A manager proposes settling a borrower complaint by cutting the originator’s commission on that file and adding the same amount to her next three files, which are all priced above par. What should the response be?
Correct Answer
D) Keep compensation independent of loan terms or proxies
Why this is correct: When a quality-control reviewer flags a compensation plan that pays more for higher interest rates, they have identified a violation of 12 CFR 1026.36(d)(1). The rule forbids tying originator pay to transaction terms. The appropriate correction is to dismantle that structure and keep compensation independent of loan terms or proxies. Why the other choices are wrong: "Apply the consumer complaint timing rule even though the file is testing Loan originator compensation based on terms" is wrong because complaint response timelines are unrelated to fixing an illegal compensation structure. "Tie the compensation plan to APR, rate, or other loan terms on covered transactions" is wrong because it explicitly prescribes the illegal action that must be corrected. "Increase compensation because the borrower selected a higher-rate product" is wrong as it compounds the violation by acting on the prohibited proposal. Exam tip: In a QC or audit context, finding term-based compensation requires a corrective action to remove the link between pay and loan terms. Simply noting the issue in the file is insufficient.
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: Apply the consumer complaint timing rule even though the file is testing Loan originator compensation based on terms.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
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 C: 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?
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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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In a mortgage origination file, a valid changed circumstance raises a fee before the Closing Disclosure has been issued. Which action should be taken?
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A consumer applies for a construction-to-permanent loan, but the timing and amount of future advances are unknown. Which Regulation Z resource provides optional estimation methods for multiple-advance disclosures?