Mortgage Underwriting, PMI and High-Cost Loan Rules in New York

For the New York salesperson exam, treat this as four connected decisions: qualify the borrower, evaluate the property, identify when PMI can end and recognize a loan structure or sales practice that requires special protection.

What is the fastest way to organize this topic?

Use this map:

The memory line is:

Underwriting studies borrower and property. PMI protects the lender. Predatory describes harmful conduct. High-cost is a legal classification with a specific test.

Official source map

The New York State Department of State Real Estate Salesperson 77-Hour Curriculum places lender evaluation, borrower qualification, loan-to-value ratio, private mortgage insurance and predatory lending in Subject 5, Real Estate Finance. It does not publish an official scored-question count or weighting for this group of concepts.

Federal ability-to-repay and Qualified Mortgage rules appear in current Regulation Z section 1026.43. The Homeowners Protection Act of 1998, or HPA, defines the general borrower-paid PMI cancellation and termination framework in 12 USC 4901 and 12 USC 4902.

The Home Ownership and Equity Protection Act of 1994, or HOEPA, is implemented through Regulation Z sections 1026.32 and 1026.34. New York has a separate high-cost home-loan statute in Banking Law section 6-l. A loan can meet one test without meeting the other.

Credit underwriting also remains subject to the Equal Credit Opportunity Act and current Regulation B. Lawful repayment analysis does not permit discrimination on a prohibited basis.

What should a student be able to do after this lesson?

You should be able to:

• distinguish borrower underwriting from property underwriting;
• identify the major federal ability-to-repay factors;
• explain why collateral value cannot replace repayment ability;
• calculate housing, total-debt and loan-to-value ratios when facts are supplied;
• distinguish prequalification, preapproval, commitment and rate lock;
• explain why no single DTI or credit score controls every loan;
• recognize lawful income verification and unlawful credit discrimination;
• state whom PMI protects and when it is commonly required;
• distinguish PMI from homeowner insurance and government mortgage insurance;
• apply the HPA 80 percent, 78 percent and midpoint rules;
• define original value for a purchase and refinance;
• identify borrower-requested PMI cancellation conditions;
• distinguish subprime, high-cost and predatory lending;
• recognize loan flipping, equity stripping and default encouragement;
• identify the three federal HOEPA coverage tests;
• use the 2026 federal points-and-fees thresholds correctly;
• recognize major federal high-cost mortgage restrictions;
• apply New York Banking Law section 6-l coverage and protection concepts; and
• choose a safe salesperson response to a suspicious lending pattern.

What is the New York salesperson exam testing here?

The curriculum tests whether a student can connect facts to the correct lending concept. It does not ask a salesperson to underwrite a live loan or give a legal opinion.

Typical tasks include:

• identifying whether a fact concerns capacity, credit, capital or collateral;
• selecting which monthly obligations belong in a ratio;
• deciding whether 80, 78 or the midpoint controls a PMI question;
• distinguishing borrower-requested cancellation from automatic termination;
• recognizing that a high rate alone does not prove predatory conduct;
• spotting repeated refinancing without a tangible net benefit;
• identifying a federally prohibited high-cost mortgage feature; and
• applying the New York rule that repayment ability cannot rest on home equity alone.

The Department of State does not publish a scored allocation for this lesson. Learn the decision, number and legal label attached to each fact.

What is mortgage underwriting?

Mortgage underwriting is the lender's evaluation of the borrower, the proposed credit and the property securing repayment. The underwriter decides whether the file meets applicable law, program requirements and the lender's risk standards.

The decision can be:

• approved;
• approved subject to conditions;
• suspended while information is obtained;
• counteroffered on different terms; or
• denied.

A salesperson can help keep a transaction organized, but the salesperson does not make the lender's credit decision.

What are the two sides of an underwriting file?

Think of two folders.

Borrower folder

The lender may review:

• income and likely continuance;
• employment or other income source;
• assets and funds needed for closing;
• reserves after closing;
• current debt obligations;
• proposed housing expense;
• simultaneous loans;
• credit history; and
• occupancy and loan purpose.

Property folder

The lender may review:

• sales price and appraised value;
• property type and legal use;
• location and marketability;
• physical condition;
• comparable sales or income information;
• title and lien position;
• hazard, flood and other required insurance;
• condominium, cooperative or association eligibility; and
• environmental or repair issues that affect the program.

Strong borrower finances do not cure unacceptable collateral. Strong collateral does not establish that a consumer can repay.

What do capacity, capital, credit and collateral mean?

The four-C framework is a useful study tool, though it is not a complete statute.

Character sometimes appears as a fifth C, often tied to willingness to repay and credit history. The exam fact pattern matters more than the number of Cs used by a particular course.

What does the federal ability-to-repay rule require?

For a covered transaction, Regulation Z requires the creditor to make a reasonable and good-faith determination at or before consummation that the consumer has a reasonable ability to repay according to the loan terms.

The general rule requires consideration of eight categories:

1. current or reasonably expected income or assets, excluding the value of the dwelling securing the loan;
2. current employment status when employment income is relied on;
3. the monthly payment on the covered transaction;
4. the monthly payment on a simultaneous loan the creditor knows or has reason to know about;
5. monthly mortgage-related obligations;
6. current debt obligations, alimony and child support;
7. monthly debt-to-income ratio or residual income; and
8. credit history.

