PERRY REAL ESTATE COLLEGE - NATIONAL PRACTICE TESTS 6-10

NATIONAL TEST 6: Economics; Appraisal - ANS- 6.1 If the price of an item is increasing, one can usually assume that a. demand for the item is decreasing in relation to supply of the item. b. demand for the item is increasing in relation to supply of the item. c. supply of the item is increasing. d. demand for the item and supply of the item are increasing. - ANS- 6.1 (b) demand for the item is increasing in relation to supply of the item. In a market economy, the primary interactions between supply, demand and price are: if supply increases relative to demand, price decreases; if supply decreases relative to demand, price increases; if demand increases relative to supply, price increases; and if demand decreases relative to supply, price decreases. 6.2 When the market for an item has achieved market equilibrium, which of the following statements is true? a. New suppliers will enter the market and drive the price down. b. Demand will slowly taper off, driving the price down. c. Unmet demand for the item is directed toward demand for some other item. d. Supply and demand are equal, and price and value are equal. - ANS- 6.2 (d) Supply and demand are equal, and price and value are equal. A market tends toward a state of equilibrium in which supply equals demand, and price, cost, and value are identical. According to this principle, market demand moves to meet supply, and supply moves to meet demand. If there is an extreme shortage of an item for which there is normally a strong demand, suppliers will rush to increase production to close the gap. If inventories of an item are very high, suppliers will stop production until the oversupply has been depleted. 6.3 As an economic product, real estate is distinguished by a. its homogeneity. b. its variety. c. the uniqueness of every parcel. d. its ability to appreciate in value. - ANS- 6.3 (c) the uniqueness of every parcel. In comparison with other economic products and services, real estate has certain unique traits. Traits of real estate include: inherent product value; uniqueness of every property; demand must come to the supply; illiquidity; slow to respond to changes; and a decentralized local market. 6.4 The city of Stevensville has declared a moratorium on new construction. If demand is increasing, what will be the likely effect on real estate prices in the area? a. Prices level off. b. Prices continue to follow the trend that preceded the moratorium. c. Prices fall. d. Prices rise. - ANS- 6.4 (d) Prices rise. If demand is increasing and a moratorium slows supply, demand will begin to outpace supply, forcing prices to rise as the product becomes scarcer in relation to demand. 6.5 If Okapi, Inc., a company that markets its sports clothing worldwide, moves into Stevensville and hires 100 employees, it is reasonable to expect that the town will experience a. an immediate rise in the demand for industrial real estate, but no other changes in the real estate market. b. an increase in demand for all types of real estate. c. a housing boom, but no other changes in the real estate market. d. an immediate increase in the prices for industrial and office real estate, but no impact on the residential market. - ANS- 6.5 (b) an increase in demand for all types of real estate. New businesses will arise to support the new company. They will hire new employees, some from out of town. The new employees will need housing. Hence the demand for residential real estate, as well as for commercial and industrial, will intensify, and it will also stimulate new construction. 6.6 What is "absorption?" a. The amount of new space that is added to available space over a period of time. b. The number of houses that are built over a period of time. c. The amount of space that is occupied at any given time. d. The number of available units that become occupied over a period of time. - ANS- 6.6 (d) The number of available units that become occupied over a period of time. Absorption is the amount of available property that becomes occupied over a period of time. 6.7 When vacancies are declining in a real estate market, it is common for the market to experience a. rising prices. b. falling prices. c. falling construction activity. d. falling absorption. - ANS- 6.7 (a) rising prices. Within the business cycle of real estate, declining vacancy indicates a combination of increasing demand which "fills up" supply which in turn decreases. As space becomes scarcer, rents for available space increase. 6.8 The price for any product is a function of four fundamental determinants of value. These are a. durability, feasibility, mobility, and location. b. desire, utility, scarcity, and purchasing power. c. popularity, recognizability, promotion, and rebate. d. fungibility, costs, convenience, and uniqueness. - ANS- 6.8 (b) desire, utility, scarcity, and purchasing power. The value of something is based on the answers to four questions: how much do I desire it; how useful is it; how scarce is it; and am I able to pay for it. 6.9 A town is rapidly growing, but all the buildable vacant lots in the most desirable area have already been occupied. In this case, it is likely that the price of existing homes in that area a. will stabilize, since the population must stabilize. b. will increase. c. will decline, since no further building can take place. d. will not show any predictable movement. - ANS- 6.9 (b) will increase. If there is no longer a supply to meet the increasing demand of a growing population, prices for existing supply will rise. 6.10 If there is a significant undersupply of homes in a market, construction will tend to increase. This is an example of a. supply outstripping demand. b. demand outstripping value. c. consumer optimism. d. the market tending toward equilibrium. - ANS- 6.10 (d) the market tending toward equilibrium. A market tends toward a state of equilibrium in which supply equals demand, and price, cost, and value are identical. Thus if supply is scarce, construction will increase to stabilize the imbalance. 6.11 If commercial real estate rental prices are falling in a market, it is likely that a. demand has outstripped supply of space. b. the market is in equilibrium. c. the market is over-supplied. d. employment is increasing. - ANS- 6.11 (c) the market is over-supplied. Falling prices indicate an oversupply of commercial properties in relation to demand. In this case, construction of new supply will also slow down. 6.12 A construction boom in a market is an indication that prices a. have been increasing. b. have been declining. c. have been in equilibrium. d. have exceeded supply. - ANS- 6.12 (a) have been increasing. A rise in prices is a market signal that there is an undersupply of product in relation to demand. As the market moves toward equilibrium, builders construct more buildings to meet the unmet demand. 6.13 Why is real estate traditionally considered a relatively illiquid economic product? a. Its physical form is fixed. b. Real estate is defined as land, not water. c. It is often difficult to convert to cash. d. It cannot be moved. - ANS- 6.13 (c) It is often difficult to convert to cash. Since real estate is often a large, long-term investment that has no exact duplicate, the process of a buyer's evaluating and choosing the right property is long and complex; hence, finding a buyer at a desired price can take a long time. 6.14 What does "base employment" refer to in the context of real estate demand? a. The lowest category of employment in terms of wages and desirability b. The number of persons employed in base industries in an area c. The number of persons employed on military bases in an area d. The labor pool available for employment in all industries in an area - ANS- 6.14 (b) The number of persons employed in base industries in an area Base employment is the number of persons employed in the base industries that represent the economic foundation of an area. It is the driving component of total employment, which includes secondary and support industries, and which creates demand for all types of real estate. 