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Test answers for Lending Practices and Loans Test 2020

(81) Last updated: March 26
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1. What is a 'custom loan repayment schedule'?


• Payments which are large initially but become smaller over time

• Paying interest only for several years, then increasing the payment to repay the principal as well

• The making of the scheduled monthly payments to the lender by the borrower

• One large payment at a predetermined time

2. What does the term "Flipping" denote?


• A fee charged for the use of money

• Buying expensive properties and renting them out

• Buying undervalued properties and renting them out

• The process of buying a property and then attempting to sell it relatively quickly for a profit

3. Why is interest paid by the borrower deductible on their tax return?


• Because interest paid represents the cost of having a loan and is an expense to the borrower

• Because it is revenue to the lender and should be income as well to the borrower

• Because it is unfair for the borrower to have this deduction

• Because the SEC requires it

4. What is meant by the term "Usury"?


• Charging people a fair market interest rate based on their credit

• Charging people zero interest rate

• Financing a car using an auto loan

• Charging interest rates in excess of what is standard and customary

5. What would the entry be for a monthly interest payment on a long term loan?


• Dr: Interest Expense, Cr: Cash

• Dr: Cash, Cr: Interest Expense

• Dr: Long Term Liability, Cr: Interest Expense

• Dr: Interest Expense, Cr: Long Term Liability

6. What is the purpose of covenants?


• They are required by law to be placed on all borrowers

• To force a borrower to abide by rules which compel the borrower to stay in a situation where they can repay the loan

• The IRS forces the lenders to place them on all commercial loans

• To protect the borrower

7. What is a loan that has a fixed rate of interest over a period of time known as?


• Coupon Payment Loan

• Conforming Mortgage loan

• Balloon Loan

• Term Loan

8. What is meant by the term "Forbearance"?


• A postponement of payment on a loan, typically if the borrower doesn't qualify for a deferment and is unable to make payments for a reason such as poor health

• A step taken during bankruptcy

• An extra loan payment made to pay down principal

• None of the above

9. Why have the  lenders been restricting the issuance of credit cards in recent years?


• Because consumer credit ratings have been going down rapidly

• Because higher bankruptcy and non payment levels by consumers have been eating into the profit levels

• Because consumers have nothing else to buy

• Because there is a tendency among consumers to take out home loans instead

10. What is something that has been made payable and is overdue and unpaid called?


• Commission

• Promissory note

• Delinquent

• Repossessed

11. How would a company that purchased a building using a mortgage show it in its account books?


• Dr: Cash, Cr: Interest Payable

• Dr: Buildings, Cr: Mortgage Liability

• Dr: Interest Payable, Cr: Mortgage Liability

• Cr: Cash, Cr: Mortgage Liability

12. What type of repayment plans do credit cards typically have?


• Exactly half is due

• Some small portion of the consumer's total balance is due each month

• They must be paid in full

• Only interest is due each month

13. What does the term "Collateral" mean?


• Assets pledged to secure the repayment of a loan

• The monthly payment of a loan

• Only the principal portion of a loan

• A situation where one fails to make a payment, which can lead to foreclosure

14. When do lenders require Private Mortgage Insurance (PMI)?


• When the loan to value ratio is greater than 80%

• When the buyer makes under $40,000 a year

• When the buyer has unfavorable credit

• When the buyer is a millionaire

15. Why are "Pay Day Loans" considered predatory?


• They target people with jobs

• They are offered in stores

• They charge interest rates lower than credit cards

• They are short term loans with interest rates far higher than those on any standard loan and are typically aimed at the poor and/or the uneducated people

16. What does the term "Escrow" mean?


• A sum a borrower pays to a lender to decrease the interest rate of a mortgage

• The market value of a home

• A neutral third party that carries out the instructions of both the buyer and the seller to handle all the paperwork of settlement or closing

• The amount by which a home is overpriced above the market price

17. What type of debt do credit cards fall under?


• Revolving debt

• Unsecured debt

• Secured debt

• All of the above

18. What is meant by the term "Portfolio"?


• A collection of loans held by a borrower

• Anything offered or given to fulfill the performance of a contract

• The interest payment of a loan

• A combination of assets held for its investment benefits including financial and non-financial returns

19. What does the term "Covenant" mean?


• A bond coupon payment

• The principal portion of a loan

• The monthly payment on a loan

• An agreement or promise to do or not to do a particular thing related to a loan