The creditor verifies income, assets and obligations it relies on with reasonably reliable third-party records. The home is security, not income.

What payment does the lender test?

The payment calculation depends on the product and Regulation Z rule. The lender cannot rely only on a temporary low payment when the contract and information show a higher relevant payment.

Depending on the transaction, underwriting can account for:

• fully amortizing principal and interest;
• an adjustable-rate calculation under the rule;
• a known simultaneous second mortgage or home-equity line;
• recurring property taxes and insurance;
• mortgage insurance;
• recurring condominium, cooperative or homeowners-association obligations; and
• a balloon payment when the rule requires it.

The fixed, adjustable, balloon and graduated mortgage lesson explains how payment structures change risk.

What are housing and total debt-to-income ratios?

The housing ratio compares the proposed monthly housing expense with gross monthly income. The total debt-to-income ratio, or DTI, includes the proposed housing expense plus qualifying recurring monthly obligations.

The basic formulas are:

Housing ratio = monthly housing expense / gross monthly income

Total DTI = total qualifying monthly debt / gross monthly income

Example: gross monthly income is $10,000. Proposed housing expense is $2,800. Other counted monthly obligations are $700.

Housing ratio = $2,800 / $10,000 = 28%

Total DTI = ($2,800 + $700) / $10,000 = 35%

These calculations organize the file. They do not decide approval alone.

Is there one maximum DTI for every mortgage?

No. Current Regulation Z does not prescribe one DTI ratio for every covered ability-to-repay transaction. Programs, products, lenders and individual files use different standards and compensating factors.

Older study material may say that every General Qualified Mortgage must have a DTI of 43 percent or less. That is stale. The 2021 General Qualified Mortgage amendments removed that fixed federal General QM DTI requirement and replaced it with price-based thresholds plus other requirements.

If an exam problem supplies a ratio limit, use the stated limit. If it asks about the current federal general rule, do not invent a universal 43 percent ceiling. The loan-to-value and qualifying-math lesson owns the full math workflow.

What is residual income?

Residual income is the money remaining after total monthly debt obligations are subtracted from total monthly income.

Residual income = total monthly income - total monthly debt obligations

Using the prior example:

$10,000 - $3,500 = $6,500

Regulation Z permits a creditor to consider DTI or residual income under the general ability-to-repay analysis. A ratio shows proportion. Residual income shows dollars left for other living expenses.

What is a Qualified Mortgage?

A Qualified Mortgage, or QM, is a category defined by Regulation Z. It generally must meet product-feature, points-and-fees, underwriting and pricing requirements applicable to its QM pathway.

QM does not mean:

• a government promise to approve the applicant;
• a statement that the loan is the cheapest option;
• a replacement for underwriting;
• a loan free of default risk; or
• the same thing as a federal or New York high-cost mortgage.

Current General QM rules use annual percentage rate thresholds relative to the average prime offer rate, with thresholds that vary by loan amount and are adjusted where required. A salesperson does not need to calculate live QM status from a rate quote.

How does a lender verify income and assets?

The creditor may use reasonably reliable third-party records such as:

• payroll records and W-2 forms;
• tax returns or tax transcripts;
• bank and investment statements;
• employer verification;
• benefit statements;
• business financial records; and
• reliable third-party databases containing applicant-specific information.

The creditor needs to verify the income or assets it relies on. A self-employed borrower can have strong repayment capacity, but the documentation and analysis may differ from a salaried employee's file.

Self-employed borrower scenario

A buyer owns a consulting company and transfers $14,000 each month from the business account. The deposit pattern alone does not establish qualifying income. The lender may analyze tax returns, business expenses, ownership, cash flow and likely continuance.

The salesperson should avoid converting deposits into a promised qualifying income figure.

What does credit history tell the lender?

Credit history can include the age and number of credit lines, payment history, collections, judgments and bankruptcies. Regulation Z does not prescribe one minimum credit score for every covered transaction or tell creditors to give each credit-history fact the same weight.

A credit report can verify debts and repayment history. A score summarizes selected report information, but it does not replace the full file. Some programs may consider nontraditional references such as rent or utility history when traditional credit is limited.

What is the difference between prequalification and preapproval?

Industry usage varies, so ask what was actually reviewed.

A strong preapproval can improve planning, but it is not the same as an unconditional closing.

Why can an approved borrower still have a property problem?

The mortgage is secured by the property. The lender must evaluate whether the collateral meets its legal, program and risk requirements.

Examples of property issues include:

• appraised value below the contract price;
• condition requiring repairs;
• unpermitted use or zoning concern;
• title defect or unexpected lien;
• condominium or cooperative project ineligibility;
• insufficient hazard or flood coverage;
• mixed-use characteristics outside the program; or
• marketability concerns supported by the appraisal.

An appraisal estimates value for the assignment. It is not a home inspection, engineering report, title search or promise about future value.

How is lawful underwriting different from redlining?

Lawful underwriting evaluates individual creditworthiness and acceptable collateral under consistent standards. Redlining denies, restricts or changes access to credit because of the location's protected-community characteristics rather than legitimate individual credit and property facts.

