Also, disclose and reference the Adjustable Payment (AP) Table on page 2.  When the Loan Amount, Interest Rate, or Monthly Principal & Interest payment cannot increase after consummation, disclose No where applicable. (§ 1026.37(b)(6)) Prepayment Penalty and Balloon Payment A Prepayment Penalty is a charge imposed for paying all or part of a transaction’s principal before the date on which the principal is due. It does not include a waived third-party charge that the creditor imposes if the consumer prepays the loan’s entire principal sooner than 36 months after closing.  A Balloon Payment is a payment that is more than two times a regular periodic payment. Under the subheading Does the loan have these features?, when the loan has a Prepayment Penalty or a Balloon Payment disclose Yes, as applicable.  and (5)) When the answer is Yes to either, also disclose, as applicable: § The maximum amount of the Prepayment Penalty and the date when the period during which the penalty may be imposed terminates. For example, As high as $3,240 if you pay off the loan in the first two years. § The maximum amount of the Balloon Payment and the due date of such payment. For example, You will have to pay $149,263 at the end of year 7.


keywords: adverse action notice

New NMLS Test Guidelines 2017

Federal Mortgage-Related Laws (23%)

  • A. Real Estate Settlement Procedures Act (RESPA), Regulation X
  • B. Equal Credit Opportunity Act (ECOA), Regulation B
  • C. Truth-in-Lending Act (TILA): Regulation Z
    • 1. Home Ownership and Equity Protection Act (HOEPA Section 32)
    • 2. High Price Mortgage Law (HPML Section 35)
    • 3. Loan Originator Compensation
  • D. TILA-RESPA Integrated Disclosure Rule (TRID)
  • E. Other Federal laws and guidelines
    • 1. Home Mortgage Disclosure Act (HMDA)
    • 2. Fair Credit Reporting Act (FCRA)/Fair and Accurate Credit Transactions Act (FACTA)
    • 3. Privacy protection / Do Not Call
    • 4. FTC Red Flag rules
    • 5. Dodd-Frank
    • 6. Bank Secrecy Act/Anti-Money Laundering (BSA/AML)
    • 7. Gramm-Leach-Bliley Act – Privacy and FTC Safeguard Rules
    • 8. Mortgage Acts and Practices – Advertising (Regulation N)
    • 9. Electronic Signature in Global and National Commerce Act (E-SIGN Act)
    • 10. USA PATRIOT Act
    • 11. Homeowners’ Protection Act
  • F. Regulatory authority
    • 1. Consumer Financial Protection Bureau (CFPB)
    • 2. Department of Housing and Urban Development (i.e., HUD, related to fair lending and fair housing)

General Mortgage Knowledge (23%)

  • A. Qualified and Non-qualified Mortgage programs
    • 1. Conventional/conforming (e.g., Fannie Mae, Freddie Mac)
    • 2. Government (e.g., FHA, VA, USDA)
    • 3. Conventional/nonconforming (e.g., Jumbo, Alt-A)
      • a. Statement on Subprime Lending
      • b. Guidance on Nontraditional Mortgage Product Risk
      • c. Non-qualified mortgage (Non-QM)
  • B. Mortgage loan products
    • 1. Fixed
    • 2. Adjustable
    • 3. Balloon
    • 4. Reverse mortgage
    • 5. Home equity (fixed and line of credit)
    • 6. Construction mortgage
    • 7. Interest-only
  • C. Terms used in the mortgage industry
    • 1. Loan terms
    • 2. Disclosure terms
    • 3. Financial terms
    • 4. General terms

Mortgage Loan Origination Activities (25%)

