Loans & Lending Practices MCQs

Loans & Lending Practices MCQs

The following Loans & Lending Practices MCQs have been compiled by our experts through research, in order to test your knowledge of the subject of Loans & Lending Practices. We encourage you to answer these 80+ multiple-choice questions to assess your proficiency.
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1: What does the term "Assignment" denote?

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

B.   The process of researching a property's title

C.   Filing for bankruptcy

D.   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

2: What does the term "Endowment" mean?

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

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

C.   The same as an escrow account

D.   The process of applying for a mortgage 

3: Why is a loan not taxable income?

A.   Because there are laws against it

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

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

D.   Because taxing them is not fair to people 

4: What is an unsecured loan?

A.   An automobile loan

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

C.   A loan only for uneducated people

D.   A loan with no collateral; the lender has no assets backing the loan

5: Why is interest earned on a loan considered taxable revenue?

A.   Because it is revenue only if over $1,000

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

C.   Because the SEC requires it

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

6: How do consumers abuse loan practices?

A.   They lie on their credit applications to get better interest rates

B.   People obtain loans with no plan to pay them back

C.   People use loan funds for purposes other than they should

D.   All of the above

7: What is an interest only loan?

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

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

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

D.   A type of mortgage

8: When do lenders require Private Mortgage Insurance (PMI)?

A.   When the loan to value ratio is greater than 80%

B.   When the buyer makes under $40,000 a year

C.   When the buyer has unfavorable credit

D.   When the buyer is a millionaire 

9: What is the payment of the monthly installment by the borrower to the lender called?

A.   Servicing

B.   Liability

C.   Financing

D.   Bond payment 

10: What does the term "Deferment" denote?

A.   The process of researching loan options

B.   The process of applying for government mortgage funding

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

D.   Adding interest that has accrued onto the principal balance 

11: What is meant by a secured loan?

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

B.   A loan under $10,000

C.   A loan for people with bad credit

D.   A short term loan for less than a year 

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

A.   Exactly half is due

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

C.   They must be paid in full

D.   Only interest is due each month 

13: Should a loan be taken out just for its tax benefits?

A.   Yes, the tax benefits make any loan amount worth it

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

C.   No, unless the loan is for over $100,000

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

14: What is meant by Subprime Lending?

A.   Mortgages aimed at the poor/uneducated people at higher interest rates

B.   Mortgages aimed at the rich and wealthy

C.   Mortgages offered at the fair market rate

D.   Mortgages geared towards people with jobs

15: What is meant by the term "Impound"?

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

B.   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

C.   The time frame of a mortgage

D.   The implied interest rate

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

A.   The lender can not sue the borrower for any amount

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

C.   The lender can have the borrower imprisoned for fraud

D.   The lender goes bankrupt

17: What is the term used when a borrower does not pay back their loan?

A.   Recession

B.   Default

C.   Extraction

D.   Extortion

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

A.   A collection of loans held by a borrower

B.   Anything offered or given to fulfill the performance of a contract

C.   The interest payment of a loan

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

19: How is interest on a loan shown on the financial statements?

A.   As a long term liability

B.   As a short term liability

C.   As revenue

D.   As an expense incurred during the period 

20: What does the term "Foreclosure" denote?

A.   The transfer of the seller's existing mortgage to the buyer

B.   The process of applying for a mortgage

C.   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.

D.   The process of finding undervalued properties for investment purposes

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

A.   Down Payment

B.   Senior Debt

C.   Subsequent Debt

D.   Second Round Debt

22: How does a credit card differ from a personal loan?

A.   Credit cards offer more favorable interest rates

B.   Credit cards are usually for higher credit amounts

C.   Credit cards always have a physical card, loans never do

D.   Credit cards have open ended payment schedules 

23: What type of debt do credit cards fall under?

A.   Revolving debt

B.   Unsecured debt

C.   Secured debt

D.   All of the above 

24: 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?

A.   There will be no impact

B.   The company would be out of compliance with loan covenants

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

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

25: Why can a lender not deduct the loans made from their net income?

A.   Because there is no reduction in their assets — there is only a change from cash assets to receivables

B.   Because it is considered the income of the borrower

C.   Because it has minimal impact on tax revenue

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

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

A.   Dr: Cash, Cr: Interest Payable

B.   Dr: Buildings, Cr: Mortgage Liability

C.   Dr: Interest Payable, Cr: Mortgage Liability

D.   Cr: Cash, Cr: Mortgage Liability

27: What does the term "Survey" imply?

