A borrower on a fixed income is drawn to a 3/1 ARM because the start payment is $410 lower than the fixed alternative. He has not asked what happens in year four. What does the originator owe him before he proceeds?
Correct Answer
D) Explain payment-change risk before the borrower proceeds
Why this is correct: A key consumer protection requirement for Adjustable-Rate Mortgages (ARMs) is clear disclosure of risks, especially the risk of payment increases. The rule mandates that the lender explain how the payment can change (based on index, margin, and caps) before the borrower proceeds, ensuring informed consent. This is a fundamental ARM feature and risk disclosure obligation. Why the other choices are wrong: "Apply a different loan-program rule without checking the file facts" is wrong because ARM rules are specific; applying a generic or different rule is incorrect. "Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan" is wrong because borrower preference does not override mandatory product feature disclosures or eligibility standards. "Apply the quality-control timing rule even though the file is testing ARM Features and Risks" is wrong because quality-control timing is a separate procedural issue, not the core requirement to disclose payment-change risk. Exam tip: For ARM questions, focus on the core obligations: disclose the index, margin, adjustment periods, caps, and the risk of payment changes.
Why This Is the Correct Answer
The correct response is "Explain payment-change risk before the borrower proceeds" because ARM products use an index, margin, adjustment periods, caps, and payment-change disclosures.
Why the Other Options Are Wrong
Option A: Apply a different loan-program rule without checking the file facts.
Apply a different loan-program rule without checking the file facts. is not correct because it does not apply the rule tested by this file scenario.
Option B: Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan.
Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan. is not correct because it does not apply the rule tested by this file scenario.
Option C: Apply the quality-control timing rule even though the file is testing ARM Features and Risks.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Memory Technique
ARM features and caps: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
Match the file facts to ARM features and caps; do not choose an exception or shortcut that skips the required rule.
Common Mistakes to Avoid
- -Choosing an internal exception instead of the governing rule
- -Treating preliminary or informal facts as a substitute for required documentation
- -Answering from a familiar but unrelated mortgage topic
More Mortgage Knowledge Questions
In a closing-readiness check, a risk reviewer sees facts tied to TILA Truth in Advertising. What should the file reflect?
In a training scenario, a trainee asks which official source controls FHA single-family origination policy. What action best follows the rule?
A compliance analyst compares the file facts with LTV Ratio Calculation during a licensing team review. Which conclusion is accurate?
A branch manager asks about a loan file because a trainee asks which official source controls FHA single-family origination policy. What should happen?
The loan team compares the file facts with ARM Cap Structures during a borrower follow-up call. Which conclusion is accurate?
A borrower has a 30-year fixed-rate mortgage with monthly principal and interest of $1,450. Property taxes increase, and taxes are paid through escrow. What can happen to the total monthly payment?
A loan has an outstanding principal balance of $240,000 and a 6% annual interest rate. Using simple monthly accrual, how much interest accrues for one month?
An annual escrow analysis for a current borrower shows a $780 shortage. One month's escrow payment is $600. The servicer elects to require repayment over the shortest installment period permitted by Regulation X for this shortage. What schedule is permitted?
What does an amortization schedule show for each scheduled payment?
A monthly principal-and-interest payment is $1,800, of which $1,250 is interest. How much principal is paid that month?
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