Deck 10: Real Estate and Consumer Lending

Question 1

The term "mortgage" in common law refers to the right of ownership in connection with real estate.

Answer 1

False

Question 2

A conventional mortgage is one that is not backed by an agency of the federal government.

Answer 2

True

Question 3

A typical loan-to-price ratio for conventionally financed mortgage loans on new homes is about 75-80 percent.

Answer 3

True

Question 4

The basic idea behind ARMs is to allow lenders to adjust the returns on their portfolios to changes in the prices of new homes.

Question 5

Home buyers can reduce their monthly payments, but increase their total cost of the loan by increasing the maturity of their mortgage loans.

Question 6

An assumable mortgage is one that assumes higher or lower interest rates when the lenders cost of funds changes.

Question 7

In a real estate portfolio, fixed rate mortgages are generally riskier than ARMs because the latter allows lenders to maintain a positive spread.

Question 8

Graduated payment mortgages are better suited for young home buyers than for the elderly.

Question 9

Home equity loans are a form of second mortgage.

Question 10

As long as a real estate loan is secured by real property, banks may lend up to 100 percent of the fair market value specified by qualified appraisers.

Question 11

RESPA and HUMDA are examples of variable rate mortgage loans.

Question 12

Securitization is used exclusively for home mortgage loans.

Question 13

The three major participants in the secondary mortgage market are Bank America, FNMA, and Citicorp.

Question 14

REITs are government backed agencies that specialize in real estate finance.

Question 15

Consumer installment loans include credit cards, automobile loans, and single payment loans.

Question 16

Credit card and automobile loans are examples of "closed-end" loans.

Question 17

Credit card issuers have intense nonprice competition.

Question 18

Indirect lending by banks to automobile dealers to finance car loans are sometimes called "dealer paper."

Question 19

Credit cards are not the same as debit cards or prepayment cards.

Question 20

In an open-end automobile lease, the borrower assumes the risk of the residual value at the end of the lease.

Question 21

Federal Reserve Regulation Z is mandated under the Equal Credit Opportunity Act to ensure fair interest rates are paid on deposits.

Question 22

Finance charges include guarantee insurance premiums.

Question 23

The "Adjusted Balance" method of computing finance charges results in the lowest finance charge.

Question 24

The "Average Daily Balance Method excluding current transactions" method of computing finance charges results in the highest finance charges.

Question 25

The APR can be the same as the IRR.

Question 26

For a given loan at the same interest rate, the add-on method produces lower finance charges than the discount method.

Question 27

The Truth in Lending Act requires creditors to disclose the APR and finance charges so that borrowers can make intelligent credit decisions.

Question 28

Many banks use credit scoring systems to assist in their evaluation of prospective borrowers.

Question 29

A typical loan-to-price ratio is

A) 90%
B) 80%
C) 70%
D) 60%

Question 30

The principal risks associates with real estate lending are:

A) declining values
B) defaults
C) lack of liquidity
D) all of the above

Question 31

Most mortgage loans in the United States are:

A) ARMS
B) fixed rate, partially amortized
C) fixed rate, fully amortized, level payment
D) GEMS

Question 32

ARM payments increase when

A) the index rate falls
B) the rates are above the cap
C) when the index rate increases
D) none of the above

Question 33

During the early years of repaying mortgage loans, most of the monthly payment is applied to

A) principal
B) interest
C) points
D) escrows

Question 34

As a rule of thumb, one point corresponds to ______in the interest charge.

A) 0.1 percent
B) 1.0 percent
C) 10.0 percent
D) 0.001 percent

Question 35

Assumable loans change interest rates

A) when interest rates increase
B) if the buydown provision is exercised
C) if the home is sold
D) none of the above

Question 36

A rate floor in an ARM

A) is the highest rate a borrower may pay
B) is the lowest rate a borrower may pay
C) part of the margin
D) may result in negative amortization

Question 37

Negative amortization of a mortgage loan may occur in which of the following types of mortgage loans?

A) ARM
B) SAM
C) GPM
D) All of the above

Question 38

In order for the seller of securitized securities to remove the assets (i.e. mortgages) from the balance sheet, the sale must

A) be made at a discount (original issue discount)
B) be without recourse
C) be overcollateralized
D) have a service agreement

Question 39

The Federal National Mortgage Association is

A) a division of Housing and Urban Development (HUD)
B) a division of the U. S. Treasury
C) an independent agency similar to the Federal Reserve
D) a government sponsored privately owned corporation

Question 40

Government National Mortgage Association is

A) a division of Housing and Urban Development (HUD)
B) a division of the U. S. Treasury
C) an independent agency similar to the Federal Reserve
D) a government sponsored privately owned corporation

Question 41

Real Estate Investment Trusts tend to special in

A) multi-family residential property
B) commercial property
C) hotel property
D) all of the above

Question 42

Private mortgage insurance is used to

A) reduce the default risk to lenders
B) protect borrowers if they cannot make periodic payments
C) in lieu of a bond for termites
D) to ensure timely payments of escrow, taxes, and other fixed charges.

