An elderly homeowner with substantial equity is offered a cash-out refinance whose fees consume most of the proceeds and whose payment is plainly unaffordable. Which concern is most directly presented?
Correct Answer
A) Equity stripping through an unaffordable, fee-heavy loan
Why this is correct: The core concept is predatory lending, specifically equity stripping. This occurs when a loan is structured to extract a homeowner's equity through high fees and unaffordable payments, with little regard for the borrower's ability to repay. The facts directly describe this: an elderly homeowner with substantial equity is offered a loan where fees consume most of the cash-out proceeds, and the payment is plainly unaffordable. This matches the definition of equity stripping. Why the other choices are wrong: A missing flood-zone determination is a compliance issue related to property location and required insurance, not described here. An improper servicing transfer concerns the handoff of loan administration after closing, which is not mentioned. A late appraisal delivery is a timing issue in the origination process, not the substantive predatory terms of the loan itself. Exam tip: When you see "elderly," "substantial equity," "high fees," and "unaffordable payment" together, think "equity stripping" as a primary red flag for predatory lending.
Why This Is the Correct Answer
Why this is correct: The core concept is predatory lending, specifically equity stripping. This occurs when a loan is structured to extract a homeowner's equity through high fees and unaffordable payments, with little regard for the borrower's ability to repay. The facts directly describe this: an elderly homeowner with substantial equity is offered a loan where fees consume most of the cash-out proceeds, and the payment is plainly unaffordable. This matches the definition of equity stripping. Why the other choices are wrong: A missing flood-zone determination is a compliance issue related to property location and required insurance, not described here. An improper servicing transfer concerns the handoff of loan administration after closing, which is not mentioned. A late appraisal delivery is a timing issue in the origination process, not the substantive predatory terms of the loan itself. Exam tip: When you see "elderly," "substantial equity," "high fees," and "unaffordable payment" together, think "equity stripping" as a primary red flag for predatory lending.
More Ethics & Fraud Questions
In a file escalation meeting, the supervisor sees facts tied to RESPA Kickbacks and Referrals. What should the file reflect?
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At closing, an MLO adds a single-premium credit-life policy to the loan amount even though the borrower declined it and the policy is not required for approval. Which practice is the clearest concern?
A refinance eliminates a borrower's fixed-rate loan, adds substantial fees, provides no cash or lower payment, and restarts a 30-year term. What should the MLO do before recommending it?
An applicant has verified monthly income of $5,000 and monthly obligations of $4,700 after the proposed mortgage payment. The applicant expects an undocumented raise next year. What should the MLO do?
A lender bases approval entirely on the home's high appraised value and does not verify the borrower's income or existing debts. What is the central compliance concern?
A borrower agrees to a mortgage but declines an optional home-warranty plan. The final loan documents nevertheless finance a $2,400 warranty premium. What should the MLO do?
An MLO recommends a loan with a low initial payment that will increase sharply in two years. The borrower says retirement income will be fixed and asks whether the payment can change. What is the appropriate response?
To obtain approval, an MLO changes a self-employed applicant's verified monthly income from $6,000 to $9,000 without supporting documentation. How should this conduct be characterized?
A homeowner is encouraged to refinance for the third time in 18 months. Each loan generates new points and fees, while the borrower's payment and rate do not improve. Which practice is most strongly indicated?
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