A compliance review finds that the file has borrower statements but no verified ability-to-repay analysis. What should the MLO do next?
Correct Answer
B) Verify repayment ability before consummation using reliable records
Why this is correct: The Ability-to-Repay (ATR) rule under 12 CFR 1026.43(c)(1) mandates a creditor make a reasonable, good faith determination of a consumer's repayment ability before consummation, based on verified and reliable third-party records. Borrower statements alone are insufficient. The MLO must obtain and use verified income, employment, and other financial data from documents like pay stubs, tax returns, or bank statements to complete the ATR analysis. Why the other choices are wrong: "Use gross deposits as income without resolving source and stability" is wrong because ATR requires verifying the source, amount, and stability of income, not just accepting deposits. "Ignore a recent employment change because the credit score meets guidelines" is wrong because ATR requires analyzing current and reasonably expected income, and a recent job change impacts stability. "Use bonus income without verifying a history or likelihood of continuance" is wrong because bonus income typically requires a two-year history and likelihood of continuance to be considered reliable. Exam tip: For ATR questions, remember the core rule: verify, verify, verify. Unverified borrower statements never satisfy the requirement.
Why This Is the Correct Answer
The correct response is "Verify repayment ability before consummation using reliable records". The ATR rule requires a pre-consummation determination based on reliable information, not unsupported statements or collateral alone.
Why the Other Options Are Wrong
Option A: 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.
Option C: Ignore a recent employment change because the credit score meets guidelines.
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.
Option D: Use bonus income without verifying a history or likelihood of continuance.
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
ATR questions usually reward verification before consummation.
Exam Tip
For income analysis and documentation questions, separate the required file step from plausible sales, timing, or documentation shortcuts.
Common Mistakes to Avoid
- -A borrower statement is not a substitute for a good-faith ATR determination.
More Origination Questions
Before the team acts on a servicing handoff check, a closing coordinator must address Asset Verification and Reserves. Which response is most defensible?
An MLO is reviewing procedures for a case where a cost changes after the Closing Disclosure has already been provided. What is the proper handling?
During a post-application update, a quality-control reviewer encounters a Credit Analysis and Evaluation issue. Which response should avoid a shortcut that would misapply the rule?
Between the Loan Estimate and closing, prepaid interest increases $180, homeowner insurance increases $95, transfer taxes increase $40, and a credit report fee for which the consumer could not shop increases $12. There is no valid revised estimate or other exception. Which increases violate TRID's zero-tolerance rule?
A construction-to-permanent loan will disburse in 5 draws over 11 months before the permanent phase begins. Which Regulation Z appendix provides a disclosure method for multiple-advance construction transactions?
Before closing, the team discovers that a borrower asks which upfront charge can be collected before intent to proceed. What is the safest compliant answer?
A construction loan agreement allows advances only after documented completion of specified work. A builder requests the next draw, but no completion evidence has been provided. What should occur?
Before releasing the final construction draw, which combination most directly supports project completion and clear collateral?
A construction-to-permanent loan will convert to a substantially higher fully amortizing payment. Which payment is especially important when assessing the borrower's long-term repayment capacity?
A construction-to-permanent note states that conversion requires completion, a certificate of occupancy, and no unresolved liens. Construction is finished, but a mechanic's lien remains. What should happen?
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