Chapter 34 — Self-Check Quiz

26 questions. Multiple choice and short answer, written in the style of the SAFE MLO test where the material is exam-relevant. Answer key in the collapsed block at the bottom — work the whole quiz before you open it.

Where a question supplies a program parameter, use it. None of the parameters in this quiz is standard, and none is published.

1. Which statement best describes a non-QM loan?

A. A loan made without verifying the borrower's income B. A loan to a borrower with damaged credit C. A closed-end consumer mortgage that does not meet the Qualified Mortgage definition D. A loan that cannot be sold on the secondary market

2. A lender makes a non-QM consumer mortgage. Which is true of the Ability-to-Repay requirement?

A. It does not apply, because the loan is not a qualified mortgage B. It applies in full; the lender simply has no QM safe harbor or presumption C. It applies only if the loan is higher-priced D. It applies only to the borrower's employment income

3. A qualified mortgage that is not a higher-priced covered transaction receives:

A. a rebuttable presumption of ATR compliance B. a safe harbor of ATR compliance C. an exemption from Regulation Z D. no special treatment

4. Regulation Z requires a creditor to consider income or assets other than which of the following in making the ATR determination?

A. the borrower's retirement accounts B. the borrower's rental income C. the value of the dwelling securing the loan D. the borrower's business receipts

5. Short answer. Name three reasons, none of which involves the form of income documentation, that an otherwise ordinary consumer mortgage would be non-QM.

6. In a business bank statement program, the expense factor is applied in order to:

A. reduce deposits to the amount the borrower actually reported on their tax return B. convert gross business receipts into the portion attributable to the owner as income C. account for the lender's underwriting cost D. satisfy the Regulation Z verification requirement

7. A twelve-month business bank statement analysis shows total deposits of \$360,000.00 and excluded deposits of \$48,000.00. The program applies a 50% expense factor and the borrower's documented ownership is 100%. Qualifying monthly income is:

A. \$30,000.00 B. \$15,000.00 C. \$13,000.00 D. \$26,000.00

8. Which of the following is generally excluded from qualifying deposits in a bank statement analysis?

A. a customer's payment for services rendered B. proceeds of an equipment loan deposited into the business account C. a routine monthly retainer from a long-standing client D. a large payment from a new customer at the end of the period

9. Short answer. A program uses personal rather than business bank statements and applies no expense factor. State the single question you must ask the borrower before you rely on the resulting income figure, and say why.

10. A 1099-only program uses a two-year average of Forms 1099 totaling \$384,000.00 and applies a 10% expense factor. Qualifying monthly income is:

A. \$32,000.00 B. \$16,000.00 C. \$14,400.00 D. \$17,600.00

11. A P&L-only program requires the profit and loss statement to be prepared by:

A. the borrower, signed under penalty of perjury B. a third party — a CPA, enrolled agent, or licensed tax preparer C. the borrower's bank D. the lender's underwriting department

12. The most common reason a P&L-only file dies is:

A. the borrower's credit score falls during processing B. the P&L reports a loss C. the corroborating bank statements do not support the receipts the P&L claims D. the preparer is not licensed in the property's state

13. An asset depletion file has \$1,080,000.00 of eligible assets after haircuts, and the transaction consumes \$180,000.00 in down payment and closing costs. At a 120-month divisor, the qualifying monthly income is:

A. \$9,000.00 B. \$7,500.00 C. \$10,500.00 D. \$3,750.00

14. Short answer. Two loan officers analyze the identical asset depletion file and produce qualifying incomes of \$10,975.00 and \$3,658.33 per month. Neither made an arithmetic error. Explain.

