Section 4 Lesson 5 2

1. Question

Why do most lenders review a borrower’s credit report before submitting the loan to an automated underwriting system?

To assess whether the borrower’s credit is likely to receive an accept/approve decision

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To estimate closing costs

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To calculate the loan-to-value ratio

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To determine employment stability

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2. Question

What is a Three-Merged Credit Report?

A credit report obtained from a single bureau

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A manually underwritten credit analysis

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A credit report used only for FHA loans

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A report that merges credit data from three major credit repositories into one report

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3. Question

Which three credit repositories are typically included in a Three-Merged Credit Report?

Equifax, Experian, and TransUnion

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Equifax, CoreLogic, and Experian

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Experian, Innovis, and ChexSystems

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TransUnion, LexisNexis, and Equifax

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4. Question

When may a lender request a Residential Mortgage Credit Report instead of a Three-Merged Credit Report?

When the borrower has no credit history

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When the borrower is self-employed

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When the Three-Merged Credit Report contains incorrect information

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When the loan amount exceeds conforming limits

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5. Question

Why is a Residential Mortgage Credit Report used less frequently than a Three-Merged Credit Report?

It cannot be used for automated underwriting

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It does not include credit scores

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It is only used for manual underwriting

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It is more expensive and takes longer to obtain

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6. Question

What option does a lender have if derogatory credit is likely to result in a refer from automated underwriting?

Automatically deny the loan

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Process the loan manually and document the file before submitting to an underwriter

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Remove the derogatory credit from the report

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Increase the interest rate

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7. Question

What potential issue may arise if automated underwriting denies a loan?

The underwriter may be hesitant to manually underwrite the loan

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The borrower’s credit score will automatically drop

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The loan must be resubmitted to a different AUS

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The appraisal must be reordered

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8. Question

What may occur when derogatory credit information is found to have been reported in error?

The borrower must wait 30 days for correction

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The lender must deny the loan

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The score cannot be changed before closing

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The incorrect information may be removed and the borrower’s credit score instantly re-scored higher

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9. Question

Why must borrowers still contact credit repositories after erroneous information is corrected for mortgage purposes?

Because mortgage corrections expire

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Because lenders do not share updates

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Because the correction does not automatically update the three major credit repositories

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Because employment history must be updated

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10. Question

Why are automated underwriting systems closely tied to a borrower’s credit score?

Credit scores directly influence automated underwriting approval decisions

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Credit scores determine property value

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Credit scores replace income documentation

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Credit scores eliminate underwriting

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11. Question

Which automated underwriting systems are referenced for conventional loans?

FHA TOTAL and VA AUS

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Encompass and Calyx

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GUS and LP

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Desktop Underwriting and Loan Prospector

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12. Question

What is meant by the term “repository” or “credit bureau”?

A lender’s internal credit department

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An organization that collects and maintains consumer credit information

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A government loan approval agency

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A software underwriting platform

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13. Question

What is the primary purpose of a credit bureau (also known as a repository)?

To supply credit information on consumers to creditors

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To approve or deny consumer loans

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To set credit scoring models

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To collect loan payments

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14. Question

Why might credit information appear on one repository’s report but not on another?

Credit bureaus store data for limited time periods

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Credit scores vary by lender

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Repositories delete inactive accounts

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Not all creditors report to every credit bureau

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15. Question

How do credit bureaus obtain information about a consumer’s credit history?

From consumers directly

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From credit grantors who extend credit

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From automated underwriting systems

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From public court records only

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16. Question

What type of consumer behavior is typically reported to credit bureaus by creditors?

Employment history

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Monthly income

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Net worth

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How the consumer pays his or her bills

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17. Question

What is a “limited subscriber” to a credit repository?

A creditor serviced by one repository that only inquires on that system

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A creditor who reports to all bureaus automatically

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A consumer with limited credit history

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A lender that only reports delinquent accounts

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18. Question

How frequently is credit status typically updated by automatic subscribers?

Daily

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Every one to two months

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Once per year

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Only at loan closing

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19. Question

Why are credit repositories working together to share information?

To reduce reporting costs

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To standardize interest rates

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To eliminate local bureaus

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To provide more accurate and complete credit information

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20. Question

A borrower submits a mortgage application, and the lender orders a credit report that includes information from multiple credit bureaus.

