An originator refinances the same borrower 3 times in 26 months, each time adding $6,400 in costs and cutting the rate by about 0.2 points. If documented analysis shows no reasonable net benefit and savings cannot recover the fees during the borrower's holding periods, what practice does the repeated refinancing illustrate?
Correct Answer
B) Churning: repeated refinancing adds $19,200 in costs without a reasonable net benefit over the borrower’s holding periods
B. The repeated, nonbeneficial refinancing illustrates churning or loan flipping. Three charges of $6,400 total $19,200. The stem supplies a documented lack of net benefit; a small rate reduction alone does not establish that the borrower benefits after costs. Scope and exceptions: Three refinances in 26 months is not a universal legal threshold. Product-specific benefit requirements and the borrower’s actual circumstances need separate review. Source: Abusive practices: Loan flipping — https://www.occ.treas.gov/news-issuances/news-releases/2003/nr-occ-2003-8.html
Why This Is the Correct Answer
B. The repeated, nonbeneficial refinancing illustrates churning or loan flipping. Three charges of $6,400 total $19,200. The stem supplies a documented lack of net benefit; a small rate reduction alone does not establish that the borrower benefits after costs. Scope and exceptions: Three refinances in 26 months is not a universal legal threshold. Product-specific benefit requirements and the borrower’s actual circumstances need separate review.
Why the Other Options Are Wrong
Option A: Churning only if the last refinance raised the loan balance materially
The concern is not limited to the final balance increase.
Option C: Permitted where the borrower signed a net tangible benefit form each time
Signing a form does not establish the economic facts.
Option D: Permitted, because each of the 3 lowered the borrower's interest rate
A lower nominal rate alone does not resolve the cost comparison.
Exam Tip
Compare total refinancing costs with realistic benefits.
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