A lock is extended and the rate moves up an eighth. Payroll applies the compensation grid to the new rate, raising the originator’s commission by $180. A quality-control reviewer flags the payment. Why?
Correct Answer
B) Keep compensation independent of loan terms or proxies
Why this is correct: The regulation (the governing federal rule explicitly prohibits structuring an originator's compensation around the terms of a covered transaction. A manager's proposal to pay more for higher interest rates violates this fundamental rule. The compliant action is to keep compensation independent. Why the other choices are wrong: "Offset a pricing exception by reducing only this originator compensation" is wrong because individual, transaction-based compensation adjustments are not allowed. "Tie the compensation plan to APR, rate, or other loan terms on covered transactions" is wrong because it explicitly describes the prohibited practice the rule is designed to prevent. "Use prior fee tolerance approval as a substitute for the current Loan originator compensation based on terms requirement" is wrong because fee tolerance rules (related to good faith estimates) are a separate concept and cannot override the strict prohibition on term-based compensation. Exam tip: The prohibition is broad: it covers not just the interest rate, but also APR, points, fees, and any proxy for these terms. Any plan that "ties" pay to these elements is non-compliant.
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: 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.
Option C: 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 D: Use prior fee tolerance approval as a substitute for the current Loan originator compensation based on terms requirement.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
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
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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?
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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?
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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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