Practice Exam #7
1. Which of the following best defines negative amortization:
A. It is the same as interest only, with no interest being paid.
B. Not only is no principal being paid, but not all of the interest due is being paid, hence the loan balance is growing due to this deferred interest.
C. It is the same as a partially amortized loan, with the principal reducing very slowly.
D. The principal is reducing so slowly it is a negative factor in the lives of the borrowers.
A. It is the same as interest only, with no interest being paid.
B. Not only is no principal being paid, but not all of the interest due is being paid, hence the loan balance is growing due to this deferred interest.
C. It is the same as a partially amortized loan, with the principal reducing very slowly.
D. The principal is reducing so slowly it is a negative factor in the lives of the borrowers.
answer
The correct answer is B. If the loan continues in a negative amortization status, the balance of the loan will soon be significantly greater than it was at the beginning of the loan. This is because unpaid interest is accruing and is being added to the loan balance.
2. Which of the following is the most adequate definition of rescind:
A. To withdraw.
B. To take back.
C. To annul or to vacate.
D. Any of the above.
A. To withdraw.
B. To take back.
C. To annul or to vacate.
D. Any of the above.
answer
The correct answer is D. All of these answer choices provide an adequate understanding of what rescind means.
3. What is the significance of the creditor or mortgage broker receiving an official loan application from a consumer?
A. It starts the processing of the loan request.
B. It triggers mandated disclosures to the borrower.
C. It places the creditor and broker under obligation to the borrower.
D. All of the above.
A. It starts the processing of the loan request.
B. It triggers mandated disclosures to the borrower.
C. It places the creditor and broker under obligation to the borrower.
D. All of the above.
answer
The correct answer is D. Yes, all of these are set in motion.
4. According to the SAFE Act, which of the following must have the MLO license:
A. Anyone who for compensation or expectation of it, originates loans.
B. Underwriters.
C. Contract loan processors.
D. A and C.
A. Anyone who for compensation or expectation of it, originates loans.
B. Underwriters.
C. Contract loan processors.
D. A and C.
answer
The correct answer is D. Yes, underwriters do not have to have the MLO designation. And a loan processor working for one company whose wages are reported on a W-2 form does not have to have the MLO designation. But a contract loan processor who services more than one client must have the MLO designation.
5. Which of the following is the best, most inclusive definition of a nontraditional mortgage product:
A. A mortgage where the payment changes during the term.
B. Anything other than a fully amortized loan.
C. Anything other than a 30-year, fully amortized, fixed rate loan.
D. Same as a nonconforming loan.
A. A mortgage where the payment changes during the term.
B. Anything other than a fully amortized loan.
C. Anything other than a 30-year, fully amortized, fixed rate loan.
D. Same as a nonconforming loan.
ANSWER
The correct answer is C. This is the definition of a nontraditional mortgage product according to the SAFE Act.
6. Loan programs are broadly classified as which of the following:
A. Conventional.
B. Government agency sponsored.
C. Conforming or nonconforming.
D. All of the above.
A. Conventional.
B. Government agency sponsored.
C. Conforming or nonconforming.
D. All of the above.
ANSWER
The correct answer is D. Yes, these are the broad categories.
7. Why are such a wide variety of mortgage products offered by lenders:
A. To meet the varied needs of borrowers.
B. To comply with federal mandates.
C. To comply with FANNIE MAE guidelines.
D. To ensure that those with less than perfect credit can buy a house.
A. To meet the varied needs of borrowers.
B. To comply with federal mandates.
C. To comply with FANNIE MAE guidelines.
D. To ensure that those with less than perfect credit can buy a house.
ANSWER
The correct answer is A. The objective is to ensure that a borrower can be accepted for a loan program that he or she can be successful in paying off. Unfortunately, not every applicant qualifies for a loan.