  • A. Application information and requirements
    • 1. Application accuracy and required information (e.g., 1003)
      • a. Borrower
      • b. Loan originator
      • c. Verification and documentation
    • 2. Suitability of products and programs
    • 3. Disclosures
      • a. Accuracy (e.g., tolerances)
      • b. Timing (e.g., Loan Estimate, Closing Disclosure, Homeownership Counseling Disclosure)
      • c. Delivery method (e.g., electronic, mail, face-to-face)
  • B. Qualification: processing and underwriting
    • 1. Borrower analysis
      • a. Assets b. Liabilities
      • c. Income
      • d. Credit report
      • e. Qualifying ratios (e.g., housing, debt-to-income, loan-to-value)
      • f. Ability to repay
      • g. Tangible net benefit
    • 2. AppraisalsCopyright © 2015. SRR. All rights reserved.
    • 3. Title report
    • 4. Insurance: hazard, flood, and mortgage (PMI, MIP)
  • C. Closing
    • 1. Title and title insurance
    • 2. Settlement/Closing agent
    • 3. Explanation of fees
    • 4. Explanation of documents
    • 5. Funding
  • D. Financial calculations used in mortgage lending
    • 1. Periodic interest
    • 2. Payments (principal, interest, taxes, and insurance; mortgage insurance, if applicable)
    • 3. Down payment
    • 4. Loan-to-value ratios
    • 5. Debt-to-income ratios
    • 6. Temporary and fixed interest rate buy-down (discount points)
    • 7. Closing costs and prepaid items
    • 8. ARMs (e.g., fully indexed rate)
    • 9. Qualified Mortgage monthly payment calculations

Ethics (16%)

  • A. Ethical issues related to federal laws
    • 1. Violations of federal law
    • 2. Prohibited acts
    • 3. Fairness in lending
    • 4. Fraud detection
    • 5. Advertising
    • 6. Predatory lending and steering
  • B. Ethical behavior related to loan origination activities
    • 1. Financial responsibility
    • 2. Handling consumer complaints
    • 3. Company compliance
    • 4. Relationships with consumers
    • 5. Truth in marketing and advertising
    • 6. Consumer education
    • 7. General business ethics

Uniform State Content (13%)

  • A. SAFE Act and CSBS/AARMR Model State Law
    • 1. Department of Financial Institutions or Mortgage Regulatory Commission
      • a. Regulatory authority
      • b. Responsibilities and limitations
  • 2. State Law and Regulation Definitions
  • 3. License Law and Regulation
    • a. Persons required to be licensedCopyright © 2015. SRR. All rights reserved.
    • b. Licensee qualifications and application process
    • c. Grounds for denying a license
    • d. License maintenance
    • e. NMLS requirements
  • 4. Compliance
    • a. Prohibited conduct and practices
    • b. Required conduct
    • c. Advertising

Does Advertising Is Illegal For A Loan Originator?

The following requirements apply to consumer credit advertising:

  • Credit advertising may not be false or misleading.
  • Disclosures must be made clearly and conspicuously (i.e., in a reasonably understandable form).
  • Specific credit terms may only be stated if those terms actually are or will be arranged or offered to the consumer.
  • Bait-and-switch credit promotions are not allowed (e.g., advertising a loan at very attractive terms and then informing potential customers that that loan is not available but that a different loan with different terms is).

An advertisement may not state that a specific installment payment or a specific down payment can be arranged unless the lender is prepared to make those arrangements, nor may it misrepresent an adjustable-rate mortgage as a fixed-rate mortgage. However, an ad may contain terms that will be offered only for a limited time or that will become available at a known future date.

Trigger Terms
If an ad contains a trigger, or triggering, term, it must disclose a number of additional credit terms. A triggering term is any of the following specific credit terms:

  • The amount or percentage of any down payment (e.g., “5% down,” “95% financing,” “$6,200 down”), except when the amount of the down payment is zero
  • The number of payments or period of repayment (e.g., “360 monthly payments” or “30-year loan”)
  • The amount of any payment (e.g., “payments of less than $1,400 per month”)
  • The amount of any finance charge (e.g., “total financing costs of less than $3,000”)

Good To Know
If an ad states a rate of finance charge, it must state the rate as an annual percentage rate, using that term or the abbreviation “APR.” The primary lending rate that may be advertised is the APR. If the APR can change during the loan term, that fact must be contained in the ad.


