An originator describes an ARM as "cheaper" without mentioning that the payment could rise from $2,310 to $2,780 at the first adjustment under the caps. What is missing from the conversation?
Correct Answer
A) Explain payment-change risk before the borrower proceeds
Why this is correct: A central consumer protection requirement for Adjustable-Rate Mortgages (ARMs) is clear and timely disclosure of risks. Regulators mandate that lenders explain key features, including the risk of payment changes, before the borrower proceeds. This allows for informed decision-making and is a critical part of the ARM lending process. Why the other choices are wrong: "Apply a different loan-program rule without checking the file facts" is wrong because ARM features (index, margin, caps) are specific to the loan program and must be checked against the file. "Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan" is wrong because ARM loans still have underwriting and program eligibility requirements that cannot be ignored. "Use the same treatment for all mortgage products without comparing program requirements" is wrong because ARM rules (like initial fixed period, adjustment frequency) differ from fixed-rate product rules. Exam tip: For ARMs, focus on the '5 Cs': Caps (periodic and lifetime), Change dates, Calculation (index + margin), Consequences (payment shock), and Communication (disclosures).
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 B: 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 C: 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 D: Use the same treatment for all mortgage products without comparing program requirements.
Use the same treatment for all mortgage products without comparing program requirements. is not correct because it does not apply the rule tested by this file scenario.
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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