Conduct with Borrowers, Fees & Business Ethics: practice questions

A lender's standard home equity line of credit agreement requires all disputes to go to binding arbitration. Is the clause permitted?

1. Yes, if the clause is printed in bold and initialled by the borrower
2. Yes, as the rule on arbitration applies only to closed-end loans
3. No, unless the arbitration is held in the borrower's home county
4. No; dwelling-secured credit contracts may not require arbitration ✓

Why: 12 CFR 1026.36(h)(1): a contract for a consumer credit transaction secured by a dwelling, "including a home equity line of credit secured by the consumer's principal dwelling", may not include terms that require arbitration or any other non-judicial procedure.

Source: 12 CFR 1026.36(h)(1)

To meet Regulation Z's qualification rules, what must a non-government loan originator organization do about its own legal status?

1. Register with the CFPB as a covered person before taking any mortgage loan application
2. Obtain a federal charter from the OCC before originating mortgage loans
3. Nothing; the rules on qualification apply only to individual originators
4. Comply with applicable state law on legal existence and foreign qualification ✓

Why: 12 CFR 1026.36(f)(1): a loan originator organization that is not a government agency or state housing finance agency must "Comply with all applicable State law requirements for legal existence and foreign qualification".

Source: 12 CFR 1026.36(f)(1)

A creditor requires HUD-approved counseling before making a negative amortization loan to a first-time borrower. May it tell the borrower which counselor to use?

1. Yes; it may require a counselor on its own approved list
2. Yes, if the counseling is free of charge to the borrower
3. No, unless the counselor is a HUD employee rather than an agency
4. No; it may not steer the borrower to a particular counselor ✓

Why: 12 CFR 1026.36(k)(3): a creditor making such a loan to a first-time borrower "shall not steer or otherwise direct a consumer to choose a particular counselor or counseling organization" for the required counseling.

Source: 12 CFR 1026.36(k)(3)

Before a bank lets an unlicensed, registered employee act as a loan originator, which of these is it NOT required to obtain under Regulation Z?

1. A criminal background check through the NMLSR
2. A credit report from a consumer reporting agency
3. A record of 20 hours of pre-licensing education ✓
4. NMLSR information on any government findings

Why: For employees not required to be licensed, 12 CFR 1026.36(f)(3)(i) requires a criminal background check through the NMLSR, a credit report, and NMLSR information on any administrative, civil or criminal findings. Pre-licensing education is a licensing requirement, not part of this screen.

Source: 12 CFR 1026.36(f)(3)(i)

A company pays higher commissions on loans secured by property in State A, where rates run higher, than in State B. Its originators have no way to influence where the property is. Is location a proxy for a loan term?

1. Yes; any factor that tracks the interest rate is a proxy
2. Yes, unless the company pays the same base salary to all
3. No, but only if the rate gap is below one percentage point
4. No; the originators cannot add, drop or change the factor ✓

Why: Under 12 CFR 1026.36(d)(1)(i), comment 36(d)(1)-2.ii.B: where the loan originator "does not have any ability to influence whether the transaction is secured by property located in State A or State B", the location "is not a proxy for a term of a transaction". Both limbs of the proxy test in 1026.36(d)(1)(i) must be met.

Source: 12 CFR 1026.36(d)(1)(i); Supplement I comment 36(d)(1)-2

Under the FTC Safeguards Rule, what must the information security programme of a mortgage lender holding data on 20,000 consumers be based on?

1. A written risk assessment of foreseeable risks to customer information ✓
2. The security standards its largest outside vendor has itself chosen to follow
3. A checklist the FTC sends to each lender at the start of every calendar year
4. Whatever controls its insurer requires for a cyber insurance policy

Why: 16 CFR 314.4(b) requires the programme to be based on a risk assessment that identifies reasonably foreseeable internal and external risks to customer information, and (b)(1) says "The risk assessment shall be written". 16 CFR 314.6 exempts institutions holding information on fewer than 5,000 consumers from (b)(1).

Source: 16 CFR 314.4(b), 314.6

A married applicant qualifies alone for a mortgage on a home she owns with her husband. State law requires his signature on the mortgage to create a valid lien. What may the lender require?

1. His signature on the note, as a joint borrower
2. His signature on both the note and the mortgage
3. His signature on the security instrument only ✓
4. Nothing, since the applicant qualifies on her own

Why: 12 CFR 1002.7(d)(1) bars requiring a spouse's signature on a credit instrument where the applicant qualifies alone, but (d)(4) allows, for secured credit, the spouse's signature "on any instrument necessary ... under applicable state law to make the property being offered as security available", for example to create a valid lien. Comment 7(d)(4)-1: the creditor may not require the spouse to sign the note where signing the mortgage is enough.

Source: 12 CFR 1002.7(d)(1), (d)(4); Supplement I comment 7(d)(4)-1

A lender holds customer information on 20,000 consumers. How often must its Qualified Individual report in writing to the board under the FTC Safeguards Rule?

1. Only after a security event
2. At least once every quarter
3. Only when the board asks for it
4. Regularly and at least annually ✓

Why: 16 CFR 314.4(i) requires the Qualified Individual "to report in writing, regularly and at least annually, to your board of directors or equivalent governing body", covering the programme's status and material matters. Under 16 CFR 314.6 this does not apply to institutions holding information on fewer than 5,000 consumers.

Source: 16 CFR 314.4(i), 314.6