Mortgage Loan Originator (MLO) Licensing Practice Test

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In which type of states does the borrower explicitly agree that the lender can take back the title upon default?

  1. Title Theory States

  2. Lien Theory States

  3. Intermediary States

  4. Private States

The correct answer is: Intermediary States

The correct answer is that in Title Theory States, the borrower explicitly agrees that the lender can take back the title upon default. In Title Theory States, mortgages are viewed as a transfer of title to the lender. When a borrower takes out a mortgage, they essentially transfer the title of the property to the lender as collateral for the loan. If the borrower defaults on the loan, the lender has the right to reclaim the title without going through the foreclosure process that may be required in other types of states. This legal framework provides lenders with a level of security because they hold the title to the property until the loan is fully paid off. In contrast, Lien Theory States operate under a different principle where the borrower retains the title during the mortgage term, and the lender holds a lien on the property. This means that if a borrower defaults, the lender typically must go through the foreclosure process to reclaim the property rather than having an automatic right to seize the title. Intermediary States blend elements of both theories. However, they do not provide the same explicit agreement for the lender to take title automatically upon default as seen in Title Theory States. Private States is not a recognized legal classification in the context of mortgage theory and is not relevant to this