Banking Lending Practices 3 — Questions and Answers
Question 1: What does a loan-to-value (LTV) ratio of 90% indicate?
- The borrower's debt-to-income ratio is 90%
- The loan amount is 90% of the property's appraised value (Correct answer)
- The lender charges a 90-basis-point origination fee
- The borrower has a 90% probability of default
Correct answer: The loan amount is 90% of the property's appraised value
LTV ratio compares the loan amount to the property's appraised value; a 90% LTV means the borrower financed 90% and made a 10% down payment.
Question 2: Which type of interest rate remains constant throughout the entire life of the loan?
- Adjustable rate
- Prime rate
- Fixed rate (Correct answer)
- Teaser rate
Correct answer: Fixed rate
A fixed-rate loan has an interest rate that does not change over the loan term, providing the borrower with consistent monthly payments.
Question 3: What is the role of a loan servicer in mortgage lending?
- To originate and underwrite new mortgage loans
- To manage the ongoing administration of existing loans including collecting payments and handling escrow (Correct answer)
- To insure the mortgage against borrower default
- To set the interest rate index for adjustable-rate mortgages
Correct answer: To manage the ongoing administration of existing loans including collecting payments and handling escrow
A loan servicer handles the day-to-day management of a loan after origination, including collecting payments, managing escrow accounts, and handling delinquencies.
Question 4: Under the Home Mortgage Disclosure Act (HMDA), lenders are required to:
- Cap interest rates at the prime rate plus 2%
- Collect and report data on mortgage loan applications and originations by borrower characteristics and geography (Correct answer)
- Provide a 3-day right of rescission on all home purchase loans
- Offer the same rate to all applicants in a given metropolitan area
Correct answer: Collect and report data on mortgage loan applications and originations by borrower characteristics and geography
HMDA requires covered lenders to collect, record, report, and disclose data about their mortgage lending activity to promote fair lending and identify discriminatory patterns.
Question 5: What is a 'hard inquiry' in the context of credit evaluation?
- A lender's internal review of underwriting guidelines
- A credit check initiated by a lender when a borrower applies for credit that can temporarily lower the credit score (Correct answer)
- A request by the borrower to correct errors on their credit report
- An IRS inquiry into the borrower's tax returns
Correct answer: A credit check initiated by a lender when a borrower applies for credit that can temporarily lower the credit score
A hard inquiry occurs when a lender pulls a borrower's credit report during an application review and can reduce the credit score by a few points temporarily.
Question 6: Which of the following is an example of predatory lending?
- Offering a borrower a lower rate after improving their credit score
- Charging excessive fees and using deceptive practices to trap borrowers in high-cost loans (Correct answer)
- Requiring mortgage insurance on loans with less than 20% down
- Verifying income and employment before approving a loan
Correct answer: Charging excessive fees and using deceptive practices to trap borrowers in high-cost loans
Predatory lending involves unfair, deceptive, or abusive loan terms that exploit borrowers, often through hidden fees, excessive interest rates, or misleading disclosures.
Question 7: What does 'underwriting' involve in the loan approval process?
- Marketing loan products to prospective borrowers
- Evaluating the borrower's creditworthiness, income, assets, and collateral to determine loan approval (Correct answer)
- Registering the mortgage lien with the county recorder
- Calculating the monthly escrow payment for taxes and insurance
Correct answer: Evaluating the borrower's creditworthiness, income, assets, and collateral to determine loan approval
Underwriting is the process of assessing a borrower's risk profile by analyzing credit history, income, assets, and the value of the collateral to make an approval decision.
Banking Lending Practices 3
What does a loan-to-value (LTV) ratio of 90% indicate?