Loan Officer Practice Exam

To protect themselves, lenders use plans for disbursing construction loan proceeds to guard against overspending by the borrower. With the _____, the lender directly pays bills presented by the various suppliers and laborers on a project.

1. A) System of Periodic Payments

2. B) Voucher System

3. C) Warrant System

4. D) Fixed Disbursement Plan

The correct answer is: C) Warrant System

The correct answer is the Warrant System. In the context of construction loans, the Warrant System is designed to protect lenders by ensuring that funds are disbursed directly to suppliers and laborers rather than to the borrower. This method helps minimize the risk of the borrower overspending or misappropriating the loan proceeds, as lenders can verify that payments are made for actual work completed and materials provided. By issuing payment warrants, lenders maintain more control over the flow of money, thereby securing their investment and ensuring that the loan is used specifically for the intended purpose of the construction project. Other options, while relevant in different contexts, do not precisely describe the mechanism where lenders directly pay for goods and services on behalf of the borrower. The System of Periodic Payments typically refers to disbursement intervals rather than the method of payment. The Voucher System involves a process where the borrower submits vouchers for payment, which does not guarantee payment directly to suppliers and laborers. Fixed Disbursement Plans outline a set amount provided at specific stages, but they're not specifically designed to manage vendor payments directly like the Warrant System does.