6.15 What is "vacancy" in real estate market economics? a. A property that has no owner-occupant b. The total number of properties of a certain type that are on the market at a given time c. The absence of certain types of users in a given market area d. The total existing space of a certain type that is unoccupied at a given time - ANS- 6.15 (d) The total existing space of a certain type that is unoccupied at a given time Vacancy is the amount of total real estate inventory of a certain type that is unoccupied at a given time. It is often stated as a percentage of total inventory, the vacancy rate for that property type. 6.16 A moratorium on new construction is an example of a. local government influencing the real estate market, regardless of demand. b. the natural result of demand exceeding supply in a local market. c. government promotion of the free market concept in the local real estate market. d. a government policy that aims to restrain a trend of rising prices in the local real estate market. - ANS- 6.16 (a) local government influencing the real estate market, regardless of demand. Local governments sometimes declare a moratorium on new construction because of present or projected inadequacies of the infrastructure—water, sewer, power, roads, etc.—or because of the desire to conform to a master plan. The result may be to drive up prices, as supply cannot freely increase to meet demand. 6.17 Of the following potential influences on a local real estate market, which one would be considered local, rather than regional, national, or global? a. Changes in money supply b. Federal Reserve interest rates c. In- and out-migrations of major employers d. Trade imbalances with foreign trading partners - ANS- 6.17 (c) In- and out-migrations of major employers Changes in employment numbers in a local market area, especially in major industries, have a direct impact on real estate demand in the area. Money supply, interest rates, and trade imbalances also have an impact, but they are regional or national factors rather than strictly local. 6.18 There is a lot of new construction going on in the town of Florence. Which of the following would most likely be the immediate effect on the real estate market? a. Demand increases and prices rise. b. Vacancy rises and prices fall. c. Absorption and vacancy decrease. d. Supply decreases relative to demand. - ANS- 6.18 (b) Vacancy rises and prices fall. New construction generally occurs to meet an excess of demand. By adding supply, it tends to increase vacancy and lower prices until supply-demand equilibrium is achieved. 6.19 What kind of real estate users are most concerned with neighborhood quality, access to services, property amenities, and quality of life in their demand for real estate? a. Retail b. Office c. Industrial d. Residential - ANS- 6.19 (d) Residential While all types of users may have these needs, they are most prominent for residential users because of concerns for family comfort and safety. Retail users are more concerned with competitive features of the trade area; office users care more about occupancy costs and suitability for the business; industrial users care more about such features as functionality, accessibility, and the labor pool. 6.20 One distinguishing feature of real estate as an economic product is a. its easy convertibility to cash. b. its quick response to changes in supply-demand balance. c. its susceptibility to swings in the local economy. d. the easy substitutability of one item for another. - ANS- 6.20 (c) its susceptibility to swings in the local economy. Because a real property cannot be transferred to a large, central real estate marketplace, its marketability is closely tied to local conditions. Investors and users must come to the product, unlike other types of economic product that can be moved to a place in search of greater demand. 6.21 Bill Parsons paid $450,000 for a house to operate as a rental property, figuring that he could rent it out at a rate of $2,700 a month. In paying a price based on the property's ability to generate a desired future income, Parsons was motivated by the economic principle known as a. substitution. b. anticipation. c. supply and demand. d. utility. - ANS- 6.21 (b) anticipation. Anticipation is the value principle that a buyer will pay a price based on the benefits the buyer expects to derive from a property over a holding period. For example, if an investor anticipates an annual rental income from a leased property to be one million dollars, this expected sum has a direct bearing on what the investor will pay for the property. 6.22 Which of the following situations illustrates the principle of contribution? a. A homebuyer makes a down payment of 20% instead of the 10% the lender requires. b. A homeowner adds a third bathroom to a house and thereby increases the appraised value by $10,000. c. The appraised value of a house goes up by $20,000 over a two-year period because of the prices recently paid for other houses in the neighborhood. d. Because of a decline in mortgage interest rates, a homeowner in a certain market is able to list her house at a higher price. - ANS- 6.22 (b) A homeowner adds a third bathroom to a house and thereby increases the appraised value by $10,000. The principle of contribution focuses on the degree to which a particular improvement affects market value of the overall property. In essence, the contribution of the improvement is equal to the change in market value that the addition of the improvement causes. For example, adding a bathroom to a house may contribute an additional $15,000 to the appraised value. Thus the contribution of the bathroom is $15,000. 6.23 When a property owner combines two adjacent properties to create a single property with a higher value than the sum of the values of the two separate properties, the applicable principle of value is called a. assemblage. b. accretion. c. progression. d. subdivision. - ANS- 6.23 (a) assemblage. Assemblage, or the conjoining of adjacent properties, sometimes creates a combined value that is greater than the values of the unassembled properties. The excess value created by assemblage is called plottage value. 6.24 What is the difference between market value and market price, if any? a. There is no difference. b. Market value is a broker's estimate; market price is a precise number derived by a licensed appraiser. c. Market value is an average price derived from comparable sales; market price is a price based on the cost of creating the property. d. Market value is an estimate; market price is the price at which a property sold. - ANS- 6.24 (d) Market value is an estimate; market price is the price at which a property sold. Market value is an estimate of the price at which a property will sell at a particular time. The market price, as opposed to market value, is what a property actually sells for. Market price should theoretically be the same as market value if all the conditions essential for market value are present. Market price, however, may not reflect the analysis of comparables and of investment value that an estimate of market value includes. 