Banking Lending Practices 4 — Questions and Answers
Question 1: What is the Community Reinvestment Act (CRA) designed to encourage?
- Banks to maintain higher reserve ratios in low-income areas
- Banks to meet the credit needs of all segments of their communities, including low- and moderate-income areas (Correct answer)
- Community groups to audit bank financial statements
- Borrowers to save more before applying for loans
Correct answer: Banks to meet the credit needs of all segments of their communities, including low- and moderate-income areas
The CRA requires federal financial regulators to assess how well banks serve the credit needs of their entire communities, particularly low- and moderate-income neighborhoods.
Question 2: What is a 'deficiency judgment' in lending?
- A lender's refusal to approve a loan application due to incomplete documents
- A court judgment against a borrower for the remaining loan balance after foreclosure sale proceeds are insufficient to cover the debt (Correct answer)
- A regulatory finding that a lender violated disclosure requirements
- A penalty assessed when a borrower misses three consecutive payments
Correct answer: A court judgment against a borrower for the remaining loan balance after foreclosure sale proceeds are insufficient to cover the debt
A deficiency judgment allows a lender to pursue the borrower personally for any remaining loan balance after the collateral is sold at foreclosure for less than the outstanding debt.
Question 3: Which of the following best describes a 'recourse loan'?
- A loan that allows the borrower to refinance without closing costs
- A loan where the lender can pursue the borrower's other assets beyond the collateral if the borrower defaults (Correct answer)
- A government-backed loan with reduced interest rates
- A loan that automatically converts from variable to fixed rate
Correct answer: A loan where the lender can pursue the borrower's other assets beyond the collateral if the borrower defaults
In a recourse loan, if the collateral's value does not cover the outstanding debt upon default, the lender can seek repayment from the borrower's other personal assets.
Question 4: What is the primary purpose of an escrow account in a mortgage loan?
- To hold the borrower's surplus monthly payments as a credit
- To collect and hold funds for property taxes and insurance so the lender can make payments on the borrower's behalf (Correct answer)
- To segregate the lender's loan origination fees from principal
- To manage the transfer of funds at the time of property closing
Correct answer: To collect and hold funds for property taxes and insurance so the lender can make payments on the borrower's behalf
An escrow account held by the servicer collects portions of the monthly mortgage payment to cover property taxes and homeowners insurance when they come due.
Question 5: A borrower with a debt-to-income (DTI) ratio of 50% would typically be considered:
- An ideal low-risk candidate for prime loan terms
- A high-risk borrower who may struggle to repay additional debt obligations (Correct answer)
- Eligible for the best available interest rates
- Exempt from income verification requirements
Correct answer: A high-risk borrower who may struggle to repay additional debt obligations
A DTI of 50% means half of the borrower's gross monthly income goes to debt payments, which exceeds typical qualifying thresholds and indicates elevated repayment risk.
Question 6: What is the 'right of rescission' under TILA for certain home loans?
- The lender's right to call the loan due after a missed payment
- The borrower's right to cancel a refinance or home equity loan within three business days of closing (Correct answer)
- The borrower's right to dispute the appraised value of their property
- The lender's right to revoke a loan commitment before closing
Correct answer: The borrower's right to cancel a refinance or home equity loan within three business days of closing
TILA grants borrowers three business days after closing to rescind (cancel) certain refinance or home equity loans without penalty.
Question 7: What is 'redlining' in the context of discriminatory lending practices?
- Highlighting loan documents where the borrower must sign
- The illegal practice of denying credit or services to residents of certain geographic areas based on racial or ethnic composition (Correct answer)
- Charging higher fees to borrowers who pay off loans early
- The practice of offering lower rates to long-term bank customers
Correct answer: The illegal practice of denying credit or services to residents of certain geographic areas based on racial or ethnic composition
Redlining is an unlawful practice where lenders refuse to offer loans or insurance in certain neighborhoods based on their racial or ethnic demographics rather than individual creditworthiness.
Banking Lending Practices 4
What is the Community Reinvestment Act (CRA) designed to encourage?