Mortgage Loan Originator Assessment 4 — Questions and Answers
Question 1: What is the primary purpose of Private Mortgage Insurance (PMI) on a conventional loan?
- It protects the borrower if they lose their job
- It protects the lender against borrower default when LTV exceeds 80% (Correct answer)
- It covers property damage not insured by homeowner's insurance
- It reimburses closing costs if the loan is denied
Correct answer: It protects the lender against borrower default when LTV exceeds 80%
PMI protects the lender, not the borrower, in the event of default on loans where the LTV is above 80%.
Question 2: Under Regulation Z, which of the following triggers additional TILA disclosures in an advertisement for a mortgage?
- Mentioning the lender's name
- Stating the annual percentage rate
- Quoting a specific monthly payment amount (Correct answer)
- Listing the loan types offered
Correct answer: Quoting a specific monthly payment amount
Advertising a specific payment amount is a triggering term under Reg Z that requires additional TILA disclosures in the ad.
Question 3: A borrower is purchasing a home for $350,000 and puts 10% down. The lender charges 1 discount point. How much does the borrower pay in points?
- $3,500
- $3,150 (Correct answer)
- $350
- $35,000
Correct answer: $3,150
One point equals 1% of the loan amount; loan = $350,000 − $35,000 = $315,000; 1% × $315,000 = $3,150.
Question 4: Which FHA loan program is specifically designed for borrowers who want to finance both the purchase and rehabilitation of a home?
- FHA 203(b)
- FHA 203(k) (Correct answer)
- FHA Title I
- FHA HECM
Correct answer: FHA 203(k)
The FHA 203(k) program allows borrowers to finance the purchase price plus renovation costs into a single mortgage.
Question 5: What is the role of Freddie Mac in the secondary mortgage market?
- It originates mortgages directly to consumers
- It purchases conforming loans from lenders to provide liquidity (Correct answer)
- It insures FHA loans against default
- It sets the federal funds rate affecting mortgage rates
Correct answer: It purchases conforming loans from lenders to provide liquidity
Freddie Mac (FHLMC) buys conforming mortgages from lenders, bundles them into securities, and sells them to investors, providing lenders with capital to make new loans.
Question 6: A borrower's loan application includes a co-borrower's income to qualify. Under HMDA, whose demographic data must be collected?
- Only the primary borrower's
- Both the primary and co-borrower's (Correct answer)
- The co-borrower's only
- Neither, as HMDA exempts co-borrowers
Correct answer: Both the primary and co-borrower's
HMDA requires lenders to collect and report demographic information for both the applicant and any co-applicant.
Question 7: An ARM has a 2/2/5 cap structure. What does the final '5' represent?
- The maximum rate increase at each adjustment
- The maximum lifetime rate increase above the initial rate (Correct answer)
- The number of years before the first adjustment
- The margin added to the index
Correct answer: The maximum lifetime rate increase above the initial rate
In a 2/2/5 cap structure, the '5' is the lifetime cap — the maximum the rate can rise above the initial rate over the life of the loan.
Mortgage Loan Originator Assessment 4
What is the primary purpose of Private Mortgage Insurance (PMI) on a conventional loan?