For a covered mortgage, a creditor verifies income and debts but qualifies the borrower using only a temporary introductory payment instead of the payment required by the ATR rule. What is the problem?
Correct Answer
B) The creditor must use the applicable fully indexed or otherwise required payment calculation, not merely a teaser payment
Why this is correct: The Ability-to-Repay (ATR) rule requires creditors to make a reasonable, good faith determination of a borrower's ability to repay. For loans with a temporary introductory ("teaser") rate, the rule mandates using the higher payment that will apply after the introductory period ends (e.g., the fully indexed rate for an ARM) or the required payment calculation for the transaction. The correct answer, "The creditor must use the applicable fully indexed or otherwise required payment calculation, not merely a teaser payment," states this core ATR requirement. Using only the low teaser payment understates the true obligation and violates the rule. Why the other choices are wrong: "Verification is unnecessary when the initial payment is low" is wrong because income and debt verification are always required for ATR, regardless of payment size. "The loan automatically becomes a reverse mortgage" is wrong; using a teaser payment does not change the loan product type. "The creditor must ignore simultaneous loans" is wrong because the ATR rule requires considering the borrower's simultaneous loan obligations. Exam tip: Remember: ATR calculations must be based on the highest payment the borrower will actually face during the loan's first years, not a temporary discount.
Why This Is the Correct Answer
Why this is correct: The Ability-to-Repay (ATR) rule requires creditors to make a reasonable, good faith determination of a borrower's ability to repay. For loans with a temporary introductory ("teaser") rate, the rule mandates using the higher payment that will apply after the introductory period ends (e.g., the fully indexed rate for an ARM) or the required payment calculation for the transaction. The correct answer, "The creditor must use the applicable fully indexed or otherwise required payment calculation, not merely a teaser payment," states this core ATR requirement. Using only the low teaser payment understates the true obligation and violates the rule. Why the other choices are wrong: "Verification is unnecessary when the initial payment is low" is wrong because income and debt verification are always required for ATR, regardless of payment size. "The loan automatically becomes a reverse mortgage" is wrong; using a teaser payment does not change the loan product type. "The creditor must ignore simultaneous loans" is wrong because the ATR rule requires considering the borrower's simultaneous loan obligations. Exam tip: Remember: ATR calculations must be based on the highest payment the borrower will actually face during the loan's first years, not a temporary discount.
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