A borrower qualifies for both a stable fixed-rate loan and a payment-option loan with negative-amortization risk. The MLO recommends the latter solely because it pays more compensation. What is the primary concern?
Correct Answer
B) The recommendation may place compensation ahead of the borrower's interests and material risks
Why this is correct: Under the SAFE Act and ethical standards, an MLO must act in the borrower's best interest. Recommending a loan solely because it pays more compensation creates a conflict of interest and violates the duty of fair dealing. The primary concern is that the recommendation may place compensation ahead of the borrower's interests and material risks, such as the risk of payment shock and negative amortization inherent in the payment-option loan. Why the other choices are wrong: The MLO not having ordered title work is unrelated to the ethical conflict described. Stating that every loan with payment options is prohibited is incorrect; these loans are permissible if properly disclosed and suitable for the borrower. Claiming fixed-rate loans may never be offered with adjustable-rate loans is wrong; both can be offered, but the recommendation must be based on the borrower's needs, not compensation. Exam tip: When you see a recommendation driven by higher compensation, flag it as an ethical violation. The borrower's interests and a full disclosure of material risks must come first.
Why This Is the Correct Answer
Why this is correct: Under the SAFE Act and ethical standards, an MLO must act in the borrower's best interest. Recommending a loan solely because it pays more compensation creates a conflict of interest and violates the duty of fair dealing. The primary concern is that the recommendation may place compensation ahead of the borrower's interests and material risks, such as the risk of payment shock and negative amortization inherent in the payment-option loan. Why the other choices are wrong: The MLO not having ordered title work is unrelated to the ethical conflict described. Stating that every loan with payment options is prohibited is incorrect; these loans are permissible if properly disclosed and suitable for the borrower. Claiming fixed-rate loans may never be offered with adjustable-rate loans is wrong; both can be offered, but the recommendation must be based on the borrower's needs, not compensation. Exam tip: When you see a recommendation driven by higher compensation, flag it as an ethical violation. The borrower's interests and a full disclosure of material risks must come first.
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