Nationwide Mortgage Licensing System (NMLS) Practice Exam

According to the Truth-in-Lending Act (TILA), the term "refinance" applies to:

1. A change in a payment schedule

2. A reduction in annual percentage rate

3. The renewal of a single payment obligation with no change in the original terms

4. The satisfaction of an existing obligation and its replacement by a new obligation

The correct answer is: The satisfaction of an existing obligation and its replacement by a new obligation

The term "refinance" as defined by the Truth-in-Lending Act (TILA) specifically refers to the satisfaction of an existing obligation and its replacement by a new obligation. This process typically involves paying off a current loan and replacing it with a new loan, often under different terms, which can include changes in interest rates, repayment schedules, or loan amounts. This definition is crucial because refinancing is a common practice in mortgage lending and consumer credit, allowing borrowers to secure better terms or alter the conditions of their debt. Understanding this definition ensures that lenders and borrowers alike comply with TILA and have a clear understanding of their financial obligations. The other options describe aspects related to loan management but do not encapsulate the full essence of refinancing. A change in a payment schedule or a reduction in the annual percentage rate does not inherently imply that an old obligation is being satisfied by a new one. Similarly, renewing a single payment obligation without changing the original terms does not fit the definition of refinancing, as it does not involve creating a new loan to replace the existing obligation.