Disclosure is required even if a triggering term is not stated explicitly but may be readily determined from the content of the ad.

An ad that states “80% financing” implies that a 20% down payment is required, so additional disclosures are required. However, an ad that states “100% financing” requires no further disclosures because no down payment is required.

Disclosures required in an ad containing a triggering term include:

  • the amount or percentage of the down payment.
  • the terms of repayment (i.e., the payment schedule [i.e., the number, timing and amount of the payments], including any final balloon payment, scheduled to repay the debt).
  • the annual percentage rate, using that term or the abbreviation “APR.”
An ad containing all the required credit terms would be:
Cash price $100,000. $5,000 down. Interest at 9?% (10.5% APR). Mortgage of $94,600 to be paid in 360 equal and consecutive monthly installments of $822.08, plus taxes and insurance..

Advertisements for Credit Secured by a Dwelling
The following requirements apply to any ad for credit secured by a dwelling, other than television or radio advertisements, including promotional materials accompanying applications.

If the ad states a simple annual rate of interest and more than one simple annual rate of interest will apply over the term of the advertised loan, the ad must clearly and conspicuously (i.e., with equal prominence and in close proximity to any advertised rate) disclose:

  • each applicable simple annual rate of interest. In a variable-rate transaction, a rate determined by adding a reasonably current index and margin must be disclosed.
  • the period of time during which each simple annual rate of interest will apply.
  • the APR for the loan.

If the ad states the amount of any payment, it must clearly and conspicuously disclose:

  • the amount of each applicable payment over the term of the loan, including any balloon payment (based on reasonably current index and margin, for a variable-rate loan).
  • the period of time during which each payment will apply.
  • for credit secured by a first lien on a dwelling, the fact that the payments do not include amounts for taxes and insurance premiums, if applicable, and that the actual payment obligation will be greater.

An ad for credit secured by a dwelling must avoid causing confusion between fixed- and variable-rate loans. Therefore, it may not:

  • use the word “fixed” to refer to rates, payments or the credit transaction for a variable-rate transaction;
  • use the word “fixed” to refer to rates, payments or the credit transaction for any transaction where the payment will increase (e.g., a stepped-rate mortgage transaction with an initial lower payment); or
  • use the word “fixed” to refer to rates, payments or the credit transaction in an ad for both variable-rate transactions and nonvariable-rate transactions.

The use of the word “fixed” may be used when advertising variable-rate loans if:

  • the phrase “adjustable-rate mortgage,” “variable-rate mortgage,” or “ARM” appears in the advertisement before the first use of the word “fixed” and is at least as conspicuous as any use of the word “fixed” in the ad; and
  • each use of the word “fixed” to refer to a rate or payment is accompanied by an equally prominent and closely proximate statement of the time period for which the rate or payment is fixed and the fact that the rate may vary or the payment may increase after that period.

An ad for credit secured by a dwelling may not:

  • state that a product is a “government loan program,” “government-supported loan” or otherwise endorsed or sponsored by any government entity unless the ad is for an FHA loan, VA loan or similar loan program that is, in fact, endorsed or sponsored by a government entity.
  • use the name of the consumer’s current creditor if the ad is not sent by or on behalf of that creditor, unless:
    • the name of the person or lender making the advertisement is disclosed with equal prominence; and
    • the ad includes a clear and conspicuous statement that the person making the advertisement is not associated with, or acting on behalf of, the consumer’s current creditor.
  • make any misleading claim that the product offered will eliminate debt or result in a waiver or forgiveness of a consumer’s existing loan terms with, or obligations to, another lender.
  • use the term “counselor” to refer to a for-profit mortgage broker or mortgage lender, its employees or persons working for the broker or lender that are involved in offering, originating or selling mortgages.
  • provide information about some trigger terms or required disclosures (e.g., an initial rate or payment) only in a foreign language and provide information about other trigger terms or required disclosures (e.g., information about the fully indexed rate or fully amortizing payment) only in English.

