Assume a covered mortgage otherwise satisfies all prerequisites for a permitted prepayment penalty under Regulation Z. Its contract imposes 2% of the outstanding balance prepaid throughout the first four years after consummation. Does this schedule meet section 1026.43(g)(2)?
Correct Answer
C) No: the limit is 2% in years one and two, 1% in year three, and no penalty after three years
C. The third-year percentage and fourth-year duration both violate the limits. Two percent is the ceiling for only the first two years. The third-year ceiling is 1%; after the three-year period the penalty cannot apply. Scope and exceptions: The question assumes, rather than proves, eligibility for a penalty. Fixed-rate or qualified-mortgage status alone is insufficient; other conditions and the alternative-offer requirement must be assessed separately. Source: Section 1026.43(g)(1)–(3) — https://www.consumerfinance.gov/rules-policy/regulations/1026/43/
Why This Is the Correct Answer
C. The third-year percentage and fourth-year duration both violate the limits. Two percent is the ceiling for only the first two years. The third-year ceiling is 1%; after the three-year period the penalty cannot apply. Scope and exceptions: The question assumes, rather than proves, eligibility for a penalty. Fixed-rate or qualified-mortgage status alone is insufficient; other conditions and the alternative-offer requirement must be assessed separately.
Why the Other Options Are Wrong
Option A: Non-compliant only because the rate is fixed rather than adjustable
Fixed-rate status is not the defect identified by these facts.
Option B: Compliant, as prepayment penalties are unrestricted on a fixed-rate loan
Eligible loans still face percentage and duration restrictions.
Option D: Compliant: 2% is within the ceiling and 4 years is the standard term
It ignores the step-down and the end of the permitted period.
Exam Tip
Check the eligibility conditions, yearly cap and expiration separately.
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