6.25 Which of the following is a valid requirement for defensibly characterizing a property's living area? a. Countable living area must be attached to the main house. b. Closets must be excluded from gross living area. c. The property must be finished, i.e., have completed studwork and sub-flooring. d. Enclosed porches and stairways cannot be counted as living area. - ANS- 6.25 (a) Countable living area must be attached to the main house. Generally, one cannot count an outbuilding that is not attached to the main house, i.e., a barn or shed. 6.26 How is a property's gross living area generally measured? a. From the lot's area, minus the area of improved buildings b. From the exterior walls, above grade, excluding open areas c. By measuring the interior rooms d. By measuring area of all enclosed rooms, minus the basement and attic - ANS- 6.26 (b) From the exterior walls, above grade, excluding open areas Gross living area is measured from the outside and includes all attached and enclosed areas, minus rooms below grade and portions of area above grade. 6.27 Which of the following statements properly describes the central concept of the sales comparison approach? a. Find the median price of recently sold comparable properties and add or subtract dollar amounts in the subject property to account for competitive differences. b. Make dollar adjustments to the sale prices of comparable properties to account for competitive differences with the subject. c. Find at least three comparable properties that are currently for sale and make dollar adjustments to the listing prices to account for competitive differences with the subject. d. Apply an appreciation factor to the price at which the subject property most recently sold and make dollar adjustments to account for competitive differences with comparable properties currently for sale. - ANS- 6.27 (b) Make dollar adjustments to the sale prices of comparable properties to account for competitive differences with the subject. The sales comparison approach consists of comparing sale prices of recently sold properties that are comparable with the subject, and making dollar adjustments to the price of each comparable to account for competitive differences with the subject. After identifying the adjusted value of each comparable, the appraiser weights the reliability of each comparable and the factors underlying how the adjustments were made. The weighting yields a final value range based on the most reliable factors in the analysis. 6.28 One of the strengths of the sales comparison approach is that it a. takes into account the subject property's investment value. b. reveals the profit margin of the builder or developer of the subject property. c. discovers the underlying value of the subject property apart from the influence of competing properties. d. takes into account the competitive value of specific amenities of the subject property. - ANS- 6.28 (d) takes into account the competitive value of specific amenities of the subject property. The sales comparison approach is widely used because it takes into account the subject property's specific amenities in relation to competing properties. In addition, because of the currency of its data, the approach incorporates present market realities. 6.29 In making dollar adjustments in the sales comparison approach, the appraiser a. adds value to a comparable that is inferior to the subject property. b. adds value to the subject property if it is inferior to a comparable. c. subtracts value from a comparable that is inferior to the subject property. d. subtracts value from the subject property if it is inferior to a comparable. - ANS- 6.29 (a) adds value to a comparable that is inferior to the subject property. If the comparable is inferior to the subject in some characteristic, an amount is added to the price of the comparable. If the comparable is better than the subject in some characteristic, an amount is deducted from the sale price of the comparable. This neutralizes the comparable's competitive advantage or disadvantage in an adjustment category. For example, a comparable has a swimming pool and the subject does not. To equalize the difference, the appraiser deducts an amount, say $6,000, from the sale price of the comparable. 6.30 The best comparable property for use in the sales comparison approach is the one that a. requires the most and largest adjustments. b. requires the fewest and smallest adjustments. c. sold most recently at the highest price. d. is located closest to the subject property. - ANS- 6.30 (b) requires the fewest and smallest adjustments. As a rule, the fewer the total number of adjustments, the smaller the adjustment amounts, and the less the total adjustment amount, the more reliable the comparable. 6.31 A house is being appraised using the sales comparison approach. The house has three bedrooms, two bathrooms, and a patio. The appraiser selects a comparable house that has three bedrooms, 3 bathrooms, and no patio. The comparable house just sold for $400,000. A bath is valued at $7,000, and a patio at $2,000. Assuming all else is equal, what is the adjusted value of the comparable? a. $402,000. b. $407,000. c. $395,000. d. $405,000. - ANS- 6.31 (c) $395,000. Since the comparable has an extra bath, it is adjusted downward to equalize with the subject. Conversely, since it has no patio, the appraiser adds value to the comparable. Thus, $400,000 minus $7,000 plus $2,000 equals $395,000. 6.32 Which of the following statements properly describes the central methodology of the cost approach to appraisal? a. Apply a depreciation factor to the reported actual cost of acquiring and improving the subject property. b. Estimate the cost of building the improvements on the subject property. c. Estimate the land value and add to this the actual cost of the improvements adjusted for competitive differences with similar properties. d. Add the estimated land value and cost of improvements and subtract the accrued depreciation of the improvements. - ANS- 6.32 (d) Add the estimated land value and cost of improvements and subtract the accrued depreciation of the improvements. The cost approach consists of estimating the value of the land "as if vacant;" estimating the cost of improvements; estimating and deducting accrued depreciation; and adding the estimated land value to the estimated depreciated cost of the improvements. 6.33 One of the strengths of the cost approach is that it a. takes into account the amount of money required to develop a similar property. b. is very accurate for a property with new improvements that represent the highest and best use. c. results in an actual price in dollars instead of an estimated value. d. reveals the owner's return on money invested in the cost of development. - ANS- 6.33 (b) is very accurate for a property with new improvements that represent the highest and best use. The strengths of the cost approach are that it: provides an upper limit for the subject's value based on the undepreciated cost of reproducing the improvements. It is also very accurate for valuing a property with new improvements which are the highest and best use of the property. 6.34 The principle underlying depreciation from physical deterioration is that a. eventually, a property loses all of its value. b. a property loses a portion of its value each year because of economic obsolescence. c. a property loses the same increment of value each year over the economic life of the property. d. the value lost to depreciation is incurable. - ANS- 6.34 (c) a property loses the same increment of value each year over the economic life of the property. All property improvements have an economic life, which becomes incrementally shorter year after year as physical deterioration takes its toll. The property as a whole does not lose value, since land itself does not depreciate. Similarly, an improvement can regain value if it is repaired or updated. Finally, not all properties lose value from economic obsolescence. 