Banking Lending Practices 5 — Questions and Answers
Question 1: What is the purpose of the CFPB's Ability-to-Repay (ATR) rule?
- To allow lenders to approve loans based on projected future income
- To require lenders to make a reasonable, good-faith determination that a borrower can repay a mortgage before extending credit (Correct answer)
- To set a maximum loan term of 20 years for all mortgages
- To permit borrowers to self-certify their income without documentation
Correct 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.
Question 2: Which of the following is a characteristic of an interest-only loan?
- The borrower pays both principal and interest each month from the first payment
- The borrower pays only interest for a set period, after which payments include principal as well (Correct answer)
- The loan accumulates negative amortization until the balloon is due
- The interest rate adjusts monthly based on the SOFR index
Correct 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.
Question 3: What is a 'cross-collateralization' clause in a loan agreement?
- A provision requiring two co-borrowers to share equal liability
- A clause that uses multiple assets as collateral to secure a single loan or multiple loans with the same lender (Correct answer)
- An arrangement where two lenders share the same collateral
- A provision that converts unsecured debt to secured debt upon default
Correct 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.
Question 4: Under RESPA (Real Estate Settlement Procedures Act), which practice is prohibited?
- Charging origination fees on conventional mortgages
- Paying or receiving kickbacks or unearned fees for referrals in a real estate settlement transaction (Correct answer)
- Requiring the borrower to use a specific title insurance company
- Providing a Loan Estimate to the borrower within three business days
Correct 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.
Question 5: What is the difference between a 'conforming' and a 'non-conforming' loan?
- Conforming loans have variable rates; non-conforming loans have fixed rates
- Conforming loans meet Fannie Mae/Freddie Mac guidelines and can be sold to them; non-conforming loans do not (Correct answer)
- Conforming loans are guaranteed by the FHA; non-conforming are conventional
- Conforming loans require PMI; non-conforming loans do not
Correct 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.
Question 6: A lender offering a 'teaser rate' on an adjustable-rate mortgage (ARM) is providing:
- A permanent rate discount for first-time homebuyers
- An artificially low introductory interest rate that will adjust upward after an initial period (Correct answer)
- A rate tied to the borrower's credit score that improves over time
- A fixed rate that converts to adjustable after 10 years
Correct 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.
Question 7: What is 'loan flipping' in the context of predatory lending?
- Reselling a performing loan to a secondary market investor at a profit
- Repeatedly refinancing a borrower's loan to generate fees while providing little or no benefit to the borrower (Correct answer)
- Converting a fixed-rate loan to a variable-rate product
- Transferring a mortgage loan between servicers multiple times
Correct 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.
Banking Lending Practices 5
What is the purpose of the CFPB's Ability-to-Repay (ATR) rule?