15. Debt service coverage ratio is computed as:

A. net operating income ÷ principal and interest B. gross rental income ÷ PITIA C. (gross rent − operating expenses) ÷ total monthly payment D. total borrower income ÷ total debt service

16. A DSCR file: rent \$2,800.00 per month, principal and interest \$1,950.00, taxes \$300.00, insurance \$130.00, HOA \$120.00. The DSCR is:

A. 1.44 B. 1.12 C. 1.24 D. 0.89

17. A DSCR of exactly 1.00 means:

A. the property produces a 100% return B. the rent exactly covers the property's debt service as the lender computes it C. the borrower's personal income exactly covers the payment D. the property breaks even after all operating expenses

18. Short answer. A property qualifies at a DSCR of 1.05. Name four costs of ownership that this ratio does not account for, and state in one sentence why lenders use gross rent anyway.

19. A DSCR loan is frequently structured as a business-purpose loan. The most important legal consequence is:

A. the borrower cannot be an individual B. Regulation Z — and therefore Ability-to-Repay and QM — does not apply C. the loan is exempt from state licensing requirements D. the loan cannot be securitized

20. Short answer. What single fact determines whether a loan is business-purpose, and what does not determine it?

21. An ITIN is:

A. a credit score used for borrowers without a Social Security number B. a tax processing number issued by the IRS to people with a U.S. filing obligation who are not eligible for a Social Security number C. a form of visa status D. an identifier issued by the NMLS

22. Under Regulation B, a creditor may consider an applicant's immigration status:

A. never — immigration status is a prohibited basis B. only for government-insured loans C. to the extent it bears on the creditor's rights and remedies regarding repayment D. only if the applicant volunteers it

23. An interest-only payment on a \$385,000.00 balance at 7.500% is:

A. \$2,406.25 B. \$2,691.66 C. \$2,888.00 D. \$3,208.33

24. Which statement about prepayment penalties is correct?

A. Non-QM loans may carry prepayment penalties because they are outside Regulation Z B. Regulation Z permits a prepayment penalty on a covered transaction only if it is a fixed-rate qualified mortgage that is not higher-priced, subject to further limits C. Prepayment penalties are prohibited on all mortgage loans in the United States D. Prepayment penalties may be charged on any loan if disclosed on the Loan Estimate

25. A business-purpose DSCR loan has an unpaid principal balance of \$418,600.00 when the borrower refinances in year 2. The note's penalty is 2% of the unpaid principal balance in year 2. The penalty is:

A. \$4,186.00 B. \$8,372.00 C. \$12,558.00 D. \$20,930.00

26. Short answer. Using the chapter's illustrative spread of \$182.37 per \$100,000 borrowed per month between an agency rate and a non-QM bank statement rate, compute the monthly and five-year cost of placing a \$300,000.00 loan in non-QM when the borrower qualified agency. Then state, in one sentence, the rule that prevents this.

