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Practice and exam technique

Practice questions: ethics

Compiled by the Sitonce editorial team from the NMLS Resource Center and the federal regulations named belowUpdated 3 min readFacts verified 4 September 2026
The short answer

Ethics is 18 percent of the paper and tests specific prohibitions rather than general judgment. These four cover steering, compensation, occupancy fraud and the confidentiality rule on suspicious activity reports.

Eighteen percent of the paper, and the area candidates most often skip on the assumption that good instincts will carry them.

They will not. These are rules with edges.

Question 1

An originator recommends a loan with no closing costs at a higher rate to a borrower who plans to sell within two years. The originator is paid more on it. Is this steering?

  1. Yes, because the originator is paid more
  2. Yes, because the rate is higher
  3. No, provided the transaction is in the consumer's interest
  4. No, because compensation may vary with the product
Answer: C. Steering has two limbs: greater compensation AND a transaction not in the consumer's interest. For a two-year hold, no closing costs at a higher rate can genuinely be the better deal. Option D misstates the compensation rule, which prohibits pay varying with a term of the transaction.
Question 2

Which compensation arrangement is permitted under 12 CFR 1026.36(d)?

  1. A bonus for closing loans above a set interest rate
  2. A percentage of the loan amount
  3. Additional pay for loans carrying a prepayment penalty
  4. A higher rate of pay on adjustable-rate products
Answer: B. Loan amount is not a term of the transaction in the sense the rule prohibits. Options A, C and D each tie pay to a term of the loan, which is exactly what the rule forbids.
Question 3

A borrower states a property will be their primary residence, and the originator knows they intend to rent it out. What is this?

  1. A permissible difference of expectation
  2. Fraud for profit
  3. Fraud for housing
  4. Not fraud unless the loan defaults
Answer: C. Misrepresenting occupancy to obtain better terms on a home is fraud for housing. It is fraud whether or not the loan performs, which disposes of option D. Fraud for profit involves extracting money from the transaction, usually with several participants.
Question 4

An originator files a suspicious activity report on a borrower. The borrower asks whether anything has been reported. What may the originator say?

  1. Confirm it, since the borrower is entitled to know
  2. Decline to answer and say nothing about a report existing
  3. Suggest the borrower withdraw the application
  4. Confirm it only if the borrower asks directly
Answer: B. Disclosure to the subject of a suspicious activity report is prohibited absolutely. Option C is disclosure by implication and is the trap - it feels like a compromise and it is a violation.

Why instinct fails here

Two of these four have an answer that feels wrong. Recommending a higher-rate loan that pays more sounds like steering, and it is not. Declining to warn somebody sounds unkind, and it is required.

This area rewards knowing the rule, not having good values.

Common questions

How much of the NMLS exam is ethics?

18 percent, which we estimate at 22 of the 120 questions.

When is a recommendation steering?

Only when the originator is paid more AND the transaction is not in the consumer's interest. Both limbs are required.

Can compensation be a percentage of the loan amount?

Yes. Loan amount is not a term of the transaction in the sense the rule prohibits.

Is occupancy misrepresentation fraud?

Yes, fraud for housing, and it is fraud whether or not the loan performs.

Can you warn someone a SAR was filed?

No. Disclosure to the subject is prohibited absolutely, including by implication.

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