At a pipeline meeting a manager says the branch will start "rewarding rate discipline", paying more on loans that close at or above a target yield. An originator raises her hand. What should she say?
Correct Answer
A) Keep compensation independent of loan terms or proxies
Why this is correct: The Dodd-Frank Act and Regulation Z prohibit a loan originator's compensation from being based on any of the terms or conditions of the transaction (e.g., interest rate, loan amount, loan type) or a proxy for such terms. Compensation must be fixed (as a dollar amount or percentage of loan amount) and cannot vary with transaction terms. The correct answer directly states this core principle: keep compensation independent of loan terms or proxies. Why the other choices are wrong: "Pay the originator based on a loan-term proxy after closing" is wrong because using a proxy for a loan term (like the word 'refinance' or 'purchase') to vary compensation is explicitly prohibited, regardless of when payment occurs. "Let the borrower and creditor both pay the MLO on the same transaction" is wrong because this constitutes prohibited dual compensation; an originator cannot receive compensation from both the consumer and the creditor or another party on the same transaction. "Apply the state renewal timing rule even though the file is testing Dodd Frank MLO Compensation" is wrong because state rules do not override the federal Dodd-Frank compensation restrictions; the question is specifically about the federal requirement. Exam tip: MLO compensation cannot 'float' with loan terms. If you see 'based on,' 'proxy for,' or 'dual payment' in an option, it's almost certainly wrong under federal rules.
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: 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 C: 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: Apply the state renewal timing rule even though the file is testing Dodd Frank MLO Compensation.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
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?
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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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