During a quarterly review, a manager suggests paying originators an extra $250 whenever a borrower accepts the lender’s higher-rate, no-closing-cost option instead of paying costs at the table. What is the correct response?
Correct Answer
C) Keep compensation independent of loan terms or proxies
Why this is correct: The governing principle from 12 CFR 1026.36(d)(1) is that loan originator compensation must not be tied to the terms of a specific loan. A manager proposing higher pay for a higher rate is suggesting a direct violation. The correct, compliant action is to ensure compensation remains independent of all loan terms and proxies. Why the other choices are wrong: "Pay the originator based on a loan-term proxy after closing" is wrong because paying based on any proxy for loan terms, whether before or after closing, is prohibited. "Let the borrower and creditor both pay the MLO on the same transaction" is wrong because this describes a dual compensation scenario, which is a separate violation under the rules, and does not address the core issue of term-based compensation. "Use profitability of the selected product to decide the originator bonus" is wrong because profitability is a prohibited proxy for loan terms. Exam tip: Watch for keywords like "proxy," "profitability," "higher rate," or "product type" in compensation plans—they signal a likely violation of the term-independence rule.
Why This Is the Correct Answer
The correct response is "Keep compensation independent of loan terms or proxies". Compensation cannot be structured around transaction terms or proxies for those terms.
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 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
If the pay changes because loan terms change, the answer is usually no.
Exam Tip
For MLO compensation restrictions questions, separate the required file step from plausible sales, timing, or documentation shortcuts.
Common Mistakes to Avoid
- -Higher revenue on a loan does not make term-based compensation permissible.
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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