A borrower on a 5/1 ARM says she will simply refinance before the first adjustment in year 6, so the caps do not matter to her. How should the originator handle that assumption?
Correct Answer
A) Explain payment-change risk before the borrower proceeds
Why this is correct: The governing concept is that a core requirement for ARMs (Adjustable Rate Mortgages) is clear disclosure of risks, particularly the risk of payment changes. As the original explanation notes, ARM features like indexes, margins, and caps determine how payments can change. The correct action is to ensure the borrower understands this potential for payment increase before they commit to the loan, which is a fundamental consumer protection principle. Why the other choices are wrong: "Delay the ARM Index Types step until a later licensing review instead of acting now" is wrong because explaining the index (which drives rate changes) is part of the initial disclosure of payment-change risk and should not be delayed. "Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan" is wrong because ARM features and program limits are separate, fixed requirements. "Use the same treatment for all mortgage products without comparing program requirements" is wrong because ARM disclosures are product-specific and differ significantly from fixed-rate loan disclosures. Exam tip: ARM disclosures must clearly explain how the fully indexed rate is calculated (Index + Margin) and the effect of periodic and lifetime caps.
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: Delay the ARM Index Types step until a later licensing review instead of acting now.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
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
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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?
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The loan team compares the file facts with ARM Cap Structures during a borrower follow-up call. Which conclusion is accurate?
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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?
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