NMLS Test Study Guide

Acts and Regulations

SAFE Act:The Secure and Fair Enforcement for mortgage licensing Act (2008)

  • Encourages states to establish minimum standards for the licensing and registration of state licensed MLOs and to establish a nationwide licensing system and registry

ECOA (Regulation B): Equal Credit and Opportunity Act (1974)

  • Ensure that all persons, consumers as well as businesses, are given equal chance to obtain credit

HMDA (Regulation C): Home Mortgage Disclosure Act (1974)

  • Provides the public with information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods/communities in which they are located

MAPs (Regulation N): The Mortgage Acts and Practices Rule

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MARS (Regulation O):Mortgage Assistance and Relief Services

  • Protects homeowners from mortgage relief scams by imposing specific requirements and prohibitions on industry professionals

GLBA (Regulation P): Gramm-Leach-Bliley Act (1999)

  • Requires a financial institution to give consumers privacy notices that explain its information sharing practices

FCRA (Regulation V): Fair Credit Reporting Act (1974)

  • Regulates agencies that provide consumer reports and ensures fairness, accuracy, timeliness, and privacy of info on consumer reports

FACTA (Regulation V): Fair and Accurate Credit Transaction Act (2003)

  • Helps prevent identity theft and enables individuals to know what their rights and obligations are when dealing with consumer credit reports

RESPA (Regulation X): Federal Real Estate Settlement Procedures Act (1974)

  • Help consumers become better shoppers for settlement (closing) services and to eliminate Kickbacks and referral fees

TILA (Regulation Z): Federal Truth in Lending Act (1968)

  • Requires lenders to provide accurate and truthful information to consumers relating to the cost and terms of credit being offered

Acronyms

NMLS: Nationwide Mortgage Licensing System and Registry

CSBS: Conference of State Banking Supervisors

AARMR: American Association of Residential Mortgage Regulators

CFPB: Consumer Financial Protection Bureau

LIBOR: London Interbank Offered Rate

COFI: 11th District Cost of Funds (Slowest moving Index)

FOMC: Federal Open Market Committee

General Mortgage Knowledge

DTI Ratios

Acceptable Debt-to-Income Ratios

  • Conforming Loans: 28/36
  • FHA Loans: 31/43
  • VA Loan: /41 (no front end ratio)
  • USDA Loan: 29/41
  • Jumbo Loan: 33/40

Bankruptcy

Chapter 7 Bankruptcy: Liquidation of assets to cancel debts; a fresh start

Chapter 13 Bankruptcy: Implementation of a payment plan over 3-5 years to pay off debts

Tax Returns to Verify Income from a Business

Schedule E: For Rental Properties, Partnerships or LLCs, Found on form 1040

Schedule C: Shows income from a sole proprietorship business

Calculations:

Salary:

  • Semi-monthly salary X 2 = monthly salary
  • (Weekly salary X 52)/12 = monthly salary
  • (Biweekly salary X 26)/12 = monthly salary
  • Annual Income/12 = monthly salary
  • ((Hourly base X average weekly hours)+(overtime X average overtime hours)) X (average weeks worked per year)/12 = monthly income

Housing Ratio: Housing debts(including PMI and HOA)/ gross monthly income

Loan to Value Ratios

  • LTV = Loan amount/property value or sales price (whichever is lower)
  • CLTV = sum of 1st and 2nd loan/property value or sales price (whichever is lower)
  • TLTV = sum of 1st mortgage, second mortgage, and limit of HELOC/Property value or sales price

Temporary Buy downs

  • 2/1 Buy down: Rate is 2% lower for the 1st year, 1% lower for the 2nd year, back to fixed rate the 3rd year

Interest Rates

  • Annual Interest = Interest rate x Loan Balance
  • Monthly Interest = (Interest rate x Loan Balance)/12
  • Daily Interest = (Interest rate x Loan Balance)/365

Principle Reduction (Equity Growth)

  1. Loan balance x Interest Rate = Annual Interest
  2. Annual Interest/12 = monthly interest
  3. Monthly Payment — Monthly Interest = Principle paid that month
  4. Loan Balance — Principal Paid = Remaining Loan Balance

Fannie Mae (FNMA)

