Adjustable Rate Mortgages (ARMs)

What is it called when a large payment is due at the end of a loan? A. Balloon Payment B. Negative amortization C. Interest-only payment D. Pre-payment penalty

A. Balloon Payment

Sansa Stark pays off her ARM loan because she sells her home. Her lender charges her an extra fee for penalty for doing so. What type of prepayment penalty is this? A. Hard prepayment penalty B. Soft prepayment penalty C. Seller's prepayment penalty D. Principle payment penalty

A. Harf prepayment penalty

What is it called when a mortgage is recalculated based on the current index? A. Recast B. Redo C. Recalculate D. Do over

A. Recast

What period encompasses an initial rate that is usually lower than the fully-indexed ARM rate?

Adjustment period

Which of the following types of loan(s) could result in negative amortization of a loan? Choose all that apply A. Hybrid ARM B. Minimum (limited) payment ARM C. Lifetime Cap ARM D. Payment Cap ARM

B and D

The CHARM Booklet provides information on which of the following? A. Open-end loans B. Adjustable Rate Mortgages C. High-cost loans

B. ARMs

Which of the following terms describes the amount of money that a lender adds to the index rate to calculate the interest rate of an ARM at each adjustment? A. Balloon B. Margin C. Principal D. Negative Amortization

B. Margin

Reg Z requires lenders to provide more information about the features of closed-end, adjustable rate loans with a term greater than ______ secured by the borrower's principal dwelling (ARMs) A. 1 month B. 6 months C. 1 year D. 5 years

C. 1 year

How long must a creditor retain records to comply with Reg Z? A. 6 months B. 1 year C. 2 years D. 10 years

C. 2 years

If a 3/1 ARM loan has a 4% index and a 3% margin, based on the previous calculation, what would the fully indexed rate be? A. 1% B. 4% C. 7% D. 10%

C. 7%

John Snow has a $200,000 Arm loan on his home. He has a _____ cap where his monthly payment can only increase 8% each adjustment period. A. Lifetime B. Periodic Adjustment C. Payment D. Recast

C. Payment cap

Jessica Greyjoy has a 3/1 Hybrid ARM loan. What does the 3 in the fraction represent? A. The rate can be adjusted every three years on the loan B. The interest rate can only increase 3% per adjustment period C. The interest rate on the loan will be 3% for the life of the loan D. The number of years the initial rate will remain fixed

D

What is another term for initial rates? A. Discounted rates B. Start rates C. Teaser rates D. All of the above

D. All of the above

Patriot Mortgage is a non-depository institution with $7 billion in assets. Which agency would examine Patriot Mortgage? A. Bank regulators B. FDIC C. Federal Reserve D. CFPB

D. CFPB, although it's less than $10 billion assets, it's a non-depository institution

Which type of ARM loan is most likely to result in negative amortization? A. Interest-Only (I-O) ARMs B. Hybrid ARMs C. Payment-option ARMs with a traditional payment D. Payment-option ARMs with a minimum (limited) payment

D. Payment-option ARMs with a minimum (limited) payment

T or F: A lender must include both a historical example and a statement of a worst case example to comply with loan program disclosures

FALSE. A lender can choose EITHER a historical example or a sample statement of a worst case example to satisfy the loan program disclosures criteria. A lender isn't required to have both

T or F: Reg Z requires lenders to include a lifetime rate cap on ALL variable rate consumer loans

FALSE. Reg Z does require an interest rate cap on variable rate loans, but only when they are secured by a dwelling

T or F: Lenders can advertise ARM loans however they choose

FALSE. Reg Z has specific criteria that must be followed when advertising ARM loans

T or F: If the index goes down, the monthly mortgage payment will go up

FALSE. The payment could go down; however, it will not increase the payment

The _____ and _____ make up the interest rate for ARM loans

Index and Margin

When the loan balance is higher than the original balance at consummation

Negative Amortization

T or F: Hybrid ARMs are advertised as fractions like 3/1 or 5/1

TRUE

T or F: If the index goes down, the borrower's monthly payment could go down. Not all ARMs adjust upward

TRUE

T or F: If the index goes up, the borrower's interest and monthly payment will be higher

TRUE

T or F: The required lifetime interest rate cap on ARM loans applies to both open-end and closed-end credit transactions

TRUE

What is a measure of interest rates generally?

The Index

What is an extra amount the lender adds to the index?

The Margin

Does Reg Z require disclosure of a limitation (cap) on the maximum interest rate that may be charged if the rate may increase after consummation for loans secured by dwellings?

YES

Most ARM loans have recasting periods; must a lender disclose all facets of the recasting process to the borrower?

YES