Mortgage Loan Origination Activities 5 — Questions and Answers
Question 1: A lender is calculating a borrower's debt-to-income (DTI) ratio for loan origination. Which of the following debts is correctly included in the back-end DTI?
- Utility bills and cell phone payments
- The proposed housing payment plus all monthly installment and revolving debt obligations (Correct answer)
- Only the proposed mortgage payment (PITI)
- Student loan debts that are currently in deferment are always excluded
Correct answer: The proposed housing payment plus all monthly installment and revolving debt obligations
The back-end (total) DTI includes the proposed housing payment (PITI) plus all other recurring monthly debt obligations such as car loans, student loans, credit cards, and other installment debts.
Question 2: What is the purpose of the Closing Disclosure (CD) in the loan origination process?
- To lock the borrower's interest rate prior to underwriting
- To provide the borrower with final loan terms and closing costs at least 3 business days before consummation (Correct answer)
- To satisfy HMDA reporting requirements for the lender
- To document that the borrower has completed homebuyer education
Correct answer: To provide the borrower with final loan terms and closing costs at least 3 business days before consummation
The Closing Disclosure provides the borrower with final, actual loan terms and costs and must be delivered at least 3 business days before loan consummation under TRID.
Question 3: Under anti-steering provisions of the Dodd-Frank Act, an MLO is prohibited from directing a borrower to a loan primarily because it:
- Has the lowest possible interest rate available to the borrower
- Generates greater compensation for the MLO than other loans the borrower qualifies for (Correct answer)
- Is offered by the MLO's employer rather than a competing lender
- Requires mortgage insurance, which adds to monthly costs
Correct answer: Generates greater compensation for the MLO than other loans the borrower qualifies for
Anti-steering rules prohibit MLOs from recommending a loan product primarily because it pays the originator more, rather than because it is in the borrower's interest.
Question 4: A borrower is self-employed. Which documents are typically required to verify self-employment income during origination?
- Most recent W-2 and one pay stub
- Two years of personal and business tax returns, year-to-date P&L, and business bank statements (Correct answer)
- A letter from an accountant confirming annual income
- Three months of bank statements showing regular deposits
Correct answer: Two years of personal and business tax returns, year-to-date P&L, and business bank statements
For self-employed borrowers, agency guidelines require two years of personal and business tax returns, a year-to-date profit and loss statement, and often business bank statements to verify income stability.
Question 5: What is the 'three-day rescission period' in residential mortgage lending?
- The window in which a lender can rescind a rate lock after market volatility
- The right of a borrower to cancel a refinance on their primary residence within 3 business days of closing (Correct answer)
- The period during which an underwriter can withdraw a conditional approval
- The time allowed for a borrower to dispute items on their credit report before closing
Correct answer: The right of a borrower to cancel a refinance on their primary residence within 3 business days of closing
Under TILA's right of rescission, a borrower may cancel a refinance on their principal dwelling within 3 business days of closing, receipt of the Notice of Right to Cancel, or receipt of all material disclosures, whichever is latest.
Question 6: When originating a VA loan, what is the primary purpose of the Certificate of Eligibility (COE)?
- To certify the property meets VA Minimum Property Requirements
- To confirm the veteran's entitlement amount and eligibility to use the VA loan benefit (Correct answer)
- To document the veteran's credit score as approved by the VA
- To authorize the lender to charge a VA funding fee
Correct answer: To confirm the veteran's entitlement amount and eligibility to use the VA loan benefit
The COE verifies to the lender that the borrower meets military service requirements and documents their remaining VA entitlement for guaranty purposes.
Question 7: An originator discovers that a borrower's employer cannot be reached to verify employment at the time of closing. What is the most appropriate next step?
- Close the loan and note the discrepancy in the file
- Place the loan on hold and attempt alternative verification methods such as a CPA letter or IRS transcripts (Correct answer)
- Substitute a prior employer verification in place of the current one
- Accept the borrower's verbal confirmation and proceed
Correct answer: Place the loan on hold and attempt alternative verification methods such as a CPA letter or IRS transcripts
If standard employer verification fails at closing, lenders should attempt alternative methods and delay closing if needed, as funding without employment verification creates fraud risk and agency guideline violations.
Mortgage Loan Origination Activities 5
A lender is calculating a borrower's debt-to-income (DTI) ratio for loan origination.
Which of the following debts is correctly included in the back-end DTI?