  • GSE (Government Sponsored Enterprise)
  • Purchases conventional (residential) loans and guarantees conventional MBS (mortgage backed securities)
  • Mostly served loans originated by banks
  • Automated underwriting system is called Desktop Underwriter
  • DTI Ratio 45% (flexible up to 50% with strongly qualifying factors)
  • Desktop Originator: allows broker to take point of sale application and submit to DU
  • DTI ratio for manually underwritten loans 28/36
  • Can be exceeded up to 45%with strong qualifying factors
  • Loan Level Price Adjustments (LLPA)
  • Fee charged to lenders to compensate for certain loan features that increase risk
  • Passed to borrowers as an additional finance charge

Freddie Mac (FHLMC)

  • GSE
  • Automated Underwriting system is called Loan Prospector

Both Fannie and Freddie require lenders to have an executed form 4506-T, know as the Request For A Copy of a Tax Transcript with the IRS

  • Validates income information in the file

Ginnie Mae (GNMA)

  • Wholly owned government corporation and not a private GSE
  • Government corporation within HUD
  • Purpose is to increase the supply of credit available for housing by directing funds from the securities market into the mortgage market
  • Guarantees federally insured loans (FHA and VA)
  • For the most part, any FHA or VA loan created in the primary market is pooled into a GNMA MBS and sold worldwide
  • GNMA MBS are backed fully by the US government

Liens and Encumbrances

  • Encumbrance: A claim against a property held by one who is not a legal owner of the property, but does not prevent the owner of the property from using, selling or otherwise transferring the estate
  • Physical Encumbrances:
  • Easements: Rights to use another’s property for a specific purpose (E.g. Utilities)
  • These arrangements are recorded between the property owner/ provider of service
  • Public/Private Restrictions: Sidewalks
  • Encroachments: Fences

Lien: A financial encumbrance on a property

  • Voluntary or involuntary
  • Voluntary Lien: Mortage or other such transactions the owner willingly entered in to
  • Involuntary Lien: Taxes, assessments, judgments, mechanics liens
  • A mortgage lien is considered a Specific Voluntary Lien

Trust: Defined as a right of propertybeing held by one party for the benefit of another

  • Trustor: (Borrower) Person that grants the rights to real estate to a trustee
  • Beneficiary would be the lender
  • Trustee: (Secures Title) Holds the property in trust for a beneficiary (the third party in an agreement)
  • In real estate financing, when a trust deed is used, it is called a deed of trust
  • When the deed of trust is combined with a note, The note includes the borrowers promise to repay the loan under the specified contract terms
  • Note also mentions the collateral

The Land Contract, Mortgage and the Note

THE NOTE is the promise to repay a debt and theMORTGAGE/DEED OF TRUST is the instrument that secures the debt to a property

  • When a note is used a debt instrument without any collateral, it is called an Unsecured Note

Contract for Deed

  • Many different Names (Land contract, Real Estate Contract, Contract for Sale, etc)
  • A complete financing and sales contract agreed upon and executed by a buyer and a seller
  • Does not have an attached note and should not be considered a mortgage or a deed of trust
  • Seller is financing the sale of the property and the buyer agrees to take and maintain possession of the property (as long as the terms of the agreement are being met)

Conveyance: The transfer of ownership or interest in real property from one person to another by a document (such as a deed, lease, or mortgage)

Reconveyance: When a borrower pays off the mortgage, the lien on the property is released, or re-conveyed back to the borrower

  • As long as there is a mortgage on a property the borrower does not have free and clear title
  • Equitable Title: means the buyer is entitled to a deed conveying the legal title when the contract is fully paid and performed

The Promissory Note: promise to repay a debt

  • Contains all of the essential elements of an enforceable contract
  • Payor and Payee, Amount owed, Interest Rate (fixed or adjustable), and Loan Terms
  • Lock-In Clause: Prohibits Pre-payment
  • The Acceleration Clause: On the Note
  • Creditor’s ability to accelerate the loan (pay the full amount due) if the borrower defaults
  • Notice to the borrower required to provide notice to the borrower of:
  • The default and the action required to cure the default
  • A minimum of 30 daysto cure the default
  • Statement that failure to cure in allowable time can result in acceleration or foreclosure
  • Borrowers right to reinstate after acceleration

Due on Sale (Alienation) Clause:

  • The Demand Featurethat states that the entire balance may be called due and payable upon the sale or transfer of property ownership
  • An individual would use the money from the sale of the current property to repay the lien on said property
  • Alienation clause: refuse to allow another person to assume the loan if the title is transferred

Exculpatory Clause:

  • Part of a written agreement that relieves one party to the agreement of a liability as a result of action (or lack thereof) performed in the course of executing the terms of the contract

Defeasance Clause:

