A processor asks how to handle a file where the file has borrower statements but no verified ability-to-repay analysis. Which response is most accurate?
Correct Answer
C) Verify repayment ability before consummation using reliable records
Why this is correct: The Ability-to-Repay (ATR) rule, 12 CFR 1026.43(c)(1), mandates that a creditor verify and analyze a borrower's repayment ability using reliable records (e.g., pay stubs, tax returns) before consummation. Unverified borrower statements do not satisfy this requirement. Why the other choices are wrong: 'Use stated monthly income after documents show the amount was annual income' is wrong because it involves a clear mathematical error (using an annual figure as monthly) and would misrepresent income, violating the requirement for accurate, reliable information. 'Average income from an undocumented second job' is wrong because income from an undocumented source cannot be used; the job and its income must be verified. 'Use gross deposits as income without resolving source and stability' is wrong because deposits may include non-income items (like transfers or loans); the source must be identified and verified as stable income. Exam tip: For ATR, every income source must be documented. If it's not in writing from a reliable third party, it doesn't count.
Why This Is the Correct Answer
The correct response is "Verify repayment ability before consummation using reliable records" because Lines 207-214; 12 CFR 1026.43(c)(1).
Why the Other Options Are Wrong
Option A: Use stated monthly income after documents show the amount was annual income.
This choice is not the best answer because it applies the wrong file step for income analysis and documentation; the governing rule is tested by the correct option.
Option B: Average income from an undocumented second job.
This choice is not the best answer because it applies the wrong file step for income analysis and documentation; the governing rule is tested by the correct option.
Option D: Use gross deposits as income without resolving source and stability.
This choice is a tempting shortcut, but it conflicts with income analysis and documentation because the file still needs the required documentation, timing, or rule-based review before the action is taken.
Memory Technique
income analysis and documentation: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
For income analysis and documentation questions, separate the required file step from plausible sales, timing, or documentation shortcuts.
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
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