Answer key — work the quiz first **1. C.** Non-QM is a legal classification: a closed-end consumer mortgage that does not meet the QM definition. A is the "no-doc" misconception the chapter exists to kill; B confuses non-QM with subprime, which described a credit profile; D is false — non-QM loans are sold routinely, just not to the agencies. **2. B.** ATR applies in full to every closed-end consumer mortgage secured by a dwelling. What the lender forgoes is the safe harbor or rebuttable presumption, not the obligation. **3. B.** Safe harbor. A **higher-priced** QM gets only a rebuttable presumption. **4. C.** The value of the dwelling securing the loan. This clause is the legislative memory of pre-2008 collateral-based underwriting. **5.** Any three of: an interest-only feature; negative amortization; a balloon payment outside the narrow exceptions; a term longer than thirty years; points and fees above the applicable threshold; a pricing or underwriting profile outside the QM parameters. **6. B.** The factor converts gross receipts into the portion treated as income to the owner. It is an investor's assumption, not a measurement of this business. **7. C — \$13,000.00.** \$360,000.00 − \$48,000.00 = \$312,000.00 qualifying deposits; ÷ 12 = \$26,000.00 per month; × (1 − 0.50) = \$13,000.00; × 100% ownership = \$13,000.00. **8. B.** Loan proceeds are a liability, not revenue; counting them as income would credit the borrower for borrowing. A and C are ordinary revenue. D may require an explanation under a deposit consistency test but is not automatically excluded. **9.** Ask whether **gross business receipts are being deposited into the personal account**. If they are, the deposits are not net of business expenses, no expense factor is being applied, and the income figure is economically fictional — the file must move to business statements with a factor, or it will be declined. **10. C — \$14,400.00.** \$384,000.00 ÷ 2 = \$192,000.00 per year; ÷ 12 = \$16,000.00 per month; × (1 − 0.10) = \$14,400.00. **11. B.** A third-party preparer. The preparer's professional identity is the third-party record the verification requirement contemplates. **12. C.** The corroboration failure. Common innocent causes: a second deposit account; a payment processor settling net of fees; an accrual-basis P&L against a cash-basis bank account; or receipts that have genuinely fallen since the P&L period. **13. B — \$7,500.00.** \$1,080,000.00 − \$180,000.00 = \$900,000.00 net available; ÷ 120 = \$7,500.00. **14.** They used different **divisors**. \$1,317,000.00 ÷ 120 = \$10,975.00 and \$1,317,000.00 ÷ 360 = \$3,658.33. The divisor is a program parameter chosen by an investor, not a mathematical fact — which is why it, and not the assets, determines the answer. **15. B.** Gross rental income ÷ PITIA — principal, interest, taxes, insurance, and association dues. A and C describe measures of profitability, which the DSCR is not. **16. B — 1.12.** PITIA = \$1,950.00 + \$300.00 + \$130.00 + \$120.00 = \$2,500.00. \$2,800.00 ÷ \$2,500.00 = 1.12. **17. B.** The rent exactly covers the debt service **as the lender computes it** — gross rent over PITIA. It says nothing about breaking even after vacancy, management, maintenance, or capital costs. **18.** Any four of: vacancy and collection loss; property management; repairs and maintenance; turnover and leasing costs; capital expenditures (roof, HVAC, systems); utilities the owner pays; income tax. Lenders use gross rent because it is documentable from a lease and an appraiser's market rent opinion, while operating expenses are not verifiable in advance. **19. B.** Regulation Z governs consumer credit, so a genuinely business-purpose loan falls outside it — and therefore outside ATR and the QM definition. This is the legal footing DSCR lending stands on. It does **not** exempt the loan from state licensing, which varies. **20.** The **actual purpose of the loan** determines it — property acquired to produce income rather than to occupy. What does **not** determine it: the vesting. Taking title in an entity does not convert a house the borrower will live in into business-purpose credit, and certifying otherwise is occupancy misrepresentation. **21. B.** An Individual Taxpayer Identification Number, issued by the IRS. It is not a credit score, a visa, or a licensing identifier, and an ITIN file is frequently a full-documentation file in every respect except the identifier. **22. C.** Regulation B permits consideration of immigration status to the extent it bears on the creditor's rights and remedies regarding repayment. **National origin** is a prohibited basis and may not be used as a proxy for anything. Verify current guidance with compliance and counsel. **23. A — \$2,406.25.** \$385,000.00 × 7.500% ÷ 12 = \$385,000.00 × 0.00625 = \$2,406.25. **24. B.** Regulation Z permits a prepayment penalty only on a fixed-rate qualified mortgage that is not a higher-priced covered transaction, and then only within limits on amount and duration and with an alternative offered. A is the classic trap — non-QM loans are *covered transactions*, not exempt ones; it is **business-purpose** loans that are outside Regulation Z. State law adds further restrictions. **25. B — \$8,372.00.** \$418,600.00 × 0.02 = \$8,372.00. **26.** \$182.37 × 3 = **\$547.11 per month**; × 60 payments = **\$32,826.60 over five years**. The rule: **attempt the agency file first, document why it failed, and only then price non-QM.**