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
To estimate closing costs
To calculate the loan-to-value ratio
To determine employment stability

2. Question

What is a Three-Merged Credit Report?

A credit report obtained from a single bureau
A manually underwritten credit analysis
A credit report used only for FHA loans
A report that merges credit data from three major credit repositories into one report

3. Question

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

Equifax, Experian, and TransUnion
Equifax, CoreLogic, and Experian
Experian, Innovis, and ChexSystems
TransUnion, LexisNexis, and Equifax

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
When the borrower is self-employed
When the Three-Merged Credit Report contains incorrect information
When the loan amount exceeds conforming limits

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
It does not include credit scores
It is only used for manual underwriting
It is more expensive and takes longer to obtain

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
Process the loan manually and document the file before submitting to an underwriter
Remove the derogatory credit from the report
Increase the interest rate

7. Question

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

The underwriter may be hesitant to manually underwrite the loan
The borrower’s credit score will automatically drop
The loan must be resubmitted to a different AUS
The appraisal must be reordered

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
The lender must deny the loan
The score cannot be changed before closing
The incorrect information may be removed and the borrower’s credit score instantly re-scored higher

9. Question

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

Because mortgage corrections expire
Because lenders do not share updates
Because the correction does not automatically update the three major credit repositories
Because employment history must be updated

10. Question

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

Credit scores directly influence automated underwriting approval decisions
Credit scores determine property value
Credit scores replace income documentation
Credit scores eliminate underwriting

11. Question

Which automated underwriting systems are referenced for conventional loans?

FHA TOTAL and VA AUS
Encompass and Calyx
GUS and LP
Desktop Underwriting and Loan Prospector

12. Question

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

A lender’s internal credit department
An organization that collects and maintains consumer credit information
A government loan approval agency
A software underwriting platform

13. Question

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

To supply credit information on consumers to creditors
To approve or deny consumer loans
To set credit scoring models
To collect loan payments

14. Question

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

Credit bureaus store data for limited time periods
Credit scores vary by lender
Repositories delete inactive accounts
Not all creditors report to every credit bureau

15. Question

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

From consumers directly
From credit grantors who extend credit
From automated underwriting systems
From public court records only

16. Question

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

Employment history
Monthly income
Net worth
How the consumer pays his or her bills

17. Question

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

A creditor serviced by one repository that only inquires on that system
A creditor who reports to all bureaus automatically
A consumer with limited credit history
A lender that only reports delinquent accounts

18. Question

How frequently is credit status typically updated by automatic subscribers?

Daily
Every one to two months
Once per year
Only at loan closing

19. Question

Why are credit repositories working together to share information?

To reduce reporting costs
To standardize interest rates
To eliminate local bureaus
To provide more accurate and complete credit information

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
B) All three repositories must be merged
C) Only active accounts are required
D) Credit history is optional

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
B) The borrower must reapply
C) Verification must be obtained
D) The loan must be denied

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
B) The account must be updated within 90 days
C) Only delinquent accounts are reviewed
D) Only revolving debt must be updated

23. Question

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

A) It reflects late payment history
B) It indicates an open dispute
C) It means no late payments occurred
D) It invalidates the credit report

24. Question

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

A) The account must be excluded
B) The borrower must close the account
C) Authorization or verification is required
D) The lender must deny the loan

25. Question

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

ECOA
Fair Credit Reporting Act (FCRA)
RESPA
HMDA

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
Wait until the borrower signs a written application before doing anything else
Only document the file if the borrower is denied
Send an ECOA Notice and maintain a borrower file for 5 years

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
No—the borrower must bring it up first
Only if the derogatory items are under $500
Only after the loan is approved

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
Yes—FCRA prohibits lenders from providing copies of credit reports
No—there’s no restriction, but lender agreements with reporting agencies often prohibit it
No—lenders must always provide copies automatically

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
Verifications of employment and deposits
The entire loan application file
The original credit report

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
If the credit report covers the previous 12 months (or longer) of mortgage payment history reported by the mortgage credit grantor
Only if the credit report shows no late payments in the past 6 months
Never—payment history must always be verified directly with the servicer

