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?
Correct Answer
D) Clearly explain the adjustment terms, payment risk, and available alternatives
Why this is correct: An MLO has an ethical and legal duty to ensure the borrower understands all material loan terms, especially foreseeable risks like payment shock. For a loan with a sharply increasing payment, the MLO must clearly explain the adjustment terms, the risk of higher payments, and discuss available alternative loans that may better suit the borrower's fixed-income situation. Why the other choices are wrong: Discussing only the initial payment is misleading and omits material information about future increases. Saying payment changes are impossible if payments are timely is factually false for adjustable-rate or step-rate loans. Telling the borrower to rely on future refinancing is irresponsible because refinancing is never guaranteed and subjects the borrower to unknown future costs and qualifications. Exam tip: Your duty is to explain the real risks. Never hide or downplay a known future payment increase, especially when a borrower expresses concern about affordability.
Why This Is the Correct Answer
Why this is correct: An MLO has an ethical and legal duty to ensure the borrower understands all material loan terms, especially foreseeable risks like payment shock. For a loan with a sharply increasing payment, the MLO must clearly explain the adjustment terms, the risk of higher payments, and discuss available alternative loans that may better suit the borrower's fixed-income situation. Why the other choices are wrong: Discussing only the initial payment is misleading and omits material information about future increases. Saying payment changes are impossible if payments are timely is factually false for adjustable-rate or step-rate loans. Telling the borrower to rely on future refinancing is irresponsible because refinancing is never guaranteed and subjects the borrower to unknown future costs and qualifications. Exam tip: Your duty is to explain the real risks. Never hide or downplay a known future payment increase, especially when a borrower expresses concern about affordability.
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