  • Provides for release of lien when the borrower pays off the debt
  • Must provide public notice that debt has been repaid
  • A Satisfaction or Release is recorded
  • Or a Deed of Reconveyance is recorded
  • Provides borrower ownership after all the loan terms have been met
  • Mortgage is considered to have been defeated when the debt is paid off

Foreclosure

Sheriff’s Deed

  • If a borrower defaults on his mortgage, the lender can ask the court for a judicial foreclosure and a court ordered sheriff’s sale of the property
  • After the sale, the sheriff will issue a sheriff’s deed conveying title to the purchaser

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

Right of Reinstatement:

  • If included on the mortgage, 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

Real Estate Owned (REO):

  • Property that the lender has acquired through foreclosure

Other options available to lender to prevent or avoid foreclosure:

  • Deed in Lieu of Foreclosure: Estoppel Deed
  • Forbearance: Allows borrower experiencing temporary financial struggles to delay his monthly mortgage payments for a short period of time. Missed payments would be made current after negotiated period of time
  • Loan Modification: Permanent change to the terms of the loan

Notices

Any liens are generally given priority by their date of registering, earlier registry means higher priority

Tax liens have higher priority over other liens regardless of where they are recorded

Constructive Notice: Public records are considered public noticeand anything learned by inspection of property

Actual Notice: Direct knowledge that one hast the property

Inquiry Notice: Information that should compel a reasonable person to make further inquiries about some aspect of the property

FHA: The Federal Housing Administration (Division of HUD)

  • Insures lenders (by a federal agency) against borrower default or foreclosure
  • Loans charge annual MIP (Mortgage insurance premium)
  • Based on Loan term and LTV
  • Charged up front in all cases (UFMIP)
  • Paid when the loan closes (pre-paid finance charge)
  • Requires a higher down payment if the borrower has a credit score below 580
  • Above 580 are eligible for maximum financing (85% LTV)
  • Below 500 not eligible
  • An assumable loan
  • Up to 100% gift funds can be used for cash to close
  • Max LTV for purchase transactions is 96.5%(3.5% required down payment)
  • LTV up to 85% allowed for refinance
  • Ratio of 31/43 DTI for manual underwriting
  • The max AUS DTI ratio is 47/57
  • Non-occupying co-borrowers allowed
  • The “Notice to Purchasers: The Importance of Home Inspection” must be signed and dated by the borrower at the time the GFE is given
  • Maximum loan amount cannot exceed the limit set for the geographic area in which the property is located
  • Offers 1, 3,5, 7, and 10 year ARMs

VA Loans: Department of Veterans Affairs

  • Guaranteesloan to lenders up to limit exposure to loss
  • Lesser of 25% of the loan balance or 25% of Freddie Mac limit
  • Requires an Up Front Funding Fee (disabled vets exempt from fee)
  • Fee varies based on: First time or repeat borrower, Regular service or reserves/national guard, nothing down or 5% down
  • 2.15% first time borrower, 3.3% for subsequent use of eligibility
  • Not affected by marital status
  • No down payment required
  • An assumable loan
  • Two methods to qualify borrowers
  • 41% DTI
  • Residual Income: borrower has enough income to cover his fixed debts although debts might exceed 41%
  • Can reapply for VA loan if:
  • Prior property has been sold
  • A qualified veteran buyer has agreed to assume the outstanding loan balance
  • VA borrower cannot borrow more than the value shown on the VA appraisal (CRV: Certificate of Reasonable Value)
  • Require a COE (Certificate of Eligibility)

USDA Loans (U.S. Department of Agriculture)

  • 30 year fixed rate, no required down payment
  • Guarantees loan to lender
  • Up front 2% guarantee fee
  • Guarantee applies to 90% of the loan
  • Applicants Must:
  • Be without adequate housing
  • Have less than 20% liquid assets
  • Have steady income up to 115% (15% above limit) of median income for area
  • 29/41 Ratio

Non-Traditional Mortgage Loan Products

The SAFE Act defines a nontraditional mortgage as any mortgage product other than a 30-year fixed rate mortgage

Adjustable Rate Mortgages (ARM)

