An audit sample shows one originator earning between 90 and 175 basis points across twelve loans closed in the same month, with the spread tracking the note rate almost exactly. What conclusion follows?
Correct Answer
D) Keep compensation independent of loan terms or proxies
Why this is correct: The rule in 12 CFR 1026.36(d)(1) is clear: an MLO's compensation cannot be based on a term of a transaction (e.g., interest rate) or a proxy for a term. The proposal to pay more for a higher interest rate is a direct violation. The compliant response is to ensure the compensation plan is structured to be independent of such terms. Why the other choices are wrong: "Let the borrower and creditor both pay the MLO on the same transaction" is wrong because it describes a potential dual compensation scenario, which is a separate prohibition under the rules. "Use profitability of the selected product to decide the originator bonus" is wrong because profitability is often a proxy for loan terms (like a higher-rate loan being more profitable), making this linkage illegal. "Change MLO pay after the lock because the borrower chose discount points" is wrong because adjusting pay based on the borrower's decision on points is compensating based on a loan term, which is prohibited. Exam tip: Proxies are just as illegal as direct terms. If a factor (like product profitability) reliably correlates with a loan term, using it to set pay violates the 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: 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 B: 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.
Option C: Change MLO pay after the lock because the borrower chose discount points.
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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