Practice Exam #11
1) The Mortgage Banker’s Association considers all of the following indicators of predatory lending except:
A. Falsifying loan documents
B. Requiring credit insurance
C. Requiring mortgage insurance
D. Charging excessive prepayment penalties
A. Falsifying loan documents
B. Requiring credit insurance
C. Requiring mortgage insurance
D. Charging excessive prepayment penalties
answer
Answer: C. Mortgage insurance is PMI, a reasonable and lawful requirement if the loan-to-value ratio is above 80%.
2) A predatory lender is trying to do any of the following, except:
A. Become the owner of the property
B. Suck the equity out of the property
C. Profit from the exorbitant fees charged
D. Raise the financial IQ of the homeowner
A. Become the owner of the property
B. Suck the equity out of the property
C. Profit from the exorbitant fees charged
D. Raise the financial IQ of the homeowner
answer
Answer: D. Predatory lenders target people with little sophistication or knowledge of financial matters.
3) Which of the following would be an indication of predatory lending:
A. Requiring the borrower to extract from savings enough cash to provide a 20% down payment
B. Pay a higher interest rate because of negative credit issues
C. Increasing interest rates for late payments
D. Refusing the borrower a negative amortization loan
A. Requiring the borrower to extract from savings enough cash to provide a 20% down payment
B. Pay a higher interest rate because of negative credit issues
C. Increasing interest rates for late payments
D. Refusing the borrower a negative amortization loan
answer
Answer: C. This is a violation of the Home Ownership and Equity Protection Act (HOEPA). The other actions strengthen the loan and enhance the borrower’s chances of being successful in repayment of the loan.
4) Which of the following laws would be considered an Anti-Predatory Lending Law:
A. ECOA
B. HOEPA
C. HMDA
D. FACTA
A. ECOA
B. HOEPA
C. HMDA
D. FACTA
answer
Answer: B. Yes, the Home Ownership and Equity Protection Act is designed to prevent lenders from heaping additional costs and penalties on top of an already high cost loan.
5) Which of the following terms refers to a “high-cost” loan:
A. Section 32 loans
B. Higher-priced loans
C. As defined by 2009 TILA amendments
D. HELOC
A. Section 32 loans
B. Higher-priced loans
C. As defined by 2009 TILA amendments
D. HELOC
ANSWER
Answer: A. Yes, Section 32 loans qualify as high-cost loans under HOEPA.
6) All of the following would trigger a high-cost loan under HOEPA, except:
A. The APR on a first mortgage exceeds the rates in Treasury securities of comparable maturity by more than eight percentage points
B. The APR on a junior loan exceeds the prime offer rate by 3.5 percentage points
C. The APR on a second loan exceeds the rates in Treasury securities by more than ten percentage points
D. The total points and fees paid by the consumer exceed eight percent of the loan amount
A. The APR on a first mortgage exceeds the rates in Treasury securities of comparable maturity by more than eight percentage points
B. The APR on a junior loan exceeds the prime offer rate by 3.5 percentage points
C. The APR on a second loan exceeds the rates in Treasury securities by more than ten percentage points
D. The total points and fees paid by the consumer exceed eight percent of the loan amount
ANSWER
Answer: B. This applies to the 2009 Amendment to the Truth in Lending Act and applies to what are called “higher-priced loans.”
7) Which of the following are lender prohibitions for balloon payments on HOEPA loans:
A. Balloon payments are prohibited on HOEPA loans
B. Balloon payments are allowed on HOEPA loans regardless of term
C. Balloon payments are permitted on HOEPA loans with terms of at least two years
D. Balloon payments are prohibited on HOEPA loans if the term is less than five years
A. Balloon payments are prohibited on HOEPA loans
B. Balloon payments are allowed on HOEPA loans regardless of term
C. Balloon payments are permitted on HOEPA loans with terms of at least two years
D. Balloon payments are prohibited on HOEPA loans if the term is less than five years
ANSWER
Answer: D. Yes, this is the minimum requirement.
