A team member asks about Fraud Prevention in a compliance desk review while trying to identify which rule controls the file. Which response should the supervisor use?
Correct Answer
B) Escalate the red flag through compliance channels
Why this is correct: The governing concept is that potential fraud requires a structured, compliant response. When a red flag is identified, the immediate action is to escalate it through proper compliance channels. This ensures the issue is reviewed by experts, documented, and handled according to policy and law, preventing reliance on unverified information. Why the other choices are wrong: "Resolve the Fraud Prevention issue with the reverse-mortgage occupancy exception that does not fit the facts" is wrong because applying an irrelevant exception to force a resolution is improper and could mask fraud. "Ignore the consumer-protection issue unless the borrower complains" is wrong because MLOs have a proactive duty to address red flags; waiting for a complaint is a compliance failure. "Document the issue later instead of correcting the compliance problem first" is wrong because documentation is essential but must follow, not replace, the initial step of escalating the potential problem. Exam tip: For any fraud red flag, remember the sequence: identify, escalate, verify, document. Escalation is the key first step.
Why This Is the Correct Answer
The correct response is "Escalate the red flag through compliance channels" because Fraud red flags require verification, documentation, and escalation before reliance.
Why the Other Options Are Wrong
Option A: Resolve the Fraud Prevention issue with the reverse-mortgage occupancy exception that does not fit the facts.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Option C: Ignore the consumer-protection issue unless the borrower complains.
Ignore the consumer-protection issue unless the borrower complains. is not correct because it does not apply the rule tested by this file scenario.
Option D: Document the issue later instead of correcting the compliance problem first.
Document the issue later instead of correcting the compliance problem first. is not correct because it does not apply the rule tested by this file scenario.
Memory Technique
fraud red flags: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
Match the file facts to fraud red flags; do not choose an exception or shortcut that skips the required rule.
Common Mistakes to Avoid
- -Choosing an internal exception instead of the governing rule
- -Treating preliminary or informal facts as a substitute for required documentation
- -Answering from a familiar but unrelated mortgage topic
More Ethics & Fraud Questions
In a closing-readiness check, a disclosure specialist sees facts tied to Appraisal Fraud Detection. What should the file reflect?
An MLO recommends a loan with a low initial payment that will increase sharply in two years. The borrower says retirement income will be fixed and asks whether the payment can change. What is the appropriate response?
An MLO alters a bank statement to make the applicant's account balance appear higher and submits it to underwriting. Which response is appropriate?
A branch manager asks about a loan file because marketing proposes a rate the company is not prepared to offer. What should happen?
A branch pays its originators 1.1% of the loan amount on every file, and an extra $400 whenever the loan closes with an escrow waiver. Escrow waivers at this branch are granted only on loans priced above par, and the originator decides whether to offer one. Under Regulation Z, which part of this compensation arrangement, if any, is prohibited?
A borrower wants cash for necessary home repairs. A proposed refinance provides $15,000 cash but adds $12,000 in costs and extends repayment by 15 years. What is the best next step for the MLO?
A borrower pays a mortgage broker $3,400 directly at closing. The lender also offers the same brokerage 1.5% of the loan amount as a lender-paid credit on the same file. Under Regulation Z's dual-compensation rule, may the brokerage accept both payments on this transaction?
Before closing, the team discovers that an ad shows an interest rate but omits the APR presentation. What is the safest compliant answer?
A residential mortgage lender files a suspicious activity report about a borrower on 8 April. On 15 April the borrower calls to ask why the file has stalled, and the branch manager wants to tell him a report was filed so he can explain himself. May the manager tell the borrower that a suspicious activity report was filed?
The loan team is resolving Privacy and Confidentiality during a quality-control sample. Which action best fits the rule?
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