Oral Rate Disclosures (12 CFR Section 1026.26)
If a consumer orally asks about the cost of credit, the lender must state the APR. For closed-end credit, he may also give a periodic or simple interest rate that is applied to an unpaid balance. If a lender cannot determine the APR for the specific closed-end credit about which he is being asked, he may disclose instead the APR in a sample transaction.

For open-end credit, once a lender states the APR, he may also give the periodic rate. Other information that applies to the consumer’s specific transactio

Who Needs To Be Licensed in Mortgage Business

This is a question which many people ask. To be safe with RESPA violations a person needs to be licensed when he or she:

  • takes a residential application and facilitate a decision on whatewer to extend an offer of residential mortgage loan terms to a borrower or prospective borrower; or accepting the terms offered by a borrower or prospective borrower in response to a solicitation.

A state is not required to license the following individuals as loan originators (continued):

  • A licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to his representation of the client, unless the attorney is compensated by a lender, mortgage broker or other mortgage loan originator, or by any agent of the same
  • An individual who is an employee of a federal, state or local government agency or housing finance agency and who acts as a loan originator in his official duties as an employee
Good To Know!
A housing finance agency is any authority: that is: chartered by a state to help meet the affordable housing needs of the residents of the state; supervised directly or indirectly by the state government; and subject to audit and review by the state in which it operates; and whose activities make it eligible to be a member of the National Council of State Housing Agencies.

A state is not required to license the following individuals as loan originators :

  • An employee of a bona fide nonprofit organization who acts as a loan originator:
    • in his capacity as an employee of the bona fide nonprofit organization; and
    • makes residential mortgage loans with terms that are favorable to the borrower

For an organization to be considered a bona fide nonprofit organization, a state supervisory agency that does not require the licensing of an employee of such an organization must determine that the organization:

  • has the status of a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code of 1986;
  • promotes affordable housing or provides homeownership education or similar services;
  • conducts its activities in a manner that serves public or charitable purposes rather than commercial purposes;
  • receives funding and revenue and charges fees in a manner that does not incentivize it or its employees to act other than in the best interests of its clients;
  • compensates its employees in a manner that does not incentivize employees to act other than in the best interests of its clients;
  • provides or identifies for the borrower residential mortgage loans with terms favorable to the borrower and comparable to mortgage loans and housing assistance provided under government housing assistance programs; and
  • meets other standards that the state determines appropriate.

A state must periodically examine the books and activities of a bona fide nonprofit organization and revoke its status as such an organization if it does not continue to the meet the criteria.

For Example
Alice Lost, a new homebuyer, applies for a mortgage loan at the Bank of Wonderland. Matt Hatter discusses the bank’s loan terms and rates with Alice and takes her application. Matt hands off the application to Katt Appeller who, over the next few weeks until closing, speaks with Alice on the phone to obtain information from her that is necessary to complete the application process. Matt is a registered loan originator; he has a unique identifier from the NMLS. Katt is a loan processor; she is not registered with the NMLS.

Background Checks (12 USC Section 5104(a); 12 CFR 1008.105(g); MSL.050)
When making an application to any state for licensing and registration as a state-licensed loan originator, the applicant must, at a minimum, furnish to the NMLS information concerning his identity, including:

  • fingerprints for submission to the Federal Bureau of Investigation and any governmental agency or entity authorized to receive such information for a state, national and international criminal history background check; and
  • his personal history and experience, including authorization to obtain:
    • an independent credit report obtained from a consumer reporting agency; and
    • information related to administrative, civil or criminal findings by any governmental agency.

