An MLO is reviewing procedures for a case where a processor wants to omit known monthly obligations from underwriting. What is the proper handling?
Correct Answer
C) Consider payment obligations, debts, income, and credit history
Why this is correct: The proper handling is dictated by the Ability-to-Repay (ATR) underwriting requirements. Per 12 CFR 1026.43(c)(2), the lender must consider the consumer's payment obligations, debts, income, and credit history to make a reasonable repayment determination. Omitting known obligations is prohibited. Thus, the correct procedure is to "Consider payment obligations, debts, income, and credit history." Why the other choices are wrong: "Use prior anti-steering approval as a substitute for the current Ability to repay underwriting factors requirement" is wrong because anti-steering rules (related to loan recommendations) are a separate compliance area and cannot replace the mandatory ATR analysis. "Use the lowest middle score from a different borrower to improve pricing" is wrong because it is unethical and fraudulent; credit scores must be specific to the applicant. "Clear credit conditions without documenting the explanation for derogatory items" is wrong because it fails the documentation and analysis requirements for credit report discrepancies. Exam tip: Compliance areas are not interchangeable. A rule from one area (e.g., anti-steering) cannot be used to satisfy a requirement from a completely different area (e.g., ATR).
Why This Is the Correct Answer
The correct response is "Consider payment obligations, debts, income, and credit history". ATR is a multi-factor repayment analysis that includes obligations, income, and credit history.
Why the Other Options Are Wrong
Option A: Use prior anti-steering approval as a substitute for the current Ability to repay underwriting factors requirement.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Option B: Use the lowest middle score from a different borrower to improve pricing.
This choice is not the best answer because it applies the wrong file step for credit evaluation; the governing rule is tested by the correct option.
Option D: Clear credit conditions without documenting the explanation for derogatory items.
This choice is a tempting shortcut, but it conflicts with credit evaluation because the file still needs the required documentation, timing, or rule-based review before the action is taken.
Memory Technique
If the stem lists debts or simultaneous payments, bring them into ATR.
Exam Tip
For credit evaluation questions, separate the required file step from plausible sales, timing, or documentation shortcuts.
Common Mistakes to Avoid
- -Credit score alone does not satisfy the ATR factor analysis.
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