Question 1

Which of the following is the principal risk faced by a home equity lender?

Accepted Answer

The principal risk faced by a home equity lender is that home prices in the area may decline. This could result in the borrower owing more on the loan than the value of the property, making it difficult for the lender to collect the full amount owed. Interest rates in the economy may also impact the profitability of the loan, but this is a secondary risk. There is no risk associated with home equity lending is an incorrect statement as all lending activities carry some level of risk.

Question 2

In a revolving line of credit,where a customer is subject to high fees and interest costs and is required to make only a small portion of total debt owed,usually called "minimum payment",often results in:

Accepted Answer

With a revolving line of credit, the customer is only required to make a minimum payment, which may not even cover the interest owed. This can result in negative amortization of debt, where the total amount owed increases over time instead of decreasing.

Question 3

According to the text,which of the following is often the most profitable credit service a lender can offer?

Accepted Answer

Consumer loans are often the most profitable credit service a lender can offer because they typically come with higher interest rates and fees, and have a larger market of potential borrowers compared to the other options listed. Business loans and loans to not-for-profit organizations may also be profitable, but they often require more stringent lending criteria and involve higher risk. Government loans and money market loans may have lower interest rates and fees, resulting in less profitability for the lender.

Question 4

Richard Thornton has applied for a home equity loan from Capital Two Bank.The bank on its part has estimated the market value of Richard's property at $750,000.If the amount of existing mortgage loan on the property is $500,000 and Capital Two as a policy lends only up to 70 percent of the borrowing base,what is the maximum amount of loan will Richard get?

Accepted Answer

The borrowing base is the value of the property minus the existing mortgage loan, which is $750,000 - $500,000 = $250,000. 
Capital Two Bank only lends up to 70% of the borrowing base, so the maximum loan amount Richard can get is 70% of $250,000, which is $175,000. Therefore, the answer is choice C.

Question 5

A bankruptcy filing usually remains in the credit report of the filer for up to:

Accepted Answer

A bankruptcy filing typically remains on a credit report for up to 10 years, which can have a significant negative impact on a person's credit score and ability to obtain credit or loans in the future. It is important to carefully consider all options and potential consequences before deciding to file for bankruptcy.

Question 6

According to a proposal under Dodd-Frank Wall Street Reform and Consumer Protection Act,lenders who are pooling and securitizing the mortgage loans they create and then selling them off should remain responsible for at least:

Accepted Answer

The proposal under Dodd-Frank Wall Street Reform and Consumer Protection Act requires lenders who are pooling and securitizing mortgage loans to retain at least 5 percent of the credit risk associated with these loans. This is aimed at ensuring that lenders have 'skin in the game' and are accountable for the quality of loans they originate and sell off to investors. Retaining 5 percent of credit risk is considered to strike a balance between protecting investors and encouraging lending without unduly burdening lenders.

Question 7

A bank customer is granted credit for a $2,000 loan at 10 percent to be repaid in 12 equal installments.If the loan quoted has an add-on rate,which of the following is the approximate annual percentage rate (APR)on the loan?

Accepted Answer

Since the loan is to be repaid in 12 equal installments, the add-on rate is simply added to the principal amount and the resulting sum is divided by 12. In this case, the total amount to be repaid is $2,200 ($2,000 + 10% of $2,000), divided into 12 equal installments, which gives us $183.33 per installment. To calculate the APR, we need to find the interest rate that would give us a total repayment of $2,200 over the course of a year. One way to do this is to multiply the monthly installment by 12 to get the total annual repayment, which is $2,200. Then divide this by the original principal amount of $2,000 to get the APR, which is 1.10 or 110%, and then subtract 100% to get the APR in percentage points. So the APR is approximately 10%. However, this APR is not the true cost of the loan since it does not take into account the fact that the principal amount is reduced with each payment. To get a more accurate APR, we would need to use a different calculation that takes into account the reducing balance of the loan. This would likely result in a higher APR than 10%.

Question 8

A ____________ uses an average of a debtor's last six months of gross income to determine whether an applicant must file for bankruptcy under chapter 7 or 13 of the bankruptcy code.

Accepted Answer

The means test is used to determine if a debtor's income is low enough to qualify for Chapter 7 bankruptcy or if they must file for Chapter 13 bankruptcy and repay their debts over time. It calculates average income based on the debtor's last six months of gross income. Therefore, the means test is the correct answer.

Question 9

The principal task of the Consumer Financial Protection Bureau (CFPB)is to:

Accepted Answer

The CFPB's main function is to write rules and regulations to protect consumers of financial services. This includes creating and enforcing laws related to areas such as credit cards, mortgages, and payday loans. The other options mentioned involve responsibilities of other government agencies such as the Federal Reserve (monetary policy), FDIC (safety and soundness of banking system), and international organizations like the Basel Committee (international banking regulations).

Question 10

Michelle Woods,a 64 year old retired professor,has applied for a home equity loan from a bank in her neighborhood.The bank structured a loan against her property in a manner that she receives $5,000 every month.This is an example of:

Accepted Answer

This is an example of a reverse mortgage loan, which allows homeowners who are 62 years or older to borrow money against the equity in their homes, and receive funds in either a lump sum, monthly payments, or a line of credit. In this case, Michelle Woods is receiving $5,000 every month, which is a form of monthly payments.

Question 11

The net effect of the new code under Bankruptcy Abuse Prevention and Consumer Protection Act,2005 has generally been to make filing for bankruptcy:

Accepted Answer

The Bankruptcy Abuse Prevention and Consumer Protection Act,2005 has added several new requirements and procedures which have made filing for bankruptcy more expensive and time-consuming. The act requires debtors to complete mandatory credit counseling and financial management courses, pay higher filing fees, provide more extensive documentation of their financial affairs, and undergo a means test to determine their eligibility for bankruptcy relief. All these requirements have made the bankruptcy filing process more expensive and lengthier than before.

Question 12

The ______________________ Act requires that applicants for mortgage loans must be given a disclosure statement indicating whether the servicing rights could be transferred to another institution that borrowers will have to deal with during the loan tenure.

Accepted Answer

The Real Estate Settlement Procedures Act (RESPA) requires that applicants for mortgage loans must be given a disclosure statement indicating whether the servicing rights could be transferred to another institution that borrowers will have to deal with during the loan tenure.

Question 13

Which of the following bodies is created under the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act?

Accepted Answer

The Consumer Financial Protection Bureau (CFPB) was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act to protect consumers in the financial marketplace. A is incorrect because the Federal Reserve Board already existed prior to the Dodd-Frank Act. B, C, and D are also existing regulatory bodies that were not created by Dodd-Frank.

Question 14

As part of the new regulations of the mortgage market,the Federal Reserve Board moved to tighten the rules on mortgage lending in 2008.All of the following would improve transparency of the market except for:

Accepted Answer

Option C actually works against transparency as it allows borrowers to misrepresent their income, making it difficult for lenders to assess creditworthiness accurately. In contrast, options A, B, and D all contribute towards improving transparency in the mortgage market by mandating that lenders provide verifiable information and greater detail about the mortgage terms. Therefore, the best choice is C.

Question 15

A bank customer is granted credit for a $2,000 loan at 10 percent to be repaid in 12 equal installments.If the loan quoted has an add-on rate,what are the net proceeds of the loan?

Accepted Answer

The answer of A bank customer is granted credit for...

Quiz 18: Consumer Loans, Credit Cards, and Real Estate Lending