Mortgage Loan Originator (MLO) Licensing Practice Test

According to guidance, which scenario is prohibited concerning negative amortization loans?

1. They can be originated without disclosures.

2. They are allowed with proper counseling.

3. They can be issued for adjustable-rate mortgages.

4. They cannot be originated without disclosures and counseling.

The correct answer is: They cannot be originated without disclosures and counseling.

Negative amortization loans involve a situation where the borrower’s payments do not cover the interest accruing on the loan, causing the loan balance to increase over time. This type of loan has specific regulatory requirements to ensure that borrowers understand the risks and implications involved. The correct answer highlights that negative amortization loans cannot be originated without required disclosures and counseling. These regulations are in place to protect consumers from potential financial harm. Disclosures ensure that borrowers are fully informed about the terms of the loan, including how payments are applied and the potential for increased loan balances. Counseling provides an additional layer of protection by ensuring that borrowers have the opportunity to discuss their situation with a qualified professional who can explain the consequences of choosing such a loan. Disclosures and counseling are paramount in safeguarding consumers against the complexities and risks associated with negative amortization. When lenders comply with these requirements, they play a crucial role in promoting transparency and informed decision-making for borrowers who may be considering loans that could lead to greater financial strain over time.