What is the term for the combination of an interest-only loan with a stated income program?

The correct answer is the term "risk layering." This phrase describes the practice of combining various aspects of lending that may carry higher levels of risk for the lender. In this case, an interest-only loan is a financial product where the borrower pays only the interest for a specified period, which can lead to negative amortization if the principal balance isn't reduced. On the other hand, a stated income program allows borrowers to report income without submitting traditional documentation, which can introduce uncertainty around the borrower's ability to repay the loan.

Combining these two components creates a situation where the lender faces greater risk, as they are offering a loan to a borrower with potentially less demonstrated financial stability (due to the lack of thorough income verification) and a payment structure that does not contribute to paying down the principal during the early years of the loan. As a result, understanding "risk layering" is crucial for assessing the risks lenders face in providing certain types of loans under specific conditions.