Current Regulation B prohibits a creditor from considering a prohibited basis in evaluating creditworthiness, subject to specific statutory rules. For example, a creditor cannot make childbearing assumptions or automatically discount qualifying part-time, retirement or public-assistance income because of its source.

The steering, blockbusting and redlining lesson owns the full fair-housing comparison. Underwriting rules do not authorize discrimination.

What happens when a creditor takes adverse action?

Under current Regulation B, a creditor generally must notify an applicant of action taken within 30 days after receiving a completed application. An adverse-action notice must provide specific principal reasons or tell the applicant how to request them within the permitted period, depending on the notice method.

“Did not meet our internal standards” is not a sufficiently specific reason by itself. Credit-score key factors under the Fair Credit Reporting Act do not replace Regulation B's specific-reasons requirement.

A salesperson should send questions about a denial or counteroffer to the creditor and qualified advisers. The salesperson should not reinterpret the creditor's notice or propose that protected information be changed or omitted.

What is private mortgage insurance?

Private mortgage insurance, or PMI, is insurance provided by a private mortgage insurer that protects a mortgage lender or investor against part of the loss if the borrower defaults. The borrower often pays the premium, but the borrower is not the insured beneficiary.

PMI can make a conventional mortgage available with a smaller down payment. It also increases the borrower's housing cost while required.

PMI is different from:

• homeowner or hazard insurance, which covers specified property losses;
• title insurance, which addresses covered title risks;
• mortgage life or disability insurance;
• Federal Housing Administration mortgage insurance;
• a Department of Veterans Affairs loan guaranty; and
• a United States Department of Agriculture loan guaranty or annual fee.

The FHA, VA and USDA loan comparison explains the government-program differences.

When is PMI commonly required?

PMI is common on a conventional first mortgage when the borrower makes less than a 20 percent down payment or the lender's loan-to-value ratio exceeds 80 percent. That is a common market pattern, not a statement that every lender uses identical rules.

A lender may offer borrower-paid monthly PMI, a single premium, split premiums or lender-paid mortgage insurance through pricing. The cost and cancellation treatment can differ, so the consumer should compare the actual disclosures and program terms.

Which loans receive the general HPA PMI rights?

The Homeowners Protection Act generally addresses private mortgage insurance on a residential mortgage transaction involving a single-family dwelling that is the borrower's principal residence and was consummated on or after July 29, 1999.

The statutory definition of PMI excludes mortgage insurance made available under the National Housing Act, title 38 and the rural housing statute. As a result, the HPA's 80 and 78 percent rules are not the rules for FHA mortgage insurance, VA guaranties or USDA coverage.

The general borrower cancellation and automatic termination provisions also have special treatment for high-risk loans. Lender-paid mortgage insurance uses disclosure rules that differ from borrower-paid PMI.

What does original value mean for PMI?

For a purchase transaction, original value is generally the lower of:

• the contract sales price; or
• the appraised value at consummation.

For a refinance, original value is the appraised value relied on by the mortgagee to approve the refinance.

This definition is critical because ordinary market appreciation does not rewrite original value for the HPA's automatic 78 percent test.

Original-value example

The contract price is $500,000 and the appraisal at consummation is $490,000.

Original value = $490,000
80% request point = $490,000 x 0.80 = $392,000
78% automatic point = $490,000 x 0.78 = $382,200

Using $500,000 would overstate both statutory balance points.

When may a borrower request PMI cancellation?

Under the HPA's general borrower-paid PMI rule, the borrower may request cancellation when the principal balance is scheduled to reach 80 percent of original value or when actual payments reduce it to 80 percent earlier.

The borrower must:

1. submit a written request to the servicer;
2. have a good payment history under the statute;
3. be current; and
4. satisfy the holder's disclosed requirements for evidence that value has not declined below original value and certification that no subordinate lien encumbers the equity.

Extra principal can move the actual balance to 80 percent earlier. Appreciation alone does not satisfy the statutory actual-payment test, though investor or servicer policies may offer other cancellation paths that are at least as favorable.

What is good payment history for an HPA request?

The HPA definition generally requires:

• no payment 60 days or more past due during the first 12 months of the two-year lookback period; and
• no payment 30 days or more past due during the 12 months preceding the later of the cancellation date or cancellation request.

The borrower must also be current when the requirements are satisfied.

This payment-history test belongs to borrower-requested cancellation. Do not add it to the general automatic 78 percent rule, which focuses on the scheduled balance and whether the borrower is current at the termination date.

When does PMI terminate automatically?

For a covered non-high-risk mortgage, borrower-paid PMI generally terminates on the date the principal balance is first scheduled to reach 78 percent of original value if the borrower is current.

For a fixed-rate mortgage, use the initial amortization schedule. For an adjustable-rate mortgage, use the amortization schedule then in effect. The actual outstanding balance does not replace the scheduled-balance test.

If the borrower is not current on the termination date, PMI terminates on the first day of the first month after the borrower becomes current.

The borrower does not need to submit a cancellation request for automatic termination.

What is final PMI termination at the midpoint?