8) Which of the following is true regarding amortization with HOEPA loans:
A. Payments must at least partially amortize the loan
B. Negative amortization is permitted for a term of no longer than five years
C. Negative amortization is prohibited at the outset of the loan, but would be permissible if an interest or payment adjustment caused negative amortization later in the term
D. Interest only payments are permissible under HOEPA
A. Payments must at least partially amortize the loan
B. Negative amortization is permitted for a term of no longer than five years
C. Negative amortization is prohibited at the outset of the loan, but would be permissible if an interest or payment adjustment caused negative amortization later in the term
D. Interest only payments are permissible under HOEPA
ANSWER
Answer: D. Yes, the preference is that payments reduce principal, but at the very least, must cover the interest due.
9) Which of the following are restrictions on pre-payment penalties on HOEPA loans:
A. They are limited to two years
B. They are limited to five years
C. They are prohibited altogether if the consumer’s total monthly debts exceed 50% of their gross income
D. Both "B" and "C"
A. They are limited to two years
B. They are limited to five years
C. They are prohibited altogether if the consumer’s total monthly debts exceed 50% of their gross income
D. Both "B" and "C"
ANSWER
Answer: D. Yes, this is correct.
10) Which of the following would be considered violations of HOEPA:
A. Leading a borrower to believe that he/she must complete the credit transaction even though they could rescind
B. Include three advance payments from the loan proceeds
C. Increasing interest rates on the consumer if he/she falls behind on payments
D. All of the above
A. Leading a borrower to believe that he/she must complete the credit transaction even though they could rescind
B. Include three advance payments from the loan proceeds
C. Increasing interest rates on the consumer if he/she falls behind on payments
D. All of the above
ANSWER
Answer: D. Yes, all of these are prohibitions of HOEPA. Consumer protection is the obvious reason.
11) HOEPA prohibits refinancing a high-cost loan within a one-year period of time except for which of the following reasons:
A. Fees the borrower will have to pay are reasonable
B. The refinance is clearly in the borrower’s best interest
C. The transaction represents a particularly good opportunity for the broker
D. The borrower’s total fees are under $10,000
A. Fees the borrower will have to pay are reasonable
B. The refinance is clearly in the borrower’s best interest
C. The transaction represents a particularly good opportunity for the broker
D. The borrower’s total fees are under $10,000
ANSWER
Answer: B. Yes, this would be the only reason to justify such a transaction.
12) Under HOEPA, a lender may not call a loan before maturityexcept for which of the following reasons:
A. The borrower has jeopardized the value of the collateral by causing or allowing damage to the property
B. A pattern of late payments
C. Modifications to the property
D. Zoning change
A. The borrower has jeopardized the value of the collateral by causing or allowing damage to the property
B. A pattern of late payments
C. Modifications to the property
D. Zoning change
ANSWER
Answer: A. Yes, this and reasons of fraud, material misrepresentation, or default would all be reasonable causes for default.
13) Under HOEPA, a lender must verify a borrower’s income in any of the following ways except:
A. By compiling written income verifications
B. FICO scores
C. Debt to income ratios
D. Cash flow analysis
A. By compiling written income verifications
B. FICO scores
C. Debt to income ratios
D. Cash flow analysis
ANSWER
Answer: B. FICO scores will not verify income, cash flow, or ability to repay the loan.
14) Which of the following best indicates actual fraud:
A. Mistake
B. Negligence
C. Deceit
D. Maliciousness
A. Mistake
B. Negligence
C. Deceit
D. Maliciousness
answer
Answer: C. Actual fraud is also known as intent to deceive. Most mortgage fraud is actual fraud.
15) All of the following would indicate constructive fraud, except:
A. Negligence
B. Active concealment
C. Misrepresentation
D. Carelessness
A. Negligence
B. Active concealment
C. Misrepresentation
D. Carelessness
answer
Answer: B. Yes, all of these represent constructive fraud except “B”, active concealment. Even though constructive fraud is not intentional, it is still serious because it places the client at a disadvantage.
16) If an individual takes a loan application, orders a credit report, and assembles other forms and documents for evaluation, which loan process does this represent:
A. Processing
B. Origination
C. Underwriting
D. Servicing
A. Processing
B. Origination
C. Underwriting
D. Servicing
answer
Answer: B. Yes, this is mortgage loan origination.
