When evaluating ability to repay for a covered mortgage, which information should be considered and verified as applicable?
Correct Answer
D) Income or assets, employment status, payment, debts, obligations, and credit history
Why this is correct: The Ability-to-Repay (ATR) rule under Regulation Z requires a creditor to make a reasonable, good-faith determination of a consumer's ability to repay a covered mortgage. This must be based on verified and documented information, specifically including the listed factors: income or assets, employment status (if relied upon), the monthly mortgage payment, simultaneous loans, current debt obligations, monthly debt-to-income ratio or residual income, and credit history. Why the other choices are wrong: "Only the property's appraised value" is wrong because collateral value alone does not demonstrate repayment ability. "Only the applicant's credit score" is wrong because credit history is just one of several required factors. "Only the initial monthly payment" is wrong because the payment amount is considered, but it must be evaluated alongside income, debts, and other obligations. Exam tip: For ATR, remember the "eight factors"—income/assets, employment, payment, simultaneous loans, mortgage obligations, other debts, DTI/residual income, and credit history.
Why This Is the Correct Answer
Why this is correct: The Ability-to-Repay (ATR) rule under Regulation Z requires a creditor to make a reasonable, good-faith determination of a consumer's ability to repay a covered mortgage. This must be based on verified and documented information, specifically including the listed factors: income or assets, employment status (if relied upon), the monthly mortgage payment, simultaneous loans, current debt obligations, monthly debt-to-income ratio or residual income, and credit history. Why the other choices are wrong: "Only the property's appraised value" is wrong because collateral value alone does not demonstrate repayment ability. "Only the applicant's credit score" is wrong because credit history is just one of several required factors. "Only the initial monthly payment" is wrong because the payment amount is considered, but it must be evaluated alongside income, debts, and other obligations. Exam tip: For ATR, remember the "eight factors"—income/assets, employment, payment, simultaneous loans, mortgage obligations, other debts, DTI/residual income, and credit history.
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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?
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