CRB Lending & Credit Products 2 — Questions and Answers
Question 1: What is the Debt-to-Income (DTI) ratio primarily used to evaluate in consumer lending?
- The proportion of a borrower's monthly gross income consumed by monthly debt obligations (Correct answer)
- The proportion of a borrower's total assets relative to outstanding debts
- The interest rate spread between a loan and a benchmark index
- The ratio of secured debt to unsecured debt in the borrower's profile
Correct answer: The proportion of a borrower's monthly gross income consumed by monthly debt obligations
DTI divides total monthly debt payments by gross monthly income, giving lenders a snapshot of whether the borrower can afford additional debt service.
Question 2: Under the Qualified Mortgage (QM) rule, what is the maximum back-end DTI ratio generally permitted?
- 28%
- 36%
- 43% (Correct answer)
- 50%
Correct answer: 43%
The CFPB's Qualified Mortgage rule generally caps the back-end DTI at 43%, ensuring the borrower has a reasonable ability to repay the mortgage.
Question 3: What is the purpose of Private Mortgage Insurance (PMI) on a conventional loan?
- It insures the borrower's life in case of death during the loan term
- It protects the lender if the borrower defaults when LTV exceeds 80% (Correct answer)
- It reimburses the borrower for property damage covered by homeowner's insurance
- It guarantees the interest rate will not increase on an adjustable-rate mortgage
Correct answer: It protects the lender if the borrower defaults when LTV exceeds 80%
PMI protects the lender — not the borrower — against loss if the borrower defaults on a conventional mortgage with an LTV greater than 80%.
Question 4: On a 5/1 Adjustable-Rate Mortgage (ARM), what do the numbers 5 and 1 represent?
- 5 years of interest-only payments followed by 1 year of full amortization
- The rate is fixed for 5 years, then adjusts every 1 year thereafter (Correct answer)
- The loan has a 5% rate cap and adjusts a maximum of 1% per year
- The initial rate is 5% and the margin is 1% above the index
Correct answer: The rate is fixed for 5 years, then adjusts every 1 year thereafter
On a 5/1 ARM, the interest rate is fixed for the first 5 years and then resets annually based on a specified index plus a margin.
Question 5: A jumbo mortgage differs from a conforming mortgage primarily because it:
- Carries a federally guaranteed repayment provision
- Exceeds the loan limits set by Fannie Mae and Freddie Mac (Correct answer)
- Requires the borrower to pay FHA mortgage insurance premiums
- Has a shorter maximum loan term of 15 years
Correct answer: Exceeds the loan limits set by Fannie Mae and Freddie Mac
A jumbo loan exceeds the conforming loan limits established by the FHFA for Fannie Mae and Freddie Mac, making it ineligible for purchase by those GSEs.
Question 6: What is a balloon payment mortgage?
- A mortgage in which monthly payments increase gradually over the loan term
- A mortgage with a large lump-sum payment due at the end of a short term (Correct answer)
- A mortgage that adjusts its interest rate based on inflation each year
- A mortgage in which only interest is paid and principal is never reduced
Correct answer: A mortgage with a large lump-sum payment due at the end of a short term
A balloon mortgage features smaller regular payments based on a long amortization schedule but requires the entire remaining balance to be paid in full at the end of a shorter term.
Question 7: When underwriting a consumer loan, a retail banker reviews the 'Five Cs of Credit.' Which of the following is NOT one of the Five Cs?
- Capacity
- Collateral
- Currency (Correct answer)
- Character
Correct answer: Currency
The Five Cs of Credit are Character, Capacity, Capital, Collateral, and Conditions — 'Currency' is not among them.
CRB Lending & Credit Products 2
What is the Debt-to-Income (DTI) ratio primarily used to evaluate in consumer lending?