A file shows an ARM chosen by a borrower whose income is fixed for the next decade, with no note of any discussion about the adjustment. What should the record contain?

Correct Answer

C) Explain payment-change risk before the borrower proceeds

Why this is correct: A defining feature of Adjustable-Rate Mortgages (ARMs) is that the interest rate and payment can change. Regulation Z (Truth in Lending) requires specific disclosures about these risks, including how the rate is determined, the existence of caps, and an example of worst-case payment increases. "Explain payment-change risk before the borrower proceeds" captures the essential duty to ensure the borrower understands this key risk prior to moving forward, which is both a regulatory and ethical requirement. Why the other choices are wrong: "Apply a different loan-program rule without checking the file facts" is wrong because ARM terms are specific to the loan product; applying generic rules is incorrect. "Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan" is wrong because borrower preference does not override underwriting or disclosure requirements. "Apply the correct general concept to the wrong rate-lock stage rather than the ARM Cap Structures rule" is wrong because rate-lock timing is unrelated to the core requirement of explaining ARM payment-change risks. Exam tip: For ARM questions, always focus on disclosure of risk—specifically, how the rate adjusts, the caps, and the potential payment shock. This is a major exam and regulatory focus.