8. In a conventional loan with a 15-year term, which of the following is the primary reason that the interest rate is lower than for a 30-year term loan:
A. The borrower needs it to be lower in order to afford the payment on the shorter term.
B. There is less risk for the lender.
C. The interest rate is actually higher on 15-year loans due to a statistically higher default rate.
D. So the borrower can reduce the interest paid with the 15-year loan.
A. The borrower needs it to be lower in order to afford the payment on the shorter term.
B. There is less risk for the lender.
C. The interest rate is actually higher on 15-year loans due to a statistically higher default rate.
D. So the borrower can reduce the interest paid with the 15-year loan.
ANSWER
The correct answer is B. There is less risk because the lender is exposed to risk for only half the time of a 30-year loan.
9. Which of the following terms goes with a fully amortized loan:
A. Balloon payment.
B. Self-liquidating.
C. Interest only.
D. Partially amortized.
A. Balloon payment.
B. Self-liquidating.
C. Interest only.
D. Partially amortized.
ANSWER
The correct answer is B. Yes, when the last payment has been made, the debt has been liquidated.
10. Which of the following statements best identifies with a conventional loan:
A. A loan insured or guaranteed by a government entity.
B. A loan purchased by a government-sponsored enterprise.
C. A loan not insured or guaranteed by a government entity.
D. A loan that meets Fannie Mae/Freddie Mac standards and can be sold on the secondary market.
A. A loan insured or guaranteed by a government entity.
B. A loan purchased by a government-sponsored enterprise.
C. A loan not insured or guaranteed by a government entity.
D. A loan that meets Fannie Mae/Freddie Mac standards and can be sold on the secondary market.
ANSWER
The correct answer is C. B and D would be similar, but the fact that the loan meets Fannie and Freddie standards and is acceptable for purchase makes it a conforming loan, not conventional.
11. All of the following statements are true regarding fully amortized loans, except:
A. Payments remain constant for the entire life of the loan.
B. The amounts applied to principal and interest are adjusted each month.
C. At the end of the loan term, most of the monthly payment goes toward interest.
D. Total payments over the life of the loan pay off the entire balance of principal and interest due at the end of the term.
A. Payments remain constant for the entire life of the loan.
B. The amounts applied to principal and interest are adjusted each month.
C. At the end of the loan term, most of the monthly payment goes toward interest.
D. Total payments over the life of the loan pay off the entire balance of principal and interest due at the end of the term.
ANSWER
The correct answer is C. At the end of the term, most of the monthly payment goes toward principal. At the beginning of the term, most of the monthly payment goes toward interest.
12. When loans meet Fannie Mae/Freddie Mac standards and can be sold on the secondary market, they are called which of the following:
A. Conforming.
B. Conventional.
C. Traditional.
D. Subprime.
A. Conforming.
B. Conventional.
C. Traditional.
D. Subprime.
ANSWER
The correct answer is A. Conforming is the term that should jump out when considering meeting secondary market standards.
13. Which of the following statements is true about Adjustable Rate Mortgages (ARMs):
A. An ARM cannot be called a conventional mortgage because conventional mortgages are fixed rate loans.
B. Conventional mortgages can involve negative amortization in special circumstances.
C. Conventional mortgages can involve planned periods of interest only payments as long as there is a period of full amortization to pay off the loan.
D. Conventional mortgages can involve ARMs.
A. An ARM cannot be called a conventional mortgage because conventional mortgages are fixed rate loans.
B. Conventional mortgages can involve negative amortization in special circumstances.
C. Conventional mortgages can involve planned periods of interest only payments as long as there is a period of full amortization to pay off the loan.
D. Conventional mortgages can involve ARMs.
ANSWER
The correct answer is D. Adjustable rate conventional mortgages do exist.
14. Which of the following statements refer to nonconforming loans:
A. Anything other than 30-year fixed.
B. These loans do not meet the standards to be sold to Fannie Mae or Freddie Mac.
C. ARMs.
D. Synonymous with subprime.
A. Anything other than 30-year fixed.
B. These loans do not meet the standards to be sold to Fannie Mae or Freddie Mac.
C. ARMs.
D. Synonymous with subprime.
answer
The correct answer is B. Regarding D, all subprime loans are nonconforming, but not all nonconforming loans are subprime. Regarding A, this answer refers to nontraditional, not nonconforming.