The Attorney General must provide access to all criminal history information to officials of the state licensing agency responsible for regulating state-licensed loan originators as required under the state’s loan originator licensing laws. (12 USC Section 5110(a))

Prelicense Education (12 USC Section 5104(c); 12 CFR 1008.105(d); MSL.070)
An applicant for a loan originator license must satisfactorily complete a prelicensing course of study that includes at least 20 hours of NMLS-reviewed and -approved education. The 20 hours of education must include:

  • three hours of federal law and regulations;
  • three hours of ethics, including instruction on fraud, consumer protection and fair lending issues; and
  • two hours of training related to lending standards of the nontraditional mortgage product marketplace (i.e., any mortgage product other than a 30-year fixed-rate mortgage [15 USC 1503])

NMLS-approved prelicensing education courses may be:

  • provided by the employer of the applicant, an entity which is affiliated with the applicant by an agency contract or any subsidiary or affiliate of such employer or entity.
  • offered in a classroom, online or by any other means approved by the NMLS.

Any prelicensing education course in federal law and regulations, ethics or lending standards for the nontraditional mortgage product approved by the NMLS for any state may be accepted as credit towards completion of the prelicensing education requirement in the licensing state.

Testing and Retesting (12 USC Section 5104(d); 12 CFR 1008.105(e); MSL.080)
In addition to completing the prelicensing education, an individual applying for a loan originator license must pass a written test, developed by the NMLS and administered by an approved test provider.

The written test is required to measure the applicant’s knowledge and comprehension in subject areas that include:

  • ethics;
  • federal law and regulation pertaining to mortgage origination;
  • state law and regulation pertaining to mortgage origination; and
  • federal and state law and regulation as it relates to fraud, consumer protection, the nontraditional mortgage marketplace and fair lending issues.

An applicant must pass the examination with a score of at least 75 percent. An applicant that fails the test may take it two additional times, if necessary, with at least 30 days between each attempt. If he fails three consecutive tests, the applicant must wait at least six months before taking the test again.

A state-licensed loan originator who fails to maintain a valid license for a period of five years or longer must also retake the licensing test. The five-year timeframe does not take into account any period of time during which an individual acted as a registered loan originator.

License Qualifications and Application Process

Surety Bond (12 USC Section 5104(b)(6); 12 CFR Section 1008.105(f); MSL .140)
Each mortgage loan originator must be covered by a surety bond. If he is an employee or exclusive agent of a person subject to the state’s SAFE Act, the surety bond of his employing licensee may be used to satisfy the loan originator surety bond requirement.

The penal sum of the surety bond must be maintained in an amount that reflects the dollar amount of loans originated. When an action is commenced on a licensee’s bond, the state licensing agency may require the filing of a new bond. Immediately upon recovery of any action filed against the bond, however, the licensee must file a new bond.

Net Worth (12 USC Section 5104(b)(6); 12 CFR Section 1008.105(f); MSL .140)
Some states may require a mortgage loan originator to continuously maintain a minimum net worth. As with the surety bond requirement, if the mortgage loan originator is an employee or exclusive agent of a person subject to the state’s SAFE Act, the net worth of that person may be used to satisfy the mortgage loan originator’s requirement.

The amount of the minimum net worth will be a reflection of the dollar amount of loans originated.

State Fund (12 USC Section 5104(b)(6); 12 CFR Section 1008.105(f); MSL .140)
A state may also choose to develop and administer a fund specifically to provide protection to consumers by making funds available for claims resulting from violations of state or federal laws and regulations. In lieu of a surety bond or net worth requirement, a state may require a loan originator to pay a certain amount into the state fund.

In order for a state to approve a license application, the following minimum standards must be met. The applicant must show that he:

  • has never had a loan originator license revoked in any governmental jurisdiction (a revocation that has been vacated will not be deemed a revocation).
  • has not been convicted of, or pled guilty or nolo contendere to, a felony in any court:
    • during the seven-year period preceding the date of the application; or
    • at any time if the felony involved an act of fraud, dishonesty or a breach of trust or money laundering.

If the applicant has received a pardon of a conviction, for licensing purposes, the conviction will not be considered
  • has completed the prelicensing education requirements and passed the written licensing test.
  • has met either a net worth or surety bond requirements or paid into a state fund as applicable.
  • has demonstrated the financial responsibility, character and general fitness to command the confidence of the community and warrant a determination that he will operate honestly, fairly and efficiently under reasonable standards established by the individual state.