20. What is the process of evaluating a loan application to determine the advisability of making the loan called?


• Debt-to-income ratio

• Underwriting

• Surveying

• Assessing

21. What is meant by Predatory Lending?


• Lending money to people who are extended beyond their means in an attempt to get them to spend more than they should

• Lending money to high net worth individuals

• Lending people money to buy a car

• Lending money to students to pay for their education

22. What is meant by the term "Impound"?


• Customary costs above and beyond the sale price of a property that must be paid to cover the transfer of ownership at closing

• The portion of a borrower's monthly payments held by the lender or service provider to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due

• The time frame of a mortgage

• The implied interest rate

23. What happens if a lender charges a rate beyond what is legally allowed and the borrower does not pay?


• The lender can not sue the borrower for any amount

• The lender can not sue the borrower to repay the amount beyond what is legally allowed

• The lender can have the borrower imprisoned for fraud

• The lender goes bankrupt

24. Who is a mortgagee?


• The borrower

• The lending institution

• The mortgage broker

• The lender

25. Should a loan be taken out just for its tax benefits?


• Yes, the tax benefits make any loan amount worth it

• Yes, as long as the loan is paid back in the same year

• No, unless the loan is for over $100,000

• No, the benefit of deduction of loan interest does not offset the cost of the interest

26. What purpose do mortgage brokers serve?


• They work for the bank and sell mortgages

• They work for the borrowers, aggregating all loan options and provide the borrowers with options

• They work for the real estate companies and sell property

• They are the buyers of real estate

27. What options does a bank have if a company breaks a covenant?


• None, the bank has to stick to the loan agreement

• None, required by the IRS to not give any forgiveness

• The bank can temporarily waive the covenants to give the borrower time to become compliant

• The bank will permanently waive the covenants

28. How does a long term loan received in cash affect a firm's quick ratio?


• It is not possible to say anything on the basis of the information given

• There will be no change

• It will decrease

• It will increase

29. How does the payment of a short term loan affect a company's balance sheet?


• It reduces cash and short term liabilities

• It reduces cash and increases short term liabilities

• It decreases short term liabilities and increases long term liabilities

• It has no impact

30. What is an interest only loan?


• A loan on which interest accrues only in the second year

• A loan on which the borrower has to pay back only the interest and not the principal

• A loan on which the borrower has to pay only the interest for a specified time period, not reducing the principal at all

• A type of mortgage

31. What is the collateral under a mortgage loan?


• The family automobile

• The borrower's job

• All the borrower's cash in the bank

• The house which the mortgage is used to purchase

32. What does the term "Margin" mean?


• The ratio of debt to equity

• The claim a lender may place on property in return for making a loan

• The amount the lender adds to the predetermined index rate of an Adjustable-Rate Loan to determine the new interest rate at each adjustment.

• The borrowing of money

33. What is the definition of a loan?


• A type of debt, the redistribution of assets between a borrower and a lender with a promise to repay

• Something similar to an asset

• Always a short term obligation to repay someone

• The same as a draft or check

34. What is meant by the term "Assumption"?


• Applying for a mortgage

• A loan secured by the equity value in a borrower's home

• The transfer of the seller's existing mortgage to the buyer

• None of the above

35. Why is interest earned on a loan considered taxable revenue?


• Because it is revenue only if over $1,000

• Because it was earned legally and therefore must be included in revenue

• Because the SEC requires it

• Because interest is profit generated by providing a loan and is income to the lender

36. When can interest paid be deducted on a tax return?


• In the year the loan was taken out

• In the year the final payment on the loan is made

• It is not allowed to be deducted at all

• In the year the interest is paid

37. What is the payment of the monthly installment by the borrower to the lender called?


• Servicing

• Liability

• Financing

• Bond payment

38. What is an unsecured loan?


• An automobile loan

• A loan where the debtor's credit is the only thing at stake

• A loan only for uneducated people

• A loan with no collateral; the lender has no assets backing the loan

39. What does the term "Deferment" denote?


• The process of researching loan options

• The process of applying for government mortgage funding

• An approved temporary suspension of loan payments based on certain events and criteria

• Adding interest that has accrued onto the principal balance

40. What does the term "Endowment" mean?


• The percentage of gross monthly income that goes towards paying housing expenses

