The branch manager is resolving Dodd Frank MLO Compensation during an internal audit sample. Which action best fits the rule?
Correct Answer
B) Use compensation plans that do not vary by APR or fees
Why this is correct: The Dodd-Frank Act and Regulation Z include strict loan originator compensation rules. A core prohibition is that an originator's compensation cannot be based on the terms or conditions of the transaction (e.g., the interest rate, APR, fees, or the presence of discount points). Compensation must be based on a fixed percentage of the loan amount, a flat fee, or a combination, but it cannot vary with transaction terms. The correct answer, "Use compensation plans that do not vary by APR or fees," directly states this key rule. Why the other choices are wrong: "Let the borrower and creditor both pay the MLO on the same transaction" is wrong because, with limited exceptions, dual compensation (payment from both the consumer and the creditor on the same transaction) is prohibited. "Use profitability of the selected product to decide the originator bonus" is wrong because profitability is often a proxy for transaction terms, making such a bonus plan a violation. "Change MLO pay after the lock because the borrower chose discount points" is wrong because compensation cannot be adjusted based on a transaction term like the purchase of points. Exam tip: Originator compensation can be a fixed percentage, a flat dollar amount, or an hourly wage. It cannot be a "proxy" for loan terms.
Why This Is the Correct Answer
The correct response is "Use compensation plans that do not vary by APR or fees" 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: 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 C: 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 D: 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
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
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