Chapter 27 — Self-Check Quiz

Fraud Prevention: Red Flags, Identity Verification, and Protecting Yourself and Your Borrower

Twenty-six questions. Multiple choice and short answer, written in the style of the SAFE MLO test where the material is exam-relevant. Answer key is collapsed at the bottom — work the whole set before opening it.

1. A material misrepresentation, misstatement, or omission relied on by a lender to fund a loan it would not otherwise have made is the definition of:

(a) a compliance violation (b) mortgage fraud (c) a misrepresentation of fact under Regulation B (d) an unfair or deceptive act

2. Which of the following most reliably distinguishes fraud for profit from fraud for housing?

(a) whether the loan eventually defaults (b) whether the borrower has a low credit score (c) whether the scheme involves multiple parties and typically an industry insider (d) whether the property is a single-family residence

3. Short answer. A borrower overstates income by \$400 a month to qualify for a house they will live in and intend to pay for. The loan performs for eleven years. Was a crime committed? Explain in two sentences.

4. A red flag, as this chapter defines it, is best described as:

(a) evidence that a borrower is committing fraud (b) a fact or pattern inconsistent with the file's story that requires independent verification (c) a condition placed on an approval by the underwriter (d) an item that must be reported to the Financial Crimes Enforcement Network

5. An originator becomes aware of facts strongly suggesting a borrower's employment documentation is falsified and deliberately declines to verify further, so as to avoid confirming it. This posture is best described as:

(a) prudent, because verification is the underwriter's job (b) willful blindness (c) a permissible exercise of business judgment (d) a violation of appraiser independence requirements

6. Short answer. Name the single professional habit that most directly protects an originator against a willful-blindness inference, and say why it works.

7. Under the S.A.F.E. Act's character and fitness standard, a felony conviction involving fraud, dishonesty, breach of trust, or money laundering results in:

(a) a three-year bar to MLO licensure (b) a seven-year bar to MLO licensure (c) a permanent bar to MLO licensure (d) a bar only if the conviction relates to residential lending

8. An individual applies for a mortgage in their own name for the benefit of an undisclosed party who supplies the funds and controls the property is:

(a) a non-occupying co-borrower (b) a straw buyer (c) a nominee trustee (d) a guarantor

9. Short answer. A straw buyer says they were recruited by an "investment group," were paid a \$3,000 fee, and were told an attorney had reviewed the arrangement. Does that protect them? Explain.

10. An undisclosed subordinate lien used to fund part of the borrower's down payment and concealed from the first-lien lender is called:

(a) a wraparound mortgage (b) a purchase-money second (c) a silent second (d) a subordination agreement

11. The Harlow Street file carries a \$10,000 forgivable county down-payment-assistance second at 0%, forgiven over five years, producing a CLTV of 101.15%. This lien is:

(a) a silent second, because it exceeds 100% CLTV (b) lawful subordinate financing, because it is disclosed, underwritten, approved, and recorded (c) unlawful, because down-payment assistance may not exceed the required minimum investment (d) permitted only on conventional loans

12. A loan on a fabricated transaction — a property, a borrower, or an entire chain of parties that does not exist, supported by counterfeit verifications — is known as:

(a) an air loan (b) a churned loan (c) a table-funded loan (d) a warehouse loan

13. Short answer. Name the single control that defeats air loans, fake-employer schemes, and business email compromise alike, and state it in one sentence.

14. A borrower represents a property as a primary residence, closes, moves in, and is transferred out of state four months later, renting the home. This is most accurately described as:

(a) occupancy fraud, because the borrower did not occupy for a full year (b) not fraud, because intent is measured at the time of the representation (c) fraud only if the servicer discovers it (d) a violation of the Ability-to-Repay rule

15. Which of the following is a legitimate structure rather than occupancy fraud?

(a) a borrower who states "primary residence" for a home they will never occupy (b) a borrower who occupies one unit of a two-to-four unit property and rents the others (c) a borrower who has a relative live in the home while the borrower lives elsewhere, stated as primary residence with no program provision applied (d) a borrower who lists a property as a second home while operating it as a full-time rental

16. Under the uniform security instrument's occupancy covenant, a borrower generally agrees to occupy the property as a principal residence:

(a) immediately at closing and for the life of the loan (b) within 60 days of closing and for at least one year, subject to lender agreement or extenuating circumstances (c) within six months of closing, with no continuing requirement (d) only if the loan is a government-insured loan

17. Which of the following is permissible contact with an appraiser?

(a) telling the appraiser what value the transaction needs (b) conditioning future assignments on the appraiser's value conclusions (c) submitting additional comparable sales through the proper channel with a request for reconsideration (d) removing an appraiser from the panel because a value came in low

18. Short answer. Illegal property flipping and legitimate renovate-and-resell look similar on paper. Name the two things that make one a crime, and name the routine disclosure on the appraisal report that makes rapid resales visible.

19. Synthetic identity fraud is best described as:

(a) the theft of a complete identity belonging to a living person (b) an identity assembled from real and fabricated elements, built up over time until it carries an ordinary-looking credit file (c) the use of a deceased person's Social Security number only (d) an alias used lawfully for business purposes

20. A borrower's credit files are frozen at all three bureaus. The correct interpretation is:

(a) a red flag suggesting identity concealment (b) a requirement to decline the application (c) a consumer doing exactly what consumer-protection agencies recommend; the freeze must be lifted for the file to proceed (d) grounds for a Suspicious Activity Report

21. Short answer. A training slide claims you can spot a suspicious Social Security number from its first three digits. Why is that guidance obsolete, and as of approximately when?