A.   An assessment of a person's credit

B.   The intentional and voluntary giving up of rights or claims

C.   The ability of a lender to provide clients with a better rate

D.   The determination of the exact boundaries and location of a property 

28: What does the term "General Recourse" mean?

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

B.   The process taken to apply for a mortgage

C.   The payment of escrow to the seller

D.   The closing process

29: What is meant by the term "Credit Repository"?

A.   The physical location where all mortgage papers are signed

B.   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

C.   A central clearing house for all loan transactions

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

A.   Because no credit history is required to get a credit card

B.   Because they are inexpensive

C.   Because regular loans are no longer available to everyday consumers

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

31: What does the term "Covenant" mean?

A.   A bond coupon payment

B.   The principal portion of a loan

C.   The monthly payment on a loan

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

32: What can a lender do if a borrower refuses to pay back a loan?

A.   Nothing — it is a risk the lender takes for high returns

B.   Sue the borrower in a small claims court

C.   Call the bank that helped structure the loan

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

33: What is the process of evaluating a loan application to determine the advisability of making the loan called?

A.   Debt-to-income ratio

B.   Underwriting

C.   Surveying

D.   Assessing 

34: What is meant by Predatory Lending?

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

B.   Lending money to high net worth individuals

C.   Lending people money to buy a car

D.   Lending money to students to pay for their education 

35: What is meant by the term "Usury"?

A.   Charging people a fair market interest rate based on their credit

B.   Charging people zero interest rate

C.   Financing a car using an auto loan

D.   Charging interest rates in excess of what is standard and customary

36: How much is one point worth?

A.   10 percent of the mortgage

B.   0.1 percent of the mortgage

C.   1 percent of the mortgage

D.   $1000

37: What is meant by a secured credit card?

A.   An open line of credit

B.   A credit card with a fixed monthly amount of payment

C.   A credit card by someone other than a major bank

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

38: What does the term "Escrow Payment" mean?

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

B.   The fee charged for borrowing money

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

D.   The final payment made to pay off a mortgage

39: What is meant by the term "Forbearance"?

A.   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

B.   A step taken during bankruptcy

C.   An extra loan payment made to pay down principal

D.   None of the above

40: What does the term "Flipping" denote?

A.   A fee charged for the use of money

B.   Buying expensive properties and renting them out

C.   Buying undervalued properties and renting them out

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

41: What is meant by Housing Expense Ratio?

A.   The same as income to debt ratio

B.   The percentage of living expenses to housing expenses

C.   The percentage of monthly income that goes towards the housing payment

D.   The ratio of the house price to those of other similar houses

42: How would a 10 year loan show up on a company balance sheet?

A.   As a short term liability

B.   As a long term liability

C.   As an asset

D.   As revenue

43: How does the payment of a short term loan affect a companys balance sheet?

A.   It reduces cash and short term liabilities

B.   It reduces cash and increases short term liabilities

C.   It decreases short term liabilities and increases long term liabilities

D.   It has no impact

44: What does the term "Closing" mean?

A.   The day a price is agreed on for a home transaction

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

C.   The process of being approved for a mortgage

D.   A legal document used to transfer the ownership of a property 

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

A.   Interim Financing

B.   Contingency

C.   Overdraft

D.   Mortgage Modification

46: What does the term "Collateral" mean?

A.   Assets pledged to secure the repayment of a loan

B.   The monthly payment of a loan

C.   Only the principal portion of a loan

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

47: What is meant by the term "Floor"?

A.   The minimum amount a loan can be made for

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

C.   The minimum amount of time a mortgage can be set for

D.   A professional opinion of the current market value of a property

48: When can interest paid be deducted on a tax return?

A.   In the year the loan was taken out

B.   In the year the final payment on the loan is made

C.   It is not allowed to be deducted at all

D.   In the year the interest is paid 

49: What is the purpose of covenants?

A.   They are required by law to be placed on all borrowers

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

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

D.   To protect the borrower

50: What is meant by the term "Recoverable Grants"?

A.   Funds provided by a philanthropist to fulfill a role similar to equity

B.   Interim financing for a home buyer

C.   A short term loan used to pay closing costs

D.   A bond that does not earn any interest