A branch manager says the ARM booklet handed out at application covers the risk, so originators need not raise the possible $500 payment jump in conversation. Is that sufficient?
Correct Answer
D) Explain payment-change risk before the borrower proceeds
Why this is correct: For adjustable-rate mortgages (ARMs), a key consumer protection rule is ensuring the borrower understands the risk of payment changes before proceeding. The original explanation notes ARMs involve indexes, margins, caps, and payment-change disclosures. Explaining this risk aligns with regulatory requirements like those in TILA-RESPA integrated disclosures. Why the other choices are wrong: "Apply a different loan-program rule without checking the file facts" is wrong because audit resolution requires evaluating the specific ARM features in the file, not applying irrelevant rules. "Use prior HMDA reporting approval as a substitute for the current ARM Features and Caps requirement" is wrong because HMDA reporting is separate from ARM disclosure obligations; one does not substitute for the other. "Use the same treatment for all mortgage products without comparing program requirements" is wrong because ARM products have unique features that must be addressed individually. Exam tip: For ARM audit issues, always focus on ensuring the borrower received clear, timely disclosures about payment-change risk.
Why This Is the Correct Answer
The correct response is "Explain payment-change risk before the borrower proceeds" 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: Use prior HMDA reporting approval as a substitute for the current ARM Features and Caps requirement.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
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?
People Also Study
Federal Mortgage-Related Laws
24% of exam
Mortgage Loan Origination Activities
27% of exam
Ethics, Fraud & Consumer Protection
18% of exam
Uniform State Test Content
11% of exam
Related Study Resources
Previous Question
After the Loan Estimate is issued, a storm damages the property and a new inspection reasonably increases an estimated third-party charge. When may the creditor use the changed circumstance to reset the applicable estimate?
Next Question
During a disclosure desk review, the MLO encounters a TILA HELOC Disclosures issue. Which response should match the file facts to the correct rule?