Diploma in Mortgage Advice and Practice (DipMAP)

Correct: In whole loan sales, the seller provides representations and warranties (R&W) regarding the quality and documentation of the loans. If a loan is found to be non-compliant with these standards, such as having post-dated employment verification, the purchaser typically has the right to demand a ‘buy-back’ or repurchase. This forces the seller to use its own liquidity to buy back the loan, often at the original par value, and reassume the underlying credit risk.

Incorrect: Forfeiture of all servicing rights is an extreme penalty and usually not a standard contractual remedy for individual file documentation errors. Reclassification of an entire portfolio from held-for-investment to held-for-sale is an accounting and intent-based decision, not a direct penalty for a documentation error in a specific sale. Increasing the interest rate on closed loans is generally not possible as the note is a legal contract with the borrower that cannot be unilaterally changed by the lender or purchaser due to a secondary market documentation error.

Takeaway: The primary risk in whole loan sales is the repurchase obligation arising from breaches of representations and warranties regarding loan documentation and underwriting quality.

Correct: To be eligible for conventional financing as real property, a manufactured home must be built in compliance with the HUD Code (Federal Manufactured Home Construction and Safety Standards). If the physical HUD Certification Labels (tags) or the Data Plate are missing, the only acceptable alternative documentation for Fannie Mae, Freddie Mac, and most conventional lenders is a Letter of Label Verification from the Institute for Building Technology and Safety (IBTS). This provides the necessary proof of compliance required for secondary market delivery.

Incorrect: Performing a secondary appraisal does not solve the regulatory requirement for HUD Code compliance evidence. Title insurance endorsements confirm the legal status of the lien but do not satisfy the specific manufacturing standards required by government-sponsored enterprises (GSEs). Re-categorizing the loans as personal property (chattel) would likely violate the investment firm’s mandate for real estate mortgage-backed securities and would not cure the underlying documentation defect for conventional real property eligibility.

Takeaway: The Institute for Building Technology and Safety (IBTS) is the sole provider of verification letters required to prove HUD Code compliance when physical certification labels are missing from a manufactured home unit.

Correct: In mortgage lending, a Quitclaim Deed only transfers ownership interest in the property; it does not release a borrower from their contractual obligation under the promissory note. By failing to perform a formal underwriting review (assumption or modification), the lender has not verified if the remaining spouse meets Debt-to-Income (DTI) requirements to carry the loan alone. This creates a misalignment between title and liability, increasing credit risk and potential legal complexities during a default.

Incorrect: Option B is incorrect because a title transfer due to divorce does not necessarily trigger a new Loan Estimate unless a full refinance is occurring. Option C is incorrect because PMI is generally not automatically voided by a title transfer between spouses in a divorce, though the policy may need updating. Option D is incorrect because the Garn-St. Germain Act actually protects borrowers by preventing lenders from enforcing due-on-sale clauses in divorce transfers; it does not mandate interest rate adjustments based on income status.

Takeaway: A transfer of property title via a Quitclaim Deed does not discharge a borrower’s liability on the mortgage note, necessitating a formal underwriting process to ensure the remaining borrower is creditworthy.

Correct: In construction lending, a milestone-based draw schedule ensures that the lender only disburses funds for work that has been physically completed and verified by a qualified third party. This maintains the loan-to-value (LTV) ratio throughout the project. Furthermore, maintaining a statutory holdback (often 10% depending on the jurisdiction) is essential to protect the lender and borrower from mechanic’s liens filed by subcontractors or suppliers who may not have been paid by the general builder.

Incorrect: Releasing funds based on invoices alone is insufficient because it does not confirm that the materials were actually used or that the work was performed to standard. Front-loading disbursements creates excessive risk for the lender if the builder defaults early in the project, as the outstanding loan balance would far exceed the value of the partially completed structure. Delegating verification to legal counsel is inappropriate because lawyers typically lack the technical expertise to evaluate construction stages, and disbursements should be controlled by the lender’s risk management protocols rather than the borrower’s representative.

Takeaway: Prudent construction lending requires independent verification of construction milestones and the retention of holdbacks to mitigate lien risks and ensure collateral value matches disbursements.

