A file is priced with two discount points at the borrower’s request. The originator’s commission is calculated on the total of the points and the rate rather than on the amount financed. What is wrong with the calculation?
Correct Answer
C) Keep compensation independent of loan terms or proxies
Why this is correct: The governing concept is the Loan Originator Compensation rule under Regulation Z (the governing federal rule This rule prohibits compensating a loan originator based on any term of a covered transaction (like the interest rate or APR) or a proxy for a term. Compensation must be based on the loan originator's overall performance or other non-transaction-specific factors, keeping it independent of the loan's terms. Why the other choices are wrong: "Offset a pricing exception by reducing only this originator compensation" is wrong because it suggests adjusting pay based on a loan term (the exception price), which is prohibited. "Tie the compensation plan to APR, rate, or other loan terms on covered transactions" is wrong because it directly describes the prohibited practice the rule was created to prevent. "Increase compensation because the borrower selected a higher-rate product" is wrong because it explicitly links pay to a loan term (the interest rate), which is illegal. Exam tip: Remember the mantra: 'Compensation cannot dance with the terms.' Any direct or indirect link between pay and loan terms like rate, points, or fees is a violation.
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 B: 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: Increase compensation because the borrower selected a higher-rate product.
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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