• A fund that contains assets the use of which is restricted only to the income earned by these assets

• The same as an escrow account

• The process of applying for a mortgage

41. What can a lender do if a borrower refuses to pay back a loan?


• Nothing ??? it is a risk the lender takes for high returns

• Sue the borrower in a small claims court

• Call the bank that helped structure the loan

• A loan is a debt contract, and the borrower can be sued for the funds

42. How do lenders abuse people who are looking to get their homes refinanced?


• They buy their homes from them

• They refinance people for minimal interest rate improvements, while charging excessive fees for their services

• They force them to take out home refinance loans against their will

• They increase people's interest rates instead of lowering them

43. What is meant by Housing Expense Ratio?


• The same as income to debt ratio

• The percentage of living expenses to housing expenses

• The percentage of monthly income that goes towards the housing payment

• The ratio of the house price to those of other similar houses

44. Why is the repayment of a loan not considered income to the lender?


• Because it only converts assets from receivables into cash

• Because the amount is too small to impact tax collections

• Because it is too complicated to track

• Because there is no set law about how to handle it

45. When does a mortgage payer have to pay a late payment penalty?


• When the payment is late by 4 days

• When the payment is late by15 days

• When the payment is late by the number of days stipulated in the loan agreement

• Never

46. What is meant by Subprime Lending?


• Mortgages aimed at the poor/uneducated people at higher interest rates

• Mortgages aimed at the rich and wealthy

• Mortgages offered at the fair market rate

• Mortgages geared towards people with jobs

47. What typically happens if a borrower breaks one of the loan covenants?


• Nothing

• The loan becomes 'in default', and can be called by the lender

• The borrower has to pay double the amount of the loan

• The IRS will tax the borrower

48. What is the term used when a borrower does not pay back their loan?


• Recession

• Default

• Extraction

• Extortion

49. What does the term "Foreclosure" denote?


• The transfer of the seller's existing mortgage to the buyer

• The process of applying for a mortgage

• The Legal process by which the lender or the seller forces the sale of a mortgaged property because the borrower has not met the terms of the mortgage.

• The process of finding undervalued properties for investment purposes

50. How do consumers abuse loan practices?


• They lie on their credit applications to get better interest rates

• People obtain loans with no plan to pay them back

• People use loan funds for purposes other than they should

• All of the above

51. Why have credit cards become a popular method of payment?


• Because no credit history is required to get a credit card

• Because they are inexpensive

• Because regular loans are no longer available to everyday consumers

• Because they enable a person to make purchases without having any money at the time of the purchases

52. How are borrowers affected by nonpayment of loans?


• It helps bolster their credit report

• They get a discount on future loans

• They are offered additional credit by the lender

• Their credit report begins to indicate late payments, reducing their ability to receive credit in the future

53. Which of the following is a reason for the proliferation of credit cards?


• The government promotes the use of credit cards

• It is healthy for people to spend beyond their means

• People want to use them for vacations

• It is easy to apply for and get a credit card

54. What is meant by a secured loan?


• A loan which uses some form of collateral as a guarantee of payment

• A loan under $10,000

• A loan for people with bad credit

• A short term loan for less than a year

55. What purpose does a title serve?


• It is required by the mortgagee

• It is the legal document showing the ownership of the property

• It lists out the interest rate of the mortgage

• None of the above

56. What are low interest loans offered by schools to the neediest students called?


• Fair Market Loans

• Trustee Loans

• Perkins Loans

• Beneficiary Loans

57. How would a 10 year loan show up on a company balance sheet?


• As a short term liability

• As a long term liability

• As an asset

• As revenue

58. What is meant by a secured credit card?


• An open line of credit

• A credit card with a fixed monthly amount of payment

• A credit card by someone other than a major bank

• A credit card to get which a deposit account must be established; often 100% of the available credit is required as a deposit

59. Why is a loan not taxable income?


• Because there are laws against it

• Because there is no increase in the wealth of the person taking a loan

• Because people lie on their tax returns and do not include it

• Because taxing them is not fair to people

60. What is "Equity"?


• The value of the assets inside the house

• The total value of the house

• The value of the house after loans are subtracted

• The amount of the mortgage

61. What is meant by the term "Credit Repository"?


• The physical location where all mortgage papers are signed

• An organization that gathers, records, updates, and stores the information about the financial, public and payment records of the individuals who are being considered for credit