Question 43

Retail banking refers to

A) providing banking services to small and medium size firms
B) providing banking services to individuals and small size business concerns
C) providing banking services to individuals
D) providing services to small size businesses.

Question 44

Credit cards are one example of

A) open-end lines of credit
B) closed-end lines of credit
C) amortized payment loans
D) term loans

Question 45

The principal distinction between a credit card and a debit card is that

A) credit cards are made of plastic and have customer information imbedded on a magnetic strip
B) debit cards do not extend credit
C) credit cards may be used to buy goods and services
D) debit cards are used in lieu of check overdrafts

Question 46

The merchant's credit card discount is based on

A) volume of credit card trade
B) average size of credit card sales
C) compensating balances
D) all of the above

Question 47

Credit card fee income comes from

A) late payments
B) cash advances
C) exceeding credit lines
D) all of the above

Question 48

Convenience use of credit cards refers to

A) the open-end use of the card
B) amounts owed being paid in full when billed
C) the line of credit may be raised as needed
D) none of the above

Question 49

Which of the following are noninstallment loans? There may be more than one correct answer.

A) bridge-loans
B) single payment loans
C) open-end leases
D) closed-end leases

Question 50

Federal Reserve Regulation Z requires

A) banks to maintain reserves against deposits
B) banks and other lenders to maintain reserves against deposits
C) lenders to advise consumers in writing about finance charges and costs before they make a loan
D) lenders to tell consumers about finance charges and costs before they make a loan so that they may compare credit costs

Question 51

The finance charge is

A) total dollar amount paid for the use of credit
B) the APR
C) determined by the actuarial method or the rule of 78
D) the interest cost plus other fees such as sales tax

Question 52

Under the adjusted balance method of assessing finance charges, the finance charge is applied to

A) the original amount billed less payments made prior to the payment date
B) the original amount billed without consideration to payments made prior to billing date
C) the original amount billed, but no including current transactions, and no consideration for the grace period
D) none of the above

Question 53

Which of the following method for assessing finance charges results in the least cost to the borrower?

A) adjusted balance
B) previous balance
C) average daily balance excluding current transactions
D) average daily balance including current transactions

Question 54

The APR is

A) the average rate paid for credit
B) the average rate paid on deposits
C) the average annual percentage cost paid for credit
D) the average annual percentage cost paid on deposits

Question 55

Assume a single-payment $1,000 loan for one year at 16 percent. The APR is

A) 32 percent
B) 24 percent
C) 16 percent
D) none of the above

Question 56

Which of the following methods of computing finance charges results in the highest APR cost to borrowers?

A) discount rate
B) add-on rate
C) monthly amortization
D) single-payment

Question 57

Given a $15,000, 3 year loan at 12.5 percent, which of the following methods will produce in the largest finance charge?

A) discount-rate
B) add-on rate
C) single-payment loan rate
D) all of the above

Question 58

Borrower's risk of using adjustable rate consumer loans is limited by

A) reserve requirements
B) caps and floors
C) interest rate swaps
D) internal audits

Question 59

Interest rate rebates on installment loans paid off before maturity may be determined by

A) caps and floors
B) the APR
C) the actuarial method or the Rule of 78
D) all of the above

Question 60

The law that ensures that credit is extended to creditworthy borrowers, and prohibits discrimination based on race or sex in the

A) Truth in Lending Act
B) Community Reinvestment Act
C) Equal Credit Opportunity Act
D) Financial Institutions Reform, Recovery, and Enforcement Act

Question 61

The law that requires public disclosure of lenders' compliance with CRA is

A) Truth in Lending Act
B) Community Reinvestment Act
C) Equal Credit Opportunity Act
D) Financial Institutions Reform, Recovery, and Enforcement Act

Question 62

Credit card loan applications cannot ask questions about the applicants

A) sex
B) income
C) retirement plans
D) age

Question 63

Applicants who have been denied credit have recourse under the

A) Equal Credit Opportunity Act
B) Truth in Lending Act
C) Fair Credit Reporting Act
D) Right to Financial Privacy Act