Which of the following is an example of a covered loan?

A covered loan refers to a loan that is subject to specific consumer protection regulations, often aimed at preventing predatory lending practices. The defining characteristic of a covered loan is often tied to the loan's features and terms, which are designed to protect borrowers from certain risks.

In this context, a loan in which the original principal balance does not exceed the most current conforming loan limit is considered a covered loan because it generally falls under the umbrella of regulation intended to ensure safer lending practices. Conforming loan limits are set by federal guidelines and are meant to regulate the types of loans that can be sold to Fannie Mae and Freddie Mac. Since these loans must adhere to certain criteria, they provide a degree of consumer protection.

On the other hand, options such as an adjustable-rate mortgage (ARM), a loan with acceleration to the rate upon default, and negative amortization all indicate potential risks or predatory features that are not aligned with the protective measures of covered loans. An ARM may have fluctuating payments that complicate budgeting for the borrower, while a loan that accelerates upon default can lead to immediate financial repercussions. Similarly, negative amortization can result in a borrower’s balance growing over time, which can lead to greater financial distress.

Therefore, the defining