An audit analyst is resolving ARM Features and Caps during an internal audit sample. Which action best fits the rule?
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
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