A compensation plan says originators earn a flat fee per closed loan, then adds a footnote: the fee doubles on any loan whose note rate exceeds the weekly benchmark by half a point. A licensing coordinator reads the footnote and stops.
Correct Answer
B) Keep compensation independent of loan terms or proxies
Why this is correct: Dodd-Frank's Loan Originator Compensation Rules prohibit basing an originator's compensation on the terms of a specific transaction (like the APR or interest rate) or on a proxy for those terms. Compensation must be independent to prevent steering borrowers into more expensive loans to increase the originator's pay. Why the other choices are wrong: "Tie the compensation plan to APR, rate, or other loan terms on covered transactions" is wrong because it directly violates the prohibition against compensation based on loan terms. "Assume the Dodd Frank Compensation Rules condition is met because the borrower satisfied the separate loan estimate requirement" is wrong because compliance with one rule (providing a Loan Estimate) does not satisfy the separate, strict compensation independence requirements. "Pay the originator based on a loan-term proxy after closing" is wrong because paying based on a proxy, whether before or after closing, is prohibited. Exam tip: For compensation rules, think "independent and fixed"—the originator's pay should not vary based on the loan's specific terms or cost to the borrower.
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 A: 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: Assume the Dodd Frank Compensation Rules condition is met because the borrower satisfied the separate loan estimate requirement.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
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
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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