A borrower sees his rate move from 5.5% to 7.5% at the first adjustment and says the lender must have made a mistake because the index only moved 1.5 points. What has to be checked to answer him?
Correct Answer
C) Apply the index, margin, and cap rules to the ARM adjustment
Why this is correct: The governing concept for Adjustable-Rate Mortgages (ARMs) is that the interest rate adjustments are calculated using a specific formula: Index + Margin. Furthermore, periodic and lifetime caps limit how much the rate can change. The correct action, "Apply the index, margin, and cap rules to the ARM adjustment," directly addresses the mechanical calculation required to ensure the new rate is compliant with the loan's terms and regulations. Why the other choices are wrong: "Apply a different loan-program rule without checking the file facts" is wrong because ARM adjustments have unique rules; applying rules from fixed-rate or other products would produce an incorrect rate. "Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan" is wrong because ARM adjustment mechanics are contractual and regulatory requirements, not subject to borrower preference. "Apply the HMDA reporting timing rule even though the file is testing ARM Rate Adjustments" is wrong because HMDA rules govern data reporting, not the mathematical calculation of interest rate changes. Applying the wrong rule set leads to errors. Exam tip: For ARM adjustments, remember the formula: New Rate = Index + Margin, and always check the caps.
Why This Is the Correct Answer
The correct response is "Apply the index, margin, and cap rules to the ARM adjustment" 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 D: Apply the HMDA reporting timing rule even though the file is testing ARM Rate Adjustments.
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
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