A lender pays its originators 1.25% of the amount financed on every loan, and adds a quarter point when the borrower buys two or more discount points. Compliance is asked whether the add-on can stay.
Correct Answer
A) Keep compensation independent of loan terms or proxies
Why this is correct: The rule in 12 CFR 1026.36(d)(1) mandates that a loan originator's compensation cannot be based on the terms of a transaction. A proposal to increase pay for higher-rate loans is a textbook example of what the rule forbids. Therefore, the correct response is to keep compensation independent. Why the other choices are wrong: "Offset a pricing exception by reducing only this originator compensation" is wrong because individual adjustments based on transaction-specific events (like pricing exceptions) are prohibited. "Use the privacy notice standard to decide the Loan originator compensation based on terms issue before confirming the trigger facts" is wrong because privacy notices (like GLBA) are unrelated to compensation rules and do not provide a basis for evaluating term-based pay. "Increase compensation because the borrower selected a higher-rate product" is wrong as it directly endorses the illegal practice described. Exam tip: Don't be distracted by unrelated regulations (like privacy). Focus on the core compensation principle: pay cannot follow the rate or any other loan term.
Why This Is the Correct Answer
The correct response is "Keep compensation independent of loan terms or proxies". Compensation cannot be structured around transaction terms or proxies for those terms.
Why the Other Options Are Wrong
Option B: Offset a pricing exception by reducing only this originator compensation.
This choice is a tempting shortcut, but it conflicts with MLO compensation restrictions because the file still needs the required documentation, timing, or rule-based review before the action is taken.
Option C: Use the privacy notice standard to decide the Loan originator compensation based on terms issue before confirming the trigger facts.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Option D: Increase compensation because the borrower selected a higher-rate product.
This choice is not the best answer because it applies the wrong file step for MLO compensation restrictions; the governing rule is tested by the correct option.
Memory Technique
If the pay changes because loan terms change, the answer is usually no.
Exam Tip
For MLO compensation restrictions questions, separate the required file step from plausible sales, timing, or documentation shortcuts.
Common Mistakes to Avoid
- -Higher revenue on a loan does not make term-based compensation permissible.
More Origination Questions
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An MLO is reviewing procedures for a case where a cost changes after the Closing Disclosure has already been provided. What is the proper handling?
During a post-application update, a quality-control reviewer encounters a Credit Analysis and Evaluation issue. Which response should avoid a shortcut that would misapply the rule?
A construction-to-permanent loan will disburse in 5 draws over 11 months before the permanent phase begins. Which Regulation Z appendix provides a disclosure method for multiple-advance construction transactions?
Before closing, the team discovers that a borrower asks which upfront charge can be collected before intent to proceed. What is the safest compliant answer?
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Before releasing the final construction draw, which combination most directly supports project completion and clear collateral?
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A branch manager asks about a loan file because a processor wants to omit known monthly obligations from underwriting. What should happen?
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