Financing and Settlement Practice Questions: Loans, Disclosures and Closing

Correct answer: B. The promissory note

The note states the repayment obligation. The mortgage or deed of trust provides security in the property for that debt. The seller's deed conveys an ownership interest, while the Closing Disclosure explains the transaction's loan terms and costs.

Watch for this: Ask whether the document creates a repayment promise, provides collateral or conveys ownership.

Rule: Financing instruments; promissory note and security instrument

• CFPB: promissory note and security instrument
• CFPB: documents, funds and ownership at closing

Correct answer: D. A contract for deed

A contract for deed, also called a land installment contract, combines the sale with seller financing while legal title stays with the seller until the contract is fulfilled. Do not assume the label removes consumer protections or lets the seller evict immediately after any missed payment. Applicable law and the agreement control the remedies.

Watch for this: Seller financing is the broad category. Retained legal title is the distinguishing fact here.

Rule: Seller financing; contract for deed

• CFPB: contract for deed and retained legal title

Correct answer: A. Flood coverage meeting the federal loan requirements

For this designated loan, the bank must require qualifying flood coverage. A compliant private flood policy can satisfy the requirement; NFIP is not the only possible source. Mortgage insurance protects against a different risk and cannot replace required flood coverage.

Watch for this: The stem establishes the lender, location and coverage conditions. Do not turn this into a rule for every loan on vacant land.

Rule: 12 CFR 22.2(e) and 22.3(a), (c)

• 12 CFR 22.2(e): designated flood-insurance loan
• 12 CFR 22.3: required flood coverage and private policies

Correct answer: C. LTV is 90%; PMI is commonly required to protect the lender

$270,000 divided by $300,000 is 90% LTV. With less than 20% down, a conventional borrower will commonly need PMI, subject to the loan program. It protects the lender against default-related loss, not the borrower against losing the home. FHA mortgage insurance has different rules.

Watch for this: Down-payment percentage and LTV are different numbers. PMI is not homeowners insurance.

Rule: Loan-to-value; conventional mortgage insurance

• CFPB: when conventional PMI is usually required

Correct answer: D. Thursday

The deadline is the third business day after receipt: Tuesday, Wednesday, Thursday. This is delivery or mailing, not required receipt by Thursday. Waiting for verification documents does not postpone an application that already contains the six required items.

Watch for this: Do not substitute loan approval for receipt of the application. The separate seven-business-day pre-consummation rule also matters.

Rule: 12 CFR 1026.19(e)(1)(iii); 1026.2(a)(3), (6)

• 12 CFR 1026.19: Loan Estimate and Closing Disclosure timing
• 12 CFR 1026.2(a)(3), (6), (13): application, business day and consummation

Correct answer: B. A prohibited settlement-service referral payment

Section 1024.14(b) prohibits paying or accepting value for covered settlement-service referrals. The broker is paid only for sending business, not actual title services. Disclosure does not cure that arrangement. Permitted payments, including qualifying real estate brokerage referral arrangements, must be distinguished from this title-company kickback.

Watch for this: A title company paying for referrals is not the same arrangement as a lawful broker-to-broker real estate referral.

Rule: 12 CFR 1024.14(b), (g)(1)

• 12 CFR 1024.14: referral fees and permitted payments

Correct answer: C. Tuesday

Count Saturday, Monday and Tuesday; Sunday does not count. This waiting period uses calendar days except Sundays and specified federal legal holidays, not just days the lender is open. The question gives actual receipt, so no presumed-mail-receipt period is added.

Watch for this: Receiving the disclosure and mailing it are not the same event. Saturday normally counts for this waiting period.

Rule: 12 CFR 1026.19(f)(1)(ii)-(iii); 1026.2(a)(6)

• 12 CFR 1026.19: Loan Estimate and Closing Disclosure timing
• 12 CFR 1026.2(a)(3), (6), (13): application, business day and consummation

Correct answer: A. Ginnie guarantees eligible MBS; Fannie and Freddie buy mortgages

Ginnie Mae guarantees payments to investors in qualifying mortgage-backed securities backed by government-insured or guaranteed loans. It does not buy or sell mortgage loans. Fannie Mae and Freddie Mac purchase qualifying mortgages and support securitization. These are secondary-market roles, not three interchangeable retail lenders.

Watch for this: Separate guaranteeing a security's payments from insuring a loan or lending directly to a homebuyer.

Rule: Secondary mortgage market; Ginnie Mae and GSE roles

• Ginnie Mae 101: securities guarantee versus loan purchases, page 12
• FHFA: Fannie Mae and Freddie Mac in the secondary market

Correct answer: D. The deed

The deed is the conveyance instrument. The note concerns repayment; the security instrument secures the loan. Recording serves a different purpose, including public notice, and is not a substitute for a valid conveyance. Applicable state law controls the detailed transfer and recording requirements.

Watch for this: A deed and a deed of trust do different work despite sharing a word.