15. Which of the following would be a primary reason for a loan to be classified as nonconforming:
A. Secondary financing.
B. Size of the loan.
C. Jumbo loan.
D. Both B and C.
A. Secondary financing.
B. Size of the loan.
C. Jumbo loan.
D. Both B and C.
answer
The correct answer is D. Yes, the size of the loan is one primary reason for a loan to be called nonconforming. A jumbo loan is generally considered at this time to be over $417,000.
16. Which of the following would be a primary reason for a loan to be classified as nonconforming:
A. Substandard credit of the borrower.
B. Creative financing.
C. It is intended as a portfolio loan.
D. All fees were not disclosed.
A. Substandard credit of the borrower.
B. Creative financing.
C. It is intended as a portfolio loan.
D. All fees were not disclosed.
answer
The correct answer is A. While some lenders might offer a loan to B and C borrowers, such a loan would not be sold to Fannie Mae or Freddie Mac.
17. Which of the following statements match up with subprime loans:
A. B-C credit.
B. Portfolio loans.
C. Higher interest rates and fees.
D. All of the above.
A. B-C credit.
B. Portfolio loans.
C. Higher interest rates and fees.
D. All of the above.
answer
The correct answer is D. Subprime loans are still being made today, even in California. Responsible MLOs and underwriters will want to see compensating factors such as larger down payments or secondary financing to ensure that the loan can be paid off. These loans will remain in a lender’s portfolio rather than be sold on the secondary market.
18. Which of the following would be a way for a borrower to get a conventional loan without making a 20% down payment:
A. Straw buyer.
B. Secondary financing.
C. Stated income.
D. Cash paid to seller outside of escrow.
A. Straw buyer.
B. Secondary financing.
C. Stated income.
D. Cash paid to seller outside of escrow.
answer
The correct answer is B. This is where a borrower borrows money from a source other than the primary lender.
19. Which of the following would be acceptable ways for a borrower to obtain secondary financing:
A. Seller carry back.
B. An additional junior lien from an outside source.
C. The seller could offer a conventional 80/20 loan.
D. All of the above.
A. Seller carry back.
B. An additional junior lien from an outside source.
C. The seller could offer a conventional 80/20 loan.
D. All of the above.
answer
The correct answer is D. Yes, all of these would be acceptable ways to obtain secondary financing. Regarding C, if the loans meet all standards and criteria, the first can still be sold to Fannie and Freddie.
20. Which of the following best describes combined loan-to-value ratio (CLTV):
A. The percentage of the property value that is borrowed only after a refinance.
B. The percentage of the property value that is borrowed through a combination of more than one loan.
C. The loan-to-value ratio from a first lien averaged together with the refi of another lien at a later time.
D. It is the deficiency ratio between what a property is worth and a higher loan balance when the property is upside down.
A. The percentage of the property value that is borrowed only after a refinance.
B. The percentage of the property value that is borrowed through a combination of more than one loan.
C. The loan-to-value ratio from a first lien averaged together with the refi of another lien at a later time.
D. It is the deficiency ratio between what a property is worth and a higher loan balance when the property is upside down.
answer
The correct answer is B. Example: a first mortgage and a second home equity loan.
21. To accept secondary financing, a lender would probably require which of the following:
A. A subordination clause to ensure that the first mortgage always takes priority.
B. A minimum of 5% down payment.
C. Regularly scheduled payments.
D. All of the above.
A. A subordination clause to ensure that the first mortgage always takes priority.
B. A minimum of 5% down payment.
C. Regularly scheduled payments.
D. All of the above.
answer
The correct answer is D. Yes, all of these would probably be required for a lender to accept secondary financing in this market.
22. Which of the following is the lender’s concern regarding a borrower taking on negative amortization:
A. The borrower might not be able to keep up with the payments.
B. The payments might be too high.
C. The borrower might never pay off the loan, even if he made all payments as scheduled.
D. At the end of the term, the property value might be lower than the loan balance and not qualify for a refi that could pay the balloon payment.
A. The borrower might not be able to keep up with the payments.
B. The payments might be too high.
C. The borrower might never pay off the loan, even if he made all payments as scheduled.
D. At the end of the term, the property value might be lower than the loan balance and not qualify for a refi that could pay the balloon payment.
answer
The correct answer is D. Regarding C, “all payments as scheduled” would include the balloon payment, which if made, would of course pay off the loan.
