Loan Officer Practice Exam

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What characterizes a higher-priced mortgage loan?

Uses the average prime offer rate as an index to compare the annual percentage rate.
Includes finance charges greater than 5% of the loan amount.
Has an interest rate above the conforming loan limit.
Requires private mortgage insurance.

The correct answer is: Uses the average prime offer rate as an index to compare the annual percentage rate.

A higher-priced mortgage loan is characterized by its relation to the average prime offer rate (APOR). This standard is crucial as it establishes a benchmark to identify loans with higher interest rates compared to typical market rates. A loan is classified as higher-priced if its annual percentage rate (APR) exceeds the APOR by a specific margin, providing a clear measure of the interest costs relative to prevailing economic conditions. The other options, while related to various aspects of mortgage loans, do not accurately define a higher-priced mortgage loan. For instance, finance charges greater than a certain percentage might indicate additional costs but do not specifically apply to the definition of a higher-priced mortgage. Similarly, the interest rate being above the conforming loan limit pertains more to loan categorization rather than pricing classification. Lastly, the requirement for private mortgage insurance (PMI) is related to encompassing loans where the down payment is less than 20%, but it does not correlate with whether a loan is deemed higher-priced. Therefore, using the average prime offer rate as a comparative index distinctly characterizes higher-priced mortgage loans.