• A central clearing house for all loan transactions

• The loss of money, property, rights, or privileges due to a breach of legal obligation

62. What does the term "Escrow Payment" mean?


• The placing of funds in a special account to cover regular payment of taxes and insurance

• The fee charged for borrowing money

• An additional payment made to reduce the principal balance of a mortgage

• The final payment made to pay off a mortgage

63. What does the term "Survey" imply?


• An assessment of a person's credit

• The intentional and voluntary giving up of rights or claims

• The ability of a lender to provide clients with a better rate

• The determination of the exact boundaries and location of a property

64. What is a written document that transfers the title to personal property callled?


• Bill of Sale

• Bill of lading

• Sales contract

• Depreciation

65. What is a typical mortgage loan term?


• 30 years

• 10 years

• 2 years

• 100 years

66. What is meant by the term "Recoverable Grants"?


• Funds provided by a philanthropist to fulfill a role similar to equity

• Interim financing for a home buyer

• A short term loan used to pay closing costs

• A bond that does not earn any interest

67. How does a credit card differ from a personal loan?


• Credit cards offer more favorable interest rates

• Credit cards are usually for higher credit amounts

• Credit cards always have a physical card, loans never do

• Credit cards have open ended payment schedules

68. What is meant by the term "Floor"?


• The minimum amount a loan can be made for

• The interest rate below which the rate of an Adjustable-Rate Loan cannot be adjusted

• The minimum amount of time a mortgage can be set for

• A professional opinion of the current market value of a property

69. How much is one point worth?


• 10 percent of the mortgage

• 0.1 percent of the mortgage

• 1 percent of the mortgage

• $1000

70. How is interest on a loan shown on the financial statements?


• As a long term liability

• As a short term liability

• As revenue

• As an expense incurred during the period

71. What is a down payment?


• Always 20% of the price of the house

• Payment on a house required by law

• The monthly mortgage payment

• Money put down towards the payment of the house by the buyer at the time of purchase which is deducted from the price

72. Why would someone not use a credit card to purchase a car?


• Credit limits on a credit card are not high enough to purchase a car

• Car dealers force consumers to use loans

• Interest rates on credit cards tend to be higher than on a loan for a car or a house

• It is illegal to pay for a car using credit cards

73. What would a company that wants to decrease their debt to equity ratio do?


• Take out a new long term loan

• Take out a new short term loan

• Pay off a short term loan

• Collect on receivables

74. What is the debt that must be repaid before a subordinated debt receives any payment in the event of default called?


• Down Payment

• Senior Debt

• Subsequent Debt

• Second Round Debt

75. What does the term "Closing" mean?


• The day a price is agreed on for a home transaction

• The meeting where the buyers, sellers, and their representatives meet to finalize the legal exchange of property

• The process of being approved for a mortgage

• A legal document used to transfer the ownership of a property

76. Why can a lender not deduct the loans made from their net income?


• Because there is no reduction in their assets ??? there is only a change from cash assets to receivables

• Because it is considered the income of the borrower

• Because it has minimal impact on tax revenue

• Because there is no need to include it as long as the loan is paid back within a year

77. What is the short-term loan that provides temporary financing until more permanent financing is available called?


• Interim Financing

• Contingency

• Overdraft

• Mortgage Modification

78. Why can a borrower not deduct loan repayments from their income when calculating taxes?


• Because there is no precedent allowing it

• Because the lender will be deducting them on their side

• Because they were not taxed on the proceeds of the loan, they can not deduct repayments either

• Because it is unfair to the borrowers

79. What does the term "Assignment" denote?


• The transfer of ownership of mortgage from one company or individual to another

• The process of researching a property's title

• Filing for bankruptcy

• A provision in a mortgage home loan that allows the lender to demand repayment in full if the borrower sells the property that serves as security for the loan

80. What would happen to the balance sheet of a company that has automobiles with loans associated with them, and sells the automobiles for more than the carrying value of the loan?


• There will be no impact

• The company would be out of compliance with loan covenants

• There will be gain on the sale of automobiles, and a reduction in debt

• There will be loss on the sale of automobiles, and an increase in debt

81. What does the term "General Recourse" mean?


• Rights to demand payment from the general assets of the debtor, without seniority in access to any specific assets

• The process taken to apply for a mortgage

• The payment of escrow to the seller

• The closing process