23. Which of the following are advantages to a borrower of a fixed rate loan:
A. The borrower doesn’t have to worry about rates going up.
B. The borrower doesn’t have to worry about a sudden increase in payment amount.
C. The borrower can refinance if the rates go down.
D. All of the above.
A. The borrower doesn’t have to worry about rates going up.
B. The borrower doesn’t have to worry about a sudden increase in payment amount.
C. The borrower can refinance if the rates go down.
D. All of the above.
answer
The correct answer is D. Yes, all of these conditions favor the borrower.
24. Which of the following are advantages to a lender of a fixed rate loan:
A. The rate is locked even if interest rates go up.
B. It is a guaranteed rate of return.
C. The rate the lender receives cannot go down.
D. Both B and C.
A. The rate is locked even if interest rates go up.
B. It is a guaranteed rate of return.
C. The rate the lender receives cannot go down.
D. Both B and C.
answer
The correct answer is D. Yes, these are benefits to the lender.
25. Why do lenders like ARMs?
A. Because when rates go down, payments go down.
B. Because they spread the risk of fluctuating interest rates on to the borrower.
C. Because they are portfolio loans and cannot be sold.
D. Because if interest rates fluctuate, they are locked in at a higher rate.
A. Because when rates go down, payments go down.
B. Because they spread the risk of fluctuating interest rates on to the borrower.
C. Because they are portfolio loans and cannot be sold.
D. Because if interest rates fluctuate, they are locked in at a higher rate.
answer
The correct answer is B. If rates increase, payment amounts go up. If rates decrease, payment amounts go down. In times of fluctuating interest rates the lender’s losses relative to the current market are not as severe.
26. Which of the following best describes a hybrid mortgage:
A. A combination of the best features of fixed, amortized, adjustable, and/or interest only to best meet the needs of the borrower.
B. A combination of amortized and interest only.
C. A combination of fixed and adjustable.
D. None of the above.
A. A combination of the best features of fixed, amortized, adjustable, and/or interest only to best meet the needs of the borrower.
B. A combination of amortized and interest only.
C. A combination of fixed and adjustable.
D. None of the above.
answer
The correct answer is A. A hybrid reflects the needs of the borrower to get the debt resolved. Different plans fit different profiles, but the objective is to resolve the debt.
27. Which of the following best describes the terms of a 5/25 interest only/fixed loan:
A. The loan is fully amortized, but five times during the term, a one-year period of interest only payments are made.
B. The loan is fully amortized, but five times during the term, at the borrower’s choosing, he/she may pay interest only for a year to relieve payment shock.
C. The loan is interest only for the first five years, and then fully amortized at a fixed rate for the duration of the loan.
D. The loan is interest only for the first five years, and then partially amortized at a fixed rate for the duration of the term.
A. The loan is fully amortized, but five times during the term, a one-year period of interest only payments are made.
B. The loan is fully amortized, but five times during the term, at the borrower’s choosing, he/she may pay interest only for a year to relieve payment shock.
C. The loan is interest only for the first five years, and then fully amortized at a fixed rate for the duration of the loan.
D. The loan is interest only for the first five years, and then partially amortized at a fixed rate for the duration of the term.
answer
The correct answer is C. The idea behind this type of payment plan is to allow the borrower to gain traction by having a lower payment at the beginning, build some equity, and stabilize with a fixed, fully amortized payment for the duration. Sometimes it works as planned, and sometimes not. Also, this type of loan is not always available.
28. All of the following statements are true about a Graduated Payment Mortgage (GPM), except:
A. The GPM carries a scheduled period of negative amortization.
B. The borrower makes larger payments at the beginning of the loan, with payments decreasing yearly in the later years.
C. Over the term, the payments fully amortize the loan.
D. The borrower makes increasingly higher payments until they are sufficient to amortize the loan.
A. The GPM carries a scheduled period of negative amortization.
B. The borrower makes larger payments at the beginning of the loan, with payments decreasing yearly in the later years.
C. Over the term, the payments fully amortize the loan.
D. The borrower makes increasingly higher payments until they are sufficient to amortize the loan.
answer
The correct answer is B. This is the incorrect statement. The others are true.
