A mortgage team asks a branch supervisor about MLO compensation restrictions during an annual compliance meeting. Which answer should guide the file?
Correct Answer
D) Use compensation plans that do not vary by APR or fees
Why this is correct: The Dodd-Frank Act and Regulation Z establish strict rules for mortgage loan originator (MLO) compensation. A fundamental prohibition is that an MLO's compensation cannot be based on the terms of a specific transaction, such as the interest rate, APR, or the presence of specific fees. Compensation must be based on the MLO's overall performance or other non-transaction-specific factors. Therefore, using compensation plans that do not vary by APR or fees is the compliant approach. Why the other choices are wrong: "Pay the originator based on a loan-term proxy after closing" is wrong because using a proxy for a loan term (like loan size or product type used as a substitute for rate) is still considered basing compensation on a transaction term, which is prohibited. "Let the borrower and creditor both pay the MLO on the same transaction" is wrong because this constitutes prohibited dual compensation; an MLO cannot receive compensation from both the consumer and the creditor on the same transaction. "Use profitability of the selected product to decide the originator bonus" is wrong because product profitability is directly tied to loan terms like rate and fees, making it a prohibited basis for compensation. Exam tip: MLO pay cannot dance with loan terms. Your compensation plan must be blind to the APR, points, and fees of any individual loan.
Why This Is the Correct Answer
The correct response is "Use compensation plans that do not vary by APR or fees" 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: 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 B: 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 C: 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
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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