CRU Client Advisory & Consultation 3 — Questions and Answers
Question 1: Under ECOA, within how many days must a lender provide an adverse action notice to a denied applicant?
- 10 days
- 30 days (Correct answer)
- 45 days
- 60 days
Correct answer: 30 days
ECOA requires lenders to provide a statement of specific reasons for adverse action within 30 days of a completed application.
Question 2: A borrower's debt-to-income ratio is 46% on a conventional loan file. Which advisory action is most appropriate?
- Approve the file since 46% is within the standard 50% DTI limit for all loan types
- Advise the borrower their DTI may require compensating factors or a different loan product, as conventional loans typically cap at 45% (Correct answer)
- Deny the loan immediately without explanation since 46% exceeds guidelines
- Ignore the DTI ratio if the credit score is above 740
Correct answer: Advise the borrower their DTI may require compensating factors or a different loan product, as conventional loans typically cap at 45%
Most conventional guidelines cap DTI at 45% (some allow 50% with strong compensating factors), so the underwriter should discuss options or compensating factors with the borrower.
Question 3: A client asks about the difference between a fixed-rate and an adjustable-rate mortgage in terms of long-term risk. What is the most accurate advisory statement?
- ARMs always cost more than fixed-rate mortgages over the life of the loan
- Fixed-rate mortgages carry no risk while ARMs are always the riskier choice regardless of market conditions
- A fixed-rate mortgage offers payment certainty, while an ARM may offer a lower initial rate but exposes the borrower to rate increases after the initial period (Correct answer)
- ARMs are only available to borrowers with excellent credit scores above 800
Correct answer: A fixed-rate mortgage offers payment certainty, while an ARM may offer a lower initial rate but exposes the borrower to rate increases after the initial period
Fixed-rate loans provide payment stability, while ARMs offer initial savings but carry interest rate risk after the fixed period ends.
Question 4: Which situation would trigger the right of rescission under the Truth in Lending Act?
- A borrower refinancing their primary residence with a new lender (Correct answer)
- A first-time homebuyer purchasing a primary residence
- A borrower taking out a home equity loan on an investment property
- A commercial real estate transaction
Correct answer: A borrower refinancing their primary residence with a new lender
TILA's three-day right of rescission applies to refinances of primary residences with a new lender, giving borrowers time to cancel without penalty.
Question 5: A borrower is considering using gift funds for their down payment. What must the underwriter verify and advise the client about?
- Gift funds are never allowed on any loan type
- The gift must be repaid within 12 months of closing
- A gift letter must confirm the funds are not a loan, and the donor and transfer must be documented per loan program guidelines (Correct answer)
- Gift funds can only come from employers, not family members
Correct answer: A gift letter must confirm the funds are not a loan, and the donor and transfer must be documented per loan program guidelines
Loan guidelines require a signed gift letter stating no repayment is expected, plus documentation of the donor's ability to give and the transfer of funds.
Question 6: What is the primary purpose of counseling a client about title insurance during the consultation process?
- To upsell an optional product with no practical value
- To explain that title insurance protects against claims arising from past ownership defects that could threaten the borrower's ownership (Correct answer)
- To inform borrowers that title insurance covers property damage from natural disasters
- To explain that title insurance is required only on investment properties
Correct answer: To explain that title insurance protects against claims arising from past ownership defects that could threaten the borrower's ownership
Title insurance protects the lender and/or owner from financial loss due to defects in title such as liens, fraud, or undisclosed heirs discovered after closing.
Question 7: When a borrower is self-employed, which additional documentation requirement should the underwriter advise them to prepare?
- Only a letter from their accountant confirming employment
- Two years of personal and business tax returns, year-to-date profit and loss statement, and business bank statements (Correct answer)
- One pay stub and a copy of their business license
- A single year of tax returns if the business has been operating for more than five years
Correct answer: Two years of personal and business tax returns, year-to-date profit and loss statement, and business bank statements
Self-employed borrowers must typically provide two years of both personal and business returns, a P&L, and business bank statements to verify stable income.
CRU Client Advisory & Consultation 3
Under ECOA, within how many days must a lender provide an adverse action notice to a denied applicant?