Lending Practices Flashcards

What is the purpose of the CFPB's Ability-to-Repay (ATR) rule?

Answer: To require lenders to make a reasonable, good-faith determination that a borrower can repay a mortgage before extending credit

The ATR rule requires lenders to verify and consider a borrower's financial information such as income, assets, employment, and credit history before approving a mortgage loan.

Which of the following is a characteristic of an interest-only loan?

Answer: The borrower pays only interest for a set period, after which payments include principal as well

During the interest-only period, the borrower's payments cover only interest charges and the principal balance does not decrease until the amortization period begins.

What is a 'cross-collateralization' clause in a loan agreement?

Answer: A clause that uses multiple assets as collateral to secure a single loan or multiple loans with the same lender

Cross-collateralization allows a lender to secure additional loans with the same collateral, meaning a default on one loan can put all related collateral at risk.

Under RESPA (Real Estate Settlement Procedures Act), which practice is prohibited?

Answer: Paying or receiving kickbacks or unearned fees for referrals in a real estate settlement transaction

RESPA Section 8 prohibits giving or accepting kickbacks, referral fees, or unearned charges in connection with federally related mortgage transactions.

What is the difference between a 'conforming' and a 'non-conforming' loan?

Answer: Conforming loans meet Fannie Mae/Freddie Mac guidelines and can be sold to them; non-conforming loans do not

Conforming loans meet the underwriting standards and loan limits set by the GSEs (Fannie Mae and Freddie Mac) and can be sold on the secondary market; non-conforming loans exceed these standards or limits.

A lender offering a 'teaser rate' on an adjustable-rate mortgage (ARM) is providing:

Answer: An artificially low introductory interest rate that will adjust upward after an initial period

Teaser rates are below-market introductory rates on ARMs designed to attract borrowers, but they reset to higher market-based rates after the initial period expires.

What is 'loan flipping' in the context of predatory lending?

Answer: Repeatedly refinancing a borrower's loan to generate fees while providing little or no benefit to the borrower

Loan flipping is a predatory practice where a lender persuades a borrower to repeatedly refinance a loan, generating fees each time while stripping the borrower's home equity.