29. A Growth Equity Mortgage (GEM) uses which type of interest rate?
A. Fixed.
B. Adjustable.
C. Interest only.
D. Negative amortization.
A. Fixed.
B. Adjustable.
C. Interest only.
D. Negative amortization.
answer
The correct answer is A. The payment level increases regularly, but the interest rate is fixed.
30. What is the advantage to the borrower of a Growth Equity Mortgage (GEM)?
A. Decreasing payments.
B. Easy qualifying.
C. Save interest.
D. Stretch payments out over longer term.
A. Decreasing payments.
B. Easy qualifying.
C. Save interest.
D. Stretch payments out over longer term.
answer
The correct answer is C. Any increase in payments goes directly to reduce the principal balance. This pays the loan off sooner and saves interest for the borrower.
31. In the “Guidance on Nontraditional Mortgage Product Risk,” the agencies that jointly wrote this document define nontraditional mortgage products (NMPs) as:
A. Anything other than 30-year fixed.
B. Mortgage products that allow borrowers to defer principal and sometimes interest.
C. Mortgage products that will not be purchased by Fannie Mae or Freddie Mac.
D. Nonconforming loans.
A. Anything other than 30-year fixed.
B. Mortgage products that allow borrowers to defer principal and sometimes interest.
C. Mortgage products that will not be purchased by Fannie Mae or Freddie Mac.
D. Nonconforming loans.
answer
The correct answer is B. Although the SAFE Act defines NMPs as anything other than 30-year fixed, for the purpose of this article, the concern is mortgage products that allow borrowers to defer principal and interest.
32. In the “Guidance on Nontraditional Mortgage Product Risk,” the agencies that jointly wrote this document are concerned with which of the following issues:
A. Payment shock.
B. Competitive pressures.
C. Ceding underwriting standards to third-party originations.
D. All of the above.
A. Payment shock.
B. Competitive pressures.
C. Ceding underwriting standards to third-party originations.
D. All of the above.
answer
The correct answer is D. Yes, the agencies are concerned with all of these issues obstructing the borrower from being able to retire the debt.
33. The agencies that wrote “Guidance on Nontraditional Mortgage Product Risk,” include all of the following, except:
A. The Office of the Comptroller of the Currency (OCC).
B. The Department of Housing and Urban Development (HUD).
C. The Office of Thrift Supervision (OTS).
D. The National Credit Union Administration (NCUA).
A. The Office of the Comptroller of the Currency (OCC).
B. The Department of Housing and Urban Development (HUD).
C. The Office of Thrift Supervision (OTS).
D. The National Credit Union Administration (NCUA).
answer
The correct answer is B. Yes, the Dept. of HUD did not participate in preparing this document. The other participating agencies were The Board of Governors of the Federal Reserve System (Board), and The Federal Deposit Insurance Corporation (FDIC).
34. The final version of “Guidance on Nontraditional Mortgage Product Risk,” includes comment and input from which of the following:
A. Financial institutions.
B. Trade associations.
C. Consumer and community organizations.
D. All of the above.
A. Financial institutions.
B. Trade associations.
C. Consumer and community organizations.
D. All of the above.
answer
The correct answer is D. Yes, and state and financial regulatory organizations, as well as other members of the public.
35. Overall, the “Guidance on Nontraditional Mortgage Product Risk,” addresses issues of:
A. Prudent underwriting.
B. Mortgage fraud.
C. Consumer protection principles.
D. Both A and C.
A. Prudent underwriting.
B. Mortgage fraud.
C. Consumer protection principles.
D. Both A and C.
answer
The correct answer is D. It’s all about protecting borrowers and lending institutions, and ensuring that the loan can be repaid. When enough borrowers are hurting, lending institutions are in distress as well.
