Two originators at the same branch are paid identically on every measure except one: the plan adds 15 basis points on loans with an adjustable rate and nothing on fixed-rate loans. A reviewer is asked whether the distinction survives.
Correct Answer
B) Keep compensation independent of loan terms or proxies
Why this is correct: The core rule under Regulation Z's loan originator compensation provisions is that an MLO's compensation cannot be based on the terms of a transaction (like the interest rate or loan type) or a proxy for those terms. This ensures the MLO does not steer the borrower to a more expensive loan to increase their own pay. The correct answer, "Keep compensation independent of loan terms or proxies," directly states this fundamental prohibition. Why the other choices are wrong: "Resolve the Dodd Frank MLO Compensation issue with the PMI cancellation exception that does not fit the facts" is wrong because it suggests applying a specific, inapplicable exception, which does not address the general rule. "Pay the originator based on a loan-term proxy after closing" is wrong because it explicitly violates the rule by basing pay on a loan-term proxy, regardless of timing. "Let the borrower and creditor both pay the MLO on the same transaction" is wrong because it describes prohibited dual compensation, where an MLO cannot receive payment from both the consumer and the creditor for the same transaction. Exam tip: Remember the two key prohibitions: no compensation tied to loan terms/proxies and no dual compensation from both borrower and lender.
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 A: Resolve the Dodd Frank MLO Compensation issue with the PMI cancellation exception that does not fit the facts.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Option C: 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 D: 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.
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?
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?
People Also Study
Federal Mortgage-Related Laws
24% of exam
General Mortgage Knowledge
20% of exam
Ethics, Fraud & Consumer Protection
18% of exam
Uniform State Test Content
11% of exam