Question 3
Domain 3: Ethics, Fraud Prevention, and Consumer ProtectionAn MLO discovers that an underwriter has approved a loan based on inflated income that the borrower verbally admitted was overstated. The MLO's appropriate response is to:
Correct answer: B
Explanation
An MLO must not proceed with a loan based on known false information because that would facilitate misrepresentation and potential fraud. The proper response is to stop the transaction, report the issue through internal compliance channels, and ensure the file is corrected before any further action, consistent with the duty to maintain accurate loan records and avoid submitting false information.
Why each option is right or wrong
A. Proceed with closing since the underwriter approved the file
B. Stop the loan, report the issue internally per company policy, and ensure the file is corrected before any further action
Under the federal anti-fraud provisions, a loan file cannot be allowed to proceed on information the MLO knows is false: 18 U.S.C. § 1014 criminalizes knowingly making or causing false statements to a federally related lender, and RESPA’s anti-kickback/anti-fraud framework requires truthful, accurate loan documentation. Once the borrower has admitted the income was overstated, the MLO must halt further processing, escalate through the company’s compliance/reporting chain, and have the file corrected before any underwriting or closing action continues; proceeding would knowingly perpetuate a materially false application.
C. Reduce the loan amount slightly to account for the inflation
D. Have the borrower sign a disclosure acknowledging the discrepancy