If PMI has not ended under the request or automatic rules, the requirement generally cannot continue beyond the first day of the month after the midpoint of the amortization period when the borrower is current.

For a fully amortizing 30-year schedule, the midpoint is after 15 years. The midpoint rule can matter more for a loan with an interest-only period, principal forbearance or balloon structure because the scheduled balance may not reach 78 percent before then.

The midpoint is about time in the amortization period, not 50 percent equity.

What are the three PMI ending points?

Remember: 80 asks, 78 ends, midpoint closes the back door.

Do high-risk loans use the same PMI schedule?

Not fully. HPA section 4902(g) exempts qualifying high-risk residential mortgage transactions from the ordinary borrower-cancellation and automatic-termination provisions.

For certain high-risk loans outside the Fannie Mae and Freddie Mac guideline category, the statute provides a 77 percent scheduled termination point. The midpoint backstop still applies when the borrower is current.

A consumer should use the PMI disclosure and ask the servicer which statutory or investor rule controls. The common 80 and 78 study rules are general rules, not a complete description of every mortgage.

What notices does the HPA require?

For covered borrower-paid PMI transactions, the mortgagee provides initial information about cancellation and termination. Fixed-rate borrowers generally receive an initial amortization schedule and the relevant dates. Adjustable-rate borrowers receive notices describing how the dates will be communicated.

The servicer also provides annual information about HPA rights and contact details while PMI remains required. After cancellation or termination, the servicer provides written notice explaining that PMI ended and no further premium is due.

The statute limits how long premiums may continue after the applicable event and requires return of unearned premiums within the statutory period.

What is lender-paid mortgage insurance?

With lender-paid mortgage insurance, or LPMI, the lender pays the insurance premium but generally recovers the cost through the loan's price, such as a higher interest rate. The HPA requires specific disclosure of that tradeoff.

The borrower does not have the same HPA cancellation or automatic-termination right for LPMI as for borrower-paid PMI. Ending the insurance does not by itself reduce a contract interest rate that priced in its cost.

What is predatory lending?

Predatory lending is harmful lending conduct built around deception, coercion, exploitation, unsuitable loan structures or equity extraction. It is identified from the total facts, not one label.

Warning patterns can include:

• false statements about rate, payment, fees or approval;
• pressure to sign incomplete or blank documents;
• hiding a balloon, adjustable feature or prepayment cost;
• lending based mainly on home equity without repayment ability;
• packing unnecessary insurance or products into the loan;
• falsifying income, occupancy or appraisal information;
• steering a borrower to a costlier loan for improper reasons;
• advising a borrower to stop paying an existing loan;
• repeated refinancing that adds fees without a real borrower benefit;
• contractor and lender coordination that strips equity; and
• targeting a protected community for abusive terms.

An unfavorable loan outcome does not prove predatory conduct by itself. Analyze what was represented, verified, charged and gained.

Are subprime, high-cost and predatory the same?

No.

A subprime loan can be lawfully underwritten and clearly disclosed. A high-cost loan can be lawful if the lender follows all applicable protections. A loan below a high-cost threshold can still involve deception or discrimination.

What is loan flipping?

Loan flipping is repeated refinancing that does not provide a reasonable or tangible net benefit to the borrower after considering the old loan, new loan, costs and borrower circumstances.

Flipping scenario

An older homeowner has a fixed-rate loan with manageable payments. A broker arranges three refinances in four years. Each transaction adds fees to the principal, cash proceeds are small and the payment rises. No documented borrower objective explains the repeated cost.

The pattern is a loan-flipping warning. Compare the full old and new obligations rather than asking only whether the borrower received cash.

What is a federal HOEPA high-cost mortgage?

Under Regulation Z section 1026.32, a covered consumer credit transaction secured by the consumer's principal dwelling becomes a high-cost mortgage when one of three tests is met:

1. the APR exceeds the average prime offer rate for a comparable transaction by more than the applicable margin;
2. points and fees exceed the applicable threshold; or
3. the contract permits a prepayment penalty after 36 months or total prepayment penalties exceeding 2 percent of the amount prepaid.

The APR margins are:

• more than 6.5 percentage points for most first-lien transactions;
• more than 8.5 percentage points for a first-lien transaction secured by personal property when the loan amount is below $50,000; and
• more than 8.5 percentage points for a subordinate-lien transaction.

Reverse mortgages and initial-construction financing are among the specified exemptions. Other coverage details still matter.

What are the 2026 HOEPA points-and-fees thresholds?

For 2026, the adjusted transaction loan-amount threshold is $27,592 and the adjusted dollar trigger is $1,380.

The test is:

The face amount of the note selects the tier, while the percentage applies to the Regulation Z total-loan-amount definition. The adjusted dollar figures can change each year, so an older threshold should not be reused for a current file.

Federal points-and-fees example

A 2026 transaction has a face amount and total loan amount of $20,000. Eight percent is $1,600.

Lesser of $1,600 and $1,380 = $1,380

If covered points and fees exceed $1,380, the points-and-fees test is met. Exactly $1,380 does not exceed the threshold.

What protections apply to a federal high-cost mortgage?

