TX MLO common mistakes
TX MLO · Understand the traps and how to avoid them.
Asked what an unlicensed loan processor may do, the candidate picks 'explain the rate-lock options and quote the borrower a rate' because the task is described as 'processing.'
Candidates learn origination duties by job title (processor, assistant, underwriter) rather than by task, and the NMLS outline tests tasks, not titles.
What to do instead
Apply the task test: any activity involving taking an application, discussing or negotiating loan rates or terms, or counseling borrowers about loan terms is origination and requires a license. Clerical tasks (data entry, document collection, scheduling) do not. Drill 15 scenario items until the task test replaces the job-title reflex.
Approves a compensation plan where the MLO earns a higher per-loan payout when the borrower accepts a higher interest rate, reasoning that 'everyone is paid on volume.'
Volume-based and term-based compensation sound similar, and the candidate conflates 'commission' with 'permitted commission.'
What to do instead
Memorize the bright line: compensation may vary with the number of loans closed, but may not vary based on the loan's terms (rate, APR, or the fact that a particular product was chosen). If payout changes when the rate changes, it is term-based and prohibited.
Given a note rate and an APR, the candidate identifies the APR as 'the rate the borrower actually pays on the balance' or treats APR and note rate as interchangeable.
APR is used in marketing and looks like the 'real' rate, so candidates assume it is the accrual rate.
What to do instead
Anchor the definitions: note rate is the interest rate used to compute periodic interest on the principal balance; APR is a disclosure rate that folds in specified finance charges to express total cost of credit. If a question asks about accruing interest or a monthly payment, it is the note rate.
On an adjustable-rate question, the candidate reads '2/2/6' as 2% first adjustment, 2% lifetime cap, 6% periodic cap, or applies the lifetime cap to a single annual adjustment.
The shorthand is memorized as three numbers without a fixed order, and the middle and last numbers get swapped under time pressure.
What to do instead
Rehearse the fixed order aloud: initial adjustment cap / periodic (subsequent) cap / lifetime cap. Convert each practice notation into a sentence before answering, then eliminate any option that lets one adjustment exceed the periodic cap.
The candidate withholds the Loan Estimate until the borrower has a signed purchase contract, has paid an application fee, or has 'chosen a property.'
Carried over from pre-TRID habits and from confusing a pre-approval with an application; candidates believe an application requires a property.
What to do instead
Memorize that receipt of the six pieces of information (consumer's name, income, SSN, property address, estimated value, loan amount sought) constitutes an application, and the Loan Estimate must be delivered or placed in the mail within three business days of receipt - property or no property.
To compute the seven-business-day wait before consummation, the candidate counts Monday through Friday excluding weekends and uses the same 'business day' meaning as the three-day Loan Estimate delivery rule.
The regulation uses two different definitions of 'business day,' and candidates learn only the general one.
What to do instead
Split them deliberately: the three-business-day Loan Estimate delivery and the rescission-period counting use the general definition (day the creditor's offices are open to the public for substantially all business functions); the seven-business-day waiting period uses the precise definition (all offices open and U.S. mail delivered). Tag each practice question with the definition it triggers.
The candidate advises a borrower to take a higher-rate loan because the lender's affiliate pays a better premium, and marks the file complete because the borrower 'signed everything.'
Candidates treat disclosure and signature as a substitute for suitability, and miss that steering/presenting only one option is itself the violation.
What to do instead
Apply the two-question test before closing: was the loan presented in the borrower's interest given their stated goals, and can the file show the alternatives considered? If only one product was presented and it maximized compensation, the answer is a violation regardless of signatures.
The candidate reads a scenario in which the MLO's company refers the borrower to its own title agency, sees a signed general disclosure packet, and concludes no affiliated-business arrangement issue exists.
AfBA is folded into the idea of 'disclosures' generally, so a signed stack feels sufficient; candidates do not check the timing or content of that specific disclosure.
What to do instead
Check three elements for every affiliate referral: written disclosure given at or before the referral, an estimate of the charge, and the borrower's option to shop elsewhere without penalty. Missing any one element means the answer is a Section 8/AfBA violation.
On a Texas home equity scenario, the candidate applies only the federal three-day rescission period and answers that the borrower may close as soon as the Loan Estimate waiting period is satisfied.
Federal TRID timelines are studied heavily and the Texas constitutional timing rules are learned as an afterthought, so the federal rule gets substituted for the stricter state rule.
What to do instead
Build a Texas home equity checklist that runs in parallel, not in place of, federal rules: the borrower must receive the required notice and copy of the application at least 12 days before closing, closing cannot occur before the 12th day after application, and the borrower has three days after closing to rescind. When a question mentions a home equity loan on a Texas homestead, run the state timeline first.
The candidate treats the Texas home equity 80% combined loan-to-value limit as a lender overlay that can be exceeded for a strong borrower, or computes it on the first lien alone.
In conventional lending LTV limits are investor guidelines with exceptions, and candidates generalize that flexibility to a constitutional limit.
What to do instead
Learn it as a constitutional ceiling under Article XVI, Section 50(a)(6): the sum of all liens on the homestead may not exceed 80% of fair market value, with no exception for credit strength. When a question gives a first mortgage, a HELOC, and an appraisal, add the liens before dividing.