A new hire is told the base commission is fixed, but that "portfolio product" loans pay an extra 20 basis points — and every portfolio product the lender offers carries a rate at least three quarters of a point above its conforming equivalent. Is the extra permitted?
Correct Answer
A) Keep compensation independent of loan terms or proxies
Why this is correct: The governing concept is that loan originator compensation cannot be based on any term of the transaction (like the interest rate or points) or a proxy for a term. This rule, from the Dodd-Frank Act and Regulation Z, is designed to prevent steering borrowers into loans that benefit the MLO rather than the borrower. The correct answer, "Keep compensation independent of loan terms or proxies," directly states this core prohibition. Why the other choices are wrong: "Treat the Dodd Frank MLO Compensation review as complete because the file contains a related PMI cancellation note" is wrong because a PMI note is unrelated to the MLO compensation analysis; the review must be based on the compensation plan itself. "Change MLO pay after the lock because the borrower chose discount points" is wrong because adjusting pay based on the borrower's choice of points directly ties compensation to a loan term, which is prohibited. "Offset a pricing exception by reducing only this originator compensation" is wrong because it involves adjusting the MLO's pay based on a loan pricing decision, which is a prohibited link to a transaction term. Exam tip: Remember the golden rule: MLO pay cannot vary with *any* loan term. If you see an option suggesting a pay change tied to points, fees, or the loan amount, it's incorrect.
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: Treat the Dodd Frank MLO Compensation review as complete because the file contains a related PMI cancellation note.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
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.
Option D: Offset a pricing exception by reducing only this originator compensation.
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
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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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