22. In a business email compromise targeting a real estate closing, the message most often arrives:

(a) months before contract, from an unknown sender, with obvious errors (b) days before closing, quoting the correct property, parties, amount, and closing date (c) from the lender's underwriting department (d) only to the real estate agent, never to the borrower

23. The correct way to verify wiring instructions is:

(a) reply to the email and ask the sender to confirm (b) confirm by voice using a phone number obtained independently of the email (c) compare the instructions to a prior email in the same thread (d) confirm by text message to the number in the signature block

24. Short answer. A borrower calls to say they wired their closing funds to instructions received by email, and the title company says nothing arrived. List the first four actions, in order.

25. A Suspicious Activity Report is:

(a) filed by the loan originator with the state regulator (b) filed by the financial institution with the Financial Crimes Enforcement Network, and may not be disclosed to its subject (c) a public record available to the borrower on request (d) an accusation of a crime that must be supported by proof

26. Short answer. On day 44 of the Linden Street file, a pre-closing credit refresh found a \$5,200.00 furniture account opened on day 41 at \$611.00 per month, moving back-end DTI from 42.66% to 48.48%. State whether this was fraud, run the three-question test to justify your answer, and name whose failure it was.

Answer key — work the whole set first **1.** (b) Mortgage fraud. The three elements are *material*, *relied on*, and that an *omission* counts as well as an affirmative statement. **2.** (c) Multiple parties and an industry insider. Default alone proves nothing — fraud-for-housing loans frequently perform, and honest loans sometimes default. **3.** Yes. Fraud for housing is still fraud: the misrepresentation was material (it changed the qualifying decision) and the lender relied on it. The borrower's sincere intent to repay, and the fact that the loan performed, are not defenses — though they may matter enormously to how the matter is treated in practice. **4.** (b) A fact or pattern inconsistent with the file's story, requiring independent verification. A red flag is a prompt to verify, not a conclusion about a person. **5.** (b) Willful blindness — deliberately avoiding confirmation of a fact one is aware is highly likely to be true. **6.** Ask the question in writing, record the answer, and verify from an independent source — so the file shows that you asked. A file containing a question, an answer, and a verification is defensible even when the answer turns out to have been a lie, because being deceived is different from participating. **7.** (c) A permanent bar. A felony in the preceding seven years bars licensure generally; a felony involving fraud, dishonesty, breach of trust, or money laundering never ages out. Chapter 3 has the licensing mechanics. **8.** (b) A straw buyer. **9.** No. Straw buyers are routinely charged alongside organizers. Being recruited, being paid a small fee, and being told the arrangement was lawful are common features of the role, not defenses to it. The application was still false in a way the lender relied on. **10.** (c) A silent second. **11.** (b) Lawful subordinate financing. The difference between the Harlow Street second and a silent second is not the structure — it is disclosure. **12.** (a) An air loan. **13.** Contact information and verification channels must come from a source the other party did not choose: an independently obtained phone number, an appraisal ordered through the lender's own channel, title ordered through normal channels. Fraud's entire project is controlling which channel you use. **14.** (b) Not fraud. Intent is measured at the time of the representation, and circumstances change. **15.** (b) Owner-occupied two-to-four unit property is a legitimate, common, program-eligible structure. Confusing it with occupancy fraud is a classic beginner error. **16.** (b) Within 60 days, and for at least one year, unless the lender agrees otherwise or extenuating circumstances exist. Verify the specific covenant language on the applicable uniform instrument. **17.** (c) Additional comparables submitted through the proper channel. A request built on evidence is professional; the identical request built on a number is a violation. Chapter 18 has the process. **18.** The two things are (i) a fraudulent appraisal supporting the higher value and (ii) a misrepresentation to the lender — often with a straw buyer. Buying, genuinely renovating, and reselling at a profit is a lawful business. The routine disclosure is the prior sales history reported on the appraisal report, which makes a rapid resale at a large increase visible without anyone hunting for it. **19.** (b) An identity assembled from real and fabricated elements. It is hard to detect precisely because there is no victim to notice and complain. **20.** (c) A freeze is ordinary consumer self-protection. It must be lifted for the credit pull, and that is a scheduling issue, not a character issue. **21.** Because the Social Security Administration moved to randomized number assignment in 2011. Prefixes no longer encode state or era of issuance, and any inference drawn from them is unreliable. **22.** (b) Days before closing, with the correct details — because the criminal has been reading the transaction's email traffic, often for weeks. **23.** (b) By voice, on an independently obtained number. Note also that the borrower's own mailbox may be the compromised one, which is why email confirmation with the borrower proves nothing. **24.** (1) Call the sending bank's fraud department immediately and request a wire recall. (2) Have the borrower report it to the FBI's Internet Crime Complaint Center (IC3) at once, since the recovery function works in hours rather than days. (3) Notify the receiving bank's fraud department. (4) File a local police report — and in parallel, notify your compliance department, the title company, and the lender, preserving all emails including headers. **25.** (b) Filed by the institution with FinCEN; disclosure to the subject is prohibited. Your obligation is to escalate internally per policy, not to file. Good-faith reporting carries a federal safe harbor. **26.** Not fraud. **False statement?** No — nothing signed or said after day 41 asserted the absence of new debt. **Concealment when asked?** No — nobody asked between day 33 and day 44, and the account reported to the bureaus in the ordinary course, in the borrowers' own names. **Intent to deceive?** No — they bought furniture for a house they were about to own. It was the loan officer's failure: the "no new credit" conversation happened once, on day 5, as item nine of twelve, and was never repeated across the eleven-day silence from day 33 to day 44.