A lender bases approval entirely on the home's high appraised value and does not verify the borrower's income or existing debts. What is the central compliance concern?
Correct Answer
B) Collateral value has been used as a substitute for a reasonable repayment-ability determination
Why this is correct: For most covered mortgages, Regulation Z's ATR rule mandates a reasonable, good-faith determination of the borrower's ability to repay based on verified financial information (income, assets, debts, etc.). Approving a loan based solely on collateral value—ignoring income and debt verification—is a practice known as "asset-based lending" and fails to meet the ATR requirement. Why the other choices are wrong: "The appraisal must be waived" is wrong because an appraisal may still be required, but its waiver doesn't address the lack of income verification. "The borrower must select an adjustable rate" is wrong because the interest rate type is unrelated to the ATR violation. "The loan must be reported as denied" is wrong because reporting a denial does not cure the underwriting failure; the problem is the approval method itself. Exam tip: A high appraisal does not replace income and debt verification. ATR requires analyzing the borrower's financial capacity, not just the property's value.
Why This Is the Correct Answer
Why this is correct: For most covered mortgages, Regulation Z's ATR rule mandates a reasonable, good-faith determination of the borrower's ability to repay based on verified financial information (income, assets, debts, etc.). Approving a loan based solely on collateral value—ignoring income and debt verification—is a practice known as "asset-based lending" and fails to meet the ATR requirement. Why the other choices are wrong: "The appraisal must be waived" is wrong because an appraisal may still be required, but its waiver doesn't address the lack of income verification. "The borrower must select an adjustable rate" is wrong because the interest rate type is unrelated to the ATR violation. "The loan must be reported as denied" is wrong because reporting a denial does not cure the underwriting failure; the problem is the approval method itself. Exam tip: A high appraisal does not replace income and debt verification. ATR requires analyzing the borrower's financial capacity, not just the property's value.
More Ethics & Fraud Questions
In a closing-readiness check, a disclosure specialist sees facts tied to Appraisal Fraud Detection. What should the file reflect?
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