6.35 A property is being appraised by the cost approach. The appraiser estimates that the land is worth $150,000 and the replacement cost of the improvements is $475,000. Total depreciation from all causes is $50,000. What is the indicated value of the property? a. $675,000. b. $650,000. c. $625,000. d. $575,000. - ANS- 6.35 (d) $575,000. To appraise value using the cost approach, add the land value to the value of the depreciated improvement. Thus you have $150,000 + ($475,000 - 50,000), or $575,000. 6.36 Which of the following statements properly describes how to apply the income capitalization approach to appraisal? a. Apply a rate of return to the price paid for an income property. b. Divide the income a property generates by a rate of return. c. Estimate the amount of income a property must generate to return the capital amount invested in it. d. Estimate the rate of return a property owner receives from income generated by the property. - ANS- 6.36 (b) Divide the income a property generates by a rate of return. An appraiser obtains an indication of value from the income capitalization method by dividing the estimated net operating income for the subject by the rate of return, or capitalization rate. The formula is: NOI / Cap rate = Value. 6.37 A strength of the income capitalization approach is that it a. uses a rate of return that is required for all potential purchasers in a market. b. yields an accurate projection of investment income. c. uses a method that is also used by investors to determine how much they should pay for an investment property. d. can be used with any type of property in any market. - ANS- 6.37 (c) uses a method that is also used by investors to determine how much they should pay for an investment property. The strength of the income approach is that it is used by investors themselves to determine how much they should pay for a property. Thus, in the right circumstances, it provides a good basis for estimating market value. The approach, however, does not project what an income property's future income will be. Moreover, it is not an applicable method for estimating value if the subject is a non-income producing property. 6.38 A property is being appraised using the income capitalization approach. Annually, it has an estimated gross income of $60,000, vacancy and credit losses of $3,000, and operating expenses of $20,000. Using a capitalization rate of ten percent, what is the indicated value (to the nearest $1,000)? a. $370,000. b. $400,000. c. $570,000. d. $600,000. - ANS- 6.38 (a) $370,000. First, identify net income by subtracting out vacancy and expenses. Then divide by the capitalization rate. Thus, ($60,000 -3,000 - 20,000) ÷ 10% = $370,000. 6.39 An apartment building that sold for $450,000 had monthly gross rent receipts of $3,000. What is its monthly gross rent multiplier? a. 12.5 b. .01. c. .08. d. 150. - ANS- 6.39 (d) 150. The monthly gross rent multiplier for a property is equal to the price divided by the monthly rent. Thus, ($450,000 ÷ $3,000) = 150. 6.40 A rental house has monthly gross income of $2,400. A suitable gross income multiplier derived from market data is 14.1. What estimated sale price (to the nearest $1,000) is indicated? a. $338,000. b. $204,000. c. $406,000. d. $346,000. - ANS- 6.40 (c) $406,000. Multiply the monthly gross income times 12 to derive annual income. Multiply annual income times the gross income multiplier to derive the estimate of price. Thus, $2,400 times 12 equals $28,800. This times 14.1 equals $406,080, or $406,000 rounded. 6.41 A certified appraiser is one who has received certification by a. a licensed real estate school. b. the Appraisal Institute. c. the state in which the appraiser operates. d. the Appraisal Review Board. - ANS- 6.41 (c) the state in which the appraiser operates. A state-certified appraiser is one who has passed the necessary examinations and competency standards as established by each state in conformance with the federal standards. 6.42 The act that required federally-related appraisals to be conducted by a certified appraiser is known as a. The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). b. The Uniform Standards of Professional Appraisal Practice Act (USPAPA). c. The Appraisal Foundation Authorization and Reform Act (AFAR). d. The Federal Institution for Regulation and Enforcement of Appraisal Act (FIREAA). - ANS- 6.42 (a) The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Title XI of FIRREA requires that competent individuals whose professional conduct is properly supervised perform all appraisals used in federally-related transactions. As of January 1, 1993, such federally-related appraisals must be performed only by state-certified appraisers. 6.43 As a component of real estate value, the principle of substitution states that a. if two similar properties are for sale, a buyer will purchase the cheaper of the two. b. if one of two adjacent homes is more valuable, the price of the other home will tend to rise. c. if too many properties are built in a market, the prices will tend to go down. d. people will readily move to another home if it is of equal value. - ANS- 6.43 (a) if two similar properties are for sale, a buyer will purchase the cheaper of the two. According to the principle of substitution, a buyer will pay no more for a property than the buyer would have to pay for an equally desirable and available substitute property. For example, if three houses for sale are essentially similar in size, quality and location, a potential buyer is unlikely to choose the one that is priced significantly higher than the other two. 6.44 Highest and best use of a property is that use which a. is physically and financially feasible, legal, and the most productive. b. is legal, feasible, and deemed the most appropriate by zoning authorities. c. entails the largest building that zoning ordinances will allow developers to erect. d. conforms to other properties in the area. - ANS- 6.44 (a) is physically and financially feasible, legal, and the most productive. This valuation principle holds that there is, theoretically, a single use for a property that produces the greatest income and return. A property achieves its maximum value when it is put to this use. The use must however be legal. 6.45 Lynne just bought a house. She paid $375,000, for it, even though it had been listed at $390,000. An adjoining property owner, Ken, had tried to buy the property for $370,000, but had been refused. He now offers Lynne $380,000 for the house. Lynne is interested, so she hires an appraiser. The appraiser returns an estimate of value of $400,000. Which of these numbers can be called the market value? a. $375,000. b. $380,000. c. $390,000. d. $400,000. - ANS- 6.45 (d) $400,000. Market value is an opinion of the price that a willing seller and willing buyer would probably agree on for a property at a given time if: the transaction is for cash; the property is exposed on the open market for a reasonable period; buyer and seller have full information about market conditions ; there is no abnormal pressure on either party; it is an "arm's length" transaction; title is marketable; and the price does not include hidden influences such as special financing deals. The amount Lynne actually paid is the market price. The previous listing price and Ken's offer might be interesting data for the appraiser, but the appraisal must also consider other market data, such as comparable sales. 6.46 A notable weakness of the sales comparison approach to value is that a. there may be no recent sale price data in the market. b. the approach is not based on the principle of substitution. c. the approach is only accurate with unique, special purpose properties. d. sale prices cannot be compared, since all real estate is different. - ANS- 6.46 (a) there may be no recent sale price data in the market. The sales comparison approach is limited in that every property is unique. As a result, it is difficult to find good comparables, especially for special-purpose properties. In addition, the market must be active; otherwise, sale prices lack currency and reliability. 