P3-21 2

1. Question

Why did federal agencies issue multiple interagency guidance documents related to subprime lending?

To increase loan volume in higher-risk markets
To standardize pricing across all lenders
To address growing risk and consumer protection concerns
To eliminate adjustable-rate mortgages entirely

2. Question

Which guidance documents most strongly influenced federal oversight of subprime mortgage lending?

The Truth in Lending Act and RESPA
The 1993 Real Estate Guidelines, 1999 Subprime Guidance, and 2001 Expanded Subprime Guidance
The Dodd-Frank Act
The Home Mortgage Disclosure Act

3. Question

Why did regulators consider the 2006 Nontraditional Mortgage (NTM) Guidance relevant to subprime lending?

It prohibited subprime loans
It eliminated adjustable-rate mortgages
It reinforced prudent underwriting and consumer protection principles
It required fixed interest rates

4. Question

What is the primary purpose of risk management practices in mortgage lending?

To maximize lender profits
To increase loan approvals
To control credit, compliance, and reputational risk
To reduce documentation requirements

5. Question

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

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

6. Question

Which practice is commonly associated with predatory lending?

Escrowing taxes and insurance
Making loans based primarily on collateral value
Verifying income thoroughly
Offering fixed-rate loans

7. Question

What is meant by ‘loan flipping’ in predatory lending?

Selling loans to investors
Repeated refinancing to generate fees and points
Converting fixed-rate loans to ARMs
Reducing interest rates repeatedly

8. Question

Why is deception considered a key element of predatory lending?

It increases lender efficiency
It conceals true loan costs and risks from borrowers
It simplifies underwriting
It reduces regulatory oversight

9. Question

What is a common consequence of payment shock?

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

10. Question