Rule: Settlement and title transfer; deed delivery

• CFPB: documents, funds and ownership at closing
• Cornell Wex: deed and legal delivery

Correct answer: B. $900 seller debit and $900 buyer credit

$3,600 / 360 = $10 per day; $10 x 90 = $900. Charge that amount to the seller and credit the buyer who will pay the bill. If the seller had already prepaid the tax, the adjustment would be different. Use the day count and allocation supplied in the problem.

Watch for this: Check paid versus unpaid before choosing the debit and credit. Do not assume a 365-day year when the problem says 360.

Rule: Proration; 12 CFR 1026.38(j)(2), (k)(2)

• 12 CFR 1026.38(j)-(k): unpaid seller items and closing adjustments
• Pearson VUE: Salesperson outline, section VII

Correct answer: A. These are distinct events; applicable law determines their effect

Consummation is when the consumer becomes legally obligated on the credit transaction under applicable law. Signing a purchase contract alone does not necessarily do that. Disbursement moves funds, and recording enters documents in public records. Do not impose one universal sequence on every state's closing process.

Watch for this: Read the event named in the rule. 'Closing' can describe a process rather than one legal instant.

Rule: Settlement; 12 CFR 1026.2(a)(13) and official interpretation

• 12 CFR 1026.2(a)(3), (6), (13): application, business day and consummation
• CFPB: documents, funds and ownership at closing

Correct answer: C. A due-on-sale clause

A due-on-sale, or alienation, clause gives the lender an acceleration option for a covered transfer. Federal law protects specified transfers for qualifying residential loans, so 'every transfer makes the debt immediately due' is too broad. Read the clause together with those protections rather than treating its name as a complete answer about enforceability.

Watch for this: Identify the clause first, then check consent and statutory protections. Acceleration is not automatic in every transfer.

Rule: Mortgage clauses; 12 USC 1701j-3(a)-(d)

• 12 USC 1701j-3: due-on-sale clauses and protected transfers

Correct answer: B. Occupancy fraud

The false statement concerns intended occupancy and is made to influence loan terms. FinCEN identifies this as occupancy fraud. A genuine later change of plans is not the same as the intentional false application described here. A criminal case requires proof under the applicable law; this question classifies the conduct.

Watch for this: The tested fact is intent when the representation is made, not merely whether the property is rented at some later date.

Rule: Mortgage fraud; material application misrepresentation; FinCEN FIN-2012-A009

• FinCEN FIN-2012-A009: intentional occupancy misrepresentation

Correct answer: A. ECOA's prohibition on discrimination based on public-assistance income

Public-assistance income is a protected basis under Regulation B. A creditor may assess relevant creditworthiness, including the amount and probable continuation of income, but may not simply reject it because of its protected source. ECOA does not require approval regardless of repayment ability.

Watch for this: A lawful review of reliability is different from automatically excluding a protected income source.

Rule: 12 CFR 1002.2(z); 1002.6(b)(2), (5)

• 12 CFR 1002.2(z): prohibited bases in credit decisions
• 12 CFR 1002.6(b)(2), (5): public assistance and evaluating income

Correct answer: C. The scheduled date the balance reaches 78% of original value

Automatic termination generally uses the scheduled 78% date, with the borrower current. Requested cancellation at 80% is a separate route with payment-history, value and lien conditions. Extra principal payments can support an earlier cancellation request; they do not turn the scheduled-termination rule into an actual-balance test.

Watch for this: Distinguish requesting cancellation from automatic termination. Do not apply these conventional PMI rules to FHA MIP.

Rule: Homeowners Protection Act; 12 USC 4902(a)-(b)

• CFPB: requested cancellation versus scheduled PMI termination
• 12 USC 4902: PMI cancellation and termination conditions

Correct answer: D. A transfer tax on a transaction conveying fee simple title

Section 29(a) bars enactment of a transfer tax on a fee-simple conveyance after January 1, 2016. Section 29(b) preserves specified categories, including the other choices. This does not mean a Texas closing has no recording fees, title charges or property-tax adjustments. A National math problem may still supply a hypothetical transfer-tax rate.

Watch for this: Use Texas law for a Texas-law question, but use the supplied rate when a National calculation asks for one.

Rule: Texas Constitution Article VIII, Section 29(a)-(b)

• Texas Constitution Article VIII, Section 29: transfer-tax prohibition and exceptions

Correct answer: B. Adjust the prorations using the current-year tax statement

Paragraph 13 requires the parties to adjust the prorations when current-year tax statements are available if the actual taxes differ from the amount used at closing. It also allows exemption changes affecting that year's taxes to be considered. The form assigns payment of current-year taxes to the buyer if they were not paid at or before closing.

Watch for this: An estimated closing adjustment is not a guarantee of the final tax bill or a rule that the seller pays the bill again.

Rule: TREC Form 20-19, Paragraph 13; effective July 1, 2026

• TREC Form 20-19: Paragraph 13, tax adjustments after closing
• TREC: Form 20-19 effective July 1, 2026