An originator is told her commission will rise from 100 to 135 basis points on any loan she places above the lender’s par rate. She asks whether she can accept the arrangement.
Correct Answer
A) Keep compensation independent of loan terms or proxies
Why this is correct: The central rule from Dodd-Frank and Regulation Z is that an MLO's compensation must be independent of the terms of the specific mortgage transaction. This means compensation cannot be tied to or vary with the loan's APR, interest rate, fees, or any factor that acts as a proxy for these terms. Keeping compensation independent of loan terms or proxies is the direct and correct application of this rule to resolve a compliance issue before moving the file forward. Why the other choices are wrong: "Tie the compensation plan to APR, rate, or other loan terms on covered transactions" is wrong because it is a direct violation of the core prohibition. "Increase compensation because the borrower selected a higher-rate product" is wrong because it explicitly bases compensation on a loan term (the interest rate), which is illegal. "Pay the originator based on a loan-term proxy after closing" is wrong because a proxy (like loan amount or product type used to indirectly reflect rate) is still considered basing pay on a transaction term and is prohibited. Exam tip: If you can trace a change in an MLO's pay to a specific loan's rate, fee, or a stand-in for them, it's a violation. Independence is absolute.
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 B: 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 C: 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 D: 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
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