AL MLO common mistakes
AL MLO · Understand the traps and how to avoid them.
Applying the federal high-cost mortgage points-and-fees threshold to a first-lien loan the same way as to a subordinate-lien loan, using the 5% figure for both.
Candidates memorize one percentage and stop, forgetting that Regulation Z sets a lower points-and-fees trigger (3%) for first liens and a higher one (5%) for subordinate liens, with a separate 8% total-loan-charge trigger and an annual adjustment mechanism.
What to do instead
Build a one-page comparison table of every high-cost trigger (APR spread over APOR by lien type and loan size, points and fees by lien type, prepayment penalty, and the points-and-fees cap) and recite it from memory before each practice set.
Treating HOEPA, the Ability-to-Repay rule, and the Qualified Mortgage definition as one merged rule, so a question about whether a loan is a QM gets answered with high-cost mortgage criteria.
The three rules overlap in exam scenarios and share terms like 'points and fees', so candidates conflate the coverage test with the safe-harbor test.
What to do instead
Draw the decision tree explicitly: first is it a consumer credit transaction secured by a dwelling, then is it high-cost (HOEPA), then is there an ATR determination, then does it meet QM product-feature and underwriting limits.
Quoting the RESPA Section 8 kickback prohibition as if it only bans cash payments, and missing that things of value, fee splits for no service, and referrals are also covered.
The statute's headline phrase is 'fee, kickback, or thing of value', but study summaries often shorten it to 'no kickbacks', so candidates overlook non-cash arrangements like free marketing or desk space.
What to do instead
Practice classifying a list of arrangements (co-marketing agreements, lease of office space at fair market value, paying a fee for a service actually performed) as permitted or prohibited using the Section 8 elements rather than intuition.
Confusing the ECOA/Regulation B adverse action notice timing with the notification required after a completed application versus after an incomplete application, and using 30 days for every case.
Regulation B contains several clocks (30 days for a completed application, the counteroffer and incompleteness rules, and a shorter window for certain withdrawn or incomplete files) that look similar in a single paragraph of text.
What to do instead
Write out the Reg B timeline as a flowchart keyed to application status, and for each branch note what must be sent, to whom, and whether the reason must be specific.
Mixing up which disclosures are triggered by the loan application versus by closing, such as assuming the Closing Disclosure replaces the Loan Estimate or that the Loan Estimate must be delivered within three business days of closing.
TRID has parallel three-business-day rules on both ends of the transaction, and candidates swap the direction of the requirement.
What to do instead
Create a two-column sheet labeled 'Loan Estimate' and 'Closing Disclosure' and list trigger event, delivery deadline, and permitted tolerance tier for each; then answer timing questions only after identifying which disclosure is at issue.
Calculating the monthly payment on an adjustable-rate mortgage using the fully indexed rate while ignoring the qualifying rule that requires use of the greater of the fully indexed rate or the introductory rate, and misapplying the maximum rate for certain loan types.
Candidates learn the index-plus-margin formula and stop there, forgetting that underwriting rules can require qualifying at a higher of comparison.
What to do instead
Work at least ten ARM scenarios by hand, each time writing the three candidate rates (start rate, fully indexed rate, maximum rate) and stating which rule selects the qualifying rate.
Reading annual percentage rate and note rate as interchangeable when explaining cost to a borrower or answering a disclosure question.
Both appear on the same page and are close in value on fixed-rate loans, so the distinction feels academic until a question hinges on which one reflects the total cost of credit including finance charges.
What to do instead
State the definition of each in one sentence and identify which one changes when a third-party fee changes; drill with problems that alter fees only and ask which rate moves.
Computing LTV, CLTV, and HCLTV from the wrong value basis, such as using purchase price when the appraised value is lower, or ignoring a HELOC's full draw when computing HCLTV.
Candidates default to whichever number appears first in the scenario and forget that lenders use the lesser of price or appraised value in purchase transactions, and that HCLTV uses the maximum potential line balance.
What to do instead
Before any ratio calculation, write the acronyms out with their formulas and circle the value basis in the prompt; practice with at least one scenario containing a HELOC and an appraisal below price.
Describing loan origination activities as if the loan officer's role ends at application, omitting the ongoing duties such as gathering and validating documentation, re-disclosing when changed circumstances occur, and documenting the borrower's ability to repay.
Study material emphasizes the application and closing events, so the middle of the process gets compressed and the compliance obligations that occur there are underweighted.
What to do instead
Map the origination lifecycle as a numbered sequence from inquiry to funding, and annotate each stage with the disclosure, documentation, or verification duty owed at that stage.
Answering ethics scenarios by choosing the option that is merely legal rather than the one consistent with the duty of good faith and fair dealing, or by failing to disclose a known conflict such as a referral relationship.
Candidates treat ethics items as compliance items and pick the technically permitted conduct, missing that the standard also requires candor, avoiding misleading omissions, and putting the borrower's interest ahead of compensation.
What to do instead
For each ethics scenario, name the specific duty implicated (loyalty, disclosure of conflicts, confidentiality, fair dealing) before reading the answer choices, then eliminate options that satisfy the letter but breach the duty.