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
Proof the debt has been paid off
A written explanation for the omission
A copy of the promissory note for each debt

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
The outstanding balance divided by 12
$25 per month regardless of balance
The greater of 5% of the outstanding balance or $10 per month

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
They may remain unpaid if the borrower has strong reserves
Only judgments must be paid; liens may remain open
They must be paid after closing using escrowed funds

34. Question

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

12 months
2 years
3 years
4 years

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
If the borrower has re-established satisfactory credit and demonstrated ability to manage financial matters
Only if seven years have passed regardless of circumstances
If the borrower pays a larger down payment

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
Because it is required by Fannie Mae for all loans
Because it may be accessed almost immediately
Because it guarantees accuracy across all repositories

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
The Residential Mortgage Credit Report is less accurate
The Residential Mortgage Credit Report is only for high-risk borrowers
The Residential Mortgage Credit Report takes longer to obtain because information is personally verified

38. Question

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

When the borrower has disputed items on a credit report
When the borrower does not use traditional credit or lacks a reportable credit history
When the borrower has excessive revolving debt
When automated underwriting returns a refer

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
31% front / 43% back, increased up to 50% with compensating factors
36% front / 45% back, increased with larger down payments
Back ratio only at 41%, increased with residual income

40. Question

What is the standard qualifying ratio guideline for VA loans?

31% front / 43% back
36% back only
41% back ratio, which may increase with compensating factors
50% back ratio

41. Question

How does VA primarily qualify borrowers for mortgage approval?

Using front-end debt ratios
Using loan-to-value limits
Using credit score thresholds
Using Residual Income (Balance Remaining for Family Support)

42. Question

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

When they extend beyond 12 months
When they extend beyond 10 months and total no more than 5% of gross income
When they exceed $100 per month
When they appear on the credit report

43. Question

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

The borrower may refinance the debt
The borrower may consolidate the debt
The borrower may not pay down the balance to meet the requirement
The borrower may exclude the debt with documentation

44. Question

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

Debts extending beyond 12 months
Debts extending beyond 10 months
Debts extending beyond nine months
All installment debts regardless of term

45. Question

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

Utility expenses
Transportation costs
HOA dues
Child care expenses

46. Question

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

Borrowers must be able to repay the mortgage
Borrowers must have a minimum credit score
Borrowers must have cash reserves
Borrowers must occupy the property

47. Question

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

The property’s resale value
The borrower’s residual income only
The borrower’s available income and assets
The borrower’s loan-to-value ratio

48. Question

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

To establish property eligibility
To demonstrate income and asset availability
To qualify for a lower interest rate
To reduce lender liability

49. Question

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

Personal budget worksheet
Bank statements and tax returns
Credit counseling certificate
Appraisal report

50. Question

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

Offering teaser rates on adjustable-rate mortgages
Disclosing teaser rates without APR
Charging interest-only payments
Masking the true cost of the loan using teaser rates

51. Question

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

Teaser rates violate RESPA
Teaser rates are illegal
Teaser rates do not reflect the long-term loan obligation
Teaser rates increase default risk automatically

52. Question

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

Based on the initial introductory rate
Based on the rate in effect for the first 12 months
Based on the lowest possible interest rate
Based on the long-term interest rate applicable to the loan

53. Question

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

The lender’s profit from originating the loan
The advantage or benefit the borrower gains by refinancing into a new loan
The reduction in lender risk due to collateral value
The borrower’s ability to qualify for a higher loan amount

54. Question

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

Investment property
Second home
Principal residence occupied by the borrower
Vacation rental

55. Question

How is a second home occupancy best described?

A property owned solely for rental income
A property occupied by the borrower for some portion of the year
A property leased to unrelated tenants year-round
A property used only for short-term rentals

56. Question

What defines an investment property?

A property used occasionally by the borrower
A property owned and occupied by the borrower
A property owned but not occupied by the borrower
A property used as a primary residence part-time

56 graded questions

Quiz Summary

Information

Results