Regulation Z supplies special disclosures, limitations and prohibited practices. Major examples include:

• specified notice, APR, payment and amount-borrowed disclosures at least three business days before consummation or account opening;
• written certification of counseling from an approved counselor before credit is extended;
• restrictions on balloon payments, with limited exceptions;
• no negative-amortization payment schedule;
• no increase in interest rate after default;
• limits on advance payments from proceeds;
• no prepayment penalty;
• limits on late fees and payoff-statement charges;
• no financing of covered points and fees;
• restrictions on paying home-improvement contractors;
• no encouragement to default on existing credit before a refinance;
• restrictions on refinancing one high-cost mortgage into another within one year unless in the consumer's interest; and
• notice to an assignee that special claims and defenses can follow the loan.

The counselor must be independent of the creditor's steering. Counseling does not convert an unlawful loan term into a lawful one.

How is New York Banking Law section 6-l different?

New York Banking Law section 6-l defines a separate “high-cost home loan.” Its covered home-loan definition generally requires:

• a natural-person borrower;
• primarily personal, family or household debt;
• principal amount at or below the applicable conforming limit described by the statute;
• security in a one-to-four-family home, condominium or cooperative interest;
• borrower occupancy as a principal dwelling; and
• property in New York.

The statute excludes reverse mortgages and loans made or fully or partly backed by the State of New York Mortgage Agency. Coverage must be analyzed from the current statute and transaction.

What are the New York section 6-l thresholds?

A covered home loan becomes high-cost when it exceeds one or more statutory thresholds.

APR threshold

• For a first-lien mortgage, APR at consummation exceeds the comparable Treasury yield by eight percentage points.
• For a subordinate mortgage, APR at consummation equals or exceeds the comparable Treasury yield by nine percentage points.

The comparable Treasury yield is measured as the statute directs using the fifteenth day of the month preceding the application month. If an introductory APR is lower than the later rate, the later applicable rate is used for this test.

Points-and-fees threshold

• More than 5 percent of total loan amount for a loan of $50,000 or more.
• More than 6 percent for a qualifying FHA- or VA-backed purchase-money loan of $50,000 or more.
• More than the greater of 6 percent of total loan amount or $1,500 for a loan below $50,000.

Section 6-l contains detailed points-and-fees definitions and discount-point exclusions. These New York figures are not the federal 2026 HOEPA figures.

What does New York section 6-l prohibit or require?

The statute provides an extensive protection set. Important exam concepts include:

• no discretionary call provision unrelated to a good-faith material default;
• limits on balloon payments, including the 15-year and irregular-income exceptions;
• no negative amortization except specified temporary forbearance;
• no default-triggered interest-rate increase;
• no financing of specified credit insurance or unrelated products;
• no loan flipping without tangible net benefit;
• no refinancing of a beneficial special mortgage without the required counseling documentation;
• due regard for repayment ability based on verified income, obligations, employment and financial resources other than home equity;
• counseling disclosures and a list of approved counselors;
• a written high-cost caution notice within three days after the determination and at least 10 days before closing;
• limits on financing points and fees;
• controlled payment of home-improvement contractors;
• no recommendation or encouragement to default on existing debt;
• no payment for unperformed goods, facilities or services;
• no prepayment penalty;
• required escrow of taxes and hazard insurance for the initial period, subject to statutory exceptions and later written waiver; and
• no introductory rate lasting less than six months.

The statute also contains disclosure, mortgage-legend, reporting, assignee, remedy and anti-evasion provisions. A live section 6-l question belongs with New York mortgage counsel or a qualified compliance professional.

How does New York test repayment ability for a high-cost home loan?

Section 6-l requires due regard to the resident borrower's repayment ability based on:

• current and expected income;
• current obligations;
• employment status; and
• other financial resources excluding equity in the dwelling.

Income must be supported by detailed documentation and independent verification. The statute provides a rebuttable presumption when total monthly debts, including the new loan, do not exceed 50 percent of gross monthly income and the lender follows specified Department of Veterans Affairs residual-income guidance.

The 50 percent figure is a limited state-law presumption for this covered loan analysis. It is not a universal approval ratio for New York mortgages.

What is New York Banking Law section 6-m?

Banking Law section 6-m is a separate New York statute for defined subprime home loans. It uses a rate-based statutory definition and imposes underwriting and servicing protections.

For this lesson, remember three points:

1. subprime and high-cost are separate defined categories;
2. neither label proves predatory conduct without the full facts; and
3. a salesperson should not calculate current statutory classification from a marketing rate.

The lender or qualified adviser must apply the current benchmark, product details and transaction date.

What should a salesperson do when lending conduct looks suspicious?

Use this response sequence:

1. Stop making predictions. Do not tell the consumer that a loan is lawful, unlawful or certain to close.
2. Preserve the documents. Keep advertisements, estimates, disclosures, messages and requested changes.
3. Name the factual concern. Examples include an unexplained fee, blank form, false occupancy statement or instruction to miss a payment.
4. Do not participate. Refuse to alter facts, conceal terms or route value through another person.
5. Notify the supervising broker. Follow the brokerage's written escalation process.
6. Direct the consumer to the right professional. That may be the lender's compliance office, closing attorney, independent attorney or approved housing counselor.
7. Report through an appropriate channel when warranted. New York Department of Financial Services and federal consumer agencies provide complaint resources.
8. Protect confidential information. Share the minimum necessary through authorized channels.