6.47 In the market data approach, an appraiser a. chooses nearby comparables, adjusts the subject for differences, and estimates the value. b. gathers relevant price data, applies the data to the subject, and estimates the value. c. selects comparable properties, adjusts the comparables, and estimates the value. d. identifies the price previously paid, applies an appreciation rate, and estimates the value. - ANS- 6.47 (c) selects comparable properties, adjusts the comparables, and estimates the value. The steps are to first identify comparable sales; then compare comparables to the subject and make adjustments to comparables; then, finally, weigh values indicated by adjusted comparables for the final value estimate of the subject. 6.48 In the sales comparison approach, an adjustment is warranted if a. the buyer obtains conventional financing for the property. b. the seller offers below-market seller financing. c. a comparable is located in another, albeit similar neighborhood. d. one property has a hip roof and the other has a gabled roof. - ANS- 6.48 (b) the seller offers below-market seller financing. The principal factors for comparison and adjustment are time of sale, location, physical characteristics, and transaction characteristics. An adjustment may be made for such differences as mortgage loan terms, mortgage assumability, and owner financing. 6.49 To complete the sales comparison approach, the appraiser a. averages the comparable values. b. weights the comparables. c. identifies the subject's value as that of the middle value of the comparables. d. identifies the subject's value as that of the nearest comparable. - ANS- 6.49 (b) weights the comparables. The last step in the approach is to perform a weighted analysis of the indicated values of each comparable. The appraiser, in other words, must identify which comparable values are more indicative of the subject and which are less indicative. However, all comparables are taken into account, not simply the nearest comparable. 6.50 One weakness of the cost approach for appraising market value is that a. builders may not pay market value for materials or labor. b. market value is not always the same as what the property cost. c. comparables used may not have similar quality of construction. d. new properties have inestimable costs and rates of depreciation. - ANS- 6.50 (b) market value is not always the same as what the property cost. The limitations of the cost approach are that: the cost to create improvements is not necessarily the same as market value; and depreciation is difficult to measure, especially for older buildings. 6.51 The cost of constructing a functional equivalent of a subject property is known as a. reproduction cost. b. replacement cost. c. restitution cost. d. reconstruction cost. - ANS- 6.51 (b) replacement cost. Reproduction cost is the cost of constructing, at current prices, a precise duplicate of the subject improvements. Replacement cost is the cost of constructing, at current prices and using current materials and methods, a functional equivalent of the subject improvements. 6.52 An office building lacks fiber optic cabling to accommodate the latest communications equipment. This is an example of a. physical deterioration. b. economic obsolescence. c. incurable depreciation. d. functional obsolescence. - ANS- 6.52 (d) functional obsolescence. Functional obsolescence occurs when a property has outmoded physical or design features which are no longer desirable or acceptable to current users. 6.53 A home is located in a neighborhood where homeowners on the block have failed to maintain their properties. This is an example of a. curable external obsolescence. b. incurable economic obsolescence. c. functional obsolescence. d. physical deterioration. - ANS- 6.53 (b) incurable economic obsolescence. Economic (or external) obsolescence is the loss of value due to adverse changes in the surroundings of the subject property that make the subject less desirable. Since such changes are usually beyond the control of the property owner, economic obsolescence is considered an incurable value loss. 6.54 In appraisal, loss of value in a property from any cause is referred to as a. deterioration. b. obsolescence. c. depreciation. d. deflation. - ANS- 6.54 (c) depreciation. Depreciation is the loss of value in an improvement over time. The loss of an improvement's value can come from any cause, such as deterioration, obsolescence, or changes in the neighborhood. 6.55 In the cost approach, after estimating the value of the land and the cost of the improvements, the appraiser a. estimates depreciation, subtracts depreciation from cost, and adds back the land value. b. subtracts deterioration from cost, estimates land depreciation, and totals the two values. c. estimates depreciation of land and improvements and subtracts the total from original cost. d. estimates obsolescence and subtracts from the cost of land and improvements. - ANS- 6.55 (a) estimates depreciation, subtracts depreciation from cost, and adds back the land value. The steps in the costs approach are: (1) estimate land value; (2) estimate reproduction or replacement cost of improvements; (3) estimate accrued depreciation; (4) subtract accrued depreciation from reproduction or replacement cost; and (5) add land value to depreciated reproduction or replacement cost. 6.56 Which regulatory entity/code establishes standards for an appraiser's methods, reporting methods and disclosures? a. Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) b. Uniform Standards of Professional Appraisal Practice (USPAP) c. National Association of Realtors®' Code of Ethics d. Federal Appraisal Regulation and Licensing Board. - ANS- 6.56 (b) Uniform Standards of Professional Appraisal Practice (USPAP) USPAP is the professional code of conduct established by the Appraisal Qualifications Board that regulates appraisal practice in the USA. Standards relate to reporting requirements, methodologies, and proper disclosures to clients and the public. National Test 7: Finance - ANS- 7.1 What is a lien-theory state? a. A state in which a mortgagee holds legal title to a secured property. b. A state in which a mortgagee has equitable title to a secured property. c. A state that allows a real estate owner's creditors to record liens against the owner's property. d. A state in which a lien is considered as a conveyance. - ANS- 7.1 (b) A state in which a mortgagee has equitable title to a secured property. States differ in their interpretation of who owns mortgaged property. Those that regard the mortgage as a lien held by the mortgagee (lender) against the property owned by the mortgagor (borrower) are called lien- theory states. Those that regard the mortgage document as a conveyance of ownership from the mortgagor to the mortgagee are called title-theory states. 7.2 What is the function of a note in a mortgage or trust deed financing arrangement? a. It is the lender's security instrument in the collateral property. b. It is evidence of ownership of the mortgage or trust deed. c. It contains the borrower's promise to maintain the value of the property given as collateral for a loan. d. It is evidence of the borrower's debt to the lender. - ANS- 7.2 (d) It is evidence of the borrower's debt to the lender. A valid mortgage or trust deed financing arrangement requires a note as evidence of the debt. 7.3 When homebuyer Henry pledges his newly purchased home as collateral for a mortgage loan, the evidence of the pledge is the a. trust deed or mortgage. b. promissory note. c. loan commitment. d. loan receipt. - ANS- 7.3 (a) trust deed or mortgage. The mortgage or trust deed is evidence of the collateral pledge of the purchased property as security for the loan. 7.4 The borrower in a mortgage loan transaction is known as the a. mortgagee. b. mortgagor. c. lienor. d. trustee. - ANS- 7.4 (b) mortgagor. The mortgagor is the borrower and the mortgagee is the lender. As a memory aid, notice that "lender" and "mortgagee" both have two "e"s. "Mortgagor" and "borrower" both have two "o"s. 7.5 If a borrower obtains an interest-only loan of $200,000 at an annual interest rate of 6%, what is the monthly interest payment? a. $1,200. b. $600. c. $500. d. $1,000. - ANS- 7.5 (d) $1,000. Multiply the rate times the loan amount and divide by 12 to calculate monthly interest. Thus, ($200,000 x 6%) ÷ 12 = $1,000. 