A disclosure specialist is resolving Dodd Frank Compensation Rules during a quality-control sample. Which action best fits the rule?
Correct Answer
D) Decline dual compensation when the consumer pays directly
Why this is correct: Dodd-Frank compensation rules prohibit tying a loan originator's compensation to the terms of a specific transaction (like the interest rate or APR). They also restrict dual compensation (being paid by both the consumer and the creditor). "Decline dual compensation when the consumer pays directly" correctly applies the rule against receiving compensation from both parties on the same transaction. Why the other choices are wrong: "Tie the compensation plan to APR, rate, or other loan terms on covered transactions" is wrong because this is the core prohibited practice under the rule. "Increase compensation because the borrower selected a higher-rate product" is wrong as it directly ties pay to a loan term, which is illegal steering. "Pay the originator based on a loan-term proxy after closing" is wrong because using a proxy (like the loan amount) to effectively vary compensation based on terms is also prohibited. Exam tip: For compensation questions, remember: Pay cannot vary based on loan terms. It can be based on the overall volume of loans or the originator's hours worked.
Why This Is the Correct Answer
The correct response is "Decline dual compensation when the consumer pays directly" 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: Tie the compensation plan to APR, rate, or other loan terms on covered transactions.
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: 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 C: 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.
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
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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?
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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