A mortgage broker places a borrower who qualifies for a conventional loan into a higher-cost loan product. Which scenario most clearly constitutes an illegal lending practice under California and federal law?
Correct Answer
C) The broker places the borrower in a loan with fees and an interest rate that generate higher broker compensation, without a reasonable basis that the loan is suitable for the borrower
Placing a qualified borrower into a loan product primarily to maximize broker compensation — without a reasonable basis that the loan is suitable — constitutes illegal steering under the Dodd-Frank Act and Regulation Z §1026.36. California's anti-predatory lending statutes, including provisions of the California Residential Mortgage Lending Act, similarly prohibit recommending loan terms that are not in the borrower's interest. The defining element is that the broker's financial incentive, not the borrower's needs, drives the loan selection.
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Related Topics & Key Terms
Key Terms:
Related Concepts
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Foreclosure is the legal process by which a lender takes possession of a property when a borrower fails to make mortgage payments. It allows the lender to sell the property to recover the outstanding debt.
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
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