7.6 If a borrower's monthly interest payment on an interest-only loan at an annual interest rate of 6% is $5,000, how much was the loan amount? a. $720,000. b. $1,000,000. c. $1,200,000. d. $500,000. - ANS- 7.6 (b) $1,000,000. The equation for the loan amount is (annual interest divided by the interest rate) = loan amount. Thus, ($5,000 x 12) ÷ .06 = $1,000,000. 7.7 A borrower of a $250,000 interest-only loan makes annual interest payments of $18,750. What interest rate is the borrower paying? a. 7.5%. b. .75%. c. 3.75%. d. 8.5%. - ANS- 7.7 (a) 7.5%. The equation for the interest rate is (annual payment / loan amount) = interest rate. Thus ($18,750 / $250,000) = 7.5%. 7.8 Maria borrows $600,000 and pays two points for the loan. How much does she pay in points? a. $1,200. b. $12,000. c. $7,200. d. It depends on the interest rate. - ANS- 7.8 (b) $12,000. A discount point is one percent of the loan amount. Thus, one point on a $600,000 loan equals ($600,000 x 2%) or ($600,000 x .02), or $12,000. 7.9 Which of the following is true of an amortizing loan? a. The amount of annual interest paid is the same for every year of the loan term. b. Part of each periodic payment is applied to repayment of the loan balance in advance and part is applied to payment of interest in arrears. c. Except for any points that may be paid, the interest on the loan balance is usually paid in advance. d. The interest rate is reduced each year to maintain equal payments even though the outstanding loan balance is smaller. - ANS- 7.9 (b) Part of each periodic payment is applied to repayment of the loan balance in advance and part is applied to payment of interest in arrears. In an amortizing loan, part of the principal is repaid periodically along with interest, so that the principal balance decreases over the life of the loan. The annual interest is never the same, since the principal balance to which the interest rate applies changes every year. Interest on a loan is always paid in arrears, not in advance. 7.10 For a loan that is not backed by the Federal Housing Administration or Veterans Administration, and for which the borrower is making a down payment of less than 20%, the lender is likely to require the borrower to obtain a. a subrogation agreement. b. private mortgage insurance. c. a letter of credit. d. a co-signer on the note. - ANS- 7.10 (b) private mortgage insurance. Mortgage insurance protects the lender against loss of a portion of the loan (typically 20-25%) in case of borrower default. Private mortgage insurance generally applies to loans that are not backed by the Federal Housing Administration (FHA) or Veterans Administration (VA) and that have a down payment of less than 20% of the property value. The FHA has its own insurance requirement for loans with a down payment of less than 20%. 7.11 What is a loan-to-value ratio? a. The percentage of a lender's portfolio that is composed of mortgage loans. b. The ratio of borrowed principal plus total interest to the appraised value of the collateral property. c. The ratio of a lender's return on a mortgage loan to the value of the collateral property. d. The fraction of the appraised value of the property offered as collateral which the lender is willing to lend. - ANS- 7.11 (d) The fraction of the appraised value of the property offered as collateral which the lender is willing to lend. The relationship of the loan amount to the property value, expressed as a percentage, is called the loan-to- value ratio, or LTV. If the lender's loan to value ratio is 80%, the lender will lend only $80,000 on a home appraised at $100,000. The difference between what the lender will lend and what the borrower must pay for the property is the amount the borrower must provide in cash as a down payment. 7.12 The difference between what a borrower has to pay to purchase a property and the amount a lender will lend on the property is the a. mortgage insurance coverage amount. b. lender's profit margin. c. buyer's down payment. d. origination fee. - ANS- 7.12 (c) buyer's down payment. Price less loan is the down payment. This is also the buyer's initial equity. 7.13 The Equal Credit Opportunity Act prohibits a lender from a. refusing a loan because the borrower does not match the lender's target market. b. including income from self-employment in the borrower's qualifying income. c. requiring both spouses to sign the loan application form. d. refusing a loan because a borrower has a defective credit report. - ANS- 7.13 (a) refusing a loan because the borrower does not match the lender's target market. The Equal Credit Opportunity Act (ECOA) requires a lender to evaluate a loan applicant on the basis of that applicant's own income and credit rating, unless the applicant requests the inclusion of another's income and credit rating in the application. In addition, ECOA has prohibited a number of practices in mortgage loan underwriting, including refusing a loan based on an applicant's demographic characteristics. 7.14 A loan applicant has an annual gross income of $72,000. How much will a lender allow the applicant to pay for monthly housing expense to qualify for a loan if the lender uses an income ratio of 28%? a. $2,160. b. $1,680. c. $1,068. d. $840. - ANS- 7.14 (b) $1680. Monthly income qualification is derived by multiplying monthly income by the income ratio. Thus (72,000 / 12) x .28 = $1680. Remember to first derive the monthly income. 7.15 AMC Bank discovers, in considering buyer Bob's application for a mortgage loan, that Bob has borrowed the down payment from an uncle and has to repay that loan. Bob should expect that AMC Bank will a. refuse the application. b. adjust the applicant's debt ratio calculation and lower the loan amount. c. increase the loan amount to enable the borrower to pay off the loan to the relative. d. require the borrower to make payments to an escrow account for repayment of the relative's loan. - ANS- 7.15 (b) adjust the applicant's debt ratio calculation and lower the loan amount. Since a lender lends only part of the purchase price of a property according to the lender's loan-to-value ratio, a lender will verify that a borrower has the cash resources to make the required down payment. If someone is lending an applicant a portion of the down payment with a provision for repayment, a lender will consider this another debt obligation and adjust the debt ratio accordingly. This can lower the amount a lender is willing to lend. 7.16 The Federal Reserve's Regulation Z applies to which loans? a. All loans. b. All loans secured by real estate. c. All loans secured by a residence. d. All loans over $25,000. - ANS- 7.16 (c) All loans secured by a residence. Regulation Z applies to all loans secured by a residence. It does not apply to commercial loans or to agricultural loans over $25,000. Its provisions cover the disclosure of costs, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the act. 7.17 If a particular loan falls under Regulation Z's right of rescission provision, a. the lender has the right to change the terms of the loan within a certain period. b. the lender has the right to accelerate repayment of the loan because of a change in the borrower's credit status. c. the borrower has