Urgency does not expand a salesperson's license or make an unsupported accusation helpful.

What are the most common misconceptions?

Misconception 1: A high appraisal proves the borrower can repay

Correction: collateral and repayment ability are different underwriting questions. Federal ATR analysis excludes the value of the dwelling from qualifying income or assets.

Misconception 2: One passing ratio requires approval

Correction: underwriting can also consider credit, assets, reserves, property, program rules and verified information.

Misconception 3: General QM still has a universal 43 percent DTI cap

Correction: the 2021 federal amendments removed that fixed General QM requirement.

Misconception 4: A preapproval is an unconditional mortgage commitment

Correction: property review, updated documents and other conditions can remain.

Misconception 5: PMI protects the homeowner

Correction: PMI protects the lender or investor against covered loss. It does not prevent foreclosure.

Misconception 6: PMI automatically ends when current market equity reaches 22 percent

Correction: the HPA automatic rule generally uses the scheduled balance at 78 percent of original value.

Misconception 7: A borrower must request PMI termination at 78 percent

Correction: the servicer initiates automatic termination when the general statutory conditions are met.

Misconception 8: FHA mortgage insurance follows the HPA 80 and 78 rules

Correction: FHA insurance is excluded from the HPA definition of PMI and uses program-specific rules.

Misconception 9: Every subprime loan is predatory

Correction: subprime describes a category. Predatory conduct requires facts showing abuse or exploitation.

Misconception 10: Federal and New York high-cost tests are interchangeable

Correction: HOEPA and Banking Law section 6-l use different coverage, benchmarks, thresholds and protections.

Misconception 11: Counseling permits a prohibited high-cost term

Correction: counseling is an additional protection, not a waiver of substantive prohibitions.

Misconception 12: Equity is enough for a New York high-cost loan

Correction: section 6-l requires repayment analysis using verified financial resources other than the home's equity.

How can you solve these questions quickly?

Use the FILE SAFE method:

• F: Is the fact about finances or the property?
• I: What income, assets, debts and payments were independently verified?
• L: Which loan label is actually defined by the facts?
• E: Is equity being confused with ability to repay?
• S: Is this PMI request, automatic termination or midpoint?
• A: Does federal or New York high-cost law apply?
• F: Is there flipping, falsehood, pressure or an improper fee?
• E: What is the safest licensed response?

Separate the issue before reaching for a number. An 80 percent fact points toward borrower-requested PMI cancellation. An 8-point APR spread could point toward New York section 6-l, but only after its coverage and comparison method are satisfied.

Worked examples

Example 1: housing and total DTI

Gross monthly income is $8,000. Proposed principal, interest, taxes, insurance and recurring association dues total $2,400. Other counted debts total $800.

Housing ratio = $2,400 / $8,000 = 30%

Total DTI = ($2,400 + $800) / $8,000 = 40%

The result describes the ratios. It does not establish approval without the lender's complete analysis.

Example 2: early PMI request

Original value is $400,000. The scheduled balance will reach $320,000 in two years, but extra principal payments have already reduced the actual balance to $320,000.

$400,000 x 0.80 = $320,000

The borrower may submit a written cancellation request now and must satisfy the other statutory conditions. Extra payments can support an earlier request.

Example 3: automatic PMI termination

Original value is $400,000. The amortization schedule reaches $312,000 while the actual balance is $305,000 because of extra payments.

$400,000 x 0.78 = $312,000

The scheduled balance reaching $312,000 controls the general automatic date. If the borrower is current, no written request is required.

Example 4: federal 2026 points-and-fees test

A covered transaction has a face amount and total loan amount of $100,000. Covered points and fees are $5,100.

$100,000 x 0.05 = $5,000
$5,100 > $5,000

The points-and-fees test is met because the amount exceeds 5 percent. This does not decide whether another exemption or calculation rule affects the file.

Example 5: New York loan flipping

A refinance pays off $190,000. The new principal is $205,000, including $12,000 in charges. Payment and term increase, cash to the borrower is minimal and no documented objective explains the new cost.

The facts support a tangible-net-benefit inquiry. “The new loan was approved” does not answer whether the refinancing is prohibited loan flipping under applicable law.

Practice questions

Question 1

Which item belongs primarily to collateral underwriting?

A. Employment history

B. Appraised value

C. Monthly alimony obligation

D. Credit-card payment history

Answer: B. Appraised value concerns the property offered as security.

Question 2

Which asset is excluded from the federal ability-to-repay income-and-assets factor?

A. Savings account

B. Vested investments

C. The dwelling securing the loan

D. Verified trust funds

Answer: C. The creditor cannot substitute the securing dwelling's value for repayment resources.

Question 3

Which statement about DTI is accurate?

A. Every mortgage uses a 43 percent maximum

B. Regulation Z prescribes one ratio for every transaction

C. Current general ATR rules require consideration but no single universal ratio

D. DTI excludes the proposed mortgage payment

Answer: C. Lenders and programs apply varying standards within the governing rules.

Question 4

What does PMI primarily protect?

