CMC Mortgage Products and Lending Practices 3 — Questions and Answers
Question 1: Under the Equal Credit Opportunity Act (ECOA), a lender must notify an applicant of an adverse action within how many days of receiving a completed application?
- 15 days
- 30 days (Correct answer)
- 45 days
- 60 days
Correct answer: 30 days
ECOA requires creditors to notify applicants of adverse action within 30 days of receiving a completed credit application.
Question 2: A borrower has a conventional loan with an LTV of 78%. Under the Homeowners Protection Act, what should automatically occur?
- The interest rate must be reduced by the lender
- The lender must automatically cancel PMI (Correct answer)
- The borrower becomes eligible for a streamline refinance
- The loan is automatically sold to Fannie Mae
Correct answer: The lender must automatically cancel PMI
The Homeowners Protection Act mandates automatic PMI cancellation when the loan balance reaches 78% of the original purchase price, provided the borrower is current on payments.
Question 3: Which type of mortgage product is specifically designed to finance both the purchase price of a home and the cost of renovations in a single loan?
- Home Equity Line of Credit (HELOC)
- FHA 203(k) Rehabilitation Loan (Correct answer)
- USDA Guaranteed Loan
- VA Interest Rate Reduction Refinance Loan (IRRRL)
Correct answer: FHA 203(k) Rehabilitation Loan
The FHA 203(k) rehabilitation loan allows borrowers to finance both the acquisition and renovation costs of a property through one mortgage.
Question 4: What is the key distinguishing characteristic of a 'stated income' loan compared to a fully documented loan?
- The borrower states a higher down payment than they actually provide
- The lender accepts borrower's claimed income without third-party verification (Correct answer)
- The interest rate is stated as fixed but can change after year one
- The loan amount is stated in foreign currency
Correct answer: The lender accepts borrower's claimed income without third-party verification
A stated income loan relies on the borrower's self-reported income without requiring W-2s, tax returns, or employer verification.
Question 5: A lender charges 2 discount points on a $300,000 mortgage. How much will the borrower pay at closing for these points?
- $300
- $3,000
- $6,000 (Correct answer)
- $30,000
Correct answer: $6,000
Each discount point equals 1% of the loan amount, so 2 points on a $300,000 loan costs $6,000 at closing.
Question 6: Which secondary market entity primarily purchases conventional conforming loans from lenders and packages them into mortgage-backed securities?
- The Federal Housing Administration (FHA)
- Fannie Mae and Freddie Mac (Correct answer)
- The Veterans Benefits Administration
- The CFPB
Correct answer: Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are the GSEs that purchase conventional conforming loans from lenders to create mortgage-backed securities and maintain market liquidity.
Question 7: A balloon mortgage most commonly requires the borrower to:
- Make increasing monthly payments over the life of the loan
- Pay off the remaining loan balance in a lump sum at a specified future date (Correct answer)
- Re-qualify for the loan every five years based on current rates
- Convert from interest-only to fully amortizing after year 10
Correct answer: Pay off the remaining loan balance in a lump sum at a specified future date
A balloon mortgage requires the borrower to pay off the remaining principal balance in a single large lump-sum payment at a predetermined maturity date.
CMC Mortgage Products and Lending Practices 3
Under the Equal Credit Opportunity Act (ECOA), a lender must notify an applicant of an adverse action within how many days of receiving a completed application?