the right to pay off the loan ahead of schedule with no penalty. d. the borrower has a limited right to cancel the transaction within a certain period. - ANS- 7.17 (d) the borrower has a limited right to cancel the transaction within a certain period. A borrower has a limited right to cancel the credit transaction, usually within three days of completion of the transaction. The right of rescission does not apply to "residential mortgage transactions," that is, to mortgage loans used to finance the purchase or construction of the borrower's primary residence. It does, however, apply to refinancing of mortgage loans, and to home equity loans. State law may require a rescission period and notice on first mortgage loan transactions as well. 7.18 Under the Equal Credit Opportunity Act, a lender, or a real estate agent who assists a seller in qualifying a potential buyer, may not a. tell a rejected loan applicant the reasons for the rejection. b. ask the buyer/borrower about his/her religion or national origin. c. ask the buyer/borrower to explain unconventional sources of income. d. use a credit report that has not been provided to the borrower. - ANS- 7.18 (b) ask the buyer/borrower about his/her religion or national origin. ECOA prohibits discrimination in extending credit based on race, color, religion, national origin, sex, marital status, age, or dependency upon public assistance. A creditor may not make any statements to discourage an applicant on the basis of such discrimination or ask any questions of an applicant concerning these discriminatory items. A real estate licensee who assists a seller in qualifying a potential buyer may fall within the reach of this prohibition. 7.19 A conventional mortgage loan is one that is a. backed by the Federal National Mortgage Association. b. insured under Section 203(b) of the Federal Housing Administration loan program. c. guaranteed by the Government National Mortgage Association. d. not FHA-insured or VA-guaranteed. - ANS- 7.19 (d) not FHA-insured or VA-guaranteed. A conventional mortgage loan is a permanent long-term loan that is not FHA-insured or VA-guaranteed. FNMA does not "back" loans; FHA only insures FHA loans; and the VA, not GNMA guarantees loans. 7.20 The assumability of an FHA-insured loan is a. unrestricted. b. limited by when the loan was originated. c. limited to owner-occupied properties. d. prohibited on all existing loans under current regulations. - ANS- 7.20 (b) limited by when the loan was originated. Rules for assumability vary according to when the FHA-insured loan was originated and whether the original loan was for an investment property or an owner-occupied principal residence. Loans originated before December 1, 1986, are generally assumable without restriction. Loans originated after December 1, 1986, require that the assumer show creditworthiness. Some mortgages executed from 1986 through 1989 contain language that is not enforced as a result of later Congressional action. Mortgages from that period are now freely assumable, despite any restrictions stated in the mortgage. 7.21 A VA certificate of eligibility determines a. how long an individual served in the military. b. the maximum loan amount an approved lender can give to veterans. c. how much of a loan the VA will guarantee. d. whether a lender is approved to issue VA-guaranteed loans. - ANS- 7.21 (c) how much of a loan the VA will guarantee. A veteran must apply for a Certificate of Eligibility to find out how much the VA will guarantee in a particular situation. 7.22 A borrower obtains a 30-year, fully amortizing mortgage loan of $450,000 at 8%. What is the principal balance at the end of the loan term? a. $36,000. b. $450,000. c. $4,220. d. Zero. - ANS- 7.22 (d) Zero. If a loan is fully amortizing, its loan balance is zero at the end of the loan term. 7.23 Which of the following describes a purchase money mortgage financing arrangement? a. A bank gives a buyer a senior mortgage loan that fully covers the cost of purchasing the property. b. The buyer gives the seller a mortgage and note as part of the purchase price of the property. c. A land trust holds title to the property while the buyer makes periodic installment payments to the seller. d. The seller uses the purchase money obtained from the buyer's mortgage loan to repay the seller's outstanding loan balance. - ANS- 7.23 (b) The buyer gives the seller a mortgage and note as part of the purchase price of the property. With a purchase money mortgage, the borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property. The seller in this case is said to "take back" a note, or to "carry paper," on the property. 7.24 A homeowner borrows money from a lender and gives the lender a mortgage on the property as collateral for the loan. The homeowner retains title to the property. This is an example of a. intermediation. b. forfeiture. c. hypothecation. d. subordination. - ANS- 7.24 (c) hypothecation. The process of securing a loan by pledging a property without giving up ownership of the property is called hypothecation. 7.25 Which of the following correctly describes the flow of money and documents in a mortgage loan transaction? a. The borrower gives the lender a note and a mortgage in exchange for loan funds. b. The lender gives the borrower a mortgage and receives a note in exchange for loan funds. c. The borrower receives a note in exchange for a mortgage from the lender. d. The lender gives the borrower a note, loan funds and a mortgage. - ANS- 7.25 (a) The borrower gives the lender a note and a mortgage in exchange for loan funds. When a borrower gives a note promising to repay the borrowed money and executes a mortgage on the real estate for which the money is being borrowed as security, the financing method is called mortgage financing. 7.26 In a deed of trust transaction, which of the following occurs? a. The beneficiary conveys title to a trustee in exchange for loan funds. b. The trustee conveys title to a beneficiary in exchange for loan funds. c. The trustor conveys title to a trustee in exchange for loan funds from the beneficiary. d. The trustee conveys title to a trustor in exchange for loan funds from the beneficiary. - ANS- 7.26 (c) The trustor conveys title to a trustee in exchange for loan funds from the beneficiary. A deed of trust conveys title to the property in question from the borrower (trustor) to a trustee as security for the loan. The trustee is a third party fiduciary to the trust. While the loan is in place, the trustee holds the title on behalf of the lender, who is the beneficiary of the trust. 7.27 A lender lends money to a homeowner and takes legal title to the property as collateral during the payoff period. They are in a a. title-theory state. b. lien-theory state. c. state allowing land trusts. d. state where hypothecation is illegal. - ANS- 7.27 (a) title-theory state. States that regard the mortgage document as a conveyance of ownership from the mortgagor to the mortgagee are called title-theory states. 7.28 A lender who charges a rate of interest in excess of legal limits is guilty of a. redlining. b. usury. c. profit-taking. d. nothing; there are no legal limits to interest rates. - ANS- 7.28 (b) usury. Many states have laws against usury, which is the charging of excessive interest rates on loans. Such states have a maximum rate that is either a flat rate or a variable rate tied to an index such as the prime lending rate. 7.29 A lender is charging 2.5 points on a $300,000 loan. The borrower must therefore pay the lender an advance amount of a. $3,600. b. $750. c. $7,500. d. $6,000. - ANS- 7.29 (c) $7,500. A point is one percentage point of a loan amount. Thus, 2.5 points on a $300,000 loan equal (.025 x $300,000), or $7,500. 