Grounds for Denying License

An applicant will have shown he is not financially responsible when he has shown disregard in the management of his own financial condition. This may be evidenced by:

  • current outstanding judgments, except judgments solely as a result of medical expenses;
  • current outstanding tax liens or other government liens and filings; and/or
  • foreclosures or a pattern of seriously delinquent accounts within the past three years.

Ward Smith is applying for a loan originator license. He has taken the required prelicense education and passed the written examination. Ward was convicted of auto theft eight years ago, money laundering ten years ago, and burglary nine years ago.

Ward does have a lengthy rap sheet, but the reason his application must be denied is the money laundering conviction. An applicant may not at any time have been convicted of a felony involving fraud, dishonesty, breach of trust or money laundering. Felonies involving any other crimes result in automatic denial if committed within seven years prior to the application date.

Continuing Education(12 USC Section 5105); 12 CFR 1008.107; MSL.100)
In order to meet the annual continuing education requirement, a state-licensed loan originator must complete at least eight hours of NMLS-reviewed and -approved coursework. The eight hours must include:

  • three hours of federal law and regulations;
  • two hours of ethics, including instruction on fraud, consumer protection and fair lending issues; and
  • two hours of training related to lending standards for the nontraditional mortgage product marketplace.

In meeting the continuing education requirement, a state-licensed loan originator:

  • may only receive credit for a course in the year in which the course is taken.
  • may not take the same approved course in the same or successive years.
  • if he is an approved instructor of continuing education, may receive credit towards his own annual continuing education requirement at the rate of two hours credit for every one hour taught.

A person who has successfully completed the continuing education requirements for any state may have that approved coursework be accepted as credit toward completion of his continuing education in the licensing state.

An individual who was previously licensed and is applying to be licensed again must have completed all of the continuing education requirements for the year in which his license was last held.

Renewal (12 USC Section 5105; 12 CFR 1008.107; MSL.090)
In order to renew his license, a state-licensed loan originator must:

  • continue to meet the minimum standards for license issuance;
  • satisfy the annual continuing education requirements; and
  • pay all required renewal fees.

The license of a mortgage loan originator failing to satisfy the minimum renewal requirements will expire. Procedures for the reinstatement of expired licenses may be adopted by the state, provided they are consistent with the standards established by the NMLS. If a licensee fails to meet continuing education required for license renewal, he may make up any deficiency based on the rules set forth by his licensing state.

Mortgage Call Reports (12 USC Section 5104(e); 12 CFR Section 1007; MSL.180)
A mortgage licensee must submit to the NMLS reports of condition. The reports must be in the form and contain the information which may be required by the NMLS.

Registration of Employees of Depository Institutions

The SAFE Act requires the creation of a registration system for those individuals acting as mortgage loan originators while employed by:

  • a depository institution;
  • a subsidiary that is controlled by a depository institution and regulated by a federal banking agency (e.g., the FDIC or the NCUA); or
  • an institution regulated by the Farm Credit Administration.

The federal banking agencies and the Federal Farm Credit Administration were originally charged with the responsibility for creating the registration system. This was accomplished with the creation of Regulation G in July 2010.

In December 2011, the CFPB which, under the SAFE Act, had inherited the authority to regulate the licensing and registration of mortgage loan originators from the federal banking agencies, republished Regulation G with changes to reflect the transfer of authority. These updated regulations are located in Title 12, Chapter X, Part 1007, of the Code of Federal Regulations.

Under the registration system, an applicant must meet minimum statutory requirements by furnishing to the NMLS information concerning his identity, including:

  • fingerprints for submission to the Federal Bureau of Investigation and any governmental agency or entity authorized to receive such information for a state and national criminal history background check; and
  • the applicant’s personal history and experience, including authorization to obtain:
    • an independent credit report obtained from a consumer reporting agency; and
    • information related to administrative, civil or criminal findings by any governmental agency.


Registration of Mortgage Loan Originators