A California covered loan closed on 3 May 2024 carries a prepayment penalty that runs for 4 years from consummation. Does this penalty period comply with the covered-loan prepayment time limit?
Correct Answer
A) Non-compliant: no prepayment fee may run past 36 months from consummation
A covered loan may not include a prepayment fee or penalty after the first 36 months from consummation, so 4 years is over the line whatever the amount. Other choices: 5 years is the balloon test rather than the prepayment window; the 6 months of advance interest is a separate cap on size that applies inside the 36 months; and penalties are very much restricted. Source: Cal. Fin. Code § 4973(a)(1)
Why This Is the Correct Answer
A covered loan may not include a prepayment fee or penalty after the first 36 months from consummation, so 4 years is over the line whatever the amount. Other choices: 5 years is the balloon test rather than the prepayment window; the 6 months of advance interest is a separate cap on size that applies inside the 36 months; and penalties are very much restricted. Source: Cal. Fin. Code § 4973(a)(1)
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