Correct: Professional judgment in an audit remediation context requires addressing both the systemic root cause and the impact on third parties. Since the misrepresentation affects the validity of the underwriting process and breaches investor warranties, a look-back is necessary to determine if this is a pattern of behavior, and disclosure is required to maintain integrity with secondary market investors who rely on accurate data.

Incorrect: Issuing a reprimand and updating systems are internal administrative actions that fail to address the potential fraud already committed or the legal risk to investors. Requesting new statements after the loan has been processed does not rectify the original ethical breach or the misrepresentation that occurred during the approval phase. Monitoring performance for 90 days is an insufficient response to known material misrepresentation and ignores the immediate ethical obligation to report and remediate fraud.

Takeaway: Ethical professional judgment requires immediate remediation of known misrepresentations, including a scope-of-impact analysis and transparent disclosure to affected stakeholders.

Correct: In the context of mortgage servicing compliance and internal audit, the first step in addressing a deficiency is to perform a root cause analysis. This allows the organization to distinguish between a systemic technical failure, such as a software bug or data mapping error, and a procedural breakdown, such as human error. Identifying the source of the problem is essential before implementing corrective actions to ensure they are targeted and effective.

Incorrect: Implementing automated reports or revising policies are corrective and preventive controls that should follow the identification of the problem; doing so beforehand may result in ineffective solutions that do not address the actual source of the error. Notifying the legal department for remediation efforts like fee waivers addresses the impact on the borrower and legal risk but does not address the operational failure itself.

Takeaway: Root cause analysis is the foundational first step in compliance remediation to ensure that corrective actions address the source of the error rather than just the symptoms.

Correct: Under standard secondary market guidelines (such as those from Fannie Mae and Freddie Mac), a borrower is considered self-employed if they have a 25% or greater ownership interest in a business. In such cases, the lender must obtain and review the full business tax returns to ensure the business is stable, has sufficient cash flow to support the income being used for qualification, and is not experiencing a decline that could affect the borrower’s future income.

Incorrect: Accepting an auditor’s letter or bank statements in lieu of required tax returns for a conventional conforming loan does not meet standard documentation requirements for self-employed borrowers with significant ownership. Providing only partial returns (such as just the first two pages) is insufficient because the underwriter needs the full returns, including all schedules and statements, to perform a complete cash flow analysis and verify the business’s overall financial position.

Takeaway: Borrowers with 25% or more ownership in a business must provide full business tax returns to verify the stability and continuity of their income for conventional mortgage underwriting.

Correct: Under the Homeowners Protection Act (HPA), automatic termination of PMI at the 78% LTV threshold must be based on the original amortization schedule and the original value of the property. Servicers are prohibited from requiring a new appraisal or any evidence of current value as a condition for automatic termination, provided the borrower is current on payments. Requiring an appraisal for an automatic trigger is a significant compliance failure and control deficiency.

Incorrect: The practice of requiring evidence of no subordinate liens is permitted for borrower-requested cancellations at the 80% LTV threshold, so it does not constitute a deficiency in that context. Calculating the 78% LTV threshold based on the original amortization schedule rather than accelerating it for extra payments is the standard legal requirement for automatic termination. Finally, delaying termination because a borrower is not current is a requirement of the HPA, not a control failure.

Takeaway: Automatic PMI termination at 78% LTV is a mandatory requirement based on the original loan schedule and cannot be legally conditioned upon a new appraisal or property valuation.

Correct: The CFPB explicitly evaluates a lender’s Compliance Management System (CMS) as the primary indicator of its ability to follow consumer protection laws. A robust CMS must include board and management oversight, a formal compliance program (policies, training, monitoring), and an independent compliance audit function. This holistic approach addresses the root causes of violations and demonstrates the ‘culture of compliance’ that the CFPB looks for when deciding whether to pursue formal enforcement actions or allow for self-correction.

Incorrect: Increasing post-closing reviews is a reactive quality control measure that identifies errors after they have occurred, rather than a systemic governance control. Establishing a legal defense fund is a financial risk mitigation strategy for litigation but does not address the underlying compliance failures that lead to enforcement. While automation is a helpful tool for maintaining tolerances, it is a technical control that lacks the necessary oversight, training, and auditing components required for a complete compliance framework.

Takeaway: A comprehensive Compliance Management System (CMS) featuring board oversight and independent auditing is the foundational requirement for preventing and managing CFPB enforcement risks.