36. When it comes to nontraditional mortgage products, an institution’s qualifying standards should avoid an over-reliance on which of the following:
A. LTV.
B. Credit scores.
C. Debt-income ratios.
D. Net worth.
A. LTV.
B. Credit scores.
C. Debt-income ratios.
D. Net worth.
answer
The correct answer is B. Credit scores by themselves may not be a good representation of how well the borrower will be able to repay the loan.
37. When underwriting a loan, the main consideration should be which of the following:
A. How much equity is in the house.
B. Payment shock.
C. The borrower’s repayment capacity by final maturity at the fully indexed rate.
D. How many sources of income contribute to the payment.
A. How much equity is in the house.
B. Payment shock.
C. The borrower’s repayment capacity by final maturity at the fully indexed rate.
D. How many sources of income contribute to the payment.
answer
The correct answer is C. The borrower must show the ability to make the payments independent of equity in the house and other collateral issues.
38. Factors working against loan applicants applying for nontraditional mortgage products include which of the following:
A. High LTVs.
B. High debt/income ratios.
C. Low credit scores.
D. All of the above.
A. High LTVs.
B. High debt/income ratios.
C. Low credit scores.
D. All of the above.
answer
The correct answer is D. Yes, all of these factors would be indications that a borrower might not be able to meet the obligation of a nontraditional mortgage product.
39. A collateral-dependent loan is which of the following:
A. A loan that has to be secured on real property.
B. A loan that relies on property sale or refinancing once amortization begins.
C. A loan that the borrower can repay from sources other than the collateral.
D. A loan on a property with declining equity.
A. A loan that has to be secured on real property.
B. A loan that relies on property sale or refinancing once amortization begins.
C. A loan that the borrower can repay from sources other than the collateral.
D. A loan on a property with declining equity.
answer
The correct answer is B. Yes, and this type of loan is unsafe and unsound.
40. What is the basic idea behind risk-layering features in a nontraditional mortgage product?
A. These features should never be used in a loan.
B. They should be compensated for with risk-mitigating factors.
C. They should be replaced with increased documentation.
D. The effort should be supplemented with secondary financing.
A. These features should never be used in a loan.
B. They should be compensated for with risk-mitigating factors.
C. They should be replaced with increased documentation.
D. The effort should be supplemented with secondary financing.
answer
The correct answer is B. If there are risk layering features such as no-doc loans or simultaneous second, they should be compensated for with features such as lower debt-to-income ratios or mortgage insurance.
41. If a loan is made with introductory interest rates, which of the following would be a serious concern for underwriters:
A. Risk layering.
B. Payment shock.
C. Early recastings.
D. Both B and C.
A. Risk layering.
B. Payment shock.
C. Early recastings.
D. Both B and C.
answer
The correct answer is D. Yes, these two could make it difficult for a borrower to make the payments.
42. Which of the following are concerns expressed by the “Guidance on Nontraditional Mortgage Product Risk” regarding simultaneous second lien loans:
A. There should be no period of interest only payments.
B. There should be no negative amortization.
C. They must be set up as Growth Equity Mortgages (GEMs).
D. Both A and B.
A. There should be no period of interest only payments.
B. There should be no negative amortization.
C. They must be set up as Growth Equity Mortgages (GEMs).
D. Both A and B.
answer
The correct answer is D. Delay of payments of principal or interest could jeopardize the borrower’s ability to retire the debt.
43. NMP Guidance states that the mortgage loan underwriting standards should address the effect of a substantial payment increase on the borrower’s capacity to repay a nontraditional mortgage loan when amortization begins. In the case of an interest only loan, this means which of the following:
A. The amount of cash the borrower has in the bank at the time of underwriting.
B. The amount of cash the borrower has in the bank at the time of the beginning of amortization of the loan.
C. The borrower’s ability to pay the debt by final maturity at the fully indexed rate (if an ARM) or note rate (if fixed).
D. The borrower’s ability to delay amortization as long as possible.
A. The amount of cash the borrower has in the bank at the time of underwriting.
B. The amount of cash the borrower has in the bank at the time of the beginning of amortization of the loan.
C. The borrower’s ability to pay the debt by final maturity at the fully indexed rate (if an ARM) or note rate (if fixed).
D. The borrower’s ability to delay amortization as long as possible.