A construction budget has no contingency and material costs rise unexpectedly. Which risk should the loan administrator evaluate?
Correct Answer
A) Whether remaining funds are sufficient to complete the project
Why this is correct: A construction budget without a contingency is vulnerable to cost overruns. As the original explanation states, the administrator must evaluate whether remaining loan funds are sufficient to complete the project, as a shortfall could leave the property unfinished and the loan undercollateralized. Why the other choices are wrong: "Whether the borrower can omit all future inspections" is wrong because inspections are risk controls; omitting them due to cost overruns increases fraud and defect risk. "Whether the unique identifier should change" is wrong because NMLS identifiers are unrelated to construction budget issues. "Whether the Closing Disclosure can replace the construction contract" is wrong because the Closing Disclosure is a settlement statement, not a substitute for the construction agreement. Exam tip: When costs rise, first assess if the loan commitment covers completion—this is a fundamental risk question.
Why This Is the Correct Answer
Why this is correct: A construction budget without a contingency is vulnerable to cost overruns. As the original explanation states, the administrator must evaluate whether remaining loan funds are sufficient to complete the project, as a shortfall could leave the property unfinished and the loan undercollateralized. Why the other choices are wrong: "Whether the borrower can omit all future inspections" is wrong because inspections are risk controls; omitting them due to cost overruns increases fraud and defect risk. "Whether the unique identifier should change" is wrong because NMLS identifiers are unrelated to construction budget issues. "Whether the Closing Disclosure can replace the construction contract" is wrong because the Closing Disclosure is a settlement statement, not a substitute for the construction agreement. Exam tip: When costs rise, first assess if the loan commitment covers completion—this is a fundamental risk question.
More Origination Questions
Before the team acts on a servicing handoff check, a closing coordinator must address Asset Verification and Reserves. Which response is most defensible?
An MLO is reviewing procedures for a case where a cost changes after the Closing Disclosure has already been provided. What is the proper handling?
During a post-application update, a quality-control reviewer encounters a Credit Analysis and Evaluation issue. Which response should avoid a shortcut that would misapply the rule?
A construction-to-permanent loan will disburse in 5 draws over 11 months before the permanent phase begins. Which Regulation Z appendix provides a disclosure method for multiple-advance construction transactions?
Before closing, the team discovers that a borrower asks which upfront charge can be collected before intent to proceed. What is the safest compliant answer?
A construction loan agreement allows advances only after documented completion of specified work. A builder requests the next draw, but no completion evidence has been provided. What should occur?
Before releasing the final construction draw, which combination most directly supports project completion and clear collateral?
A construction-to-permanent loan will convert to a substantially higher fully amortizing payment. Which payment is especially important when assessing the borrower's long-term repayment capacity?
A construction-to-permanent note states that conversion requires completion, a certificate of occupancy, and no unresolved liens. Construction is finished, but a mechanic's lien remains. What should happen?
A branch manager asks about a loan file because a processor wants to omit known monthly obligations from underwriting. What should happen?
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