A mortgage file is paused during a risk-control review because of ARM Index Types. Which answer should separate the real requirement from a near-miss shortcut?
Correct Answer
D) Treat negative amortization as a material risk feature
Why this is correct: Some ARMs have payment options that can lead to negative amortization, where the monthly payment is less than the interest due, causing the loan balance to increase. This is a significant risk feature that must be properly disclosed and evaluated. The correct action is to "Treat negative amortization as a material risk feature." Why the other choices are wrong: "Apply a different loan-program rule without checking the file facts" is wrong because ARM features like negative amortization require specific analysis; applying another program's rules is inappropriate. "Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan" is wrong because material risks must be addressed regardless of borrower preference. "Use the same treatment for all mortgage products without comparing program requirements" is wrong because negative amortization is not a feature of standard fixed-rate loans; treating all products the same would miss this critical risk. Exam tip: Negative amortization is a red-flag feature for ARMs. It triggers specific disclosure requirements and is a key point for assessing loan suitability.
Why This Is the Correct Answer
The correct response is "Treat negative amortization as a material risk feature" because ARM products use an index, margin, adjustment periods, caps, and payment-change disclosures.
Why the Other Options Are Wrong
Option A: Apply a different loan-program rule without checking the file facts.
Apply a different loan-program rule without checking the file facts. is not correct because it does not apply the rule tested by this file scenario.
Option B: Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan.
Ignore product, occupancy, LTV, or eligibility limits because the borrower prefers the loan. is not correct because it does not apply the rule tested by this file scenario.
Option C: Use the same treatment for all mortgage products without comparing program requirements.
Use the same treatment for all mortgage products without comparing program requirements. is not correct because it does not apply the rule tested by this file scenario.
Memory Technique
ARM features and caps: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
Match the file facts to ARM features and caps; do not choose an exception or shortcut that skips the required rule.
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
More Mortgage Knowledge Questions
In a closing-readiness check, a risk reviewer sees facts tied to TILA Truth in Advertising. What should the file reflect?
In a training scenario, a trainee asks which official source controls FHA single-family origination policy. What action best follows the rule?
A compliance analyst compares the file facts with LTV Ratio Calculation during a licensing team review. Which conclusion is accurate?
A branch manager asks about a loan file because a trainee asks which official source controls FHA single-family origination policy. What should happen?
The loan team compares the file facts with ARM Cap Structures during a borrower follow-up call. Which conclusion is accurate?
A borrower has a 30-year fixed-rate mortgage with monthly principal and interest of $1,450. Property taxes increase, and taxes are paid through escrow. What can happen to the total monthly payment?
A loan has an outstanding principal balance of $240,000 and a 6% annual interest rate. Using simple monthly accrual, how much interest accrues for one month?
An annual escrow analysis for a current borrower shows a $780 shortage. One month's escrow payment is $600. The servicer elects to require repayment over the shortest installment period permitted by Regulation X for this shortage. What schedule is permitted?
What does an amortization schedule show for each scheduled payment?
A monthly principal-and-interest payment is $1,800, of which $1,250 is interest. How much principal is paid that month?
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