17) If an individual evaluates the information in a file and decides whether or not the lender should make the new loan, which loan process does this represent:
A. Processing
B. Origination
C. Underwriting
D. Servicing
A. Processing
B. Origination
C. Underwriting
D. Servicing
answer
Answer: C. Yes, this is underwriting. This is always performed by the funding source, never by the broker.
18) If an individual verifies the information in the file, sends out employment verification forms, and works with the title company, which function does this represent:
A. Processing
B. Origination
C. Underwriting
D. Servicing
A. Processing
B. Origination
C. Underwriting
D. Servicing
answer
Answer: A. Yes, this is processing, a very necessary function.
19) If an individual maintains a loan after it has closed, receives payments, and provides an accounting of the loan, which function does this represent:
A. Processing
B. Origination
C. Underwriting
D. Servicing
A. Processing
B. Origination
C. Underwriting
D. Servicing
answer
Answer: D. Yes, this process is called servicing.
20) Freddie Mac Form 1003 is also known as which of the following:
A. Notice of Default
B. IRS Form 4506-T
C. Freddie Mac Form 65
D. Section 21 Disclosure Form
A. Notice of Default
B. IRS Form 4506-T
C. Freddie Mac Form 65
D. Section 21 Disclosure Form
answer
Answer: C. Yes, this is the 1003, the Uniform Residential Loan Application.
21) According to RESPA, what is a loan application:
A. A form that presents the borrower’s financial information
B. The submission of a borrower’s financial information in anticipation of a credit decision
C. Primarily information about the property in question
D. It is primarily a statement of the net worth of the borrower
A. A form that presents the borrower’s financial information
B. The submission of a borrower’s financial information in anticipation of a credit decision
C. Primarily information about the property in question
D. It is primarily a statement of the net worth of the borrower
answer
Answer: B. Yes, this is the best definition of a loan application among these answer choices.
22) The significance of a lender receiving a completed application is which of the following:
A. It triggers mandated disclosures
B. The lender is now ready to make a decision
C. The lender has all of the information it will need
D. The lender cannot require any further information
A. It triggers mandated disclosures
B. The lender is now ready to make a decision
C. The lender has all of the information it will need
D. The lender cannot require any further information
answer
Answer: A. This is most important in terms of the legal requirements of receiving a completed application.
23) If material changes to income or assets occur after a borrower has signed and submitted the loan application, does the borrower have any obligations to the lender:
A. No, not if the borrower has signed and dated the 1003
B. No, not if all borrowers have signed
C. Yes, they are required to update material information if there are any changes after signing and prior to closing
D. Yes, but only if the material changes exceed a 10% margin on the negative side
A. No, not if the borrower has signed and dated the 1003
B. No, not if all borrowers have signed
C. Yes, they are required to update material information if there are any changes after signing and prior to closing
D. Yes, but only if the material changes exceed a 10% margin on the negative side
answer
Answer: C. This should be common sense.
24) Which of the following would the lender be interested in knowing about the borrower:
A. How many siblings they have
B. If they are a co-signor on any other debt
C. Their ethnicity
D. Any physical disability
A. How many siblings they have
B. If they are a co-signor on any other debt
C. Their ethnicity
D. Any physical disability
answer
Answer: B. Of course. This is a material fact.
25) A Uniform Residential Loan Application should be filled out with which of the following:
A. Accuracy
B. Truthfulness
C. Enthusiasm
D. Both "A" and "B"
A. Accuracy
B. Truthfulness
C. Enthusiasm
D. Both "A" and "B"
answer
Answer: D. Yes, a loan application must be filled out truthfully, and also be accurate.
26) An applicant on a 1003 must not conceal which of the following:
A. If they are obligated to pay alimony or child support
B. If they intend to occupy the property as their primary residence
C. If they have any outstanding judgments, bankruptcies, or foreclosures
D. All of the above
A. If they are obligated to pay alimony or child support
B. If they intend to occupy the property as their primary residence
C. If they have any outstanding judgments, bankruptcies, or foreclosures
D. All of the above
answer
Answer: D. Yes, all of these must be freely disclosed on a loan application.