7.30 The difference between a balloon loan and an amortized loan is a. an amortized loan is paid off over the loan period. b. a balloon loan always has a shorter loan term. c. an amortized loan requires interest-payments. d. a balloon loan must be retired in five years. - ANS- 7.30 (a) an amortized loan is paid off over the loan period. Amortized loans retire the principal balance over the loan period. If a loan does not do this, one must make a balloon payment at the end of the loan term to complete the loan payoff. 7.31 A distinctive feature of a promissory note is that a. it is not assignable. b. it must be accompanied by a mortgage. c. it is a negotiable instrument. d. it may not be prepaid. - ANS- 7.31 (c) it is a negotiable instrument. A promissory note is a negotiable instrument, which means the payee may assign it to a third party. The assignee would then have the right to receive the borrower's periodic payments. 7.32 When the terms of the mortgage loan are satisfied, the mortgagee a. may retain any overage in the escrow account. b. may inspect the property before returning legal title. c. may be entitled to charge the borrower a small fee to close the loan. d. may be required to execute a release of mortgage document. - ANS- 7.32 (d) may be required to execute a release of mortgage document. Lenders may be required to release the mortgage or trust document to the borrower when the borrower has paid off the loan and all other sums secured by the document. The release clause, also known as a defeasance clause, may specify that the mortgagee will execute a satisfaction of mortgage (also known as release of mortgage and mortgage discharge) to the mortgagor. 7.33 In addition to income, credit, and employment data, a mortgage lender requires additional documentation, usually including a. an appraisal report. b. a criminal record report. c. a subordination agreement. d. a default recourse waiver. - ANS- 7.33 (a) an appraisal report. Loan underwriting is the process of assessing the lender's risk in giving a loan. Mortgage underwriting includes: evaluating the borrower's ability to repay the loan; appraising the value of the property offered as security; and determining the terms of the loan. 7.34 The three overriding considerations of a lender's mortgage loan decision are a. points, interest rate, and loan term. b. the location of the mortgaged property, the borrower's cash, and the amount of the borrower's equity. c. the ability to re-pay, the value of the collateral, and the profitability of the loan. d. the amount of the loan, the borrower's income, and the down payment. - ANS- 7.34 (c) the ability to re-pay, the value of the collateral, and the profitability of the loan. A lender assesses risks by examining, or qualifying, both borrower and property. In qualifying a borrower, an underwriter weighs the ability of the borrower to repay the loan. In qualifying a property, an underwriter assesses the ability of the property value to cover potential losses. In this evaluation, a lender requires that the appraised value of the property be more than adequate to cover the contemplated loan and costs. Finally, the loan must make money for the lending organization as a basic business precept. 7.35 The reason lenders consider the loan-to-value ratio important in underwriting is that a. they don't want to lend borrowers any more money than necessary. b. they want to ensure there is more than enough collateral to cover the loan amount. c. borrowers can only afford to borrow a portion of the entire purchase price. d. the higher the loan-to-value ratio, the more profitable the loan. - ANS- 7.35 (b) they want to ensure there is more than enough collateral to cover the loan amount. Without an ample difference between the property value and the loan amount, a drop in property values could cause the loan balance to exceed the collateral itself. This greatly increases the risk of a loan loss should the borrower default since the balance could not be completely recovered in a foreclosure sale. 7.36 The Equal Credit Opportunity Act (ECOA) requires lenders to a. extend equal credit to all prospective borrowers. b. consider the income of a spouse in evaluating a family's creditworthiness. c. discount the income of a person involved in child-rearing or child-bearing. d. specialize lending activity by geographical area for improved customer service. - ANS- 7.36 (b) consider the income of a spouse in evaluating a family's creditworthiness. The Equal Credit Opportunity Act (ECOA) requires a lender to evaluate a loan applicant on the basis of that applicant's own income and credit rating, unless the applicant requests the inclusion of another's income and credit rating in the application. In such a case, a lender may not discount or disregard income from part-time work, a spouse, child support, alimony, or separate maintenance. 7.37 Lenders use an income ratio in qualifying to a. insure a borrower has the earning power to make the loan payments. b. compare a borrower's earnings to the borrower's short-term debt. c. identify the highest possible interest rate that the borrower can afford. d. quantify the borrower's assets to the fullest extent. - ANS- 7.37 (a) insure the buyer has the earning power to make the loan payments. Both the income and debt ratios in borrower qualification quantify how much a borrower can safely afford to pay on a mortgage loan. The income ratio focuses on the borrower's earning power. 7.38 The debt ratio formula used to qualify borrowers is a. total debt divided by debt payments. b. gross income divided by assets. c. gross income divided by debts. d. debt payments divided by gross income. - ANS- 7.38 (d) debt payments divided by gross income. The debt ratio formula is (debt obligations) ÷ (income). 7.39 At the closing of a mortgage loan a. the borrower pays off the note and receives clear title. b. the lender issues a firm loan commitment. c. the parties complete all loan origination documents and the loan is funded. d. the borrower's loan application is complete and the file closed. - ANS- 7.39 (c) the parties complete all loan origination documents and the loan is funded. Closing of a mortgage loan normally occurs with the closing of the real estate transaction. At the real estate closing, the lender typically has deposited the funded amount with an escrow agent, along with instructions for disbursing the funds. The borrower deposits necessary funds with the escrow agent, executes final documents, and receives signed copies of all relevant documents. 7.40 Which laws or regulations require mortgage lenders to disclose financing costs and annual percentage rate to a borrower before funding a loan? a. The Equal Credit Opportunity Act. b. Truth-in-Lending laws and Regulation Z. c. The Real Estate Settlement and Procedures Act. d. Federal Fair Housing Laws. - ANS- 7.40 (b) Truth-in-Lending laws and Regulation Z. Regulation Z, which implements the Truth-in-Lending Act, applies to all loans secured by a residence. It does not apply to commercial loans or to agricultural loans over $25,000. It prescribes requirements to lenders regarding the disclosure of costs, the right to rescind the credit transaction, advertising credit offers, and penalties for non-compliance with the Truth-in-Lending Act. 7.41 Which laws or regulations prevent mortgage lenders from discriminating in extending credit to potential borrowers? a. The Equal Credit Opportunity Act. b. Truth-in-Lending laws. c. The Real Estate Settlement and Procedures Act. d. Federal Fair Housing Laws. - ANS- 7.41 (a) The Equal Credit Opportunity Act. ECOA prohibits discrimination in extending credit based on race, color, religion, national origin, sex, marital status, age, or dependency upon public assistance. 7.42 Which laws or regulations require mortgage lenders to provide an estimate of closing costs to a borrower and forbid them to pay kickbacks for referrals? a.