On what basis can commissions for an MLO be calculated?

Commissions for a Mortgage Loan Originator (MLO) are typically calculated in basis points under a loan originator agreement. This method is standard in the industry, where the commission is expressed as a percentage of the loan amount. A basis point is one-hundredth of a percentage point, allowing for precise calculations based on the size of the loan. For example, if an MLO receives a commission of 100 basis points on a $200,000 loan, they would earn $2,000 (1% of $200,000).

This structure aligns the MLO's incentives with the loan amount, ensuring that as the loan size increases, the MLO's compensation reflects that growth, while also complying with regulatory standards that govern loan originator compensation. Other methods for calculating commissions, such as a flat fee regardless of loan amount, do not take into account the size and complexity of the transaction, and factors like marketing reach or borrower income do not directly correlate to the MLO’s commission structure within the regulatory framework. Thus, calculating commissions in basis points is both a common practice and considered best practice in the industry.