  • Basic non-traditional mortgage product
  • Alternative Mortgage Transaction applies to a loan/credit sale secured by an interest in residential real property
  • The interest rate changes periodically, usually in relation to an index (can increase or decrease)
  • Written information on each type of ARM must include its terms and conditions, including:
  • Index and Margin
  • How the interest rate will be calculated
  • How often the rate can change
  • Caps on changes
  • Example of how high a monthly payment could be
  • Other ARM features, such as negative amortization
  • Interest Rate= Index +Margin (or cap, whichever is lower)
  • Common Indices Used:
  • 1 year Constant Maturity Treasury Rate (CMT)
  • 6 month London Inter Bank Offered Rate (LIBOR)
  • 11th District Cost of Funds (COFI)
  • Changes slower than the rest of the indices
  • Moving Treasury Average (MTA)
  • A 12 month moving average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year
  • For a HELOC, the most popular indexes are the Prime Rate Index (based on the federal funds rate) and 3 or 6 month Treasury Bill rates
  • The fully amortizing payment schedule should be based on the Term of the Loan
  • On a 30 year loan with a 5yr Interest only period, the payment would be calculated based on a 25yr amortization schedule following the initial 5yr IO period
  • The Note Rate is the teaser, initial rate that would show on the note (lower than fully indexed rate)
  • The Adjustment Period is the period between rate changes

Rate Caps

  • Interest Rate Cap limits the amount the loan’s rate can change
  • Lifetime Cap limits the interest rate increase over the life of the loan
  • 1/6 cap means ARM has a 1% a year cap and 6% lifetime cap
  • In 5/2/5 ARM
  • 5% initial cap, 2% periodic cap, 5% lifetime cap

Negative Amortization:

  • Monthly payments are not large enough to pay all of the interest charged
  • Loan balance increases
  • Usual cap on negative amortization is 110% to 115% of the original loan amount

Prepayment Penalties

  • If loan is repaid in a short period of time the lender can lose money even if balance is paid in full (loss of interest on loan)
  • Abolished in some states and limited by Federal Laws
  • Majority of loans purchased by Fannie and Freddie are not allowed to have penalty
  • May not exceed 2% of the amount prepaid within first 2 years of the loan
  • May not exceed 1% in year 3 and beyond
  • Hard Prepayment Penalty: borrower would be liable for a penalty during the set timeframe for prohibited prepayment
  • Property cannot be sold or refinanced during that period
  • Soft Prepayment Penalty: Property cannot be refinanced during the prohibited payment period, but can be sold

Types of ARMs

  • Hybrid ARM: mix of a fixed-rate loan and an adjustable rate loan
  • Most ARM loans are not referred to as Hybrid (even though they are)
  • 2/28 ARM means it has a fixed rate for 2 years and the rate adjusts for the 28 years after the fixed period
  • Adjustment period may be a number of years, annual, 6 months, or less
  • 3/1 ARM
  • 3 years fixed at a low rate
  • After 3 years, rate changes annually
  • The FHA offers standard 1 year ARM and four hybrid ARM products
  • 3/1 (annual cap of 1% and lifetime 5% cap)
  • 5/1 (2% annual cap and lifetime 6% cap)
  • 7/1 (same caps as 5/1)
  • 10/1 (same caps as 5/1)
  • Interest Only ARMs
  • Borrower only pays interest for a specified number of years (typically 3 to 10 years)
  • After Interest Only Period, payment will dramatically increase (because paying principle)
  • High chance of Payment Shock
  • Option ARM
  • Borrower has option to pay:
  • Full principle and interest (highest payment)
  • Interest Only (Middle)
  • Negative Amortization (Lowest Payment)

Secure and Fair Enforcement for Mortgage Licensing Act (SAFE)

  • Designed to enhance consumer protection, reduce fraud and reduce regulation by:
  • Encouraging states to establish minimum standards for the licensing and registration of state-licensed MLOs
  • Establishing a nationwide licensing system and registry
  • Enacted in 2008, Directed by CSBS and AARMR, enforced by the CFPB
  • Provides a floor to MLO licensing
  • NMLS: Nationwide Mortgage Licensing System and Registry
  • Provides Unique Identifier
  • Does not license people
  • Individual State Regulators approve or deny the application of an MLO
  • MLOs of non-depository institutions are licensed with the state
  • Employees of depository institutions are registered with the state
  • Once a state licensing agency provides confidential information to the NMLS, privacy and confidentiality requirements continue to apply
  • Exempt from SAFE
  • Real estate brokers only performing only real estate brokerage activities and who are properly licensed
  • Purely administrative/clerical personnel
  • Registered Loan Originators or employees of institutions regulated by Federal Bank Agencies (FDIC, Federal Reserve, etc)
  • Subsidiaries owned/controlled by a federal banking agency

Licensing/Pre-education