A loan permits a prepayment penalty of 1.5% of the amount prepaid, chargeable up to 48 months after consummation. For an otherwise covered HOEPA transaction, does this prepayment-penalty duration trigger high-cost status?
Correct Answer
B) High-cost: a penalty reachable beyond 36 months meets the test
B. Permitting the penalty through month 48 triggers the duration test. The coverage test uses alternative conditions: duration beyond 36 months or a penalty exceeding the amount threshold. A 1.5% amount does not cure the excessive duration. Scope and exceptions: High-cost status does not authorize the penalty: high-cost mortgages may not include one. Remaining below this trigger also does not establish legality under other restrictions or avoid the APR and points-and-fees tests. Source: Section 1026.32(a)(1)(iii), (d)(6); comment 32(a)(1)(iii)-1 — https://www.consumerfinance.gov/rules-policy/regulations/1026/32/
Why This Is the Correct Answer
B. Permitting the penalty through month 48 triggers the duration test. The coverage test uses alternative conditions: duration beyond 36 months or a penalty exceeding the amount threshold. A 1.5% amount does not cure the excessive duration. Scope and exceptions: High-cost status does not authorize the penalty: high-cost mortgages may not include one. Remaining below this trigger also does not establish legality under other restrictions or avoid the APR and points-and-fees tests.
Why the Other Options Are Wrong
Option A: High-cost: any prepayment penalty at all makes a loan high-cost
The mere existence of any penalty is not this coverage test.
Option C: Not high-cost: prepayment terms are outside the coverage tests
Prepayment provisions are explicitly a coverage trigger.
Option D: Not high-cost: 1.5% is below the 2% ceiling the test uses
It considers only amount and ignores duration.
Exam Tip
Test both alternative triggers, then apply the restrictions resulting from coverage.
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