A. The lender or investor from covered default loss

B. The borrower from unemployment

C. The home from fire

D. The deed from title defects

Answer: A. PMI protects the lender or investor, though the borrower commonly pays.

Question 5

When may a borrower generally request HPA PMI cancellation?

A. Scheduled or actual balance reaches 80 percent of original value and other conditions are met

B. Market value rises 5 percent

C. Scheduled balance reaches 78 percent with no request

D. One year after closing in every case

Answer: A. Eighty percent is the borrower-request point.

Question 6

What generally happens at the scheduled 78 percent point when the borrower is current?

A. Borrower must order a new appraisal

B. PMI terminates automatically

C. Interest rate falls automatically

D. Principal is forgiven

Answer: B. The general automatic rule does not require a written request.

Question 7

For a purchase, what is original value under the HPA?

A. Current tax assessment

B. Higher of sales price or appraisal

C. Lower of contract price or appraisal at consummation

D. Replacement cost

Answer: C. The lower figure generally controls.

Question 8

Which fact most strongly suggests loan flipping?

A. One refinance lowers both rate and payment

B. Repeated refinances add fees with no tangible net benefit

C. A borrower compares three lenders

D. A lender verifies income

Answer: B. Repetition, cost and lack of borrower benefit are the core warning pattern.

Question 9

Which statement about a subprime loan is accurate?

A. It is predatory by definition

B. It is identical to every high-cost mortgage

C. It is a category that does not prove abuse by itself

D. It cannot be secured by a home

Answer: C. Predatory conduct requires more than a category label.

Question 10

Which is a federal HOEPA high-cost coverage test?

A. Property is in New York City

B. APR exceeds APOR by the applicable margin

C. Borrower makes a 20 percent down payment

D. Seller uses an attorney

Answer: B. Regulation Z compares APR with the average prime offer rate.

Question 11

For 2026, which adjusted amount selects the federal HOEPA points-and-fees tier?

A. $1,380

B. $15,000

C. $27,592

D. $50,000

Answer: C. The 2026 adjusted transaction loan-amount threshold is $27,592.

Question 12

Which term is prohibited on a federal high-cost mortgage?

A. Required counseling certification

B. Prepayment penalty

C. APR disclosure

D. Amount-borrowed disclosure

Answer: B. Regulation Z prohibits a prepayment penalty on a high-cost mortgage.

Question 13

Which resource may not be used by itself to establish repayment ability under New York Banking Law section 6-l?

A. Verified income

B. Employment status

C. Other documented financial resources

D. Equity in the securing dwelling

Answer: D. The statute excludes home equity from the financial resources used for this purpose.

Question 14

What is the safest response when a lender asks a salesperson to change an occupancy fact?

A. Change it if closing is near

B. Ask the buyer to sign a blank correction

C. Refuse, preserve the request and escalate through the broker and appropriate professionals

D. Post the accusation online

Answer: C. The salesperson should not participate in a false statement and should use a documented escalation path.

What is the one-minute review?

• Underwriting evaluates both borrower and property.
• Capacity, capital, credit and collateral organize common underwriting facts.
• Federal ATR rules require a reasonable, good-faith repayment determination for covered transactions.
• Eight federal factors include income or assets, employment, loan payments, mortgage obligations, debts, DTI or residual income and credit history.
• The securing dwelling's value does not replace repayment resources.
• No universal DTI or credit score controls every mortgage.
• The old 43 percent General QM DTI rule is not current.
• A preapproval can remain conditional, and a rate lock addresses pricing rather than approval.
• Lawful underwriting cannot use a prohibited basis.
• PMI protects the lender or investor, not the borrower.
• HPA borrower cancellation generally starts at 80 percent of original value with a written request and other conditions.
• Automatic termination generally occurs at scheduled 78 percent when the borrower is current.
• The midpoint is a final time-based backstop.
• Original value generally means the lower purchase price or appraisal, but a refinance uses the relied-on appraisal.
• FHA, VA and USDA coverage does not use the HPA PMI framework.
• Subprime, high-cost and predatory are different labels.
• Loan flipping is repeated refinancing without a tangible net benefit.
• Federal HOEPA uses APR, points-and-fees and prepayment-penalty tests.
• The 2026 federal points-and-fees figures are $27,592 and $1,380.
• New York Banking Law section 6-l uses a separate high-cost home-loan test.
• New York requires repayment analysis using verified resources other than home equity.
• High-cost protections include counseling, disclosure and prohibited-term rules.
• A salesperson should refuse false facts, preserve evidence and escalate through proper channels.

Frequently asked questions

What does a mortgage underwriter evaluate?

The underwriter evaluates the borrower's ability and willingness to repay, the proposed loan and the property's acceptability as collateral.

What are the four Cs of mortgage underwriting?

They are capacity, capital, credit and collateral. Some materials add character as a fifth concept.

What are the eight federal ability-to-repay factors?

They cover income or assets, employment, covered-loan payment, simultaneous-loan payment, mortgage obligations, debts and support obligations, DTI or residual income, and credit history.

Is 43 percent the current maximum DTI for every mortgage?

No. Regulation Z does not prescribe one DTI for every loan, and the current General QM rule no longer uses the former fixed 43 percent requirement.

