Ethics
Ethics is 18% of the test, and much of it is fraud and predatory lending. Questions name a scheme or describe a file with red flags and ask what the MLO should do. The right answer is almost always: verify, do not alter anything, escalate internally, and do not tip off the borrower.
Ethics4 min read7 sections
MLOs are often the first to see a file's red flags. The test checks that you recognize schemes by name, notice warning signs, and respond lawfully: verify, escalate, and never participate or alter documents.
| Scheme | What happens |
|---|---|
| Occupancy fraud | Rental or second home presented as a primary residence for better terms |
| Income or employment fraud | Fake pay stubs, phony employers, borrower-answered VOE calls |
| Asset fraud and asset rental | Fake statements; borrowed funds parked to show reserves |
| Gift that must be repaid | A loan disguised as a gift |
| Straw buyer | Someone else's name and credit used for the real buyer |
| Air loan | Nonexistent borrower or property |
| Illegal flip | Quick resale at a price propped up by a false appraisal |
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| Silent second |
| Undisclosed second lien for the down payment |
| Shotgunning | Several loans on one property at once from different lenders |
| Flopping | Short sale price suppressed, then quick resale at full value |
| Equity skimming | Rents or equity taken while the mortgage goes unpaid |
| Foreclosure rescue scams | Advance fees or deed transfers to a 'rescuer' |
