Banking Lending Practices 2 — Questions and Answers
Question 1: What is the purpose of the Truth in Lending Act (TILA)?
- To regulate bank capital requirements
- To require lenders to disclose loan terms and costs clearly to borrowers (Correct answer)
- To set maximum interest rate ceilings on all loans
- To insure deposits at commercial banks
Correct answer: To require lenders to disclose loan terms and costs clearly to borrowers
TILA requires lenders to provide standardized disclosure of credit terms, including APR and finance charges, so borrowers can compare loan offers.
Question 2: A balloon payment loan requires the borrower to:
- Pay equal installments throughout the entire loan term
- Make a large lump-sum payment at the end of the loan term (Correct answer)
- Pay interest only for the first year, then principal only
- Prepay the loan within six months of origination
Correct answer: Make a large lump-sum payment at the end of the loan term
A balloon payment loan has lower periodic payments but requires a large final payment that covers the remaining principal balance.
Question 3: What does the term 'amortization' mean in the context of a mortgage loan?
- The process of increasing the principal balance over time
- The gradual repayment of a loan through scheduled periodic payments of principal and interest (Correct answer)
- A penalty charged for paying off a loan early
- The lender's method of calculating the APR
Correct answer: The gradual repayment of a loan through scheduled periodic payments of principal and interest
Amortization is the systematic reduction of loan principal through regular payments that cover both interest and principal over the loan's life.
Question 4: Under the Equal Credit Opportunity Act (ECOA), a lender may NOT deny credit based on:
- Insufficient income to repay the loan
- Poor credit history with prior defaults
- The applicant's race, color, religion, national origin, or sex (Correct answer)
- High existing debt relative to income
Correct answer: The applicant's race, color, religion, national origin, or sex
ECOA prohibits credit discrimination based on protected characteristics including race, color, religion, national origin, sex, marital status, and age.
Question 5: What is a 'jumbo loan' in U.S. mortgage lending?
- A loan with a term exceeding 30 years
- A mortgage that exceeds the conforming loan limits set by the FHFA (Correct answer)
- A loan requiring no down payment from the borrower
- A business loan of more than $1 million
Correct answer: A mortgage that exceeds the conforming loan limits set by the FHFA
A jumbo loan exceeds the conforming loan limits established by the Federal Housing Finance Agency and cannot be purchased by Fannie Mae or Freddie Mac.
Question 6: What is the primary function of private mortgage insurance (PMI)?
- To protect the borrower in case of job loss
- To protect the lender if the borrower defaults on a loan with less than 20% down payment (Correct answer)
- To insure the property against physical damage
- To guarantee the borrower a fixed interest rate
Correct answer: To protect the lender if the borrower defaults on a loan with less than 20% down payment
PMI protects the lender against losses if the borrower defaults when the loan-to-value ratio exceeds 80%, requiring less than a 20% down payment.
Question 7: A lender that uses 'steering' as a discriminatory practice is guilty of directing borrowers toward:
- Lower interest rate products to boost loan volume
- Less favorable loan products based on protected class characteristics rather than creditworthiness (Correct answer)
- Fixed-rate mortgages instead of adjustable-rate products
- Government-backed loans such as FHA or VA loans
Correct answer: Less favorable loan products based on protected class characteristics rather than creditworthiness
Steering is an illegal practice where lenders direct borrowers to certain loan products—often less favorable—based on protected characteristics rather than their actual qualifications.
Banking Lending Practices 2
What is the purpose of the Truth in Lending Act (TILA)?