27) When must a Co-Borrower’s information be included on a Uniform Residential Loan Application:
A. Only when the income or assets of the Co-Borrower will be used as a basis for loan qualification
B. If the income or assets of the Co-Borrower will not be used as a basis for loan qualification, but their liabilities must be considered because the Co-Borrower has community property rights and the Borrower resides in a community property state
C. If the borrower is relying on other property located in a community property state as a basis for repayment of the loan
D. Both "B" and "C"
A. Only when the income or assets of the Co-Borrower will be used as a basis for loan qualification
B. If the income or assets of the Co-Borrower will not be used as a basis for loan qualification, but their liabilities must be considered because the Co-Borrower has community property rights and the Borrower resides in a community property state
C. If the borrower is relying on other property located in a community property state as a basis for repayment of the loan
D. Both "B" and "C"
answer
Answer: D. Yes, these reasons, as well as if the security property resides in a community property state, or when the income or assets of the Co-Borrower will be used as a basis for loan qualification.
28) A lender would be interested in knowing the net worth of a borrower for all of the following reasons except:
A. To ensure that the payment of down payment and closing costs are not borrowed
B. To indicate that the borrower is in the top 50% of wage earners
C. To indicate that the borrower has adequate reserves to handle property-related emergencies
D. To show that the borrower has some ability to handle money
A. To ensure that the payment of down payment and closing costs are not borrowed
B. To indicate that the borrower is in the top 50% of wage earners
C. To indicate that the borrower has adequate reserves to handle property-related emergencies
D. To show that the borrower has some ability to handle money
answer
Answer: B. Yes, this is not a requirement.
29) Which of the following practices is a lender likely to do to verify the legitimacy of a borrower’s down payment:
A. Will want to know the source of a borrower’s down payment for the first 10% of a conventional loan
B. Require three months of bank statements
C. Verification of Deposit form from borrower
D. Gift letter from donor stating the down payment can be paid back over time
A. Will want to know the source of a borrower’s down payment for the first 10% of a conventional loan
B. Require three months of bank statements
C. Verification of Deposit form from borrower
D. Gift letter from donor stating the down payment can be paid back over time
answer
Answer: C. Yes, this is the only correct answer.
30) A lender’s employment documentation requirements may include all of the following except:
A. Self-employed borrowers will have to provide personal and corporate tax returns for a minimum of two years
B. Original pay stubs for a 60-day period
C. Verification of Employment form
D. Appropriate W-2 forms
A. Self-employed borrowers will have to provide personal and corporate tax returns for a minimum of two years
B. Original pay stubs for a 60-day period
C. Verification of Employment form
D. Appropriate W-2 forms
answer
Answer: B. Thirty days, not 60.
31) All of the following would meet a lender’s continuous employment requirements except:
A. The borrower has been employed by the AG Disposal Company for fifteen years
B. The borrower has been employed by U.C. Irvine as a professor for six months after recently obtaining his Ph.D
C. The borrower has been a parole officer for 18 months—previous employment with a supermarket chain
D. The borrower has been a sales manager with Burlington Coat Factory for one year—previous employment as sales manager for Sears for four years
A. The borrower has been employed by the AG Disposal Company for fifteen years
B. The borrower has been employed by U.C. Irvine as a professor for six months after recently obtaining his Ph.D
C. The borrower has been a parole officer for 18 months—previous employment with a supermarket chain
D. The borrower has been a sales manager with Burlington Coat Factory for one year—previous employment as sales manager for Sears for four years
answer
Answer: C. This does not meet the requirement for continuous employment because the employment has been in different fields. “B” is acceptable because of special education and training.
32) When a loan application has been properly completed, what further information does a lender seek:
A. Insurance
B. Borrower analysis
C. Property analysis
D. All of the above
A. Insurance
B. Borrower analysis
C. Property analysis
D. All of the above
answer
Answer: D. Yes, all of this information needs to be fleshed out to see the full picture of acceptable risk.
33) Property analysis could include any of the following, except:
A. Housing expense ratio
B. Appraisal
C. Title reports
D. Toxic waste report
A. Housing expense ratio
B. Appraisal
C. Title reports
D. Toxic waste report
answer
Answer: A. This has to do with the borrower analysis.