Is a mortgage preapproval final approval?

No. Property review, updated financial information, title, insurance and other conditions can remain.

Who does PMI protect?

PMI protects the lender or investor against part of a covered default loss. It does not protect the borrower from foreclosure.

When can a homeowner ask to cancel PMI?

Under the general HPA rule, at the scheduled 80 percent point or when actual principal payments reach 80 percent of original value, subject to a written request and other conditions.

When does PMI terminate automatically?

Generally, when the scheduled balance first reaches 78 percent of original value and the borrower is current.

Does a borrower need an appraisal for automatic PMI termination?

The general automatic rule does not condition termination on a new appraisal or current property value. A permitted value-evidence requirement applies to borrower-requested cancellation.

What is the PMI midpoint rule?

It generally ends PMI on the first day of the month after the amortization midpoint when the borrower is current and PMI did not end earlier.

Does FHA mortgage insurance end at 78 percent?

The HPA 78 percent PMI rule does not control FHA mortgage insurance. FHA program rules apply.

What is predatory lending?

It is abusive or exploitative lending conduct shown by facts such as deception, pressure, equity stripping, falsification or repeated costly refinancing without meaningful benefit.

Is a high interest rate automatically predatory?

No. Pricing may trigger a legal high-cost classification, but predatory conduct requires analysis of the entire transaction and behavior.

What is loan flipping?

It is repeated refinancing that adds cost without a reasonable or tangible net benefit after considering the borrower and both loans.

What makes a mortgage federally high-cost under HOEPA?

A covered mortgage meets an applicable APR spread, points-and-fees threshold or prepayment-penalty test under Regulation Z section 1026.32.

What are the 2026 federal HOEPA dollar figures?

The adjusted loan-amount threshold is $27,592 and the adjusted dollar trigger for the lower tier is $1,380.

Does a federal high-cost mortgage require counseling?

Yes. The creditor must receive written certification that the consumer obtained counseling from an approved counselor before extending the high-cost mortgage.

What is a New York high-cost home loan?

It is a covered New York home loan that exceeds an APR or points-and-fees threshold in Banking Law section 6-l.

Can a New York high-cost lender rely only on home equity?

No. Section 6-l requires due regard to repayment ability using verified income, obligations, employment and other financial resources apart from the home's equity.

Are New York and federal high-cost thresholds the same?

No. They use different benchmarks, amounts, coverage definitions and comparison rules.

What should you study next?

Use the Real Estate Finance subject guide to review the complete finance sequence. Revisit PITI and mortgage escrow for payment components, then compare TILA and Regulation Z with the high-cost protections here.

The next exact queue item is NY-D04, How to Read a Loan Estimate. You can also try the free 19-subject sampler. The sampler is not an official exam distribution or pass predictor.

Sources and verification notes

This lesson was checked against the following primary and official sources on August 27, 2026:

1. New York State Department of State, Real Estate Salesperson 77-Hour Curriculum, Subject 5, lender evaluation, PMI and predatory lending.
2. Consumer Financial Protection Bureau, Regulation Z section 1026.43, ability-to-repay and Qualified Mortgage requirements.
3. Consumer Financial Protection Bureau, current Regulation Z, version most recently amended April 8, 2026.
4. Consumer Financial Protection Bureau, 2026 Regulation Z annual threshold adjustment, HOEPA and QM adjusted amounts.
5. Consumer Financial Protection Bureau, Regulation Z section 1026.32, federal high-cost mortgage coverage, disclosures and prohibited terms.
6. Consumer Financial Protection Bureau, Regulation Z section 1026.34, high-cost mortgage prohibited practices and counseling.
7. United States Code, 12 USC 4901, HPA definitions including cancellation date, original value and termination date.
8. United States Code, 12 USC 4902, borrower cancellation, automatic termination, midpoint and high-risk exceptions.
9. United States Code, 12 USC 4903, initial and annual PMI disclosures.
10. United States Code, 12 USC 4904, notice after PMI cancellation or termination.
11. United States Code, 12 USC 4905, lender-paid mortgage-insurance disclosures.
12. Consumer Financial Protection Bureau, PMI removal guide, consumer explanation of 80 percent, 78 percent and midpoint rights.
13. Consumer Financial Protection Bureau, current Regulation B, Equal Credit Opportunity Act regulation most recently amended July 21, 2026.
14. Regulation B section 1002.6, lawful evaluation of applications and prohibited-basis rules.
15. Regulation B section 1002.9, action-taken timing and specific-reasons notices.
16. New York State Senate, Banking Law section 6-l, high-cost home-loan definitions, thresholds and protections.
17. New York State Senate, Banking Law section 6-m, subprime home-loan definitions and protections.
18. New York State Department of Financial Services, avoiding predatory loans and loan scams, consumer warning patterns and assistance resources.

Underwriting standards, product rules, annual federal thresholds and rate benchmarks can change. A borrower should use current creditor disclosures, servicer information and qualified legal, housing or lending advice. This article provides independent exam preparation and general education. It is not legal, lending, compliance or financial advice, is not affiliated with or endorsed by the New York State Department of State and does not reproduce state exam questions.