A mortgage file is paused during a lock-desk handoff because of Dodd Frank MLO Compensation. Which answer should match the file facts to the correct rule?
Correct Answer
A) Document compensation under Regulation Z rules
Why this is correct: The Dodd-Frank Act and Regulation Z establish key rules for MLO compensation: it must be documented, cannot be based on loan terms (like interest rate or proxy), and dual compensation (payment from both borrower and creditor) is generally prohibited. The correct answer aligns with the foundational requirement to properly document compensation under these rules. Why the other choices are wrong: "Pay the originator based on a loan-term proxy after closing" is wrong because compensation cannot be tied to any term of the transaction, including proxies. "Let the borrower and creditor both pay the MLO on the same transaction" is wrong because this constitutes prohibited dual compensation. "Use profitability of the selected product to decide the originator bonus" is wrong because compensation cannot be based on the profitability or terms of the loan product, as this is effectively a loan-term-based incentive. Exam tip: MLO compensation rules are strict: think 'documented and fixed'—compensation should not vary based on the loan's terms or the transaction's profitability.
Why This Is the Correct Answer
The correct response is "Document compensation under Regulation Z rules" because Loan originator compensation cannot be based on transaction terms or proxies and dual compensation is restricted.
Why the Other Options Are Wrong
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 C: Let the borrower and creditor both pay the MLO on the same transaction.
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 D: Use profitability of the selected product to decide the originator bonus.
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
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
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