Prepayment Penalty

Prepayment Penalty restrictions apply to consumer, closed-end, dwelling-secured loans, generally – certain restrictions apply under Regulation Z, § 1026.43, and specific restrictions for principal dwelling-secured loans apply under the requirements of Regulation Z, § 1026.32 for high-cost loans. The term “prepayment penalty” includes prepayment charges, plus, other charges that are deemed prepayment penalties.

A high-cost loan cannot include a prepayment penalty provision. A closed-end loan that is not high-cost may include a prepayment penalty feature only if the loan is a Qualified Mortgage and specific conditions are met (if otherwise permitted by law). In addition, loans that are subject to HOEPA (and are not exempt)may only include a certain type of a prepayment penalty. If specific limits are exceeded, the loan becomes high-cost. In addition, the maximum amount of the prepayment penalty (and a prepayment penalty charged upon refinance) must be included in the points-and-fees calculation.

The prepayment penalty provision may be included if (1) the type of the supported prepayment penalty will not set off the high-cost trigger (i.e., the prepayment penalty alone will not make the loan high-cost) and (2) the type of the prepayment penalty that may be charged is permissible for covered transactions.

You are expected to know if you meet the additional requirements that allow you to include a prepayment penalty provision among the loan terms. You are expected to remove the prepayment penalty feature when it is not allowed.