Compliance, Prohibited Acts & Advertising: practice questions

Under the Model State Law, what is the maximum civil penalty the commissioner may impose for each act or omission that violates the Act?

1. $1,000
2. $10,000
3. $25,000 ✓
4. $100,000

Why: MSL XX.XXX.130(3) sets the maximum penalty for each act or omission at $25,000, and 130(4) makes each violation or failure to comply with a directive or order a separate and distinct violation. The figure is the model's; each state sets its own in enacting it.

Source: Model State Law MSL XX.XXX.130(3)-(4)

A broker asks borrowers to sign an agreement promising the broker a fee for its "best efforts" to find a loan, payable even if no loan is obtained. How does the Model State Law treat this?

1. It is allowed if the fee is disclosed in writing
2. It is a prohibited act under the model law ✓
3. It is allowed if the fee is refunded on request
4. It is allowed for borrowers with weak credit only

Why: MSL XX.XXX.170(4) of the Model State Law prohibits soliciting or entering into a contract with a borrower that provides that the person may earn a fee or commission through "best efforts" to obtain a loan even though no loan is actually obtained. Disclosure does not rescue it; the model contains no such exception.

Source: Model State Law MSL XX.XXX.170(4)

Before imposing a civil penalty on a loan originator under the Model State Law, what must the commissioner provide?

1. A court judgment against the originator
2. Notice and an opportunity for a hearing ✓
3. A prior written warning for the same act
4. The consent of the originator's employer

Why: MSL XX.XXX.130(2) allows a civil penalty if the commissioner finds, "on the record after notice and opportunity for hearing", that the originator violated the Act, a regulation or an order. No court judgment or earlier warning is required.

Source: Model State Law MSL XX.XXX.130(2)

During a state investigation, a branch manager shreds borrower files he fears will show problems. How does the SAFE Act treat this?

1. It is allowed for records older than the retention period
2. It is a matter for the employer's policy, not federal law
3. It is allowed during an exam if copies are kept on servers
4. It is forbidden to destroy records in an investigation or exam ✓

Why: 12 U.S.C. 5114(4) provides that no person subject to investigation or examination may knowingly withhold, abstract, remove, mutilate, destroy or secrete any books, records, computer records or other information. The Model State Law repeats the rule at MSL XX.XXX.160(8), and 5114(2) obliges the originator to make books and records available on request.

Source: 12 U.S.C. 5114(2), (4)

An originator's NMLS license application asks about past civil judgments. He carelessly answers "no", forgetting a judgment entered against him three years ago. How does the Model State Law treat the answer?

1. No violation, because he did not intend to mislead
2. No violation unless the judgment exceeded $10,000
3. A violation; negligent false statements count ✓
4. A violation only if the regulator had asked him twice

Why: MSL XX.XXX.170(10) prohibits negligently making any false statement, or knowingly and willfully making any omission of material fact, in information or reports filed with a governmental agency or the NMLS. Negligence is enough for a false statement. Separately, MSL XX.XXX.130(1)(b) lets the commissioner deny a license for a material misstatement in an application.

Source: Model State Law MSL XX.XXX.170(10), .130(1)(b)

An originator offers an appraiser a bonus on future orders if the appraisal "comes in at the contract price". Which prohibited act in the Model State Law does this fall under?

1. Failing to account truthfully for monies held for others
2. Charging the appraiser a fee the Act does not authorize
3. Soliciting rates that are not available when advertised
4. Paying or promising to influence the appraiser's judgment ✓

Why: MSL XX.XXX.170(11) prohibits making any payment, threat or promise, directly or indirectly, to any appraiser of a property for the purpose of influencing the appraiser's independent judgment as to value. A promise of future orders tied to the value is exactly that. Regulation Z's valuation independence rule, 12 CFR 1026.42, prohibits the same conduct at federal level.

Source: Model State Law MSL XX.XXX.170(11)

While taking an application, an originator learns that the borrower owes $400 a month on a car loan that does not yet appear on the credit report. To keep the debt ratio under the limit, the originator leaves it off the application. What has the originator done?

1. Used a scheme to mislead the lender, a prohibited act ✓
2. Nothing wrong, since the debt is not on the credit report
3. Nothing wrong, provided the borrower agreed to leave it off
4. A minor error, to be put right only if the loan is audited

Why: The Model State Law makes it a violation to employ any scheme, device or artifice to defraud or mislead borrowers or lenders (MSL XX.XXX.170(1)) and to make any false or deceptive statement or representation (170(9)). Knowingly omitting a debt to pass the lender's ratio misleads the lender, and the borrower's consent does not change that. False statements on a loan application can also be a federal crime (18 U.S.C. 1014).

Source: Model State Law MSL XX.XXX.170(1), (9); 18 U.S.C. 1014

For how long must a creditor keep records of the compensation it paid to a loan originator, and the compensation agreement behind them, under Regulation Z?

1. Two years after the date of payment
2. Five years after the loan is repaid in full
3. For as long as it services the loan it made
4. Three years after the date of payment ✓

Why: 12 CFR 1026.25(c)(2)(i) requires a creditor to maintain records sufficient to evidence all compensation it pays to a loan originator, and the governing compensation agreement, for three years after the date of payment. A loan originator organization has the matching duty for compensation it receives and pays (1026.25(c)(2)(ii)). Two years is Regulation Z's general rule in 1026.25(a), which this paragraph overrides.

Source: 12 CFR 1026.25(c)(2)