A) One credit bureau is sufficient

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B) All three repositories must be merged

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C) Only active accounts are required

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D) Credit history is optional

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21. Question

During underwriting, a loan processor notices several debts listed on the application that do not appear on the credit report.

A) The debts can be ignored

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B) The borrower must reapply

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C) Verification must be obtained

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D) The loan must be denied

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22. Question

An underwriter reviews a credit report showing an outstanding balance that has not been updated in over 90 days.

A) No action is required

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B) The account must be updated within 90 days

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C) Only delinquent accounts are reviewed

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D) Only revolving debt must be updated

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23. Question

A credit report shows payment history listed as “0x30, 1×60, 0x90.”

A) It reflects late payment history

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B) It indicates an open dispute

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C) It means no late payments occurred

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D) It invalidates the credit report

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24. Question

A credit report states that written authorization is required before account information can be released.

A) The account must be excluded

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B) The borrower must close the account

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C) Authorization or verification is required

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D) The lender must deny the loan

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25. Question

A lender pulls a borrower’s credit report before getting anything signed. Which rule is being violated?

ECOA

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Fair Credit Reporting Act (FCRA)

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RESPA

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HMDA

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26. Question

A loan officer takes a verbal application over the phone and orders credit. What compliance action is now required?

Send the borrower a copy of the credit report immediately

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Wait until the borrower signs a written application before doing anything else

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Only document the file if the borrower is denied

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Send an ECOA Notice and maintain a borrower file for 5 years

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27. Question

A borrower does not mention their late payments. Can the lender still discuss derogatory items shown on the credit report with the borrower?

Yes—FCRA allows discussing derogatory credit shown on the report even if the borrower didn’t volunteer awareness

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No—the borrower must bring it up first

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Only if the derogatory items are under $500

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Only after the loan is approved

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28. Question

Is there any legal restriction against a lender giving the borrower a copy of their credit report?

Yes—doing so makes the lender a consumer reporting agency

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Yes—FCRA prohibits lenders from providing copies of credit reports

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No—there’s no restriction, but lender agreements with reporting agencies often prohibit it

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No—lenders must always provide copies automatically

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29. Question

A loan file is transferred from Lender A to Lender B. Which document cannot be transferred as the original and must be re-obtained by the receiving lender?

Appraisal

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Verifications of employment and deposits

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The entire loan application file

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The original credit report

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30. Question

When can a lender rely on the credit report alone to verify a borrower’s prior mortgage payment history?

Only if the borrower provides a written statement confirming payment history

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If the credit report covers the previous 12 months (or longer) of mortgage payment history reported by the mortgage credit grantor

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Only if the credit report shows no late payments in the past 6 months

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Never—payment history must always be verified directly with the servicer

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31. Question

A credit report shows significant debt the borrower did not list on the loan application. What must the borrower provide?

A new credit report

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Proof the debt has been paid off

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A written explanation for the omission

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A copy of the promissory note for each debt

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32. Question

If a revolving account has an outstanding balance but no stated minimum required payment, how should the monthly payment be calculated?

2% of the outstanding balance

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The outstanding balance divided by 12

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$25 per month regardless of balance

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The greater of 5% of the outstanding balance or $10 per month

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33. Question

What is required when a borrower has judgments, garnishments, or liens?

They must be paid in full before closing, and the borrower must provide a satisfactory explanation and have re-established good credit

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They may remain unpaid if the borrower has strong reserves

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Only judgments must be paid; liens may remain open

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They must be paid after closing using escrowed funds

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34. Question

Under standard guidelines, what is the minimum elapsed time required between bankruptcy discharge and the mortgage application?

12 months

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2 years

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3 years

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4 years

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35. Question

A borrower had a foreclosure three years ago due to a serious long-term illness. Under what conditions might the borrower still be acceptable?

Only if the foreclosed home was an investment property

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If the borrower has re-established satisfactory credit and demonstrated ability to manage financial matters

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Only if seven years have passed regardless of circumstances

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If the borrower pays a larger down payment

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36. Question

Why is the Three-Merged Credit Report the most commonly used type of credit report by lenders?

Because it contains verified employment and residence history

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Because it is required by Fannie Mae for all loans

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Because it may be accessed almost immediately

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Because it guarantees accuracy across all repositories

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37. Question

Why do most lenders prefer a Three-Merged Credit Report instead of a Residential Mortgage Credit Report?

