FiCEP Fundamentals 2 — Questions and Answers
Question 1: Which federal law requires creditors to disclose the Annual Percentage Rate (APR) to borrowers before loan consummation?
- Fair Credit Reporting Act
- Truth in Lending Act (Correct answer)
- Equal Credit Opportunity Act
- Fair Debt Collection Practices Act
Correct answer: Truth in Lending Act
The Truth in Lending Act (TILA) mandates clear disclosure of credit terms including APR before a loan is finalized.
Question 2: A client has a debt-to-income (DTI) ratio of 48%. Which statement best describes their financial situation?
- Their DTI is within the ideal range for mortgage qualification
- Their DTI indicates strong savings capacity
- Their DTI exceeds the typical 43% threshold lenders prefer (Correct answer)
- Their DTI qualifies them for premium interest rates
Correct answer: Their DTI exceeds the typical 43% threshold lenders prefer
A DTI above 43% is generally considered high risk and can hinder mortgage and loan approvals.
Question 3: What is the primary purpose of the Fair Credit Reporting Act (FCRA)?
- To set maximum interest rates on consumer loans
- To prohibit discrimination in credit decisions
- To ensure accuracy and privacy of consumer credit information (Correct answer)
- To regulate debt collection practices
Correct answer: To ensure accuracy and privacy of consumer credit information
The FCRA promotes accuracy, fairness, and privacy of consumer credit reports maintained by credit bureaus.
Question 4: A client wants to build an emergency fund. What is the generally recommended minimum number of months of expenses to save?
- 1 month
- 2 months
- 3 months (Correct answer)
- 6 months
Correct answer: 3 months
Financial counselors typically recommend saving at least 3 months of living expenses as a minimum emergency fund.
Question 5: Which type of interest calculation results in the borrower paying the most total interest over the life of a loan?
- Simple interest
- Compound interest (Correct answer)
- Discount interest
- Add-on interest
Correct answer: Compound interest
Compound interest accrues on both principal and accumulated interest, resulting in higher total interest paid over time.
Question 6: When counseling a client on the 50/30/20 budgeting rule, what percentage is allocated to savings and debt repayment?
- 50%
- 30%
- 20% (Correct answer)
- 10%
Correct answer: 20%
The 50/30/20 rule allocates 20% of after-tax income to savings and debt repayment beyond minimum payments.
Question 7: What is 'lifestyle inflation' in the context of personal finance counseling?
- Increasing income to match rising costs of living
- Spending more as income increases rather than saving the difference (Correct answer)
- Adjusting a budget for Consumer Price Index changes
- Inflation that disproportionately affects lower-income households
Correct answer: Spending more as income increases rather than saving the difference
Lifestyle inflation occurs when a person's spending rises in tandem with their income, preventing wealth accumulation.
FiCEP Fundamentals 2
Which federal law requires creditors to disclose the Annual Percentage Rate (APR) to borrowers before loan consummation?