P3-20

1. Question

Why did the Agencies issue the Statement on Subprime Mortgage Lending?

To encourage growth in subprime lending
To address borrower misunderstanding and unsafe lending practices
To eliminate adjustable-rate mortgages
To promote higher-risk mortgage products

2. Question

What was the primary concern regarding subprime borrowers and adjustable-rate mortgages (ARMs)?

Borrowers preferred fixed-rate loans
Borrowers did not understand how ARM payments could increase
Borrowers had too much documentation
Borrowers were overqualified

3. Question

Which ARM feature was most associated with payment shock?

Escrowed taxes and insurance
Low introductory rates that later adjust upward
Fixed interest margins
Short loan terms

4. Question

Why are ARMs with high or no payment caps considered dangerous?

They increase lender profits
They reduce borrower flexibility
They allow large, uncontrolled payment increases
They require higher down payments

5. Question

Why is limited or no income documentation a concern in subprime lending?

It delays processing
It prevents accurate assessment of repayment ability
It lowers lender profitability
It increases closing costs

6. Question

Why do subprime loans often lead to frequent refinancing?

Borrowers seek better interest rates
Loan terms require refinancing
Payments become unaffordable after adjustment
Lenders require refinancing

7. Question

Why are prepayment penalties particularly harmful in subprime lending?

They increase lender profit
They prevent borrowers from escaping unaffordable loans
They delay loan approval
They reduce escrow requirements

8. Question

Why is borrower awareness of taxes and insurance important in subprime lending?

Because taxes lower interest rates
Because taxes and insurance may not be escrowed
Because insurance replaces mortgage payments
Because lenders require separate billing

9. Question

What is a common consequence of payment shock?

Improved credit
Reduced housing costs
Inability to afford monthly payments
Lower interest rates

10. Question

Why did subprime lending pose risks to lenders?

It reduced loan volume
It created legal, compliance, and liquidity risks
It lowered interest income
It eliminated refinancing opportunities

11. Question

What was a major consequence for borrowers involved in subprime lending?

Increased home equity
Improved credit scores
Loss of homes through foreclosure
Lower monthly payments

12. Question

Why did regulators emphasize borrower understanding of loan terms?

To increase loan volume
To reduce lender documentation
To prevent borrowers from entering unaffordable loans
To eliminate adjustable-rate mortgages

13. Question