The Residential Mortgage Credit Report excludes public records

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The Residential Mortgage Credit Report is less accurate

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The Residential Mortgage Credit Report is only for high-risk borrowers

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The Residential Mortgage Credit Report takes longer to obtain because information is personally verified

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38. Question

When may a lender request a Non-Traditional Mortgage Credit Report?

When the borrower has disputed items on a credit report

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When the borrower does not use traditional credit or lacks a reportable credit history

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When the borrower has excessive revolving debt

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When automated underwriting returns a refer

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39. Question

What are the standard FHA qualifying ratios, and under what condition may they be increased?

28% front / 36% back, increased with higher credit scores

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31% front / 43% back, increased up to 50% with compensating factors

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36% front / 45% back, increased with larger down payments

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Back ratio only at 41%, increased with residual income

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40. Question

What is the standard qualifying ratio guideline for VA loans?

31% front / 43% back

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36% back only

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41% back ratio, which may increase with compensating factors

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50% back ratio

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41. Question

How does VA primarily qualify borrowers for mortgage approval?

Using front-end debt ratios

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Using loan-to-value limits

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Using credit score thresholds

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Using Residual Income (Balance Remaining for Family Support)

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42. Question

Under FHA guidelines, when are installment debt payments included in the back-end ratio?

When they extend beyond 12 months

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When they extend beyond 10 months and total no more than 5% of gross income

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When they exceed $100 per month

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When they appear on the credit report

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43. Question

What restriction applies to borrowers attempting to meet the 10-month installment debt requirement?

The borrower may refinance the debt

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The borrower may consolidate the debt

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The borrower may not pay down the balance to meet the requirement

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The borrower may exclude the debt with documentation

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44. Question

Which installment debts are included in the VA back-end ratio calculation?

Debts extending beyond 12 months

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Debts extending beyond 10 months

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Debts extending beyond nine months

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All installment debts regardless of term

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45. Question

When both spouses work full-time, what additional expense must be included in VA qualifying liabilities?

Utility expenses

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Transportation costs

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HOA dues

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Child care expenses

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46. Question

What fundamental requirement underlies all Ability-to-Repay (ATR) scenarios?

Borrowers must be able to repay the mortgage

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Borrowers must have a minimum credit score

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Borrowers must have cash reserves

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Borrowers must occupy the property

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47. Question

What must lenders evaluate to ensure compliance with the Ability-to-Repay rule?

The property’s resale value

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The borrower’s residual income only

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The borrower’s available income and assets

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The borrower’s loan-to-value ratio

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48. Question

Why must borrowers provide documentation as part of the ATR analysis?

To establish property eligibility

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To demonstrate income and asset availability

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To qualify for a lower interest rate

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To reduce lender liability

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49. Question

Which of the following is an example of acceptable documentation for ATR purposes?

Personal budget worksheet

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Bank statements and tax returns

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Credit counseling certificate

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Appraisal report

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50. Question

What practice regarding teaser rates is prohibited under Ability-to-Repay rules?

Offering teaser rates on adjustable-rate mortgages

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Disclosing teaser rates without APR

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Charging interest-only payments

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Masking the true cost of the loan using teaser rates

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51. Question

Why may lenders not measure a borrower’s ability to repay using a teaser rate?

Teaser rates violate RESPA

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Teaser rates are illegal

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Teaser rates do not reflect the long-term loan obligation

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Teaser rates increase default risk automatically

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52. Question

How must lenders measure a borrower’s ability to repay an adjustable-rate mortgage?

Based on the initial introductory rate

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Based on the rate in effect for the first 12 months

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Based on the lowest possible interest rate

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Based on the long-term interest rate applicable to the loan

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53. Question

What does a tangible net benefit refer to in a refinance transaction?

The lender’s profit from originating the loan

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The advantage or benefit the borrower gains by refinancing into a new loan

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The reduction in lender risk due to collateral value

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The borrower’s ability to qualify for a higher loan amount

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54. Question

Which occupancy type represents the least amount of risk to the lender?

Investment property

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Second home

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Principal residence occupied by the borrower

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Vacation rental

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55. Question

How is a second home occupancy best described?

A property owned solely for rental income

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A property occupied by the borrower for some portion of the year

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A property leased to unrelated tenants year-round

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A property used only for short-term rentals

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56. Question

What defines an investment property?

A property used occasionally by the borrower

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A property owned and occupied by the borrower

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A property owned but not occupied by the borrower

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A property used as a primary residence part-time

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