A sales manager circulates a spreadsheet ranking originators by the average rate on their closed loans, and says next quarter’s bonus pool will be split using that ranking. An originator asks whether the plan is allowed.
Correct Answer
C) Keep compensation independent of loan terms or proxies
Why this is correct: The Dodd-Frank Act established strict MLO compensation rules. The core restriction is that an MLO's compensation cannot be based on the terms or conditions of the loan (such as the interest rate, loan amount, or type of product) or on a proxy for those terms. Compensation must be independent, typically a fixed percentage of the loan amount or a flat fee. The correct action, as stated in the original explanation, is to keep compensation independent of loan terms or proxies. This prevents steering borrowers to higher-cost loans for the originator's financial gain. Why the other choices are wrong: "Increase compensation because the borrower selected a higher-rate product" is a direct violation, as compensation cannot vary with the loan's interest rate. "Pay the originator based on a loan-term proxy after closing" is wrong because paying based on any proxy for a loan term (like the word 'premium') is prohibited. "Assume the Dodd Frank MLO Compensation condition is met because the borrower satisfied the separate privacy notice requirement" is wrong because satisfying one unrelated requirement (privacy notice) does not fulfill the distinct and mandatory compensation rules. Exam tip: MLO compensation is a major exam topic. Remember: compensation cannot change based on loan terms. It must be fixed or based on a percentage of the principal.
Why This Is the Correct Answer
The correct response is "Keep compensation independent of loan terms or proxies" because Loan originator compensation cannot be based on transaction terms or proxies and dual compensation is restricted.
Why the Other Options Are Wrong
Option A: 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.
Option B: Pay the originator based on a loan-term proxy after closing.
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 D: Assume the Dodd Frank MLO Compensation condition is met because the borrower satisfied the separate privacy notice requirement.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Memory Technique
MLO compensation restrictions: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
For MLO compensation restrictions questions, separate the required file step from plausible sales, timing, or documentation shortcuts.
Common Mistakes to Avoid
- -Choosing an internal exception instead of the governing rule
- -Treating preliminary or informal facts as a substitute for required documentation
- -Answering from a familiar but unrelated mortgage topic
More Origination Questions
Before the team acts on a servicing handoff check, a closing coordinator must address Asset Verification and Reserves. Which response is most defensible?
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?
A construction loan agreement allows advances only after documented completion of specified work. A builder requests the next draw, but no completion evidence has been provided. What should occur?
Before releasing the final construction draw, which combination most directly supports project completion and clear collateral?
A construction-to-permanent loan will convert to a substantially higher fully amortizing payment. Which payment is especially important when assessing the borrower's long-term repayment capacity?
A construction-to-permanent note states that conversion requires completion, a certificate of occupancy, and no unresolved liens. Construction is finished, but a mechanic's lien remains. What should happen?
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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