34) Borrower analysis could include any of the following, except:
A. Income
B. Credit
C. Title report
D. Total debt to income ratio
A. Income
B. Credit
C. Title report
D. Total debt to income ratio
answer
Answer: C. This is about the property, not the borrower.
35) What types of insurance would be under consideration as the lender prepares to make a loan decision:
A. Hazard insurance
B. Flood insurance
C. Private mortgage insurance (PMI)
D. Any and all of the above
A. Hazard insurance
B. Flood insurance
C. Private mortgage insurance (PMI)
D. Any and all of the above
answer
Answer: D. Hazard (fire) insurance would always be required. The property may not be in a flood zone, so flood insurance may not be required. And if the loan-to-value ratio is not over 80%, PMI would not be required.
36) The final decision maker on a loan application is usually which of the following parties:
A. Processor
B. Underwriter
C. Mortgage loan originator
D. Bank executive
A. Processor
B. Underwriter
C. Mortgage loan originator
D. Bank executive
answer
Answer: B. This is correct.
37) All of the following are functions of a loan processor, except:
A. Review and verify all information
B. Assemble the loan package
C. Make a recommendation to the lender
D. Submit the package to an underwriter
A. Review and verify all information
B. Assemble the loan package
C. Make a recommendation to the lender
D. Submit the package to an underwriter
answer
Answer: C. Yes, this is not a function of a processor.
38) What benefits would a lender have in using an automated underwriting program:
A. Though it is more expensive, it is quicker
B. Though it is subject to error, it is less expensive
C. It is faster and quicker
D. It is prestigious
A. Though it is more expensive, it is quicker
B. Though it is subject to error, it is less expensive
C. It is faster and quicker
D. It is prestigious
answer
Answer: C. Yes, it reduces time and costs to close a loan.
39) In qualifying a borrower, a lender looks at all of the following, except:
A. Income
B. Debt
C. Character
D. Assets
A. Income
B. Debt
C. Character
D. Assets
answer
Answer: C. The level of a person’s character may be inferred from the credit report, but is not otherwise observable in this context. Also assets, liabilities, and qualifying ratios are under examination.
40) A borrower’s overall financial situation is comprised of all of the following, except:
A. Assets
B. Credit history
C. Income
D. Net worth
A. Assets
B. Credit history
C. Income
D. Net worth
answer
Answer: A. “Assets” is a subset of net worth, and therefore not the best answer.
41) Regarding the borrower’s analysis, the primary concern throughout the underwriting process is which of the following:
A. Income
B. Risk
C. Equity
D. Hypothecation
A. Income
B. Risk
C. Equity
D. Hypothecation
answer
Answer: B. Yes, this is the primary concern for the lender.
42) A fundamental question that the underwriter must answer in the underwriting process is which of the following:
A. In the event of default, does the borrower have sufficient cash to reinstate the loan?
B. If this loan is approved, will hypothecation play an important part in the process?
C. In the event of default, will the property pledged as collateral be of sufficient value to assure recovery of the loan amount for the lender?
D. Will the note be secured by a mortgage contract or deed of trust?
A. In the event of default, does the borrower have sufficient cash to reinstate the loan?
B. If this loan is approved, will hypothecation play an important part in the process?
C. In the event of default, will the property pledged as collateral be of sufficient value to assure recovery of the loan amount for the lender?
D. Will the note be secured by a mortgage contract or deed of trust?
answer
Answer: C. This is what is significant to the lender. If the borrower defaults, does the lender lose, or are they able to recover the amount loaned?
43) For the purpose of net worth, which of the following is the best definition of an asset:
A. Anything owned by the borrower
B. Any item of value owned by the borrower
C. Anything of value owned by the borrower where the borrower doesn’t owe more than 50% of the value of the item
D. For the purpose of net worth, an asset includes only real property
A. Anything owned by the borrower
B. Any item of value owned by the borrower
C. Anything of value owned by the borrower where the borrower doesn’t owe more than 50% of the value of the item
D. For the purpose of net worth, an asset includes only real property