A borrower is placed in a payment option ARM with a minimum monthly payment of $850. The fully amortizing payment required to pay off the loan in 30 years would be $1,340. After 12 months of making only minimum payments, approximately how much has been added to the loan balance, and what predatory concern does this raise?

Question

Accepted Answer

$5,880 has been added to the balance; this is negative amortization and is predatory if the borrower was not clearly informed their balance would grow The monthly shortfall is $1,340 - $850 = $490. Over 12 months, $490 × 12 = $5,880 is added to the principal balance. This is negative amortization — the borrower owes more than they originally borrowed. The predatory concern is that lenders market the low minimum payment without adequately disclosing that the loan balance is growing. Dodd-Frank and the ATR/QM rule addressed this by restricting negative amortization loans. ","'s $10,200 calculation is incorrect. "s negative amortization prohibition for all loan types" is wrong because negative amortization occurs on ARMs, not fixed-rate loans. "$5,880 has been added to the balance; this is negati..." contains a real threshold (125% is the cap before mandatory recast) but misstates when the practice becomes predatory — it's predatory at origination if not disclosed, not just at the 125% threshold.

Drill 2,078 more questions like this, free

More Ethics practice questions

Free practice by category