Free NMLS MLO Practice Exam with Questions & Answers

A 2-1 buydown provides for a reduced interest rate for the first two years:

Year 1: Note rate minus 2% (6% - 2% = 4%)

Year 2: Note rate minus 1% (6% - 1% = 5%)

Years 3–30: Note rate (6%)

“In a 2-1 buydown, the interest rate is reduced by 2% the first year and 1% the second year. The third and subsequent years, the rate is the note rate.”

— SAFE MLO National Test Study Guide; CFPB Mortgage Glossary

The main purpose of the secondary market is to fund additional loans by allowing lenders to sell existing mortgages to investors. This process replenishes the lender’s capital, enabling them to originate more loans. The secondary market is where mortgage-backed securities (MBS) are bought and sold, providing liquidity to the mortgage market.

Other options such as funding second mortgages or second home loans are specific transactions that do not capture the overall purpose of the secondary market.

In an 80/20 loan structure, the borrower obtains two loans: an 80% first mortgage and a 20% second mortgage, often referred to as a "piggyback loan." The 20% loan has second lien priority, meaning it is subordinate to the 80% loan. If the borrower defaults and the property is foreclosed, the lender holding the first mortgage (80%) is paid first, and the second mortgage (20%) is paid from any remaining proceeds.

The first lien is always the larger 80% loan, and the second lien covers the smaller 20% loan.

Under the SAFE Act, state regulators have the authority to examine, investigate, and review any mortgage loan originator “as often as necessary” to ensure compliance with applicable laws and regulations. There is no specific limit on frequency.

“The State licensing agency may investigate and examine any mortgage loan originator as often as necessary to carry out the purposes of this chapter.”

— SAFE Act, 12 U.S.C. § 5117(b)

Mortgage loan originators (MLOs) are required to complete 8 hours of continuing education (CE) annually to maintain their license under the SAFE Act (Secure and Fair Enforcement for Mortgage Licensing Act). This is mandatory to ensure that MLOs stay updated with changing regulations, compliance requirements, and industry practices.

The 8 hours must include specific coursework, typically:

3 hours of federal law and regulations

2 hours of ethics (covering fraud, consumer protection, etc.)

2 hours of non-traditional mortgage lending

1 hour of elective content that may vary depending on state requirements.

Failure to meet these CE requirements can result in license suspension or revocation.

A servicing transfer is when the responsibility for collecting payments, managing escrow accounts, and handling other aspects of loan servicing is moved from one lender or servicer to another. This is regulated by RESPA, which requires timely notification to borrowers.

“A servicing transfer is the transfer of the right to collect payments and service a mortgage loan from one servicer to another.”

— CFPB, RESPA Servicing Transfer Disclosures

The SAFE Act and Regulation Z require that all mortgage loan originator advertisements include the MLO’s NMLS unique identifier. This ensures transparency and accountability.

“Any advertisement by a state-licensed mortgage loan originator must clearly show the unique identifier of the mortgage loan originator.”

— SAFE Act, 12 U.S.C. § 5104(a)(2); 12 CFR § 1026.36(g)(1)

According to the SAFE Act, state-licensed MLOs must complete at least eight hours of approved continuing education annually, including three hours of federal law and regulations, two hours of ethics (which includes instruction on fraud, consumer protection, and fair lending), and two hours of training on nontraditional mortgage products.

“The annual continuing education requirement must include at least—(A) 3 hours of Federal law and regulations; (B) 2 hours of ethics, including instruction on fraud, consumer protection, and fair lending issues; (C) 2 hours of training related to lending standards for the nontraditional mortgage product marketplace.”

— SAFE Act, 12 U.S.C. § 5105(b)(2)(A)-(C)

The USA PATRIOT Act was enacted in 2001 to help deter and punish terrorist acts in the United States and around the world, and to enhance law enforcement investigatory tools. It requires financial institutions to establish anti-money laundering programs and procedures to help prevent terrorist financing.

“The purpose of the USA PATRIOT Act is to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and to address money laundering and terrorist financing.”

— USA PATRIOT Act, Public Law 107-56

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

This differs from other loan types:

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

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

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