A compliance analyst compares the compensation plan with the pricing sheet and finds that the only loans paying above the base rate of commission are the ones carrying above-market note rates. What does the comparison establish?
Correct Answer
B) Keep compensation independent of loan terms or proxies
Why this is correct: The regulation (the governing federal rule is clear: a loan originator's compensation cannot be based on the terms of a transaction. A proposal to pay more for a higher interest rate directly violates this prohibition by making compensation dependent on a key loan term. The compliant response is to keep compensation independent. Why the other choices are wrong: "Offset a pricing exception by reducing only this originator compensation" is wrong because adjusting pay based on a transaction-specific pricing exception is prohibited. "Treat the Loan originator compensation based on terms review as complete because the file contains a related document-retention note" is wrong because document retention does not cure or excuse a compensation violation. "Increase compensation because the borrower selected a higher-rate product" is wrong as it explicitly advocates for the prohibited practice described in the scenario. Exam tip: The rule is absolute. No documentation, note, or borrower choice can make it permissible to tie MLO pay to loan terms like the interest rate.
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: Treat the Loan originator compensation based on terms review as complete because the file contains a related document-retention note.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
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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