Examice

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Question 35

Underwriting standards in Subprime Mortgage Lending include:

The borrower's debt-to-income ratio should include the borrower's total yearly housing-related payments as a percentage of gross monthly income

Institutions should have a clear policy governing the use of risk-layering features, such as reduced documentation loans or simultaneous second lien mortgages

Stated income and reduced documentation loans to subprime borrowers should be made only if there are clear, documented mitigating factors

Mitigating factors should be present when risk layering features are combined in order to support the underwriting decision and the borrower's repayment capacity

Correct Answer: D

Mitigating factors should be present when risk layering features are combined to support the underwriting decision and the borrower's repayment capacity. This ensures that despite higher risks inherent in subprime lending, the decision to lend is backed by thorough assessment and measures that enhance the likelihood of repayment.

Discussion

Dex24Option: B

B, C and D per page 39. A it is not correct as it should be "monthly", not "yearly".

Cam22Option: D

This option accurately captures the essence of prudent underwriting standards in subprime mortgage lending, emphasizing the need for mitigating factors when risk layering features (like reduced documentation and simultaneous second-lien mortgages) are combined. Such practices ensure that the lending decision is supported by a solid assessment of the borrower's ability to repay the loan.